Governments are increasingly called upon to respond to a variety of concerns raised by society in many areas, including some related to agriculture such as the environment, animal welfare and food safety. Corrective actions are expected when markets either do not exist or fail and hence result in inefficient outcomes. If market solution is not satisfactory, governments have a number of options available to intervene, and these policies often have implications for international trade. Given the lowering of classical import barriers such as tariffs, non-tariff measures (NTMs) are becoming an increasingly important instrument governments use to safeguard domestic societal concerns.

Many technical measures may restrict trade but improve welfare in the presence of market failures. Other measures can expand trade as they enhance demand for a good through better information about the good or by enhancing the good’s characteristics. Despite the challenges involved, systematic quantification and analysis of cost and benefits for all different economic actors through an evidence-based approach can yield a solid basis for identification of least-cost solutions.

Rationale behind NTMs
Growing societal concerns with implications for agriculture such as environment protection, animal welfare and food safety are leading governments to respond in a variety of ways. Regulatory, subsidy or tax-based responses offer countries wide scope to address these concerns. The response may be a purely local or national matter with little or no incidence on trade or trade policy. But for societal concerns related to traded goods, NTMs are becoming an increasingly important policy tool, particularly against the background of continued trade integration and the lowering of classical barriers to trade, such as tariffs and quotas.

Protection of human, plant and animal health motivates most non-tariff measures. Imports can carry invasive species such as pathogens, pests, or weeds, foreign to a country’s ecology. Different trade partners may have different food safety standards and institutional capacity to enforce these standards. This may lead to imports of food that do not meet domestic requirements. Imperfect monitoring at the border can compound the health or environmental risk.

Distribution of NTMs by purpose

Comprehensive data on NTMs are lacking but available UNCTAD data show that only 8 out of 777 agri-food products traded in the OECD are not subject to any NTM, and individual products are faced with many overlapping measures, so that half of the products are subject to between 9 and 12 different measures. The measures are very heterogeneous, with labelling and product characteristics requirements among the most common.

Distribution of number of different NTMs by number of affected products

Many NTMs associated with domestic regulations are a consequence of differences among national regulatory frameworks, such as in monitoring and enforcement of compliance. These differences often lead to trade frictions. Concerns about the appropriateness of certain NTMs, particularly sanitary and phytosanitary (SPS) measures, are frequently brought to WTO, and developing countries have increasingly been active in raising concerns about the trade restrictiveness of NTMs.

However, developing country concerns do not only apply to their exports to OECD markets. About one third of the “specific trade concerns” raised by developing countries at the WTO SPS committee since 1995 relate to trade among developing countries, while two-thirds relate to exports to OECD countries.

Economic impacts of NTMs
Preliminary OECD analyses show that assessing the economic effects of NTMs poses significant challenges. Many technical measures may restrict trade but improve welfare through reduction in negative externalities (e.g. through reduced risk of importing pests or diseases) or information asymmetries (e.g. through product labelling). Other measures can expand trade as they enhance demand for a good through better information about the good or by enhancing the good’s characteristics.

The efficiency costs of NTMs are hence much less evident than the welfare losses associated with tariffs and quotas. They do not necessarily embody the economic inefficiencies that are associated with classical trade barriers, unless they discriminate between sources of supply, and they may be the least trade-restricting policies available in the face of market imperfections.

It is therefore not clear a priori that less stringent NTMs would always lead to efficiency gains that would exceed the losses from weaker regulation. However, higher fixed and variable costs related to compliance with standards may create barriers to market entry, and may thus exclude foreign producers from competing in the market.

Analysis of measures put in place by governments is complicated further by the increasing use of private standards in the food supply chain (see box).

Trade and Private Standard Schemes Private standards can be viewed as a key management tool that permits firms to ensure that a wide range of consumer demands are met and government regulations satisfied, whether sourcing domestically or globally. Lead retailers have harmonised private standards through collectively defining core attributes and procedures in order to facilitate global sourcing. Compliance with these private standard schemes has become a requirement for doing business with lead retailers, making them important instruments in determining the “what, how, where and by whom” of food production. These schemes impose specific procedures for compliance which can make them more demanding than those of the government, as retailers themselves attest in the figure below. The switch from purely product standards (e.g. a given maximum residue level, MRL) to combined process and product standards (e.g. MRL plus requirements on the storage facilities of agro-chemicals) along with quality management systems presents new challenges for public and private governance of the food system at the local and global levels. While harmonised standards can promote trade flows, suppliers differ in their capacity to meet these standards. Satisfying these requirements may weigh more heavily on the small and medium sized farms/firms that lack the management skills or physical and human capital to meet stringent technical conditions. They can also be exclusionary for producers in developing countries, which lack the well-developed infrastructures in telecommunications, testing facilities, energy and transport to support implementation of the standards. These factors have given rise to discussions in international arenas about the legitimacy of the use private standards schemes by retailers as requirements in sourcing products and what the role of governments might be. Retailers’ view of own standard compared to government standards in %

Ongoing OECD work on NTMs in agri-food aims at systematic analysis of the different costs and benefits of NTMs for consumers, producers and governments, domestically as well as abroad. Through a comparative analysis of different policies to address the same issue, this work provides an evidence-based approach for identifying least-cost and most trade-friendly policy options. Availability of good information represents a key challenge for this comparative analysis.

Overall, responding to the challenges of designing NTMs will require OECD policy makers to:

• Recognise the important role NTMs play in addressing a wide array of societal concerns.
• Recognise the complexity of the economic impacts of NTMs.
• Recognise that NTMs can potentially  be trade enhancing as well as trade restrictive.
• Identify the least-cost and most trade-friendly policy options.

 

References

• OECD (2009), "Report on Trade and Trade Policy Implications of Different policy Responses to Societal Concerns"
• OECD (2008), "Interaction of Public and Private Standards in the Food Chain"