42720 TRADE ISSUES IN EAST ASIA January 2008 OVERCOMING TRADE BARRIERS FROM STANDARDS AND TECHNICAL REGULATIONS POLICY RESEARCH REPORT EAST ASIA AND PACIFIC REGION POVERTY REDUCTION AND ECONOMIC MANAGEMENT THE WORLD BANK ACKNOWLEDGEMENTS This report was prepared by Mona Haddad (Task Team Leader, EASPR) based on contributions from Titik Anas (CSIS Jakarta, Indonesia), John Lawrence Avila (University of Asia and the Pacific, Philippines), Silja Baller (EASPR), Kakada Dourng (Economic Institute of Cambodia), Robert Kirk (The Services Group Inc., USA), George Manzano (University of Asia and the Pacific, Philippines), Jacques Pelkmans (College of Europe, Bruges, Belgium), Thiphaphone Phetmany (Enterprise and Development Consultants Co. Ltd, Laos), Apichart Prasert (Fiscal Policy Research Institute, Bangkok, Thailand), Luz Julieta Rio (Enterprise and Development Consultants Co. Ltd, Laos), Hach Sok (Economic Institute of Cambodia), Dang Nhu Van (Institute of Economics, Hanoi, Vietnam), and Yang Zerui (CNCPEC, CIIS, Beijing, China). Special thanks go to John Wilson (DECRG) and Michael Jensen (PRMTR) for reviewing the report, as well as Alain Khaiat (Seers Consulting) and Le Chau Giang (formerly ASEAN Secretariat) for their guidance with parts of the report. ABBREVIATIONS ACC ASEAN Cosmetics Committee ISO International Standards Organization ACCSQ ASEAN Consultative Committee on Standards and Quality ITU International Telecommunications Union ACD ASEAN Cosmetics Directive KAN National Accreditation Committee (Komite Akreditasi Nasional) AHCRS ASEAN Harmonized Cosmetics Regulatory Scheme LACF Low-Acid Canned Food APEC Asia Pacific Economic Cooperation MAFF Ministry of Agriculture, Forestry and Fisheries APLAC Asia Pacific Laboratory Accreditation Cooperation MIME Ministry of Industry, Mines and Energy, Cambodia APLMF Asia-Pacific Legal Metrology Forum MOC Ministry of Commerce, Cambodia APMP Asia-Pacific Metrology Program MOH Ministry of Health, Cambodia ASEAN Association of South-East Asian Nations MRA Mutual Recognition Agreement ASEM Asia Europe Meeting MSDS Material Safety Data Sheet ASQIQ General Administration of Supervision, Quality Inspection and Quarantine, China NAFIQAVED Certification Body under Ministry of Fisheries ASTM American Society for Testing and Materials OECD Organization for Economic Cooperation and Development BOA Bureau of Accreditation, Vietnam OEM Original Equipment Manufacturing BPS Bureau of Product Standards, Philippines PASC Pacific Area Standards Congress BSI BSI British Standards, UK National Standards Body PIF Product Information File BSN National Standards Body, Indonesia (Badan Standardisasi Nasional) PTB Physikalisch Technische Bundesanstalt, Germany CAMCONTROL Cambodia Import Export Inspection and Fraud Repression Department RASFF Rapid Alert System for Food and Feed CEN European Committee for Standardization REACH Registration, Evaluation, and Authorization of Chemicals CENELEC European Committee for Electrotechnical Standardization Administration of the People's Standardization SAC Republic of China CLMV Cambodia, Laos, Myanmar, Vietnam SAC Singapore Accreditation Council CNCA Certification and Accreditation Administration of APEC Sub-Committee on Standards and China SCSC Conformance CODEX Codex Alimentarius (Collection of International Food Standards) SDoC Suppliers' Declaration of Conformity EMC Electromagnetic Compatibility SEOM ASEAN Senior Economic Officials Meeting ETSI European Telecommunications Standards Safety, Health, Environment and Consumer Institute SHEC Protection EU European Union SPS Sanitary and Phytosanitary FDA Food and Drug Administration STAMEQ Directory of Standards and Quality, Vietnam FTA Free Trade Agreement STEA Science Technology and Environment Agency, Laos GMP Good Manufacturing Practice TBT Technical Barriers to Trade HACCP Hazard Analysis and Critical Control Points TCVNs Vietnamese Standards ICT TISI Thailand Industrial Standards Institute IEC International Electro-technical Commission TRAINS Trade Analysis and Information System IFRA International Fragrance Association UNCTAD United Nations Conference on Trade and Development ILAC International Laboratory Accreditation Cooperation VFA Certification Body under Ministry of Health IOLM International Organization of Legal Metrology VMI Vietnam Metrology Institute IRR Import Refusal Report WTO World Trade Organization ISC Department of Industrial Standards of Cambodia TABLE OF CONTENTS Executive Summary ...........................................................................................................................i 1. Standards, Technical Regulations and Compliance ..................................................................1 1. What are Standards?...........................................................................................................1 2. Infrastructure for Compliance with National or Foreign Standards...................................2 3. The Role of the WTO.........................................................................................................3 4. Facilitating Trade in the Presence of Technical Regulations .............................................4 2. Technical Regulations and Standards Infrastructure in East Asia .........................................7 1. WTO Agreements and International Standards..................................................................7 2. Cambodia ...........................................................................................................................8 3. Laos....................................................................................................................................9 4. Vietnam ............................................................................................................................10 5. Indonesia ..........................................................................................................................11 6. Philippines........................................................................................................................11 7. Thailand............................................................................................................................12 8. China ................................................................................................................................12 3. Complying with Standards Abroad...........................................................................................13 1. Complying with Standards in Developed Countries ........................................................13 2. Voices from the Private Sector in East Asian Countries..................................................16 4. Regional Approaches to Standards in East Asia ......................................................................19 1. The ASEAN Approach.....................................................................................................19 2. Standards Cooperation in the ASEAN-China FTA..........................................................24 3. The APEC Approach........................................................................................................24 5. Case Study: Regulatory Harmonization in the ASEAN Cosmetics Sector ............................27 1. Elements of the ASEAN Cosmetics Directive .................................................................27 2. The AHCRS Process and Implementation .......................................................................31 6. Removing Technical Barriers: EU Lessons for East-Asia?.....................................................33 1. Tackling Technical Barriers that Fall Under a Derogation ..............................................33 2. European Standardization.................................................................................................40 3. Possible Lessons for East Asian Economic Integration?..................................................41 References ........................................................................................................................................45 EXECUTIVE SUMMARY `The real 21st Century trade issues are standards and rules in areas such as safety, health or consumer protection', (Pascal Lamy, EU Trade Commissioner, Financial Times September 9, 2004 on the launch of trade talks between the EU and ASEAN). The lowering of tariffs has shifted attention towards non-tariff measures that impede market access. One of the most important non-tariff measures are regulations and standards aimed at securing the safety and or quality of products, labeling requirements and protection of the environment. Standards are now recognized as a `trade issue' since they determine market access. What Are Standards? Given that standards and technical regulations are set to achieve desirable objectives such as protecting health, safety and the environment, simply removing them is neither desirable nor responsible public policy. However, since these measures have the potential to be used as non- tariff barriers to trade, multilateral and regional trade agreements can be used as tools to achieve objectives to address use of technical regulations as protectionist measures. The WTO Agreements on Technical Barriers to Trade (TBT) and the Application of Sanitary and Phyto- Sanitary Measures (SPS Agreement) set forth general provisions at the multilateral level on use of standards as non-tariff barriers to trade. These were agreed during the Uruguay Round and built on the obligations of the original Tokyo Round Standards code. Since the establishment of the WTO in 1995 more than a quarter of all the WTO Dispute Settlement cases referenced standards- related provisions. The use of standards by governments to meet public health and safety objectives and by the private sector to meet market-driven consumer and industrial objectives is important for economic development. Standards provide information on the quality and reliability of a product that may not be readily observable and thus reduce uncertainty and contribute to increased trade. The use of internationally accepted standards creates an incentive for domestic firms to improve the quality and reliability of their products and enables firms to integrate into global production chains while also providing an important mechanism for technology transfer. Following the establishment of the WTO, trade officials have spent more time ensuring that standards and technical regulations do not constitute unnecessary obstacles to trade. There has also been an increased recognition of the potential trade distorting effects of technical regulations. Trade distortions may occur through applying the regulations in an arbitrary or discriminatory manner or when the importing country requires testing and certification requirements that are cumbersome or expensive to comply with, or simply because the cost of compliance is asymmetric between domestic and foreign firms. Standards have become a key element in facilitating trade within and between countries since in order for a good to be traded it must comply with the agreed standard. This applies to both mandatory standards required by governments and voluntary standards set by industry association and other non-state actors. Standards Issues in East Asia Dried fruit spiked with industrial chemicals, mercury-laced creams, toothpaste containing anti- freeze ­ these are only some examples of what consumers may be faced with if a system of product standards is not fully functioning. In order to meet product requirements in export i destinations and ensure the safety and health of their consumers as well as a smoother functioning of their markets, East Asian governments have started to spend increasing amounts of their budgets on standards systems. The ASEAN economies have identified divergent standards, technical regulations and standards infrastructure as a potential bottleneck to increased integration since they increase the costs of intra-regional trade. Since being established in 1967 by the original ASEAN-5--Indonesia, Malaysia, the Philippines, Singapore and Thailand--ASEAN has expanded in both size and scope and now includes Brunei, Cambodia, Laos, Myanmar, and Vietnam. The ASEAN-10 is committed to completing the ASEAN Free Trade Area by 2010 and the ASEAN Economic Community (AEC) by 2015. Furthermore, ASEAN recently concluded a FTA with China and is negotiating further FTAs with Japan and Korea. These FTA commitments fall short of establishing a full common market and allow for ASEAN Member States to agree to regulatory compatibility rather than harmonization of standards. The quality infrastructure and system of technical regulations vary substantially between the different countries in East Asia ranging from those without accreditation agencies that are internationally recognized to economies with no accreditation bodies and a weak quality infrastructure. ASEAN Members are committed to developing a regional approach to standards and conformity assessment and through the ASEAN Consultative Committee on Standards and Quality (ASCCSQ) are pursuing a policy of developing and implementing Mutual Recognition Agreements (MRA) for the conformity assessment of specific products and for negotiating the unilateral adoption of international standards. ASEAN is investing significant resources in the pursuit of an ambitious agenda for harmonizing technical regulations and standards in selected sectors and for agreeing MRAs across all the priority sectors. International recognition and mutual recognition agreements are based on an acceptance of equivalence between the contracting parties and tend not to work when approaches to quality and standards range widely. Many developing and least developed countries experience difficulties in implementing MRAs. Furthermore, the absence of effective product liability legislation is frequently used to justify mandatory pre-market testing. Recognizing the potential of diverging national technical regulations to hinder trade flows, ASEAN has taken steps to eliminate such barriers in the sectors it considers important for economic integration. The sector that will be the first to have a fully harmonized regulatory regime across ASEAN countries will be cosmetics, starting in January 2008. The new regulation primarily involves broadly defined common safety requirements and a new approach to risk management, which does away with the requirement of pre-market approval for cosmetics products and introduces instead a system of post-market surveillance. In doing so, the new directive shifts to a great extent the responsibility of ensuring safety from the government to the private sector. Lessons from the EU and Other Regions The EU and other regions experiences may be useful for ASEAN's integration efforts. In the EU, derogations from the principle of free movement of goods are possible in cases where member states deem it necessary to put in place technical regulations that protect consumer safety and health or the environment. Over several decades, the EU system to deal with such derogations evolved from an extremely rigid approach to regulatory harmonization, where every characteristic and sometimes production method was specified in a directive (the "old approach"), to a system ii where only overall regulatory objectives are negotiated and essential requirements are referenced in EU harmonized directives. This has been complemented with a shift away from government involvement in pre-market approval to post-market surveillance in certain sectors, allowing new products to enter the market based solely on a "Suppliers' Declaration of Conformity" with a given regulation. In the United States, the voluntary standards system is private sector-led and coordinated by various private organizations, including the American National Standards Institute and other sector-specific groups, such as the American Society for Testing and Materials, among others. The U.S. also has in place mechanisms to rely on private sector developed standards for adoption and reference in mandatory technical regulations. iii CHAPTER 1: STANDARDS, TECHNICAL REGULATIONS, AND COMPLIANCE Countries impose mandatory standards (i.e. technical regulations) on products for safety, health, and other reasons for public good purposes and conditions in which the market fails to provide for such purposes. International standards are also developed which may be adopted or referenced in national technical regulations. A supporting infrastructure for regulations to ensure compliance, including for testing, accreditation, and enforcement is established at the national level. This is important for producers to meet national technical regulations and for exporters to meet the standards of their export market. A modern standards infrastructure is a key element in supporting a competitive business-enabling environment. Inevitably there is considerable variation among countries in their approach to regulation. To facilitate trade among countries with different standards, several mechanisms can be adopted including suppliers' declaration of conformity to mandatory technical regulations, and mutual recognition of conformity assessment requirements, for example. 1. What are Standards? Product standards come in two different guises: voluntary standards are documents defining certain product characteristics or production methods and are developed by independent standards bodies. Technical regulations on the other hand, are similar in their function, but are legal documents issued by a government, which are in all cases mandatory. They are often based on said standards developed by private national or international standards bodies. Standards or technical regulations are necessary in three types of situation: (1) where compatibility of inputs or among final products needs to be assured, as for example in the case of auto parts or fax machines; (2) where product quality cannot be immediately established by the consumer, as with a bike helmet or water; and (3) in situations where the production or consumption of goods has negative side effects on third parties; an example would be the negative effects on the environment of lead in petrol. In general, the market can be expected to generate optimal common standards in the first of the three cases and government intervention is hence unwarranted. Cases two and three, on the other hand, describe situations where standards are required in order to correct for market failure. Rather than being just technical specifications, these are minimum quality standards to guarantee the health and safety of the consumer or the protection of the environment. Government intervention is needed in these cases to guarantee a minimum level of safety (whereby in some cases firms will voluntarily set even higher standards in order to gain a reputation for quality). Once they become mandatory, these standards are known as technical regulations. Technical barriers to trade may raise prices of imports in a way that is equivalent to a tariff (and in some cases equivalent to a very high or even prohibitive tariff). Discriminatory country- specific standards and technical regulations can put foreign producers at a disadvantage compared to domestic firms by creating additional costs as exporters adjust their product and production 1 process in order to meet individual national standards. Moreover, firms which have to meet different standards for different markets will be unable to take advantage of economies of scale. Further costs arise from the requirement that producers prove conformity with a given standard or technical regulation. This requires laboratory facilities and testing equipment in the exporting country, and conformity assessment requirements could become prohibitive for exporters in developing countries even if their products may meet the foreign standard or technical regulation. The cost of conforming to standards may particularly affect small and medium size enterprises. Countries develop their own national standards but often adhere to or adopt de-facto international standards. Three major international bodies--the ISO (the International Standards Organization), the IEC (the International Electrotechnical Commission), and the International Telecommunications Union (ITU)--account for the majority of de-facto international standards and in aggregate they issue approximately 1000 new or revised standards annually. The standardizing bodies develop international standards through a lengthy consultation process-- ISO requires the approval of 75 percent of its members. While the IEC and ITU are sector- specific bodies, the scope of activity for ISO is open ended. Both the ISO and the IEC are private, nongovernmental organizations with membership drawn from the main national standardizing bodies from each member country (which can be either government or private). Internationally-agreed guides developed by the international standardizing bodies have provided the basis for the work and activities of the national standards bodies and the conformity assessment providers. 2. Infrastructure for Compliance with National or Foreign Standards The actual standard or technical regulation is only part of standards systems. In addition to an adopted set of national standards or technical regulations there are certification and accreditation institutions, the interplays of which are fairly complex (Figure 1 outlines components of a standards system): · In order to prove that a given standard or technical regulation has been satisfied, producers have to subject their product to testing. This can be done by the manufacturer internally, outsourced to other firms, or through government facilities. · If the test is successful they obtain a certificate showing that the product is indeed in conformity with the standard or regulation. · In turn, the testing facilities themselves have to be subject to oversight, so as to ensure accuracy of test results. This is done by accreditation bodies. · On a national level, this requires a reliable legal metrology institution which guarantees the accuracy of basic weights and measurements. Compliance with standards and technical regulations--including conformity assessment and accreditation elements--is important. Conformity assessment refers to the technical procedures such as testing, verification, inspection and certification, which seek to ascertain whether the product/service meets the national/international standards. Some of these steps are performed by firms or may be conducted by third party entities for firms. Laboratories that may conduct tests may also be assessed or audited to ensure they are operating in accordance with accepted guidelines--this is referred to as laboratory accreditation. Developing countries have recently started acceding to international accreditation bodies such as ILAC (International Laboratory Accreditation Cooperation) and APLAC (Asia Pacific Laboratory Accreditation Cooperation). 2 Figure 1: National Standards Infrastructure National International MSTQ value chain System IAF ILAC Accreditation ISO guides 62, 65, PAC APLAC etc ISO 9000, ISO 14000, HACCP, etc Certification Product Certification - products Applicable - processes to all products National Standards ISO CODEX Standardization and International Standards processes Testing, Analysis Testing ISO 17025 Intercomparisons Investigation Laboratories Proficiency tests ytilil ISO 17025 eab acrt Calibration of Equipment BIPM Metrology Reference Materials APMP Product - Calibration with - Reference Materials Certificate Source: Physikalisch Technische Bundesanstalt (PTB) Germany 3. The Role of the WTO The WTO addresses the use of product standards and technical regulations in several ways. Standards and technical regulations, as a potential source of discrimination, have always fallen under the scope of the most-favored nation and national treatment principles (Article I and III GATT). Article XXb GATT grants an exception to the extent that governments are allowed to impose discriminatory measures deemed "necessary to protect human, animal or plant life or health". The Standards Code (1979) and the Agreement on Technical Barriers to Trade (1995) were later negotiated to ensure that standards, technical regulations and related conformity assessment procedures do not become "an unnecessary obstacle to trade", encouraging governments and firms to negotiate mutual recognition agreements for testing procedures and to adhere to international standards to the greatest extent possible. The requirement to use international standards was made more stringent in the Agreement on Sanitary and Phyto-Sanitary measures which applies to matters of food safety and human, animal and plant health, allowing deviations from international standards for scientific reasons only. More specifically, the SPS Agreement covers "all measures whose purpose it is to protect: (i) human or animal health from food-borne risks; (ii) human health from animal- or plant-carried diseases; (iii) animals and plants from pests or diseases; whether or not these are technical requirements."1 The two agreements are mutually exclusive to the extent that the TBT Agreement covers technical regulations, standards and conformity assessment procedures in all cases except when these are imposed for sanitary or phyto-sanitary reasons. The WTO TBT Agreement requires that members' conformity assessment procedures do not discriminate between the treatment of imports and domestic products and encourages members to adopt international standards. The WTO also requires countries to establish notification enquiry points through which other Members are notified of new draft technical regulations on products promulgated by other WTO members. As part of the transparency criteria the SPS and TBT 1See http://www.wto.org/english/tratop_e/sps_e/spsund_e.htm (last accessed Oct.1, 2007) 3 Committees meet between 3-4 times each year to discuss issues relating to the operation of the Agreements. All Members are eligible to participate in the Committees. The multilateral Agreements on SPS and TBT provide for a binding mechanism of dispute settlement when a Member believes that a standard or conformity assessment procedures does not conform to the WTO disciplines. Since the establishment of the WTO, disputes related to SPS and TBT have been prominent and have cast a spotlight on the importance of standards and the standards infrastructure for trade and competitiveness. The multilateral framework represents the architecture governing the treatment of standards and technical regulations for all its members and implies that: · Where international standards exist, harmonization is encouraged; however, there is room to design less strict standards if this is appropriate for the level of development; · While countries are free to establish more strict standards if justified they must not discriminate; · The Agreements oblige countries not to discriminate against imports or between different suppliers of imports in the application of conformity assessment procedures and encourages these procedures to follow international norms. All countries should seek to meet the notification requirements of the Agreement procedures and maintain an Enquiry Point. · While the Agreements carry obligations concerning import measures they also create opportunities to facilitate exports. In order to benefit from the opportunities, countries need to examine whether their existing standards infrastructure optimizes government- business cooperation, active participation in WTO Committees and in dispute settlement. 4. Facilitating Trade in the Presence of Technical Regulations Trade barriers posed by technical regulations can be overcome in several ways. One step toward lowering technical barriers to trade from technical regulations would be a greater emphasis on private sector-led standards development as well as private sector responsibility in ensuring technical regulations are met (to different degrees, depending on the risk to consumers associated with a given product). Adoption of de-facto international standards and reference of these in national technical regulations can also serve to reduce technical barriers to imports and exports. The following outlines options for reducing technical barriers: Suppliers' Declaration of Conformity (SDoC). Giving more responsibility to the private sector in ensuring product safety, regulatory reform has included the introduction of Supplier's Declaration of Conformity. Under these schemes, the responsibility of proving that a product is in conformance with a technical regulation falls onto the producer. SDoCs can thereby replace product-by product pre-market approval by government agencies with a more risk-based system of post-market surveillance. This should help facilitate the introduction of new products. Mutual Recognition Agreements (MRAs). Countries have been concluding Mutual Recognition Agreements (MRAs) that recognize each others' conformity assessment results. In the presence of an MRA, products that are tested and certified before export can enter the importing country directly without having to undergo similar conformity assessment procedures in the importing country. Testing and certification can be done by third parties and independent laboratories either resident in the exporting country, or based in other countries. MRAs for test results do not require two trading partners to have comparable technical regulations per se--they only require the exporter to fulfill the technical regulation of the partner for the product they wish to export, 4 but not meet the same regulatory objectives for their own country. This approach avoids the costs of double testing and does not require any changes in national regulation. Harmonization: Harmonization of technical regulations between countries involves tedious product-by-product legislation, typically implemented through numerous and detailed directives. This approach requires considerably more regulatory effort than MRAs and is the most administratively burdensome. It was used by the EU until 1985 and was abandoned because the high technicality of the process was considerably slowing down progress towards harmonization on a product-by-product basis. Which institutional and policy option to choose? Many of the potential options for dealing with differentials in design and testing of standards across counties are sub-optimal because they require multiple testing and/or are simply not realistic given the current situation on the ground. Experience from the EU has shown than full harmonization is time consuming and does not obviate the problem of multiple testing. Mutually recognizing existing standards is not seen as practical as it is difficult for countries to agree that trading partners' standards are `equivalent'. Mutual recognition of testing and test results has the potential to make a significant impact as technical regulations become more general (e.g. children's toys should not contain lead) by focusing on the essential criteria since this places more of the regulatory burden on the testing and conformity assessment process. Moreover, there is the need to move toward reliance on de-facto international standards and take steps to remove government from unnecessary involvement in standards, testing, and certification procedures. Adoption of suppliers' declaration of conformity to technical regulations with post-market surveillance and monitoring of compliance and moving toward private sector led standards systems can help to reduce trade barriers, strengthen private sector competitiveness and product quality of imports and exports over time. 5 CHAPTER 2. TECHNICAL REGULATIONS AND STANDARDS INFRASTRUCTURE IN EAST ASIA Countries in East Asia have different levels of standards infrastructure in place, depending on their level of development. The use of technical regulations among East Asian countries is varied and does not seem to necessarily depend on a country's level of development. Among ASEAN countries, Thailand, Indonesia, and the Philippines have a large share of technical regulations compared to their overall non-tariff measures--as notified to the WTO by governments and compiled in the UNCTAD TRAINS database (Figure 2).2 China has the highest number of technical regulations, making up about 60% of its total non-tariff measures. Technical regulations in ASEAN countries are predominantly imposed in agriculture and food products, followed by pharmaceutical products (Figure 3). China also imposes technical regulations in these sectors, but has a significant amount of technical regulations in other sectors as well-- mainly electronics and machinery, iron and steel, fabrics of cotton and wool, rubber, leather, and paper products. 1. WTO Agreements and International Standards The original Members of ASEAN (Indonesia, Malaysia, Philippines, Singapore, Thailand) all complied with the WTO TBT and SPS Agreements--including submission of a statement of implementation and administration of the TBT and SPS Agreements, and the establishment of a national enquiry point for TBT and SPS--within one year of implementation. Similarly upon acceding to the WTO, China, Cambodia, and Vietnam were in compliance with the TBT and SPS Agreements (although they were given different implementation periods for compliance). China committed, as part of its accession agreement, that its regulatory authorities apply the same standards, technical regulations, conformity assessment procedures, fees, processing periods and complaint procedures for both imported and domestic goods. China agreed not to maintain duplicative conformity assessment procedures and impose requirements specifically on imported goods. Cambodia, Laos and Vietnam continue to seek to augment their national quality infrastructure in order to meet internationally-accepted standards. However, considerable institutional reform and substantive capacity building is required before their state-owned laboratories will be able to obtain international accreditation. Given the dearth of capacity within the public sector, the private sector should be allowed to perform an enhanced role. Indonesia, Thailand, Malaysia, Singapore, China, the Philippines and Vietnam are all full members of ISO, while Cambodia is a subscriber member and Laos has yet to join. 2 Many caveats are attached to the database, the most important being that it only records standards that were notified by the country which is imposing the standard--a method that could give rise to many gaps due to incomplete notification. In addition, the figures presented are only frequency measures (number of standards notifications divided by total number of HS codes) from which no direct inferences about the actual stringency of different standards regimes can be made. 7 Figure 2: Technical Regulations by Country Total Number of Non-Tariff Measures and No strong correlation between level of Share of Technical Regulations by Country development and number of technical regulations GDP per capita ($) 2000 4500 1800 Malaysia (2003) 4000 1600 3500 1400 1200 3000 1000 2500 800 Thailand(2003) 2000 600 400 1500 200 Phillippines(2001) 1000 China(2001) 0 Laos(2004) Indonesia (2003) 500 Vietnam(2004) Cambodia(2003) Cambodia China Indonesia Laos Malaysia Philippines Thailand Vietnam 0 0 200 400 600 800 1000 1200 technical regulations other total number of technical regulations Figure 3: Technical Regulations by Product Category Including China Excluding China 700 700 600 Vietnam 600 Vietnam Thailand Thailand 500 Philippines 500 Philippines Malaysia 400 Malaysia 400 Laos Laos Indonesia 300 300 Indonesia China Cambodia Cambodia 200 200 100 100 0 0 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 Source: UNCTAD TRAINS Note: latest available data: Cambodia: 2003, China: 2001, Indonesia: 2003, Laos: 2004, Malaysia: 2003, Philippines: 2001, Thailand: 2003, Vietnam: 2004 0 live animals, meat, fish, dairy, plants (edible and inedible) 1 cereal, seeds, oil, prepared foodstuffs 2 prepared foodstuffs, alcoholic and non-alcoholic beverages, tobacco, organic chemicals 3 chemicals, pharmaceuticals, cosmetics, fertilizers, explosives, plastics 4 Rubber, leather, paper and paperboard, books and newspapers, plywood and veneered panels 5 woven fabrics of wool, cotton, flax, synthetic fibers 6 fabric, textiles, footwear 7 iron and steel, base metal and metal articles, electronics and parts 8 Electronics, computers and parts, motor vehicles, tools, household appliances, machinery parts and equipment 9 Optics, clocks, arms & ammunition, toys, art 2. Cambodia Standard setting. The Department of Industrial Standards of Cambodia (ISC), established in 2002, forms part of the Ministry of Industry, Mines and Energy (MIME) and has the mandate for developing national standards, maintaining laboratories, operating conformity assessment schemes for products, materials and equipment for local consumption as well as export. The ISC operates as the WTO TBT enquiry point and acts as the notification authority. The ISC 8 recognizes that international standards should form the basis of national standards. By end-2005, ISC had published six National Standards and has drafted a further 14. It also adopted 40 International Electronic Commission (IEC) standards for electrical safety as National Standards. Under Cambodian legislation all products manufactured domestically should be registered with ISC. Certification and conformity assessments. There are no certification or inspection bodies operating in the voluntary sector; instead government agencies such as CAMCONTROL are undertaking inspection and testing, providing Government-to-Government certification. These are unlikely to be internationally accredited and CAMCONTROL for example reported that their certificates are not always accepted by importing countries. There is limited laboratory capacity within the private sector and the government owned laboratories suffer from a shortage of laboratory equipment and of trained technicians/laboratory assistants. The few operating private certification companies focus on garment exports--which account for over 90 percent of Cambodia's exports. Intertek Testing Services, for example, a private certification firm based in the UK, has established a laboratory testing service for textiles. Responsibility for the enforcement of SPS standards is spread across various Ministries. For food safety, three ministries are involved: (i) the Ministry of Industry, Mines and Energy (MIME) is responsible for the surveillance of food production; (ii) the Ministry of Health (MOH), Department of Drugs and Foods, is responsible for the inspection of restaurants and street vendors; and (iii) the Ministry of Commerce (MOC), department of CAMCONTROL, is involved in the inspection of imported and exported food and domestic market surveillance. For animal health, the Department of Animal Health and Production in the Ministry of Agriculture, Forestry and Fisheries (MAFF), is responsible for controlling the import and export of livestock at border checkpoints; it also inspects animal health as well as sanitary conditions of animal products, slaughterhouses and other animal processing factories. For plants, the Department of Agronomy and Agriculture Land Improvement in the Ministry of Agriculture, Forestry and Fisheries (MAFF), inspects plants and implements phyto-sanitary treatment for quarantined plant materials imported into, to be exported from or transiting through the territory of Cambodia. CAMCONTROL is responsible for safety and quality standards and the certification of imports and exports and it is also the WTO SPS enquiry point. Export inspection covers garments, agricultural products, rice, wood and processed food. Import inspection concentrates on food, agricultural chemicals, petroleum, textiles and garments. Domestic market surveillance concentrates on food safety. CAMCONTROL operates laboratories for goods and water microbiology, petroleum products and cereals but has no capacity for testing in other areas even though it has legal responsibility. Accreditation and recognition system. Cambodia does not have a national accreditation body that is a signatory to an international cooperation agreement such as ILAC or APLAC. Institutional laboratories are finding it difficult to become internationally accredited due to a lack of technical competence and facilities. Exporting firms therefore have to depend heavily on negotiations with importing countries and buyers. The lack of accreditation of domestic laboratories often also leads to tests being repeated in the importing country, whereby the exporter has to carry the extra costs. 3. Laos The Science, Technology and Environment Agency (STEA) is the central agency responsible for standardization activities for final products at the national level. Its tasks are to develop product 9 assessment and conformity schemes and issue certificates for local products. STEA is assisting companies in their quality control, which is often voluntary. Quality control is mandatory for food, drinks, and medicines and falls under the general responsibilities of the Committee for Food and Drug Control. The Department of Food and Drugs issues the Certificate of Quality that is used for registering companies. Once a company has passed the quality requirements, it is allowed to export. A veterinary certificate is required for the export of live animals. Eleven standards have so far been developed and published in Laos and cover green coffee, steel, cement, gasoline/diesel, coated zinc sheets, clay building blocks, wire nails and steel sections for buildings. Conformance tests are conducted at laboratories that are presently operating under different ministries: these are (i) the Food, Drug and Quality Control Centre under the Ministry of Health for testing food and drugs, (ii) the Water Quality Laboratory under the Ministry of Agriculture and Forestry, and (iii) the Agriculture Inputs Testing Laboratory of the Plant Protection Centre for agricultural inputs. A product registration scheme which has been in operation since 2000 so far has 27 products registered and 325 quality certificates for imported goods awarded. Quality inspection of products is done at retail sales points and at factories. Several challenges are currently facing Laos' standards system. The standards agency is not yet fully functioning, there is no legislation for setting up an accreditation body and Laos does not yet have a certification body for quality assurance systems (ISO 9000, HACCP). Certification is usually obtained from Thai certifying bodies. There is a lack of functioning standards and testing infrastructure including laboratories in general and accredited testing laboratories in particular which would satisfy international requirements. 4. Vietnam In Vietnam, the Directory of Standards and Quality (STAMEQ) under the Ministry of Science and Technology is responsible for administering standards, accreditation, and metrology--more particularly, the relevant agencies are the Vietnam Standards Center (VSC), the Bureau of Accreditation (BOA), and the Vietnam Metrology Institute (VMI). STAMEQ's tasks include the development and application of TCVNs (Vietnamese Standards), establishing and maintaining national measurement standards, overseeing suppliers' declarations of conformity as well as conducting conformity assessments, certification, accreditation, advising on disputes and carrying out scientific research. It also operates the WTO TBT enquiry point. STAMEQ tries to adopt international/regional standards wherever possible. In 2007, approximately 7,300 standards had been issued, of which approximately 1,500 followed international or regional standards of organizations such as ISO, IEC, BSI, CODEX and the US ASTM. The Bureau of Accreditation (BOA), which was established in 2001 and reports to STAMEQ, provides accreditation to calibration and testing laboratories and inspection and certification bodies. BOA has accredited 178 laboratories and 5 inspection bodies, however, is not currently compliant with ISO/IEC 17011 ("General Requirements for Accreditation Bodies Accrediting Conformity Assessment Bodies"). Accreditation by BOA is mandatory for all certification bodies in Vietnam. There are currently 14 certification bodies registered with the BOA, some of these are government entities such as VFA (under the Ministry of Health) and NAFIQAVED (under Ministry of Fisheries). The Vietnam Metrology Institute (VMI) has 10 accredited laboratories and has been a Member of the International Organization of Legal Metrology since 1994 and in 2004 signed the global MRA for metrology. 10 Vietnam has signed several bilateral agreements with China, Russia, and Ukraine which include provisions on harmonization of national standards and conformity assessment procedures with international standards and guidelines, mutual technical cooperation, and a mechanism for mutual recognition of conformity assessment results. 5. Indonesia Four key institutions form part of the Indonesian standards infrastructure. These include the National Standards Body (Badan Standardisasi Nasional or BSN), the National Accreditation Committee (Komite Akreditasi Nasional or KAN), the technical departments and Ministries and the certification/inspection and training agencies. The BSN is a government agency responsible for developing and publishing standards. The KAN grants accreditation to laboratories, quality management agencies, quality environment management system agencies, inspection agencies and personnel certification agencies. The technical departments and Ministries implement the standards set by the BSN and decide whether the standard should be voluntary or mandatory. Both BSN and KAN are understaffed. Even though auditors from outside the institution are employed to carry out accreditations, only 17 KAN staff are tasked with managing the accreditation of hundreds of laboratories and certification agencies which needs to take place every four years. As a result, enforcement has been lax. Indonesia is a member of ISO, IEC and CODEX and ­ on paper ­ Indonesian standards are in line with the international standards promulgated by those institutions. Indonesia is also a signatory member of ILAC and APLAC. Apart from ILAC and the ASEAN MRAs, Indonesia does not have any bilateral, regional or multilateral MRAs. Indonesia has so far notified only a few standards to the WTO's TBT Committee (these are fertilizers, wheat-flour, tires and light bulbs) while the BSN published several more Indonesian National Standards. This puts local producers at a disadvantage because technical regulations which have not been notified to the WTO will only be effective for local producers but will have no legal implications for imported goods--thereby raising costs of local firms, but not foreign competitors. International buyers specify that products from Indonesian producers meet certain specification and expect them to provide certification from an independent certification agency. There are two major internationally recognized private certification agencies in Indonesia. Certifying a food product costs about Rp 2 million per package and takes approximately two weeks to obtain. 6. Philippines The Bureau of Product Standards (BPS) within the Ministry of Commerce is responsible for developing standards. It has promulgated more than 5000 Philippine Standards, with almost 80 percent being harmonized with international standards. BPS tests domestically-produced products for consumer use; however, private testing laboratories are encouraged and there are 65 accredited laboratories that comply with ISO 17025. There are two independent Accreditation schemes: the Laboratory Accreditation Scheme and the Accreditation Scheme for Certification Bodies for ISO 9000 (with approximately 6 service providers), reporting to the Philippines Accreditation Bureau. The BPS certifies foreign suppliers subject to receiving mutual recognition. To date there are bilateral agreements with Indonesia, Japan, Malaysia, and Australia and authorities are currently 11 negotiating with Thailand, Korea and Vietnam. If the product is not certified, the Philippine authorities require an Import Commodity License for each shipment (i.e. bill of lading). This can only be avoided if the product has been pre-tested by a company accredited by APLAC, ILAC, or the Registry Accreditation Board (in the USA). Domestically, the Philippines require mandatory pre-market inspection for all products covered by Philippine National Standards. These include automotive and motorcycle batteries, medical equipment, lighting fixtures, fire extinguishers, electrical wires and cables, cement, tires, sanitary wares and household appliances. For all other products a suppliers' declaration of conformity is sufficient. 7. Thailand The Thailand Industrial Standards Institute (TISI) under the Ministry of Industry is the national standards organization; it is empowered to provide product certification according to Thai Standards and is an accredited body for ISO and HACCP certifications in Thailand. Thailand requires mandatory certification of 60 products across ten sectors, including agriculture, construction materials, consumer goods, electrical appliances and accessories, PVC pipe, medical equipment, LPG gas containers, surface coatings and vehicles. Testing and certification permits for the mandatory standards covering food and pharmaceutical products are controlled by the Thai Food and Drug Administration (TFDA). 8. China In 2001 China merged the domestic standards and conformity assessment agency, and the entry- exit inspection and quarantine agency into one new body, the AQSIQ. It then created two quasi- independent agencies reporting to AQSIQ: the Certification and Accreditation Administration of China (CNCA) responsible for unifying the conformity assessment regime and the Standardization Administration of China (SAC) responsible for setting mandatory standards and administration of technical regulations in accordance with the WTO. SAC houses the WTO TBT enquiry point and has established cooperation on standardization with 52 countries. More effective coordination may be needed between AQSIQ and CNCA and SAC as well as with Customs and central and local government. The hierarchy of the Chinese standards administration is described in Table 1. By the end of 2005, over 20,000 national standards (and 16,000 local standards) were issued in China. Of these, approximately 50 percent were based on international standards. Table 1: Standards Regime in China Law Standardization Law of the People's Republic of China Regulations Regulations for Implementation of the Standardization Law of the People's Republic of China Regulations of the People's Republic of China on Certification and Accreditation Ministerial Level General Administration of Supervision, Quality Inspection and Quarantine (ASQIQ) Sub-Ministerial Level Standardization Administration of the People's Republic of China (SAC) Certification and Accreditation Administration of China Authorized Organizations China National Institute of Standardization China Association of Standardization China Quality Certification Center Source: author's compilation 12 CHAPTER 3. COMPLYING WITH STANDARDS ABROAD: WHAT DO EAST ASIAN EXPORTERS FACE? East Asian exporters face difficulties in meeting technical regulations in high-income export markets due to their stringency, especially when it comes to health-related matters. On the other hand, East-Asian firms exporting to low- and middle-income countries point to the fact that technical regulations in these countries are difficult to meet due to their lack of transparency. In addition, technical regulations often vary significantly by export destination, making diversification in terms of export markets more difficult. This Chapter provides an illustration of the types of standards problems faced by East Asian exporters based on in-country qualitative surveys undertaken for this study. The surveys are not comprehensive and are only meant to provide concrete examples. 1. Complying with Standards in Developed Countries East Asian producers generally have no difficulty complying with voluntary standards set by foreign firms to which they are supplying inputs. In the last decade, East Asia has seen an extreme form of supply side integration, where inputs are produced in various countries in the region and are subsequently assembled in another set of East Asian countries. The countries which are heavily involved in this process of production sharing seem to be less constrained by foreign standards. The Philippines is one example, where exporting firms are almost exclusively engaged in original equipment manufacturing (OEM) for parent firms abroad (e.g. electronics and auto parts and components) and standards are easy to meet as templates for production are supplied with the contract or incorporated in the technology and production systems provided by the parent company (though this applies only to contractual partners, while for other potential suppliers the standard may pose an entry barrier). The same seems to be true for outsourced textiles production where samples are often supplied by the contractor, making expected standards sufficiently transparent (again, only for the contractors). How are East Asian products doing in the US? Firms that export to the United States report two types of issues related to exporting: (i) sanitary and phyto-sanitary regulations for reasons of protecting human health, e.g. food quality and safety standards, labeling and packaging requirements, or strict limits on insecticides and heavy metals; and (ii) anti-fraud measures, requirements for bill of lading, identity, and measurement standards. For food product exporters additional technical standards and requirements apply. These products are subject to provisions in the food safety law, the bio-terrorism law of 2002, the law on labeling, the United States registry on food quality and safety, the law on trademarks, and regulations on food additives. Exporting firms have to study all of these regulations very carefully and strictly apply them during the production process. Quality control before shipment is very important, as the cost of deportation or goods detention is extremely high ­ as it is in any other country. 13 During 2006, China, Indonesia, Philippines, Thailand and Vietnam had 3,001 products refused entry into the US, with China accounting for approximately 60 percent of all refusals (Figure 4).3 The reason for detention for more than 90 percent of all refused products was adulteration or misbranding. Imports are strongly affected by the FDA Import Alerts that identify problem commodities and/or shippers that meet criteria for automatic detention. When a product is on an import alert list, any further shipment to the US will be automatically detained under the authority of the FDA without physical examination. Import alerts can cover an entire exporting country, or region of a country. In February 2007, there were 30 import alerts for products from China (15), Indonesia (2), Philippines (4) and Thailand (11).4 Twenty-three out of the thirty import alerts relate to food products and are justified on the basis of food safety following the earlier proven problems with adulteration. The Thailand case gives more details about reasons for rejection of exports into the US (Table 2). Safety concerns dominate. For food products unsanitary conditions, salmonella, and missing or incomplete labeling account for a significant number of the rejections. For non-food products failure to register and products that are not fit for purpose represent clear justifications. Figure 4: US import refusals of East Asian products Number of US import refusals, 2006 Reasons for US import refusals, 2006 number of US import refusals, 2006 2000 Vietnam filth/decomposed 1800 product 1600 salmonella Thailand 1400 unfiled LACF 1200 other safety-related Philippines 1000 reasons other sanitation-related 800 reasons 600 Indonesia adulteration non-food items 400 mandatory label omitted 200 China other reasons 0 China Indonesia Philippines Thailand Vietnam 0% 50% 100% reasons for US import refusals, 2006 Notes: Other safety-related reasons include unregistered low-acid canned food (LACF) manufacturers, unsafe color additives, substandard and the presence of C. Botulinum, cyclamates, E.Coli, Listeria, and mercury; Other sanitation- related reasons include unfit for food, under-processed, mold and unsanitary. Import refusal data is quantity data (number of products) and not volume of trade Source: Derived from OASIS, US FDA (www.fda.gov/ora/oasis) 3This is based on US Food and Drug Administration monthly Import Refusal Report (IRR). The IRR data provides only a rough indication of product/country quality and safety levels because, with the exception of productions that are on the Automatic Detention list, the FDA randomly selects which shipments to examine and the agency may choose to focus on certain hazards and not others. 4Although this totals 32 import alerts when adding by country, there is one alert (rice-based products due to filth) that applies to China, Philippines and Thailand. 14 Table 2: Why are exports rejected? The case of Thailand's exports to the United States (products rejected in 2004) Category of goods frequently rejected Details Reasons given for rejection Sea Food Possibility of partly/totally having decomposed or filthy Filthy Elements or not fit for consumption Sea Food Possibility of containing salmonella bacteria Salmonella Canned Food (coconut juice, cat food, instant Producer does provide USFDA information on production No process noodles) process Fruit Juice, Energy Drink, Dried Fruits Possibility of unsafe color used (Section 721 (a)) Unsafe Color Canned Food Producer not registered with USFDA as a low acid canned Need FCE food producer Shrimp/prawn products Possibility that product tainted by Vet drugs Vet Drugs Food and Canned Drinks Does not comply with label regulations Labeling Instant Noodle Possibility of misleading/false information False Food and Herb Products Wrong label, labeling in the wrong place Labeling Computer Screen, TV set Possibility of violating Section 534 of Food and Drug Law Non Standard (tagging of radiation products) Pharmaceutical Products Possibility of new drug not approved by FDA Unapproved Pharmaceutical Products Missing information require by FDA Not listed Snack Missing Common Name on Label Labeling Frozen Fish Product may be offered in name of another product Labeling Frozen Fruits Contaminate with Pesticide Pesticide Canned Fruits and Salted Fish Possibility that the product was produced, packed, stored in Unsanitary unhygienic environment TV Screen Electronic Goods differing from FDA standards No Registration Food No net content information on the label Labeling Frozen Sea Food Does not give name of producer, packer, dist. Labeling Canned Food and Fruit Products Possibly unsafe ingredients Unsafe Sea Food Possibly produced in unsanitary conditions Unsanitary Herb Products Unclear or insufficient information Labeling Canned Food Possibly produced in unsafe environment Unsafe Supplementary Food Dietary Supplement not labeled Labeling Medical Rubber Gloves Lower standard/damaged product Hole Food Swelling package (leakage) Leak Source: Prasert Apichart, Non Tariff Measures Encountered by Thailand's Exporters, Mimeo, September 2005. and in the EU? In order to be able to export to the European Union, firms have to meet minimum requirements such as: (i) ISO9000; (ii) HACCP for food products; (iii) consumer safety standards, as certified by the CE mark for products such as toys, low-voltage electric appliances, medical equipment, and building materials; (iv) environmental protection, including rules on labeling (environment friendly materials, or recycled materials); and (v) labor standards. The European Union also applies an import ban for products made from forest wood, for environmental reasons. Since 1979 the European Union operates the Rapid Alert System for Food and Feed (RASFF). The RASFF is primarily a tool for exchanging information between food and feed central competent authorities in the Member States where a risk to human health has been identified. Where Member States encounter problems from third-country imports, the RASFF informs the country via the Commission Delegation; where the problem is more serious an email is sent to the country informing them of the distribution of a contaminated product. When the problem is deemed more serious, the RASFF sends a letter to the competent authority in the exporting country. In 2004 the RASFF sent five letters to three countries, two of these countries were in Asia--China and Thailand--and related to salmonella, the migration of chemicals in food products and illegal imports. The European Union has experienced a significant increase in the number of alert notifications for food-related problems from internal production and imported foods (Figure 5). In 2005, 36 15 percent of alert notifications were for third countries. The product categories most affected were fish and crustaceans and meat and meat products, which collectively accounted for almost 40 percent of the total. China, Vietnam, and Thailand all had more than one hundred alert notifications in 2005 (Figure 6). A large number of the notifications were due to potentially pathogenic micro-organisms (27 percent in 2005), composition (19 percent), and mycotoxins (9 percent). Figure 5: EU alerts for food-related problems on Figure 6: ...and affect East Asian countries too the rise... number of alert notifications in the EU number of alert notifications in the EU, 2005 8000 300 7000 250 6000 5000 200 4000 150 3000 2000 100 1000 50 0 0 2002 2004 2005 China Vietnam Thailand Indonesia Philippines Source: RASFF Annual Report, 2005 and in Japan? The Japanese market has its own rule for products; all products must obtain a certificate before they can be imported into Japan. Besides, Japan requires exporters to produce "proof of experience in doing business in the Japanese market". This barrier is almost prohibitive to new exporters, especially small and medium size enterprises. 2. Voices from the Private Sector in East Asian Countries Cambodian garment exports do not seem to be restricted by foreign standards. Garment standards facing Cambodian exporters are mostly driven by buyers and generally come in the form of quality and labor standards. The quality of garment exports is certified by local certification firms or inspectors nominated by buyers. Labor standards are enforced by the International Labor Organization and buyers' inspectors. The key to success for the sector in overcoming standard barriers has been the skills and experience of foreign entrepreneurs who are familiar with buyers' requirements. Moreover, the large size of the market for garment certification has been a natural incentive for investors to set up private certification firms. Foreign support for quality control systems is also evident in some food products (Box 1). Box 1: Foreign support for quality control systems Confirel Co., Ltd. produces a wide range of products made from the unique Cambodian palm tree including palm wine, sugar palm, crystallized products and palm hat. These products are produced for both local and external markets. The majority of exports are directed to France and other EU countries, which make up 75 percent of its profits. The company can access EU markets duty free under the Everything But Arms (EBA) arrangement. The quality control is accepted in EU markets as the company has been following guidelines of national and international affiliations. The company has a partnership with a French agricultural researcher centre ­ CIRAD (International Cooperation centre for Agronomic Research and Development) ­ from which it receives technical support for its quality control laboratory. Its quality control is also checked by a national laboratory and the Pasteur Institute in Phnom Penh. The company has won several awards from international organizations, such as the IFC's "Environmental Stewardship" award and the "Organic" Trophy in the NatExpo 2005 trade fair in France, a symbol of recognition by professionals for unique quality in the sector of organic products. These helped the company build trust from customers in the quality of their products. Source: Based on The Cambodia Daily Newspaper, p. 18, July 13th, 2005, and Interviews with General Manager of Confirel Co, Ltd. in June 2006. 16 Cambodian fish exporters have not been able to meet EU standards. Fish product exports to the EU have been banned since 1997 as per Commission Decision (CD 97/296/EC). According to an EC mission to Cambodia in 2004, the country still does not meet EU requirements both in terms of legislation and risk assessment. Shortcomings identified include: · Health conditions during production and storage of fishery products potentially intended for export to the EU are not in line with Community requirements. · The Cambodian legal system does not provide guarantees equivalent to those required by EU legislation for the production and the placing on the market of fishery products. · Cambodia's competent authority currently has no legal basis for carrying out control activities based on food safety principles. There are no official control services, neither at the central level nor in the provinces and as a consequence health control and monitoring of production conditions are currently not in place at any stage of the fish production chain. · The official laboratories are not currently in a position to perform the range of analyses required by Community provisions (Chapter V of the Annex to Directive 91/493/EEC and Directive 98/83/EC). They are not accredited against standard ISO17025 as required by Art.3 of Council Directive 93/99/EEC. · The health certification currently carried out is not in line with international standards in the field of certification (Chapter 1.3.2 of the Aquatic Animal Health Code 2005 of the Office International des Epizooties and Council Directive 96/93/EC). Cambodian rice exporters are currently unable to access Chinese markets. China has been requesting a number of risk assessment documents showing that all rice and paddy imported into China are free of pests and diseases. China has also been dispatching expert groups to conduct field inspections in Cambodia, evaluating laboratories, phyto-sanitary authorities at the border as well as conditions in export firms. The results of the assessments will determine whether China will sign a bilateral inspection and quarantine agreement with Cambodia to facilitate market access. According to the assessment, Cambodia currently does not seem to meet China's requirements in the following respects: · Capacity of phyto-sanitary laboratories does not yet satisfy Chinese requirements. · Inadequate capacity of border phyto-sanitary authorities both in terms of facilities and staff carrying out inspection. · Inadequate facilities and management capacity of export firms such as processing facilities and quality management. A Cambodian firm cannot export black pepper to Japan because of lack of sterilization certification services in Cambodia. In order to be able to export black pepper to Japan, documents describing the manufacturing processes, raw materials and additives used in manufacturing processes, as well as certificates of sterilization are required. The black pepper exporter interviewed for this survey has been unable to export black pepper to Japan as the firm was unable to present a certificate of sterilization. In order to obtain this certificate, the exporter needs to buy expensive technology for sterilizing black pepper, which may not yield sufficient returns to justify the investment. There is so far no private investment in sterilization certification services. Vietnamese exporting firms face a challenge in meeting different technical requirements from the major market--US, EU, and Japan--but are determined to strictly follow their standards. More and more Vietnamese seafood is denied access in the US (Figure 7), while technical regulations in the EU are becoming increasingly stringent (Table 3). The country's quality assessment service is underdeveloped. There are seven institutions that offer this service, of which three are state run, but all lack appropriate testing equipment. Hence many products that pass the Vietnamese conformity tests are still rejected by the EU. This has proven very costly 17 and damaging to the image of Vietnamese exporters. In addition, poor post-harvesting and processing technology is another impediment to Vietnamese agricultural exporters in meeting standards. Vietnamese exporters are putting every effort in meeting the technical regulations of their major markets, including a clean and environment-friendly production process, investing in new processing equipment, and conducting quality control for food safety standards from the raw material production stage. Some firms send samples to importing country authorities for checking before shipment. Others hire consultants from the importing countries for technical supervision. Business associations sometimes play an active role in updating information for their members about new standards applied in different markets and quality control requirements. Figure 7: Vietnam's seafood denied by US- Table 3: Rising technical standards applied on FDA (in value and volume) imported seafood in the EU lb or $ 2,000,000 Value (US$) Allowed Chloram- Random check 1,800,000 ethion phenicol (% of imported 1,600,000 1,400,000 residual volume) 1,200,000 Before 1ppb 5% 1,000,000 1999 0.1ppb 800,000 2002 3ppm 0.003ppb 100% 600,000 400,000 Volume (lb) 2003 2ppm 200,000 2004 0.01ppm 0 2002 2003 2004 Source: Vietnam's Association of Seafood Exporters and Producers Indonesian exporters of processed food face double testing in Japan. In the Japanese market, imported processed food such as fish nuggets will get on-arrival SPS checks, although the exports have often undergone pre-shipment inspection already. One Indonesian tuna exporter pointed to stringent bacterial tolerance rates in Europe while his company easily exports to the US once it obtains an HACCP certificate (issued by the FDA). Established exporters generally found standards and other requirements in those markets transparent and appeal procedures not costly and relatively fast. Indonesian exporters of wood products rely on buyers' standards. Standards seem less cumbersome in the case of wood products as many specifications are predetermined by buyers/agents. Buyers often require suppliers to have their input tested in designated laboratories. Standards for these products are not difficult to fulfill, as they are clearly defined and samples are generally sent to buyers before mass production begins. The quality assurance process of the products runs as follows: 1. The company's internal quality control personnel does the assessments on quality/standards conformity required by buyers/agents in their order form. In order to avoid unnecessary rejects by customers, companies sometimes apply higher standards in their internal quality control check than those applied by buyers. 2. Buyers/agents bring their quality control personnel to the company and carry out random on- the-spot checks. 3. After buyers/agents run their quality control in the factory, the goods are shipped without undergoing additional product assessments. 4. If the products were found to be sub-standard in the destination market, the price will be discounted. 18 CHAPTER 4. REGIONAL APPROACHES TO STANDARDS IN EAST ASIA 1. The ASEAN Approach The ASEAN 1995 Bangkok Summit declaration called for the alignment of national standards with international standards and the development of mutual recognition agreements. Following this Summit the Senior Economic Officials Meeting (SEOM) established the ASEAN Consultative Committee on Standards and Quality (ACCSQ) to support the implementation of the AFTA through harmonizing national standards with international standards and negotiating mutual recognition arrangements for test reports and certification (i.e. conformity assessment) to achieve it goal of "One Standard, One Test, Accepted Everywhere". In order to achieve these objectives, ACCSQ is active in efforts to strengthen the technical infrastructure in member countries and enhance the exchange of information on standards and technical regulation. In 1998 ACCSQ committed to working with five key priority sectors which included electrical and electronic equipment, telecommunications equipment, cosmetics, pharmaceuticals and processed food. Widespread variations in technical standards and differing institutional structures and capacities between ASEAN members present considerable challenges in advancing a regional approach to reducing technical barriers to trade. Most ASEAN countries maintain national mandatory standards for electronic products and require pre-market approval; however, there is considerable variation in the procedures for obtaining approval (Table 4). While Indonesia, Malaysia, Singapore and Vietnam will accept test reports from a foreign laboratory this is not the case for the Philippines and Thailand. Furthermore Malaysia requires further testing of samples in a local laboratory even when the product has completed foreign tests and inspects every consignment. Only Singapore practices post-market surveillance. Table 4: Electronics: Diversity of Technical Regulations in selected ASEAN economies Cambodia Indonesia Laos Malaysia Philippines Thailand Singapore Vietnam National mandatory Y Y Y Y Y Y standards Testing and certification Pre-market approval requirements Register product with Y Y Y Y Y Y local department Test reports from Y Y Y Y Y Y local lab accepted Test reports from Y Y Y Y foreign lab accepted Further testing of Y samples at local lab Inspection for every Y consignment Post Market Surveillance Y Source: Derived from information on the ASEAN Website 19 Presently many food and beverage products and most consumer electronics are required to be tested or certified before they can enter the market.5 Most ASEAN countries do not recognize each other's testing and certification procedures, which results in companies having to test/certify products in each market that they sell in. In the electronics sector delays in arranging testing procedures constrains competitiveness and reduces the volume of intra-ASEAN trade. Firms that plan to sell their products throughout ASEAN need to understand the technical regulations and compliance and testing requirements for each market. The ACCSQ has a very broad mandate and is organized into 12 sub-committees. There are Working Groups on Standards and Mutual Recognition Agreement, Accreditation and Conformity Assessment and Legal Metrology and then 9 product specific groups. The Working Group on Standards is responsible for identifying areas for mutual recognition and standards harmonization, monitoring the implementation of the sectoral MRAs, developing a guide to the MRAs, harmonizing national standards to international standards, promoting the concept of Good Regulatory Practice to regulators, providing confidence building among regulators in the use of harmonized standards, promoting transparency of technical regulations, recommend modalities for increasing cooperation between standards bodies and regulatory agencies and advising the ACCSQ on ASEAN participation in international and regional organizations. This Working Group has also carried out a survey on the use of National Standards in Technical Regulations and developed a template for identifying and listing the relevant international standards in the ASEAN priority sectors. The Working Group on Accreditation and Conformity Assessment seeks to provide support to the capability of accreditation bodies in ASEAN to achieve regional and international recognition, to assist the new Member Countries and to monitor the certification bodies within ASEAN. The Working Group on Legal Metrology has the mandate to align legal metrology in ASEAN to support the objectives of the AFTA, to promote cooperation and to hold discussions and promote ASEAN interest in legal metrology in international fora. Efforts at harmonization within ASEAN. In 1997 the AFTA Council identified 20 products in the five priority sectors as priorities for standards harmonization (Table 5). In order to minimize any trade distortion the products were harmonized in accordance with 59 ISO, IEC and ITU international standards. This was achieved in 2003. In 1999 the AFTA Council extended the initiative and committed Members to harmonizing the safety aspects of electrical products and 81 safety and Electromagnetic Compatibility (EMC) standards were identified. This was completed in July 2004. While ASEAN succeeded in harmonizing member countries' standards to 140 international standards for the 20 priority products, progress at implementation at the country level and monitoring at the regional level has been extremely slow. Committing to harmonize standards requires countries to reform their policies, physical standards and technical regulations, and at the regional level requires the creation of a permanent institutional mechanism in order to monitor the implementation in partnership with the national standards agencies. The ASEAN Secretariat through the ACCSQ is responsible for ensuring countries implement the harmonized standards. To date, few countries within ASEAN have committed to reform their regulatory framework to adopt the OECD Best Practice guidelines. Consequently countries have multiple regulatory 5 For example, Singapore requires that fresh chicken is either imported live or as frozen parts from slaughterhouses certified by the Singapore authority. The price of chicken in Singapore is much more expensive than in Thailand. 20 institutions and this significantly increases the time required to obtain `buy-in' for policy/institutional change. The ACCSQ process allows for the inclusions of the private sector although their participation is not coordinated and varies significantly between member states. Resources at the ASEAN Secretariat to support this effort are short of optimum. Table 5: ASEAN Priority Manufacturing Sectors 1998 Key Priority Sectors 2003 Priority 20 priority products harmonized by 2003 Sectors · Electrical/ Electronic · Electronics · Air-conditioners · Refrigerators Equip. · ICT · Monitors/ keyboards · Inductors · Telecommunications · Healthcare Loudspeakers · Video apparatus Equip. products · Telecommunications · Radio · Cosmetics · Agro-based equipment · Parts of TV/ radio · Pharmaceuticals · Rubber-based · Television · Resistors · Processed Food · Fisheries · Capacitators · Switches · Textiles/ · Printed circuits · Diodes Garments · Cathode ray tubes · Motors/ Generators · Automotive · Mounted piezo- · Medical rubber electronic crystal glovers · Rubber condoms Source: ASEAN Secretariat Following the New Initiative for ASEAN Economic Integration, the ACCSQ was requested to develop a detailed roadmap for eliminating technical barriers to trade in the 11 priority sectors in September 2003 (8 of the 11 sectors are in manufacturing--see Table 5--and 3 are in services). The following year the ACCSQ recommended the establishment of new product-specific working groups (PWG) in automotive, traditional medicine, medical devices, and rubber and wood-based products (Table 6). The ACCSQ is currently developing an ASEAN policy on standards and conformance. Table 6: Product Specific Working Groups in ACCSQ Joint Sectoral Committee for ASEAN Sectoral MRA for Electrical and Electronic Equipment (JSC EE MRA) ASEAN Cosmetic Committee (ACC) Pharmaceutical Product Working Group (PPWG) Prepared Foodstuff Product Working Group (PFPWG) Automotive Product Working Group (APWG) Traditional Medicines and Health Supplements Product Working Group (TMHSPWG) Wood-Based Product Working Group (WBPWG) Rubber-Based Product Working Group (RBPWG) Medical Devices Product Working Group (MDPWG) Source: ASEAN Secretariat ASEAN countries began to adopt a more pragmatic approach to standards in the late 1990s by deciding to negotiate Mutual Recognition Arrangements on testing standards. The Framework Agreement on Mutual Recognition Arrangements was agreed in 1998. This followed on the 1995 Bangkok Summit declaration, which called for the alignment of national standards with international standards and the development of mutual recognition arrangements (MRAs). MRAs were considered to facilitate intra-regional trade. The 1998 Framework Agreement considers that MRAs for conformity assessment activities can be important for eliminating technical barriers to trade and of particular interest to small and medium sized enterprises. The Framework Agreement 21 set out the general principles for the development of sector-specific MRAs. The ACCSQ proceeded to negotiate MRA on a sector-by-sector basis. A sector MRA can be entered into by two or more ASEAN Member States and must include, inter alia, the scope and coverage by products, the relevant legislative, regulatory and administrative provisions governing conformity assessment and technical regulations for the specified products, the list of Designating Bodies, the criteria and listing for Conformity Bodies, the mutual recognition obligations, a list of contact points and provisions for the establishment of a Joint Sectoral Committee. In order to be eligible as a Designating Body for conformity assessment the body must meet one of the following criteria: accreditation by an accreditation body that is a signatory to a regional or international MRA, or participation in regional/international mutual recognition arrangements for testing and certification bodies, or regular peer evaluations.6 These are standard criteria however they cannot be met by several of the newer members of ASEAN. In the past six years ASEAN members have negotiated a MRA on conformity assessment for electronics and electrical equipment (2002), reached agreement on an MRA for cosmetics (2003), which was, however, superseded by the ASEAN Cosmetics Directive on January 1, 2008 (see Chapter 5), and negotiations are underway for pharmaceuticals, prepared foodstuffs and automotives (Table 7). The implementation of the MRA on cosmetics is the most advanced (see Chapter 5); however, overall progress on finalizing MRAs is still slow within ASEAN due to the differing levels of economic development which impact on the ability of national laboratories to undertake testing and certifications of equivalent quality and therefore reduce the possibility of developing common approaches to policy objectives. Table 7: ASEAN Mutual Recognition Agreements Sector Current Status Comments Electronics and Electrical Equipment Implemented 2005 10 countries notified Cosmetics Agreed in 2003 Superseded by ACD in 2008 Pharmaceuticals Under discussion Implementation in 2009 Prepared Foodstuffs Under discussion Agreed on priorities Automotive Products Under discussion Agreed on priorities Source: ASEAN Secretariat The ASEAN Economic Ministers signed the MRA for Electrical and Electronic Equipment in April 2002. All ten members have notified their participation either in acceptance of the test reports and /or through product certification. Member countries are expected to transpose the Agreement into national legislation and develop the ASEAN Mark of compliance. Member Countries have committed to working towards harmonizing the regulatory regimes in this sector by 2010. Effective implementation has been constrained by the dearth of appropriate testing infrastructure in many economies. Further, the MRA allows for case-by-case safeguard clauses, which highlight the conditional nature of the Agreement and implicitly allows for arbitrary behavior by the host (i.e. importing) country. This, however, provides for a degree of uncertainty over market access. The Electrical and Electronic Equipment MRA adopts the ISO/IEC Guide 65 and ISO/IEC Guide 62 as the accreditation criteria for conformity assessment/testing bodies to be listed. In July 2006 25 Quality Assurance and Testing Centers had been listed, of these 7 were in Singapore, 1 in Malaysia, 4 in Thailand, 8 in Vietnam, 4 in Indonesia and 1 in the Philippines. Each of the listed 6All of these must be conducted in conformity with the relevant ISO/IEC Guides. 22 companies is approved for testing/certifying for electrical and electronic equipment in specified countries in ASEAN.7 There were none in Cambodia, Laos, Brunei and Myanmar. Six ASEAN countries belong to ILAC.8 Products traded under the MRA that are tested and certified prior to being exported will not have to undergo any further conformity assessment procedures in the importing country. The avoidance of duplicative testing reduces costs, increases the certainty of market access and encourages competition and trade. Overcoming differences in standard infrastructure among ASEAN countries. The ASEAN Secretariat with donor support is working to `upgrade' the standards infrastructure in Cambodia, Laos and Vietnam. The lack of facilities for conducting laboratory testing and the absence of an accreditation service are frequently cited as major constraints. The absence of internationally recognized public laboratories need not act as a binding constraint to implementing MRAs, provided that the private firm can either use a private company or obtain access to the testing infrastructure of neighboring countries. Testing and conformity assessment is a specialized private sector activity in most developed countries. Permitting the efficient operation of private testing service providers (local and foreign) can enable export ready firms to access low-cost testing fees. In the presence of internationally-recognized Third Party Certifiers the absence of a National Accreditation Agency/office need not be a serious constraint. The major export markets will accept certification from these Third Party Certifiers. While the small size of the market in Laos and Cambodia acts as a disincentive for foreign testing companies to establish and offer services across a wide range of sectors, at least one foreign Third Party Certification company has begun operating in Cambodia. Intertek (an internationally recognized testing company) has established an office in Phnom Penh and is offering testing and certification services to exporting companies. They test for companies that export garments to the US and EU market. Since Intertek established a laboratory testing service inspection costs have declined. Intertek have no contact with the Government of Cambodia (ISC), they work closely with the foreign buyers. The Intertek example illustrates the importance of private sector Third Party Certifiers in enabling exporters to obtain the necessary documentation to prove they meet international standards. East Asia is developing a network of calibration laboratories with traceability to physical measurement standards at either the national level or to internationally-recognized national physical standards of another country. Most ASEAN economies have both privately- and publicly-owned laboratories that are accredited by a government accreditation service. The ASEAN-6 have entered into mutual recognition agreements on laboratory accreditation with other ASEAN members. Outside of the ASEAN-6 in the CLMV countries individual laboratories engage in mutual recognition agreements with foreign counterparts--this is the case for Intertek in Cambodia. In countries without a national accreditation agency it is possible for the government to contract a foreign accreditation body to carry out national accreditation activities on its behalf. Within ASEAN the Ministry of Development in Brunei has an agreement with the Singapore Accreditation Council (SAC), which includes the use of SAC Accreditation of Laboratories, certification and inspection bodies. The Agreement also provides for training to build up 7The geographical scope is specified for each firm and is not Pan ASEAN and a firm is either approved as a testing laboratory, a certification body or both. For example, PSB Corporation in Singapore is approved twice, once as a testing laboratory and once for Certification. The listings apply for 3 years. 8Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam. Source: http:/www.aseansec.org/8305.htm 23 Brunei's capacity. It is also possible for the government to allow foreign accreditation bodies to provide their services direct to laboratories in a foreign country without any formal arrangement with the government. While this would work for many markets it would not assist with improved market access to the EU under any of their mutual recognition agreements since they require the exporting country to endorse the accreditation service. 2. Standards Cooperation in ASEAN-China FTA ASEAN-China standards cooperation is incorporated into the ASEAN-China FTA and will be important going forward. In the context of the ASEAN-China FTA, the two parties set out to promote trade and investment through greater transparency, standards conformity and enhanced information exchange; in this, commodity inspection and quarantine, food safety, quality and standardization are placed top on the cooperation list. In March 2006, the first meeting between SAC and ACCSQ (the ASEAN Consultative Committee on Standards and Quality) was held in Malaysia. The meeting stressed the strengthening of cooperation on standards and conformity between China and ASEAN in order to support overall economic cooperation and the FTA process. Issues that were discussed at the first meeting included: 1. the establishment of a liaison channel and the nomination of contact persons for standards issues in China and the ASEAN countries; 2. the identification of 10 prior areas for China-ASEAN standards cooperation, including food and agricultural products, machinery, and electronics; 3. the strengthening of bilateral cooperation in international and regional standards organizations, such as ISO/IEC, PASC, APEC and ASEM; 4. training courses for officials. In addition, the SAC suggested two projects for standards cooperation: (i) comparative studies on laws and regulations on standards and technology in China and ASEAN countries; and (ii) a joint effort to establish an ISO Jadeite (stone) Technical Committee. 3. The APEC Approach The Asia-Pacific Economic Cooperation addresses technical barriers to trade through the Sub- Committee on Standards and Conformance (SCSC), established in 1994. Most of the ASEAN members are active participants in the SCSC. Following the adoption of the Osaka Action Agenda in 1995 APEC agreed to four key objectives: · Ensuring transparency of standards and conformity assessment of APEC economies; · Aligning APEC member economies' mandatory and voluntary standards with international standards; · Achieving mutual recognition among APEC economies of conformity assessment in regulated and voluntary sectors; and · Promoting cooperation for technical infrastructure development to facilitate broad participation in mutual recognition arrangements for both regulated and voluntary sectors. The APEC SCSC highlights the importance of communication and collaboration at the national, regional and multilateral levels with an emphasis on a regular exchange of information. In APEC the SCSC has encouraged mutual recognition of conformity assessment in both regulated and voluntary sectors. These include conformity assessment of telecommunications equipment and 24 electrical and electronic equipment safety, exchange of information on toy safety, and food recall and food recall guidelines. The SCSC seeks to support the work that is already taking place in `Specialist Regional Bodies'. Most of the larger ASEAN members of APEC have their own physical standards and maintain a national measurement system under the administration of a national government agency, with the national standards laboratory having responsibility for maintaining primary and secondary physical standards. Commonality in testing instruments between trading partners promotes increased trade equity and increased safety. For this to function effectively it is necessary to have an effective legal metrology system and a competent metrological infrastructure with proven integrity and competent personnel. At the regional level this is being developed through the Asia-Pacific Legal Metrology Forum (APLMF) and the Asia Pacific Metrology Program (APMP). The APLMF seeks to harmonize legal metrology regulations under the International Organization of Legal Metrology (OIML) and to develop the infrastructure of legal metrology in member countries through agreeing common means for testing instruments. The APMP promotes the regional and international recognition of the measurement capability of its members. The ASEAN-5 plus China are members of all the major international and regional organizations. The Pacific Area Standards Congress (PASC) seeks to address areas of common interest in the ISO/IEC and has succeeded through playing a coordination role in increasing the level of regional participation in building and construction-related activities of the international standards bodies. The Asia-Pacific Laboratory Accreditation Cooperation (APLAC) is a regional body that seeks to encourage the development of competent laboratories and inspection bodies and to harmonize accreditation practices. APLAC members have developed a Multilateral Mutual Recognition Arrangement with the aim of facilitating more formal recognition of member's accredited laboratories (Table 8). Table 8: Participation in APLAC MRA and PAC MLA in Specialist Regional Bodies APLAC LAT LAC Inspection PAC QMS EMS PASC Cambodia China X X X X X X Indonesia X X X X X X Laos Malaysia X X X X X X Philippines X X X X Singapore X X X X X X Thailand X X X X X X X Vietnam X X X X Notes: APLAC MRA, Laboratory Accreditation Testing (LAT), Laboratory Accreditation Calibration (LAC) and Inspection, Pacific Accreditation Cooperation Multilateral Recognition Agreement (PAC MLA), Quality Management Systems (QMS), Environmental Management Systems (EMS), Pacific Area Standards Congress (PASC). Source: Report on Economic Participation on MRA's Sub-committee on Standards and Conformance, APEC, February 2004. 25 CHAPTER 5. CASE STUDY: HARMONIZATION IN THE ASEAN COSMETICS SECTOR Since January 1, 2008, the cosmetics sector is the first sector in ASEAN to have a fully harmonized regulatory regime. In 2003, ASEAN governments signed the ASEAN Harmonized Cosmetics Regulatory Scheme (AHCRS), which contains a Mutual Recognition Agreement for product registration approval (in effect since 2003) and the ASEAN Cosmetics Directive (ACD) which harmonizes the regulation of cosmetics products across the region beginning in January 2008. The MRA has ceased to be effective since the ACD has come into force. While regulatory harmonization is the most important objective of the new cosmetics directive, there is also an element of quality upgrading, introduced in the form of a new requirement for a quality management system. 1. Elements of the ASEAN Cosmetics Directive Since cosmetics are considered relatively low-risk products, regulation does not have to be as tight as in sectors such as pharmaceuticals. This is reflected in the new directive. Member countries agreed to a general requirement that any product placed on the market be safe without setting explicit safety standards (with exception of some prohibitions and restrictions on certain ingredients). The new regulation further does away with mandatory pre-market safety assessments by the government, introducing instead a system of post-market surveillance, where only individual samples of products already on the market are tested by the authorities. In switching from pre-market approval to post-market surveillance the ASEAN countries are adopting current best practice in regulating a low-risk industry. In order to compensate for the lack of explicit safety standards and direct regulatory approval, the ACD requires an increased level of transparency from companies in addition to introducing mandatory compliance with good manufacturing practices (GMP). Increased transparency is required firstly, vis-à-vis the authorities regarding the manufacturing process and the test methods/results of the safety assessments for raw materials and finished products (these must be available for auditing); and secondly, vis-à-vis the consumer as set out under the new labeling requirements. The following is required of a company wishing to place a new product on the market (all are explained in more detail below): · That the product is notified (Article 1, para.2) · An assessment showing that the product is safe (ACD, Article 3) · That the company follows Good Manufacturing Practice (GMP) (Article 8c), · That the company keeps a Product Information File (PIF) containing details on the product, its manufacturing process, as well as safety and efficacy (Article 8) · That the product is labeled according to the rules laid down in the ASEAN Cosmetic Labeling Requirements in Annex 2 (Article 6) and · That it does not contain forbidden ingredients and restricted ingredients only up to the amount, and/or for the purpose, permitted by the Annexes. 27 Post-market surveillance. Part A of the AHCRS previously facilitated the introduction of new products to the ASEAN market by providing for mutual recognition of product registration among ASEAN member countries. This implied that a product which was registered in one ASEAN country was guaranteed market access in all other ASEAN members, who are signatories of an MRA with that country. Part B of the AHCRS, the ASEAN Cosmetics Directive, which has replaced Part A since January 2008, does away with this requirement of pre-market product registration and instead introduces a system of post-market surveillance. The introduction of post- market surveillance presents a significant departure from the previous system, where companies desiring to market a cosmetic product had to endure a lengthy registration process which required every new product to be tested and approved by the authorities. These requirements are replaced by a simple obligation to notify new products to the authorities, whereby the notification format is the same in all member countries. Under the new system, authorities will no longer check the safety of every product brought to the market, but instead draw samples from the market ex post. The switch in system brings with it changed responsibilities for the individual stakeholders, with the responsibility of assessing the safety of products being shifted from government to companies. While the company putting the product in the market is now responsible for product safety, the authorities are responsible for controlling the safety of products. From January 2008, companies have to give an overall guarantee that their product is safe, i.e. will "not cause damage to human health when applied under normal or reasonably foreseeable conditions of use, taking account, in particular, of the product's presentation, its labeling, instructions for its use and disposal, warning statements as well as any other indication or information provided by the manufacturer or his authorized agent or by any other person responsible for placing the product on the market." (ACD, Article 3) Companies now have to notify the authorities before placing a product on the market, declaring on the notification form that they have an adequate knowledge of the ACD and that the product complies with all its parts, annexes and appendices, including Good Manufacturing Practice (GMP) and labeling requirements. Under the new system, companies further have to keep a Product Information File (PIF), which must contain detailed information regarding the product's formula, the safety and specifications of the raw materials used, and the safety and efficacy of the final product. All the information must be made available upon request to the authorities for auditing purposes. In turn, the new directive commits regulators to send companies an acknowledgment of notification within three working days, which considerably shortens the previous registration time-frame of several months or even years. Authorities will further have to put in place the infrastructure to deal with new product requests (these can be as high as 200 per day in some ASEAN countries) and to conduct post-market surveillance. The latter includes routine and emergency audits, following up with consumer complaints, and taking action against non- compliant products and firms. Good Manufacturing Practices. Good manufacturing practices differ depending on the industry to which they apply. While pharmaceutical GMP contain explicit requirements regarding the premises of manufacturing, for example (e.g. different product lines have to be separated by walls to avoid cross-contamination of products), cosmetic GMP are broadly based on two principles and it is left up to the companies how to fulfill these. The first principle concerns document control, whereby all processes, actions, and assessments need to be written down in order to exist. 28 The second principle is the avoidance of contamination, whether this is contamination from the outside (dust, people, rodents, insects, microbiological contamination), the inside (people, packing materials, carton, glass, metal etc.) or between raw materials, products or labels. The GMP guidelines in Annex 6 of the ACD provide a structure along which such a process may be organized. Five other guidelines which are stricter than the ASEAN Cosmetics GMP are recognized as equivalent and include those of the US and the EU9, but not those of China, Japan or Korea. There is no official certification of GMP compliance from the government; instead, companies self-declare as part of the product notification that they are compliant. If they are found to be non-compliant, they can be held liable for the false declaration in addition to non- compliance. This means that ASEAN producers have to be compliant with GMP as soon as they notify the first new product after January 1, 2008. Product Information File. The product information file serves as a resource for regulators to verify product safety as well as efficacy in light of the product claims made by the company on the label and in its advertisements. The PIF guidelines developed in June 2007 suggest for the PIF to be divided into four parts, whereby the following documents must be included: Part 1: Administrative documents and raw material/product assessment summaries · Administrative documents o Copy of notification form o Authorization letter from the manufacturer (if the company is only the distributor) o Other (e.g. license to manufacture) · Qualitative and quantitative formula of the product · Product presentation and label o Outer/inner labels o Consumer information leaflets · Manufacturer's statement o Statement by the manufacturer that it complies with GMP o Explanation of the batch coding system · Summary of safety assessment as per safety assessment guidelines, signed by a qualified person · Summary of confirmed undesirable effects on human health from consumer complaints10 · Summary report of the efficacy assessment of the on-pack product claim Part 2: Quality data of raw materials · Two types of data on safety and quality of the raw materials are required; this data does not necessarily have to come from in-house testing, but can generally be obtained from the supplier; alternatively, it can be based on published scientific data including reports from scientific committees. The required datasets are: o Specification of each ingredient and method of analysis used to test whether ingredients are in line with the specification (e.g. range of pH levels or heavy metal-contamination the company will consider acceptable in a raw material and the method to test this) 9 Guidelines recognized as equivalent to ASEAN Cosmetics GMP are: WHO GMP for Pharmaceuticals; PIC/S/ Australia GMP for Pharmaceuticals, Draft ISO 22716, US CTFA Draft (April 28,2005), EU COLIPA. 10Consumer complaint management is part of GMP. 29 o Material Safety Data Sheet (MSDS): contains safety data on the raw material in its pure form (e.g. explosiveness, effects on respiratory system, reactions in case of contact with skin, eyes, etc.); the MSDS is intended to protect workers handling the raw materials during the production process; · When fragrances are used as an ingredient, only the name & address of supplier need to be provided and a declaration of compliance with latest IFRA guidelines; this is because fragrances contain intellectual property which the fragrance manufacturer may not want to pass on to the cosmetics manufacturer Part 3: Quality data of the finished product · Qualitative and quantitative formula of the product, whereby functions of each raw material/ingredient must be specified as part of the formula (e.g. moisturizer, preservative, color) · Details on manufacturing o Manufacturer's contact details; name, full address o Summary of the manufacturing process (additional detailed information on the manufacturing process, quality controls and related manufacturing documents must be made available to the authorities upon request) o Specification & test methods of finished product Criteria for microbiological control Method of analysis corresponding to the specification for checking compliance o Stability data: this is only mandatory if the product is stable less than 30 months Part 4: Safety and efficacy data The summaries of these assessments are given in part 1: · Safety assessment containing a detailed description of test methods signed by a qualified person · Latest compiled report on confirmed or recorded adverse events or undesirable effects on human health including a detailed report of consumer complaints; · Details on the claim support in a full signed report on efficacy of the product based on tests performed or scientific literature (i.e. scientific evidence that the product will have the effect claimed by the manufacturer, e.g. moisturizing, firming) · CV of the safety assessor The PIF must be kept at the address of the company placing the product in the market as indicated on the label (ACD, Article 8). It must further be kept for three years after production of the particular product was stopped. Safety Assessment. Article 3 of the ACD serves as the legal basis for the safety assessment requirement. The safety assessment must be included as part of the PIF and should be carried out using the ASEAN guidelines for safety evaluation. While the risk of serious adverse effects on health is extremely low and far lower than in the case of pharmaceuticals, sometimes (adulterated) cosmetics are found to contain carcinogenic ingredients or to cause skin, eye and photo irritations and sensitivities. For certain cosmetics, such as lipstick, toothpaste and mouth wash, a small amount of ingestion will be unavoidable and the manufacturer will hence have to ensure that this will not be harmful. There is further a risk of accidental intake of cosmetics products especially by small children. Again, the cosmetics manufacturer will have to ensure that this will not cause serious harm and place appropriate warnings on the packaging. 30 Ensuring product safety should be a concern throughout the lifecycle of the product. It needs to start with the raw materials and stretch all the way to post-market surveillance. Raw materials must be carefully chosen and used in safe concentrations and within their specification. Certain prohibitions (ACD Annex 2) and restrictions (ACD Annex 3) on cosmetics ingredients apply; in addition there is a positive list of coloring agents, preservatives as well as UV-filters. Particular importance should be given to testing for the presence of impurities, keeping in mind potential interactions between impurities (e.g. pesticide residues or heavy metals) and ingredients. Attention should also be paid to toxicological data where it is available and the ingredient should not be used if the available data is not sufficient to establish that the ingredient is safe. Once it has been assessed that the formula is safe, it needs to be ensured that the product is manufactured as it was designed by R&D. In some cases, it is further necessary to conduct tolerance tests of the final product and place appropriate instructions and warnings regarding use and storage on the label. Packaging should be chosen so as to reduce the risk of accidents or misuse. In general, safety assessments have to be conducted on the formula, rather than every individual batch, and it has to be shown that the safety assessor signing the assessment is qualified (i.e. has a relevant degree as well as experience). Unless the assessment is signed by the safety assessor, the product cannot be placed in the market. A system should be in place to deal with adulteration of products after they have been marketed. Since unforeseen adverse reactions may still occur, it is also important that the manufacturer has a functioning consumer complaint management system which ensures systematic follow-up. All consumer complaints have to be recorded and, if health related, must be included in the PIF as part of the safety assessment. Labeling. The ACD places much emphasis on the proper labeling of products, whereby different rules apply for inner and outer labels. Labeling requirements include rules regarding ingredients listings, identifiability of the company placing the product in the market, country of manufacture, safety warnings, and expiry/manufacturing date depending on the stability of the product. Some member countries have specific requirements regarding the language used on the packaging; all accept English, while some require certain parts of the label to be translated into the local language. Product Claims. Any claims made by the manufacturer about the product, whether on the label, in advertisements or any other form of publication, should follow the ASEAN claims guidelines for cosmetics products (ACD Appendix 3). According to ASEAN rules, it cannot be claimed that a cosmetic product prevents or cures disease or has any permanent or restorative effects. Further, any claim that is made about the product must be backed up by scientific data, which needs to be provided in the PIF. 2. The AHCRS Process and Implementation Both negotiation and implementation of regulatory harmonization in the ASEAN cosmetics sector progressed relatively fast, with strong commitment from industry and regulators from the beginning. The harmonization process was originally initiated by the industry association. An agreement on a harmonization template was reached relatively fast, an issue that the pharmaceutical sector, for example is still struggling with. In general, the process of finding a template can be expected to slow down if existing regulations in other parts of the world are significantly different from each other and negotiation partners have different stakes in the respective systems. This was not an issue in the case of the cosmetics industry and it was agreed 31 relatively quickly that the EU-system would be used as a template. An additional reason why countries were able to agree on a basis for the regulation relatively quickly was that safety standards in cosmetics are relatively lax and there was hence no occasion to lose time over negotiations of detailed standards. The largest challenge in terms of implementation is the systemic change brought about by the new regulation--a switch from pre-market product approval to post-market surveillance. PMS shifts the main responsibility of ensuring the safety of products from the government to the manufacturer and brings in its wake the need for more sophisticated systems of quality assurance in the companies. To this end, the ACD includes a clause on mandatory GMP compliance and various transparency provisions regarding product safety. In particular the new GMP requirements mean that many firms will have to invest considerably into their existing production facilities, while for some, the upgrading required to meet the new standard is so significant that they will have to build new facilities. At the same time, governments have to adjust to their new role as auditors, which includes developing strategies for risk management and carrying out product audits accordingly. Small and medium-sized local companies are sometimes unsure about the benefits that a costly switch to GMP will bring and may hence be hesitant to implement or may not have the resources to do so (both human and financial). Since multinational companies are generally experienced with post-market surveillance and GMP systems, implementation efforts are focusing mainly on smaller companies. They have taken the form of extensive training sessions on GMP, the product information file, notification, labeling and claims guidelines with individual SMEs, which have in turn committed to cascade the training to all other cosmetics companies in their country. Trainings have covered both the content of the regulations as well as processes by which implementation may best be achieved. Training on implementation and enforcement of the new directive is also being given to regulators. The overall implementation has been overseen throughout by the ASEAN Cosmetics Committee (ACC) which consists of both regulators and representatives from the industry and was founded for this purpose. While implementation itself may pose a hurdle to some companies, it should soon become clear that the new regulation takes a significant burden off both companies and regulators. Given the relatively low risk posed by cosmetics products for human health, the new system should turn out to be a more efficient and equally safe way to regulate the cosmetics industry. 32 CHAPTER 6. REMOVING TECHNICAL BARRIERS EU LESSONS FOR EAST-ASIA? The EU started the process of removing regulatory barriers to trade in the early 1970s. Rather than taking a barrier-by-barrier approach, the EU system is based on the right to market access or free movement (making many barriers illegal) with some derogations. Barriers posed by such derogations are tackled individually. Over the decades, the system of overcoming these barriers evolved from rigid detailed harmonization of technical regulations and conformity assessment procedures, to a more risk-based system, where regulators negotiate common regulatory objectives while leaving the technical specifications largely up to the private sector. Even though the institutional structure supporting this process is far more extensive in the case of the EU than for other regional groupings, some fundamental lessons are still relevant. 1. Tackling Technical Barriers That Fall Under a Derogation The EU went through a long learning process when it came to technical harmonization, moving from a rigid approach of regulating methods and details (the "Old Approach") to a more flexible approach regulating objectives (the "New Approach"). In the first decades of the EU, "harmonization" did not mean "harmony". Due to vetoes and hidden protectionism as well as mistrust among the Member States or between Member States and the Commission, harmonization turned into trench wars on details, if not outright nitty-gritty, often taking many years. With hindsight, it is easy to criticize this initial approach as excessive, too centralist, costly, and too slow. The more interesting query in the early 1980s (after 25 years of living under the Rome treaty) was how to escape from the set of perverse incentives (vetoes, sticking to every detail as if it was vital to a Member State, fragmented and splintered harmonization directives in order to obtain 'results', etc.) which was holding the removal of technical barriers in the regulatory sphere hostage. The Union gradually developed a new regulatory strategy in the 1980s and following Maastricht (Figure 1). It took significant deepening of the EU's commitments with respect to the internal market, and a learning process for lawmakers to think first of all in terms of objectives, and much less and ultimately very flexibly in terms of methods and detail. The upshot is that today's harmonization "acquis" 11 is a far more extensive, sophisticated and lower-cost collection of risk regulation in SHEC areas than might have been imagined only two decades ago. The Old Approach today The Old Approach was a technique of total harmonization. It involved inflexible and detailed regulation. It implied that product characteristics/processes and conformity assessment procedures were fully specified and included in the directive itself, whilst the national laws on the subject were completely replaced by the directive. After many years under the Old Approach, some sectors have fully adjusted to the specifications and the numerous technical amendments, which, presumably, have lowered the costs of inflexibilities somewhat. Nevertheless, it is more than likely that the regulatory design of these directives would score low in any cost/benefit 11 The "acquis communautaire" is an expression in the treaty - in French, in all language versions of the treaty - referring to the total EU-level accomplishments in terms of directives and other EU laws (such as "EC regulations", decisions) , institutions and case law as well as 'soft law' where relevant. 33 analysis. Realizing this, some directives have been moved out of this approach and other ones have been made more flexible, step by step, or gone through wholesale reform. The Old Approach has in most cases been replaced by a risk-based approach, but it is still relevant for high-risk sectors and sectors requiring high precision. Nowadays, the Old Approach is a collection of EU directives which (1) are characterized by such large sunk costs that a shift out of this category is simply too costly to consider, (2) can be justified to belong to a segment of regulation with far-reaching precision, (3) represents a sub-category of risk regulation concerned with such high risks that European society cannot afford flexible approaches. Sectors with large sunk costs--vehicles and cosmetics. The first group of 'locked-in' directives has shrunk a little. It now comprises technical regulation (for production and trade) for cars, two- and three-wheel vehicles, and tractors, together nearly 100 directives. The basic directive on cosmetics also remains, including its very regular amendments, testing issues (e.g. animal testing), labeling and approvals. In any system this area would always be subject to fairly strict regulation. A group of seven so-called 'recipe' directives of food law-- on chocolate, honey, coffee, jam, etc.--was moved out of the Old Approach (although in the case of the chocolate directive the switch has remained incomplete). Sectors requiring extreme precision--legal metrology. This area needs one authoritative and trustworthy method so that (very precise) calibration cannot lead to discrepancies in the internal market. This function is probably the oldest instance of technical regulation or standards. Apart from technical progress (i.e. electronic measuring), this area does not allow flexibility or differentiation; its very essence is the absence of doubt and the presumption of trust. It is also a reasonable guarantee against fraud in cross-border trade. Therefore, it is not particularly costly to use the Old Approach in this field.12 High-risk sectors--pharmaceuticals and chemicals. In medicines, no risks can be taken; they are subject to approvals and verification everywhere in the world. Despite the ultimate political and regulatory responsibility of the national authorities for the allowance of medicines on the market, and although the EU directives with all their exactness still leave a good deal of discretion to Member States when it comes to approvals, the EU has gradually shifted to an ever greater degree of de-facto centralization for 'new' medicines via the EU Medicinal Agency in London. In chemicals, the Old Approach in chemicals worked reasonably well to integrate the internal market. Since the mid-1990s, with the greater emphasis on innovation and sharper world competition, the costs of the Old Approach have been felt. A proper regulatory design could drastically lower the cost, while addressing systematically risk profiles and taking away any barriers to innovation the current system still suffers from. The REACH proposal 13 is an attempt to reform the entire system. Once REACH is adopted, the chemicals sector would no longer be part of the Old Approach. Should the Old Approach be totally phased out? All in all, the Old Approach is slowly being improved and its coverage has already shrunk. The current attempts to reduce the costs and 12The directives in legal metrology can be illustrated by examples such as units of measurements, water meters, gas meters, electricity meters, taxi meters, tire pressures gauges for motor vehicles, standard mass of grain, calibration of tanks of ships, and measuring instruments e.g. weighing instruments. 13REACH stands for Registration, Evaluation, Authorization of Chemicals, a totally new design of all 40- plus EU directives, also involving a European Chemical Agency, with a rigorous risk-based logic. Its initial overly heavy and environmentally ambitious set up (with a tendency to emphasize hazards rather than the risks) has been altered into a much more balanced set up (see Pelkmans, 2005 ­ b). 34 render the systems more risk-based and flexible are likely to reduce the technical barriers with non-EU traders over the long run, but not necessarily in the short run. While the New Approach (see details below) is undoubtedly a more sophisticated and lower-cost regulatory design-- including greater flexibility with a view to technical progress and amendments--the Old Approach is still useful. The relatively limited list of sectors remaining under the Old Approach consists mostly of regulatory domains which are inevitably quite strict or even minutely precise, irrespective of the approach. There are ways to ease the market access restrictions arising from the Old Approach. In the case of medicines, the US, the EU and Japan have formed an informal but active forum in an attempt to promote non-automatic mutual recognition of tests and other ways to smoothen exchange of pharmaceutical pre-clinical files. For metrology, a good deal of the barriers can be resolved in the longer run by adoption of world standards--although marginal costs of quality and fine calibration rise quickly with higher standards, making world standards less attractive for developing countries. In the car sector, the EU is moving towards adoption of standards written by the UN-Economic Commission for Europe in Geneva--with less emphasis on design requirements and more on performance requirements, while giving the world producers a more meaningful say in the technical work. In chemicals, the possible adoption of the regulatory approach implied by REACH worldwide is currently being debated. The foundation of REACH being systematically risk-based is a good one, but the practical operation of an Agency having to manage a phenomenal workload and the first stage (probably over 10 years) of testing and data evaluation of existing pre-1981 chemical substances still prompts a lot of resistance outside the EU. The Old Approach as applied today in the EU is also less burdensome because regulations are put in place with qualified majority voting, while in the past the Old Approach suffered from a veto- based decision making when being developed, and this raised its costs. The New Approach The New Approach changed the focus of regulators from detailed product characteristics to overall objectives and now covers a quarter of intra-EU trade. The New Approach was innovative in several ways: a focus on SHEC-type objectives, rather than the technical requirements themselves, and the preparedness to delegate the technical aspects to standard bodies, but under contractual and legal assurances that such (European) standards serve as a "presumption of compliance" with the objectives. In addition, for directives under the New Approach, a system of conformity assessment (the proof that the standard has indeed been used as asserted, and properly so) was developed under the label of the "Global Approach" (see below). It is that 'presumption of compliance' that removes the technical barrier inside the EU. Figure 8 depicts the New Approach, on the right hand side, and compares it with mutual recognition. Directives under the New Approach include construction products, gas appliances, and medical devices (Table 9). With the Low Voltage directive of 1973 (applying basic safety standards to all electric and electronic equipment for 'normal' use, from light bulbs to computers to household appliances and a precursor of the New Approach), the range of this technical harmonization might well cover nearly 25% of intra-EU trade. 35 Figure 8: Removing Technical Barriers: The New Approach PRODUCTS* not subject to subject to "essential requirements" "essential requirements"** - Health - Environment - Safety - Other consumer protection Reference to standards, with specifications in conformity with the essential requirements Yes Yes No CEN/CENELEC/ National, ETSI as long as EN's are lacking Mutual Recognition Presumption of Conformity provides right of access provides initial right of access Liberalization Legal redress ECJ, art.s 28/30 Conformity CE Conformity assessment mark assessment possible required FREE MOVEMENT OF PRODUCTS THROUGHOUT EU * Legally marketed in one Member State, irrespective of origin ** "Essential Requirement" is ECJ language for regulatory objectives Formal Sources: Council resolution of 7 May 1985; Council resolution of 12 December 1989 (Global Approach, conformity assessment); for details, http://ec.europa.eu/enterprise/newapproach/index_en.htm 36 Table 9. New Approach directives, mid-2006 directive product scope directive product scope reference reference 90/396/EEC gas appliances 94/62/EEC packaging and packaging waste 2000/9/EC cable way installations 89/689/EEC personal protective equipment 89/336/EC electromagnetic compatibility 97/23/EEC pressure equipment 89/106/EEC construction products 99/5/EEC terminal equipment (radio/telecoms) 94/9/EC equipment for explosive atmospheres 94/25/EC recreational craft 93/15/EEC explosives (civil use) 87/404/EEC simple pressure vessels 95/16/EC lifts 88/378/EEC toys safety 73/23/EEC low voltage equipment 96/48/EC high speed rail, interoperability 98/37/EEC machinery safety 96/98/EC marine equipment 2004/22/EC measuring instruments 2001/16/EC conventional rail, interoperability 90/385/EEC medical devices (active implantable) 1996/57/EC* household fridges/freezers, energy efficiency 93/42/EEC medical devices (general) 1999/36/EC* transportable pressure equipment 98/79/EC medical devices : in-vitro diagnosis 2000/14/EC* noise levels equipment outdoors 92/42/EEC energy efficiency household boilers 2000/55/EC* energy efficiency fluorescent lighting 90/984/EEC weighing instrument, non-automatic Note: * conformity assessment only (global approach) Source: EC website Conformity assessment under harmonization In the EU conformity assessment is tackled in two ways--under the Old Approach directly in the directive and under the New Approach in an arrangement called the Global Approach. A significant part of TBTs in world trade is caused by problems of conformity assessment, in particular, the refusal or reticence to recognize tests performed or certificates issued in other countries. Even if the standards used in country B are recognized in the law of country A, the verification via conformity assessment may not be recognized and this can cause costly transport, re-testing, waiting time, uncertainty, even corruption and some scope for anti-competitive conduct. In turn, this might throttle innovation. The main sectors still under the Old Approach are subject to costly conformity assessment. The question is whether this can be done more cheaply and whether it conveys any particular competitive advantage to European producers. This is a highly technical subject, but two points can be made. First, compulsory conformity assessment under the Old Approach has de facto become 'Europeanized'. In cars, for example, there is a European approval since 1996, irrespective where (in the EU) this approval was first given. In REACH, the effect for chemicals would be very similar. In new medicines, the EU Medicinal Agency also has de facto equivalent effects. This Europeanization lowers cost considerably, other things being equal. It also lowers costs for outside competitors if they target several countries in the internal market. Second, the detail of specification being exhaustive, it does create transparency and special committees with national officials (chaired by the European Commission) foster this on a permanent basis. The Global Approach, as a complement of the New Approach, is risk based--it is good for SHEC objectives, provides incentives for quality control, and is relatively cheap. The Global Approach consists of a range of modules (of distinct quality assurance requirements) at the design and production stages of products, accompanied by third-party assessment of conformity by so- called 'notified bodies' (certification bodies) which have been accredited to do so under explicit and published Commission approval (meeting presumably high 'standards' of quality testing and objectivity, etc.). What is key in this approach is the traceability of what has been done in the design, production process, pre- and post- marketing stages. Therefore, ISO 9000 standards are a 37 requirement; once companies operate with ISO 9000, conformity assessment under the Global Approach becomes far cheaper because traceability creates basic trust about permanent adherence to (standard) rules, and facilitates quick remedies. The presumption of trust and the swift self- correction reduce the otherwise extremely damaging risk of product recall or forced withdrawal from the market for companies. Another advantage of the Global approach is that once notified bodies exist all over the Union and they are trusted to be truly independent and technically qualified, competition can emerge in conformity assessment so that the cost of assessment is subject to price disciplines. A company can produce in Member State A, have it assessed in Member State B, and sell in Member State C. Quasi-monopolies which existed in some Member States before the Global Approach have lost their privileges, without there being a loss in trust. The notified bodies should in any event abide strictly by EN 45000 standards for quality of such bodies, e.g. organizational, technical competence and operational criteria. The EN 45000 series are based on a range of ISO/IEC Guides to this effect. Preventing new technical barriers from arising A mechanism has been set up by the EU to attempt to prevent new technical barriers from arising. The EU realized that it would be a waste to work tediously on the gradual removal of TBTs, if, at the same time, due to the regulatory drift of Member States, a lot of new TBTs are created and left unattended. A mechanism to keep new technical barriers from arising was established under the misleadingly label of the 'mutual information' directive 98/34/EC (formerly 83/189). It has inspired the notification system under the TBT Agreement of the WTO--the mere fact of notification might preempt extreme domestic measures, given the current text of the TBT and SPS Agreements and the case law of the Appellate Body. Within the EU, prevention of new TBTs is a permanent and intensive activity which needs considerable powers, credible disciplines and ample resources both at the Member States' level and for the Commission (Table 10). National legislative processes are interrupted ("domestic standstill") at the draft stage of any technical law or major amendment. The EU approach is tough, commensurate with its legal order and the rigor of the internal market based on free movement. 38 Table 10: Preventing intra-EU technical barriers (the operation of dir. 98/34) BENEFITS · preventive nature, national drafts to be altered · avoids adversary `disputes' between MS, renders cooperative work on national (!) law routine (`common ownership of the IM') · supports mutual recognition ADMINISTRATIVE REACH · scope: very wide, from technical specifications, and PPMs, to insurance codes on safety or fiscal rules for `green cars' · detail: any degree of detail, if relevant · but not: any national laws or measures under EU harmonization, ECJ rulings, etc. STRINGENT DISCIPLINES · failure to notify infringement EC law domestic law unenforceable DOMESTIC STANDSTILL · automatic: 3 months · if objection: ranging from 4 ­ 12 months · if threat to IM : 18 months for COM proposal SCRUTINY BY C'TEE · (advisory) "comments" by MS & COM · objection via `detailed opinions'; action required · equivalence (or MR) clauses always required NOTES: MS = Member State; COM = European Commission; IM = Internal Market. For details, see Pelkmans, Vos and di Mauro, 2000 and the TRIS website at http://europa.eu.int/comm/enterprise/tris/index_en.htm 39 2. European Standardization In the EU, standard setting has decisively moved beyond the national level. The original source of this tremendous internationalization was the European market integration, but more recently it was topped up by globalization (Box 2). At first, European standard bodies were more like 'regional bureaus' of the ISO and IEC (the world bodies in Geneva) than active standardizers at the regional level. The three European standard bodies are CEN (for non electric goods), CENELEC (for electric and electronic goods) and ETSI (for telecoms standards and radio communication).14 They are private, not-for-profit institutions. They write essentially two types of standards: standards on request of the European Commission ('mandates') for the purpose of New Approach directives, or, rarely, in special cases or new areas (like recently, standards for services); and standards because market participants see a need, a benefit in terms of better functioning markets. Despite all the attention for the 'reference-to-standards' system first tried out with the 1973 Low Voltage directive and later adapted under the New Approach, the market- driven standardization process in CEN/CENELEC/ETSI is dominant in the order of a ratio of more than 5 to 1 (Figure 9). Figure 9: European Standardization Market-driven standards on the rise... ...and dominated by CEN number of standards regulations number of standards regulations, 2004 20000 12000 M arket driven EC directives 10000 15000 8000 10000 6000 4000 5000 2000 0 0 1992 1994 1996 1998 2000 2002 2004 CEN CENELEC ETSI Source: European Commission, Internal Market Scoreboard no. 14, July 2005. Box 2: European Standardization: speeding up, widening and deepening European business, consumers and the Commission have long been of two minds when it comes to European standardization. Compared to the somber predicament of the internal market, more than two decades ago, much has been achieved and European standard bodies are more efficient, agile and well networked with many sectoral organizations supplying early drafts of standards. Nevertheless, the glass is also half empty in that a number of problems require more firm action and reform. European business (paying 93% of all European standard costs) remains unhappy with having to cope with three separate standard bodies, an old issue going back almost two decades (see Egan, 2001). The Commission is concerned that national standard bodies, under the duty to replace national standards by European ones once adopted, drag their feet because such bodies earn money from selling the national standards. Countries such as Poland, Latvia, Spain, France or Portugal are thousands of standards behind. Of course, European standards are more widely available but, particularly for SMEs, these delays fail to convey the message of business opportunities across the entire internal market. Furthermore, in October 2005, the Commission launched an ambitious new Action Plan for European Standardization with an incredible widening of areas including e.g. services, defense materials, hydrogen, eHealth and nanotechnologies. For all initiatives, see http://ec.europa.eu/comm/enterprise/standards_policy/index_en.htm 14 See www.cenorm.be , www.cenelec.org and www.etsi.org . 40 European standards have a beneficial impact on the effective functioning of the internal market, but what about their effect on third country exporters to the Union? According to Renda and Schrefler, 2006, 27 percent of CEN standards reflect ISO standards. Often, however, ISO standards are not suitable for CEN because they have too many options (so as to compromise) or they are not product specific enough (see Pelkmans and Costello, 1991). Since networks and compatibility issues are critical in electric and electronic goods, especially in components, the CENELEC standards have a high share of world standards in their portfolio-- some 57 percent is identical and another 8 percent only slightly amended. The barrier effect of standards linked to directives is potentially greater than for other European standards; it was therefore important that performance requirements have largely replaced design features. This facilitates compliance for third-country producers. Also, in the Vienna and Dresden agreements, more intense cooperation between respectively CEN and CENELEC on the one hand and ISO and IEC on the other has been organized, which should in the longer run lower the disparities even further. 3. Possible Lessons for East Asian Economic Integration? The EU is an economic union and therefore would be expected to have harmonized standards that are accepted by all members. However, this is still not the case in all sectors in the EU. ASEAN is an emergent Free Trade Area with widely differing approaches to regulation and divergent levels of development. In an FTA it is not necessary to pursue harmonization. ASEAN works through consensus and requires all 10 members to agree. The regional approach adopted by ASEAN assigns multiple tasks to the Secretariat (Table 11). This increase in responsibility needs to be matched by the required increase in capacity. The relationship between mandatory standards and voluntary standards needs to be clarified. Regional standards activities consisting largely of public civil servants need to establish clear mechanisms for involving the private sector. The ASEAN dispute settlement mechanism has yet to be tested on standards. The ASEAN Secretariat does not play a role in ensuring a coordinated position at international forums. Nobody would suggest that EU methods of removing technical barriers could be mimicked as immediate deliverables in the East Asian region or for FTAs between East Asian countries and other WTO partners. Nevertheless, for policy makers, analysts, advisors and business it is possible to learn some interesting lessons and find some inspiration from the manifold initiatives undertaken in Europe to come to grips with what is perhaps the most intractable of all trade issues: the removal of technical barriers. Can the New Approach be of any concrete help for East Asia's own removal of technical barriers? The New Approach requires harmonization of the regulatory objectives--which requires a certain depth of integration among countries. A "minimal harmonization" (as it was in the 1980s in Europe) can be initially denoted because countries simply need to agree on the objectives and presumably some procedural back-up as well as safeguard clauses. Countries or regions can thus adapt at a lower level of ambition and still harvest considerable removal of non- essential technical regulations. Possibilities to design an East Asian or specific FTA adapted version of the New Approach might include: (i) an agreement, sector by sector or even at the level of narrower goods categories, about the SHEC objectives at stake. The difference with the EU approach would probably be that this agreement would not be not a legal form of "harmonization", and would not be backed up by judicial review 'a l' Europeenne'; but countries could agree to implement the 41 agreement at home by a specific date (perhaps even subject to reciprocity clauses) and report about it to a committee; (ii) the agreement should be accompanied by an MoU with the relevant standard bodies of the FTA or group, where the bodies commit to prioritize work on standards which reflect properly the objectives agreed upon; (iii) once standards are adopted by the standard bodies, a committee of the FTA should declare that they reflect the objectives and hence, if correctly used, will give market access; (iv) in a separate agreement, the conformity assessment has to be solved and this can only be accomplished by ensuring sufficient and lasting trust. East Asian countries are increasingly engaged in FTAs with each other and with other countries. If solutions for overcoming TBTs would take this format, the complexity might actually be reduced considerably. Can the Global Approach generate lessons or options for Asian countries? This is not immediately obvious. For the Global Approach to make sense, trust and traceability will have to permeate everything. This imposes a cost on enterprises. The willingness to accept this as well as the capability to afford it might differ considerably amongst the highly diverse countries of East Asia, and depend on the sector. It might be more feasible to require adoption of international standards from testing laboratories and, in addition, full and verified independence from government and (major) clients. In practice, there may be some ad hoc recognition amongst the better known and equipped conformity assessment bodies in East Asia, if only because of the day-to-day needs of multinationals manufacturing extremely complex products with components from all over the region and beyond. Considerations for East Asia in dealing with technical barriers at a regional level: 1. Disentangle, the regulatory objectives from the methods and detail employed in specific rules. This is a fundamental lesson. The EU experience would not be relevant as long as domestic regulators or political leaders maintain a preference for far-reaching regulatory autonomy--not only for objectives but equally for methods and detail--and are wary to tie their hands for the sake of predictability and lower costs of market access. 2. The EU experience cannot be understood by a reliance on technical documents alone, or even primarily. The removal of technical barriers is an integral part of the broader regulatory regime of any internal market,. 3. The Old Approach with its far-reaching uniformity and excessive detail is not a useful example for East Asia. Nevertheless, the sectors now still under that approach are typically the ones creating the most costly and stubborn obstacles and will be troublesome in any trade or FTA due to higher risks, greater precision, or extreme sensitivities with the public. 4. The New Approach is instructive, even if the basic harmonization (of objectives) would not be an easy option for East Asia. One option is an agreement on SHEC objectives with commitments of implementation by a deadline and reciprocity clauses, supervised by committees. This could be backed up by a MoU with standards bodies, light arrangements about conformity assessment, and some basic 'best endeavor' commitment to allow market access. 42 5. Whether the Global Approach can provide lessons to Asian FTAs depends on the willingness to accept a modular structure of conformity assessment based on risk, as well as the fundamental acceptance of the idea that trust and traceability will have to permeate everything. 6. It is important for FTAs to create transparency about new regulation with potential new TBTs. Best-endeavor clauses, a reporting system based on the WTO notification, and a preparedness to insert equivalence clauses would at least help somewhat. 7. Reliance on international standards and efforts at de-regulation and use of supplier's declaration of conformity where possible is important. Table 11: Differing Regional Approaches to Standards and Conformity Assessment EU ASEAN Type of Agreement Common Market Free Trade Area Institutional Configuration Supranational Secretariat Tech. Regional Standardization Body Enterprise DG Secretariat Voluntary Standards Body CEN(general standards), Secretariat CELENEC (electrotechnical Standards) & ETSI (telecommunications) Criteria for setting regional standards Regional Standards tend to follow the Follow international standards highest standards of the Members Harmonization Strategy Harmonization of technical regulations Harmonize standards in Priority led by countries demand and voluntary Sectors, existence of TBT, standards by private sector volume of intra-ASEAN trade, stated interest. Harmonization of national technical No, only required to satisfy minimum No, but obliged to accept imports Regulations requirements that satisfy regional standards Voting Structure for regional Qualified majority voting Unanimity technical regulations Relationship between technical Complementary No clear delimitation regulations and voluntary standards Involvement of private sector and High Low (private sector involvement consumers but limited consumer awareness) Perceptions of standards by private Consumers very aware of Consumers and private sector sector and consumers health/environment/safety issues. have limited awareness of Private sector sees standards as standards investment for competitiveness Implementation Compulsory once regulation approved Compulsory with long implementation time Dispute settlement institution Fully operational Consultation between Member States, referral to Joint Sectoral Committee and then follow ASEAN Protocol on Enhanced Dispute Settlement (2004) Financing for setting regional Yes, EU provides funds to national Harmonization of standards standards standardization bodies meetings coordinated by Secretariat Common policies in international Yes, standard bodies establish common No, ASEAN Secretariat does not organizations positions include this in their workplan Regional information point Yes Yes Conformity assessment procedures Aligned and principle of equivalence Product specific mutual and mutual recognition is operational recognition of conformity assessment procedures Conformity assessment test At origin. 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