Trade and trade policy issues in the United Nations' Millennium Development Goals and the sustainable development goals

Messerlin, Patrick A. Working Paper Trade and trade policy issues in the United Nations' Millennium Development Goals and the sustainable development goals ADBI Working Paper, No. 638 Provided in Cooperation with: Asian Development Bank Institute (ADBI), Tokyo Suggested Citation: Messerlin, Patrick A. (2017) : Trade and trade policy issues in the United Nations' Millennium Development Goals and the sustainable development goals, ADBI Working Paper, No. 638, Asian Development Bank Institute (ADBI), Tokyo This Version is available at: https://hdl.handle.net/10419/163137 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/3.0/igo/ ADBI Working Paper Series TRADE AND TRADE POLICY ISSUES IN THE UNITED NATIONS’ MILLENNIUM DEVELOPMENT GOALS AND THE SUSTAINABLE DEVELOPMENT GOALS Patrick Messerlin No. 638 January 2017 Asian Development Bank Institute The Working Paper series is a continuation of the formerly named Discussion Paper series; the numbering of the papers continued without interruption or change. ADBI’s working papers reflect initial ideas on a topic and are posted online for discussion. ADBI encourages readers to post their comments on the main page for each working paper (given in the citation below). Some working papers may develop into other forms of publication. Suggested citation: Messerlin, P. 2017. Trade and Trade Policy Issues in the United Nations’ Millennium Development Goals and the Sustainable Development Goals. ADBI Working Paper 638. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/tradepolicy-issues-united-nations-mdg-and-sdg Please contact the author for information about this paper. Email: [email protected] Patrick Messerlin is professor emeritus of economics at Sciences Po Paris, and serves as c hairman of the Steering Committee of the European Centre for International Political Economy (ECIPE, Brussels). The views expressed in this paper are the views of the author and do not necessarily reflect the views or policies of ADBI, ADB, its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms. Working papers are subject to formal revision and correction before they are finalized and considered published. Asian Development Bank Institute Kasumigaseki Building, 8th Floor 3-2-5 Kasumigaseki, Chiyoda-ku Tokyo 100-6008, Japan Tel: +81-3-3593-5500 Fax: +81-3-3593-5571 URL: www.adbi.org E-mail: [email protected] © 2017 Asian Development Bank Institute ADBI Working Paper 638 Messerlin Abstract This paper presents an overview of the trade and policy issues in the United Nations’ Millennium Development Goals (MDGs) and the Sustainable Development Goals (SDGs). It assesses the dramatic changes in the political, economic, and business background from the early 2000s (shaping the MDGs) to the early 2010s (designing the SDGs). These changes rarely get the attention they merit, despite their profound consequences on how to use—or not use—trade policies for promoting development. Following this, it examines the three major phases in the MDG/SDG progress: first, a pro-trade agenda during the preparation of the MDG Report (2002–2005) insisting on the positive impact of trade for development if—a big if—economically sound trade policies are adopted; then, uninspiring MDG8 Gap Reports cantoned in the increasingly sterile—and economically unsound— World Trade Organization negotiations during the implementation period of the MDGs (2007–2015); finally, the ignorance of the trade potential for a “better life” during the preparation of the SDGs (2013–2015). The paper also provides a telling comparison of the MDGs’ and SDGs’ very different inputs and outputs. The paper concludes by stressing the largely ignored common regulatory agenda between trade policies and the SDGs, arguing that a well-designed trade policy could play a key role for improving domestic regulations, and, hence, contribute to the SDGs’ ultimate goal—a “better life”. JEL Classification: F10, O10 ADBI Working Paper 638 Messerlin Contents INTRODUCTION .................................................................................................................. 1 1. DRAMATIC CHANGES IN THE POLITICAL, BUSINESS, AND ANALYTICAL ENVIRONMENT ......................................................................... 1 1.1 The MDG Preparation Phase: Still a Pro-trade Agenda.................................. 1 1.2 The SDGs’ Preparation: Lack of Interest in Trade .......................................... 3 2. DIFFERENCES IN THE MDGS AND SDGS PRODUCTION PROCESS ................... 4 2.1 The MDG Preparatory Phase ......................................................................... 4 2.2 The SDG Preparatory Phase ......................................................................... 6 2.3 A Missed Opportunity: The MDG8 Gap Reports ............................................ 6 3. MDG AND SDG OUTPUTS: TARGETS AND INDICATORS ..................................... 9 3.1 MDG Output ................................................................................................... 9 3.2 SDG Output: Goals and Targets .................................................................. 10 3.3 SDG Outputs: Indicators in Trade Matters.................................................... 12 4. CONCLUDING REMARKS ...................................................................................... 13 REFERENCES ................................................................................................................... 16 ADBI Working Paper 638 Messerlin INTRODUCTION The impression that the United Nations’ Sustainability Development Goals (SDGs) have been much less interested in trade issues than its Millennium Development Goals (MDGs) flows neither from there being few places in the former’s documents where they are explicitly mentioned, nor to the SDGs having much wider “transformational” ambitions than the MDGs. While MDGs were shaped with a heavy aid perspective targeting poor countries, SDGs addressed the roots of world poverty by adopting a holistic development approach, with every country expected to work for them (United Nations Association – UK 2016). With such a change of scale, one should expect that trade would be somewhat “downscaled” compared to their position in the MDGs—as indeed with every other prominent issue in the MDGs. Rather, this impression flows from the SDG ideas and suggestions being mere replicas of those highlighted by the MDGs, as if the issues raised by trade policies in the 2010s and beyond were similar to those faced between 2000 and 2005. This is this routine approach which signals best a profound lack of interest in trade. This paper presents an overview of the MDG and SDG trade and policy issues in three steps. Section 1 shows the dramatic changes in the political, economic, and business background from the early 2000s (shaping the MDGs) to the early 2010s (designing the SDGs). Section 2 focuses on the differences in the inputs used in the preparatory process of the MDGs and SDGs. MDGs have been largely driven by small teams of experts in a limited number of topics, while SDGs have relied on grand-scale UN consulting and negotiating machinery for defining and addressing a much wider agenda. The section also shows how the MDG Gap Reports have failed to bridge the MDGs and SDGs. Finally, section 3 focuses on the MDG and SDG outputs, that is, their goals, targets, and indicators, showing the very different scale of these two endeavors, before making a first tentative economic assessment of the SDGs vis-à-vis trade issues. 1. DRAMATIC CHANGES IN THE POLITICAL, BUSINESS, AND ANALYTICAL ENVIRONMENT The MDG and SDG preparation phases occurred in dramatically different environments in almost all possible dimensions: increasingly chaotic domestic politics, severe and unresolved economic turbulence, growing tensions in international relations, etc. Having emerged in such different environments, these two endeavors could hardly have been similar even had they wanted to be, which was not the case. 1.1 The MDG Preparation Phase: Still a Pro-trade Agenda The core MDG preparation phase was from 2002 to 2005, and was a product of recent world trade achievements. A pro-trade environment and the successful conclusion of the Uruguay Round in 1995 and the expansion of the topics it covered meant that supporting opening markets was still perceived as politically beneficial by most world politicians. This was greatly amplified by the broad political and economic consequences of the Fall of the Berlin Wall, which confirmed the prevalence of market economies and suggested a shift from the adversarial US-USSR relationship to a US-China duopoly, with China seen as slowly but firmly conforming to the Western economic model. 1 ADBI Working Paper 638 Messerlin In addition, two events kept trade policy at the center of the world diplomacy and stage: First was the “Millennium syndrome”, that is, the desire shared by many politicians to use the change of millennium as an opportunity to scale up ambitions and their political visibility. One of the very first manifestations of this happened in trade policy: Sir Leon Brittan, then the EU Trade Commissioner, tried to launch a new round of negotiations (the “Millennium” Round) at the brand new World Trade Organization (WTO) in the very late 1990s. This attempt ultimately failed in the 1999 Seattle WTO Ministerial not so much because of the anti-globalization movement, but because it relied on a fundamental mistake: there was still a decade left before the full implementation of the Uruguay Round commitments. As a result, many countries, including in the developed world, were waiting until the last minute to fulfill their commitments in sensitive areas, such as textiles (elimination of quotas) or agriculture (tariffication of existing trade barriers). In such a context, nobody was eager to go back to the negotiating table so soon. The second important political event was the 11 September 2001 attacks on New York and Washington D.C. that triggered a strong desire among the international community to unite against terrorism. As the WTO is the largest gathering of countries outside the UN, it was the best place to show this short-lived consensus, with its first Round thus launched in Doha, Qatar, only two months after the terrorist attacks. However, the pro-trade agenda faced obstacles from two quarters. First, the most often mentioned—although arguably the less damaging in the long run—was the rise of nongovernment organizations (NGOs), mostly from Organisation for Economic Co-operation and Development (OECD) countries, which, almost invariably, perceived trade as a negative force for their very specific agendas. Those such as Oxfam that took a more balanced view of the trade role in development and governance were relatively few. In this context, the early 2000s witnessed a complex chemistry between the trade community (economists and negotiators) and the anti-free trade NGOs. Despite their opposing views, both needed the other side. On the one hand, their anti-trade platform notwithstanding, the NGOs had fragmented positive development agendas competing against each other for public attention. On the other hand, the trade community, realizing the progressive lack of public support, was highlighting its role in development. In short, both sides became part of an ecosystem based on the WTO “sound box” in hopes of making their individual goals better known, understood, and supported. The second obstacle, which was much less apparent in the early 2000s,although it could be seen as the most seriously damaging for trade in the long run, was the fading support for multilateral trade negotiations from the Western business community (most notably in the US). This support was at its zenith among the large firms in the second half of the 1990s when the Uruguay Round expanded the General Agreement on Tariffs and Trade (GATT) coverage to issues such as services and intellectual property rights. However, by the mid-2000s, most large Western firms had already lost interest in the Doha WTO negotiations, which were felt to be too slow—indeed, the arcane Doha discussions on “modalities” did their best to confirm this impression. Even more important, the Doha discussions were increasingly irrelevant for large international firms since they paid scant attention to such issues as norms in goods, market access (and the related regulations) in services, and intellectual property rights. This mismatch became deeper and more entrenched when large firms found their own alternative to WTO negotiations by designing tailor-made liberalization via global value chains, that is, extracting tariff cuts on specific goods of interest in exchange for investments in the countries at stake. These tailor-made tariff cuts and foreign investments had an additional advantage for the firms: they did not need to be “bound” in the GATT-WTO sense, and did not require the huge political investments associated to bound deals. 2 ADBI Working Paper 638 Messerlin In the early 2000s, trade still predominated in the MDG program, and policy recommendations were largely dominated by the hope that the 2005 Hong Kong WTO Ministerial could open the door to a successful Doha Round within a few years. As a result, trade was involved at every step of the MDG production process, with a special task force and a special report on Trade and Development (UN Millennium Project 2005a). Trade was part of target 12 on global governance and target 13 on the Least Developed Countries; in addition, it was part of the recommendations of the eighth MDG “Developing a global partnership for development,” a point examined in more detail in section 2. 1.2 The SDGs’ Preparation: Lack of Interest in Trade Twelve years later, the policy and analytical environment of the SDGs is vastly different, following a slow, but continuous political evolution in the developed countries and a brutal world economic shock. Indeed, it is very revealing that, while the early 2000s were rich in anti-trade books, papers and op-eds, such literature almost disappeared in the early 2010s. The political evolution, which is related neither to trade nor development, but to the functioning of representative democracies, started in the 1990s when freer trade was still firmly part of the international consensus. Since then, in almost all the large democratic countries, presidential and/or parliamentary elections have repeatedly brought increasingly thin governing majorities. Such ill-elected governments have a hard time fighting even the smallest vested interests, which exacerbates the asymmetrical situation between trade and development. In trade, small vested interests are mostly defensive, and easy to mobilize because they have a strong sense of the potential economic damage in case of liberalization, as well as their own political clout. Offensive trade interests are generally weaker since they don’t perceive as robust or clear the opportunities brought by more open foreign markets, they are often not politically powerful since they are often emerging sectors, and they are simply too busy, with little time for lobbying. The situation in the development-related issues is largely the opposite, where offensive interests with their often anti-trade corollaries are often supported by small groups that lobbied hard at home, but also used the world to bypass local opposition. In short, during the last two to three decades, democratic governments elected by increasingly thin majorities have had to face defensive interests in trade issues and offensive interests in development matters. Such a situation could only result in an increasing anti-trade bias, with the SDGs abandoning the more balanced approach on trade and development that prevailed during the MDGs. This was all the easier because, as stressed above, the SDGs have been an inter-governmental process in the UN context. The SDGs have also been profoundly shaped by the 2008 Great Crisis, which, interestingly, hurt trade’s reputation as much as—if not more than—finance. This is strange for two reasons: first, it is not yet very well known that, while there has been a very long financial crisis (especially in the EU), there has been no trade crisis. The trade collapse in 2008–2009 only lasted a few months and was largely driven by the collapse of trust, including among subsidiaries of the same firm located in different countries. Though the WTO annual reports provided the information showing the very time-limited trade crisis, the public at large did not pay attention, and still does not realize that trade has been a strong stabilizing force in the post-2008 world economy. 3 ADBI Working Paper 638 Messerlin The second strange aspect of the loss of credibility in trade pertained to the criticisms addressed to the efficiency of the markets. The belief in “perfect” markets that prevailed in most financial circles before 2008 was never a strong element in trade matters; rather, trade economists spend most of their time looking for more efficient public measures, with one of the oldest basic elements of trade theory (the Stolper-Samuelson theorem) stressing that freer trade will always face opponents since any attempt to eliminate barriers will generate some losers. In this context, no wonder that trade policy requires very determined and pro-active governments—in sharp contrast to the widespread public opinion that freer trade strips domestic governments of their powers. All these forces converged to weaken the SDGs’ pro-trade approach. Top politicians became mute on trade, before becoming increasingly outspoken on plain mercantilist actions which started with a focus on job-creating exports in the late 2000s and is ending up in the mid-2010s with unrestrained advocacy for retaliatory tariffs and trade wars. The long agony of the Doha Round has added its burden—to the point to even divide the trade economists’ community, as illustrated by two fora in 2011, that is, the year before the launch of the SDG production process (Messerlin and van der Marel 2011). Following the Doha Round, these two groups was split in half a dozen sub-groups pushing for different concrete solutions, a recipe for becoming increasingly irrelevant. 2. DIFFERENCES IN THE MDGS AND SDGS PRODUCTION PROCESS The differences in the MDG and SDG environments have extended to their respective philosophy and related production process. The MDGs were a relatively limited exercise when they were launched, with a carefully defined mandate. That made their production process relatively light and well organized. By contrast, as already mentioned, the SDGs have an agenda which was almost borderless at the beginning; its final definition required several years of debate. It is thus not astonishing that the SDG production process was more volatile and complicated. This section presents in more detail the two preparatory processes before looking at the missed opportunity of the Gap Reports set up by the MDGs for monitoring their implementation until 2015. 2.1 The MDG Preparatory Phase The MDG preparation phase was a two-step process. First, a very limited number of top UN officials worked in “relative casualness” for shaping the list of the topics to be addressed. This first step was so short that topics that today seem a must for such an endeavor were nearly overlooked, with environmental issues being included literally at the last minute (Tran 2012). The second phase was a three- to four-year work done by the 10 task forces listed in Table 1 (task force 5 on Diseases and Medicines was composed of four sub-task forces to better address the wide spectrum of its issues). Each task force was invited to write a comprehensive report documenting and analyzing the main issues in the fields covered and suggesting the key MDG targets for the end-year 2015. An overview report was then presented (UN Millennium Project 2005b). 4 ADBI Working Paper 638 Messerlin Table 4: The Proliferation of SDG of Goals, Targets, and Words Number of Targets per Goal Words per Target Goals Targets Words MDGs 8 21 374 2.6 17.8 SDGs High Level Panel – 54 889 – 16.5 11th OWG – 139 2,360 – 17.0 12th OWG – 212 4,389 – 20.7 Final 17 169 4,369 9.9 25.9 MDGs = Millennium Development Goals; SDGs = Sustainable Development Goals; OWG = Open working group. Sources: Table 1 for the MDGs and Copenhagen Consensus Center for the SDGs. These observations raise questions: To what extent have the SDG targets been able to keep an economic dimension? Has the proliferation of goals, targets and words been achieved by piling up too many quantitative elements? For instance, is the indicator 12.6.1 “number of companies publishing sustainability reports” useful and appropriate for monitoring the target 12.6 “encourage companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycles”? Answering these questions goes beyond this paper and would require an in-depth analysis. However, key words suggest that basic economic terms rarely appear: for instance, the word “price” appears only twice in the targets and indicators (United Nations Economic and Social Council 2015). Similar observations could be made for trade, exports, and imports, with again the notable bias of exports preferred to imports, revealing a mercantilist approach not amenable to improving trade policies. In this context, the analysis done by the Copenhagen Consensus Center (CCC), the only existing systematic review of the SDGs from a purely economic perspective, deserves some attention (Lomborg 2014). Table 5 summarizes its main conclusions. Columns 1 and 2 list the 17 goals and 169 targets associated with each goal. Column 3 presents the goals in which there are some references to trade (based on the words “trade”, “export”, and “import”) and trade policy (based on the words “tariff”, “quota” and “subsidy”). Columns 4 through 9 summarize the CCC’s conclusions. Column 4 shows the distribution of the “reviewable” targets, that is, the targets for which the CCC has estimated to have enough knowledge and information to provide a reasoned economic assessment of those that do not contain internal inconsistencies. Only 38 of the targets have been considered reviewable. Column 5 shows that the distribution of these targets is very uneven among the various goals: at one end of the spectrum, a few goals have no reviewable target at all, while at the other end, two goals have listed targets two-thirds of which have been considered reviewable. For the 38 reviewable targets, Columns 6 to 9 show that the CCC cost-benefit analysis has led to four outcomes: “phenomenal” (robust evidence that benefits are 15 times higher than costs); “good” (robust evidence that benefits are 5 to 15 times higher than costs); “fair” (robust evidence that benefits are 1 to 5 times higher than costs); and “poor” (robust evidence that benefits are smaller than costs, or that the target definition is inconsistent or provides wrong incentives). 11 ADBI Working Paper 638 Messerlin Table 5: An Initial Economic Assessment of the SDGs’ “Reviewable” Targets Targets Targets Reviewed by the CCC [b] CCC’s Assessments Number of Indicators Goal Number Refer to Trade [a] Phenomenal Good Fair Poor Number Ratio 4/1 1 2 3 4 5 6 7 8 9 10 1 7 1 14.3 1 9 2 8 yes 3 37.5 1 1 1 15 3 13 8 61.5 3 4 1 25 4 10 4 40.0 1 2 1 11 5 9 1 11.1 1 14 6 8 1 12.5 1 10 7 5 3 60.0 2 1 6 8 11 yes 4 36.4 2 1 1 15 9 8 2 25.0 1 1 12 10 10 2 20.0 1 1 12 11 10 0 0.0 13 12 11 2 18.2 1 1 12 13 6 0 0.0 5 14 10 3 30.0 2 1 10 15 12 0 0.0 15 16 12 0 0.0 21 17 19 yes 4 21.1 1 1 1 1 24 All 169 3 38 22.5 13 11 9 5 229 Source: Copenhagen Consensus Center (CCC), 2014. The CCC review leads to two main conclusions. The first deals with all the targets reviewed, either trade-related or not. Two-thirds of the reviewable targets (24) benefit from a “phenomenal” or “good” assessment. Though this seems a very positive outcome, this impression should be seriously nuanced by 131 targets—77 percent of all the total—not being able to be reviewed because of a lack of information or internal inconsistency. The second conclusion deals only with the targets that include one of six key words related to trade (“trade”, “export”, “import”, “tariff”, “quota”, and “subsidies”). All the targets containing one of these six words are among the 38 reviewable targets, and they have been rated as “phenomenal” or “good”. In this context, it is interesting to note that the CCC assessment on trade-related targets (Anderson 2014) has been careful enough to accommodate the most recent developments in trade policy, such as the “mega” preferential trade agreements that have been omitted by the Gap Reports. 3.3 SDG Outputs: Indicators in Trade Matters Column 10 of Table 5 lists the current number of indicators associated with the targets (Leadership Council of the Sustainable Development Solutions Network, 2015).1 There are 229 indicators, roughly four times the number under the MDGs. There are wide differences among the targets, some of them having a much higher number of indicators than others. What follows focuses on the indicators under the Trade heading (Goals 17-10, 17-11 and 17-12). A rapid analysis reveals serious problems in the way these indicators are defined. 1 This number may still be subject to change. 12 ADBI Working Paper 638 Messerlin Goal 17-10 is a rewording of the MDG goal: “promote a universal, rules-based, open, non-discriminatory and equitable multilateral trading system under the World Trade Organization, including through the conclusion of negotiations under its Doha Development Agenda.” The associated indicator 17.10.1 reads as follows: 17.10.1 Worldwide weighted tariff average. This indicator is hard to understand. Is it the average over all the goods for a given country, or the average over all the countries for a given good? Is this average tradeweighted or not? In any case, broad tariff averages are not useful because they “dilute” the limited number of high tariffs (tariff peaks)—those which really hurt domestic consumers, be they households or firms, and are welfare-deteriorating—in the number of small or zero tariffs imposed on most of the goods. They are particularly unhelpful when one focuses on LDCs, which export a very limited range of goods. Goal 17-11 requests to “significantly increase the exports of developing countries, in particular with a view to doubling the least developed countries’ share of global exports by 2020.” The associated indicator 17.11.1 reads as follows: 17.11.1 Developing countries’ and least developed countries’ share of global exports. This goal raises also several questions. Why has “doubling” been preferred to any other pre-determined figure? Even more important, how should such a result be assessed: is it the consequence of the proper functioning of the markets, or of some government policy (for instance, export subsidies)? Is it possible to disentangle the many economic forces and policies that could have led to such a result, with possibly none of them due to the developing countries or least-developed countries? Goal 17-12 requests to “realize timely implementation of duty-free and quota-free market access on a lasting basis for all least developed countries, consistent with World Trade Organization decisions, including by ensuring that preferential rules of origin applicable to imports from least developed countries are transparent and simple, and contribute to facilitating market access.” The associated indicator 17.12.1 reads as follows: 17.12.1 Average tariffs faced by developing countries, least developed countries and Small Island Developing States As in the case of Goal 17-11, defining such an indicator exclusively in terms of tariff averages does not provide a robust enough information for monitoring this goal. 4. CONCLUDING REMARKS The SDGs have missed the opportunity to harness trade as an instrument for achieving their ultimate target—a “better life”. The SDG working framework did not allow them to be both bold and pragmatic in trade matters for two main reasons: first, the Gap Reports have been uninspired, and cantoned themselves in the increasingly sterile WTO negotiations. As a result, they were unable to inform the UN about the new aspects of the trade debate that could be of great interest for the SDG participants. The second reason is that the Missions to the UN have been the main SDG negotiating body. Unfortunately, the UN Missions’ staff rarely has an intimate knowledge of how to handle trade, and the limited funds for the SDGs have prevented many countries from bringing trade experts from their capital cities. 13 ADBI Working Paper 638 Messerlin This is a great loss because trade and the SDGs have a common regulatory agenda. What the trade aspect could bring to the SDGs is the realization of how a well-designed trade policy can improve domestic regulations. To some extent, this theme has emerged during the MDGs: for instance, the MDG report on Trade for Growth has stressed how eliminating water subsidies for farm production would improve resources and reduce agricultural trade distortions. What happened during the last decade is the realization that such mutual benefits between better domestic regulations and better trade policies exist in almost every economic sector. Modern economies are split between two economic drivers: the desire for harmonization associated to scale economies and the endless appetite for diversity in goods and services fueled by economies of scope. So far, the first force has been the most powerful—hence the massive efforts until the late 1990s to harmonize norms in goods (harmonization has impacted very few services where diversity has always been prevalent). But the huge technological progress of the two last decades enables an endless diversity in goods and services at increasingly lower costs—turning harmonization into a costly constraint. One of the best illustrations of these changes is provided by the EU “five decades” harmonization approach in the car sector. It has recently faced a remarkable debate, with Daimler (interestingly backed by Greenpeace) refusing to enforce a new, less polluting car coolant because it was found to be more flammable.2 In other words, this case illustrates the increasing difficulties to define a norm that is unambiguously better than any alternative from all the conceivable criteria (pollution vs. safety in the Daimler case). The second case is the “Volkswagen (VW) case” of playing with the norms—in fact, most EU carmakers have behaved as VW. To dictate norms is worthless if they are not implemented and monitored. The VW case is a powerful illustration of how useful a trade partner can be for ensuring compliance. It must be stressed that the case did not emerge because of some protectionist intent to hurt VW. On the contrary, the first tests were done in California by an engineer eager to assess the quality of German cars. When the engineer discovered what was going on, he turned to the California authorities, which sent the issue to the US federal authorities after having confirmed the engineer’s results. The lesson to be drawn from the Daimler and VW cases is simple: designing, enforcing, certifying, and monitoring “better” norms is a very difficult task and would greatly benefit from international “conversations” among the concerned regulating agencies. This key lesson is embodied in the concept of “mutual equivalence”, which is a much better approach than harmonization or mutual recognition, a weaker form of it (Messerlin 2011, 2015; Morall III 2011).3 Under mutual equivalence, two countries debate whether their norms or regulations are “different but equivalent”. Their decisions are prepared by a joint evaluation made by the partners’ relevant regulatory bodies—not the trade negotiators—of their existing norms for a given good or of their regulations for a given service. (This process of mutual evaluation can be made at the level of the definition of the norms or regulations, or at the corresponding certification processes, or at both levels.) This preliminary step of mutual evaluation is essential. Beyond its “technical” aspects, it is political to the extent that it creates the trust among the regulatory agencies—hence among the two countries—that is so badly needed 2 Interestingly, it is reported that the new coolant is produced by only two firms (Honeywell and Chemours) a non-competitive situation opening the way to high prices (Hakim 2016). 3 At a first glance, mutual equivalence seems a new and untested idea. It is not. The EU 2006 Services Directive is based on this principle, as stated in Article 15. 14 ADBI Working Paper 638 Messerlin when dealing with issues as complex and subtle as norms or regulations. If, and only if, mutual equivalence is granted after a satisfactory mutual evaluation process, producers are allowed to produce the good or service in question under the regulations of their own country and/or to sell it to the consumers of the other country without any other formality. Mutual equivalence is the only way to get a deeper and more beneficial integration of two economies because it does not generate the costs that harmonization imposes. It has two additional benefits that should not be underestimated. First, it is a careful process that requires time and thus fits well the concept of bilateral trade as “living” agreements. An “ambitious” agreement concluded “quickly” is an oxymoron in 21st century economies, as it defies the complex economic and regulatory realities—hence, it is doomed to generate anxiety among the public opinion and ultimately to be selfdefeating. Second, mutual equivalence provides a robust solution to the widespread fear of trade agreements generating a “race to the bottom” in regulatory matters. If a country decides to change its regulation for some reason, under mutual equivalence, the regulatory body of the partner could, if needed, evaluate this new regulation. If it does not find the new regulation equivalent, then it can suspend the existing agreement, possibly conditional on some measures being taken by its partner. In such a context, no regulator has an interest to a race to the bottom. The only true option is a race to the top. 15 ADBI Working Paper 638 Messerlin REFERENCES Anderson, K. 2014. Trade Assessment Paper. Benefits and Costs of the Trade Targets for the post-2015 Development Agenda. 10 October. Copenhagen Consensus Center. Available at www.copenhagenconsensus.com/post-2015-consensus/ trade (accessed 3 December 2016). Hakim, D. 2016. Refrigerant Now Adopted in Cars Isn’t Worry-Free. The New York Times International Edition, 22–23 October, 1–10. Leadership Council of the Sustainable Development Solutions Network, 2015. Abridged Report: Indicators and a Monitoring Framework for the SDG. Launching a Data Revolution for the SDGs. New York: United Nations. Lomborg, B. 2014. 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