The Importance of Trade and Meaningful Regulatory Engagement for Securing Foreign Direct Investment Marcus Jadotte, Assistant Secretary for Industry and Analysis April 2016

Today’s discussion: Review the importance of regulatory engagement and trade to foreign direct investment (FDI) Consider the broad benefits of trade and institutionalizing public consultations to business, civil society, and regulators Address how regulatory engagement can be achieved 2

Production networks are increasingly complex and global Global environmental, safety and health challenges and spillovers Resource constraints/value of sharing evidence, enforcement, etc. Increased emphasis on competitiveness, enabling innovation, and creating jobs and growth  Trade and regulatory reform agendas are mutually supportive Today’s Globally Competitive Manufacturing: 3

FDI Correlates Strongly with Transparency Results show “that not only the relationship between transparency and FDI inflows is positive but this relationship is in fact quite strong.” Zdenek Drabek and Warren Payne (2001), “The Impact of Transparency on Foreign Direct Investment,” WTO Staff Working Paper ERAD

FDI also Correlates with Good Institutional Governance  Review the Basics of Foreign Direct Investment  Introduction to WTO TBT Agreement  Five Core TBT commitments  Common TBT compliance problems  Discuss key good regulatory practices (GRPs)  Questions & Answers Note: Countries clustered on the left lack good governance and also lack FDI compared with countries on the right. 1.Only those countries with cumulative inflows of less than US$60 billion since 1995 are considered so as to focus on the developing and small country context. Source: based on data on institutional governance provided in Chen-Lee and Ahn (2001). 5

FDI also Correlates with Trade “As trade volume as a percentage of GDP increases one unit, all else constant, FDI increases by about 14 million dollars.” (David Wernick, Jerry Haar, and Shane Singh (2009). "Do Governing Institutions Affect Foreign Direct Investment Inflows? New Evidence from Emerging Economies," International Journal of Economics and Business Research, 1(3).) 6

What companies are looking for: Predictability Transparency Fairness Flexibility Alignment with international practice 7

Why? 8

Regulatory engagement fosters confidence among foreign businesses and governments ‎ For businesses, it boosts confidence and encourages risk taking to invest their time and resources to grow their business In parallel, for foreign government officials, it fosters confidence to further cooperate on matters that are mutually beneficial 9

Trade fosters the same type of confidence Open trade relations provide potential investors with:  Access to materials  Development of production platforms  Domestic consumption  Global export opportunities 10

Openness and engagement also:  ‎ Averts unnecessary obstacles to trade before they become the topic of international concern  Advances economic growth and living standards 11

OECD Regulatory Policy & Governance Recommendations Adhere to principles of open government Establish mechanisms and institutions for oversight of regulatory and implementation Integrate Regulatory Impact Assessment (RIA) Review of existing technical measures Consider relevant international standards and frameworks for co-operation Effective legal review and procedural fairness 12

Developing meaningful engagement with the private sector: Normally affords all interested persons an equal opportunity to participate in the development of proposed regulations of general application. Treats foreign and domestic stakeholders equally with respect to: 1)Information disclosure; 2)Notice-and-comment procedures; 3)Advisory committees; and 4)Other consultations and hearings. 13

Regulatory engagement leverages the public to help “rationalize” governmental actions Government authorities should adjust:  External procedures to open participation to interested persons in the review and analysis of proposed regulations  Internal procedures to channel public participation and broaden involvement to working level officials in the review and analysis of proposed regulations Government authorities may then increasingly benefit by:  Borrowing the knowledge, expertise, and resources of the public  Helping drive down information costs of developing regulation  Implementing effective and publicly-supported regulations 14

In the United States: For all “significant” regulatory actions, all U.S. federal agencies must publish for comment: 1) the text of the draft regulatory action, along with 2) an estimate of the potential costs and benefits of the proposed regulatory action, i.e., a regulatory impact assessment (RIA)* 3) a description of how the comments received were taken into account in the text of the final regulation. * (OECD (2012), Recommendations of the Council on Regulatory Policy and Governance, OECD, Paris: Section 4.5, p. 10) 15

An established “tradition” of regulatory engagement will: Enhance the public’s trust in the work of government:  Civil Society having collaborated in the development of regulations, can better support government decision making  Regulators can better defend their actions to the public showing how they followed the established procedures (taking public comments into account) Reduce mutual fears and thus appeals of “closed door,” reflexive, or precautionary actions Lower the overall “temperature” of public discourse Allow the development of more deliberate, evidence-based regulations and thus more legitimate government actions 16

Steps toward developing regulatory engagement: Set and follow general laws and procedures for all ministries on “how-to-regulate,” including whole-of- government procedures for notice and comment, as well as other public consultations Appoint a central executive body to review, coordinate, and plan regulations in compliance with the general laws and procedures For significant measures, also require ministries to publish a regulatory impact assessment (RIA) along with proposed regulation for comment ( Note: RIA should justify the costs of the new regulation) 17

Regulatory engagement is a central theme in “21 st Century” Trade Agreements U.S. –Korea Free Trade Agreement (KORUS)  First-ever set of U.S. FTA commitments on good regulatory practices (GRPs) by name Trans-Pacific Partnership (TPP)  Singapore, Vietnam, Chile, New Zealand, Australia, Brunei, Malaysia, Japan, Peru, Canada, Mexico, and the United States Transatlantic Trade and Investment Partnership (T-TIP)  European Union and the United States 18

Summary Reviewed the importance of regulatory engagement and trade for investment Considered the broad benefits of institutionalizing a whole-of-government approach to public consultations for business, civil society, and regulators Addressed how regulatory engagement can be achieved 19

Questions ? 20