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The Transatlantic Trade and Investment Partnership (TTIP) between the United States and European Union—which launched in July 2013 and has undergone nine rounds of negotiations as of June 2015—seeks to bridge the gap in regulatory standards in order to boost trade and set the rules for the global trading system.
The automobile sector is overdue for such reform. Currently companies must produce two versions of the same model in order to sell in both markets. For example, Ford produces one version of the Fusion for the US market to meet US regulations and a different one for Europe to meet European regulations. This raises production costs, reduces the available varieties in a given market, and allows producers to price discriminate. If a regulatory agreement is reached, costly duplication would be avoided and producers and consumers would benefit, while standards in both markets would remain high. Moreover, reducing regulatory differences would significantly boost transatlantic trade.
In a new Policy Brief, we examine the scope for regulatory reform in the auto sector.
First, we find that the divergent safety regulations do not produce significantly different outcomes. No one standard is higher; they are just different in terms of their production requirements and implementation. As an illustration, figure 1 shows the number of fatalities per 100,000 motor vehicles for US states and EU member countries compared to their GDP per capita. In both cases, the number of fatalities per motor variable is negatively correlated with GDP per capita. Richer countries or states are safer. However, there is no significant difference between the safety outcome in a European country and a US state at the same income level.
Figure 1 Motor vehicle fatalities versus GDP per capita
Sources: World Health Organization Global Health Observatory Data Repository, 2010; authors’ calculations using data from US National Highway and Traffic Safety Administration, 2012, FARS database, and US Census Bureau, 2012.
Second, it is clear that reducing regulatory differences stimulates trade. We examine the trade effects of the United Nations Economic Commission for Europe (UNECE) 1958 Agreement, the most comprehensive regulatory agreement on global auto standards, which provides one set of auto safety standards for its signatories and has over 50 members. The European Union is of course party to the agreement, while the United States is not.
To measure the export-related gains from this agreement, we use data from 1970–2013, a period over which 41 countries signed the agreement. After entering the agreement, exports to other members of the 1958 Agreement double on average, a gap which persists in the years following the agreement. Figure 2 shows the mean and median exports (in logs) for trade in the auto sector with members (red lines) and non-members (blue lines) of the 1958 Agreement. Since countries signed the agreement in different years over the period, we adjusted the data so that zero represents the year that a country signs the agreement, and the graph includes exports five years before and five years after signing.
Figure 2 Export expansion relative to accession to 1958 Agreement
Source: Authors' calculations using data from UN Comtrade database and IMF Direction of Trade statistics.
This gain could be the result of countries choosing to enter the agreement as their exports expand. Since countries signed the agreement in different years from 1970–2013, we control for exporter supply shocks, importer demand shocks, and country-pair ties to isolate the impact of regulatory convergence on exports in the auto sector under the 1958 Agreement. Overall, this so-called difference-in-differences estimation shows that there is at least a 20 percent increase in exports associated with signing the 1958 Agreement. This result holds when controlling for EU membership, temporary trade barriers, and different periods.
Policy Recommendations
The difference between the US and EU systems for recognizing standards compliance makes mutual recognition of safety standards the most realistic policy proposal. In addition to differences in the safety standards themselves, there are differences in implementation. In the United States, private manufacturers certify that vehicles meet safety requirements, while under the 1958 Agreement, the responsibility and liability falls to government certifiers.
Given this difference, both groups should agree to accept the other's regulations for sale in their own markets. This type of policy could be implemented overall or for a range of particular components—and indeed a similar policy is part of the Canada-EU Comprehensive Economic and Trade Agreement as well as the Korea-US Free Trade Agreement. Though harmonization and mutual recognition both have similar economic outcomes as firms can redeploy inventory to both markets, create a single version of each model, and make models with small demand available for export, mutual recognition allows minimal adjustments to current systems and does not force either the United States or the European Union to change their legal requirements for safety certification.
While total regulatory integration would certainly be preferable from a market integration perspective, a mutual recognition of safety regulations across the European Union and the United States provides a feasible alternative to harmonization. The safety standards in both markets are similarly effective at ensuring the safety of drivers, and previous efforts to harmonize auto safety regulations in the 1958 agreement led to export gains of at least 20 percent for new members.
For more detailed analysis see, Caroline Freund and Sarah Oliver's study Gains from Harmonizing US and EU Auto Regulations under the Transatlantic Trade and Investment Partnership (Policy Brief 15-10, Peterson Institute for International Economics, 2015).
