Standards and
international
trade
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title
Geoffrey Chapman
Trade Economist
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
Avoidance of
unnecessary
obstacles to
international
trade
Allowing for
regulatory
authorities to
protect
legitimate
interests
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)
Outline
• Introduction to the world of Standards
• Standards and economics
• Standards and international trade
• Theory
• Empirics
• Conclusion
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):
1. Compatibility or Interface
2. Minimum quality or Safety
3. Variety reduction
4. Information or Measurement
Standards and economics
Positive
Compatibility/Interface • Network externalities
• Avoiding lock-ins
• Increase variety of
systems products
Negative
• Monopoly
Minimum
quality/Safety
• Correct adverse selection
• Decrease transaction
costs
• Correct –ve externalities
• Regulatory capture
(raises rival’s costs)
Variety reduction
• Economies of scale
• Decrease choice (lowers
• Build focus & critical mass
willingness of consumer
to pay)
• Market concentration
Info/Measurement
• Facilitates trade
• Decrease transaction
costs
• Regulatory capture
Outline
• Introduction to the world of Standards
• Standards and economics
• Standards and international trade
• Theory
• Empirics
• Conclusion
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 countryspecific 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 nonmanufacturing
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.
Outline
• Introduction to the world of Standards
• Standards and economics
• Standards and international trade
• Theory
• Empirics
• Conclusion
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