Competition

As globalisation and trade liberalisation have formed global markets and abolished trade barriers, states are under growing pressure to compete for foreign investment and business interests. Domicile regulation is designed to compete by attracting businesses with laxer regulation. With each country constantly craving to improve its own standing in the world economic order, countries begin competing with each other’s regulation. It has been assumed that regulatory competition would therefore lead to a race to the bottom as governments adopt laxer regulation to attract business. The “Delaware effect” poortrays the phenomenon when jurisdictions regulate less stringently than others to gain competitive advantage. In the US, the state of Delaware deliberately undercut other states’ regulation to improve its own competitive standing.

From such a viewpoint, tight and strict regulation exists as a detriment and deregulation is favourable to appear more attractive to corporate operations. As countries try to compete by continuously lowering their regulative standards, a downward spiral of deregulation occurs between jurisdictions. Typically this happens specifically in the fields of environmental and labour standards,⁸⁹⁴ but other policy areas may be subject to similar patterns. In the field of business and human rights, the race to the bottom is typically used as an example of government

889 Bennett (n 879) 215-219.

890 ibid 228.

891 Beth Simmons and Zachary Elkins, ‘The Globalization of Liberalization: Policy Diffusion in the International Political Economy’ (2004) 98 American Political Science Review 171, 171.

892 Holzinger and Knill (n 874).

893 Plümper and Schneider (n 875) 991.

894 David Vogel and Robert A Kagan, ‘Introduction’ in David Vogel and Robert A Kagan (eds), Dynamics of Regulatory Change: How Globalization Affexts National Regulatory Policies (University of California Press 2004) 3.

gaps and is illustrated as the scary monster waiting in the closet. This phenomenon has been used as a fundamental and crucial aspect of demanding international and congruent regulation globally. However there exist other illustrations of the effects of regulation competition.

The “California effect”, coined by David Vogel, depicts the opposite development.

He bases his theory on the phenomena that followed the automobile emission standards enacted in California, which were stricter than federal law required.

California chose an option for stricter emission standards based on the 1970 Clean Air Act Amendments, which made its emission laws the strictest in the US.⁸⁹⁵ The emission standards not only allowed California to have more stringent standards, but also to exclude products from their market that did not comply with their standards.⁸⁹⁶ What followed did not however follow the theory of the race to the bottom, but instead the rest of the US followed suit in raising their emission standards to the California levels in the following decades. California did not then lose due to their stricter regulation, but instead their policies shaped the rest of the country’s emission standards in a stricter direction.

The California effect can also be used to illustrate the ‘ratcheting upward of regulatory standards in competing political jurisdictions’⁸⁹⁷ in international instances. Trade liberalisation can be followed by either a race to the bottom or a phenomenon comparable to the California effect in which national regulation extraterritorially forces other nations to raise their regulation standards, called a race to the top. In an international setting, the California effect depends on the competitive advantage it can give domestic firms, the association between market access and compliance with the regulation and the capabilities to pressure others to stricter regulation.⁸⁹⁸ Therefore, the theory has been revised by amending the regulatory context of the EU and its capability to export norms to non-EU nations.⁸⁹⁹ The EU may only be competent to regulate its international market, but due to its market power, foreign companies must comply with its regulation if they wish to trade in the large market area, and as companies wish to standardise their production, the EU’s regulations may become global standards as companies lobby for similar standards globally.⁹⁰⁰ The EU also has the regulatory capacity to

895 David Vogel, Trading Up- Consumer and Environmental Regulation in a Global Economy (Harvard University Press 1995) 259.

896 Fritz W Scharpf, ‘Introduction : The Problem- Solving Capacity of Multi-Level Governance’ (1997) 4 Journal of European Public Policy 520, 523.

897 Vogel (n 895) 259.

898 ibid 260.

899 Anu Bradford, ‘The Brussel Effect’ (2012) 107 Northwestern University Law Review 1, 5.

900 ibid 45.

produce and enforce regulation and the preference to regulate stringent standards and rules.⁹⁰¹

10.2.1.1.1 Race to the Top

Empirical literature and research does not typically support the race to the bottom phenomenon.⁹⁰² This does not however mean that automatically on the flip side there will be a race to the top, either. Certain criteria must occur for a possible California effect to ensue. Firstly, the country in question regulating stricter standards must be considered an important market area in size and power.⁹⁰³ Compliance with the stricter regulation becomes vital for companies outside the nation that wish to enter the market area and be able to compete with domestic companies, otherwise they will lose out on conducting business in the entire nation or area. To meet the criteria, they might have to modify their business operations, after which they may streamline all operations to meet the stricter criteria or at least wish for the stricter standards to be met in other nations where they operate as well. Companies will not be interested in doing this unless the country with stringent regulation is a significant market area.

Secondly, for regulation competition to materialise, the country in question must be subject to international market pressure. In today’s globalised world even a country like North Korea takes part in some form of international trade. Through competition, governments are more likely to be affected by the policy changes of their most important foreign economic competitors, but without common markets convergence will not occur between countries.

Thirdly, the California effect is more effective for product standards than process standards⁹⁰⁴ and specifically situations in which products are exported

901 ibid 12–16. Bradford describes states needing apart from market power also regulatory capacity and regulatory propensity.

902 David Wheeler, ‘Racing to the Bottom ? Foreign Investment and Air Quality in Developing Countries’ (2000) 6; Katharina Holzinger and Thomas Sommerer, ‘“Race to the Bottom” or “Race to Brussels”? Environmental Competition in Europe’ (2011) 49 Journal of Common Market Studies 315, 335; Drezner (n 875) 75; Vogel (n 881) 259; Arik Levinson, ‘Environmental Regulations and Manufacturers’ Location Choices: Evidence from the Census of Manufactures’ (1996) 62 Journal of Public Economics 5, 5; Martin Jänicke, ‘Trend-Setters in Environmental Policy: The Character and Role of Pioneer Countries’ (2005) 15 European Environment 129, 133; David M Konisky, ‘Regulatory Competition and Environmental Enforcement: Is There a Race to the Bottom?’ (2007) 51 American Journal of Political Science 397, 869; Peter Starke, Herbert Obinger and Francis G Castles, ‘Convergence towards Where: In What Ways, If Any, Are Welfare States Becoming More Similar?’

(2008) 15 Journal of European Public Policy 975, 996; Katharina Holzinger, Christoph Knill and Thomas Sommerer, ‘Environmental Policy Convergence: The Impact of International Harmonization, Transnational Communication, and Regulatory Competition.’ (2008) 62 International Organization 553, 584; Bas Arts and others, ‘The Gap Approach: What Affects the Direction of Environmental Policy Convergence?’ in Katharina Holzinger, Christoph Knill and Bas Arts (eds), Environmental Policy Convergence In Europe (Cambridge University Press 2008) 220; Christoph Knill, Katharina Holzinger and Bas Arts, ‘Conclusion’ in Katharina Holzinger, Christoph Knill and Bas Arts (eds), Environmental Policy Convergence In Europe (Cambridge University Press 2008) 228.

903 Vogel (n 895) 261.

904 Scharpf (n 896) 526; Holzinger and Knill (n 875) 7; Knill, Tosun and Heichel (n 882) 1021.

from weaker regulated jurisdictions.⁹⁰⁵ A race to the top does not transfer easily to production standards as most production is controlled in less regulated areas by local contractors and Western countries’ consumer interest is highly selective of which products’ production process they are interested in. ⁹⁰⁶ Process standards also suffer more from the pressure for a race to the bottom as stringent regulation drives the cost of production and hence products higher without increasing the quality of the product. It is important to note that competition does not of course directly impact all policy areas.⁹⁰⁷