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1. The Agreement on Technical Barriers to Trade (TBT) incorporates key legal requirements aimed at ensuring that the standards and technical regulations adopted by WTO Members are effective in achieving legitimate objectives while at the same time ensuring that they are not "more trade-restrictive than necessary to fulfil a legitimate objective, taking account of the risks non-fulfilment would create" (Article 2.2).
2. In implementing these requirements governments generally also have regard to a further objective, which is to minimise the overall economic costs of regulation. This includes both direct costs of complying with regulation, and the indirect costs associated with the effect of regulation on innovation.
3. New Zealand is of the view that the TBT requirements accommodate these complementary objectives. However, effective implementation of the requirements requires a thorough examination of the nature of the effects of technical regulations on trade and economic activity, and consideration of the alternative approaches to achieving desired objectives. Using the TBT requirements as the framework, this paper considers the factors that should be taken into account in the development of technical regulations.
4. New Zealand considers that the development of a better understanding between WTO members on the practical steps that need to be followed in the preparation, adoption and review of technical regulations, in accordance with the requirements of the TBT Agreement, will assist in securing more effective implementation of the TBT Agreement by the WTO Membership.
Technical Regulations
5. It is important to distinguish from the outset between standards and technical regulations. Standards are voluntary. In contrast, technical regulations are requirements set by governments with which compliance is mandatory. Technical regulations are set by governments to manage risks when it is less efficient for consumers to manage them themselves. Typically these arise in areas of health, safety and the environment. The boundary between voluntary standards and technical regulations is not always clear both because technical regulations are often based on voluntary standards, and voluntary standards often become so widely used that commercial considerations dictate adherence to them in a similar way to technical regulations.
6. As noted above, the TBT Agreement recognizes the need to ensure that technical regulations, including packaging, marking and labelling requirements, and procedures for the assessment of conformity with technical regulations, do not create unnecessary obstacles to trade, and establishes a set of requirements aimed at achieving this outcome.
7. The achievement of good regulatory design through the deliberate and effective implementation of all the requirements of the TBT Agreement in the development of technical regulations at the national level is essential. This paper seeks to highlight the practical steps and considerations that need to be addressed by regulators in this regard.
8. These relevant steps and considerations are perhaps best illustrated by first, considering whether a technical regulation is necessary and second, if this is the case, ensuring that the technical regulation is designed and implemented in accordance with the requirements of the TBT Agreement. These two sequential stages of the process are further examined below:
9. This question entails (a) an identification of the "problem" that the technical regulation is perceived as necessary to remedy; and (b) consideration of the options available to address the problem.
10. The first step in the development process for technical regulations should be to clearly identify the problem that needs to be addressed. The TBT Agreement states (Article 2.2) that legitimate reasons for imposing technical regulations are inter alia:
11. Accurate problem definition reduces the risk of choosing inappropriate options for government action or ignoring more effective solutions, and reduces the likelihood of over-regulation. Over-regulation occurs where the extent and/or nature of regulation is greater than what is needed to address a problem. This results in additional costs to the economy, for example through increased production costs, reduced competition, reduced innovation, or reduced customer choice.
12. The operation of markets is in general the most effective means of ensuring that resources go to their highest valued use, thereby maximizing their contribution to the economy. In some circumstances markets fail to do this as when a market transaction creates an externality the effect of which falls on a third party, or when consumers lack sufficient information with which to make informed choices. However, government intervention is not always necessary to address market failures. In some circumstances they may be self correcting, e.g. social pressures on business to reduce pollution.
13. Once the nature of the problem is established, the magnitude of the problem must then be assessed.
14. Article 2.2 goes on to state that consideration must be given to the risks non-fulfilment of the legitimate objectives would create, and:
"In assessing such risks, relevant elements of consideration are, inter alia: available scientific and technical information, related processing technology or intended end-uses of products (Article 2.2)."
Why is government intervention required?
15. Having established that some form of government intervention may be warranted, it is essential to clearly specify policy goals. These goals should focus on outcomes, rather than means to achieve them, so that all possible alternatives for achieving a desired result can be considered. Knowledge of the nature of the underlying problem is important in assessing which alternative best achieves these policy goals. It is also necessary to consider whether legitimate objectives can be adequately secured by means other than government regulation. This is the corollary of the requirement of Article 2(2) that "technical regulations shall not be more trade-restrictive than necessary to fulfil a legitimate objective".
16. In order to ensure that government intervention meets the TBT objective of good regulation design, it is important that all feasible options are identified and assessed. In addition to the option of technical regulations, there are a number of alternative policy instruments which should be considered.
17. Such alternatives could include:
18. A fuller description of these alternatives is attached as Appendix A.
19. The options should be considered within a cost-benefit framework which would normally become progressively more detailed as specific options are shortlisted. This cost-benefit analysis process is a useful way of meeting the requirement of "least trade restrictiveness".
20. This section assumes that after completing the analysis described above, a decision has been made that imposing a technical regulation is considered necessary on the basis that other less trade restrictive means would not fulfil the legitimate objective sought.
22. Having determined that Government action in the form of a technical regulation is warranted, the technical regulations developed must not discriminate against imported products. In other words, products of domestic or imported origin shall be given the same treatment. Section 2.1 of the TBT Agreement states that:
"Members shall ensure that in respect of technical regulations, products imported from the territory of any member shall be accorded treatment no less favourable than that accorded to like products of national origin and to like products originated in any other country".
23. It is important to recognize that national treatment by itself is not sufficient to meet the requirements of Article 2 of the TBT. While there may be a level playing field, the technical regulations may be unnecessarily stringent for both domestic and foreign business. Accordingly, the further requirements of Article 2 need to be considered.
24. Both standards and technical regulations have the potential to be trade restrictive, but because of their explicit mandatory nature, this is particularly so in the case of technical regulations. Hence governments are required to ensure that recourse to technical regulations is minimized to the extent possible.
25. Accordingly, if a determination is made that a technical regulation solution is required, the technical regulation must be designed and implemented in the manner that fulfils the legitimate objective in the least trade-restrictive manner. A thorough analysis and assessment is required of the effect of the proposed regulation and of alternative technical regulations that might achieve a similar objective with less effect on trade.
26. To ensure that technical regulations are no more trade-restrictive than necessary it is important that provisions are put in place for the review of regulations when circumstances change or there is a change in objectives. In addition, technical regulations shall be subject to review to assess whether or not the regulation is achieving the desired objective. This is acknowledged in Article 2.3 of the TBT Agreement:
"Technical regulations shall not be maintained if the circumstances or objectives giving rise to their adoption no longer exist or if the changed circumstances or objectives can be addressed in a less trade-restrictive manner".
27. Section 2.4 of the TBT Agreement states that members shall adopt international standards or the relevant parts of them, as the basis for a technical regulation except in circumstances when:
"... such international standards or relevant parts would be an ineffective or inappropriate means for the fulfilment of the legitimate objectives pursued, for instance because of fundamental climatic or geographical factors or fundamental technological problems".
28. To minimise trade barriers, only that part of an international standard which is necessary to achieve a legitimate objective should be used to establish a technical regulation. Voluntary standards provide an important foundation for technical regulations in many sectors. However, voluntary standards reflect a wide range of perspectives and needs, and for this reason will often contain requirements which, while desirable, are not essential to fulfil the legitimate objectives of technical regulations. Calling up the entirety of these standards in regulation can have the effect of imposing unnecessary costs on business.
29. A decision to call up international standards in regulation should only be made after accurately defining the problem which needs to be addressed, appropriate cost-benefit analysis and consideration of alternative regulatory options. This approach will ensure that the benefits of regulation are achieved and adverse trade impacts and the costs to business of regulation in both domestic and international markets are minimized.
30. Section 2.8 of the TBT Agreement states that:
"Wherever appropriate, Members shall specify technical regulations based on product requirements in terms of performance rather than design or descriptive standards".
31. In order to minimise the trade barriers created by technical regulations, wherever possible technical regulations should be designed in such a way that they are performance based rather than prescriptive in nature.
32. Prescriptive standards generally define the processes and procedures required to achieve compliance. Prescriptive standards focus on the means by which the objective will be achieved rather than on the outcome. Although easier to enforce, such standards are often considered to be inflexible and are more likely to restrict competition and inhibit innovation.
33. In contrast, performance standards are based on outcomes rather than inputs. The major advantage of such an approach is that different approaches to generating desired outcomes can be accommodated, and arbitrary distinctions are avoided. Performance based standards provide both flexibility and predictability of outcomes. Flexibility in compliance provides incentives for firms to minimise the costs of complying, therefore creating incentives to innovate to find more efficient ways of complying. Performance based standards also allow for developments in technology. They are more likely to minimise barriers to trade, in that foreign goods entering the market made to different standards will be accepted provided they achieve the desired outcome required by the country of importation.
34. This links to another TBT requirement (Article 2.7) which encourages recognition of equivalency. It should be noted that while Article 2.7 is commonly identified as the basis for "mutual recognition agreements", the wording of the provision is much broader than this in that it encourages equivalency being granted on a unilateral and non-reciprocal basis. The article states:
"Members shall give positive consideration to accepting as equivalent technical regulations of other Members, even if these regulations differ from their own, provided that they are satisfied that these regulations adequately fulfil the objectives of their own regulations".
35. One concern regarding performance based standards is the level of uncertainty created by the flexibility in methods of achieving compliance. It can be argued that performance based standards disadvantage those firms that are unable to invest in the research and development of new methods of compliance or that need more guidance on how to meet the standard. One mechanism that can reduce this problem is to provide assistance to users, by specifying examples of acceptable solutions which, if followed, will ensure compliance.
36. The process of developing technical regulations should be as transparent as possible. Transparency is of particular importance given the potential for technical regulations to affect international trade. Consultation and transparency processes provide greater discipline on regulation makers, and provide a mechanism for quality control. Article 2.9 of the TBT Agreement establishes processes for consultation to be carried out in circumstances where a proposed technical regulation is not in accordance with the technical content of an international standard, and the resulting regulation is likely to have significant trade effects on other Members. In such circumstances the TBT Agreement requires dialogue and consultation. An important means of achieving this objective is the requirement established under the TBT Agreement for each WTO Member to have an Enquiry Point. Standards New Zealand performs this function in New Zealand.
37. The effectiveness of technical regulations will depend on the level of compliance. Hence, consideration of how compliance will be achieved is an essential element of the process.
38. Conformity assessment is the comprehensive term used for measures taken or required by manufacturers, their customers, regulatory authorities and independent third parties to assess conformity to standards or technical regulations.
39. When deciding the level of conformity assessment required, consideration must be given to minimizing the effects of any conformity assessment requirements on international trade. The TBT Agreement (Article 5.1.2) states:
"Members shall ensure that conformity Assessment procedures are not prepared, adopted or applied with a view to or with the effect of creating unnecessary obstacles to international trade. This means, inter alia, that conformity assessment procedures shall not be more strict or be applied more strictly than is necessary to give importing members adequate confidence that products conform with the applicable technical regulation or standard, taking into account the risks non conformity would create."
40. Applying this requirement requires consideration of the following issues:
41. Lack of acceptance of test data across borders and of recognition of certificates of conformity can also create significant barriers to trade. This can often result in multiple testing, time delays and an overall reduction in the competitiveness of imports. One way of overcoming this problem is for countries to recognize each other's conformity assessment procedures. The TBT Agreement states (Article 6.1) that countries are required to recognize the results of conformity assessment procedures of other countries, provided they are satisfied that those procedures offer an assurance of conformity with the applicable technical regulations. The TBT Agreement does, however, recognize that an important precursor to recognition of conformity assessment procedures is confidence in each other's systems and procedures (Article 6.1.1).
42. While mutual recognition agreements are one approach to generating this confidence, and negotiation of such agreements is encouraged in the TBT Agreement (Article 6.3), such agreements can themselves impose costs both in negotiation and implementation. As with technical regulations, unilateral recognition of test reports, certificates of compliance etc, should be considered an efficient option for reducing technical barriers to trade created by conformity assessment requirements.
43. Technical regulations have the potential to create significant barriers to trade. This risk is minimised, however, if regulators have taken full account of the requirements of the TBT Agreement in designing their regulations and policies. In order to ensure effective implementation of TBT requirements for technical regulations the following steps and considerations are among those that need to be considered:
44. If technical regulations are necessary:
This Appendix discusses a number of regulatory and non-regulatory options, other than technical regulations. The main options are:
Each of these is elaborated on below.
The status quo should always be considered as an option, to ensure that alternatives are not chosen which would in fact lead to worse outcomes than the current situation.
Reliance on the general law
Consideration of alternatives should also include assessing whether reliance on the general law, such as competition and consumer protection laws, could sufficiently address the problem.
Educational programmes
Where there is an asymmetry of information between buyers and sellers an educational strategy can be an effective way to remedy the problem. Possible approaches include:
Educational programmes can improve outcomes while still preserving consumer choice. Even poorly-informed consumers have a lot of information that governments do not; about their preferences, their financial situation, their skills and so on. Governments, on the other hand, can obtain critical information for consumers by buying expertise or testing resources. It is far easier to get that information into the hands of consumers than to try to collect all of the information that would be required for the government to substitute its own judgement about when and how goods and services should be used. For example, it may be better to label appliances with energy-use information than to set energy-efficiency standards, since the government does not know whether a furnace will be installed in a well- or poorly-insulated house; whether an air conditioner will be used daily, or only on weekends; how many people will be taking showers from a water heater; how many people will be contributing laundry to a washing machine. All these conditions change the cost-benefit analysis of specific energy-use decisions.
Mandatory disclosure, however, is not without cost. The administrative burdens of collecting and maintaining information can be high. Some form of registration requirement may be needed to identify the members of a particular industry or occupation who will be subject to an information requirement. If consumers are not able to interpret disclosed information, mandated disclosure can be more confusing than helpful to them.
"Voluntary" or "consensus" standards enable suppliers to provide consumers with improved information on the quality of their product or service, without reducing consumer choice.
Economic instruments seek to influence market behaviour by altering the relative prices of goods or services. Market behaviour can be influenced either directly (e.g. through a tax or user charge), or indirectly (e.g. through controlling the overall level of supply). The most common use of economic instruments is as a response to externalities. Economic instruments are a means of "internalizing" the costs of externalities, so that they will be taken into account in production and consumption decisions. The two main types of economic instrument are:
Much regulation is intended to reduce risks and governments place an increasing emphasis on preventative measures. Yet risk by itself is not evidence that governments should intervene to prevent accidents. Technical regulations may not be necessary if those who are able to reduce the risk of accidents and/or injury (usually services providers or manufacturers) face effective incentives to do so. This can be achieved through laws which make the service provider/manufacturer accountable for any damage caused through their actions. Robust, transparent liability laws create strong incentives for service providers or manufacturers to educate consumers, workers, and others about risks that may be outside the realm of their direct experience and how to minimise or avoid them.
Voluntary schemes may be established by a private body or group of private bodies in the form of codes of practice. These can cover issues such as standards, information requirements, or dispute resolution mechanisms. Codes of practice can be effective tools for building consumer confidence, and providing for effective communication between consumers and suppliers. The effectiveness of codes of practice depends on how many suppliers are covered by the scheme, the sanctions for non-compliance and the degree to which consumers are involved in developing and monitoring the scheme.
Codes of practice are developed by consensus between those who will be applying them. As a result compliance should be higher than in the case of technical regulations. In addition, codes of practice tend to be developed by people with a good knowledge of market conditions, and so should be better suited to economic and competitive conditions than Government regulations. However, there is a risk that codes of practice can be used to reduce competition, or to create de facto cartels. Care needs to be taken that codes of practice are subject to effective competition laws.
Self-regulation can be defined as an arrangement in which an organized group (such as an industry association) regulates the behaviour of its members. The advantages of self-regulation are that rules may be more likely to be observed if they are made by insiders, changes and updating can be more rapid, and it is cheaper for the Government because the regulated group bears the costs of regulating. Accountability, on the other hand, is often hard to establish, and oversight may be needed to ensure that the public are being protected, rather than the private interest of the regulated group.
Co-regulation is similar to self-regulation. However, under co-regulation, the government works together with the industry group to develop rules for the industry, with a view to ensuring the public policy objectives are met.
