Understanding How Product Standards Affect South-South Trade
With funding from the Bank-Netherlands Partnership Program (BNPP), the World Bank’s Trade and International Integration Unit has embarked on a research agenda aimed at evaluating the role of product standards – such as standards for food and agricultural products – in influencing trade flows and economic development. Particular attention will be given to analyzing the role of standards in the fast growing BRIC countries (Brazil, Russia, India, China and South Africa) on exports from less developed countries.
South-South Trade as a Driver of Growth in Low-Income Countries
As a result of their rapid economic growth and integration into the world economy, the BRICs have vastly expanded their trade and financial ties with low-income countries (LICs) in recent years. The emerging BRIC markets are starting to eclipse the advanced economies in terms of their stake in the external economic sectors of many LICs. There is therefore significant potential for further economic growth in BRICs to have positive spillover effects on growth rates in LICs, primarily through channels such as increased bilateral trade and investment. Moreover, growth in BRIC countries can also lead to higher growth in LICs through indirect channels such as rising global demand and higher commodity prices. Indeed, the significant resilience shown by many LICs during the global recession may point to a decoupling from the advanced economies as a result of increased integration with BRICs.
Product Standards as Potential Barriers to Trade
However, there is a risk that the positive effects of stronger economic ties with the BRICs may be short-lived. A growing body of literature shows that, as countries climb the rungs of the income ladder, they adjust their tastes accordingly and increasingly demand higher quality goods (Bils and Klenow, 2001; Broda and Romalis, 2009). In other words, as the BRIC countries become wealthier, standards are likely to become more restrictive. This will pose a challenge to the export potential of LICs unless they are able to meet these more stringent product standards.
The increase in the number of sanitary and phytosanitary standards (SPS) is a case in point. As of October 2011, 10,366 regular and emergency SPS measures had been notified since 1995 when the World Trade Organization was established, with another 2,980 additions, alterations or corrections to existing notifications. The United States submitted over a quarter of the regular notifications since 1995 (2,192), followed by Brazil (775), and China (592).
Since 2008, developing countries submitted more SPS notifications to the World Trade Organization (WTO) than developed countries. The 50 percent threshold was passed in 2008, and currently developing countries’ share of annual notifications stands at about two thirds of the total.
Although standards serve an important function - primarily ensuring the safety of the domestic consumer - standards that are either too prescriptive or too restrictive than objectively necessary to achieve a sufficient level of safety place an unnecessary burden on exporters. The compliance costs are often compounded by the fact that a large number of standards are not harmonized across countries. Many exporters in LICs cannot afford to make the necessary investments to keep up with the proliferation of standards and effectively find themselves shut out of lucrative markets.
An additional concern for LICs is that they tend to export a limited number of goods to a limited number of markets. For example, 25 percent of Gambia’s exports comprise one product category (“edible fruits and nuts”), of which 93 percent is destined for India. Needless to say a change in standards affecting key export goods to key markets could impose potentially devastating adjustment costs on LIC exporters. The risk of this happening rises as BRICs continue to grow.
Working Together to Reduce Technical Barriers to Trade
With BNNP support, The Trade and International Integration team at the Bank will help increase information exchange between governments, multilateral organizations, the private sector, and other stakeholders to increase knowledge of the impact of standards on South-South trade flows, and help to build capacity around this knowledge in BRICs and LICs. The ultimate goal is to contribute to this promising avenue for poverty reduction by reducing technical barriers to South-South trade.
Last updated on December 12, 2011