In late March, a delegation of California government officials arrived in Brussels on a most unusual mission. Governor Arnold Schwarzenegger had sent them to meet their counterparts at the European Commission and explore whether his state could join one of Europe's most ambitious and controversial projects: the emissions trading scheme.

Both sides emerged from the talks feeling optimistic that a deal was possible to link the European Union regime with a state that itself counts among the biggest emitters of carbon dioxide in the world. "We hope that California will be able in the near future to be the first non-European region that would join the emissions trading system," a Commission official said.

California's eagerness to bypass the federal government in Washington and participate in a regime developed by lawmakers and governments more than 9,000km away may seem startling. But the US state is far from alone in following Brussels' regulatory and legislative lead: on issues such as product safety, financial regulation, antitrust, transport, telecommunications and myriad other policy areas, the EU is leaving an indelible mark on nations outside the bloc.

Sometimes voluntarily, sometimes through gritted teeth and sometimes without even knowing, countries around the world are importing the EU's rules. It is a trend that has sparked concerns among foreign business leaders and that irritates US policymakers. But whether they like it or not, rice farmers in India, mobile phone users in Bahrain, makers of cigarette lighters in China, chemicals producers in the US, accountants in Japan and software companies in California have all found that their commercial lives are shaped by decisions taken in the EU capital.

"Brussels has become the global pace-setter for regulation," says David Vogel, a professor of business and public policy at the University of California, Berkeley. Prof Vogel points out that even the US - the world's most powerful nation and the biggest economy - is finding it increasingly hard to escape the clutches of the Brussels regulatory machine: "The relative impact of EU regulation on US public policy and US business has been dramatically enhanced. Even if a country does not adopt the [European] standards, the firms that export to the EU do. And since most firms do export to the EU, they have adopted the EU's more stringent standards."

The EU's emergence as a global rulemaker has been driven by a number of factors, but none more important than the sheer size and regulatory sophistication of the Union's home market. The rapid expansion of the economic bloc to 27 nations with a total of more than 480m largely affluent consumers has turned the Union into the world's biggest and most lucrative import market. At the same time, the drive to create a borderless pan-European market for goods, services, capital and labour has triggered a hugely ambitious programme of regulatory and legislative convergence among national regimes.

This exercise has left the Union with a body of law running to almost 95,000 pages - a set of rules and regulations that covers virtually all aspects of economic life and that is constantly expanded and updated. Compared with other jurisdictions, the EU's rules tend to be stricter, especially where product safety, consumer protection and environmental and health requirements are concerned. Companies that produce their goods to the EU's standards can therefore assume that their products can be marketed everywhere else as well.

As Henrik Selin and Stacy VanDeveer, two US-based academics, point out in a recent paper that examines the global impact of three recent EU laws on chemicals, electronic waste and hazardous substances: "The EU is increasingly replacing the United States as the defacto setter of globalproduct standards and the centre of much global regulatory standard setting is shifting from Washington DC to Brussels."

Japan, for example, has copied a whole batch of EU environmental laws. South-east Asian nations such as Malaysia and Indonesia have followed Brussels' approach on cosmetics regulation. All around the world, chemical groups are implementing the Union's so-called Reach regulation, which forces companies from BASF in Germany to Dow Chemical in the US to register some 30,000 substances with a new EU agency in Helsinki.

Immediate EU neighbours such as Switzerland and Norway as well as countries in eastern Europe, the Balkans and North Africa are committed to keeping their regulatory regimes as close as possible to the EU approach to ease trade. Countries hoping to join the 27 must in any case incorporate the Union's rules and regulations down to the very last line.

This situation has not come about by accident. The Commission, the EU's executive body, states openly that it wants other countries to follow EU rules and its officials are working hard to put that vision into practice. The Union has established "regulatory dialogues" with a host of countries, most importantly China, to help them improve their domestic regulatory framework - and often to urge them to copy the EU approach.

A Commission policy paper released in February boasted that "frequently the world looks to Europe and adopts the standards that are set here". The document went on to say that the integration of Europe's economies had "spurred the development of rules and standards in areas such as product safety, the environment, securities and corporate governance which inspire global standard setting". It even advocated stronger measures to promote the global use of EU norms, for example through bilateral deals and lobbying in international organisations.

In some cases, however, the EU has to do little more than sit back and watch as other nations voluntarily copy it. This has happened, for example, with the EU's blacklist of airlines that are banned from European airspace. Saudi Arabia, Bahrain and South Korea have copied and enacted the flight bans themselves, while countries including South Africa and Kuwait use the list without putting it into national law. Commission officials also point to a recent law on mobile phone roaming rates and a proposal on solvency ratios for the insurance industry as examples that are closely followed - and may soon be copied - by non-EU countries.

For a country such as Japan the importing of foreign laws is nothing unusual, says Franz Waldenberger, an economics professor at the Japan Centre of Munich'sLudwig-Maximilians University. "Ever since Japan opened itself to the west, there has been a long tradition of turning to western laws for inspiration. There is barely a Japanese law that has not taken a western law as a model. But the key factor is having the highest standard. Global companies develop products for the global market and that means they have to follow the highest standard - which today tends to be European."

The second way in which the EU has stamped its authority on other jurisdictions is through influencing the decisions of international standard-setting organisations and global regulatory bodies such as the International Maritime Organisation or Unece, the Geneva-based branch of the United Nations that deals with economic co-operation.

Carmakers around the world - with the exception of the US - follow Unece's technical standards. But these in turn are based on EU norms drafted and agreed in Brussels. This means European automotive groups such as Volkswagen or Renault can export their vehicles to Japan, India or China without having to remodel their cars or seek the approval of foreign safety authorities. Their US rivals, meanwhile, are often forced to invest in additional tests and costly tweaks to their models before they can be shipped abroad.

Perhaps the most famous example of an EU standard conquering the world is in the market for mobile telephones. The GSM standard was enshrined in a 1987 EU law, then rapidly spread across the economic bloc and today forms the platform used by more than 2bn mobile phone customers around the world (though, again, the US is largely an exception).

Not least thanks to Europe's first-mover advantage, companies such as Finland's Nokia, Ericsson of Sweden and Britain's Vodafone emerged as some of the biggest players in a vast and expanding market.

Officials in Brussels say the EU will in future be in even better shape to dominate globalstandard-setting. Though it tends to act in unison, the EU after all wields not one but up to 27 votes in bodies such as the IMO. This enabled the Union to persuade the maritime grouping to ban single-hull tanker ships from international waters earlier than many non-European countries wanted.

Indeed, the EU's emergence as a global rulemaker has not been without controversy - and the US in particular has followed the Union's growing regulatory clout with concern. Washington and Brussels have clashed at the World Trade Organisation over the EU's strict limits on genetically modified crops, not least because the US biotechnology industry fears that Europeans' aversion to GM foods will spread to other nations.

Even if Brazilian or Indian farmers do not share Europe's hostility to the new varieties, they must think twice before planting GM rice or maize: if they fall foul of the Union's strict GM laws, they face being shut out from the world's most lucrative market. As Berkeley's Prof Vogel says: "In the long run it seems there will be a more permissive approach to GMOs. But in the short term there are many countries which are reluctant to use GM crops because of their fear of losing access to the EU market."

C. Boyden Gray, the US ambassador to the EU, says Washington's concerns about the Union's moves reflect the fact that they often hurt businesses outside the 27 member states: "I think there is now recognition [in the US] that the EU is being aggressive about exporting their approach - which tends to favour their own native companies. I think the US is concerned about it because frequently it imposes higher costs across the board."

He adds: "What many in the US think is happening is that EU policymakers tolerate a higher level of regulation and then worry that they are putting themselves at a competitive disadvantage. So they seek to export their regulations abroad so that every multinational is subject to the same level [of regulation]."

To EU officials, this may seem a less than charitable interpretation. But even they admit that the drive to export EU rules is motivated to a large degree by the desire to help European companies. As the February Commission paper argued, being the maker rather than the follower ofglobal rules "works to the advantage of those already geared up to meet these standards".

Companies outside the bloc, meanwhile, are waking up to challenges posed by the EU's growing clout. Groups such as Microsoft - which has been fined close to€780m ($1.1bn, £528m) by the European Commission for breaking EU antitrust laws - now employ large teams of lawyers and lobbyists to attempt to ensure that their views are heard in the Brussels corridors of power. Others use their national governments or trade associations to seek to influence the outcome of the EU regulatory process.

They all know that Brussels is slowly but steadily emerging as the regulatory capital of the world. As much as some loathe it, it is a trend that business leaders and policymakers from Tokyo to Washington feel they cannot afford to ignore.

Copyright The Financial Times Limited 2007 - http://www.ft.com/cms/s/6e721ba2-2e7d-11dc-821c-0000779fd2ac.html

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