Precautionary Preference How Europe’s New Regulatory Protectionism Imperils American Free Enterprise© by Lawrence A. Kogan, Esq. Institute for Trade, Standards and Sustainable Development, Inc. 116 Village Boulevard, Suite 200 Princeton Center Princeton, NJ 08540-5700 609-951-2222 Website: www.itssd.org July 2005 ITSSD is an independent, non-partisan, not-for-profit organization dedicated to the promotion of a positive paradigm of sustainable development consistent with World Trade Organization principles. Donations and other forms of support are tax-deductible and do not influence the views and policies of the Institute. Copyright © 2005 THE INSTITUTE FOR TRADE, STANDARDS AND SUSTAINABLE DEVELOPMENT, INC. TABLE OF CONTENTS I. INTRODUCTION: EUROPE AS THE NEW GLOBAL REGULATOR...................6 II. WHAT IS THE PRECAUTIONARY PRINCIPLE?...................8 A. Evaluates Hazards Rather Than Risks...................................8 B. Dispenses With Economic Cost-Benefit Analysis ................8 C. Generates Fear and False Perceptions that Lead to Risk Aversion ....................................................8 III. HOW DID THIS OCCUR? – IT BEGINS WITH HEALTH AND THE ENVIRONMENT AND ENDS WITH TRADE .......9 A. The Crafting and Packaging of a Regional EHS Policy Message.............................................................9 B. Incorporating Regional EHS Policy into the International Trade System.....................................10 C. Establishing the Political and Moral Legitimacy of European EHS Policy......................................................11 D. Using EHS Policy as a Disguised Trade Barrier .................11 IV. EXAMPLES OF EUROPEAN PRECAUTION-BASED EHS REGULATIONS ...............................................................12 A. Biotech Products..................................................................12 B. Toxic and High Volume Chemicals ....................................12 C. Cosmetics ............................................................................13 D. Biocides...............................................................................13 E. Product Stewardship, Life Cycle Management and Waste Disposal .............................................................13 F. Climate Change...................................................................14 2 V. THE HIGH COSTS OF PRECAUTIONARY PRINCIPLE-BASED REGULATION......................................17 A. Compliance, Intellectual Property and Misrepresentation Costs................................................17 B. Social and Eco-Labeling and the Costs of Brand Reputation.................................................................17 C. Tort Liability Costs..............................................................18 D. Insurance Costs Related to Development Risk....................22 E. Insurance Costs Related to Climate Change........................25 F. D&O Liability and the Business Judgment Rule.................28 G. The Encroaching Sarbanes-Oxley and SEC Disclosure Rules...................................................33 VI. EUROPEAN INDUSTRY’S EXPERIENCE WITH HIGH COST PRECAUTIONARY PRINCIPLE-BASED REGULATIONS....................................35 A. Overall.................................................................................35 B. Forest-Based Industries.......................................................35 C. Pharmaceuticals and Life Sciences......................................36 D. Chemicals and Downstream Industries ...............................37 VII. PRECAUTIONARY PRINCIPLE-BASED REGULATIONS EXPORTED TO CHINA .......................40 VIII. PRECAUTIONARY PRINCIPLE-BASED REGULATIONS PROPOSED AND ADOPTED IN THE U.S.........................................................................43 A. General................................................................................43 B. Sector-Based State and Local Legislative Initiatives ..........44 1. Hazardous Substances and Waste Product Disposal....44 2. Cosmetics ......................................................................49 3 3. Toxic and High Volume Chemicals...............................49 4. Biotech Foods – State and Local Initiatives .................50 4. Climate Change ............................................................53 C. State and Local Law Initiatives to Adopt the Precautionary Principle..................................................62 IX. EFFORTS TO REFORM U.S. FEDERAL LAW......................62 A. State Attorneys General Lawsuits on Climate Change........62 B. Efforts to Enact Federal Legislation on Climate Change ....65 C. Efforts to Change Environmental Accounting and SEC Disclosure Rules (Non-SOX) ..............................................69 1. SEC Disclosure Rules – S-K Regulations .....................69 2. Changing Financial Accounting Rules to Broaden Environmental Disclosure – SEC Petition 4-463..........70 3. Congressional, State and UN Activities Concerning SEC Disclosure Rules................................71 D. Efforts to Reform Federal Food, Drug and Chemicals Regulations..........................................................................73 1. Agricultural Biotech/USDA/FDA/EPA .........................73 2. FDA/Medical Biotech ...................................................75 3. FDA/Antimicrobial Animal Drugs................................76 4. Toxic Chemicals/EPA ...................................................78 5. Waste Disposal and Take-Back/EPA ............................81 X. IMPOSING PRECAUTIONARY PRINCIPLE-BASED SUPPLY CHAIN MANAGEMENT STANDARDS – THE GROWTH OF ‘SOFT’ LAW ....................................................81 A. General................................................................................81 B. The EU and United Nations as Protagonists........................82 4 1. Threatening Company Brand Reputation and Shareholder Value.........................................................83 2. U.S. Manufacturing Sectors Affected............................83 3. U.S. Sectors Affected.....................................................85 4. Accounts Broadly for Company and Brand Reputation.....................................................................87 XI. THE BROADER INTERNATIONAL LEGAL, POLITICAL AND ECONOMIC IMPLICATIONS..................91 A. The Legal Rights of Individuals vs. the Collective Legal Rights of Society .................................................................92 B. EU Cultural Vales Are Critical of U.S. Free Markets – The Role of Social Welfare Theory..................................93 C. Exporting Social Welfare Statism to Constrain U.S. Industry – Securing a Competitive Economic Advantage....................95 D. Using European Cultural Values to Change International Law...............................................................100 CONCLUSION..................................................................................103 ENDNOTES ......................................................................................105 This paper will form the basis for a forthcoming Washington Legal Foundation Monograph, to be released by the Foundation's Legal Studies Division in August 2005. 5 I. INTRODUCTION: EUROPE AS THE NEW GLOBAL REGULATOR U.S.-based businesses of all sizes, but especially small and medium sized businesses will, over time, likely be subject to more stringent environment, health and safety (‘EHS’) regulations and related technical product standards. Whether they know it or not, many of these rules will have originated within the European Union (‘EU’) without their constructive input or consent – ‘regulation without representation’. According to a 2002 Wall Street Journal article, Americans may not realize it, but rules governing the food they eat, the software they use and the cars they drive increasingly are set in Brussels, the unofficial capital of the EU and the home of its executive body, the European Commission. Because of differing histories and attitudes toward government, the EU…with the world’s second-largest economy, regulates more frequently and more rigorously than the U.S., especially when it comes to consumer protection. So, even though the American market is bigger the EU, as the jurisdiction with tougher rules, tends to call the shots for the world’s farmers and manufacturers… EU rules often cause particular friction in high-tech fields, such as software, electronic commerce and biotechnology…The EU requires any product that contains even 1% of a genetically altered ingredient to say so on its label…pending European recycling rules, which are tougher than U.S. standards…would require electrical equipment makers to eschew certain hard-to-recycle plastics and chemicals, such as brominated flame retardants…the EU is considering requiring companies to test 30,000 chemicals already on the market to see whether they are hazardous, as well as thousands of products that use some of the chemicals in question…another EU initiative targets auto makers…”1 Indeed, as reflected in official EU policy documents, the products covered by these regulations, directives2 and standards3 “represent a large proportion of [all] products that are placed on the market. It is estimated that, as of 2003, the trade of products covered only by the major [agricultural and industrial] sectors regulated…largely exceeds the volume of 1500 billion euro (1.5 trillion euro) [(or approximately $2.25 billion)4] per year.”5 Given the breadth and reach of these regulations and standards, the U.S.