RESEARCH AND ANALYSIS

Preferential agreements, regional cooperation and standards

Jean-Christophe Maur and Ben Shepherd (1)

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Provisions relating to the management of standards as applied to internationally traded goods are now a common feature of most PTAs. While classified as one of many non-tariffs barriers — whose relative importance is growing with the decline in tariff duties — one important economic distinction is that standards serve a different policy objective than just discriminating against foreign goods and services. Standards represent a quasi-regulatory means of pursuing important public policy objectives, such as environmental protection, consumer safety, quality of food, manufactured products and services, or compatibility between different apparatus and regulatory systems. Therefore the policy objective should not be to eliminate standards but to make them more efficient and cost effective.

Harmonization to international standards is an effective way to reduce the duplication of compliance costs due to varying sets of standards in export markets. Standards harmonization may thus facilitate market access and enable countries with no or inefficient standards policies to acquire better practice. However, harmonization means compromising on governments’ ability to set national standards at the appropriate level that may fit better the needs of local industries and consumers. Harmonization also requires potentially important and costly adjustments, involving the alignment of the national standards infrastructure with international practice.

When it comes to facilitating trade, PTAs have a unique role to play in providing practical and alternative ways of reducing standards barriers to trade.  First and foremost, bilateral agreements offer the unique possibility of recognition of equivalence of rules and procedures, which can be reciprocal (then called mutual recognition). Recognition can be agreed at different levels, for instance for testing and certification procedures (assessing the conformity of a product or service with standards) only. Though not necessarily achieved through the sole conduct of PTAs, and often signed as standalone agreements, recognition agreements are likely to gain by being part of broader trade agreements, as negotiations of difficult concessions might be traded off with commitments in other sectors, and mutual trust might be increased in the context of PTAs. Standards related disputes can also be solved more easily through formal (dispute resolution mechanism) and informal conduits (the threat of withdrawal of concessions). Institutions set up through PTAs such as working parties on standards can also spread best practices, increase transparency and promote dialogue when compliance issues arise.

Crucially, the best approach to standards setting in PTAs depends on the characteristics of the trading partners. Deep integration in the form of mutual recognition and the concerted creation of harmonized standards — as opposed to unilateral harmonization with the partner’s standards — require many similarities among economies and a high degree of trust, so as to share similar regulatory objectives. In this context, developing countries are often faced with the sole prospect of importing standards practices, either because they sign agreements with larger Northern partners, or because they still have little capacity in South-South agreements to develop mutual recognition approaches or concerted harmonized standards.

Nevertheless, both adoption of international standards and regional solutions should be given careful consideration when PTAs are negotiated. For instance the sharing of standards infrastructure (for testing and certification for instance) or the development on a case-by-case basis of local standards to meet regional specific demand (such as creating a second-tier of less demanding professional standards) could prove beneficial especially for small countries. This has been the case in ASEAN, for instance, where creative approaches to cross-border collaboration on standards have helped share the costs of developing standards infrastructure across countries.

An important consideration as well when looking at how partners might influence standards setting is the different approaches to managing standards and negotiating standards provisions by large trading partners such as the EU and the US, with the US favoring a more decentralized regime.

Generally, standards provisions in PTAs are likely to have welfare enhancing effects on participating members. Unlike tariffs, preferential liberalization will automatically be beneficial for parties to the PTA when standards are not generating private rents (i.e., when standards are not misused to tax compliant producers). Liberalization, even in the limited context of PTAs as compared to a multilateral setting, can reduce transaction costs generated by standards. However, there is also the danger of locking countries in sub-optimal choices if second-best standards are chosen, as important sunk costs are incurred when opting for a given regulatory regime. This suggests that preference should be given to international standards whenever possible. PTAs can also be useful in helping cement best international practices such as the ones promoted by the WTO agreements. Indeed, PTAs that give preference to international standards help reduce the overall degree of cross-country discrimination in the trading system, and are strongly compatible with the aim of “multilateralizing regionalism” through the WTO system.

From the perspective of outsiders, bilateral provisions have the potential to discriminate against non-member countries when mutual recognition agreements are not open to third countries or when harmonization is not done on the basis of internationally agreed standards. Like in the case of contingent protection measures and restrictive rules of origin, standards may end up raising external barriers towards countries outside the PTA; thus eroding the benefits of multilateral liberalization.

Good standards practices in PTAs usually promote institutional arrangements to supervise the effective implementation of standards provisions.  Important objectives of such arrangements are usually to promote transparency, diffuse  expertise, and promote consultations on legal and administrative matters through regular dialogue.

This note is based on Maur, J.-C., and Shepherd, B. “Product Standards.” In Chauffour, J.-P. and Maur, J.-C. eds. Forthcoming. Preferential Trade Agreement Policies for Development: A Handbook. Washington, D.C.: World Bank.

Notes:
1.
Maur: Senior Economist, World Bank Institute. jmaur@worldbank.org. Shepherd: Principal, Developing Trade Consultants Ltd. ben@developing-trade.com. The views expressed in this note are those of the authors only. They do not reflect the views of the World Bank, its Executive Directors, or the countries they represent. back to text

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Jean-Christophe Maur is a Senior Economist in the Growth and Competitiveness Program at the World Bank Institute. His current responsibilities in WBI include leading the regional integration program and contributing to the Development Debates platform. Jean-Christophe joined the World Bank in 2008 from the UK Department of International Development, where he was in charge of UK trade negotiations in several areas, and also of managing multilateral trade assistance. His research interests are regional trade integration and public goods, trade facilitation and non-tariff barriers, intellectual property rights, and trade institutions. Jean-Christophe has a Doctorate from Institut d'Etudes Politiques de Paris, and is a graduate of Essec business school. He was also a Visiting Fellow at Harvard University

Ben Shepherd, Ben Shepherd, the Principal of Developing Trade Consultants Ltd., is a trade economist and international development consultant. He has worked on a wide range of trade and development issues with various international organizations (the World Bank, the OECD or the United Nations among others). He specializes in providing policy-relevant research, as well as capacity-building seminars for researchers working in trade and development. Ben’s particular areas of expertise include: Trade facilitation, transport, and infrastructure; Governance, institutions, and anti-corruption; Product standards, technical barriers to trade (TBT), and sanitary/phyto-sanitary measures (SPS);Trade in services, and the GATS. He holds a Ph.D. in economics from the Institut d’Etudes Politiques de Paris (Sciences Po) and was a Postdoctoral Research Associate at Princeton University's Niehaus Center for Globalization and Governance.

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