The Cumulative Effect of EU Regulations on External Trade

There is a risk that the many new regulations introduced by the European Union will have undesirable consequences for trade with third countries. This may result in welfare losses for the EU as a whole and, in the long term, damage the image of the EU as a trading partner. These are the findings of a new report from the National Board of Trade Sweden.

Heidi Lund, you are one of the authors of the report. What can you tell us about the analysis?

We have analysed the cumulative effect of selected regulations and proposed new regulations on trade with and investment by countries outside the EU. This assignment ties in well to a number of recent analyses performed by the National Board of Trade Sweden that reveal that EU regulations are becoming increasingly complex for businesses, something that is related to the EU’s efforts to be a global leader in many policy areas, especially sustainable development and the digital transition.

In this analysis, we build on our previous analyses and look in more depth at three policy areas simultaneously: digital regulations, sustainability regulations and resilience related frameworks. These areas have been chosen because of the large number of legislative initiatives put forward over recent years, as well as the potential major impact of these regulations on trade and investment.

Why is it important to examine the cumulative effect?

Normally when we analyse the impact of different legislation, our focus is on individual regulations or specific requirements. This might be because they have been shown to create barriers to trade or that they are being discussed by various committees, within the WTO for example.

As the EU is now hastily drawing up new regulations in several different policy areas at the same time, it is vital to take a broader view and consider what the cumulative effect of these regulations on trade with third countries is likely to be. After all, the new regulations do not necessarily promote trade; indeed, they may create constraints – in order to promote sustainability, improve resilience or address digital vulnerabilities.”

In the report, you write that greater uncertainty is one obvious effect. How so?

Simultaneously complying with multiple complex regulations, each with different policy objectives, poses new challenges for businesses. Our analysis clearly confirms the cumulative impact of the total regulatory burden in the form of ambiguous, overlapping or contradictory requirements.

What might the consequences be when it comes to perceptions of the EU as a trading partner?

If EU regulations become too complicated, companies may choose to do business in other markets, or countries may choose to negotiate trade agreements elsewhere. As the regulations we have analysed are so recent, as yet it is difficult to establish their impact in economic terms. That said, we can see that the EU is increasingly finding itself on the defensive when it comes to new regulations. It is therefore important that the EU can answer questions, justify its regulations and ensure that guidance is available regarding both application and supervision, so that there is a level playing field in the market.

What more can the EU do to prevent this?

It is of the utmost importance that the EU really keeps its ear to the ground and listens to concerns or complaints about the lack of clarity in EU regulation. And takes the time to explain and clarify uncertainties in the regulations. Even if the EU does have a broad regulatory mandate and sometimes seeks to make a difference in other countries and other markets, it is important to be humble in order to maintain functioning trade with third countries. One of our recommendations is to strengthen cooperation with third countries in order to rebuild confidence.

The EU also needs to ensure that adequate support is available to both businesses, especially SMEs, and trading partners in developing countries.

So, in your opinion the EU should have a considerably better overview of what the overall impact of different regulations and laws is likely to be. How should the EU go about achieving this?

Yes, we draw attention to the fact that detailed impact assessments of EU regulations are increasingly lacking. We therefore consider it important that the EU follows good regulatory practice and performs thorough impact assessments that consider correlations between and the effects of several regulations. We also underline that new types of laws and regulations that address issues such as resilience and cybersecurity should be assessed particularly carefully, as the regulatory objectives and the tools for achieving them in these areas differ from traditional regulation.