Regulatory Process in the Post-Uruguay Round World Summary ofWorkslwp Held in Yogyakarta, Indonesia April 25 - 29, 1994

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Governance INDONESIA

MALAYSIA

SINGAPORE

VIETNAM

PHILIPPINES

In collaboration with: Lembaga Administrasi Negara (Indonesia)

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INSTITUTE ON GOVERNANCE

The Institute On Governance is a non­profit organization established in 1991 to create, share, and apply knowledge about the renewal of government and other public sector institutions, and to address related public policy issues both in Canada and abroad. The Institute carries out this mission through linkages with an extensive international network of mem­bers, affiliates and partners engaged in related work. The work of the lOG includes: organizing special events such as seminars and workshops, providing advisory services to governments en­gaged in renewal, conducting research and publishing of a strategic and Inter­jurisdictional nature, and offering profes­sional development programs which help to develop the skills, knowledge and altitudes which will support the renewal of public organizations.

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© 1994 Institute On Governance. Editedby Kathleen Lauder and Terri Epps. AU rights reserved ISBN0-9696759-2-5 For copies of this publication send CDN $24.95 plus postage per copy (price includes GST) to:

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TABLE OF CONTENTS

Acknowledgements " ..............•.................• i

Program " iii

List of Participants , xi

Synthesis of Main Themes and Issues Harry Rogers , 1

Developing and Enforcing Regulations and Standards: A Canadian Private Sector Perspective David A. Brown " 17

The Uruguay Round: All Overview David Lee " 41

Regulation in the Agricultural Sector in an Increasingly Interdependent World: The Canadian Experience Michael N. Gifford 61

Closing Remarks Dr. Prijono Tjiptoherijanto 69

ACKNOWLEDGEMENTS

The workshop is a result of the initiative and generous contribution of a variety of individuals and organizations. The Institute On Governance (lOG) would like to acknowledge CIDA's Partnership Branch for its financial support. Apprecia­tion and thanks are also extended to Lernbaga Administrasi Negara (LAN) of Indonesia, and particularly to Dr. Kristiadi, chairman of LAN who has been an important driver of the Insttute On Governance's network in South-East Asia and Dr. Apulijah and her team who looked after all of the logistical and administrative details which made the event so memorable. We are also grateful to Harry Rogers, Deputy Minister of the Office of Federal Economic Development (Ontario) of the Privy Council Office who chaired the workshop and provided excellent advice on the programming for the event. Thanks are also due to David Brown Lee of Foreign Affairs and Interna­tional Trade Canada who prepared and presented papers. Finally, we are most appreciative of the excellent contribution of the participants themselves whose experience, insights and active participa­tion formed the heart of the workshop. .f

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CANADA SOUTH-EAST ASIA GOVERNANCE

INNOVATIONS NETWORK

The Canada South-East Asia Governance Innovations Network is a network of senior officials from Canada and South­east Asia. The network is founded on the belief that innovation is critical to social and economic development. A society which is continually striving to increase prosperity and quality of life for its members must find effective approaches to sharing ideas and information and learning how to adapt experiences from one jurisdiction to another.

The network was conceived and is ani­mated by the Institute On Governance (lOG) (Canada). The lOG identifies critical governance' issues, develops programs designed to share experiences and foster innovation on those issues, and searches for means to draw people and organizations into the network who can act as resources to each other. The lOG worked closely with individuals and organizations in participating countrles, drawing on their resources in the concep­tual design of the network activities and also in the logistical and administralive aspects of hosting events and meetings.

The network is focused on the enhance­ment of governance models and practices. Countries participating in the network include all of the ASEAN countries, Canada and Vietnam. Activities to date have included:

• colloquia which brought together a small number of selected top level officials from all participating countries to share knowledge and experience in

an informal setting. These have been held annually over a three year period starting in 1991. The location of the colloquia has rotated each year starting in Canada and moving to Thailand and Vietnam:

• u leadership program of "high flyers" in the participating countries de­signed to enhance leadership knowl­edge, skills and attitudes and to build a network of leaders through which continuous learning and innovation may be fostered. The program is held annually with the first one occurring in January, 1994. The program is hosted by the Singapore Civil Service College and held in Singapore, and

• this regional workshop on "The Regulatory Process in the Post Uru­guay Round World".

The network began with 16 people partici­pating in a colloquium. It has grown to include over 150 people, from over 50 organizations who have participated in or contributed to five events. Recently it has reached a new stage in its evolution. Governments of participating countries and tile Canadian International Develop­ment Agency have agreed to support a three year program in which activities of the network would be coordinated and supported on a more sustained basis.

This publication focuses on the activities and issues of the regional workshop held in April 1994. "

Governance: "the manner in which power is exercised in the management of a country's economic and social resources for development."

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PROGRAM SCHEDULE

18:15 -18:45

18:45 -19:00

19.00 -19:10

19:10 ~ 19:20

19:20 -19:30

19:30 -19:45

19:45 - 22:00

Day 1Monday, April 25

Arrival of Participants

Welcoming Reception at Phoenix-Heritage Hotel.

Motorcade from Phoenix-Heritage Hotel to the Sultan's Palace.

Brief Report by Chairman of Organizing Committee.

Welcoming speech by Governor of Yogyakarte /Srl Paduka Pakualam.

Speech by Dr. J. B. Kristiadi, Chairman of Lembaga Administrasi Negara (LAN).

Speech by Mr. Harry Rogers, Chairman of the Workshop/Deputy Minister, Office of Federal Economic Development (Ontario), Government of Canada.

Keynote Speech and Official Opening.

Dinner and Cultural Evening, Hosted by Lembaga AdminislTasi Negara (LAN), Republic of Indonesia.

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Day 2 Tuesday, April 26

Presenters: Harry Rogers Kathleen Lauder

08,30 - 09,00 Beginning of Workshop discussions:

Introduction to Workshop Program and Review of Administrative Matters.

Presenter: David Brown

9:00 -10:45 Developing and Enforcing Regulations and Standards:

Some fundamental questions are: To regulate or not? Should there be legislated rules or only guidelines? Who regulates (special tribunals, civil servants, cabinet)? What are the sanctions? What proce­dures are best followed in implement­ing regulations? What are the tradeoffs between certainty and flexibility?

Process of creating regulations: The four stages of conception, develop­ment, marketing to stakeholders and ongoing consultations.

10:45-11:15 Coffee/Tea Break

Presenter: Harry Rogers

11:15-12:00 The Regulatory Framework Policies of the Government of Canada

The need for a responsive regulatory regime.

12:00 M 13:30 Lunch

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Presenter: David Brown

13c30 -15:00 A Canadian Case Study:

Government of Canada reform and harmonization of financial institution legislation (banks, trust companies, insurance companies),

Analysis of how the techniques described earlier were used to plan and implement this massive legisla­tive reform.

All Participants

15:00 -16:30 Break-out into working groups for coffee and discussions of how well elements of the Canadian regulatory principles and experiences might apply in home countries.

16:30 -17:30 Re-assemble in plenary session for round­table discussion of deliberations of working groups.

Evening Free time.

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Day 3Wednesday, April 27

Presenter: David Lee

08:30 - 09:00 Sectoral Reviews

Agriculture

Telecoms

An overview of the Uruguay Round.

10:00 ~ 10:30 Coffee/Tea Break

10:30 ·12:00 Session continues

12:00 -13:30 Lunch

13:30 -18:00 Sightseeing tour to Prambanan, Kotagede, Borobudur Temple.

18:00 Dinner in Borobudur area.

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09:00 -10:30

10:30 -11:00

11:00 -12:00

12:00 - 1330

13:30 -15:30

15:30 -16:00

16:00 -17:30

19:00

Day 4Thursday, April 28

Presenter David Lee

The New Challenges:

Regulatory issues arising from trade agreements in the areas of trade in services, investments and intellectual property; principles underlying those agreements; parallels with domestic regulatory measures; and implications for domestic regulation.

Future issues, induding competition measures, environmental standards, labour law, tax measures.

Lessons to be drawn.

Coffee/Tea Break

Session continues

Lunch

All Participants

Panel discussion:

Canadian resource persons formed a panel to lead a session of questions and answers and general discussion arising from the presentations with conference participants.

CoffeelTea Break

Session continues

Closing dinner

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Day 5Wednesday, April 27

Presenters: Harry Rogers All Participants

09:00 -11:30 Wrap-up session:

Synthesis of main workshop themes and results.

Comments of country delegations.

11:30 -12:00 Closing remarks by Tim Plumptre.

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LIST OF PARTICIPANTS

INDONESIA

1. Wirawan Martaredjo SE. Assistant III, State Minister for Administrative Reform Phone (062-021) 345-6189 FaX' (062-021) 384-7028

2. Dr, Sueiyarl B. Hirawan Head of Bureau for Regional Finance Analysis, Agency for Financial and Monetary Analysis Ministry of Finance Phone' (062-021) 38-01-66 ext. 5000, 3451188 FaX' (062-021) 36-57-63

3. Sunaeno S.H., M.Sc. Director Research & Development for Systems and Procedure National Agency for State Adminis­tration }1. Veteran No. 10 Phone, (062-021) 386-8201-7 ext. 193 FaX' (062-021) 386-5102

4. Dr. Han Purwanto Partner, Auditor and Business Advi­sory, Prasetio, Utomo & Co. Phone, (062-021) 570-3691 FaX' (062-021) 570-4360

S. Kiki Partini, M.Sc Staff of the Ministry of Food Affairs Agency for National Logistics Admin­istration JI. [end. Catot Subroto No. 49 Phone: (062-021) 525-2209 FaX' (062-021) 830-2534

6. Bambang Triyono Munadjat, SH LLM Chief of Foreign Claim Section, Legal Department Agency for National Logistics Admin­istration Phone' (062-021) 525-2209 FaX' (062-021) 830-2536, 830-2534

7. Herry Soetanto Deputy Director for International Institutions Department of Trade JI. M I Ridwan Rals 5 Jakarta Pusat Phone' (062-021) 385-8195 FaX' (062-021) 385-8191

MALAYSIA

8. Roldah Hanum BT Ibrahim Assistant Secretary, Ministry of Finance, JI. Duta 50592 Kuala Lumpur Phone' (03) 258-2534 FaX' (03) 253-5707

9. Lim Eng Siang Principal Assistant Secretary, Ministry of Agriculture [alan Sultan Salahudin Kuala Lumpur Phone' (603) 440-3271 FaX' (603) 291-7991

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SINGAPORE

10. Lim Toh Eng Deputy Director, Trade Documenta­tion, Regulation and Enforcement Division Singapore TradeDevelopment Board World Trade Centre #10 - 40 (Lobby D) Singapore 0409 Phone' (65)279-0425 Fa" (65)274-0770

11. Sulaintah Bte Mahmood SeniorTradeOfficer Economic Cooperation Division Singapore Trade Development Board World Trade Centre #10-40 (Lobby D) Singapore 0409 Phone' (65) 279-0369 Fax (65) 274-0770

VIETNAM

12 Dinh Van Hoi SeniorOfficiaJ Ministry of Trade. 31 Tramg Hem Hanoi, Vietnam Phone: 26-25-29 Fa" 844-264-696

PHILIPPINES

13. Luis C. Liwanag II Deputy Executive Secretary Officeof the President of the Philip­pines Rm II-B Now Executive Building, Malacanang, Manila, Philippines Phone' (632)712-5432/712-5434 Fa" (632) 712-5410

14. Eliseo S. Galchalian Director IV Civil Service Commission Constitution Hills, Batasan Pambansa Complex Dillman, Quezon City Phone' (632)931-79-81 Fa" (632)931-79-81

15. Rogelio B. Espiritu Commissioner Commission on Audit Dan Mariana Marcos Avenue Quezon City Phone' (632)931-78-73 Fa" (632)931-75-93

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The opening ceremony at the Sultan's Palace complete with Indonesian dancers and a banquet

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Dr. Kristiadi, Chairman of LAN and Harry Rogers, the Canadian Deputy Minister who chaired the workshop

Participants enjoying dinner at a local restaurant near Borobodur.

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The workshop was made even more memorable by a visit to the famous temple at Borobudur.

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WORKSHOP ON THE

REGULATORY PROCESS IN A POST-URUGUAY ROUND

WORLD

Synthesis ofMain Themes and Issues

by Harry Rogers Deputy Minister Office ofFederal Economic Development (Ontario) Government ofCanada

CONTEXT

The recent GAIT negotiations, the cre­ation of the European Union and the signing of the North American Free Trade Agreement have focused the attention of all trading nations on their increasing interdependence. These events have combined to bring significant pressures on the process of regulatory reform. Indeed, one of the early priorities for all trading nations will be the harmonization of many of their domestic regulatory structures with those of their trading partners. At the same time, governments increasingly recognize the importance of designing changes in legislative and regulatory programs, in a manner which is supportive of private sector develop­ment. This calls for new levels of involve­ment of non-government bodies and citizens in the design of legislative and regulatory frameworks, to ensure an appropriate balance between public and private interests.

To examine the implications of these twin issues, the need for regulatory reform related to new international trade agree­ments and the involvement of non­government bodies and citizens in the processes of reform, the Institute On Governance of Canada partnered with the Lembaga Administrasi Negara of Indone­sia to hold a workshop for selected senior personnel from the ASEAN countries and Vietnam.

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OBJECTIVES

Objectives of the workshop included:

gaining a better understanding of how the public sector can develop regulations which both address public interests and meet the need of the private sector to be internationally competitive:

examining alternative forms of regula­tory intervention in the context of private sector needs;

understanding the various approach­es through which the public sector can build consensus with the private sector and other governments, in the process of developing, monitoring and enforcing regulations;

• developing a better understanding of the implications of GAIT for the regulatory regimes for which partici­pants are responsible;

• learning how to harmonize domestic regulatory regimes with requirements laid out in International trade agree­ments;

• learning about the Canadian experi­ence in negotiating with the United States and Mexico to harmonize regulations within the context of NAFrA;

• exploring approaches through which participants can negotiate effectively within the ASEAN region to harmo­nize regulations;

• developing a practical list of do's and don'ts in developing regulations; and

developing a better understanding and enhancing relationships among

senior officials responsible for the regulatory process in the ASEAN countries, Vietnam and Canada.

FORMAT AND PROCESS

The workshop brought together resource persons from Canada, and fifteen partici­pants from the ASEAN countries and Vietnam in an open forum through which they shared experiences and explored approaches to common issues. The proceedings included lectures by Canadi­an experts on their experiences in regula­tory and trade negotiation processes, followed by questions and answers and discussions among the resource persons and participants.

The concluding sessions of the workshop consisted of panel discussions between the Canadian resource persons and participants, summarizing the major themes and issues set forth in the balance of this report.

THE NEED FOR REGULATORY REFORM

There was a unanimous view that the requirement for regulatory reform exists in all countries to:

• enhance certainty for the private sector, both for existing enterprises and for the attraction of new invest­ments, by being competitive with the regulatory regimes of other nations, both inside and outside the region;

• respond to GAIT requirements; and

• update outmoded laws as part of this effort.

Generally, it was agreed that the role of the State is to protect the broader public interest against narrower private interests.

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DEVELOPING AND ENFORCING REGULATIONS AND STANDARDS

Alternalives to Regulation

The introductory presentation' provided an overview of the subject starting with the basic question "is regulation by govern­ment necessary toaccomplish stated public policy goals?"

The main alternative is self-regulation by an industry or profession. This is attrac­tive to governments because costs and administrative burdens remain in the private sector and specialized expertise is available (lawyers, accountants, stock exchanges). Another form of self-regula­tion that does not involve the licensing schemes that prevail for members of an industry or profession, is the develop­ment of industrial standards, specifica­tions and quality control procedures. Here, it is usual to have a recognized and credible institutional framework. In Canada, there is a Canadian Standards System, overseen by the Standards Council of Canada (SCC). Accredited standards-setting organizations develop standards by consensus, relying on representation by all major stakeholders (producers, industrial users, consumers, governments). Standards elsewhere in the world are considered carefully, since harmonization can be useful in encourag­ing exports. Finally, merely the threat of government action can be used to force self-regulation. In Canada, a recent example was the threat directed at the financial services industry to curb impru­dent investment decisions by lmprovlng its standards of corporate governance, or else be faced with "extensive and intru­sive rules."

Other initiatives that can be considered as options to direct government regulation and enforcement include use of the taxing power; use of the spending power; or the establishment of government-owned corporations. These can either encourage certain kinds of activity or impose costs on them in accordance with public policy objectives.

If a government has decided that regula­tion is needed, one of the basic choices is whether to regulate by precise rules (black and white codes") or through flexible guidelines. Black and white codes are applied in such areas as income tax laws and employee health and safety. Such codes apply often in regulating new activities where neither the regulators nor the regulated have much expertise. The environment is such a field. A regime of guidelines, with actual controls based on administrative discretion, can be em­ployed to replace "black and white" rules. Implementation could occur once an industry has matured: when the pace of change necessitates a flexible approach; or where processes are highly technical. Examples in Canada include the regula­tion of financial institutions, foreign investment, competition law (anti-trust) and broadcasting.

Creating RegUlatory Bodies

Another basic question reviewed in the opening presentation was "who are the regulators?" The choice often depends upon the extent to which the government desires that regulation be viewed as independent of the government. Central banks are an example in most countries. Canada has tended to use specialized tribunals in the following circumstances:

Drown, David A., QC. Developing and Enforcing Regulations and Standards: A Canadian Private Sector Perepediue, Paper. Davies, Wardand Beck. Barristersand Solicitors, Toronto,Ontario, Canada, April11, 1994.

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when the government desires to make it clear that the government is ultimately accountable (even if interventions occur infrequently); when there is a need for specialized expertise; and lor, frequently, when procedures can be made more efficient and less costly to parties than enforcement through the courts. Canadi­an examples include securities commis­sions/ the Canadian Radio and Television Commission (CRTC) and labour relations boards.

Ensuring Compliance

A further question regulators have to answer is "what are the sanctions f01· failure to comply?" Clearly, the objective of sanctions is to compel compliance, bu t this objective sub-divides between the aim of providing compensation to those who suffer losses and the aim of meting out punishment, including punitive fines and imprisonment. Sometimes, punitive measures have been so inappropriate that they were not used, even though provid­ed for under the law. For example, under Canadian competition law, prior to 1986, mergers detrimental to the "public inter­est" were punishable by fines and impris­onment. The courts consistently found the harsh penalties to be inconsistent with the commercial objectives being pursued and did not impose the sanctions provid­ed under the law. In the final analysis, what is required is flexibility -- the ability to tailor the nature and severity of the penalty to the seriousness of the infraction.

Providing Certainly ina Regulatory Regime

The provision of certainty in a regulatory regime is fundamental, if policy objectives are to be achieved without adversely affecting business and citizens. If an investment is perceived to be subject not only to normal economic risks, but also to risks of major shifts in government policy

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or the regulatory environment, a major disincentive to investment is created.

Governments may have to take special steps to provide investors with an accept­able degree of legal and regulatory certainty. Canada had to do this some years ago with respect to off-shore 011 and gas exploration and production rights. In regulatory areas where administrative tribunals have discretion, they often attempt to provide greater certainty to those they regulate by issuing policy statements or guidelines. Beyond policy statements and guidelines, the practise of issuing, upon request, advance, binding rulings on the application of laws to particular transactions, is well-developed in the administration of Canadian tax and competition law. Alternatively, where precise rules are provided in legislation and regulation, sometimes regulators have the power in the same legislation to issue exempting orders covering transac­tions deemed to be in the public interest. Finally, where advance rulings and exemptions are not provided for, it is possible to obtain some measure of certainty as to whether a proposed trans­action will be acceptable to the regulator simply by having discussions in advance. These can range from seeking general guidance on a "no-names" basis to discussing the proposed transaction in detail (which would generally require a confidentiality commitment from the regulator).

The Process 01 Developing Regulations

The presentation turned to a discussion of the process of developing regulations. The key question here is "howcangovern­ments develop regulatory regimes that satisfy theirpolicy objectives whilestill maintaining n positive climate fOl· business?" Obviously, the substance of regulations affect this

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climate, but the process followed can also play an important role.

Four stages of regulatory development were described:

idea or concept stage;

• drafting stage;

• "selling" stage; and

• on-going monitoring and reform.

Canadian experience has shown that involvement of the private sector in each of these stages has produced the most satisfactory result for both the govern­rnent and the private sector.

1) Idea orConcepl Slage

Undoubtedly, this is the most crucial stage. Once the government has identi­fied the need for regulation and formulat­ed its policy, but before the regulation is drafted, the government should inform the affected private sector communities and invite comment. In the Canadian experience, public servants alone are not well equipped to anticipate all of the effects of proposed regulations. There is great risk of unintended consequences, leading to unequal burdens on Ihe play­ers, conditions that adversely affect international competitiveness, and the possibility that the costs to society of compliance may outweigh the benefits.

The consultative processes must be real. They must permit sufficient time for consideration and there must be a demon­strated willingness to modify the initial regulatory concepts to avoid unintended results. If significant changes are identi­fied, the government must be prepared to repeat the consultative process.

2) Drafting Slage

Once the concept of the regulation has been defined, it is essential that the legal text achieve the intended objectives. In this stage, private sector expertise, such as consultants or experts seconded for limited periods of time can usefully supplement the government's own legislative drafters. Finally, regulations should be published in draft form for comment, prior to approval.

3) "Selling" Slage

This important stage is often overlooked. It cannot, and must not, be assumed that all bodies and persons affected by the new regulation will have been involved in the preceding consultative phases. By making the effort to explain how to comply, governments can derive a higher level of compliance than otherwise might be expected. Such initiatives will also help to eliminate uncertainty and curtail negative reaction, particularly from the press and other media.

The "selling" stage can be accomplished through press kits, information packages and explanatory notes accompanying promulgation of the regulation. A tech­nique termed "road shows" has been used to great effect in Canada. Public servants and other experts travel the nation conducting a series of meetings, usually in major centres, to explain the regulatory framework in detail and make themselves available to answer questions from participants.

4) On-going Mon~oring and Reform

Most regulations attempt to regulate future activity based on past experience. For this reason, some regulations are out of date before they are implemented, given the rapid pace of change in certain

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industries. Outdated regulations can be destructive, since they do not permit business to respond to changing needs and circumstances. Therefore, there is need for a process of constant re-evaluation.

A variety of processes can be employed, such as sunset clauses in legislation, which require a formal review within, say, five years and the re-affirmation of the law and regulations by Parliament. Alternatively, on-going forums for periodic consultation are maintained between regulators and the regulated in Canada in such areas as the securities industry, banking and insurance and the field of competition law. These forums have mandates to make recom­mendations which can lead to modifica­tions in administrative interpretations and practices or in the regulations themselves.

Overall Assessment of the Four Stages of Regulatory Development

The consultative process just described is relatively new in Canada. Where it has been used, it has produced some desir­able results and each time It has been repeated, improvements have been made. We seem to be learning from our experi­ences. It is dear that the most successful regulatory systems in Canada are those in which an adversarlal relationship has been avoided. The principal criteria for this are clear government objectives which are considered to be fair. Business should believe an hospitable environment exists in which H can operate with a reasonable expectation of profit and security for investments.

THE REGULATORY FRAMEWORK POLICIES OF THE GOVERNMENT OF CANADA'

The ReqUirements of Canadien Government Regulatory Policy

Government agencies are required first to demonstrate that there is a risk. The basic tests are: what happens if nothing is done? (new proposals) and, what are the consequences of revocation? (existing regulations). If risk is deemed to exist, agencies then must determine why govern­ment intervention is justified. For example, if pressure to regulate is coming from special interest groups, what broader public interest is served? Or, do the social benefits of intervention offset sufficiently any constraints on individual or corporate freedom? Lastly, if intervention seems justified, agencies must be persuasive in supporting why regulation is a better alternative than say, education campaigns, voluntary standards, use of the courts, or new market-based incentives, to mention a few of the alternatives.

If regulation is deemed the best alterna­tive, then government agencies must demonstrate compliance with a further five policy requirements:

1) Canadians most affected have been consulted and have been given the opportunity to participate in the development of the regulations.

2) Benefits must outweigh costs. That is, regulatory gains to beneficiaries have

See(a)Treasury Board ofCanada. Regulatory Policy. Government ofCanada, October, 1992; and (b) Treasury Board ofCanada. TheFederal Regulatory Process: AnInterim Procedures Manual forDepartments and Agencies, 1991. Government of Canada. Revised May29,1991. In thelatterpublication, seeespecially "Citizen's Code ofRegulatory Fair­ness," in Annex A.

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been maximized, in relation to costs to governments, businesses and individ­uals.

3) Regulatory activity impedes Canadian competitiveness as little as possible. There are numerous issues to be considered, such as: does regulation affect the private sector's ability to innovate? Is price-setting by market forces impeded? If higher consumer prices seem likely, what steps have been taken to minimize this effect? Have compliance costs been mini­mized? Are approval processes for businesses speedy?

4) Regulatory burdens have been mini­mized through cooperation with other governments. This can range from formal standards harmonization internationally through trade agree· ments, to harmonizing processes or mutually recognizing one another's standards, qualifications or technical specifications. Other, less formal forms of cooperation can be designed to improve effectiveness/responsive­ness such as scientist-to-scientist collaboration between governments, sharing databases, agreeing to one another's testing protocols or agreeing on submission formats between governments.

5) Systems are in place to manage effectively the resources devoted to regulation. The emphasis here is upon such operational matters as: having measurable objectives for the standards of service to be provided; the existence of a published mission statement; a good definition of re­sponsibilities of regulatory personnel and their training, etc.

Regulatory Plans

The Canadian government regulatory system requires the preparation each year of Ita regulatory plan" by each department and agency. Regulatory proposals are categorized in three groups:

1) minor / technical;

2) intermediate (net present value <$50 million and high probable public acceptance); and

3) major (n.p.v. <$50 million and low acceptance or n.p.v. >$50 million and high acceptance).

The government publishes the depart­mental regulatory proposals as a govern­ment-wlde plan serving as notice, to potentially affected groups in SOciety, of likely actions to be taken in the following twelve-month period. (Obviously, many groups will already be aware, from the early consultation phases carried out by the government departments.)

Regulatory Impact Analysis Statements and Public Communications Plans

Key elements of the government's regula­tory system are the ....Regulatory Impact Analysis Statement I/(RIAS)" and "public communication plans." Both elements must be prepared for each intended regulatory action. Inasmuch as the text of regulations is often highly legalistic and difficult to interpret, these two documents are plain language descriptions of how the six policy prescriptions described have been discharged.

The communication plan is expected to deal with reactions from affected groups in society and present the strategy for dealing with their objections. The plan must detail who was consulted, the

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content of the discussion/consultation, what consensus was achieved and what outstanding issues remain. Federal­provincial and/or international consider­ations are to be covered as appropriate.

For purposes of discussion, it should be noted that it is only the RIAS's and communications plans that are reviewed by ministers and released to the public for discussion and comment. The actual regulatory legal texts are deemed too technical and thereby not suitable for this purpose.

Public Consunalions

The regulatory review and approval process is a very public one in Canada starting with the annual federal regulato­ry plan. Based upon consultations with appropriate private sector bodies, the originating department submits the drafts of the regulation, together with an accom­panying RIAS and communications plan. A preliminary reliability check is conduct­ed to ensure consistency with govern­ment-wide policy principles and existing law, particularly the Canadian Charter of Rights and Freedoms. A committee of Ministers carries out a review of the drafts, and if satisfactory, authorizes pre­publication. Members of the public have a minimum of 30 days in which to provide comments and objections.

Following the pre-publication phase and the disposition of comments and objections, the originating department re-submits the same documents (amended if required) to Ministers for final approval and promul­gation of the regulation. The originating department implements and administers the regulation.

There is a parliamentary committee, the Standing C.ommittee for the Scrutiny of Regulations, which maintains oversight of

10 Institute On GOTJe"nIJIH:e

all regulations. From time-to-time, this committee provides comments and recom­mendations for changes.

National Standards System

Canada is one of only a few nations that maintains a National Standards System. This is made up of the Standards Council of Canada and, at present, six standard writing organizations (SWOs) approved by the sec. The following are agreed upon parameters:

• Where standards are deemed required or appropriate, the SWO's develop them in consultation with stakehold­ers (producers, users, consumers, governments). Standards can be based on consensus or not, but consensus standards are preferred.

• Standards can be mandatory or voluntary. Voluntary standards are to be used unless there is strong reason not to.

• Standards required by regulations should be international ones wherev­er appropriate and possible.

• Preference is given to performance standards over detailed technical/ design standards, since such standards provide greater flexibility in dealing with changes in technology and markets. In addition, the potential of benefitting individual firms unduly or locking in old technology is avoided.

Future Improvements to the System

The Canadian regulatory framework continues to evolve. Among possible future improvements, the following initiatives are worthy of note:

• There is a need to review exlstlng statutes and amend them to move away from criminal sanctions towards civil penalties. As part of this review, there is the associated need to intro­duce a broader range of escalating sanctions, where serious or persistent non-compliance occurs.

• There is need for greater consistency of sanctions across different regulato­ry regimes.

• In order to enhance compliance without incurring onerous inspection procedures, it would be desirable to introduce "proof of compliance" filings from regulatees in certain cases.

• It would be desirable to incorporate undated standards "as amended from time-to-time" in regulations. This would eliminate the need for processing minor amendments to regulations through government and Parliament.

• As a further time saver, consideration is being given to "omnibus" legislation to delete obsolete regulations com­pared with the present one-at-a-time approach.

• Finally, Canada is well-advanced in developing a computer system called On-line Access to Regulations and Statutes (OARS). This system would provide access and inquiry capability to all statutes and regulations of the Government of Canada from remote sites, with a guarantee that all the material is current within two weeks of changes.

THE NEW CHALLENGES· REGULATORY ISSUES ARISING FROM TRADE AGREEMENTS ON TRADE IN SERVICES, INVESTMENT AND INTELLECTUAL PROPERTY

The History of the Uruguay Round

As a backdrop to discussions on "The New Challenges," there was a presentation on the evolution of the Uruguay Round of trade negottatlons': from its origins in the unfinished business of the earlier "Tokyo Round" that concluded in 1979, to the signing of the latest agreement in Marrakech in April 1994.

The five objectives of the negotiations were established at a meeting of govern­ments in Punta del Este, Uruguay in 1986. These were to:

1) tackle barriers to trade in goods;

2) tackle barriers to trade in agricultural products and textiles left over from the Tokyo Round;

3) establish new rules of the game, in areas such as safeguards, subsidies, and the operations of countervail and anti-dumping laws, which often disadvantaged developing nations in particular;

4) tackle development of a new institu­tional framework to replace the GAIT secretariat, including the provision of strengthened dispute settlement processes, that should be available to the replacing institution; and

5) deal with new areas - services, intellectual property and the like.

Lee, David, The Uruguay Round, An Overview, Paper prepared from a transcript of an impromptu discussion at the workshop.

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In the 12 years between the two trade rounds, immense changes occurred in the world: the end of the Iron Curtain; the collapse of the USSR and the creation of new nation states whose models were market-based and democratic in intent; the creation of new regional trade blocs such as NAFTA; and globalization and the information technology revolution, to mention a few examples. All of these events impacted upon, or were reflected in, the final agreement. One of the conse­quences of these major events was that the framework of the agreement contin­ued to enlarge as negotiations proceeded.

There is strong general consensus that the outcomes of the agreement are formidable even though much remains to be done. Goods tariffs which were targeted to reduce by a third will come down 40 percent overall. Agriculture is finally in a trade agreement, including disciplines on domestic and export subsidies, and the inclusion of sanitary and phytosanitary standards. Textiles have been agreed (although the "back-end loading" of concessions is a disappointment), The World Trade Organization (WTO) was established with real powers to handle new trade negotiations and manage dispute settlements. The agreement includes safeguards (the ability to take temporary tariff action in the case of import surges) and subsidies are defined, reducing the ability of nations to take unilateral action withou t punishment. The new areas of services, investments and intellectual property will require further negotiations and the GAIT Agreement provides for this. Such negotiations will occur in a multilateral environment and in the context of basic rules already established in the agree­ment. These features should permit the orderly working out of a number of differences that remain, over a number of years.

12 lneiituie On Governance

New Challenges from the Uruguay Round

Turning to the main topic of "the new challenges," there was a brief description of the provisions in the agreement cover­ing investment, intellectual property (IP) and the General Agreement on Trade in Services (GATS).

1) Investments:There is the Trade-Related Investment Measures ([RIMS) Agree­ment for investments related to goods. Its primary provisions are to forbid investment measures that fail to provide national treatment for inves­tors or that provide for quantitative restrictions or quantitative undertak­ings on the part of investors. For violations, the agreement provides for freezes in activities and roll-baeks within two years. There is special treatment extended to developing countries in the agreement. There are requirements for transparent rules and there is a TRIMS Committee of the WTO that will mediate disputes, There is provision for a review of the TRIMS Agreement within five years that may include an examination of competition policy.

2) Trade-Related Intellectual Property Measures: Part I of the Agreement sets forth general provisions and principles covering, especially, the rights to national treatment and most­favoured nation (MFN) status. Part II describes standards for each IP right, covering separately copyright, trade­marks, geographical indications, industrial design, patents, integrated circuits, trade secrets and know-how and anti-competitive practices in contractual licenses. Part III prescribes remedies for infractions that can be sought in the domestic laws of the participating countries.

3) General Agreement on Trade in Services (GATS): Its framework rules cover:

Scope, that is, the Agreement applies to governmental measures at the federal, state and local government levels, but not to private measures.

• Provisions concerning iransparen­cy, i.e., measures of general application must be published and, within two years, each signatory government is to set up an inquiry point.

• The requirement to extend most favoured nation status across-the­board.

• The establishment of a Services Council, subordinate to the WTO and providing dispute settlement provisions for the Council that mirror the provisions made for the wro itself.

There are four specific sectoral sections in the GATS covering financial services; transportation; telecoms (setting forth rules for the use of telecom networks) and natural persons (the issues that arise from people doing business across borders including their entitlement to work permits).

Finally, there are country-specific commit­ments Onmarket access and national treatment. These are detailed in appropri­ate annexes to the Agreement. To be part of the GATS, any country has to have an annex, but it was (and is) not obligatory to participate.

Because the GATS is very new, the discussion and negotiation process will continue. Over the next two years, the

four specific sectoral sections described above will be re-examined. In addition, areas such as subsidies and restrictions present in government procurement codes will be added to the agenda. Issues for future review include environmental standards, consumer protection, regulato­ry policy, worker mobility, competition policy and technology and innovation.

LINKAGES BETWEEN INTERNATIONAL TRADE AGREEMENTS AND DOMESTIC REGULATORY MEASURES

In summary, what becomes clear is the parallel between the objectives of the rules in international trade agreements and the objectives of domestic regulatory actions. There is the same emphasis in both on the rule of law, non-discrimina­tion, transparency and predictability. The objectives of fostering economic develop­ment, fair competition and protecting individual rights and freedoms are the same in both regimes, as is the desire for principles and practices that meet the tests of good governance. It is quite clear that the results of international trade negotiations are already well into areas of policy and programs of Signatory countries previously thought to be strictly "domes­tic" matters.

The motivations that may drive the domestic and international agendas for deregulation (or "re-regulatlon") are linked by their purpose.'I and operations.

The domestic aim in relation to purposes may be to scrape off the barnacles of time that hamper the real effectiveness of regulations in dealing with substantive issues (e.g. health and safety; consumer protection; the ability of administrators to substitute free-market action for adminis­trative decisions, such as licensing). For trade negotiators, the aim is more likely to

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ward off protectionism in its many guises in export markets, and to take account of fast-changing circumstances in those markets. The key criteria here are trans­parency and clarity of objectives. For example, if an allegedly agriculture.related. measure is really about domestic social policy, it should be dealt with on its own merits in the latter context.

As regards operational considerations, the domestic/international techniques are similar. Consultation, policy formulation, and negotiation all form essential parts of both the domestic-origin and the interna­tionally-mediated deregulation (or "re­regulation"). Here our discussion of the importance of wide-ranging consultations seemed to come into sharp focus.

The primary general need on which participants focused, was a fuller recogni­tion that nothing on the "domestic" side is any longer exclusively domestic. On the international side, trade negotiators must work closely with the subject matter experts and the domestic stakeholders.

More specifically, other identified needs included:

• developing information databases on, for example, markets and market opportunities; product information; regulations and regulatory regimes of major export markets -- the key being utility to, and accessibility by, the private sector;

• training of negotiators, especially to develop their capabilities in terms of strategic preparation, analysis of proposals and counter-proposals. In addition, there is the need to be able to access specialized technical exper­tise periodically, such as in develop­ing food standards or drawing up new regulations in areas like transfer

pricing and intellectual property protection;

• acquiring good GATT marketing tools that can be used to promote the benefits of the agreement and the export opportunities it will open up to local firms; and

• complying with GATT while remain­ing competitive requires studies of major industry sectors, to understand how competitive the local companies are in relation to major competitors in principal (or opportunity) export markets. Expertise to carry out this work is in short supply in many countries.

ISSUES FOR FURTHER REVIEW AND ACTION

Training

The issues and needs highlighted above focused the participants on the training needs of public servants as a key issue. The training of trade negotiators is a matter the new World Trade Organization is addressing now. It appears that ASEAN country training institutions stand ready to develop tailored programs for their public servants. To complement special­ized expertise in technical matters or in support of analytical market studies, short-term secondees from other govern­ments and knowledgeable consultants were identified as sources to supplement the public services' skills base.

With reference to earlier workshop presentations and discussions, partici­pants identified a need for subject matter experts on a bilateral basis. If there is enough common interest to deal with specific regulatory matters among several countries, the development of "mini­workshops.... would be considered. Topics

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mentioned were: a more in-depth review of how sunset clauses work; the structure and substance of RIAS's and related communications plans, and how the Canadian annual regulatory plan is put together.

Distribution of Powers

Participants discussed, at several points in the workshop, the question of "what distribution of powers between different levels ofgovernment und administration aremost appropriate tofoster economic and social development ut alllevds in society?"

TIle discussion uncovered more problems than answers to this question. Issues such as the extstlng levels of centraliza­tion versus decentralization; the experi­ence and knowledge base of officials serving in the more junior levels of government; and the adequacy of the infrastructure of these junior levels of government were all seen as impediments in the short to medium-term. There was, however, a strong consensus that the correct path to follow is the decentraliza­tion of authority to local governments. This would likely lead to the most respon­sive and cost-effective regulatory regimes. There was agreement this topic might be a fruitful one for other workshops that are focused on the development of local government. This would allow the ASEAN and Vietnam participants to exchange information on successes and on pilot experiments,

Top-down versus Consultative Regulatory Regimes

Another major theme pursued in the discussions was the desirability of moving from top-down regulatory regimes, dominated by the public sector, to more consultative regimes, characterized by

collaboration and cooperation between the state and private sector.

There are two preconditions. The first is the existence of capable private sector organizations which truly represent the interests of their respective groups and which can act as partners in the discus­sion. The second is, for there to be a meaningful conclusion to consultations, government must "decide to decide" and this means government must have a clear view at the outset of what goals it wants to accomplish.

A related issue is the inclusion in consul­tations of a third group, variously called "the people sector" or "civic SOciety." These are taxpayer/ consumer / citizens, different from the government sccto- or the private business sector, on which attention seemed to focus in the main. Their consensus is important in arriving at regulatory frameworks that have popular support. This support is key to minimizing enforcement costs to society.

How to foster the formation of such business and "civic society" interest groups in certain of the participating countries remains a key question on which further dialogue should occur. In addition, the whole area of techniques that have proven successful, in a variety of consultative forums, might be helpful for some countries. "

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DEVELOPING AND

ENFORCING REGULATIONS AND STANDARDS:

A CANADIAN

PRIVATE SECTOR PERSPECTIVE

T

DEVELOPING AND

ENFORCING REGULATIONS

AND STANDARDS:

A CANADIAN PRIVATE

SECTOR PERSPECTIVE

byDavid A. Brown, Q.C. DAVIES, WARD &BECK Barristers &Solicitors April//, /994

Introduction

The object of this paper is to provide a Canadian private sector perspective on the development and implementation of regulatory schemes and standards by governments. The paper will draw upon our practical experience in Canada in order to illustrate some recurring themes and problems which arise when govern­ments attempt to set up regulatory struc­tures which will achieve governmental policy objectives while assisting, or at least not hindering, development in the private sector. The paper does not try to provide detailed information on Canadi­an law, nor does it present any general theory or philosophy of administration. However, we will outline some of the lessons which can be learned from Cana­dian regulatory initiatives, both those which have succeeded and those which have failed in achieving their objectives in harmony with the interests of the private sector.

First, the paper discusses basic prelimi­nary questions in regard to a regulatory initiative, such as whether regulation is necessary at all and whether il should be implemented by way of precise rules or flexibleguidelines. Second, the paper deals with the need for certainty in regulation, from the standpoint of the private sector, and ways in which it can be achieved. Finally, the paper reviews the process of developing, adopting and implementing regulatory initiatives and the circum­stances in which such process can either help to legitimize the initiative with the private sector, or alternatively, provoke resistance from the private sector.

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SOME FUNDAMENTAL QUESTIONS

To Regulate or Not to Regulate?

Over the last decade in many western countries, there has been a shift in pre~

vailing views concerning the appropriate­ness of regulating certain economic sectors. While such a shift reflects in part the conservative political philosophies of the governments which have held power in these countries during this period, it is due as well to Widespread disillusion­ment with the results of regulation in certain sectors, particularly the perceived economic inefficiencies and distortions afflicting some regulated industries,

For example, transportation in Canada has been SUbstantially deregulated in recent years, particularly in the trucking and air segments. Recent financial difficulties within the airline industry have given rise to demands for re-regula­tlon of airline markets. Given the initial opposition to airline deregulation in the early 1980s, it is not surprising that the industry's current problems are being blamed on that deregulation. However, deregulation has led to significantly lower prices for COnsumers and increased service levels. Moreover, the airline industry worldwide has suffered record financial losses during the past two years in both deregulated (North America) and highly regulated (European) markets.

In areas where regulatory standards and regimes are perceived as necessary for the protection of the public, it may nonethe­less be an attractive option for govern· ment to accept self-regulation by an industry or profession. This shifts the costs and administrative burdens of regulation to the private sector, and relieves governments from most of the controversies which may erupt from time to time over the effectiveness of such

20 Institu.te On Govel"l1anCe

regulation or its exercise in particular cases. Unless self-regulation becomes generally perceived as ineffective in a particular area due to flagrant and well­publicized abuses, so that the government is forced to intervene, self-regulation is usually effective. Self-regulation can be used to legitimize regulation with the private sector (which is in control of the process) and to avoid the perceived bureaucratic inefficiency often associated with government intervention.

Where the institutions or persons to be regulated may have a special expertise or a particular function involving expecta­tions of integrity and trust, self-regulation may be the most effective option. This is frequently the case with professionals such as lawyers and accountants, or with institutions such as stock exchanges whose members have a collective interest in maintaining high levels of skill and integrity. Such. examples of self-regulation are usually based upon licensing schemes, which include some form of tribunal empowered to revoke Or suspend a licence, or impose other sanctions, if a member of the profession or industry breaches the imposed requirements.

Another form of self-regulation, which does not involve a licensing scheme, is the development of industrial standards, specifications and quality control proce­dures. If the development of private sector standards is to remove the need for regulation, it usually must have a recog­nized and credible institutional frame­work such as the Canadian Standards System overseen by the Standards Coun­cil of Canada. Accredited organizations like the Canadian Standards Association (CSA) develop standards by consensus, relying on representation by all major stakeholders, including producers, industrial users, consumers and govern­ments. This helps to ensure a higher level

of acceptance among these stakeholders. Private sector standards may be adopted as legal requirements, as in the case of building codes which have consistently adopted product standards developed by accredited standards-writing bodies such as the CSA.

Despite the opportunities which the development of self-imposed standards might seem to present for industries to adopt unduly lenient requirements for their own convenience, industrial stan­dards are an area where most govern­ments recognize that their expertise is limited and their viewpoint too narrow. Industrial standards are seldom devel­oped in isolation by an industry in one country, without considering standards elsewhere in the world and how the adoption of standards will facilitate or hamper both the export of products from that country and the use of foreign products within such country. Harmoni­zation of standards to encourage exports and adoption of unique standards to attempt to frustrate imports are both well­known phenomena. While some govern­ments may act in concert with the private sector in such initiatives, the interests involved are primarily those of the private sector and it is generally the private sector which guides such efforts.

The threat of regulation is often used to force self-regulation. For example, the perceived financial excesses of the private sector in the 1980s have led to closer scrutiny of the effectiveness of corporate governance in many countries. In Cana­da, the Superintendent of Financial Institutions has recently threatened the financial services industry with "exten­sive and intrusive rules" unless it adopts principles of corporate governance which will effectively restrain management from imprudent business decisions, such as the excessive portfolios of commercial real

estate accumulated by some Canadian institutions in the last decade, the value of which has now collapsed. Corporate governance has traditionally not been subjected to regulation (other than by general legal principles which might give investors remedies enforceable in the courts), primarily because it was viewed as an area which could not effectively be regulated without undue intrusion into decision-making in the private sector. Accordingly, it is understandable that a regulator's preferred strategy may be to force self-regulation in this area, in the hope that it will address the problems which have arisen without the inefflcien­cies of governmental regulation.

In some sectors where governments or government agencies are major purchas­ers of goods or services, the government may be able to establish standards as a matter of practice through procurement policy without resorting to regulation. One example might be the health care products industry, where in Canada government agencies and publicly-owned hospitals account for a high proportion of purchases.

Although the balance of this paper focuses on regulatory schemes which prescribe or prohibit defined activities with some kind of enforcement mechanism to ensure their observance, sometimes referred to as "command and control" regulation, the regulator should consider whether other government initiatives might be more suitable for accomplIshing the policy objectives. These initiatives might include:

• use of the taxing power to impose a cost on certain kinds of activity or, by providing exemptions from tax, to encourage other kinds of activity;

• use of the spending power to encour­age certain kinds of activity; and

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• establishing a government-owned corporation either with a monopoly on certain kinds of activity or as a competitor with the private sector.

Consider the area of environmental regula­tion, as an example. Suppose the govern­ment feels that the use of non-returnable son drink containers is too costly from an environmental point of view. One possi­bility is to simply ban or prohibit the use of such containers and enforce the ban through a series of fines or penalties. But this is a very costly way to go -- and it will likely encounter significant industry opposition, The government might decide to take a different approach. It might impose some special"environmental tax" on the use of such containers, or else provide grants to the industry to encour­age or facilitate the use of recyclable containers.

These alternative types of initiatives might be used by themselves to accom­plish the desired objectives or as a supple­ment to a more conventional ....command and control" regulatory scheme.

Rules orGuidelines?

If a government has decided that regula­tion is needed, one of the basic choices is whether to regulate by precise rules or through flexible general guidelines. In Canada, there are a number of examples of regulatory schemes which originally employed detailed rules, which over time were found to be too arbitrary and inflexi­ble to deal effectively with the develop­ment of the industry to which they applied. Historically, the investments made by Canadian financial institutions were subject to strict rules designed to ensure they invested in stable companies. Cur­rently, these rules are being replaced by investment guidelines which provide flexibility without sacrificing prudence.

22 Institute On Governance

The old rules generally precluded finan­cial institutions from investing other than in certain debt instruments and shares of companies which satisfied specified financial ratios. These financial tests often bore little relationship to the criteria which an informed investor would otherwise apply in looking at a company. At the same time, often the rules did not permit investments in warrants, options and the wide range of derivatives and other financial products available today, re­gardless of how prudent an investment they represented.

The new rules provide that a financial institution can make investments so long as the investments are prudent and fit within investment guidelines developed by the institution itself. What is prudent in any situation depends on the circum­stances. These flexible rules allow flnan­cial institutions to seek out the best return for their shareholders without sacrificing the goal of ensuring financial stability. The adoption of a less restrictive approach to regulation in this sector reflects not only rapid change in the financial services industry, on a global scale as well as within Canada, but also a recognition that investment and money management functions in institutions are now normally handled by trained full-time profession­als, which was by no means always the case in the past. Changes in philosophical outlook are also involved, such as a shift from regarding institutions as equivalent to trustees for their depositors, investors or beneficiaries, who should apply above all a conservative strategy designed to avoid losses, to a view of such institutions as businesses which must manage risks rather than merely trying to avoid them.

A change to a more permissive form of regulation based upon flexible guidelines usually reflects a degree of confidence in the maturity of the industry being regular­

ed. It may also be implemented where the number of participants in the industry is relatively small and all of them are substantial, so that controlling their activities by relatively informal methods is more feasible. In Canada, the banking industry is highly concentrated (by comparison with, for example, the United States). Canada's approach to bank regulation reflects this. In Canada, many of the activities conducted by banks are not subject to specific regulation under banking legislation. This provides Cana­da's banking industry with the flexibility to respond quickly to International developments and market opportunities.

Conversely, where a sector is new or comes under regulation for the first time, lack of experience on the part of both the regulator and the regulated may dictate an initial approach of imposing precise rules. Regulation of a new area may also initially be seen as a matter of addressing primarily technical issues. Only later will experience suggest that issues of public policy are also involved which require the exercise of discretion. For example, the regulation of broadcasting in Canada began on an almost exclusively technical level. Although, because of the nature of the subject-matter, technical regulations remain and will probably always remain, proportionately fewer regulatory resourc­es are devoted to such aspects and indus­try participants are encouraged to resolve technical problems (such as interference between signals) voluntarily without relying on enforcement by the authorities. However, an extensive regulatory frame­work has developed, based to a large extent on the exercise of administrative discretion, to regulate what are perceived to be issues of public policy relating to Canadian ownership of broadcasting enterprises, the encouragement (or indeed mandating) of Canadian programming, the nature and degree of competition in

the market and the delivery systems which will be permitted.

A tighter and less discretionary regulatory scheme may also be adopted in circum­stances where a former approach has been discredited, either due to perceived political influence or even corruption in the exercise of discretion, or merely because of laxity leading to abuses. Such a change maybe accompanied by the creation of an administrative agency which can be given some degree of independence from the government. The appointment of judges in Canada, once a notoriously political (and hence distrusted) process, has been distanced from government influence by placing a large part of the selection process in the hands of the legal profession. More formal procedures for identifying and recommending candi­dates are also practised. While this is not an example of regulation in the usual sense of the word, the independence of the judicial process can in fact be signifi­cant for private sector confidence and many of the same considerations apply as in governmental activities which impinge more directly on the private sector.

Certain industries will inevitably be subjected to stringent and detailed regula­tion because of the risks which are in­volved. The nuclear industry, the certifi­cation and inspection of aircraft and the licensing of pharmaceu ticals are obvious examples where governments will gener­ally consider themselves compelled to impose detailed safety standards or criteria, as frequent controversy in each of these areas seems inescapable in many coun­tries, including Canada. The quandary for governments in such fields is that effective regulation requires extensive scientific and technological knowledge, which governments usually lack and for which they must rely upon the private

Institute On 23 Governance

sector. For regulation to work, close co­operation between the regulators and the regulated is required and, given the stakes involved, accusalions that the regulators have become "captive" to the regulated are common. This can occur even where the regulated industry is government-owned. The public percep­tion has often been, for example, that regulation of Ontario Hydro, a publicly­owned utility operating nuclear power plants, has been just as ineffective in protecting the public as if the utility were a private profit-making entity.

Such examples illustrate that regulation by detailed rules can fail not only because of its inability to deal with change, but also because of the frequent lack of technical competence or economic exper­tise on the part of governments to develop and apply appropriate rules effectively. The Canadian airline industry prior to deregulation in the 1980s demonstrated the inefficiency induced by over-regula­tion. Regulatory oversight typically induded matters such as the type of aircraft used to serve particular routes. This resulted in low-volume routes being served by large jets with correspondingly large numbers of empty seats, higher prices and less frequent service.

Governments are not oblivious to such problems and, in fact, it has become almost fashionable for governments to express an unaccustomed modesty in regard to their capabilities and a sincere desire to harness, rather than thwart, market forces. To achieve such a goal almost invariably requires a scheme of regulation which permits some flexibility. For example, Canada's competition policy does not treat competition as an end in itself. Rather, competition is viewed as the most effective means of attaining other objectives set out in the purpose clause of the legislation.

24 Institute 0/1 Governance

The first and arguably the most important objective is to promote the efficiency and adaptability of the Canadian economy. Flexibility is especially important in a relatively small and open economy like Canada's which has historically expert­enced high levels of market concentration. An overly rigid and inflexible approach to competition policy either too aggressive or too lenient has the potential for more damaging consequences than might be the case in the larger economies of our major trading partners. While certain conduct, such as conspiracies to limit competition, may dearly be harmful in all cases and require skid regulation, other conduct, such as mergers, may be benefi­cial or harmful depending on the circum­stances and will require a flexible approach.

Who are the RegUlators?

Regulators can be special agencies or tribunals which are not part of the general government apparatus, or merely ordi­nary civil servants. TIle choice of the appropriate regulator to apply and enforce a regulatory scheme will often depend upon the extent to which the government desires that regulation of the area in question be viewed as indepen­dent of the government. There are certain areas in which the private sector's lack of confidence in the competence of govern­ments is so acute that even the suggestion of political control or interference can be damaging. Thus governmental agencies such as the Competition Bureau of the Canadian federal government (which deals with monopoly and anti-trust issues) and the Bank of Canada are set up with independent mandates intended to leave them relatively free of governmental interference.

However, there are examples of regulato­ry schemes designed to achieve a public policy objective, where the government

desires to make it clear that the regulator is ultima Lely politically accountable, even if the government's power to interfere in the regulatory process is used sparingly in practice. For example, decisions of the Canadian Radio-television and Telecom­munications Commission, which oversees broadcasting in Canada, can in certain cases be appealed to the federal govern­ment, since the Commission's mandate is to achieve public-interest goals in relation to the Canadian broadcasting industry. Similarly, Canada's legislation imposing constraints on foreign investment (which was perceived to be quite intrusive in the 1970s but is now minimal in its impact) has provided for decisions to be made ultimately by the federal government, rather than the agency which administers the legislation, since such decisions require a determination of whether an investment was likely to be beneficial to Canada, a question involving consider­ations of public policy.

Licensing regimes may involve either a tribunal following formal procedures similar to those of a court in considering whether to grant, revoke or otherwise deal with a licence, or a much less struc­tured administrative agency. For exam­ple, Canadian banking legislation provides that if a bank follows unsafe or unsound business practices, the Superintendent of Financial Institutions, a federal civil servant, may direct the bank to cease such practices and take such other action as he or she believes necessary to remedy the situation. In areas where both the public sector and private sector are sophisticated, this type of approach facilitates business flexibility and innovation better than providing strict limits on business activity and penalties for exceeding those limits. This approach also permits policy issues to be resolved quickly, with less formality and less expense than contested proceed­ings, Furthermore, where the regulatory

function is primarily to protect the public (and, more directly, the Canadian govern­ment entity which provides deposit insurance) from potential financial loss due to an insolvency of a financial institu­tion, it is necessary for the regulator to be able to take rapid action without conduct­ing hearings or other lengthy formal procedures.

If speed of remedial action is less a consideration than the need to assess complex fact situations, it is likely that the regulatory model adopted will provide for proceedings before either a court or a quasi-judicial tribunal. It is rare for any regulatory scheme today to provide for the courts as the initial forum in which proceedings are taken, due to the expense, delay and complexity usually associated with court proceedings. However, this may not be the case if enforcement is not initiated solely by a governmental regula­tory agency or official, but may be pur­sued by private parties. Private litigation has long been an important component of antitrust enforcement in the U.S., and is becoming increasingly important in the European Community. Even in Canada, where there is relatively little private antitrust litigation, the possibility of exposure to private actions can have an impact on business decision-making. The U.S. provldes significant incentives to private parties to pursue enforcement action in various spheres of regulation, such as "treble damages" for antitrust violations, following a "bounty-hunting" tradition which perceives private action as an efficient tool of law enforcement reducing the need for direct government involvement. This philosophy has not prevailed in Canada, where litigation in general remains subject to cost disincen­tives not present in the U.S.

Administrative tribunals are often created to hear cases arising under regulatory

Institute On 25 Governance

schemes involving specialized technical knowledge, where it is assumed that the ordinary courts would never hear suffi­cient cases on a consistent basis to devel­op an appropriate level of expertise. In Canada, for instance, international trade remedies such as anti-dumping and countervailing duty cases are heard before an administrative tribunal, the Canadian International Trade Tribunal. This Tribunal, like other specialized tribunals, has developed an extensive body of jurisprudence and considerable expertise in its field. Moreover, given the specialized nature of its activities, it is closely attuned to the practice of compa­rable bodies in other countries such as the United States and will occasionally adopt international precedents where they prove useful in the Canad ian context.

A somewhat different model can be seen in the adjudication of competition cases in Canada. Depending on the statutory provisions involved, cases might be heard by either a specialized tribunal, the Competition Tribunal, or by the criminal courts. Where it is necessary for econom­ic factors to be evaluated, as in the case of mergers, jurisdiction is generally assigned to the Competition Tribunal, whereas the determination of whether a person has committed a specified prohibited con­duct, such as conspiracy to restrain competition or misleading advertising, is left to the criminal courts. Thls reflects a distinction between matters requiring special expertise and those which require only a process to establish the facts and reach a legal conclusion.

Provincial regulation of securities markets follows an even more complex model. The Securities Commissions of each province are comprised of experts in the securities field called "Commissioners" who sit in judicial tribunals to determine whether the securities laws have been

26 Institute On Governance

violated and to mete out appropriate punishment to offenders. However, the Securities Commission, as an administra­tive body, has a much broader mandate to preserve the integrity of the securities markets in the province. Thus the Com­mission promulgates rules of conduct, its staff investigates perceived infringements and its lawyers prosecute suspected offenders before the Commissioners sitting in the judicial tribunal. Although decisions of the Securities Commissions may be appealed to the courts, because of the highly specialized nature of the cases, the courts are generally reluctant to interfere with the rulings of the Commis­sioners unless the courts believe that the process has not given the offender a fair opportunity to present a defence.

Different institutional settings and subject matters will naturally give rise to differ­ing procedural schemes. Due to the strict time limitations imposed by GAIT rules, the Canadian International Trade Tribu­nal has become adept at concluding its hearings and rendering decisions expedi­tiously. To do so, it relies on less formal procedures and relaxed rules of evidence. This Tribunal also relies extensively on a highly skilled staff to prepare for hearings and analyze the evidence. Securities Commissions also rely on skilled staff and legal counsel to investigate and prosecute offenders. Bycontrast, the Competition Tribunal does not face statutory deadlines and follows a more formal, court-like procedure. The Competition Tribunal does not rely on expert staff to assist it with cases. It is a somewhat unique body in Canada, being made up of both Federal Court judges and lay members appointed on account of their expertise in economics or industry.

What a,. the Sanctions?

The goals of a regulatory regime will dictate the remedies which are available to enforce it. For example, the regulation of financial institutions requires a range of possible remedial orders and preventative actions which can be taken by the regula­tor to force changes in the practices of a regulated institution Of, if necessary, take control of its affairs in whole or in part.

Usually, the objective wiJl be to deter industry participants from engaging in prohibited conduct by penalizing offend­ers or forcing compliance with rules that have been breached. A carefully designed system of sanctions will contain a range of remedies that will permit the tribunal to match the remedy to the infraction. Frequently, however, the only available remedies are too severe for all but the most serious infractions with the result that the tribunal is reluctant to impose the sanctions unless the breach is very seri­ous. When this happens, the objective of forcing changes in the behaviour of regulated institutions is less likely to be achieved.

For example, under Canadian competi­tion law, until 1986, mergers that lessened competition to the detriment of the "public interest" were punished by fines and imprisonment. The government recognized that the use of fines and imprisonment was not an appropriate remedy to deal with the issues raised by mergers. For a comparatively small economy like Canada, mergers can be desirable to permit Canadian firms to achieve world class economies of scale and other efficiencies. The threat of fines and imprisonment can have a chilling effect on business and prevent firms from pursuing such efficiency-enhancing mergers. Conversely, courts were reluc­tant to impose criminal penalties on

business leaders for conduct which, although illegal, did not seem to involve the same criminal intent as other tradi­tional crimes. Accordingly, in 1986 the criminal law merger provisions were repealed and replaced with an adminis­trative law review. Mergers which result or would likely result in a substantial lessening or prevention of competition are now subject to remedial orders by the Competition Tribunal, a quasl-judlcial tribunal. These new provisions are flexible enough to allow firms to pursue efficiency-enhancing mergers, while providing for appropriate remedies to prevent or unwind a merger that has an anti-competitive effect.

Similarly, all of the provincial securities statutes define market practices which are prohibited. If a licensed dealer in securi­ties engages in one of these practices, his or her licence may be restricted or can­celled. If any other person is found to have breached these rules, however, the only remedies in the existing legislation require prohibiting the person from trading any securities of any kind. As this sanction is perceived by most Securities Commissions to be too harsh for most offences, only the most serious offenders are ever charged. Proposals are currently underway to enact sanctions which will permit a range of remedial actions and penalties designed to make the enforce­ment of securities laws more effective.

Except in instances where a regulatory body has had an opportunity to design comprehensive revisions to its governing legislation, Ora regulatory scheme has been developed on the basis of compre­hensive advance analysis, the remedial powers available to regulatory authorities often lack consistency and have apparent­ly been drafted on the basis of a conserva­tive approach which has sought to limit the powers available to administrative

Institute On 27 Governance

bodies. As a result, Canadian statutes almost always provide for virtually uselesscriminal penalties for contravention of the statute, which are never enforced because of their perceived inappropriate­ness to deal with minor contraventions of regulatory requirements, while failing to provide more flexibleand useful remedies.

How Can Regulations Be Changed?

Providing flexibility in regulations often requires not only some degree of discre­tion (whether such discretion is built into the regulatory criteria or is applied by the regulatory authority in practice), but also some means of changing the regulations on a frequent basis to deal with changing circumstances, new governmental COncerns or the developing expertise and capabilities of the regulatory body. In general, Canada has not met this chal­lenge effectively.

Because of the nature of the political process, it is usually difficult to amend a statute in a sufficiently timely fashion to respond to changing regulatory require­ments. In Canada, controversial regulate­ry reforms (such as the major 1986 reform of competition legislation) have often taken years, or even decades, from con­ception to enactment. Non-controversial changes can take almost as long because of crowded legislative agendas and low priority given to non-essential legislation. Traditionally, this problem has been dealt with by providing a broad power under the statute to make regulations dealing with various aspects of the SUbject-matter of the statute. Regulations can be passed by the ruling party without going through the lengthy political process of debating and enacting legislation. In fact, there have been many Canadian statutes consisting of little more than a regulation­making power, where it was considered to be too difficult to predict precisely

28 Institute On Gooernunce

what rules should be adopted to achieve the statutory purpose at the time the statute was passed. However, the process of making regulations likewise often fails to provide the speed and flexibility necessary to deal with changing regulato­ry conditions. The process of obtaining the passage of regulations may be almost as slow and cumbersome as that of amending a statute, particularly when it is not an important part of a government's political agenda and is therefore given little priority. In addition, a regulatory body which is intended to have a measure of independence may not wish to be in the position of having to persuade the government on a regular basis that it requires changes in the regulations which govern it.

In general, Canadian regulatory legisla­tion does not provide regulatory bodies with any authority to make rules having the force of law. Accordingly, many agencies have sought to issue guidelines or policies which, while not purporting to have the force of Jaw, fill the gap between the general provisions of the governing statute and regulations and the decisions which the agency may make in particular cases. Particularly where a regulated industry evolves rapidly, the issuance of such guidelines or policies may be the only practical way for the agency to indicate to industry participants the manner in which it proposes to deal with new developments. In SOme cases, these statements of policy provide an indication to industry participants how the agency will interpret existing rules to the regula­tion of new developments. In other cases, however, the existing rules are not broad enough to regulate the new development, in which case the so-called statement of policy is really a new rule without the necessary legislative back-up. A court has recently held that one of the policies of the Ontario Securities Commission is

invalid because it had the effect of enact­ing a code of conduct that could only be prescribed by governmental legislation.

This court decision raises the possibility that many other policy statements of Canadian securities regulators (whose policy statements considerably exceed in bulk their governing legislation and regulations) may be invalid. The rapid pace of change in industries such as the securities industry, however, makes effective regulation by legislative or government action very difficult. Special­ized agencies such as the provincial Securities Commissions may represent the only effective means of keeping the regulatory structure current with the industry. In recognition of this reality, the Ontario government is currently consider­ing proposals to invest the Ontario Secun­ties Commission with authority to make rules which have the force of law.

CERTAINlY

Provision of certainty in a regulatory regime is fundamental if policy objectives are to be achieved without adversely affecting business. Private sector invest­ment will only be made in a country if investors are able to assess the risks associated with the investment with a reasonable degree of certainty. If an investment is perceived to be subject not only to normal business and economic risks, but also to unquantifiable risks of major shifts in government policy or the regulatory environment, there will be a major disincentive to investment.

The effect on investment is usually most drastic and visible where overall govern­ment policy is perceived as unfriendly to a particular industry and likely to impose unacceptable constraints upon it. The present government in the Province of British Columbia campaigned for election

in 1991 with a promise to double the amount of land in the province protected from mining. Uncertainty over access to land and compensation for loss of mining rights prompted the industry to shift much of its exploration activities to Chile. It was reported earlier this year that there had been a 50% drop in exploration investment in British Columbia over the last two years. The President of one mining corporation recently commented that "nobody is going to spend money looking for minerals if they don't know whether they will ever be allowed to exploit them."

Even where a government is endeavouring to create a positive climate for investment, it may be necessary to take additional steps to provide investors with an accept­able degree of legal and regulatory certainty. For example, when offshore oil development was first seriously pursued in Canada in the late 19705 and early 19805, the federal government lacked an adequate regulatory scheme governing the rights to explore and produce which had been issued by the government EoI' offshore areas. Since there had never previously been significant oil production from any federally-owned lands in Canada, much less offshore, the federal statutory regime had lagged behind those in place in the major producing provinces. This affected not only the federal govern­merit's ability to regulate so as to limit environmental and other risks, but also created uncertainty for producers who wanted certainty of tiUe and for banks being asked to lend on the security of offshore oil and gas rights. This illustrates how, in certain cases, the private sector will actually insist upon proper regulato­ry schemes being in place so that the "rules of the game" are dear.

While certainty is a paramount objective, the most effective way to attain it in some

Institute 0,1 29 Governance

cases may be to provide more flexibility, depending on the complexity of the SUbject metter. In some instances, hard and fast rules may give rise to a greater incidence of perverse or capricious results. Important aspects of Canada's transport and communications laws state the general objectives and leave it to the specialized tribunal charged with the administration of the regulatory scheme to interpret these broad guidelines in particular cases" However, the private sector would normally consider it intoler­able if taxation regimes were subject to extensive administrative discretion, because of their direct financial impact. To the extent that tax laws produce arbitrary or unforseen results, it is accept­ed that relief must generally be sought through legislative amendments.

Where administrative agencies are given considerable discretion, they often at­tempt to assist those they regulate by issuing policy statements or guidelines outlining the principles which the agency will apply in exercising its discretion, such as the various enforcement guide­lines issued by the Canadian Bureau of Competition Policy. These enhance certainty by informing the business and legal communities as to the Bureau's interpretation of key provisions of Cana­dian competition law. The existence of detailed guidelines also encourages consistency in decision-making byoffi­cials, thus further promoting certainty.

Guidelines setting out the general pnnct­ples which will be applied by an agency may be insufficient to provide certainty in respect of particular transactions. The practice of issuing, upon request, advance rulings on the application of laws to particular proposed transactions is well­developed in the administration of both Canadian tax legislation and Canadian competition law. Parties to a proposed

30 lltstitute On Couemnnce

merger can obtain iron-clad assurance that a merger will not subsequently be challenged on competition grounds, by obtaining an advance ruling certificate from the Director of Investigation and Research. Provided that a transaction is completed within one year of the issuance of a ruling and that the relevant facts are as disclosed to the Director, a subsequent challenge is statute-barred.

In certain areas, such as securities regula­tion, it maybe necessary to provide precise rules in the legislation, regulations and policy statements upon which indus­try participants can rely with certainty, since it would be completely impractical to deal with transactions on a case-by­case basis. However, it can also be anticipated that sometimes such rules will prevent particular transactions, even though such transactions would not contravene the general policies of investor protection underlying the regulatory scheme. To deal with this problem, the legislation provides securities regulators with the power to issue exempting orders where it is in the public interest to do so. Thus, certainty as to the way in which the regulatory framework will be applied derives not only from specific statutory rules, but also from the expectation that the legislation will be applied in accor­dance with certain basic policy objectives.

Certainty is also enhanced if a regulatory requirement can be enforced only by a specific body, so that risks do not arise of potential challenges from various sources (this is one argument against reliance upon enforcement by private parties). A regulatory regime is obviously defective if it permits a party to be exposed to poten­tially conflicting, or duplicative, require­ments from different government agen­cies or even from different branches within the same agency. In Canada, the primary source of conflicting or overlap­

ping regulatory requirements is Canada's federal political structure. Although the division of authority between the federal and provincial governments is reasonably well demarcated, in many areas the provinces have failed to make serious efforts to harmonize requirements among themselves. (Interprovincial trade barri­ers in Canada have been estimated to cost the Canadian economy $6.5 billion annually.)

Even where formal advance rulings on transactions are not available or parties do not wish to seek them, it is possible to obtain some measure of certainty about whether a proposed transaction will be acceptable by discussing the matter with the regulator in advance. Such consulta­tions can range from seeking general guidance on a no-names basis, which provides limited certainty since a regula­tor will usually be reluctant to provide definitive advice in the absence of full disclosure of the facts, to discussing the proposed transaction in detail. Obvious­ly, disclosing the facts of a proposed transaction to the regulator may be unacceptable unless the regulator will make a commitment not to disclose such facts. It is possible to obtain an advisory opinion from the Bureau of Competition Policy on a confidential basis, respecting the application of the Canadian competl­tion legislation to a proposed set of facts or a proposed transaction, in contrast to business review letters issued by the antitrust authorities in the United States, which are made public. Although the assurance of confidentiality can remove a disincentive to seeking government advice, it can mean that other businesses which might be interested in pursuing similar practices will not have the benefit of the government's prior consideration of the issue. This can lead to needless duplication of effort by the government and private parties. To avoid this

problem, certain government agencies publish summaries of the advice they provide to private parties in particular circumstances. For example, the Ontario Securities Commission publishes summa­ries of past cases in which it has exempt­ed parties from certain regulations. The names of the parties are not published. However, it is only practical to publish ease summaries without names if the fact situations occur frequently in the industry and involve numerous different parties, Even a general description of a set of facts in a competition matter might, in many cases, provide a basis to anyone familiar with the industry to guess at the identity of the parties involved,

PROCESS OF CREATING REGULATIONS

Although the regulators and the regulated cannot be expected always to see eye to eye, regulations should ideally reflect some degree of consensus between government and the private sector that regulation is appropriate, that the meth­ods used are reasonable and that the procedures of application and enforce­ment work. If regulations are not per­ceived as legitimate by those who are required to comply with them, they will usually be ineffective. Taxation provides a simple example. Coinciding with steep increases in the taxation of cigarettes in Canada, intended to discourage smoking, the black-market sale of Cigarettes in Canada (usually ones produced in Cana­da which have been legally exported without payment of tax and illegally re­imported), formerly a negligible problem, has reached massive proportions. Part of the explanation is simply that at former levels the tax was viewed by most of the public as legitimate, but when raised to punitive levels the tax has become one which a Significant part of the public no longer has any compunction in evading.

Institute On 31 Governance

Stopping the smuggling became virtually impossible and prohibitively expensive. Thus the governments had no alternative but to reduce the taxes to more appropri­ate levels.

Since governments cannot afford 1:0 devote the resources necessary to enforce laws if a significant proportion of people will not voluntarily comply, it is lmpor­tent that the process by which regulations are developed and adopted involves the regulated parties. Such a process assists governments to fashion regulations in a way which takes into account the legiti­mate concerns of the regulated and avoids making mistakes which can arise through a lack of understanding on a government's part of the sector that it intends to regulate. In addition, the process facilitates compliance once the regulations are adopted, simply because the regulated have been consulted rather than ignored in the process.

Too often, government regulations ignore the incentives that are created by regula­tion. They assume that individuals and markets are static, and that government regulation can Simply be added to an environment that will otherwise remain constant. This, of course, is not the case. Regulation creates a new set of incentives that will prompt individuals and markets to act differently than they would have in the absence of the regulation. The prob­lem is that it is often very difficult to predict exactly how these incentives will work in practice. It is for this reason that many government regulations ultimately turn out to be counter-productive. The regulators have failed to correctly antici­pate the "incentive effects" flowing from the regulation, resulting in behaviour that is either unintended or contrary to that desired.

Unfortunately, Canada has provided its share of examples of how not to adopt regulatory initiatives. Particularly where a government is committed to a particular political agenda, it may deliberately ignore the views of constituencies which it regards as hostile to its intentions. For example, in preparing the 1981 Budget, the Canadian federal government of the day avoided seeking advice from civil servants in the Department of Finance who would have been able to advise them that the government's plans would be completely unacceptable to most of the private sector. The resulting BUdgetwas described as "criminally stupid", "one of the most pelVerse tax documents ever to stagger an already floundering economy" and "totally out of touch with economic reality." Ultimately, the government had to backtrack substantially from its position.

The Canadian federal government's National Energy Program of the early 1980swas intended to lead to Canadian self-sufficiency in oil and gas production, based upon the government's corwlctlon that the rise in world energy prices triggered by OPEC would be a permanent phenomenon, from which Canada could be sheltered by "made-in-Canada" energy pricing. As subsequent events proved, the government's ability to predict the future was less than perfect. As well as demonstrating the futility of long-term initiatives based upon shaky premises, the National Energy Program was imple­mented over vociferous objections from many of the affected parties. Because of its discriminatory impact on foreign-owned companies, it did nothing to improve the perception of Canada by foreign investors and, in addition, it exacerbated long­standing regional tensions within Canada between energy-producing and energy­consuming provinces.

32 Institute On Gooemance

At least in the Canadian context, it is difficult to think of any examples where governments, believing themselves to be wiser and more far-seeing than the private sector, ignored all opposition and ultimate­ly were proved to be right. This is not to say that governments have no role to play in attempting to direct private sector activities in a way which takes a more long-term view than the private sector might, but only that government schemes which are imposed without consultation, because the government knows that the advice it would receive would not be favourable, are usually headed for disaster.

Conception of Regulations

Regulatory initiatives often arise in a haphazard way. They may be conceived as a result of particular scandals or perceived problems, or from models in other countries which appear useful or attractive. Traditionally, Canada has been heavily influenced by the examples of Great Britain and the United States, drawing upon British models for such concepts as a public broadcasting system and public heath care, While borrowing heavily from American models of, for example, securities regulation or trans­portation regulation.

Until recently, Canada has lacked any consistent process for evaluating and developing proposed regulatory initia­tives. In some cases, governments have sponsored studies by specially-appointed commissions, or continuing bodies such as law reform commissions, to provide an analytical basis for proposed legislation. The Canadian practice of appointing Royal Commissions has often been ridiculed as a political device to defuse controversy without having to take positive action, but in some cases it has ultimately resulted in better-conceived legislative proposals than would probably

otherwise have been the case. Hearings or inquiries of this kind provide a forum where interested parties can express their views, which can be taken into consider­ation in formulating a proposal. Howev­er, in the past, problems which are the subject of a proposed regulatory initiative have tended to be approached in isola­tion. As a result, Canadian govern­ments have failed to give truly effective guidance and leadership to the private sector.

There has been a growing awareness in Canada, however, of the need for drastic improvement in the processes by which new regulatory initiatives are conceived, developed and implemented. On March 6, 1986, the Canadian government an­nounced a Citizen's Code of Regulatory Fairness. This consisted of 15 ground rules by which all regulatory initiatives were to be measured. Although citizens aggrieved by the regulatory process were not given any new rights of challenge, the Code did herald a new awareness by the government of a need to involve those affected by regulation in the process.

In 1990, the federal government co­sponsored a study by Professor Michael Porter on Canadian competitiveness. As part of his report, Professor Porter re­viewed and criticized the role of govern­ment in Canada in developing the inter­national competitiveness of Canadian business. Professor Porter observed that the government has played the role of protector and has only infrequently aggressively pressed firms to innovate, upgrade and meet high standards. For example, the study cites historically weak environmental standards as one of the factors contributing to a lack of upgrading in the Canadian newsprint industry.

While key issues like those which we have outlined in the first part of this

Institute all 33 Governance

paper have often been considered in conceiving Canadian regulatory initia­tives, at least on an intuitive basis, there has been little consistency in approach. Governments are beginning to realize that their approach to the conception of regulatory initiatives is inefficient and results in important questions often left unasked. In 1991, the federal government commenced its Prosperity Initiative, to stimulate a national discussion on the issues affecting Canadian competitiveness and prosperity. A Steering Group, com­prised of members of the private sector, was struck to develop recommendations "to secure Canada's future economic and social well being." The Steering Group's recommendations included publicly assessing the competitive impact of all current and proposed legislation. Some of the questions which the Steering Group recommended asking included:

• Where does the proposed action or regulation fit within the government's priorities?

• Is there still a need for action or regulation, or has the targeted prob­lem already been solved?

• Can the action be taken by another level of government, delegated or handled jointly with others?

• Could market instruments of self­regulation be as effective as govern­ment regulation in terms of meeting policy goals?

The Steering Group noted that Canada's federal government has relatively more departments and agencies than the governments of other leading countries. The governments of the United States and the United Kingdom, for example, were said to operate with about half the num­berof major executive departments, even

34 Institute On Governance

though they serve much greater popula­tions.

In May 1991, the Treasury Board of the Government of Canada issued regulatory guidelines to all federal government departments and agencies with the stated objective of ensuring that the use of the government's regulatory powers results in the greatest net benefit to Canadians. Essentially, the policy prescribes a series of steps which must have been taken by the sponsoring department before any new regulation will be enacted. These include procedures for ensuring Lhat Canadians have been consulted and have had an opportunity to participate in developing or modifying the regulations, a comprehensive analysis of the net impact of the proposed regulation on Canadians, including the impact on competitiveness of Canadian business and a comprehensive plan of communica­tion to Canadians of the scope and perceived need for the new regulation.

One reason why regulatory initiatives often have not been conceived in a coher­ent or consistent way is that they have tended to arise as reactions to particular problems, not as part of an ongoing organized process. In areas which are already subject to regulation, it is possible to build into the regulatory framework a mechanism for regular re-evaluation of the regulations. For many years, Cana­da's banking legislation has provided that the right of a bank to carryon busi­ness will expire after a specified period of years from the legislation coming into force. This is intended to ensure that the legislation is reviewed at regular inter­vals, which formerly were every ten years and are now five. Increasingly, where Canadian federal legislation has been substantially overhauled, provision is made for review of the legislation after a certain nu rnber of years, primarily for the

purpose of determining whether the statutory reforms have been effective and whether further changes are required. For example, a review of Canada's trans­portation legislation, five years after its enactment, has just been concluded, An independent review committee held public hearings and solicited submissions from industry, other interested parties, and the general public. Canada's recently revamped bankruptcy legislation pro­vides for its review by the federal legisla­ture after a period of three years. Such provisions for a periodic review of legisla­tion are not mandatory and do not follow a set pattern, but provide a useful model.

Governments usually experience dlfflcul­ty even in passing the key legislation which forms part of their political agenda. Accordingly, they are completely unable to devote any effort to reviewing laws which are already in force, with a view to determining whether they have outlived their usefulness and should be repealed, or require modification. This problem has led to considerable discussion in North America of the idea of legislation with a "sunset" provision, by virtue of which the legislation will expire after a specified period. Thus, if the legislature still considers that the law serves a useful purpose at the end of its stated life, it is forced to take the positive step of re­enacting it, with or without amendments. Such an apparently extreme solution reflects Widespread frustration with the inability of governments to "de-legislate". A more focused approach would be to require, as one of the basic questions which must be considered in connection with every regulatory initiative, appropri­ate time frames for reviewing the effec­tiveness of the regulatory scheme and, if necessary, amending it, and, over a longer term, for assessing whether the legislation continues to achieve its intended purpose

or should be replaced with some other approach or abandoned altogether,

Development 01 RegUlations

Particularly where a government has limited experience in regulating a particu­lar area, as will be the case if a regulatory scheme IS new or has been substantially revised, it is crucial that there be consulta­tion with the regulated sector in develop­ing the details of the regulatory scheme. The 1986amendments to Canada's competition law, and the new merger provisions in particular, were the subject of extensive consultations with interested parties, especially the business and legal communities that would be most directly affected by the proposed legislation. Consultation with stakeholders can also usefully be pursued with respect to policy guldellnes that may not have the force of law, For example, after four years of experience with the new merger provi­sions, the Director of Investigation and Research held extensive consultations with business, the legal community, other government departments and even foreign agencies and practitioners, in order to receive their comments on draft merger enforcement guidelines. The eventual published guidelines incorporat­ed many of the views expressed in the consultations, In view of the cross-border nature of many mergers, consultation with the international community was particularly important to ensure that Canada's merger review process was not radically out of step with those of its major trading partners.

This need for consultation is becoming increasingly recognized. The 1992 Cana­dian Federal Regulatory Policy requires sponsoring departments to show how Canadians have been afforded an oppor~

tunity to participate in developing or

lnstitvte On 35 Gooemence

modifying the proposed regulatory program.

The ordinary legislative process provides some opportunity for comments from affected parties to be reflected in changes to legislation between the time it is intro­duced in the legislature and the time it is passed. Where legislation is important to a particular sector or to the private sector generally, it is often released for corn­merit, at least to selected representatives of those who will be affected, in advance of its introduction in the legislature. This process is made less effective, however, by the secrecy which is imposed upon draft legislation. A more successful model of full and ongoing consultation is the manner in which some government agencies, such as Securities Commissions and the Bureau of Competition Policy, seek comments on drafts of proposed guidelines or policy statements prior to their adoption. This process provides an opportunity to fine-tune the proposed policy, based upon the knowledge and experience of those to whom it will apply. It also provides the regulated sector with a fuller view of the regulator's concerns and objectives, which helps to build a consensus between regulator and regulat­ed so that, even if the regulated sector has reservations about the policy, it acknowl­edges that the policy attempts to achieve a worthwhile purpose.

In developing regulatory initiatives, governments must be particularly con­scious of the compatibility of their pro­posals with the approach taken in other countries and the effect which their proposals may have on competitiveness in a world context. The 1992 World Competitiveness Report indicated that Canada had slipped from 5th to lIth place among developed nations in the competitiveness of its government. The Report considers whether government

36 Institute 011 Governance

policies, including the legislative and regulatory environment, are conducive to competitiveness. It is used by Interna­tional corporations in assessing where to locale corporate offices and plants.

It is generally recognized that inconsistent regulatory schemes between different countries may affect investment decisions and operate as a barrier to trade. Compat­ibility between different countries tends to reduce "shopping" by multinational companies for less onerous regulatory environments, encourages investment by providing a familiar and well-understood regulatory environment and facilitates international trade. The European Com­munity is perhaps the best example of a multilateral effort to bring about the convergence of regulatory policies. For example, the Community has launched an extensive program to harmonize technical standards where possible, and to remove any trade distorting effects where harmonization cannot be attained. Similarly, the 1988Canada-Ll.S.Free Trade Agreement contained several undertak­ings to pursue harmonization and conver­gence of the two countries' laws in a number of areas, including technical standards and trade remedies laws. These undertakings have, in part, been overtaken by the North American Free Trade Agreement negotiations.

Consistent with the spirit of the Canada­U.S. Free Trade Agreement, two leading private sector standards organizations, Underwriters Laboratories in the United States and the Canadian Standards Association in Canada, have begun to issue common standards jointly. The benefits to businesses producing to such standards are immense, including being able to use a single prod uctlon run to supply both countries and avoiding duplication of testing and certification procedures. In each case, the result is

production cost savings. In view of the European Community's recent standards initiative, the EC has undertaken discus­sions with a number of countries, includ­ing Canada, aimed at negotiating mutual recognition agreements with respect to standards testing and certification. Effective mutual recognition agreements will greatly reduce the cost of doing business across borders by allowing businesses to avoid duplication in testing and certification requirements.

The Securities and Exchange Commission in the United States and the provincial Securities Commissions in Canada have entered into arrangements that permit certain public disclosure documents which satisfy the requirements of one jurisdiction to be accepted in the other jurisdiction with minimal additional formalities. This permits, for example, Canadian corporations meeting specified criteria to effect public offerings in the United States of securities using a Canadi­an prospectus cleared with the Canadian securities authorities, without preparing and clearing a U.S. registration statement through the U.s. Securities and Exchange Commission. This facilitates the raising of capital by issuers in both countries, but may be especially beneficial for Canadian companies, which are thereby afforded simpler and less expensive access to the substantially larger capital markets in the United Stales.

"selling" Regulations

Even if extensive consultations with the private sector have been carried out by government in developing a regulatory initiative, it is important for efforts to be made, when the regulations are imple­mented, to familiarize the regulated sector with them and explain the policies under­lying them. Among other reasons for pursuing such a process, unless the

regulated sector is very concentrated, it is rare for all of its members to have been involved in earlier consultations in the course of developing the regulations. A process of education is still necessary in order to obtain a high degree of compli­ance and co-operation from the regulated sector.

Following the 1986 Canadian competition law reform, the Director of Investigation and Research initiated an extensive program of compliance involving numer­ous speaking engagements by officials, the publication of bulletins and guide­lines, and other efforts aimed at inform­ing the business and legal communities as to the impact of the new legislation and the Bureau's enforcement policies. The Bureau attempts to use a broad range of dispute resolution mechanisms ranging from information visits and undertakings, through consent proceedings and, where necessary, contested litigation. The Bureau's efforts to publicize its willing­ness to consider alternative case resolu­tion and avoid costly and time-consum­ing litigation have led to more efficient case resolution in recent years.

In order to allocate government resources most effectively, voluntary compliance with regulations must be encouraged. Even if affected parties may sincerely intend to comply with the regulatory requirements, the regulatory scheme will not work efficiently unless those regulat­ed by it understand how to comply with it, which usually involves an appreciation of the purposes of the scheme as well as knowledge of its specific requirements. Recognition of this phenomenon led to the requirement in the 1992 Canadian Federal Regulatory Policy that sponsoring government departments must prepare and submit a full communications plan before any new regulatory program will be enacted. In the case of Canadian

Institute A" 37 Got/fTnalJCe

competition regulation, following the Director's consultations with interested parties before and after the publication of the Merger Enforcement Guidelines, the Bureau's experience has been that private sector submissions have generally im­proved in quality. Parties' counsel now have a better understanding of the kinds of information that the Director requires to review a proposed merger. They are therefore more likely to produce the information at the outset rather than at a later stage in the review process after a request from the Director's staff. This helps to make the process more efficient.

Where the meaning or application of a regulatory requirement is unclear, the uncertainty tends to thwart the objectives of the regulatory scheme. For example, in the area of competition regulation, the threat of incurring sanctions for breaching unclear prohibitions may have a chilling effect on competition rather than enhanc­ing it. For many years, the criminal offence of price discrimination under Canada'scompetition legislation was the single most important source of advisory opinion requests to Canada's Bureau of Competition Policy. This is somewhat startling, given the fact that these provt­slons were rarely invoked over the past half century following their introduction. Nevertheless, business decisions were dearly being affected, and the uncertainty was furthered by the absence of judicial interpretation of the relevant provisions. As a result, the Director of Investigation and Research issued Price Discrimination Enforcement Guidelines in 1992 that set out his enforcement policy in some detail. While it is too early to determine the impact of the new Guidelines, they have generaIly received favourable reviews from the legal community.

Governments have become increasingly aware in Canada that, as well as educat­

38 Institute On Governance

ing those affected by regulatory initiatives in the objectives and operation of the regulations, II is necessary to use some of the skills of diplomacy and public rela­tions to try to establish a non-adversanal relationship with the regulated sector. In this respect, perceptions can be as impor­tant as realities. For example, in introduc­ing controls on foreign investment in the early 1970s, the Canadian federal govern­ment managed to convey the impression that it was generally hostile to foreign investment. In 1985, the legislation was substantially changed by a different government, which viewed it as an obstacle to Canada attracting foreign investment. While significant substantive changes were made in the legislation, primarily to introduce clearer and more precise criteria for the circumstances in which it would apply, major efforts were also devoted to changing the tone and emphasis of the regulatory scheme and the agency which administered it, towards facilitating rather than blocking foreign investment. (Since then, because of the Free Trade Agreement with the U.S., which is by far the largest source of foreign investment in Canada, restrictions on Ll.S. investment have been gradually phased out, with the result that the legislation has become of little practical lmportance.)

In order to "sell" regulatory initiatives, governments in Canada have Increasingly recognized that they should not sit and wait for the private sector to approach them, but must actively take their mes­sage to the private sector. In conjunction with major legislative reforms of recent years, such as those in the fields of competition law and financial services legislation, government representatives have made numerous speeches and presentations to industry groups to explain the operation of the new regulations.

Ongoing Consultation

In order to maintain the effectiveness of a regulatory regime on an ongoing basis, dialogue between the government and the regulated sector must be continuous. Governments must remain receptive to private sector criticisms and suggestions, to ensure the continuing effectiveness of regulations. In some areas, particular methods have been adopted to keep open a continuing dialogue between regulators and those they regulate. For example, securities regulators participate in regular discussion forums and seminars with members of the securities industry and securities practitioners to discuss current issues and proposed responses to them. Similarly, banking and insurance regula­tors regularly meet in open sessions with industry representatives, lobby groups, lawyers and accountants to assess wheth­er the regulatory framework is contrlbut­ing to a healthy, competitive environment for Canadian industry. The Bureau of Competition Policy and the Department of Justice have, for many years, jointly operated an execu live exchange program for the private sector lawyers in the competition law field. As a result, both government and the private sector have greatly benefited from the existence of a cadre of practising lawyers with extensive knowledge of the Bureau's priorities and its approach to particular competition issues. This not only results in higher quality and more cost-effective service to clients, but also more effective com­munication between the private bar and officials.

CONCLUSION

To regulate effectively, in a way which both achieves the objectives of govern­ment policy and directs private sector energies in a constructive way, govern­ments must approach the process of creating, applying and updating regula­tions in a more organized manner, with fuller consultation with the private sector, than has often been the case. A country's competitiveness is not derived solely from the efforts of its private sector, but is crucially affected by the regulatory strategies of its governments, and by the degree of co-operation between its private sector and its governments. ~

In8titute OJ1 39 Governance

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THE URUGUAY ROUND:

AN OVERVIEW AND

NEW CHALLENGES

by David Lee

Prepared from a transcript ofan impromptu discussion led by David Lee, Senior Coordinaor, New Issues, OffiC8 of Multilateral Trade Negotiations (OMTN) Foreign Affairs and International Trade Canada

INTRODUCTION

The Uruguay Round was a massive under­taking. It began in the early 19805 and finished in Marrakech in April 1994. This discussion will provide a personal over­view from a Canadian perspective. I will do that by: outlining some of the key milestones; describing some of the major changes that took place in the world during that time; recalling the main agenda items agreed upon for the negotiations; giving an idea of the Canadian objectives; and discussing the outcomes.

Key Dates

Let us recall some of the key dates. The Tokyo Round ended in 1979. Within the first few years after that, there were already moves to get a new Round under­way. There was some unfinished business from the Tokyo Round: agriculture had not been dealt with; textiles were still outside; the issues of subsidies, counter­vail, and anti-dumping remained. There were a lot of issues that had not been resolved satisfactorily. Then, of course, there was already talk of the so-called New Issues: of services, intellectual property and investment. Some people had additional issues such as technology and workers' rights.

There was a Geneva ministerial meeling in December, 1982. The original plan for that meeting was to launch a new Round, within three years of the end of the Tokyo Round. Because of the eco­nomic situation at that time, there was not sufficient political will, but there was an agreement on a work program. By September of 1986 in Punta del Este, Uruguay, there was sufficient political will and the new Round was la unched. It

. was envisaged to end in four years, with a ministerial meeting in Montreal at the halfway point of December, 1988. The

Institu.te On 43 Governance

ending point was to be in Brussels in December, 1990, again at a ministerial meeting. Both the Montreal meeting and the Brussels meeting took place but the Round did not end. The Brussels meeting failed because there was insufficient agreement on agriculture. It was agreed that the negotiations would continue; not without difficulty, but it was agreed.

In December, 1991, Arthur Dunkel, the Director General of the General Agree­ment on Tariffs and Trade (GAIT), produced his so-called "Draft Final Act: the Dunkel Text." In fact, much of what is in the final agreement, was in the Dunkel Text of December 1991. At the end of 1992, there was a change in the US and European Union administrations. A further extension was negotiated, albeit with some difficulty because, unlike the move from Reagan to Bush in the U.S. four years earlier, this was a change of parties as well. It was not at all clear that the new Clinton Administration would wish to pursue the "Republican" trade agenda. So that was another difficulty. Finally at the end of December 1993, the Final Act was agreed to, and signed by all our countries, or most of our countries, in Marrakech in April 1994.

World Changes Impacting onthe Round

If we date the beginning of the Uruguay Round as the 1982 ministerial meeting, the Round can be seen to have lasted 12 years. That is a very long period of time. lt was obviously an immense political endeavour quite apart from anything else. To be able to sustain the political momen­tum over that period of time, that is, half a generation in people's lives and many different political administrations in all our countries, is remarkable. In terms of world events, let us recall some of the major events that took place from 1982 to 1994:

• the end of the Iron Curtain in Europe;

• the change in the USSRi

• the Commonwealth of Independent States (CIS) was created with all the changes that took place in Asia and Europe as a result;

• democracy increased all around the world -~ Asia, Latin America, Africa (although not quite as much); and

• attitudes changed on an ongoing basis towards economic matters, especially regarding the market economy, the price mechanism, and the role of trade.

In half a generation, people's ideas can and do change. Within different regions there were a number of developments. Regional trade agreements were coming to the fore. The European Community changed from the "Community" to the "Union." It expanded. There was the North America Free Trade Agreement (NAFfA) preceded by the Canada-US Free Trade Agreement (FfA). Within Latin America there were also moves to coalesce further from a trade and econom­ic point of view. There was also an Australia-New Zealand Closer Economic Relations Agreement (CER) which is a free trade agreement. Within the world economy, there were a great many changes taking place on the ground including, but not limited to, the in­creased importance of high technology, and the demand for investment.

Many of these developments can. be grouped under the heading of "Globalization." The strength of different countries in economic matters changed. No one was immune to rising or indeed to faIling. Conslder what has happened to Germany since re-unification. Consider the difficulties the Japanese have been

44 Institute all Gceeruence

having in the last few years. There were ups and downs, uncertainties and chang­es. All of these elements were reflected in one way or another in the course of the negotiations. It is probably fair to say that one of the significant results of all these changes and this evolution was that the need for an agreement in the Uruguay Round became more and more obvious and the size of the package got bigger and bigger as time went on.

Let's look at it from the negative side. People began to appreciate more and more that a failure of the Round would have had potentially catastrophic effects. It would have meant an in­crease in regionallzation, an increase in trade disputes, a growth in uncertainty, and investor loss of confidence. All of these types of psychological and econom­ic effects would have been expected lo flow from a breakdown of these negotia­tions.

On the other hand, a success of the Round would go a long way to re-affirming the intention of having a one-world approach to economic and trade matters, so as to:

reduce barriers between countries and, perhaps more importantly, between regions;

• strengthen the rule of law at the multilateral level; and

• create an institutional structure where everyone could operate on the same basis, with the same rules, with the same access to a system for settling disputes.

OBJECTIVES OF THE URUGUAY ROUND

Objectives from the Ministerial Meellng

The objectives from the Punta del Bste Ministerial Meeting can be summed up under five headings.

1) The Punla Declaration set out the mandate that recognized the need to tackle first, the barriers to international goods trade.

2) It recognized the need to tackle the "new - old" issues, agriculture and textiles in particular.

3) It recognized that there were impor­tant rules issues which needed to be addressed: a) safeguards and the perceived abuse of the safeguards system, which was a great concern to developing countries; b) subsidies on the one hand and, on the other hand, the way the countervailing duty system was operated by the U.S. among others; and c) the anti-dump­ing system whIch was seen as a great concern to a number of developing countries.

4) Attention was given to institutional and disputesettlement questions. There was a general concern that the GAIT remained a temporary body. It was set up in 1947/48 as a fallback after the failure of the U.S. Congress to ratify the International Trade Organi­zation (ITO). It was to have been the third pillar of the multilateral eco­nomic and trade system along with the World Bank and the International Monetary Fund (IMF) arising out of the Bretton Woods Agreement in 1944. So we had a temporary orga­nization which did not have the institutional strength or status to

In!>titute On 4S Guvernance

carry the weight of the international trading system. We had a dispute settlement system that was inad­equate.

5) Finally, there were the so-called New Issues: trade-related investment measures, trade-related intellectual praperty issues, and trade in services. The U.S.wished to include technology-related issues and workers rights. The latter two were not accepted. There were no separate discussions of technology or workers' rights in the Uruguay Round, although some technology issues arose in the course of the intellectual property discussions and indeed (in some ways) in some of the other traditional access negotiations.

Q: It seemed to me agricultural subsidies as an issue cameup very late. As I interpret your remm·ks they seem to havebeen part of the original five objectives, but my memorywas that they were only on the table post-Montreal, post 1988, and thus the second question related to that is, the institutional framework of the World Trade Organization (WTO) was also somethingthat seemed to arrive verylate in thediscussions. Couldyou clarify?

R: On theprofile of agriculture, it was accepted right from the start that one needed todeal with agricultural issues: tariffs, quotas, and so on;export subsidies; domestic subsidies and related trade remedies; and of course the sanitaryand phytosanitary technical issues. All four elements werepad of it from the begin­ning. But theagriculture issuedid assumehuge public importance specifi­callybecause, beginningin Montreal, it was oneof thestumbling blocks. The European Union or the European Com­munity as it was then called, was per­ceived by the CairnsGmup, and not wrongLy, as bei11g unwilling to deal with

46 Institute On Governance

thatadequately. It became a highly political exercise in MontTeal when Argentinaand theotherCairns members said they were not prepared to sign on to theoverall outcome, unlessagriculture was satisfactory. So there wasa delay from Montreal, over thenext threeor four months,until agreement could be reached to resume the negotiations on theagricul­turefile.

On the institutionalside, this was certainly partof the package from the beginningand it certainly was one of the major concerns amongothers. Two separate negotiating groups wereestab­lished -- one todetermine how to strengthen the GAIT and the other to workon thedisputesettlementsystem. But decisions on the wro itselfwereonly taken at thevery end of theday in 1993.

Canada's Objectives

The Canadian objectives for the Round paralleled to a considerable degree the five issue areas I have mentioned. I am going to emphasize some of them in particular, because I think we would probably share some of them with you. But first 1 would like to make a brief digression and mention Canada's free trade agreement negotiations with the US.

One ofthe developments that was taking place during this same period was the negotiation of an agreement between Canada and the U.S. on free trade. The concerns that led us to get involved were very much in parallel with the kinds of concerns that led us to take a strong position favouring the multilateral negoti­ation. Most of the key objectives were identical and as far as we were concerned they were simply two paths, two means of trying to achieve a common set of objectives.

Our objectives can be laid ou t as follows.

1) We wanted 10 constrain the major economic players from the ability to act unilaterally, by strengthening the rules and strengthening the institu­tional structure for currying out those rules. This led us to give enormous importance to the issues of institu­tional structures and dispute settle­ment. We wanted to have it estab­Iished in those rules that. unllateralism was not acceptable. So these are all over-riding, horizontal, cross-cutting issues and objectives.

2) We had a number of very specific, more sectoral-type objectives:

As a major agricultural exporter, we were very concerned that the agriculture area had effectively been left out of the previous Rounds. This was the 8th major Round since the GAIT was established. In the previous seven, agriculture had failed. It had been part of the negotiations but had largely been dropped, due to a lack of political wilL So for us it was very important that agricul­ture be part of the final result.

As a major resource producer and exporter, we were concerned that in previous rounds the tariff results had been skewed against resource producers and in favour of finished goods producers. We wanted to be sure that the resource prod ucers and exporters achieved beneflts - raw materials of various kinds, wood products, fish prod­ucts were important to us and, of course, all types of minerals. So these were major goods issues. We also had a number of machin­

ery and other equipment interests at issue.

3) There were also some important rules issues, which we shared more broadly with a number of the other countries. These were things we felt we could share the burden of negotiating. For us, it was very important to deal with the subsidy issue in particular, given the way the U.S. countervail operated; and that obviously had a particular bearing on agriculture.

4) We also wanted to deal with the new issues, particularly trade in services, because we were concerned that this was an area completely outside the international trading system. This meant that the U.S.and other big countries could act totally unilateral­ly, with no constraints. At least, on the goods side, one did have the GAIT: imperfect, incomplete, but it existed. On the services side, there was nothing whatsoever. We were convinced that it was important to put in place a system of law, a framework, that would apply to everyone. We also had a number of specific services, sectoral interests and objectives but they were much more specific,

THE CANADIAN CONSULTATIVE PROCESS

For both the FfA and NAFTA negotla­lions and the multilateral trade negotia­lions, we put in place a team of negotia­tors who would look across the range of negotiations and would consult widely.

Pirst, we consulted on an inter-minieteri­al basis in Ottawa to ensure that we had all the views at the federal level.

Second, we put in place a consultative mechanism with the provinces, because

Institute On 47 Gcoernance

the provinces have institutional powers in relation to many aspects of business life. Although trade and commerce are a federal responsibility, in some cases it is hard to draw the line in terms of leglsla­live responsibilities. This is particularly the case when you get into the new issues such as trade in services where the provinces do have important powers, and accordingly, we were consulting closely with them on that. We had a very active mechanism put in place, ministerial, official level and very detailed by sector. I went around myself and visited the provinces on a number of occasions to consult closely on the new issues with which I was particularly involved.

Third, we had a very active and intense level of consulting with the private sector. We put in place two new mechanisms, one of which was a horizontal body, called the International Trade Advisory Committee (ITAC). This was a body of some 30-40 very senior business leaders, i.e., the Chairman or President of a company. They would get together once every three months or so during the negotiations to look at the overview of the negotiations and at horizontal issues that affected all aspects of the negotiations. They might strike sub-bodies. Their views and recommendations were pre­sented to the Minister of International Trade. Officials of other departments were also involved in advising and discussing issues with them. As well, there were about 15 sectoral advisory groups (SAGIT's) covering the whole gamut of the Canadian economy -­textiles, agriculture, resources, automo­tive, a few other goods areas: and in services, transport, business services, cultural!arts services, telecommunica­tions! computer services, financial services, the whole lot. This was a very intensive process. At its height, each of these groups would be meeting as fre­

48 Institute On Governance

quently as once a month or more. When the negotiations were very intense we would be in touch with them by tele­phone, sometimes calling them from Geneva - a very active process. In some cases, these groups would go to Geneva with us (particularly concerning agricul­ture). This provided an opportunity for them to meet other delegations, business and private sector people, and get a first hand appreciation of how things were going.

This process was particularly helpful in increasing the level of understanding at the industry level of the process, how things worked, what other people thought, what the real constraints and pressures in the negotiations were -and thus helping them to understand the results. Obvious­ly in a negotiation you do not get every­thing you want. Negotiation means give and take by definition or it is not a negoti­ation, it is a dlctat. This was a negotiation as far as we were concerned. It is impor­tant that the industry side and the private sector side understand what it means to negotiate. What is going into the pot? How it is being stirred? What is the soup likely to taste like at the end of the day? I think this process helped greatly in doing that. I can refer to the tarifficatlon of our import quotas that we had to do in agriculture at the end of the day. This process certainly helped us in bringing people, inside and outside government, to realize the necessity of our actions.

I have dealt with the Canadian objectives. I have dealt with the mechanisms that we put in place to facilitate the consultative process. I think that it parallels the kind of process that was being outlined here yesterday regarding new regulations. In effect these are new regulations, because we wl1l have to implement the agreements. We knew we would have to implement the results of the Round. We would have

to put in place whatever changes would be necessary, for Canada, in terms of tariff levels and changed regulations at home. The process was in many ways very similar; the length of time also parallels, to some degree, at least some of the changes in regulations that took place domestically.

URUGUAY ROUND OUTCOME

The Elements of the Uruguay Agreement

In terms of its outcome, the Uruguay Round is truly remarkable. I will say right away that not everything was achieved. Some of our objectives were not met or not fully met. But I think that is the case around the world. Some other people's objectives were not met. Never­theless, the results are, without question, enormous by any standard. These results include:

1) First, the World Trade Organization was created. Canada is particularly pleased with this because the original suggestion was ours and we worked very hard with a number of countries to achieve this. We think it will help everybody. It is a body that now equals in status the World Bank and the International Monetary Fund. It will provide an ongoing forum for dealing with all aspects of trade matters, including new negotiations, if and when they are agreed to be necessary. This is a multilateral system. As you know, the People's Republic of China (PRC) is negotiat­ing to be a full member and the Russians and other members of the CIS are very anxious to become members. When this happens, it will be a truly global system for the first time. It is extremely important that it be put on a sound footing from the outset. We are convinced that the

Agreement establishing the WTO has done that. It has provided the sound base from which we can operate. The superstructure we have yet to build properly.

2) The multilateral dispute settlement system has been vastly strengthened and improved. There is an explicit prohibition on unilateralism. I should qualify that but only in this sense. If there is no obligation or commitment on a particular issue under the WTO, then of course countrles can still act on their own. If somehow, something has been left out, then a country can still act on its own in regard to that. But in a way, that is an argument for including things, because then you have to operate on a multilateral basis with multilateral approval.

We have an interesting Canadian case study on this. I will digress for two minutes to illustrate in regard to services. One of the issues was cultural services and this is very controversial in Canada. There had been a long argument whether cultural issues should be part of the FTA with the U.S. and indeed whether it should be part of the Uruguay Round. Without going into detail, we were able, through this consultative process, to convince those concerned in Canada, that we should not exclude it as such. Other­wise a trading partner could possibly act unilaterally against us. If you include it, they have to act on a multilateral basis. This was accepted as a sensible approach. It is not excluded from the rules. As a footnote, Canada has not in fact taken market access commitments on the subject. We have not granted anything in terms of market access or national treat­ment that we did not do under the FfA. It is in under the rules, so if there is a dispute settlement case, our partners will have to act consistently with the WTO

Institute On 49 Governance

provrstons. I think this illustrates the point. It is better to have things included because then the rest of the rules apply, than to try to leave them out. Otherwise you are back in the unilateral approach that existed before.

3) There is a much better set of rules, e.g. safeguards. The negotiations were led by a developing country, Brazilian representative Ambassador Maciel. He did a very fine job, to reach an agreement that everybody signed which provided the ability to take safeguard action. This had been a great concern for developing coun­tries. It had failed to be achieved in the Tokyo Round.

Q: What do you mean by safegum'ds?

R: The basic rule is that if thereis an actual import that is injuring your domestic production, or there is a threat of suc/t imports, you am put duties on it, which effectively raises the cost closer to the equivalentof what it would be in your country. There aresomeotherassociated rules that go with it. Essentially tha/. is the basic rule.

4) On subsidies, for the first time, there was a definition of subsidy. This had not been achieved before. It meant that people had argued over what was a subsidy. With this definition of subsidies we are now much clearer about what is allowed and what is not. There are certain exceptions, e.g, for regional development and re­search and development. There was also some agreement on anti-dump­ing which was less dramatic.

5) Fifth, on agriculture, I will not attempt to go into detail. This is a very famil­iar file. Suffice it to say that we have for the first time brought agriculture

50 Institute On Governance

into the multilateral setof rules. There are dlscipltnes on export subsidies and domesticsubsidies; the link with the subsidy and countervail rules has been made. There was agreement on: the import regime, arrangements with a minimum provision for importing small percentages, at least, of prod­ucts; and the sanitary and phytosanitary rules. All four areas have been covered in the Agreement. I think exporters like ourselves were not fully satisfied with the Agreement - with the reduction in subsidies or the level of import penetration that is permitted. But there will be a possi­bility to pursue this under the WTO in further negotiations. I have men­tioned tariffication a couple of times and for Canada it was a big difficul­ty; but at the end of the day it was something we came to realize we had to do.

6) The textiles agreement was a matter of great concern to your countries. This also was an area of difficulty for Canada and other importing countries. However, we recognized that this was a necessary part of the package. Indeed, we welcomed the fact that it was going to be brought back in under the international trading system. I guess you would argue that it is "back-end loaded" to use the technical jargon: too much happens towards the end of the Agreement, not enough up front. I think we would have other arguments to make - i.e .the level of penetration is much too fast. I think overall this is an Agreement that over time does bring textiles and clothing in under the WTO and allows a dispute settlement system to be used. It is very Impor­tant from your point of view and ours too, for that matter, and improves the market access situation and brings it

wholly within the GATT system by the end of the transttlonal period.

7) The goods outcome, generally, as well as agriculture and textiles is a quan­tum jump bigger and better than One could have expected. The target figure from Montreal, the so-called interim review conference, was a tariff cut of one third on average. In fact, it is about one third more than that. It is around 40% instead of 33% on aver­age. It is much more than that on some of the important resource products of interest to all of us here. These reductions are to zero tariff levels. This is a very positive out­come. We did not get quite as much from the Canadian point of view on wood, but we made progress and we will resume the negotiations later on.

8) I think it is important that the flew

issues were included. This means that they are subject to a multilateral approach - not a unilateral, not a bilateral, but a multilateral one. This means that wherever there is a dis­pute, wherever the U.S.,Japan or the European Union is not regarded as living up to ils obligations, each of us has the right, and we should take advantage of it, to say, "OK, you are not doing what you are committed to be doing. We are going to take you to wro court, have a panel, and you are going to have to live up to this."

There will be a requirement for follow-up in a number of the new issue areas, particularly in services. There was explicit agreement to return to the negoti­ating table very soon. In fact, in early May 1994 some of the negotiations on service are to resume. This will continue through the rest of the decade. There is a very extensive program put in place to

improve the rules and to negotiate for market access.

Key Elements 01 the Agreements in New Issues

Trade Related Inveslment Measures (TRIMS)

For goods, the only investment-related agreement is the Trade Related Invest­ment Measures (TRIMS)Text. A TRIM requires the investor to take certain actions such as local purchases or export­ing a certain amount. The Agreement recognizes that such investment measures can cause trade restrictions and trade distortions. The Agreement states that any measures which are inconsistent with the GAIT Articles are forbidden. Now basically, in any case, they were forbid­den. This Agreement Simply re-affirms and clarifies what was already in the GATT. By signing on to the GATT, in principle, all of us had already accepted this. This Agreement refines it, makes it more precise, as you will see in a moment. The two articles are the national treatment article, Article 3, and Article 11, which deals with the elimination of quantitative restrictions. (It is the same one that is used for the agriculture imports.) The text says that you must apply national treatment. You must treat the foreigner like the domestic producer or domestic investor, and you are not allowed to have quantitative restrictions. There is an illustrative list provided in the Annex to the Agreement. The examples given spell out the ways national treatment might be infringed upon and the types of quantita­tive measures which might be taken that could distort trade. For example, you might require that the investor purchase or use products of domestic origin or

- you might require that their purchase or use of imported products be the same level as the amount that they would

In.9tituJe On 51 Gcuernance

export. There could be a trade balancing notion. These kinds of things could distort trade and they are forbidden. There are special arrangements for devel­oping countries, both in relation to transition and in other respects.

There are certain provlslons for notifica­Lion of any existing measures. Existing measures cannot be made any worse. They must be phased out. The timefrarne for developed countries is two years and for developing countries longer. There are rules on transparency. A Trade­Related Investment Measures Committee, a TRIMS Committee, has been established and there are provisions under which the general disputes settlement mechanism established under the WTO will be used. Finally, within five years, a review will be conducted to determine whether broader measures need to be taken in relation to investment in goods, and also to determine whether competition policy measures need to be applied in this area. Five years down the road, that is to say, around the year 2000, there will be a process set in train under the WTO to examine possible further investment related measures, investment policy measures and competi­tion policy measures. That is the summa­ry of the investment provisions for goods. Investment provisions for services are pad of the Services Agreement (see below).

Q: For all of these things you just talked about, is therea threshold of materiality? That is, -if it is not significantin world trade, if somethingis not at asignificant level of overall world trade, is it still subject to challenge or is it subject to being treated or ignored simply because it is not material orSignlfica"t?

R The term "materiality"as such is not used. The rule is a general one. National treatment must apply, noquantitalive

52 Institute 011 Governance

restrictions can apply. Theexamples are illustrativeonly. Clearly if it is not a significant issuein uorld trade, in the first place, it is unlikely that somebody is going to raise it as a problem. Secondly, if they do, it probably uouid bedismissed by the panel as too small to be of any importance. However, the term materi­al injury or something like that was not used. We havehada lot of problem,~ with that typeof terminology in the GAIT in the past: What is material injury? How do you dt;fine it? And so they stayed away from it.

Trade·Related Intellectual Property Mailers (TRIPS)

For Trade-Related Intellectual Property Matters (TRIPS) the Agreement is in three parts. The first is general provisions and principles, especially national treatment and most favoured nation treatment. There were already a whole range of intellectual property conventions under the World Intellectual Property Organiza­tion (WIPO). These provided different standards for different intellectual property rights. They were applied in different ways by different countries and they had no dispute settlement system. Under this Agreement everyone is on the same footing. The same rules apply to everybody with certain transi­tional qualifications which will be mentioned later. There is a multilateral dispute settlement system in place, so that each of us will not be subject to the kind of bilateral pressures that all of you have been concerned about in recent years. The TRIPS Agreement will provide the forum, locus and the set of rules used in dealing with issues in this area. The general provisions and principles of equal treatment of foreigners with the domestic operators, and equal treatment among foreigners, will apply.

Second, specific standards apply on each of the main areas of intellectual property rights: copyright, trademarks, geographi­cal indications, industrial design, patents, integrated circuits, trade secrets and similar issues, and anti-competitive practices.

The third part of the TRIPS Agreement is enforcement. Enforcement is clearly very important to the success of this Agree­ment. Specific provisions within the Agreement detail how it will be enforced.

Some measures of the TRIPSagreement are applied more leniently to developing countries, e-g., arrangements to deal with patent applications that were in the pipeline. There is a longer phase-in period for developing countries.

Trade in Services

The third area I want to address is the Agreement on Trade in Services and I may spend longer on this one, largely because this was an area with no prior rules at all. What we were doing in the negotiations was getting together and trying to create a system of law in this new area of services where there was previously no international law. We took as our guide and model, the GAIT for goods, but we made a number of signifi­cant changes to it. We did not use all aspects of it, and we introduced some quite different elements. The following will outline the main features of the Agreement, which are: a set of framework rules, broadly similar to the GAIT, a set of sectoral provisions, and individual country commitments, set out in national schedules that vary with each country.

First, going back to the framework rules, the scope and coverage were a very important part of the discussion. It concerned both sectoral coverage and also

coverage within countries, and what types of measures were to be covered. It was agreed, first of all, that what we were talking about was measures taken by a government. It was not activities of a private firm. It was measures of a gov­ernment that affected trade in services. There is no definition of a service. The Agreement does, however, list four ways they can be supplied:

• cross-border e.g. via telecommunica­tions;

• the purchaser (or consumer) of the service can move - a foreign tourist buys Canadian services in Vancouver;

movement of a firm - an insurance company or an engineering company establishes in Singapore or London and sells its services there; and

• movement of people - the telecommu­nications experts, the software people, the pipeline experts, travel across borders and sell their services in the country of destination.

The second area of work was to develop a set of rules that took account of this rather incredible set of complexities. Partly we did this through subject or sector annexes. One of the things we had to do was write a special annex on the rules for the movement ofpeople, so as to make it clear that this was not an immigra tion ques­tlon, that visa rules could still be applied. Some countries were worried abou t the security of their borders and we under­stood this. This is not what we were talking about. What we were talking about was work permits once a person is admitted. One of the problems is that the systems vary so much among countries,

, we had to find terminology to deal with this issue. These were very complex negotiations. Some countries were very

Institute On 53 Governance

anxious to push for expanded exports. Some are represented in this room. Other countries also represented in this room were very concerned that this not take place too fast. This was, and is, a very sensitive issue, both politically and economically, and had to be dealt with very carefully. It took a long time to work out. There were also sectoral annexes on financial services, telecommunications and air transport.

The third broad area was the country specific commitmentson marketaccess and national treatment. Without going into detail, there were many bilateral negotia­tions. We sat down with the European Community, with Singapore, with India, with Egypt, with Japan, etc., and we negotiated. We made an offer as to where Canada was prepared to commit itself, on which services, to what extent. You made an offer of what you were prepared to do in relation to a whole range of sectors and the negotiations would take place on and off over a period of months and years. The results were set down in national schedules of commitments and attached to the Agreement. The legal point is that you have to have a schedule of commit­ments in order to join. Each country has to take on some specific commitments at the national level in order to be part of the whole thing. That has been done.

Q: Was there any kind ofqualitative test or did a country just have to haveafairly perfunctory minor commitment to be entiJled to join or did they have to meet certain requirements?

R: There wasa longdiscussion on this issue, and there was a particularly kmg discus­sionas to whether developing countries couldget special treatment. There wasa recognition that the levelof deuelopmen t must be taken into account when assess­ing the outcome, but not tnore precise

54 Institute On Governance

than that. And in fcu:t, I think that it is natural enough in any negotiation -- you can not get moreblood than there is in the stone! Soyou haveto take into account, if you aregoing to come to an agreement, tilelevel cf development. You do not expect Yemen todo the samethings as the U.S. Similarly amongdevelopingcoun­tries there is a whole range. You do not expect Gabon to do the samethings as Korea. This was in fact taken into account. Qualitative judgements were made by each country nationally. It is not like a tariffnegotiation whereyou can quantify it. When we had problems with theoutcomes we went back repeatedly and said we want another meetingwith you. Othercountries did thesamewith us. Theywould say, "Canada, you haven't made sufficient commitments on the level of inoeetment." InvestmentCanada provisions wereabigissuefor a number of foreign countries, someof whomare in this room. At theend of theday, Canada said, "OK we willgrant that concession. We will equalize the If:Ve1 of treatment for everybody around the world asoneof our major commitments. Yes, we will bind our provinces." Othercountries also, aftera longsetof negotiations said, "OK we recognize that more is required and we will improve our offer." Soat the end of theday we hada generally acceptable matchingoutlook. But it is impossible to quan lify and even coming tosome degree of qualitative assessment is difficult because thecircumstances within each country are sodifferent. Each one has to belooked at specifically.

I am coming to the final point of next steps. There is agreement for further negotiations on financial services, basic telecommunications, Maritime transport and the movement of natural persons. There is a time­frame for each over the next couple of years. In some, we have the right to

reopen commitments made or most favoured nation treatment exemptions. Basically it says that we want to go even further than what we were able to achieve in each of these four key areas. There is also agreement that we need to look further at questions of subsidies, safeguards, government procurement and professional servic­es, beginning with accounting. All of that will take place over the next three, four, five years. There is a very active work program in place. One other area that was agreed upon as requiring negotiations was Trade and the Environment.

Principles Underlying the Agreements

What are our governments aiming for in economic policy and indeed social policy to some extent? How do these agreements further those goals? The following several paragraphs are taken from the preamble to the WTO agreement:

• Objective is to raise standards of living, ensure full employment and a large and steadily growing volume of real income and effective demand, and expand the production of and trade in goods and services, while allowing for the optimal use of the world's resources in accordance with the objective of sustainable develop­ment, seeking both to preserve the environment and to enhance the means for doing so in a manner consistent with the parties' respective needs and concerns at different levels of development

• Recognition of need for positive efforts favouring developing countries

• Parties consider that those objectives can be furthered "by entering into reciprocal and mutually advanta­

gecus arrangements directed to the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treat­ment in international trade relations"

• And further, to "develop an integrat­ed, more viable and durable multilat­eral trading system."

The rather lengthy statement at the beginning is something we have all agreed upon in the agreement setting up the WTO. I think this is really what we are all after - raising standards of living, full employment, increasing real income, expanding production of goods and services, recognizing the importance of the environment and sustainable develop­ment. It must be recognized that coun­tries are at different levels of development and that must be taken into account fully and adequately.

All these objectives are ones that we share and ones that underlie the types of measures that governments put in place, domestically, in order to regulate, and internationally when they are engaged in trade negotiations. The key words here are "reciprocal and mutually advanta­geous arrangements". They have to be agreements that benefit all of us; otherwise there will not be a sustainable agreement.

The purpose of these agreements is twofold:

• to reduce barriers to trade and ellml­nate discrimination, so as to further the basic objective just outlined; and

• to ensure that we have a multilateral trading system that is sound and durable. It must be fully multilateral for all the institutional and dispute settlement-related reasons which have been discussed.

lnstitute On 55 Governance

The general conclusion was that gains in the new areas of trade related-Investment measures, intellectual property and services fit into these categories. There­fore it was worthwhile including them in the Uruguay Round outcome and ensur­ing they would be part of the process of seeking full employment, social better­ment, and enhancement of well-being both individually and collectively. Both aspects are important. People in this part of the world sometimes recognize better than we, in the West, the importance of collective well-being. We tend to empha­size individual well-being. The notions of both individual and collective are impor­tant.

DISCUSSION

Q: It is a very idealistic principle: that some of thedeveloping countries will make gainsfrom the intellectual property agreement. Is there a mechanism for correcting the negativebalance of pay­ments between the developing and developed countries, eitheras agroup or as an individual state?

R Your question raises a lotof issues. To be very precise, there is no specific mecha­nism in the WTO to redify tradeimbal­ances assuch. I'm not quite surehow you would do that. The philosophy is thatyou arelooking[or an overall, reciprocally advantageous agreement - one that wiff benefitcountriesaround the worldat various Levels of development, It may be at the presen t time that certain developed countrieswill benej£t from someparts of the intellectualproperty agreement outrome. I think it is also fail' to say developing countriesaremorelikely to gain from the textile provisions. So the idea is that overall there will be, as it says, a "reciprocal and mutually advanta­geous" outcome - over time. 1do not

think you can e:lo:pect it tomorrow morn­mg.

If problems emerge, that is where the provisions of the WTO comein. There are mechanisms there to raise problems, and to say, "Hey this is not working out the way it was supposed to workout. We are not getting the advantages we thought we wouldget." There is a TlOti071 of reason­able expectation that is very much part of thedisputesettlementmechanism. You cancome back andsay our reasonable expectations weresuchand such, it is not what happened and we want that recti­fied. Of(nurse, as I emphasized, i.fthere was a specific commitment that was not met, then it is very important that the disputesettlement mechanism be utilized by everybody, not just the developed countries, not by just thebig ones,but by allof us. Utilize those mechanisms. Make it work. That is why it is there. It is a rule of law. Then thebigcountries will learn theyhave to liveby the rules likeeverybody else.

Q: Who will be the members of the dispute resolution panel?

R The way it works is through what they calla Dispute Settlement Board. It is in fact composed of all the members of the YVTO. It simply is theWTO wearing a differenthat and your national represen­tativewould be on that. If I havea dispute with you, for example, Malaysia, we will approach you and SiZy we would like to coneuli. There is an article which provides for consultation on any issue, any cxmcnn. We wouldljke toa'msult so we engage in amsultation and 'we say this is not workingout quite theway we thought it would work. We thoughtyou would be doing this. We do not think that is what is happening. Our exporters are having problems. Can youfix it please? You will say,Canada's exporters arenot doing a

56 Institute On Gove"nance

thing tohelp themselves. Theyjust do not payany attention to theway our markets work. We are not going todoanything at all. It is up to them. So Ifwe are not satisfied we then say, ohwell, we think there is an article overhere thatyou are actually not living up to, you are not providingall the infor71li1tion, you are not giving national treatment or whatever. You say we disagree with thatand we are going to fight it in court. You defend yourselves andyou win. In otherwords, what happens is thatwe go toa panel and the panel hears arguments from you and us and anyone else. Singapore decides they like the Malaysian case; soyou can get "friends of thecourt" submissions presented by otherswho havean interest in thecase, oneway or the other. The panel, (which is a panel that you and we haveagreed upon, youwill name this person to thepanel, we will Tlame that person to the panel and there isa third one.tIebothhaveto agree upon), these three people listen to thearguments and they come out with adecision. They say, "Well Canada does not have a legto stand 011, Malaysia hasmet all the requirements and yes it carried out thecommitment and theexporters dohave fa 'WOrk harder. N We say, "we are not happywith thatIf. There is em appeal mechanism. We say we think the panel did not follow therules properly. Sowe aregoing to appeal. The appeal mechanism says that the panel was absolutely right, they administered the law correcdg, (it does not get into the facts). They say the Jaw was adminis­tered correctly, thecase stands, Malaysia wins, "Canada get lost. "

Ofcourse, it might go theotherway: they couldsay, in this case. Malaysia was not providingfull national treatment, with a measure here that infringes upon national treatment. Malaysia please rectify that, please change it, but just far enough that you will beapplying national treatment

fully. So the preferred route, is not to havea penalty, but tofix the regulation whichdoes not live up to the agreement. Only as a second stage, if that does not happen, if theOJuntry refuses to change theregulation, orloioerthe tariffor whatever it was supposed to do, only then, doyou get into theissueof a compensation possibility. In that case you would say, "OK we arenot prepared to change that but we will offer you this otherthing in exchange." We can say eitherwe will accept that or no flTat is not good ellough, we want to retaliate. In which case we uxiuldwithdrawa bemifif which you had in our market to equivalent effect. There has tobe this equivalence. You can't be completelyarbitrary. So if what you have doneaffects Cdn$l00 million then we would in principle do something which wouldaffect a comparable amount.

Q: If there hasbeen a suit likeyou hfWe described and it has been decided whichever way it hasbeen decided, calf it ever come up again? Can it bechal­lenged at a later point in time? If there hasbeen thisdispute about what either Canada or Malaysia haue been doing and it is resolved by retariatory actions or by compensation, in those circumstances, can the original issuebe re-presented or does it forever stay in limbo?

R: I cannot recall a case where there hashad to be retaliation. The country has regular­ly chosen to change the rule. Sometimes it has taken a considerable period of time but thepreferred course is to change the rule. In whiclt case, of course, thecase would neverarise again. Generally, off­hand, 1cannot remember acase which went to retalia/.ion. There weresomethat almostwent there. In fact, I think there was a Dutchcase many years ago, retalia­tion wasapproved, but at that point, they decided to confonn. Under the threatof retaliation, theydid coniorm and it never

Institute On 57 Governance

had to beapplied. 50 thathasbeen the GAIT experience and I think that is the way mostof us feel it will go in thefuture.

Q: What will happen to the bilateral agreements that were concluded before the signing of the Final Aef in Moroeco?

R: A re you talking about textileagreements? Which ones? There erea whole series of typesof bilateral agreements that you are talkingabout I suppose. One sethasto do with Free Trade Agreements. There are special provisions, as there wereunder the GATT, special provisions under the wro, which allow regional or otherFree Trade Agreements. There are certain conditions which have to be met, there is a process of reviewandconsultation and so on, but ifyou meetthe conditions (it has tobea big agreement covering all aspects of the economy, dealing with alleeatore, that sortof thing and there arecertain other requirements), provided you meet those conditions you can havea Free Trade Agreementsuch as theNAFTA. the European Union or indeed, such as the A5EAN.specific kind of thing. These are provided for. The conditions areimpor­tant. But there is provision for that.

If you have a naTTow agreement dealing with one small sub-sector, between two countries that may not be compatible, it may have to be eliminated or extended to everyoneelse under theso·adled 'most favoured nation' rule. On textiles, there is provision for gradual phasing in (the !Tansitional periods), so that we can dovetail the bilateral regime that has existed underthe Multi·ftbre Agreement up to now with gradual implementation of the Uruguay Round Agreement. That hasbeen dealtwith in the transitional arrangements. Dutifyou have in mind someothertype of bilateral agreement that is 1lOt consistent then either you have to

get rid of it or applyit on a mostfavoured nation basis.

Q: Most favoured nation treatment?

R: That is thebasic rule of the MO. Most favoured nation treatment. I did not even mention that, but thatof course is basic to the multilateral approach. Multilater­al, mostfauoured nation treatment means that you treateveryone equally well Of' I guess, equally badly, but »c-cee gets less favourable treatment. I have to treatyou as wellas I am treatingeveryone else. You have to treat meas well asyou are treating everyone else.

Q: [am just wondering why the wro as a concept failed in the 1960'sand why it should succeed now?

R: It's a very good question. In the 1940's, the U.S. Congress turned down the International Trade Organization (ITO). It did not havea chance to turn down the GATT, because that was a so­called ExecutiveAgreement that the President entered into so it was not put to Congress. TheAmericansdid indeed fuss a good deal about the wro as part of the Uruguay Round. The major countries pushingfor it were ourselves and the European Community andof course, there were otherpeople supporting it as well. But theU,S. washesitant precisely because of concerns about Congress. They decided that the restof theAgreement was satisfadory to them; that they would be able to convince Congress that it was in the U,S. 'e best interest to dothis. The Administration itself is convinced the wro is a good idea. They areconcerned about Congress and have feflrs about sovereignty.

I thinkthemore,general answer toyour question is that international events over thelast 40 year5 haveidentified a need for

58 Institute On Governance

a WTO organization as the third pillar of the Triadof the international system. The Administration thinks that along with the other elements of the UruguayRound they can use that argument to convince Congress that it is worth doing. But the U.S. Congress will beunderpressure, because due to theway that U.S. trade mechanisms work, Congress can only vote yes or no. They cannot pickthe agree­ment apart. Once theagreement is submitted to them under thefast track authority that Congress provided to the President, l'hey haveayes/no option. Members ofCongress have the political responsibility to say, if we vote this down,we have created a crisis in the world of hugeproportions. Onewould hope, most members of CongTess would say to theirspecial interest groups back home, "I could not responsibly vote against itgiven the overall consequences to the World and the U.S. ofa failure to ratify." But tI1e Administration is still expecting a greatdeal of trouble and the need for a lor of arm twisting. What happens in the U.S., interestingly, is that people have the intention of voting yes allalong. Yet they say they arenot going to voleyes, they will vote it dawn, so that theAdministra­tion will give them some deal on something else. It looks protectionist and we surefeel it in Canada. You have toget down underneath that to realize thatwhal is going on is deal making.

Q: When they were talkingabout the NAFTA in the U.S., the main concern there was thecheap labour in Mexiro. Most businesses will begoingacross the border.

R: There will certainly beplenty of concern about that. But they did pass the NAFTA, they did adopt it. And the Vice President, in Marrakech, made a clear commitmentonbehalfof the President

that they would adopt the Uruguay Round Final Act.

Thediscussion on tiledynamics of the U.S. concerns overMexico would be almosta conference in itself The U.S. government has had to pay careful attention to the labour constituencies in its muntry. Careful attention must be paid to theeconomies of the statesborder­ing Mexico, where there is fear that economic development will be drained away just because of the convenience of geography. A van'etyof tactics was used to try to prevent NAFTA's adoption, particularly in theearlier months of discussion. That is why we had these side agreements on labour lind theenviron­ment before President Clinton would sign on to the deal. In point offact, for most companies they have been able for many years to establish businesses with all the advantages in Mexico, in thefree trade zone, industrialareas bordering the U.S. Mexico hasopportunities but faces many problems. Somefirms that havegone down thereare/acing 18~20% staff turnoverpermonthand low levels of education. You have just investedin somebody and she'sgone. The real unit costs tofirms there aremuch higher than what you look at when you lookat nominalwage rates.

So I do not think you will see this feared mass exodus. I think you will see some development, the autobusiness asan example. Buta hugeexodus is unlikely. There may be new investments down there that havenothing to doat all with the agreement itself Many companies are lookingat Mexicowith a fresh eye simply because it is a countrg they should bein. .,

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REGULATION IN THE

AGRICULTURAL

SECTOR IN AN

INCREASINGLY

INTERDEPENDENT

WORLD:

THE CANADIAN

EXPERIENCE

...

REGULATION IN THE

AGRICULTURAL SECTOR IN

AN INCREASINGLY

INTERDEPENDENT WORLD:

THE CANADIAN EXPERIENCE

byMichael N. Gifford, Director General. International Trade Policy Directorate, Agricu/lure and Agri-Food Canada

Government intervention in the agri-food system in Canada, like most countries, is pervasive. Federal and provincial governments are involved in regulation in such areas as food safety, plant and animal health, and grading, packaging and labelling standards. Governments also promote the development of the agri­food system through their activities in the provision of research and extension services, factor supplies, infrastructure and through commercial policy and foreign market development. A third major component of activity in agriculture is supporting farm income through price support payments, direct income transfers and administered pricing systems operat­ed by government sanctioned marketing boards, often with monopoly powers.

The purpose of this paper is to examine how both domestic and international forces are reshaping the environment in which the government operates as well as the industry it regulates. Particular emphasis is placed on identifying the effects that the fast changing domestic and international environment is having On the traditional government role in setting and administering technical standards and regulations in the agricul­tural sector.

THE CHANGING ENVIRONMENT

Canada's primary producers are becom­ing more closely integrated with the national economy and, thus, more vulner­able to general economic forces as more and more inputs are purchased off-farm and producers become increasingly specialized. At the same time, those sectors of the economy which rely upon farmers purchasing inputs have become more and more dependent on the com­

. merctal health of the farming community.

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The processing and distribution levels of the agrl-food sector have experienced similar structural changes. There are now fewer and more efficient food processing plants and the distribution and retail of the food chain is highly concentrated.

Internationally, the emergence of regional trading arrangements such as the Cana­da/USA Free Trade Agreement and its subsequent enlargement to incorporate Mexico into a North American Free Trade area of 360 million consumers are changing the manner in which agricultural products are marketed and sold. This process will be further reinforced as the results of the recently concluded Uruguay Round of GA'Tl' negotiations are phased-in.

The challenge facing the agri -food ind us­try is how to adapt to remain competitive in the mldst of radical change. For govern­ment the dilemma is how to meet its legislative responsibilities to consumers and the industry without detracting from the ability of the agricultural sector to grow and meet the competitive challenges facing it.

The magnitude of this challenge is further exacerbated by the fiscal reality facing Canada. The need for overall government fiscal restraint and cutbacks in the face of persistent deficits has meant that the government focus on "doing more with less" has been increasingly replaced with "doing less with less". This has meant an increasing use of alternatives to tradition­al government-delivered activities, such as fees for service.

REGULATORY REVIEW

It was against this backdrop that the federal government's February 1992 Budget called for a full review of federal regulations and the regulatory process on a government-wide basis. The Budget

identified three departments - Agricul­ture, Transport and Consumer and Corporate Affairs which were to begin immediate in-depth reviews of their own regulations.

The recommendations arising from the Agriculture and Agri-food Canada regulatory review established a set of departmental principles. These are:

• Health and Safely

Protecting the health and safety of Cana­dians is a primary responsibility of government. However, the means to ensure that food is safe includes the development of systems and practices.

• Quality and Efficiency

Market forces should be relied upon to achieve quality and efficiency goals unless government intervention is essen­tial for market facilitation.

• Beneficiary Pays

The cost of regulations (financial, process and otherwise) should be borne by beneficiaries of the regulatory regime.

• Equity

Equity of treatment should be the key to regulatory action, though the means to achieve this goal should reflect the state of development and specific priorities of individual commodities and products as well as the inherent risks.

• Trade

To the extent possible and consistent with international trading agreements, imports and domestic products should be given equal treatment. Standards for imported

64 Institute On Governance

products should be consistent with those required of domestic products.

Canada must be cognizant of both the regulatory regimes and trade strategies of its international competitors. A regulato­ry framework should support the overall competitive strategy in both domestic and export markets.

Other recommendations from the regula­tory review dealt with improving the efficiency and effectiveness of the regula­tory system and improving its transparen­cy. Key recommendations included the following:

• There should be appropriate mecha­nisms to ensure that regulations are reviewed on a regular basis. The Department should identify sunset clauses (the establishment of a dead­line at which the regulation will be repealed) and other instruments to realize this objective.

• As instruments of policy, regulations should be reviewed as component parts of an overall agrl-food policy framework.

• An ongoing external advisory panel should be created to oversee the department's regulatory plans and policy as well as progress against these plans.

• Ongoing stakeholder consultations should be strengthened.

CASE STUDIES IN REGULATION

(1) Fruits and Vegetables

In 1992 the Canadian International Trade Tribunal completed"An Inquiry into the Competitiveness of the Canadian Fresh and Processed Fruit and Vegetable Indus­

try." It is noteworthy that on two matters in particular, the Tribunal shared the industry's views that government action was needed. One issue was the need to allow producers a greater choice of pesticide products at lower costs, while still meeting high standards of health safety and environmental protection. The other issue was the need for the Canadian and Ll.S. governments to breathe more life into the Free Trade working groups which aim at reducing barriers to trade caused by differences in health, safety, labelling and quality standards.

With regard to pesticides, the Tribunal identified five problem areas which were having a negative impact on the competi­tive portion of the Canadian industry as it adjusted to the phased implementation of the Canada/US Free Trade Agreement. These were:

1) The limited availability of pesticide products in Canada compared with the large number of products avail­able in the U.S.at more competitive prices.

2) The presence and consumption in Canada of U.S. products that were produced with pesticides not avail­able in Canada, which enter the country provided they meet certain residue tests.

3) The complexity and rigidity of the Canadian system of pesticide registra­tion which does not take grower competitiveness factors into account in addition to such other necessary considerations as consumer, operator and environmental protection.

4) The general reluctance of multination­al pesticide-producing companies to register their products in Canada, given the necessity of complying with

Institute 01'1 65 Governance

uniquely Canadian registration requirements. The small size of the Canadian market is unlikely to bring returns sufficient to justify the time and cost of separate registration in Canada.

With regard to the harmonization of standards the Tribunal shared the indus­try's concern about the slow progress in reconciling differences in technical regulations between Canada and the U.S. The Canada/USA Free Trade Agreement Article 708 (Technical Regulations and Standards Goods) urges the two countries "to seek an open border policy" and "to harmonize their respective technical regulatory procedures .. or where harmo­nization is not feasible, to make equiva­lent their respective technical regulatory

.requlremenIs"....

The pesticide and harmonization/equiva­lent issues in the fruit and vegetable industry illustrate graphically the sorts of external pressures that new trading arrangements can have on domestic regulatory systems. Differences in the regulatory systems between Canada and the USA are accentuated, as tariff barriers are reduced. and producers in both coun­tries are subject to increased competitive pressures. Accordingly, regulators are increasingly being asked to amend their regulations so as to allow producers and processors to "compete on a level playing field". Differences in regulatory systems which 10 or 20 years ago were accepted as an inevitable part of the reality of separate nation states are now being questioned in terms of their appropriateness in an increasingly interdependent world.

(2) The Canadian Quality Conlrol System for Grains

Canada has long been able to extract from international grain markets a significant price premium because of its quality control system which guarantees product quality and consistency.

The Canadian Grain Commission's quality control system is concerned with every phase of the grain industry, from ensuring new varieties of grains meet Canadian grade standards, to the inspec­tion and grading of all grains marketed outside of the western Canada grain producing region.

The Canadian quality control system for grain, especially for wheat, has enabled Canada to price differentiate a bulk commodity effectively, particularly at the high end of the quality scale for milling wheats for bread making. This system has been largely responsible for enabling Canada to maintain a presence in the European wheat market, notwithstanding the EC's variable import levy system, and has assisted Canadian producers to weather the export subsidy war between the USA and Europe in third markets.

This classic example of a government regulated quality control system in effec­tive support of an export-orientated sector pre-dates World War II. However, in this case the system has improved with age. Without this system Canadian grain producers would have undoubtedly lost market share and received lower returns from export sales.

66 Institute 0/1 Governance

TECHNICAL REGULATIONS AND TRADE AGREEMENTS

It is no coincidence that in all three trade agreements Canada has negotiated in the past eight years, the agricultural negotiat­ing agenda has been the same: (1) market access, i.e. tariff and non-tariff barriers; (2) export subsidies; (3) domestic subsidies, including what subsidies are "countervallable:" and (4) technical regulations, particularly sanitary and phytosanitary measures.

All four agenda issues are, of course, inter-related. In particular, it was recognized that as conventional trade barriers were reduced, the potential for differences in technical regulations to be used as disguised barriers to trade would increase. However, it was equally clear that no country would be willing to surrender its right to take whatever measures were necessary to protect human, plant or animal health.

The result was that the FrA, NAFrA and GAIT agreements all contain similar provisions, namely:

• the right of a country to take appropri­ate measures with respect to safety; protection of human, animal and plant life or health; the environment; and consumers;

• these measures must be applied in a nondiscriminatory fashion to both domestic and foreign goods;

• the application of such measures must involve no unnecessary obstacles to trade; and

• in the design and implementation of these measures, international stan­dards should be used whenever

possible (although tougher standards can be applied).

In the case of sanitary and phytosanitary measures there are more specific provi­sions. For example, regulations must be based on scientific evidence and an appropriate risk assessment. Moreover, in this area greater emphasis is placed on pursuing equivalence as opposed to harmonization and explicit provision is made for restrictions to apply only against products originating in areas where a pest or disease is endemic, as opposed to taking action against the exporting country as a whole.

A major feature of all three trade agree­ments is that the general dispute settle­ment machinery also applies to technical regulations.

CONCLUSIONS

I would like to conclude by re-emphasiz­ing some of the main points of the Cana­dian agricultural regulatory experience:

1) Changes in the international environ­ment are occurring rapidly and domestic regulatory systems must adapt at the same pace if the regulated sector is to remain competitive.

2) Regulatory systems should be reviewed on a regular basis and as part of an overall agrl-Iood policy framework.

3) The management of regulatory changes must include all involved private sector stakeholders and sub­national governments.

4) A regulatory framework should support an overall competitive strate­gy in both domestic and export markets."

Institute On 67 Governance

S)llIVWtllI DNISO'I:)

CLOSING REMARKS

Dr. Prijono Tjiploherijanlo Depury Chairman Education and Training I, L4N for the CBnada-South-East Asia Workshop on the Regulatory Process in the Post­Uruguay Round World

Yogyakarta, 25 -29 April1gg4

Dear Ganadian Friends, Distinguished Participants, Ladies and Gentlemen

Four days of presentations and fruitful discussions in plenary and work­ing group sessions, four days of mutual exchange of ideas, experiences and concepts are behind us.

I do not want to deal extensively with the various themes that have been dis­cussed during the last few days. Let me only mention two issues that seem impor­tant to me: One of the lessons we can learn from the Canadian example is the positive impact the involvement of the private sector can have for shaping the regulatory process in a way that is advan­tageous both for the achievement of public policy objectives and for the development of private sector activities. However, the change from a more top­down regulatory regime (dominated by the public sector) to a more consultative regulatory regime characterized by cooperation and collaboration of the state and of the private sector, requires the existence of capable private sector organi­zations which represent the interests of their respective groups and which can act as partners in the discussion. I think we should encourage and foster the forma­tion of such business and interest groups in our countries.

The second lesson I would like to take home is that there is a wide range of regulatory instruments which can be applied by the public sector in imple­menting policy objectives, ranging from the so-called "black & white" rules to self­regulatory processes of the private sector that do not require further involvement of the state. I think in implementing our

. respective national policy objectives we should make wider use of a broader range of regulatory instruments, instead of

Institute On 71 Governance

relying primarily on restrictive laws and government regulations. With mechanisms as described in the Canadian Regulatory Framework, regulatory measures can be made more rational, open, less bureau­cratic and perhaps more policy-oriented. The concept of sunset clauses that force the government or the parliament auto­matically to review regulations after a certain period of time strikes me in particular.

The workshop has seen a lot of discussion on GAIT and regional trade agreements. The need for developing countries to strengthen their negotiation skills and capabilities in terms of strategic preparations for negotiations, analysis of proposals and counterproposals and preparation of fall-back positions has been mentioned. We have to definitely work harder on this aspect, and will be grateful for any external assistance offered to us. Even after the conclusion of the Uruguay-Round, international trade issues will continue to take a prominent place on the political agenda of Our countries.

I would like to thank all those who have made this workshop possible:

• Kathleen Lauder from the Insti­tute On Governance;

• Mr. Harry Rogers and his col­leagues from Canada who presented in an open and skillful way their experiences with GAIT and NAFTA and the consequences of these negoti­ations for the regulatory process in Canada;

• the participants whose contribu­tions made the discussions lively and fruitful and who freely shared their personal and national experiences;

72 Institute On Governance

• the organizing committee and its secretariat whose behind-the-scene work guaranteed the smooth implementation of this workshop;

• and the Gajah Mada University and the Office of the Governor of the Special Territory of Yogyakarta whose assistance was extremely important in the preparation and implementation of the workshop.

I am confident that you enjoyed your stay in Yogyakarta and that, besides the professional and intellectual experience of the workshop deliberations, you will also take home the experience of the culture and hospitality of the region and the people of Yogyakarta.

On this note I declare the workshop closed, and wish all participants a safe journey to their respective countries. Thank you very much. "

29 April 1994Yogyakarta

PUBLICATIONS OF THE INSTITUTE ON GOVERNANCE

The following are recent publications of the lOG. To ordec copies, please fill out and return this form, with payment in Canadian dollars. Canadian and U.S. residents please add $3.00 postage and handling; from anywhere else in the world, please add $10.

Emerging Issues in Capacity Development, edited by Peter Morgan and Victoria Carlan, 1994 Price: CDN $24.95 (includes GSl)

This editedcollection of papers offers excellent insights into the popular, yet often vague, concept of capacity development. The publication ie the result of an international workshop which brought together 12 leading thinkers from the international development community to create a framework for the capacity development concept.

Regulatory Process in the Post Uruguay Round World: Summary of a Workshop held in Yogyakarta, Indonesia, April 1994 Price: CDN $24.95 (includes GSl)

This publication came out of II workshop for South-East AS/lin and Canadian participants on the challenge of creating and implementing effective regulations in the wake of the Uruguay round of GATT negotiations. A synthesis of the main themes and issues is presented, as well as background papers on developing and enforcing regulations; tile evolution of the Uruguay round; and regula. tion in the agriculture sector.

Governing in an Environment of Increased Regional Economic Integration: Canada South-East Asia Colloquium Ill, 1994 Price: CDN $24.95 (includes GST)

This colloquium sought to answer some of the governance questions which are being raised by increased regional economic cooperation in South-East Asia. Dackground papers included in this publication cover subjects such as the nature of the integration: the reduction of borders between government, business, and NGO's; the impact of modern communications and information tech­rlolo81J; the regulatonJ framework in a borderiess world; the challenge of administrative reform; and the implications for senior public servants and politicians.

Public Sedor Support for Private Sector Development: Canada South-East Asia Colloquium II, 1993 Price: CDN $24.95 (includes GSl)

This publication includes a range of information about approaches for shifting the role of the public sector toward more effective support of the private sector. Strategies across South-East Asian jurisdictions are compared and contrasted. Several detailed aspects of the issue are explored, and background papers from eight countries are included.

Transforming the Public Sector: Canada South-East Asia Colloquium I, 1992 Price: CDN $21.00 (includes GSl)

This first lOG Canada South·East Asia Colloquium provided an opportunity for senior public ser­vants in Canadaand South-East Asia to compare experiences in public sector reform. The publica­tion includes summaries ofsessions on eight specificelements of public sector reform, background papers from seven countries, and presentations by Marcel Masse, Paul Cadario, and Tim Plumptre.

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