Extra-territoriality of laws is one thing that is guaranteed to get some people very wound up. In other words, how dare laws not passed by the country's elected representatives impact the country, its citizens and its businesses? Whether its the United Nations, the World Trade Organisation, the European Commission, International Criminal Court or what have you. I previously talked about how a US court had asked Iran to pay damages to US citizens. Now that's extra-territoriality in practise. Remember when the Sarbanes Oxley Law started impacting European Businesses or when American laws meant that British citizens were extradited to USA despite committing no crime under British Law? Remember how NY Mayor Giuliani and Mayor Bloomberg fulminate against the city tax evaders amongst the UN delegations? That's extra-territoriality!, Or when London Mayor splutters against the US Ambassador for not paying his beloved congestion charges because the US thinks the congestion charges are extra-territorial laws. So on and so forth. Generally, countries try to avoid doing this, it needlessly gets people upset and the eventual benefits are not worth it.
But the EU is different. It is pushing for standards above and beyond what national European parliaments have agreed to. I would like to draw an attention to how the EU's soft power is established through these standards. I point to MiFID, REACH, ICC and IFRS as four standards that are now global or are getting global respectability. This is, in turn causing national governments to lose power. Let us take each example. MiFID (Markets in Financial Instruments Directive) is a European wide standard for investor protection, information transparency, pricing and quoting of advice and financial instruments, reporting of transactions, etc. This, very simply speaking, will standardise the behaviour of all investment firms across the EU and is really quite path breaking in nature. It also allows for a British investment firm to work in Athens and anywhere else seamlessly (well, near enough). Guess what? European investment banks who have to cater for MiFID are now considered to be at the top of the investor protection league. The quality mark. So the Japanese, Australian and other Asian and Latin American branches are actually telling their customers that they dont just satisfy Japanese protection requirements, but go for the gold standard called as MiFID!. So here we are, it’s almost like a slap in the face of the local financial regulator like the FSA in Japan, which states that it doesnt really care as much about investors as that of EU!
Or take ICC for another example, if EU had not pushed hard and made sure that all EU members had signed up, this possibly first extension of criminal laws on an international level would never had come up. What it does mean that unilateral action is going to slowly get more difficult, also war crimes are even more difficult. Take the previous blog post of IFRS, again, the fact that the EU has adopted it means that it has become the global standard and firms love it. Or the fact that California Governor is wanting to sign up to European standards for environmental legislation. Or how about the EU REACH protocol, which is for the safety of chemicals. At this moment, Wall Mart is trying to ask its suppliers to avoid 3-4 chemicals which have been identified by REACH. Now all this is causing some of the American firms and American government quite a lot of angst because if a state the size of California and a company the size of Wall Mart go outside American law and standards to adopt European standards, then it is indeed a slap on the face.
This is the flip side of the race to the bottom, where while on one hand, you have tax arbitrage (countries compete with trying to have the lowest tax rates!) and people accuse them of having a race to the bottom, regulation can be a race to the top. Curious, no?
All this to be taken with a grain of piquant salt!!!