Trade Forum Features

Trade and public policies: A closer look at non-tariff measures in the 21st century

25 September 2012
ITC News
The World Trade Organization's (WTO) World Trade Report 2012 takes a fresh look at non-tariff measures (NTMs).

NTMs are nothing new, they have existed since countries started to trade and been subject to General Agreement on Tariffs and Trade disciplines since 1947. As tariffs have come down, however, NTMs have acquired growing importance. At the same time, changes in the trading environment have brought about a transformation of NTMs, raising new challenges in the multilateral trading system. This transformation and the challenges it raises are the topic of this year's World Trade Report.

The report focuses on technical barriers to trade (TBTs) and sanitary and phytosanitary (SPS) measures. Trends in the use of NTMs in the past 20 years are difficult to establish due to data limitations, but there is considerable evidence that TBTs and SPS measures have become more important, both in absolute terms and relative to other measures. The number of notifications of both TBTs and SPS measures has followed an upward trend and, at least in the case of TBTs, the number of specific trade concerns raised in the WTO TBT committee has increased.

There is now clear evidence of the predominance of SPS measures and TBTs over other NTMs, both in new data collected by the United Nations Conference on Trade and Development from official sources, such as government and international organization publications, and in responses to business surveys conducted by ITC. According to ITC, surveys of firms in 11 developing and least developed countries show that about half of the NTMs considered to be burdensome are TBTs and SPS measures. For exporters, business surveys also show that more than 70% of burdensome NTMs raise a procedural obstacle.

The growing importance of TBTs and SPS measures relative to more traditional measures, such as quotas or contingent protection, reflects a trend whereby NTMs increasingly address concerns about health, safety, environmental quality and other social imperatives. Given that these concerns are taking a more central role in policy as economies develop and incomes grow, the trend is unlikely to weaken in coming years. Moreover, with the expansion of global production sharing, product and process standards are becoming increasingly relevant in linking various stages of international production chains. This suggests public policy related NTMs will not decline in importance.

Trade effects of NTMs

TBTs and SPS measures can be burdensome for exporters, but they are not ordinary trade restrictions. Their trade effects, which can be positive or negative, depend on various factors. First, the trade impact varies according to how measures are applied or administered. The procedural obstacles most commonly mentioned by developing and least developed country exporters in ITC business surveys are time constraints, including delays related to regulations and short deadlines to submit documentation. These constraints represent 35% of obstacles reported. Issues of time are followed by unusually high or informal payments, which represent 22% of obstacles reported. Second, even more than the measures themselves, differences between national policies can substantially raise trade costs and reduce or distort trade flows.

The actual trade effects of NTMs are difficult to assess. Economists often calculate ad valorem tariff equivalents of NTMs. This can be done either by using the so-called price-gap approach, or by comparing observed imports with an estimate of what imports would be under free trade and converting the quantity gap into a price gap using the price elasticity. This approach does not allow for decomposition by specific measure of the aggregate.

While public policies need not be trade distorting or trade restricting in and of themselves, they may be designed to create an intentionally protectionist effect while serving a public policy objective. Assessing the purpose of a measure like this, or measures that assume a dual purpose, is even more difficult. This is because it is necessary to discover the share of the trade effect needed to achieve the legitimate purpose.

Challenges to cooperation on public policies

International cooperation on NTMs, and in particular on those related to public policy, is complicated by a number of factors. One factor is that many NTMs raise acute transparency issues. Several are intrinsically complex and opaque, and available information is limited and of generally low quality. The opacity of measures makes international cooperation difficult as it creates rule-making inefficiencies, reduces the capacity to enforce agreements, impedes regulatory improvement and fails to correct governments' lack of commitment. Opacity imposes costs on certain firms, typically exporters, but it may benefit others, perhaps import-competing firms. Depending on circumstances, politically motivated governments may have a preference for opaque rather than transparent policy instruments.

Considerable efforts have been made by the WTO and other international organizations to enhance the quantity, quality and accessibility of NTM information, but much remains to be done. The WTO's Integrated Trade Intelligence Portal (I-TIP), which will be launched at the end of 2012, will provide unified access to all WTO databases and information on NTMs collected through notifications. Improving the quantity and quality of information is more difficult. The WTO Secretariat and other agencies have revamped the existing international classification to facilitate the integration of all available sources of information. The multi-agency Transparency in Trade initiative can also play an important role, boosting the collection and dissemination of data, and putting in place a sustainable governance mechanism for transparency. Ultimately, however, the key to sustainable improvement in the level of transparency is in the hands of national governments.

A second factor that complicates international cooperation in the case of public policies is an intrinsic tension between the achievement of legitimate policy objectives and trade restrictiveness in the design and implementation of measures. This tension is reinforced by information problems. WTO members may not know which measure will be most efficient in striking this balance. In this respect, setting an internationally agreed benchmark of efficient regulation for a particular policy objective can help. Accordingly, WTO TBT and SPS agreements encourage the alignment of measures with relevant international standards. This is not a panacea as countries differ with respect to risk preferences and tastes. Further, defining relevant international standards in the areas of TBTs and domestic regulation in services is not straightforward. Most important, due to a lack of regulatory capacity, developing and least developed countries may face particular challenges in influencing the standards development process.

Another information problem is that members may not know how best to design and implement TBTs and SPS measures within the regulatory lifecycle. The use of an agreed set of regulatory steps that define an efficient regulatory intervention may be beneficial. Sharing a common regulatory language increases transparency and predictability of measures, and provides common criteria against which to judge them. The work of the TBT and SPS committees is relevant in this context, encouraging members to follow common approaches such as good regulatory practice when crafting TBTs and SPS measures.

The multiplication of private standards constitutes another challenge to expanding cooperation on public policies. These standards address a range of perceived or actual consumer-driven instances related to environmental protection, social values or food safety. Although cast as voluntary in nature, because they are imposed by private entities, private standards often become a de facto condition for market access. Developing countries have often raised concerns that these requirements are more stringent than regulations imposed by governments, that private standards are proliferating and that there is no recourse to discipline them. The impact of such standards is being voiced in the TBT and SPS committees, yet there is uncertainty on what the role of the WTO should be, if any.

Poorer countries often find it impossible to meet standards in major markets as it can be too costly for firms to adapt to the stringent standards required to access rich countries' export markets and for governments to supply the appropriate infrastructure for conformity assessment. Regulatory capacity building is a vital element in improving international cooperation on public policies to benefit poorer countries. The Standards and Trade Development Facility has proven relevant to building the necessary capacity for poorer countries in the SPS area, but so far there is no similar tool to address standard implementation in the area of TBTs.

Future challenges in adapting to a world beyond tariffs

For the reasons outlined above, public policies are here to stay and they will only grow in importance. Inevitably, the WTO will have to deal with trade frictions that are more complicated to adjudicate than those related to classical barriers to trade. A number of high-profile disputes, such as the beef hormones case, have already arisen around public-policy measures. This means WTO adjudicators may be increasingly required to assess the legitimacy of the objectives of public policies. Some question whether it should be the prerogative of WTO adjudicators to decide on the legitimacy of a stated public-policy objective and to strike the balance between the pursuit of such an objective and the pursuit of gains from trade.

Lastly, trade opening in the case of public policies involves regulatory convergence. The WTO promotes some forms of convergence, for instance encouraging members to align their TBTs and SPS measures with relevant international standards. Transparency provisions, Aid for Trade and encouragement to follow best practice in the regulatory process also promote convergence. However, differences in preferences, levels of development and the capacity to ensure good governance can act as formidable obstacles to multilateral convergence. Instead, it may be achieved more easily through regional cooperation agreements between similar countries. The potential for trade-diverting effects on outsiders and regulatory lock-in cannot be overlooked. This is yet another challenge in adapting the WTO to a world beyond tariffs while keeping its relevance at the heart of the multilateral trading system.