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Science. Technology and Public PolicyLectures 15 and 16

Regulatory Harmonization and Standard SettingCauses of Diversity, Implications for Conflict Management

Professor Kenneth A. OyeDepartment of Political Science and Engineering Systems Division

Massachusetts Institute of Technology

MIT Center for International Studies Political Economy and Technology Policy Program oye@MIT.EDU

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OUTLINE

CONTEXT – RISING CONFLICT OVER REGULATIONS AND STANDARDSWHY– DECLINING BORDER MEASURES X CONTINUING REGULATORY DIVERSITY

TECHNICAL STANDARD SETTINGPERCEIVED COMMERCIAL ADVANTAGE INSTITUTIONAL ARRANGEMENTS EFFECT STANDARDS

REGULATIONS OF HEALTH, SAFETY AND ENVIRONMENTPROCESS REGULATIONS -- BASIC ARGUMENTS ON CAUSES AND EFFECTS OF DIVERSITY-- EXAMPLES OF PROCESS CONFLICTS-- DISCUSSION ON POLICY ISSUES RELATING TO PROCESS REGULATIONS

PRODUCT REGULATIONS-- BASIC ARGUMENTS ON CAUSES AND EFFECTS OF DIVERSITY-- EXAMPLES OF PRODUCT CONFLICTS -- REVIEW STATUS OF WTO AND NAFTA CASES -- SUGGEST WAYS OF MANAGNG CONFLICTS OVER REGULATIONS

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TECHNICAL STANDARD SETTING

MUTUAL INTEREST IN COORDINATION ON TECHNICAL STANDARDSCONFLICTING INTEREST IN SECURING COMPETITIVE ADVANTAGE

RESULTS OF SURVEY OF MANAGERSSTANDARDS HAVE LITTLE OR NO EFFECT ON EXPORTS -- 66% STRONGLY DISAGREE

INTERNATIONAL STANDARDS ORGANIZATIONS• ISO 1947 - 14000 STANDARDS } TOGETHER ABOUT 85% OF INT STANDARDS• IEC 1906 - 5800 STANDARDS }

US STANDARD SETTING -- DECENTRALIZED MARKET DRIVEN• 300 TRADE ASSOCIATIONS• 130 PROFESSIONAL AND SCIENTIFIC SOCIETIES• 40 GENERAL MEMBERSHIP ORGANIZATIONS• 150 CONSORTIA • ASTM, ASME, IEEE • => ORGANIZATIONS RAISE REVENUES BY SALES OF STANDARDS • => RESISTANCE TO AMERICAN NATIONAL STANDARDS INSTITUTE ANSI• => RESISTANCE TO NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY NIST

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EU STANDARD SETTING -- CENTRALIZED COORDINATED REGULATED SUBSIDIZED INCLUSIVE• NATIONAL STANDARDS ORGANIZATIONS NSOS LIKE DIN BSI• SECTORAL BODIES ARE PART OF NATIONAL STANDARDS ORGANIZATIONS• PARTICIPATION BY WEAKER NGOS UNIONS AND ENV GROUPS SUBSIDIZED• NSOS REGULATED AND SUBSIDIZED BY GOVERNMENTAL AUTHORITY • REGIONAL STANDARDS ORGANIZATION• COMITE EUROPEEN DE NORMALISATION CEN• COMITE EUROPEEN DE NORMALIZATION ELECTRONIQUE CENELEC • BOTH PARTIALLY FUNDED BY EUROPEAN COMMISSION

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EFFECTS?NEW ISO EU AND NATIONAL STANDARDS 1985-97 EU US• SECRETARIATS OF ISO TECH COMMS 110 27

EUROPEAN FIRMS FIRST MOVERS IN INTERNATIONAL STANDARDIZATIONBETTER INFORMATION ON EARLY OPPORTUNITIES AND PROPOSALSCONVERGE ON EURO TECHNICAL PRACTICES AND PREFERENCESUS FIRMS WI EU SUBSIDIARIES CAN PLAY IN NSOS AND CEN COMMITTEES

EUFIRMS US FIRMS• LEARN OF ISO/IEC STANDARD AT LAST STAGE 16% 30%• SEEK HELP FROM NSO 43% 12%• RECEIVE INFO FROM NSO 71% 14%• HOW FREQUENTLY DOES PROPOSED INTERNATL• STANDARD DIFFER FROM CURRENT PRACTICE?

OFTEN / VERY OFTEN 11% 21%RARELY 31% 17%

• STANDARDS WILL BE MORE INTERNAT 84% 78% • STANDARDS SHOULD BE MORE INTERNAT 90% 41%

EU STANDARDS ARE BECOMING WORLD STANDARDS – BENEFIT OF REGIONAL INTEGRATIONUS RESPONSE? INTERNAL REORGANIZATION? CHANGE US EXTERNAL STRATEGY?

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ENVIRONMENTAL, HEALTH AND SAFETY REGULATIONS

PURPOSES OF UNITEVALUATE LOCAL/NATIONAL REGULATIONS AND POLICIESANALYZE EFFECTS OF DIVERSITYANALYZE EFFECTS OF POLICIES TO COPE WITH DIVERSITY

EXPLAIN CURRENT PATTERNS OF CONFLICT OVER REGULATIONS?INITIAL PROPOSITIONSTABLE OF CASESEXAMPLES

MANAGE CONFLICTS OVER REGULATIONS? WTO AND CODEX - GOOD NEWS ON PAST, BAD NEWS ON FUTUREPAST WTO CASES BETTER THAN COMMONLY RECOGNIZEDBUT WORST PAST CASE (BGH) PRECURSOR OF FUTURE CASES-- WITHOUT CODEX SETTING BASELINES -- WITH NOMINAL RISK ASSESSMENTS THAT ELIMINATE PROCEDURAL BAILOUTUP FRONT CONFLICTS OVER PRECAUTIONARY PRINCIPLE WILL BE INTENSEAGREEMENT ON BACK END ADAPTATION MAY EASE UP FRONT CONFLICT

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INITIAL PROPOSITIONS ON REGULATORY VARIATION AND CONFLICT

PRODUCT- PROCESS DISTINCTION• PRODUCT REGULATION => POSSIBLE BARRIER TO TRADE• PROCESS REGULATION => REPEL OR ATTRACT INVESTMENT JUSTIFICATIONS AND LEGITIMATING PRINCIPLES • EXTERNALITIES => UNCONTROVERSIAL• RISK SHIELDING => CONTROVERSIAL• SPECIES/HUMAN/ENVIRONMENTAL RIGHTS => CONTROVERSIALSCIENTIFIC UNCERTAINTY• UNCERTAINTY LOW => LESS DIVERSITY AND CONFLICT• UNCERTAINTY HIGH => MORE DIVERSITY AND CONFLICTASSET SPECIFICITY (EFFECT ON PROCESS REGULATIONS)• ASSET SPECIFICITY HIGH => MORE DIVERSITY • ASSET SPECIFICITY LOW => LESS DIVERSITYINDUSTRIAL STRUCTURE AND FIRM INTERESTS• DIFFUSE INTERESTS UNDERREPRESENTED• CONCENTRATED INTERESTS REPRESENTED

=> MULTINATIONAL FIRMS AS FORCE FOR UPWARD HARMONIZATION=> LOCAL FIRMS AS FORCE FOR DIFFERENTIATION

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Where are conflicts most intense? How do neo-liberal economic and deontological perspectives cut across columns? How does uncertainty on underlying phenomena affect ability to differentiate between legitimate andn illegitimate applications of principle?

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BASIC ARGUMENTS ON PROCESS STANDARDS

EXPECT AND FEAR COMPETITION IN LAXITYPRODUCER INTEREST IN LOWEST COST SITES => SITING OF PRODUCTIONGOVERNMENT COMPETITION FOR CAPITAL & JOBS => REGULATORY RELAXATION PROPONENTS: RALPH NADER, WILLIAM CARYPUTATIVE RESULT: SUBOPTIMAL REG & UNDERPROVISION OF PUBLIC GOODSFAVORITE EXAMPLES: SHIPPING AND FOC, DELAWARE INCORPORATION

EXPECT AND FAVOR CONTINUING HETEROGENEITYVARIED PROCESS STANDARDS SUIT LOCAL CONDITIONS AND PREFERENCESRELOCATION TO SUIT PREFERENCES TO LOCAL CONDITIONSPROPONENTS: C.M. TIEBOUT, RALPH WINTER, LARRY SUMMERSPUTATIVE RESULT: ECONOMICALLY OPTIMAL VARIATION IN REGULATIONFAVORED EXAMPLES: LOCAL SCHOOL TAX, NAT’ INCOME AND ENVIR REG

EXPECT AND FAVOR UPWARD HARMONIZATIONMNC INTEREST IN COMMON PRODUCTION STANDARDS TO MINIMIZE COSTS TO SECURE EDGE RE LOCAL FIRMS, MNC FAVORS HIGHEST STANDARD IT FACESPROPONENT: DAVID VOGELPUTATIVE RESULT: REDISTRIBUTE TO MNC -- MAY OR MAY NOT SERVE PUBLICFAVORED EXAMPLE: CALIFORNIA EMISSIONS STANDARDS, ISO 14000, CHEVRON

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EXAMPLES AND DISCUSSION ON PROCESS STANDARDS

SOCIO-ECONOMIC EXAMPLES

TAXATION AND INCORPORATION => TAX HAVENS AND CHARTERING IN DELAWARECAPITAL ADEQUACY => OFFSHORE AND AIC BANKING => BASLE AGREEMENTLABOR STANDARDS => SUNBELT STATES => RIGHT TO WORK/RIGHT TO ORGANIZELABOR STANDARDS => INTERNATIONAL VARIATION => ?

ENVIRONMENTAL AND TECHNICAL EXAMPLESSHIPPING REG => FLAGS OF CONVENIENCE => MINIMUM STANDARDS FOR ENTRYVOC EMISSIONS => STATE POLLUTION HAVENS => EPAVOC EMISSIONS => NATIONAL POLLUTION HAVENS => EU GUIDELINE

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DISCUSSION ISSUES FOR SOME CASES • How would Nike or Ford interests in higher environmental and labor practices differ from

those of Fly-By-Night Sneaker or Commodity-Car-Co? • What companies have a substantial interest in establishing high common standards? Which

do not care? Why? Are more than production costs involved here?• If you were managing an NGO with interests in environment or labor, what strategies would

you adopt to induce upward movement in environmental or labor standards? If you were managing an MNC or a local competitor to an MNC, what positions would you adopt to resist or reinforce NGO strategies?

• If you were leader of a developing country what position would you adopt? • How might American or Norwegian interests in shipping regulations differ from those of

Liberia? What sources of leverage has the US deployed to modify standards adopted by FOCs?

• How do American, Japanese, and Cayman Island interests in capital adequacy standards differ? What leverage might countries with a preference for restrictive standards use to induce others to shift?

• How did the US seek to induce Mexico and other countries to tighten standards for catching shrimp to reduce the killing of turtles?

• Many processes differ across nations. Which differences in process standards should be tolerated? Which should be forced to higher common standards? Which should be allowed to descend into competitions in laxity? Why?

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BASIC ARGUMENTS ON PRODUCT STANDARDS AND TRADE

DEFENSE OF GLOBAL FREE TRADE FROM VARIATION IN PRODUCT REGULATIONS• INTENT AND EFFECT OF REGULATORY VARIATION TO SHIELD LOCAL PRODUCERS

FROM INTERNATIONAL COMPETITION• WHERE DOMESTIC REGULATIONS HAVE THE EFFECT OF LIMITING MARKET

ACCESS, TRADE SHOULD TAKE PRECEDENCE OVER NATIONAL PREFERENCES• PROPONENTS: BUSINESS ROUNDTABLE, GATT-WTO

DEFENSE OF NATIONAL VARIATION IN PRODUCT REGULATIONS• INTENT OF REGULATORY VARIATION TO TAKE ACCOUNT OF LEGITIMATE

DIFFERENCES IN CONDITIONS AND PREFERENCES• EFFECTS ON INTERNATIONAL TRADE ARE LIMITED, AND EVEN WHERE EFFECTS

ARE GREAT, NATIONAL PREFERENCES SHOULD TAKE PRECEDENCE OVER TRADE• PROPONENTS: RALPH NADER, VANDANA SHIVA

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EXAMPLES AND QUESTIONS ON REGULATIONS AND WTO FINDINGS

WTO PANEL FINDINGSRegulation Defendant OutcomeGrowth Hormone EU Struck downSalmon Heat Treatment Australia Struck downFumigant Certification Japan Struck downShrimp-Sea Turtle Exclusion US Struck downGasoline Formulation US Struck downAsbestos France Upheld• Growth Hormone: A WTO panel ruled against the EU ban on meat produced using synthetic

growth hormones because the European measures: (1) did not conform to CODEX Commission standards; (2) were not based on risk assessment that exhibits "...a rational relationship between the measure and the risk assessment"; and (3) were arbitrarily higher than measures governing other potential risks, such as antimicrobial feed additives, hence were intended as a discriminatory barrier to trade. The WTO Appellate Body upheld the Panel ruling against the EU for failing to conduct a risk assessment to justify its standards. However, the Appellate Body overturned the Panel on the other two issues, offering more flexibility in the relationship between national and international standards; and holding that complaintant had not provided sufficient evidence that the restrictions in this case had functioned as a discriminatory restriction on trade.

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EXAMPLES AND QUESTIONS ON REGULATIONS AND WTO FINDINGS• Salmon: A WTO panel ruled against Australian bans on fresh and frozen salmon imports to

prevent the spread of fish borne diseases because the ban: (1) was not based on a risk assessment including identification of vectors, entry methods, and consequences; (2) were arbitrarily higher than measures governing other potential risks including bait fish and live ornamental fish without trade implications; (3) were not minimally trade restrictive, since beheading and eviscerating fresh and frozen fish would have been as effective as heat treatment. The WTO Appellate Body upheld the Panel ruling against Australia noting that the ban was not based on assessment of risks and the ban was a disguised restriction on trade.

• Fumigant Certification: A WTO panel runed against Japanese requirements for full testing of the effectiveness of fumigants against moth eggs and larva on every new variety of fruits and nuts, finding that the testing requirement for every new variety: (1) was not based on risk assessment; (2) was more trade restrictive than necessary since testing standards could be set on the basis of sorption level rather than full testing; and (3) were not transparent since requirements were not published. The Appellate Body upheld the Panel ruling against Japan, noting that the retesting requirements were not based on risk assessment and were not transparent, while overturning the Panel finding that the retesting was needlessly trade restrictive because the finding was based on evidence provided by the Panel and not by parties to the case.

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EXAMPLES AND QUESTIONS ON REGULATIONS AND WTO FINDINGS• Fuel Formulation: A WTO panel ruled against the US for imposing penalties on Venezuelan

gasoline that did not meet oxygenation standards under US law. Panel found US had established higher standards for gasoline of foreign than domestic origin, noting that the legislative history explicitly mentioned congressional intent to provide a modest favor for domestic producers. The WTO panel found that the penalty imposed by the US on Venezuela in this case was negligible, but that the differential standards were discriminatory. The WTO panel offered the US two methods of coming into compliance, by raising the domestic standard to meet the international standard or by lowering the international standard to meet domestic standard.

• Shrimp-Turtle: A WTO panel ruled against the US for banning some imports of shrimp harvested without benefit of sea turtle restriction devices. The WTO panel did not unconditionally strike down US reliance on import restrictions to address differences in how nations regulate fishing practices. The WTO panel did find that the US had set two different schedules for phasing in import bans linked to shrimping techniques, and in so doing had engaged in discrimination against countries faced with the tighter schedule for compliance and in favor of countries faced with the more relaxed schedule for compliance.

• Asbestos: WTO panel considered a complaint by Canada against France and the United States challenging domestic regulations barring use of ceiling tiles and other products that use asbestos. The Canadian challenge on behalf of asbestos producers in Quebec contended that French and US regulations are not based on adequate scientific risk assessment. The core of the Canadian case rests on the claim that some varieties of asbestos are safe when used in ceiling tiles and other building materials, and that regulations that do not differentiate among varieties of asbestos are both arbitrary and needlessly trade restrictive. Panel upheld French regulations.

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FIGURE 3: REGULATORY DIVERSITY AND TRADE CONFLICT: SELECTION EFFECTS

REGULATORY DIVERSITY? -------------NOYES |TRADE EFFECTS? --------------------------NO AIR QUALITY| DIOXINYES METHYL BROMIDE AGRICULTURE|WTO DISPUTE? -------------------------------NO FOOD IRRADIATION| AUTO-FUEL STANDARDSYES|WTO PANEL RULING? ----------------ALLOW FR ASBESTOS|DISALLOW| DEFENDANT RESPONSE? ---------ACCEPT US GASOLINE FORMULATION| AU SALMON RESIST JP FUMIGANT CERTIFICEU GROWTH HORMONE US SHRIMP SEA TURTLE

The real test of the WTO machinery will come with a new round of regulation and cases, where domestic and regional regulators craft their requirements with an eye to pro forma risk assessments and nominally nondiscriminatory standards. Existing case law, as embodied in these panel decisions, cannot tell us how WTO panels will rule on cases of bans or restrictions on products where there is no clear evidence of environmental, health or safety risk and where a plausible systematic case for restriction based on precautionary principle could be made.

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NAFTA CHAPTER 11 Article 1110: Expropriation and Compensation1. No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation"), except: (a) for a public purpose; (b) on a non-discriminatory basis; (c) in accordance with due process of law and Article 1105(1); and (d) on payment of compensation in accordance with paragraphs 2 through 6.2. Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place ("date of expropriation"), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.

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Article 1114: Environmental Measures1. Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. 2. The Parties recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures. Accordingly, a Party should not waive or otherwise derogate from, or offer to waive or otherwise derogate from, such measures as an encouragement for the establishment, acquisition, expansion or retention in its territory of an investment of an investor. If a Party considers that another Party has offered such an encouragement, it may request consultations with the other Party and the two Parties shall consult with a view to avoiding any such encouragement.

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SOME NAFTA CHAPTER 11 CASESMetalclad vs Mexico re San Luis Potosi dump permit -- NAFTA tribunal ruled against Mexico and State of San Luis Potosi when San Luis Potosi refused to grant permit to Metalclad for waste dump and reprocessing center until Metalcladcompleted clean up of old site after central government had approved of investment. Ethyl Corp vs Canada re MMTphase out -- Canada issued regulation barring use of MMT as additive to gasoline because of suspected effects on health. Canada withdrew regulation prior to NAFTA ruling and paid $13 million in damages to Ethyl Corporation. S.D. Meyers vs Canada re PCB -- NAFTA tribunal ruled Canadian interim temporary regulation of exports of PCB waste violated Chapter 11; but explicitly upheld right of NAFTA members to impose high environmental standards. Under appeal.Methanex vs California re MBTE phase out-- Methanex sues California for ban on MTBE alleging health risks not sufficient. California claims regulation based on well founded concerns over groundwater contamination through spills and leaks and air contamination from incomplete combustion of MTBE. California wins.

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DEBATE OVER PRECAUTIONARY PRINCIPLE

PROPONENTS OF PRECAUTIONARY PRINCIPLE PP Retrospective studies find under-recognized risks - lead, DDT, CFC, PCB, MTBE, asbestos• Industry skews priors on risks and costs Svend Auken, Nick Ashford• Scientific review process creates bias for false negatives David Gee, Anne Myhr, Rene Von SchombergPP offsets a bias toward acceptance of what may be irreversible harms

PROPONENTS OF PROOF BEFORE ACTION PBARetrospective studies find exaggerated risks – alar, implants, food irradiation• NGOs, courts, and govt skew priors on risks and costs Marcia Angell, Harvey Sapolsky• Mass perceptions and fear create bias for false positives John Graham, Granger Morgan, Wendy GrammPBA offsets a bias toward approval and lock in of what may be needless restrictions

WHY CONFLICTS OVER APPLICATIONS OF PRECAUTIONARY PRINCIPLE ARE INTENSE• Up front information conditions force choice between minimization of Type I and II errors • Up front Information conditions assure that many choices will be in error • Difficult to appraise sincerity of invocation of precautionary principle• Prospect of irreversible harms and irreversible policies at the backend fuels fights up front

Elements of debate

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Precautionary Principle Proof Before Action Principle

Climate Change EU – support Kyoto ProtocolDiesel, wind, nuclear, biofuelsPrior of irreversible harm

US – oppose Kyoto ProtocolDo not regulate CO2 – researchCertain costs / uncertain benefits

EstrogenicsLow Level Chronic Exposures

EURestrict substances and products Hi expectation irreversible harm

USDo not restrict unless harm evident Low expectation of harm

GMO foods EULimit approval and monitor hi irreversible harm; limited gain

USGrant approvals and do not monitorlow expectation of harm

Antibiotics in animal feed

EU Pfizer decisionLimit use of antibiotics in feedAB strains in animals & people

US Allow use of antibiotics in feed

Table eu pp

“Absence of evidence of harm is not evidence of absence of harm”David Gee, EU Environment Agency, on estrogenic chemicals

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Precautionary Principle Proof Before Action Principle

NOx emissions standards

US EPA Tier 2 and CARBStringent standardsLarge NOX ozone health effects

EU Euro IVModerate standards

Passive smoking US states & cities, NorwayBan in workplace & cafesSecondary health effects

EU Allow in workplace and cafes

Pharmaceuticals US and EU – most drugsDo not allow without proof of efficacy and safety

US – HIV and other urgent drugsDo not ban without proof of harm if potentially effective

Export ControlsDual use technology

US OFAC, EAR, ITARExpansive definition of controlsExpansive definition of risk

EUModerate definition of controlsDemonstration of danger

WMD Iraq Bush-Rumsfeld-Wolfowitz-FeithIntervention and regime changeIrreversible harm from WMD

ChiracControls, inspection, containmentLimited capabilities and motive

Table eupp us pp

Absence of evidence is not evidence of absence”

Donald Rumsfeld on WMD Iraq

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Table us wmd

Preliminary thoughts . . . EU-US conflict is not over the precautionary principle per seEU-US conflict is over priors on risks of irreversible harm and priors on costs on specific issues

How can EU and US conflict be mitigated?

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SOME WAYS OF IMPROVING RESPONSES TO RISKS UNDER UNCERTAINTY

INTEGRATED ASSESSMENT makes best use of available information, but information available at the outset is severely limited.

INTEGRATED RE-ASSESSMENT makes use of information revealed after initial decisions are made to improve quality of decision making and to reduce the intensity of up front fights.

BY DEVELOPING STRATEGIES TO GENERATE INFORMATION FOR UPDATING PRIORSWHY To improve terms of tradeoff across Type I and Type II errorHOW By treating policies as experiments and preparing to monitor resultsUPEM Carl Cranor “Precautionary Information” & Anne Myhr “Precautionary Motivated Science“

BY ADAPTING TO INFORMATION THAT EMERGES AFTER INITIAL DECISIONSWHY To improve policies by using revealed information to correct policiesHOW By reducing sources of policy lock in and improving capacity for adaptation. UPEM Steve Raynor, “Precaution and Conservatism” & Elizabeth Fisher “Administration”Other James Q. Wilson, Herbert Simon, Lawrence McCray, Warren WalkerBut how? Focus on disincentives and incentives for harvesting information and for adapting . . . .

Ways of improving

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HARVESTING INFORMATION TO UPDATE PRIORS -- EU AND US GMO POLICIES

EU -- MONITORING WITHOUT (MUCH) EXPERIMENTATION 10,000 hectares cultivated with 13 products 1999, 0 1999-2003, BT-11 May 2004Well designed program for monitoring effects :• Careful validation and testing of detection methods• Preliminary Standard Action Protocol• Samples to government to devise tests • Labels to warn of health concerns• Traceability allows tracking inputs and outputs

US – EXPERIMENTATION WITHOUT (MUCH) MONITORING 40,000,000 hectares cultivated with 56 products approvedWeak program for monitoring effects:• Limited validation of detection methods• No labels for heath concerns• Limited documentation and tracing potential• Limited means of monitoring compliance–

MISMATCH EVIDENT -- WASTING INFORMATION FOR UPDATING

gmo

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HARVESTING INFORMATION TO UPDATE PRIORS -- IRAQ WMD

PRIORSIraq had chemical and biological weapons circa 1990 No UN inspections took place 1998-2002 hence limited info on Iraq WMDWorst case assumptions on Iraq WMD were broadly shared Bush-Chirac disagreed more over risks posed by capabilities than over likelihood of existence

UN RESOLUTION AND INSPECTIONS AS A BAYESIAN UPDATING STRATEGYIAEA inspections => Dramatic revision downward of priors re Iraq nuclear programUNMOVIC inspections => Gradual revision downward of priors re chem bio and missilesInformation generated by UNMOVIC and IAEA undercut precautionary WMD justification for war

INSINCERITY OF US INVOCATION OF PRECAUTION? Bush issued ultimatum that forced out inspectors and ended updating of priorsBush actions revealed that WMD rationale was façade

Iraq wmd

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ADAPTATION AND DISINCENTIVES FOR INFORMATION HARVESTING

Governmental: Possible de-legitimation of policies, costs of modifying indicators, rules, standards, models and test methods, resistance to revision of existing operating procedures.

Business: Easier to recognize and act on existing interests in current regulations, technologies and products than on prospective interests in potential regulations, new technologies, and innovative products.

KEYIdentify governmental and business interests in adaptation and resistance. • Who can recognize and act on interests in change?• Who can recognize and act on interests in status quo?Then . . .• Strengthen incentives for surfacing and using information elicited by experiments. • Use compensation to buy off opposition to modification of policies.• Use consummatory/aggregated over instrumental/compartmentalized indicators……………..other ideas on reducing tendencies toward lock in and improving performance?

Incentives

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CONCLUSIONS AND IMPLICATIONS…..

Updating strategies that harvest emerging information offers partial escape from deadlocks over invocation of precautionary principle

EU GMO monitoring provisions, UNMOVIC and IAEA inspectorates, and CARB NOxmonitoring rise to the challenge of extracting useful information from policy experiments.

Tendencies toward locking in to existing policies may limit the adaptive use of information harvested through updating strategies.

Explicit framing of policies as experimental, with transparent attention to provisions for monitoring, may improve prospects for adaptation.

Firms whose competitive position would be advanced by addressing risks are important potential offsets for biases against adaptive regulation.

Conclusions and imp

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CONCLUSIONS AND IMPLICATIONS.....

REGULATION AND UNCERTAINTYHow much help will scientific risk assessment be in resolving differences in definition of precautionary standards or differences in legitimating principles? How strong are the trade diverting effects of differences in regulation? How much variation is not protectionist in intent? What criteria should be used to reach judgments on these cases?

REGULATION, TECHNOLOGY AND INDUSTRIAL STRUCTUREIndustrial Structure New Production• concentration Technologies and • vertical integration New Products• internationalization

Regulation reinforces or weakens this cycle by affecting the use of production technologies, the value of products and the distribution of liabilities

Conclusions and imp

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ASSET SPECIFICITY

Low asset specificity: Assets can be re-deployed because they are not specific to their current use. Firms with investments with low asset specificity may relocate to less restrictive regulatory environments. This may facilitate a competition-in-laxity or downward spiral in which one state lowers regulations first and others follow suit.

High asset specificity: alternative uses are much less valuable. • High multinational asset specificity means that assets are specific to

international transactions. Firms with investments specific to international transactions will seek regulatory convergence and oppose heterogeneous regulations. Regulatory diversity may inhibit effective use of assets and increase transaction costs.

• High domestic asset specificity means that assets are specific to transactions in one country. Firms with investments specific only to a given domestic market will fight against regulatory convergence that threatens their investment and support heterogeneous regulations that protect the investment.