Original publication: May 2018
Council for Agricultural Research and Economics, Centro di  Ricerca Politiche e Bio-economia (CREA-PB): Annalisa Zezza, Federica De Maria, Maria Rosaria Pupo D’Andrea
Center for European Policy Studies (CEPS): Jo Swinnen, Giulia Meloni, Senne Vandevelde
Department of Environmental Science and Policy, University of Milan: Alessandro Olper, Daniele Curzi, Valentina Raimondi
INRA, UMR MOISA: Sophie Droguè
Short link to this post: http://bit.ly/2KngqhY
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Agricultural trade: assessing reciprocity of standards

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Over the past decades, the reduction in tariffs through multilateral and regional trade agreements has provided greater opportunities for the expansion of global agri-food trade. However, in order to trade globally and access markets for high-value products, food operators must meet international production standards.

The use of international standards worldwide helps make trade more transparent and efficient. It also contributes to public health, environmental protection or animal welfare. Standards ruled by multilateral bodies have an increasing impact on trade in agricultural and food products. This includes the Sanitary and Phytosanitary Measures (SPS agreement) and on Technical Barriers to Trade (TBT agreement) under the WTO, the Codex Alimentarius Commission of the FAO, and others.

However, there is a wide variety of standards implemented outside these multilateral bodies. EU standards increasingly regulate food safety, animal and plant health, animal welfare and environment protection.  Standards are also part of the Common Agricultural Policy (CAP) which requires compliance with several of these standards (referred to as ‘management requirements’ and ‘good agricultural and environmental practices’) to receive direct payments. Food safety requirements (concerning traceability, contamination prevention, feed additives, hygiene requirements, hormones treatments, etc.) play a crucial role inside both in the CAP and in the EU Food Law, to ensure food quality and safety “from farm to fork“. EU food regulations lay down requirements for horizontal issues (General Food Law, official controls, etc.) as well as vertical (category-specific) requirements (food additives, packaging materials, etc.).

In addition to standards set by public institutions, a variety of private entities use voluntary standards, which are an important part of the international trade framework. However, mandatory standards remain the predominant form of European governance over food safety, animal welfare and environment protection – and the focus of this report.

Outside the EU, many public food standards exist both in their legal regulation and their enforcement that are different from the EU standards. These differences create problems for trade and can also be used to affect competitive advantage of farmers or the food industries. “Regulatory fragmentation” may thus imply significant additional costs for producers that have to modify their products and/or undergo extra conformity assessments (possibly for no added food safety or other public benefits). These costs may be particularly significant for farmers and agri-food SMEs, and constitute an insurmountable market access barrier.

In a context of declining tariff barriers in global markets, and where the social concerns and expectations often differ between countries, standards and regulatory tools have become elements of strong debate in international trade negotiations (at multilateral, regional or bilateral level). Differences in standards may be used to affect trade. Countries with low standards may be able to produce at lower costs, giving them a potential competitive advantage vis-à-vis EU farmers who face extra costs when complying with the European legislation. On the other hand, countries may use regulatory differences as a mechanism to protect domestic markets against imports.  Some studies have argued that this protectionist use of standards has increased in recent years as trade agreements have constrained the use of import tariffs and quotes, the traditional mechanisms of protection.

However, as the role of standards has grown, reciprocity of product standards and product procedures have become increasingly important aspects of EU trade agreements. Most EU free trade agreements in the past did not have the purpose to create conditions analogous to those of the internal market. In the past trade agreements point essentially to multilateral provisions and were far from symmetric. In addition, animal welfare and environmental standards are not usually part of the ‘mutual recognition agreements’ (MRAs) and some sensitive agricultural products are frequently excluded from trade agreements.  Trade agreements can also be achieved by applying the mutual recognition principle (or‘ equivalency’ approach) on food production standards.

The EU is the world’s biggest trading bloc and has the largest numbers of Free Trade Agreements (FTAs) in the world. In its approach to standards in new trade agreements, the EU has tried to achieve two objectives.  On the one hand it follows European trade policy wants to contribute to the liberalization of world trade by lowering customs and trade barriers (as in Article 206 TFEU).  On the other hand it wants to guarantee European consumers standards regarding food safety, animal welfare, environmental protection and minimum social standards – and thus to prevent a race-to-the-bottom on standards.

In 2015, the European Commission set out a new trade strategy for the European Union through a Communication known as “Trade for all“. The strategy wants to make sure that as many people as possible (consumers, workers, SMEs and citizens in general) have access to the benefits of trade.  The “Trade for all” strategy also implies guaranteeing EU standards on consumer, environmental and social protection. Part of this is providing consumer confidence in the safety of the food products they buy and how food products are made (e.g. fair working conditions and without harming the environment or animal welfare). This new trade strategy envisages reciprocal and effective opening of trade, while also enhancing global governance on issues like food safety, public health, environmental protection and animal welfare.

Objectives of the Study

The objectives of the study are to provide qualitative and quantitative assessments on the application of the reciprocity principle of standards in the EU agri-food trade and inform Members of European Parliament of any potential threats to both competition and consumer protection from an unequal application of the food production standards.

In pursuing this objective, the report documents the growth and extent of standardisation in EU agri-food trade and analyses the major drivers of food standards and their implementation at the global level. The study combines a thorough review of the existing literature and available datasets with new analyses of specific important aspects of standards and EU agri-food trade, in particular relating to food safety, animal and plant health, animal welfare and environment protection. An important issue is our analysis of the application of the reciprocity principle in food standards, which is analysed through a combination of data analysis and specific case studies.

Key Findings

Agri-food production and trade are increasingly regulated through stringent standards on quality, safety, environmental, and ethical aspects. These standards are imposed by governments (public standards) but also by private companies and third parties (such as NGOs) and have spread geographically through trade and foreign direct investments (FDI). Interestingly, while the use of standards has been criticized for hampering trade, the emergence and spread of standards across the world has coincided with the growth of global trade in agricultural products. Moreover, the growth has been the most pronounced for those products where standards are most important, such as fruits, vegetables, seafood, meat and dairy products.

Standards have also transformed the structure and the organization of global and local value chains. Compliance with increasingly complex and stringent food standards require tighter vertical coordination within value chains. It may also have implications for the position and investment of farms in the value chains, competition at various stages in the value chain, and the welfare of farmers and consumers.

Standards almost always affect trade, but the impact can be positive or negative depending on the nature of the standard, the product, the (international) markets and institutions, etc. Standards can enhance trade and welfare by reducing asymmetric information (eg by guaranteeing certain safety and quality attributes), by reducing externalities (e.g. guaranteeing the absence or limits of undesirable environmental or social externalities), by reducing transaction costs in trade, etc.  All these effects of standards will typically enhance trade and welfare. However, standards can also be used to protect domestic producers against imports, especially when traditional protectionist instruments such as tariffs have been reduced as a consequence of trade agreements and agricultural policy reforms.

It is difficult often to disentangle between both effects, and, not surprisingly, vested interests have an incentive to distort information on the impacts. This makes the conceptual analysis and empirical studies on the impact of standards complex, and makes it difficult to identify the “optimal standard” from a social welfare perspective. It is also likely that the “optimal standard” may differ between countries, due to differences in economic development, comparative advantage, consumer preferences, institutions and infrastructure, etc.  These differences add another layer of complexity in the discussions on the costs and benefits, and therefore the desirability of harmonization of standards.

International harmonization and coordination of standards has become ever more pertinent in recent years as agri-food trade has continued to grow and it is increasingly governed by a wide variety of standards.  Yet it should be noted that if differences in standards between countries or trading blocs are large, harmonization and regulatory rapprochement of standards does not necessarily only have benefits. Complete harmonization can be costly in terms of deviating from a country’s social optimum.

Historically, the WTO has played a pivotal role in working towards international coordination of regulations and standards. Yet, despite major advances in the development of global standards and common conformity assessment under the institutions recognized in the WTO international trade rules on standards and regulations (TBT and SPS agreements), domestic and import regulations continue to differ from country to country.

Moreover, there are growing complaints about the obstacles that these standards and their implementation pose for trade increase, as reflected in the continuously growing number of “specific trade concerns” (STCs) that WTO members submit.

The EU received the highest number of official complaints (STCs) – about 20% of the total STCs are about EU policies. The STC issues raised by the EU often concern a criticism towards import length and lack of transparency in bureaucratic procedures in many trade partners, mainly LDCs.

At the same time, the EU has submitted the largest number of official complaints – about 20% of total number of STCs was submitted by the EU about its trading partners’ policies. The United States and China are also among the top 4 of countries submitting and receiving STCs.  Other active countries include Brazil, Mexico, Canada and Australia. Small developing countries are much less active, presumably because of the high (political or economic) costs of submitted such STCs.

Despite the growing number of STCs, there are many areas of trade concerns where substantial progress in harmonization and/or mutual recognition is made. For example, more than half of the issues raised by the EU have been positively solved in a reasonable time, showing the positive impact of increased collaboration between countries on specific issues.

Our case studies also document (a) progress in harmonization and in removal of trade-constraining practices, as well as (b) continued (unnecessary) problems of standards and their implementation for trade. Because of the difficulty and complexity of identifying general effects (which are likely to depend on specific standards, countries, products, market conditions etc.), it is important to focus in detail on a series of case studies. Our report provides evidence on progress and problems in regulatory rapprochement of standards, either in the form of harmonization (as, for example, in the case of MRLs) or in the form of mutual recognition (as, for example, in the case of GIs) for the EU and its trading partners.

Some specific areas of progress (in harmonization and removal of trade-constraining practices), and of continued problems of standards and their implementation for trade are:

Procedures: The case studies on Mexico, Philippines and Brazil are examples of how STCs by the EU have ultimately resulted in changes and enhanced trade. Bilateral negotiations, reciprocal knowledge and technical support from the EU helped in making progress. Further progress requires greater efforts in scientific cooperation, collaboration between risk assessment bodies, harmonization of official controls, improved traceability and improvement of early warning systems for emerging hazards.

MLRs and zero tolerance: MRLs can act like unintended trade barriers due to misaligned regulatory systems. For example, the EU (and aligned countries) fixes the MLR at a default level of 0.01 while the US and aligned countries require zero tolerance. Harmonizing MLR for these substances would enhance the degree of harmonization by a great extent, reducing transaction costs for suppliers without jeopardizing food safety.

Regionalization: The lack of implementation of the regionalization principle affects trade in large countries as the EU and the US when a sanitary problem occurs in these countries but is confined to a specific region. The regionalization principle is only applied by a relatively small number of WTO members but it features in many disputes and STCs on animal zoonosis and fruits and vegetables.  In countries where the EU is not considered as a single entity (as illustrated in our case studies about pig exports to Mexico and fruit and vegetables exports to Brazil), the burden of negotiations and documentation fall upon single EU member states.

In recent years Regional Trade Agreements (RTAs) are replacing multilateral agreements as the main arena for major trade negotiations, and also as the main area for discussions on potential harmonization of standards. This is particularly important for the EU as the EU has been at the forefront of this evolution with the largest number of FTAs in the world. These RTAs can serve as a laboratory or stepping stone integration of specific standards in global trade agreements.

The integration of Geographical Indications (GIs) in recent EU trade agreements with South Korea and in the CETA with Canada are examples of the integration of standards in new bilateral trade agreements. They represent milestones regarding the inclusion of GIs and the increased protection of GIs in international trade agreements. However, achieving more protection for EU GIs in future (bilateral) trade agreements may require additional EU market access concessions in other areas.

Remaining Issues and Actions for the Future

Although significant progress was made on some aspects of harmonization of standards and more than half of the STCs were solved in a reasonable time, several problems remain. Some key problem areas and potential ways to address these that came out of our analysis are the following.

Some issues are very difficult to solve, especially when there is no agreement on the scientific evidence of potential impacts and the process to deal with risk. This is especially the case in the areas of plant health, animal health and food safety.  Examples are the cases of citrus black spot, GMOs, hormones in beef, antibiotics use in animal production.  There could be an important role of the scientific community to avoid unnecessary conflicts by providing the latest evidence with regard to new agricultural and food technologies. However, as the GMO and beef hormone cases are documenting, more scientific evidence does not necessarily lead to changes in regulations. All developed countries attempt a high level of food safety for consumer protection, but the perception of risk and how to deal with this may be different to the extent that they are very difficult to harmonize, such as e.g. in the EU’s precautionary approach versus the countries like the US who use a different regulatory model.

Conflict resolution could result from better collaboration between risk assessment bodies, harmonization of official controls, improved traceability and improvement of early warning systems for emerging hazards. International bodies are trying to stimulate this and to play an active role in this. Examples are the role of the International Olive Council (IOC) in olive standards; the OECD calculator, the OECD seed scheme, the Food Safety Cooperation Forum, the FAO Committee on Commodity Problems, etc.

Modernization of the Codex Alimentarius is also needed through a harmonization in methodologies and data. This modernization of the Codex could also be used to assist farmers and other stakeholders in developing countries’ supply chains to implement the necessary changes in order to meet EU standards. The EU can play a role by contributing to the institutional capacity and technical knowledge in developing countries with regard to standard setting, implementation and enforcement.

Link to the full study: http://bit.ly/617-477

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