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Meeting New Challenges for U.S. Industry

Robert L. Mallett

Why Standards Matter

Today the United States is the world's most prolific exporter, its strongest competitor, and its most productive innovator. Yet there are no guarantees that this hard-won mantle of competitive success will remain on the nation's shoulders. In fact, we are jeopardizing our leadership position--and perhaps future industrial and economic growth--by not paying full attention to important details of international trade and technology diffusion: standards and the methods used to assess conformity to those standards. If we do not sharpen our focus on these essential infrastructural ingredients of global commerce, we may ultimately discover that the devil truly is in the details. Dismissed by many as arcane technicalities, standards are formally agreed--on specifications for products, processes, and services that can either facilitate access to export markets or pose obstacles to entry. In both cases, the economic impact is large. Standards and regulations that incorporate standards are involved in transactions affecting the sale of at least $150 billion in U.S. exports. Divergent standards peculiar to a nation or region, complex conformity assessment requirements, and a thicket of other standards-related barriers have been estimated to impede the sale of an additional $20 billion to $40 billion worth of U.S. goods and services.

A Hewlett-Packard official recently reported that standards and certification requirements for information technology equipment have increased sixfold over the past 10 years. That's a serious problem for a company that derives more than half its revenue from sales in foreign markets. But as the world's second largest manufacturer of computer products, Hewlett-Packard has the resources to deal with the new requirements. For small and medium-sized businesses, trade barriers raised by unanticipated regulatory and standards-related developments can be insurmountable. Many lack the resources needed to stay abreast of these developments and to satisfy new testing and certification requirements that raise the ante for securing access to export markets. It has been estimated that such requirements can add 10 percent to the cost of export sales in Europe.

Effective participation in the international standards arena has become a prerequisite for competitiveness in the global marketplace. Although now troubled by financial turmoil in Asia and Latin America, this marketplace is critical to the long-term growth of the U.S. economy. From 1993 to 1997, increases in U.S. exports fueled about one-fourth of the growth in the nation's gross domestic product. More than 11 million jobs are supported by exports. In the manufacturing sector, wages for export-related jobs are 12 to 15 percent higher than the sector average.

Exports can be a powerful economic engine. Just how powerful will depend in large part on how successfully the decentralized U.S. standards system can advance U.S. technology interests at the international level. Other countries and other regions have made standards an integral element of their competition policies. In particular, the 15-nation European Union (EU) has been quicker to position itself in the increasingly important international standards arena, and it is reaping the benefits of its strategy.

For example, in the late 1980s, Europe advanced a single standard for the current generation of digital cellular phones. Meanwhile, U.S. companies were slugging it out in the market, each aiming to position its particular technology as the de facto standard by building an enormous base of subscribers that could not be ignored. European companies bypassed the fray, concentrated on enlisting subscribers worldwide, and emerged victorious.

U.S. strengths and weaknesses

The U.S. standards system is unique in the world and has many valuable characteristics. First, standards-setting is strictly a voluntary, private sector affair. Unlike many other nations where governments play a more active role and the process is more centralized, the federal government participates only as a stakeholder--as one of the many users of standards--and not as the driver of the process.

Second, the U.S. system is tremendously diverse, consisting of about 600 organizations and consortia that develop standards. The result is a system that is partitioned largely into sectors such as information technology, telecommunications, automotive, medical devices, and building technology. This is a logical approach, because each sector knows best what standards it needs. Compared with the umbrella-type standards organizations that operate in other nations or at the international level, the more specialized U.S. standards-developing organizations (SDOs) also tend be quicker to generate standards needed by industry. In an era of shrinking product development cycles, shorter standards development cycles can translate into a competitive advantage.

Third, the nation's SDOs operate according to the principles of balanced representation, consensus, due process, and transparency. The result is an open, competitive system that has produced standards that are widely recognized for their high-quality technical content. Indeed, standards developed by U.S.-based organizations such as the American Society of Mechanical Engineers, the National Fire Protection Association, the Institute of Electrical and Electronics Engineers, and ASTM (formerly the American Society for Testing and Materials) are used in scores of nations.

Yet no single U.S.-based SDO can claim the banner of "international standards organization," at least not in the eyes of most nations that make up the World Trade Organization (WTO). This is a formidable problem, because many nations are specifying in their trade laws the use of standards developed by international organizations. Under the Technical Barriers to Trade (TBT) Agreement, which was part of the WTO Treaty signed in 1994, the U.S. government and the governments of about 130 other signer nations are obliged to give preference to international standards as a basis for their technical regulations. In addition, the TBT Agreement encourages national and regional standards developers to defer to international standards in their activities.

The motivation for this agreement is the long-term goal of free trade worldwide. If trading partners adhered to identical, or equivalent, standards, then the costly problem of satisfying arbitrary technical requirements peculiar to nations or regions would be reduced substantially. This nudge toward harmonization of national and international standards complements other global trends. For example, among U.S. companies, the strategic importance of thinking and operating globally is reflected by the increasing use of international standards. According to one estimate, international standards now account for about 45 percent of the standards used by U.S. industry, up from about 10 percent in 1970.

Through the TransAtlantic Business Dialogue (TABD), the chief executives of more than 100 North American and European businesses have endorsed the preference for international standards. The TABD has cited standards and certification requirements as "one of the most significant barriers to increased transAtlantic trade." Topping the list of the 70 or so policy recommendations made by this body is the need to harmonize divergent standards, regulations, and requirements for testing and certification.

Among many nations that signed the TBT Agreement--including Canada, Mexico, Japan, and members of the EU-an international standard is presumed to be one promulgated by the International Organization for Standardization (ISO), the International Electrotechnical Commission (IEC), or the International Telecommunications Union (ITU). In ISO and the IEC, the United States is represented by the American National Standards Institute (ANSI), a federation of 1,400 companies and other U.S. organizations, including about 175 SDOs. In the ITU, which was formed by international treaty, U.S. interests are represented by the State Department, which consults with industry. As the U.S. representative to ISO and the IEC, ANSI is responsible for convening U.S. technical experts to serve on ISO and IEC committees that develop standards. With some 600 standards organizations to choose from, ANSI faces a difficult job in assembling the most appropriate and, from a national perspective, most effective group of U.S. participants. If a prospective ISO or IEC standard is likely to affect more than one industrial sector, as is frequently the case today, this responsibility becomes all the more challenging.

Our unique sector-focused approach to setting domestic standards makes it difficult to counter the monolithic cross-sectoral approaches of other nations. We approach international standards in an ad hoc, often hit-or-miss fashion, working diligently in some sectors and totally ignoring others. But if we don't set our minds to figuring out a way to counter the global strategies of competitor nations, we will not find our technology embedded in the standards of the future, and U.S. industry will be at a significant disadvantage.

Europe's strategy

Consider the strategy successfully put forth by the EU. To promote integration of its large internal market, Europe has set out to harmonize the standards of member nations. For exporters, the good news is that there should be only one set of regulations and standards to follow when doing business in the countries within the European Economic Area. The bad news is that new or revised European requirements may go well beyond those specified by individual nations. This may necessitate changes in product design or manufacturing processes, and it may result in more testing for product certification.

Responsibility for developing regional standards that meet the requirements set forth in sector-specific European Directives has been assigned to three regional standards bodies: the European Committee for Standardization (CEN), the European Committee for Electrotechnical Standardization (CENELEC), and the European Telecommunication Standards Institute (ETSI). These three organizations give preference to international standards. For example, if an ISO standard already addresses a European Directive requirement for, say, medical devices, then it would be adopted as a European standard. However, there also is a formalized reciprocity arrangement among two of the European standards bodies and ISO and the IEC.

To continue with the example, if no ISO or IEC standards exist for particular aspects of medical devices covered by a European directive, ISO or IEC can defer the task of developing the specifications to CEN or CENELEC. ISO and IEC will then submit the resulting European standards for fast track approval as "international standards."

No other region or nation enjoys this type of relationship with ISO or the IEC. There is concern that ISO and the IEC are, in effect, delegating some standards development activities to the European bodies. At the same time, non-Europeans are finding it difficult to participate in the development of European standards. As a result, there is some friction. If a European standard is considered disadvantageous to U.S. industry, there is opportunity to mobilize opposition against its adoption by ISO or the IEC. In both these organizations, however, the United States has one vote, which is cast by ANSI. In contrast, within ISO, EU nations have a total of 15 votes.

Although Europe is clearly interested in integrating its regional market and in reducing standards-related barriers, it also recognizes other benefits to be gained. "These standards," notes a European Community report released earlier this year, "are very important to the competitiveness of industry and services in that they give preference to the European approach at the world level."

U.S. industry leaders should have more than a passing interest in the development of global standards, because they will dictate our access to global markets and our relationships with foreign suppliers and customers. In addition, standards used globally will influence the nature of technology and product development. Some U.S. companies and organizations are acutely aware of the strategic importance of international standards issues. The great majority are not. These companies are surrendering decisionmaking authority on standards to their better-organized foreign competitors. This needs to change.

First steps

Getting organized is a key first step for our peculiarly American standards system. Unlike most other nations, the United States does not have a single private sector organization or government agency that has overriding responsibility for standards. Nor do we want one! Yet we cannot have 600-or even 60-discordant voices espousing their own strategies and approaches. It should be no wonder that the rest of the world is confused by our standards system and that it sometimes dismisses our efforts. Government's role is to serve as a facilitator of private sector efforts to work together. Under the ANSI umbrella, U.S. industry, SDOs, and government must act collectively to shape the international standards framework and level the international playing field for all. We must act determinedly and intelligently to advance U.S. technologies and concepts as the basis for international standards. The U.S. Department of Commerce intends to be a catalyst in mobilizing private sector and federal actions that will end our costly inertia and confusion in the international standards arena. To be sure, each group of stakeholders has its own set of issues and problems, but we can no longer afford to be bystanders on the global standards scene. Last fall, the Commerce Department's National Institute of Standards and Technology (NIST) joined with ANSI to host a "national standards summit." More than 300 representatives of U.S. companies, SDOs, and federal agencies took initial steps toward devising a coherent strategy. There was broad agreement about the urgency of the situation and the need to improve public-private sector cooperation on standards policy. Elements of the emerging strategy include working together under the umbrella of ANSI, advancing U.S. technical positions through coordinated initiatives on standards, promoting acceptance and use of internationally recognized standards by U.S. businesses, strengthening U.S.-foreign technical cooperation during the development of international standards, and exploring options for reengineering the standards development processes and voting structure of ISO and IEC.

Important activities already under way can be folded into the strategy that results. NIST and ANSI are spearheading efforts to streamline conformity assessment and laboratory accreditation procedures and to broaden international acceptance of test results. NIST has organized intensive standards training programs that have been offered to more than 400 people, mostly from Latin America, Russia, and the newly independent states of the former Soviet Union. These programs familiarize personnel in emerging markets with U.S. standards and measurements.

NIST standards experts who can advise industry of potential barriers are stationed in five markets: the EU, Mexico, Brazil, Saudi Arabia, and India. NIST also is providing technical support to speed implementation of the recent U.S.-EU trade agreement. This agreement calls for mutually recognized testing, inspection, and certification procedures for five categories of projects that account for $50 billion in transatlantic trade. Standards and conformity assessment are pivotal to the ultimate success of the agreement. The United States needs to face squarely the issue of adopting and developing international standards. After all, this is what the users of standards--businesses, governments, and consumers--want. In fact, industries in all countries want standards that enable companies to build products that are accepted worldwide. The United States must vigorously represent its technology interests at the international level. If not, we--U.S. industry, government, and consumers--must accept the consequences of our inaction.

Robert L. Mallett is deputy secretary of the U.S. Department of Commerce.