45154 Trade Issue Brief WORLD BANK, WASHINGTON, DC July 2008 Benjamin J. Taylor and John S. Wilsoni Harmonized International Standards Do Matter to Developing Country Exportsii Standards and technical regulations are an increasingly prominent part of the international trade policy debate. As many of the least-developed countries have duty-free access to major developed-country markets, the trade effects of non-tariff barriers have assumed greater importance. Recent analysis has focused on how standards and regulations affect trade costs and export prospects for developing country firms exporting into developed markets. In short, new work indicates that standards harmonized to international ones have a less negative effect on developing country exports than do non-harmonized or regionally harmonized standards. Chen, Wilson, and Otsuki (2004) find that testing procedures and lengthy inspection lower the exports of developing countries by 9 and 3 percent, respectively, and that standards reduce the likelihood of exporting to more than three markets by 7 percent. In a study on the effects of mutual recognition agreements (MRAs) for testing procedures and harmonization initiatives, Baller (2007) finds that MRAs are more effective in promoting developing country exports and that regionally harmonized standards have little to no benefit for developing country firms. Finally, Czubala, Shepherd, and Wilson (2007) find that internationally harmonized standards exert less of an impact on African exports than non-harmonized standards, but that the share of such standards in certain developed markets has fallen in recent years. Together, these studies demonstrate the effects standards have on both the volume of exports from firms and the number of firms engaged in exporting. Standards, Costs, and Export Propensity 25 According to the World Bank's Technical Barriers to 20 Mean Trade Database, developing country firms face a much 15 Std. Dev. higher cost-to-sales ratio than developed-country firms 10 do when investing in technical requirement 5 compliance. Firms based in Sub-Saharan Africa, for 0 example, face an average cost that represents 7.65 r percent of sales, with a range extending from 0.01 C SSA Eu LA ME ia As percent to 124 percent. According to CSW (2007), this E. S. variation is largely due to differences in firm size and productivity differences--with the smallest and least productive firms feeling the largest impacts. In support of this view, CWO (2004) find that firms for which testing procedures have affected their ability to export have an export share that is almost 9 percentage CHART 1: AVERAGE COSTS TO COMPLY points lower than that of other firms. Similarly, firms WITH TECHNICAL REQUIREMENTS (% OF that face "information inquiry difficulty" in one or FIRM SALES BY REGION) more of their major destination markets export 18 percent less of their total sales than other firms do. Interestingly, CWO (2004) find that firms that are completely domestically owned are much more affected by testing procedures and report more instances of difficulty in obtaining information on In light of these effects, Baller (2007) suggests that technical requirements. MRAs could be a supportive policy instrument in encouraging market diversification of export firms by In terms of the export market diversification of lowering fixed costs. Since MRAs for testing developing country firms, CWO (2004) find that the procedures only apply to the export sector, their presence of standards and "information inquiry enforcement would be less costly than the enforcement difficulty" are again the most statistically significant of a certain harmonized standard across an entire determinants. This is likely due to the fact that sector. However, developing countries must first build compliance with different standards across markets an accreditation infrastructure before industrialized translates into fixed market-entry costs, which, in turn, countries will find it in their interest to negotiate such lead to diseconomies of scale. This would explain why agreements. larger firms in the sample tend to export to more countries than smaller firms; total employment was the What Can Developed Countries Do to Help? most statistically significant positive determinant with respect to export market diversification. In light of the fact that attempts to integrate standards across developed markets do little to mitigate the The Best Solution ­ MRAs versus Harmonization disproportionate negative effects of standards on developing country exporters, CSW (2007) look to see Despite the fact that standards produce significant which policy options available to developed markets compliance costs for exporters, the trade policy have the least negative effects on developing-market dialogue has focused on how to mitigate the negative exporters. They construct a new database of European spillovers of legitimate product standards versus a Union product standards in order to identify standards reduction of standards, as most are not protectionist in that are aligned with International Organization for intent and serve to protect consumers against poor Standardization (ISO) standards (as a proxy for de product quality, health hazards, and/or other negative facto international standards). They then use a gravity externalities. Moreover, there is evidence that certain model to examine the impact EU standards have on standards increase and expand trade opportunities in African textiles and clothing exports. certain sectors. In their analysis, CSW (2007) find that non- Baller (2007) adds to the policy dialogue surrounding harmonized standards reduce African exports in these standards and developing country exporters in a study sectors, whereas standards harmonized to ISO that analyzes the effects of MRAs and harmonization standards are less trade restricting. Their results initiatives on bilateral trade flows. Her analysis of support the conclusion of Baller (2007) that standards more than 40,000 observations shows that MRAs have affect trade by raising both variable and fixed costs for a strong positive influence on both the export developing country exporters. However, by probability (the likelihood that a firm will export to a harmonizing their standards to de facto international given market) and trade volumes (the amount exported standards, developed countries can substantially by firms that already trade with a given market) for mitigate this cost burden. CSW (2007) therefore partner countries. However, she notes that few propose the international harmonization of standards as developing countries are partners to MRAs, as most an important complimentary policy in support of recent lack the institutional capacity to enforce such efforts to extend more generous and easily accessible agreements. preferences to the developing world. With respect to harmonization initiatives, Baller (2007) This finding is particularly noteworthy given that CSW finds that third-party developing countries do not seem (2007) also find that the share of internationally to benefit from the market integration effect brought harmonized EU standards consistently decreased from about by integration in other regions. By contrast, the year 1995 to the year 2003. The percentage of EU third-party OECD countries benefit immensely from harmonized standards in the clothing and fabrics harmonization in other regions; the effect on export sectors stood at 20 and 30 percent, respectively, as of diversification for OECD firms is particularly strong. 2003. Although movement across all sectors has been 2 small across the sample period, Shepherd (2007) finds that a 10 percent increase in the number of EU Chen, Maggie Xiaoyang, Tsune Otsuki, John S. Wilson. standards is associated with a 6 percent decrease in the 2004. "Do Standards Matter for Export Success?" Policy range of product varieties exported to the European Research Working Paper 3809, World Bank, Washington, Union by its trading partners. DC. Czubala, Witold, Ben Shepherd, and John S. Wilson. 2007. CHART 2: REASONS FOR NOT EXPORTING "Help or Hindrance? The Impact of Harmonized Standards (% OF SURVEYED FIRMS BY REGION) on African Exports." Policy Research Working Paper 4400, World Bank, Washington, DC. 100 80 Maskus, Keith E., Tsunehiro Otsuki, and John S. Wilson. Design Costs 60 2004. "The Cost of Compliance with Product Standards for Firms in Developing Countries: An Econometric Study." 40 Testing/Cert. Policy Research Working Paper 3590, World Bank, 20 Costs Washington, DC. 0 A C Shepherd, Ben. 2007. "Product Standards, Harmonization, SS rope LA ME and Trade: Evidence from the Extensive Margin." Policy Eu S. Asia E. Research Working Paper 4390, World Bank, Washington, DC. Conclusion World Trade Organization. 2006. Fourth Triennial Review of the Operation and Implementation of the Agreement on Technical Barriers to Trade under Article 15.4." Committee The above findings suggest a number of considerations on Technical Barriers to Trade, November 14. for the efforts of exporting nations to address technical regulations imposed by importing countries. Yue, Chengya, John Beghin, and Helen H. Jensen. 2006. Negotiating on testing procedures toward mutual "Tariff Equivalent of Technical Barriers to Trade with recognition with importing countries could stimulate Imperfect Substitution and Trade Costs." American exports. Building the capacity of exporters to meet Agricultural Economics Association. November. standards could help firms diversify their export markets and improve the stability of their sales given i The findings, interpretations, and conclusions expressed in the uncertainty in international markets. Facilitating this paper are entirely those of the authors. They do not information exchange with importing developed necessarily represent the view of the World Bank, its economies on standards and technical regulations Executive Directors, or the countries they represent. could also stimulate the propensity of firms to export. ii With respect to developed countries, efforts should be This brief draws on research under a project on Trade Facilitation and Economic Development at the World Bank, made to harmonize standards to international norms with support of the U.K. Department for International whenever possible in order to mitigate the negative Development. It is also aligned with work under the Multi- effects imposed on developing country exporters. Donor Trust Fund Trade Project on "Trade Costs and Building on the framework of the World Trade Facilitation." Organization's Agreement on Technical Barriers to . Trade to support further harmonization should also be explored. Further Reading Baller, Silja. 2007. "Trade Effects of Regional Standards Liberalization." Policy Research Working Paper 4124, World Bank, Washington, DC. 3