TADAGMIN2010 › The challenge of designing non-tariff measures that enhance welfare and trade
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
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