The successful conclusion of the Trans-Pacific Partnership (TPP) negotiations has generated a lot of interest. While much of the discussion has focused on what the mega-regional trade agreement – the largest in a generation – means for environmental or labor standards, equally important are the regulatory standards on agricultural and food products known as Sanitary and Phytosanitary (SPS) measures, which are addressed in Chapter 7 of the agreement.
But how much do SPS standards really matter for trade?
Countries impose food safety standards for good reason, namely to protect the health of domestic consumers. However, domestic food safety standards often deviate from international ones. From an exporter’s point of view, such standards are likely to be seen as barriers to entry. Producers must modify production processes in order to meet each individual market’s product regulations, which raises the cost of the product for consumers. Economists and policy-makers are hungry for micro-level evidence on the effects of such standards on trade.
New World Bank Group research (Fernandes, Ferro, Wilson 2015) offers a first look at how a specific set of mandatory product standards—in this case, the maximum pesticide residue permitted on unprocessed food—impacts exporters. Novel firm-level data for exporters from 42 developing countries from 2006-2012 were analyzed along with data on pesticide standards for 243 agricultural and food products in 63 importing countries. We found that pesticide standards differ greatly across countries.
The research shows that product standards significantly affect individual producers’ decisions to enter foreign markets, as well as their eventual success in those markets. The more restrictive the standards in the importing country, the lower a producer’s probability of exporting.
Restrictive and unique national standards also cut exporters’ product values and the quantities sold in foreign markets. The relative restrictiveness of standards deters exporters from entering new markets and leads to higher exit rates.
The research also shows that smaller exporters are more negatively affected by unique national standards compared to larger ones. Larger exporters tend to be more productive and are therefore able to more easily overcome compliance costs and enter new markets. These findings have clear implications for developing countries trying to reduce poverty by expanding agricultural trade.
Differences in regulatory standards for agricultural and food products across countries are likely to remain in place since full global harmonization is not likely—the SPS Agreement has created no more than a presumption in favor of the international Codex Alimentarius standards. For developing countries excluded from trade agreements like the TPP, one issue of concern is whether within the agreements such regulatory standards will be harmonized (through the adoption of a common standard) or mutually recognized (through acceptance of one another’s standards) and whether this recognition will be extended to third countries.
There are ways in which non-member governments can help small exporters expand their markets, even if deep trade agreements such as TPP create new challenges. As the new World Bank Group research suggests, governments can inform and educate potential exporters on best practices in food safety and foreign product regulations. They can also support producer associations. The knowledge acquired from one exporter can be beneficial for other producers hoping to export.
Investment in trade facilitation is also necessary. Well-equipped testing facilities that allow exporters to verify that their products are compliant with foreign regulations, as well as the promotion of foreign accreditations, can have an important impact on the success of an agriculture-focused development strategy.