It is July 2012 and cattle farmers in Nicaragua are worried because Guatemala has enacted a series of laws that restrict beef trade. These so-called “non-tariff measures,” or NTMs, require that beef crossing the Guatemalan border meet stricter safety and labeling standards. The Guatemalan government argues that these measures protect the country’s consumers from health hazards. But the Nicaraguan farmers say they hurt business and unfairly shelter Guatemalan producers from competition.
This is just one example of the debates that arise in the food industry in Central America and elsewhere. While it is laudable and good policy for a government to use legitimate, non-trade related legislation to protect its citizens from certain risks, governments can also use these measures to protect domestic industry. Regardless of their intention, in an increasingly globalized, competitive world, non-tariff measures increase the cost of doing business, impact prices, affect the competitiveness of the private sector, and impact the overall welfare of the economy.
In a recent study, I looked into how non-tariff measures affect regional integration in Central-America. My emphasis was on the role of sanitary and phytosanitary (SPS) measures, because they are applied to agricultural products and processed food, which drives intraregional trade. The study, “Non-tariff Measures in Central America, Incidence, Price Effects, and Consumers’ Welfare,” examines the prevalence of NTMs in the region and examines their impact on import prices. I found that these measures are unusually widespread in Central America. Within the region, Guatemala, Nicaragua, and Honduras use them most frequently; Costa Rica has the lowest reported application.
There is some evidence that non-tariff measures have replaced the more straightforward import tariffs. The 2012 World Trade Report, for example, shows that NTMs now restrict trade more than tariffs do. In Central America, non-tariff measures are creating obstacles that hinder effective trade integration, despite the existence of the CAFTA-DR trade agreement. The issue is sometimes not about the measure itself, but about the way it is applied. If a measure is applied in an inefficient or confusing manner, that process can increase the cost of compliance or the clearance time, which delays the product’s entrance into the market.
These measures can have unintended negative consequences for consumers. One major impact is on food prices: Our study estimates that SPS measures—such as inspection requirements or labeling standards for meats and grains – increase import prices in Central America by approximately 30 percent, on average.
This is because firms must expend time and money to comply with any measures that affect their products. In El Salvador, for example, the entry of foods and drinks into the sanitary registry – a process that verifies that all the products meet the country’s SPS standards – requires between 48 hours (for low-risk goods) and 20 days (for goods that require laboratory testing). The company must then spend two to four weeks preparing a product file. They must also pay between 250 and 450 US dollars per item registration. When companies are faced with this type of requirement, some – especially if they are small – abandon the effort altogether. Others simply pass part of the cost on to the consumer. In Guatemala, we estimate that such measures increase the price of meat by 68.4 percent.
While some NTMs are effective policy tools to achieve non-trade objectives, such as the protection of human, animal and plant health, the imprudent use of these measures can hurt some of the world’s poorest consumers. In Central America, it is essential that countries work together to simplify key non-tariff measures. This effort could have a tremendous impact on national and regional competitiveness.
In the study, we make specific suggestions for lessening the negative impacts of NTMs on the regional economy. In particular, the manner in which the countries’ sanitary registries work is hindrance to deeper regional integration. The problem is that while there is mutual recognition of registries between countries, all exporters must produce paperwork for each individual country they want to enter. So, for example, if a Nicaraguan milk producer has registered her yogurt in Guatemala, when she goes to export it to Costa Rica, she must provide all the materials again. A solution that could make great strides in this arena is the formation of a regional, electronic database that centralizes documentation about the credentials that each firm submits to meet the sanitary registration requirements. This would lessen the time and cost burden on exporters, who now have to gather all the documentation each time they apply to a sanitary registry.
Support for the creation of such a database and work towards a regional information portal on non-tariff measures – similar to the one in place for South America through ALADI – would help exporters and importers better navigate the regulations. This would help Central American governments remedy imbalances that affect final food prices. And the reduction of food prices would be a big step in helping citizens in a region that has long struggled to overcome poverty and inequality.
For more information on non-tariff measures in Central America, click here.