*{BIAC CONSULTATION WITH THE OECD LIAISON COMMITTEE
WITH INTERNATIONAL NON-GOVERNMENTAL ORGANISATIONS
8 November 1996
Pursuing Domestic Policy Objectives in a Global Economy
--Discussion Note--
Introduction:}

The international business community is generally encouraged by the progress made in reducing or
removing traditional obstacles to trade and investment, as well as the continuing efforts to expand
such liberalisation through further work at the WTO and the negotiation of a Multilateral
Agreement on Investment (MAI) at the OECD. These actions demonstrate a clear recognition by
governments that globalisation is indeed a positive force for our economies. BIAC strongly agrees
that the globalisation of product development, production and distribution processes offers both
OECD and Non-Member countries a powerful source of growth and employment.

Our focus in this paper is on the impact of domestic policies on international trade and investment
as an important corollary to the benefits of multilateral liberalisation. The OECD has addressed the
effects of domestic measures on economic performance, most notably in its landmark 1987 study
on Structural Adjustment and Economic Performance, and new efforts are under way to analyse
particular aspects of this issue. Of particular interest is the current, “horizontal” study on regulatory
reform. Another important example is the Industry Committee’s ongoing analysis of Framework
Conditions for Industrial Competitiveness. Indeed, all OECD Committees have focused on related
problems in their particular domains, e.g., in Labour Policies (as part of the extensive Jobs Study),
Fiscal Affairs, Competition Policy, Banking and Financial Market Supervision, etc.

These projects are clearly useful in promoting sound domestic policies as a basis for improving
national economic efficiency and, hence, growth prospects. However, we believe that such
analyses and recommendations have become even more important in view of the changing
requirements of efficient business operations in the global marketplace. While implementation of
“ best practice” policies promulgated by the OECD will continue to be crucial in the pursuit of
domestic objectives, such measures are having an increasingly significant effect on companies’
trade and investment decisions, and thus on international economic performance. In other words:
good domestic policy makes good international policy.

This paper provides a brief survey of some key domestic policy areas identified by multinational
companies as having a particular impact on their international operations and their selection of
investment locations. In many cases, we emphasise the importance of work which the OECD is
already doing to resolve certain problems in the hope that they will continue to be addressed by the
Organisation. In other cases, we highlight issues which could usefully be addressed by the OECD,
and hence be included in the Organisation’s work programme. Finally, we provide some general
conclusions on how the OECD can help its Member Governments to recognise and hopefully take
into account the international effects of their domestic policy actions.

*partie=titre Domestic Policies with International Effects: *partie=nil

*partie=titre Taxation: *partie=nil One of the clearest examples of domestic policies which have an impact on trade and
investment is taxation. In the current economic environment, nearly all OECD Member
governments are continuing the drive to bring their public deficits into balance. BIAC
wholeheartedly supports these efforts. However, while a significant part of fiscal retrenchment
involves reducing public spending, there is also understandably a desire to ensure that governments
receive their fair share of tax revenues. One of the primary targets of such efforts tend to be foreign
companies which use sophisticated tax planning techniques to reduce their tax liabilities in a given
country. This seems to result in a continual search for new, more effective rules and techniques for
administering international tax policies, which in turn provide the basis for one of the most
important activities of the OECD.

The OECD Committee on Fiscal Affairs has been indispensable as a vehicle to maintain
consistency in Member countries’ international tax policies according to multilaterally recognised
standards and BIAC works hard to ensure that the Committee’s delegates are aware of the views of
the business community on the many issues under discussion. Still, we see a continuing risk in
some governments’ efforts to develop new rules or different interpretations of agreed standards
such as the arm’s length principle in transfer pricing. Changing rules and procedures add
considerable expense to the operating costs of such companies’ operations and often result in
conflicting requirements/assessments among governments leading to double (or multiple) taxation.
While BIAC continues to believe that taxation is just one of a number of factors of importance to
an MNE in allocating resources across geographical borders, it is nonetheless a significant factor
since it can affect, sometimes drastically, an MNE’s rate of return in a given jurisdiction. Taxation
is thus a potent domestic tool for controlling international trade and investment flows, and as a
result, implementation of inconsistent and/or controversial measures will represent a growing
problem in our interdependent world economy.

*partie=titre Competition Policies: *partie=nil Last November, BIAC presented a discussion note to OECD Ambassadors
on the interaction between trade and competition policies in which we provided various examples
of how differing interpretations and/or enforcement of national (or regional) competition policies
can cause friction between international trading partners. From that analysis, it should be clear that
the international business community considers that national competition policies will play an
increasingly important role in the years to come. As government restraints are removed or reduced
in significance through trade agreements, private restraints on international trade and business
present a more formidable hurdle for market entry. Further convergence in the application and
enforcement of Member countries’ policies in this area would be desirable. Differences of
interpretation and implementation on such issues as horizontal and vertical agreements, abuse of
dominant positions, and public involvement in the economy may create friction among major
economies, and impede the cross-border activities of multinational enterprises. While a global
harmonisation of substantive antitrust laws is premature, work can be done on core principles and
cooperation in process and enforcement.

Through monitoring and, updating as necessary, the 1986 Council Recommendations, and its
ongoing efforts to promote convergence in Members policies, the OECD Committee on
Competition Law and Policy is playing a vital role in resolving the present and potential problems
in this area. However, the issues are clearly complex and, as a result, progress is relatively slow.
Therefore, and as we stated last year, Governments should attach greater priority to dealing with
these issues through the OECD and, in particular through the joint work of the Trade Committee
and the Competition Law and Policy Committee.

*partie=titre Technology Policy: *partie=nil National policies on technology and innovation often have an extensive impact on globalisation since new technologies are among the principal driving forces behind the ability
of companies to integrate production and distribution processes around the world. As a result, such
policies are increasingly important factors in cross-border business activities. BIAC actively
supports the work of the OECD Committee on Science and Technology Policy in this field, and in
particular, the OECD Council Recommendation Concerning Principles for Facilitating
International Technology Cooperation Involving Enterprises, as useful steps towards removing
policy barriers in this area.

National public sponsorship of research and development through, for example, direct subsidies or
sharing of defence-related research can affect the international competitive balance among
companies operating in the sector(s) involved. Domestic companies may also be given preferences
in local government procurement or enjoy comparative advantages in national standards for certain
technologies. In some countries ambiguous or incomplete provisions of regimes governing
intellectual property rights or their high cost of implementation may also act as a restraint on
innovation or foreign participation in technology development. To pick a major example, the
incompatibility of patent protection regimes among the broad OECD regions, such as the costly
and bureaucratic procedures required in the acquisition of a patent in Europe, and heavy reliance
on costly litigation in defending patent rights in North America, often presents formidable barriers
to co-operation between firms from different OECD regions, and therefore is a barrier to trade in
R&D activities. In October 1996, BIAC submitted a Discussion Paper on Barriers to International
Technology Co-operation Involving Enterprises, as a contribution to the OECD’s work on these
and other issues.

*partie=titre Information and Communications Policies: *partie=nil The adoption of appropriate national policies in
response to the continuing communications revolution is essential to the international business
community. The added cost to consumers -- both corporate and household -- of overregulation/
protection of the telecommunications sector has been well documented and,
fortunately, is prompting efforts towards deregulation in a number of countries. However, there
are also a number very crucial issues which are inhibiting the development of a globally accessible
information infrastructure. The result is that markets for information and communications
technology (ICT) products and services remain segmented and inefficient, constraining the growth
of product development and business activities which would otherwise benefit from considerably
lower costs in efficient ICT markets. The segmentation of markets is often exacerbated by some
policies in areas such as “national security” or “culture”, arbitrarily developed without regard to
economic and business concerns. In the area of security of information systems, the use of public
networks for data transmission is restrained by problems such as restrictions on the availability
(which depends on free import and export) or use of adequate encryption. The result often is that
economic activity that depends on the use of proper security systems cannot be transplanted to
areas with incompatible regulation.

National policies that restrict the free flow of information have a detrimental effect on the
development of the Global Information Infrastructure (GII). The ability of companies to compete
in the global market place depends on their ability to transport data freely across national borders.
It is therefore imperative that Member countries avoid creating disincentives to the free flow of
transborder data that could result in significant trade barriers in this important area of the
international economy. In this regard, BIAC reaffirms its commitment to the 1980 OECD
Guidelines on the Protection of Privacy and Transborder Flows of Personal Data, which provides
an international approach to privacy protection in an era of rapid technological progress without
creating unjustified obstacles to international trade. The 1980 Guidelines represent a clear
statement of OECD Members’ commitment to the fundamental principles regarding the protection
of data.

In this context, BIAC wholeheartedly supports the work that is in progress at the OECD
Committee for Information, Computer and Communication Policies (ICCP) and its subsidiary
bodies aimed at facilitating the development of a global information infrastructure, and the
widening of the application of market principles in the areas of telecommunication and information
services. These efforts will help to improve competitiveness of OECD countries in the GIS by
promoting further liberalisation of telecommunications markets, and the creation of robust and
secure information infrastructures.

*partie=titre Environment: *partie=nil The effects of national environmental regulations on international business
transactions is the focus of considerable research and debate. Most existing environmental law at
the national level does not create trade barriers. But, as trade and environmental regimes expand,
the possibility for environmental regulations to create unwarranted trade barriers which limit the
ability of business to function efficiently and to use resources sustainably will increase. An
important trade issue arises when national laws, measures and standards designed to protect the
natural environment proliferate in an unharmonised fashion, or are applied to foreign products and
processes, potentially limiting or preventing market access by companies based abroad. The use of
eco-labels, a market instrument aimed at encouraging the development and consumption of more
environmentally sound products, is a key example, and BIAC believes that there is considerable
scope for continued work by the OECD on the comparison of national eco-label schemes with a
view to enhancing international co-ordination and preventing trade barriers. Another salient
example is the regulation of process and production methods (PPMs). GATT law does not
currently permit PPM standards to be applied to products originating in another country. BIAC
supports this interpretation, and believes that any environmental issues requiring action beyond
national borders can best be addressed through Multilateral Environment Agreements (MEAs).

Overall, BIAC believes that the multilateral approach is the most promising route to addressing
potential conflicts between national environmental legislation and the smooth functioning of the
international economy. The OECD has conducted extremely useful work in harmonising standards
related to the testing and evaluation of high production volume chemicals; it has begun a crucial
study to develop an agreed international basis for distinguishing waste and non-waste, which, if
completed in a satisfactory manner, could reduce trade barriers constituted by different national
and regional definitions of the term “waste”. Work must also be continued on scientifically
rigorous criteria for what is “hazardous” and what is not, not only in the priority context of the
Basel Convention and the proposed “trade ban” decision, but also to give broader and timely
direction as regards other international attempts to limit trade in other substances, notably
chemicals. BIAC fully supports the continuation of these efforts at the OECD. More specific
recommendations on the market-based approach to effective environmental regulation needed to
enhance economic growth in a global market place are contained in the BIAC submissions of
November 1992 and 1993. These will be further developed by the BIAC Study Group on
Environment and Economic Instruments.

*partie=titre Social Policies: *partie=nil BIAC fully supports the conclusions of the OECD Jobs Study, and believes that implementation of the country-specific recommendations by all Members will not only have a
strong impact on employment creation at the national level, but will improve economic prospects
generally throughout the OECD area.

BIAC further believes that OECD economies would benefit significantly by opening national
social welfare and health care provision systems to international competition. An obvious starting
point is in the health care sector (e.g., hospital management, pharmaceuticals, medical equipment
production, health insurance, management of medical information etc.), where there is already
some international trade. However, even in this sector, growth and productivity are constrained by
impediments which are also present in other social services. For example, both the content and
prices of health care products and services are heavily regulated by national authorities (or, in some
cases, the EC) independently from one another, requiring separate registration and testing for each
market. In some cases competition by foreign enterprises in the provision of a service is banned
outright. One example is public medical insurance systems which do not reimburse medical
expenditure carried out abroad, or the purchase of medical services from private providers.

BIAC will develop these points further during its participation in the forthcoming OECD
Conference on the New Welfare Agenda (Beyond 2000, 12-13 November 1996), and will
contribute actively to projects which emerge from this event.

*partie=titre Product/Service Standards: *partie=nil The barriers to trade and investment posed by differing national product and/or service standards are generally well known. For companies operating and/or selling
products around the world, different national standards in such fields as automobiles and their
component parts, information technology, electronics, telecommunications, medical devices,
pharmaceuticals, etc. add considerable costs to the design, manufacture and distribution of goods.
Domestic companies are frequently better able to meet local standards and thus may have a
significant competitive advantage in their home markets on the basis of such regulations rather
than on the strength of their product. These issues are similarly prevalent in the service and/or
professional sectors. Local standards for certification or licensing frequently act as a barrier to
foreigners’ provision of, for example, financial, legal, accounting or medical services.

Significant progress to reduce such barriers has also been made in the development of the
European single market, and in negotiations/discussions within the context of the GATT and
WTO. Most recently, participants in the OECD Symposium on Regulatory Reform and Market
Access discussed this issue and one of the principal mechanisms for mitigating the problem:
mutual recognition agreements (MRAs). The business community attaches a high priority to
improvements in this area, and believes that MRAs should be a critical feature of the world trading
system in the future, and BIAC applauds the efforts to negotiate such agreements between the
United States and European Union, and in other bilateral and regional settings.

*{Conclusions:}

This paper has attempted to identify certain domestic policies which have an impact on foreign
companies’ operations, and which will become increasingly important as traditional barriers to
trade and investment are removed. Since the pursuit of domestic policy objectives is correctly
considered a matter of national sovereignty, what can be done at the multilateral level to limit the
negative impact on international business activities? BIAC believes the OECD can play a critical
role in this regard.

The first objective should be for the Organisation to continue to promote transparency in
Members’ domestic policies. Many OECD Committees conduct roundtable reviews of national
developments in their respective policy domains and, in some cases, publish the results of this
“monitoring”. International dissemination of specific national laws and regulations is extremely
useful to multinational enterprises for planning purposes, especially when done on a comparative
basis. Moreover, objective updating of the surveys, as well as how rules are applied in practice,
should not only keep companies informed of changes, but also government officials (particularly
parliamentarians) who do not normally attend OECD meetings. Indeed, targeting the latter
audience may serve to moderate proposals for controversial new policies by raising the level of
understanding of the implications of such measures for the international economy. In the best
cases, presentation and discussion of effective national policies may promote “best practice”
regulatory convergence among OECD Members.

A related objective should be for the OECD to recommend to its Members that all cost/benefit
analyses of new laws and regulations should consider whether the measures will have any
particularly negative effects on foreign companies’ operations. Such assessments should consider
whether the new rules will result in conflicting requirements for companies operating in multiple
jurisdictions.

Third, the OECD could promote the practice of pre-notification of pending domestic legislation
which could have impacts on foreign companies’ operations. Early access to such information by a
Member’s key trading partners, and an opportunity to discuss it within a multilateral context, will
serve to quell potential controversy and post-enactment friction. A positive example of the value of
pre-notification (and consultation) is the U.S. policy of publishing draft tax regulations for public
(international) comment.

Finally, the OECD itself can set a very positive example by including a more regular assessment
of international implications in its analysis of targeted domestic structural reforms.