While it often isn’t recognized, much of world business and international trade is increasingly based on private industry rule-making.
Earls Restaurants got itself into a colossal public-relations jam with its decision to stop buying Alberta beef and instead to source “humane” beef from Kansas.
The chain was looking for suppliers that could provide it with beef free of antibiotics and steroids and slaughtered according to humane animal-welfare criteria. It ended up buying beef certified by Humane Farm Animal Care, but supplied from the United States.
A storm of protest erupted from Alberta beef farmers and consumers in Western Canada. Faced with commercial disaster, Earls shamefacedly admitted its mistake and returned to purchasing Alberta-slaughtered beef that, as it turned out, equally met humane best practices.
What drove this was a pure business decision to follow a given standard. It had nothing to do with government regulation or treaties. Yet that decision had an impact on the flow of cross-border beef trade possibly as profound as any trade agreement might have.
The case illustrates the impact of private-industry standards, developed and applied outside the orbit and often beyond the reach of governments. This so-called private regulation is a growing phenomenon in international trade.
Halfway across the world, the 2013 collapse of a garment factory in Bangladesh killed 1,133 people and injured more than 2,500 others. The result was public outrage over use by North American apparel designers of substandard and exploitative Third World garment factories. Clothing manufacturers and retailers rushed to put into effect tough labour and other standards in their offshore outsourcing policies. This was an industry-driven response, not a government one.
These two quite different cases show the spread of private rule-making at the non-state level, led by business groups, financial institutions and civil organizations. These are not legally binding in any formal sense but have emerged as a phenomenon of increasing significance in international commerce.
Take the globally applied rules governing letters of credit formulated by the International Chamber of Commerce. Or the industry engineering standards in the international steel trade. Or consumer product certifications and standards formulated and applied outside of government mandates.
Most Internet and electronic commerce is based on international rules totally outside of governmental involvement. Add to this the example of industry-developed standards in the field of corporate social responsibility, a phenomenon that’s profoundly changed corporate attitudes and behaviour in extractive industries worldwide. On another level, a Wal-Mart decision to source products certified according to a given industry standard can have as much impact on international trade as the tariff reductions under a trade agreement.
The point about all this is that forces of economic self-interest produce understandings, standards and “rules” often as effective in opening markets as actions of governments concluding international trade agreements. This is happening even though not all countries participate, and even though enforcement is through consumer choice or engineering best practices.
These are the new modes of internationalism, complementing and in some cases supplementing state action. While less dramatic than government-led trade negotiations, these are helping to bind a globalized world into generally accepted norms of conduct.
To the extent that this private regulation enables governments to solve or ameliorate problems that no government can solve unilaterally or collectively, the rise of private regulators need not diminish state power at all. It may be more fruitful to think in terms of complementarity between public and private authority. Of course, governments and private-sector standard-setting bodies have a mutuality of interest and shared concerns. While keeping out of industries’ standard-formulating activities, governments can still aid in promoting high-quality, fair and transparent industry standards.
Earls learned its lesson about the impact of private standards on its business. What that shows is that markets don’t open and trade doesn’t flow because governments conclude treaties.
While it often isn’t recognized, much of world business and international trade is increasingly based on private industry rule-making.
Lawrence Herman is a principal at Toronto-based Herman & Associates. He practises international trade law and is a senior fellow of the C.D. Howe Institute.
Published in the Globe and Mail
