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Standards and international trade Geoffrey Chapman Trade Economist Click to add title

KAL draws: Trade https://www.youtube.com/watch?v=69c9ZTgpOR8

Outline • Introduction to the world of Standards • Standards and economics • Standards and international trade • Theory • Empirics • Conclusion

Introduction to the world of Standards • The SABS is a founding member of the International Organization for Standardization (ISO; founded in 1947) and the only local organisation that can develop national standards – what sets us apart from TUV and SGS • ISO has 164 members (in total)

Introduction to the world of Standards • Standards are: • Voluntary and they set minimum requirements. • Reached through consensus in technical committees.

Introduction to the world of Standards • As minimum requirements, standards can act as TBTs • This effect is more prominent once a standard is referenced in legislation because that standard (now known as a technical regulation) is then mandatory

Introduction to the world of Standards • Standards being proposed as technical regulations are notified to the WTO • Members can comment before coming into effect • Disputes are raised with notifying country • Read “Hitting where it hurts: Retaliation requests in the WTO” (Found at: www.voxeu.org) • As far as possible, ISO members must adopt international standards

Introduction to the world of Standards • International standards: • Prevent (undue) protectionism • Facilitate market access • Reduces costs and allows economies of scale • Lowers costs to consumers • Since WW II, international trade has increased 17 fold. WW II ended in 1945, ISO founded in 1947, after 65 delegates from 25 countries met in 1946.

Introduction to the world of Standards Multilateral trading system Allowing for regulatory authorities to protect legitimate interests Avoidance of unnecessary obstacles to international trade

Introduction to the world of Standards • Exceptions are allowed… When the standard will be ineffective and inappropriate to fulfil the legitimate objective:

Introduction to the world of Standards • Exceptions are allowed… When the standard will be ineffective and inappropriate to fulfil the legitimate objective: • Geographic (altitude for example – affects conductivity of heat) • Climatic (humidity and average temperatures) • Technological (difference in voltage – 110 Volts versus 240 Volts)

Standards and economics There is an urgent need for job creation in Africa. Productive firms create jobs as they invest and grow. But market imperfections and weak business environments that lower the productivity of firms and prevent resources from being allocated toward better-performing firms may reduce the potential for job creation(Iacovone & Ramachandran, 2014).

Standards and economics The overall price level in Africa could also be a factor in determining the size of firms (Gelb, Meyer & Ramachandran, 2013). In absolute terms (excluding SA), the average purchasing power parity for a sample of African countries is about 20% higher than the average for the four poorest comparators: Bangladesh, Indonesia, Philippines and Vietnam (Iacovone & Ramachandran, 2014).

Standards and economics • The implementation of international standards leads to: • Increased economic efficiency and this generates economic benefits for the supplying industry, through increasing profits. • Lower prices for g&s for the consumer. • Reduced risks and increased quality of service. • Standards in general have been shown to increase exports and imports.

Standards and economics • Economically speaking, standards can be classified into four categories (distinction based on the economic impact): • Compatibility or Interface • Minimum quality or Safety • Variety reduction • Information or Measurement

Standards and economics

Standards and international trade 164 ISO members and 159 WTO members (2 March 2013)

Standards and international trade • Theory • General Agreement on Tariffs and Trade (GATT) - successful in reducing the “traditional” trade barriers such as tariffs, quotas and VERs. Thus, in recent decades, tariffs on several products, including quota barriers to trade, have declined, enabling a range of developing countries to accelerate their economic growth through expanded exports.

Standards and international trade • In contrast, however, these reductions have been accompanied by an increase in NTBs in which standardisation policy is often used as a key instrument. • Uruguay Round of GATT left countries with the option of setting standards on safety and health grounds, so international trade is also governed by an increasing range and variety of product and process standards and technical regulations.

Standards and international trade • Standards and technical regulations applied to mitigate against health and environmental risks, to prevent deceptive practices and to reduce transaction costs in business by providing common reference points for notions of 'quality', 'safety', 'authenticity', 'good practice' and 'sustainability'. • In practice, however, standards and technical regulations may be used strategically to enhance the competitive position of countries or individual firms.

Standards and international trade • Economists and politicians commonly share the belief that country specific standards act as barriers to trade and that consequently, internationally shared standards should be trade-promoting • What do we find empirically?

Standards and international trade • Empirics • Generally, the econometric analysis confirms that bilaterally shared standards are favourable to trade. • In contrast, the analysis does generally not find that the number of country-specific standards is a barrier to trade. On the one hand, country-specific standards in non-manufactured goods reduce imports but on the other, they promote trade in manufacturing sectors.

Standards and international trade Effects of UK standards: Comparison of three perspectives Source: Swann, Temple & Shurmer(1996).

Standards and international trade • One explanation for this puzzle is information costs… If goods have to be adapted to a foreign market, then country-specific standards of the importing country offer valuable information for such. Otherwise, this information would be costly to gather.

Standards and international trade • Theoretical literature = inconclusive • The few empirical studies suffer from serious data problems • Further, there is at least one theory predicting a positive effect and another negative, resulting in a net effect that is ambiguous

Standards and international trade • The mixed results are possibly found because standards, whether country-specific or shared, reduce information costs and allow for easier contracting but country-specific standards may concurrently increase adaptation costs. If consumer tastes or production technologies vary across countries, implying goods have to be adapted to foreign markets, then exporters are assisted by a large number of informative standards that describe the export market.

Standards and international trade • Homogenous products are characteristic of non-manufacturing industries, so informational requirements are low and product adaptation costs likely dominate information costs. On the other hand, information requirements are relatively high in manufacturing industries, so since standards lower information gathering costs, the benefits of this cost reduction tend to outweigh the additional adaptation costs, which may be increased by the same standards.

Standards and international trade • Where do the mixed results leave us (ito exports)? • The use of international standards by exporting countries has a positive (or at least neutral) effect on their export performance in most cases. • The use of national standards by country X may lead to superior export performance by country X.

Standards and international trade • Where do the mixed results leave us (ito imports)? • When international standards are adopted by importing countries, the most common effect is an increase in imports. • When national standards are used by the importing country, the results are more diffuse: Voluntary standards have quite evenly distributed effects, whereas regulations tend to effect imports negatively.

Standards and international trade • Is there not a simultaneity problem (ito developing standards in areas where trade performance is strong and conversely where it is weak)? • No, the effect is not simultaneous. The average time for a standard to be developed is roughly two years and so there is a significant lag from improved trade performance to more standards.

Conclusion Standards are an integral component of numerous economic activities. Their diversity makes it difficult to sensibly aggregate them into a single measure while on the other hand, the economy-wide, rather than the specific effect of standards, may be the most important.

Conclusion Nonetheless, previous research has shown empirically that standards contribute positively to the financial performance of companies and at a macro-level, to total factor productivity, labour productivity (SA included in this) and economic growth. Why not standardise everything?

Conclusion Why not standardise everything? For cost-increasing standards, a small country cannot win a “standards war” in which both countries impose standards on imports: Both producers and consumers may lose in the small country.

Conclusion Why not standardise everything? For cost-increasing standards, a small country cannot win a “standards war” in which both countries impose standards on imports: Both producers and consumers may lose in the small country. What about the benefits from differentiated products to consumers?

Conclusion This is a new area of research in South Africa and consequently offers a lot of room to explore. Currently collaborating with Professor Neil Rankin (Stellenbosch University). Panel data consisting of 8 countries, spanning 1990 – 2013.

THANK YOU

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