A partnership with academia

Building knowledge for trade and development

Vi Digital Library - Text Preview

Trading with Conditions: The Effect of Sanitary and Phytosanitary Measures on Lower Income Countries’ Agricultural Exports

Report by Murina, Marina; Nicita, Alessandro / UNCTAD, 2014

Download original document (English)

Using the UNCTAD's TRAINS database on non-tariff measures, this paper utilizes an econometric model to investigate the effect of the European Union’s sanitary and phytosanitary (SPS) measures across 21 broad categories of agricultural goods. The findings indicate that SPS measures result in relatively higher burdens for lower income countries but that membership in deep trade agreements seems to reduce the difficulties related to compliance with SPS measures. Overall, the additional trade distortionary effect of the European Union SPS measures is quantified in a reduction of lower income countries’ agricultural exports of about 3 billion $US (equivalent to about 14 percent of the agricultural trade from lower income countries to the European Union). These results are consistent with the hypothesis that while many middle and high income countries have the internal capacity to comply with SPS measures, lower income countries do not. In broader terms, these results may be interpreted as an indication that technical assistance is helpful for lower income countries to meet compliance costs related to SPS measures. Further progress with well-targeted technical assistance projects, both at the bilateral and multilateral levels, could generate considerable gains for lower income countries.

U n i t e d n at i o n s C o n f e r e n C e o n t r a d e a n d d e v e l o p m e n t


TRADING WITH CONDITIONS:
THE EFFECT OF SANITARY AND


PHYTOSANITARY MEASURES ON LOWER INCOME
COUNTRIES’ AGRICULTURAL EXPORTS


POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES
RESEARCH STUDY SERIES No. 68


Printed at United Nations, Geneva
1425020 (E) – January 2015 – 250


UNCTAD/ITCD/TAB/70


United Nations publication
ISSN 1607-8291











POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES


RESEARCH STUDY SERIES No. 68






TRADING WITH CONDITIONS:


THE EFFECT OF SANITARY AND PHYTOSANITARY MEASURES


ON LOWER INCOME COUNTRIES' AGRICULTURAL EXPORTS






by



Marina Murina


and


Alessandro Nicita


UNCTAD, Geneva













New York and Geneva, 2014


U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T





ii POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES


Note


The purpose of studies under the Research Study Series is to analyse policy issues and to


stimulate discussions in the area of international trade and development. The Series includes


studies by UNCTAD staff and by distinguished researchers from other organizations and academia.




The opinions expressed in this research study are those of the authors and are not to be


taken as the official views of the UNCTAD secretariat or its member States. The studies published


under the Research Study Series are read anonymously by at least one referee. Comments by


referees are taken into account before the publication of studies.




The designations employed and the presentation of the material do not imply the


expression of any opinion on the part of the United Nations concerning the legal status of any


country, territory, city or area, or of authorities or concerning the delimitation of its frontiers or


boundaries.




Comments on this paper are invited and may be addressed to the author, c/o the


Publications Assistant, Trade Analysis Branch (TAB), Division on International Trade in Goods and


Services, and Commodities (DITC), United Nations Conference on Trade and Development


(UNCTAD), Palais des Nations, CH-1211 Geneva 10, Switzerland; e-mail: tab@unctad.org; fax no:


+41 22 917 0044. Copies of studies under the Research Study Series may also be obtained from


this address.




Studies under the Research Study Series are available on the UNCTAD website at


http://unctad.org/tab.





Series Editor:
Victor Ognivtsev


Chief
Trade Analysis Branch


DITC/UNCTAD











UNCTAD/ITCD/TAB/70









UNITED NATIONS PUBLICATION


ISSN 1607-8291









© Copyright United Nations 2014
All rights reserved





Trading with Conditions: The Effect of Sanitary and Phytosanitary Measures on Lower Income Countries' Agricultural Exports iii


Abstract





Agriculture plays a fundamental role in the development prospects of many developing


countries, especially those at the lower end of the development process for which export earnings are


largely related to the export performance of their agricultural sector. Although the last few decades


have seen a progressive trade liberalization, market access for agricultural products is increasingly


determined by a wide array of regulatory measures. The increase in the use of such measures has


been largely driven by non-trade policy objectives such as consumers’ demand for quality and safety


of products and to the needs of agri-food businesses to streamline food production chains. Still,


regulatory measures have a critical role in determining market access conditions as compliance with


them is often a sine-qua-non condition for exporting to developed countries markets. From a trade


perspective one of the most important aspects of such regulatory measures is their potential


distortionary effect as their cost of compliance is often asymmetrical across countries. Using the


UNCTAD's TRAINS database on non-tariff measures, this paper utilizes an econometric model to


investigate the effect of the European Union’s sanitary and phytosanitary (SPS) measures across 21


broad categories of agricultural goods. The findings indicate that SPS measures result in relatively


higher burdens for lower income countries but that membership in deep trade agreements seems to


reduce the difficulties related to compliance with SPS measures. Overall, the additional trade


distortionary effect of the European Union SPS measures is quantified in a reduction of lower income


countries’ agricultural exports of about 3 billion $US (equivalent to about 14 percent of the agricultural


trade from lower income countries to the European Union). These results are consistent with the


hypothesis that while many middle and high income countries have the internal capacity to comply with


SPS measures, lower income countries do not. In broader terms, these results may be interpreted as


an indication that technical assistance is helpful for lower income countries to meet compliance costs


related to SPS measures. Further progress with well-targeted technical assistance projects, both at the


bilateral and multilateral levels, could generate considerable gains for lower income countries.






Keywords: Non-Tariff Measures, "Agricultural Trade", Trade Policy




JEL Classification: F1

















iv POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES






Acknowledgements





We are grateful to Rajan Dhanjee, Marco Fugazza, Ralf Peters, Denise Penello Rial,


Miho Shirotori and Victor Ognivtsev for comments.




The authors accept sole responsibility for any errors remaining.










Trading with Conditions: The Effect of Sanitary and Phytosanitary Measures on Lower Income Countries' Agricultural Exports v


Contents




1 INTRODUCTION .......................................................................................................................... 1




2 EUROPEAN UNION REGULATORY FRAMEWORK ................................................................. 2




3 EMPIRICS .................................................................................................................................... 4




4 CONCLUDING REMARKS ........................................................................................................ 10




REFERENCES ......................................................................................................................................... 11












List of figures




Figure 1. Regulatory intensity and total imports ................................................................................... 5


Figure 2. Regulatory intensity and trade gap........................................................................................ 6


Figure 3. Effects of SPS measures on low income countries exports to the EU ............................... 10










List of tables






Table 1. Regression results on overall regulatory intensity ................................................................. 7


Table 2. Regression results on regulatory intensity based on conformity assessment ...................... 8












Trading with Conditions: The Effect of Sanitary and Phytosanitary Measures on Lower Income Countries' Agricultural Exports 1




1. INTRODUCTION


Agriculture plays a fundamental role in the development prospects of many developing


countries, especially those at the lower end of the development process and which export earnings are


largely related to the export performance of their agricultural sector. Although the last few decades


have seen a progressive trade liberalization, market access for agricultural products is increasingly


determined by a wide array of regulatory measures. These regulatory instruments are generally referred


to as sanitary and phytosanitary (SPS) measures and include many diverse conditions such as import


licenses, inspection requirements, testing and certification requirements, labeling and packaging


requirements, and quarantines. The increase in the use of such measures has largely been driven by


non-trade policy objectives such as the increase in consumers’ demand for the quality and safety of


products and the needs of agri-food businesses to streamline food production chains. Still, SPS


measures have a critical role in determining market access conditions as compliance with them is


necessary for entering developed countries markets.
1




From a trade perspective one of the most important aspects of SPS measures is their potential


distortionary effect. SPS measures are generally applied in a nondiscriminatory manner as they usually


target products regardless of their origin. However, regulatory and procedural requirements are of


particular relevance for poorer countries’ exports for two main reasons. First, regulatory measures fall


disproportionally in sectors on which poor countries are dependent (i.e. agriculture). Second,


compliance with SPS measures is asymmetrical because it requires technical know-how, production


facilities, and an infrastructural base that, while usually available in developed and emerging markets, is


often lacking in many lower income countries (Athukorala and Jayasuriya, 2003).




The distortionary and trade-restrictive effects of SPS measures are among the most important


reasons why SPS measures are increasingly addressed in trade agreements. At the multilateral level


SPS measures are governed by the broad guidelines set in the World Trade Organization (WTO)


Agreement on the Application of Sanitary and Phytosanitary Measures (the SPS Agreement). The


fundamental tenet of the SPS Agreement is the principle of non-discrimination for which SPS measures


should be applied in order to limit unnecessary distortions in international trade.
2
The restrictive effects


of SPS measures are increasingly addressed in regional and bilateral trade agreements. The inclusion


of provisions on SPS measures together with those on technical barriers to trade (TBT) is motivated by


a desire to remove barriers to deeper economic integration through mutual recognition or the


harmonization of each party's regulatory system and by facilitating compliance through the means of


technical assistance programs and other trade facilitation mechanisms. Still, the actual effectiveness of


trade agreements with regard to addressing the effects of SPS measures is debatable. This


effectiveness greatly depends on the implementation of a cooperative work program aimed at reducing


the discrepancies among different regulatory systems and on the actual realization of technical


assistance programs aimed at reducing compliance costs.




The literature on the effects of SPS on international trade has shown that SPS measures often


have both restrictive and trade diverting effects. The rationale is that the presence of regulatory


measures imposes country and sector specific compliance costs that alter export competitiveness.


These diverse costs ultimately reflect in the structure of international trade flows. Among the various


studies on the topic, Disdier et al (2008) find distortionary effects resulting from SPS measures applied


by OECD members on their agricultural and food exports. Using a gravity model framework, Disdier et


al findings indicate that SPS measures significantly reduce developing countries’ exports to OECD


countries, while not affecting trade between OECD members. Athukorala and Jayasuriya (2003) also


look at the export responses to regulatory measures in countries with different levels of. Their study




1 UNCTAD (2012).


2 The WTO SPS Agreement stipulates that SPS measures should be based on international guidelines and common risk
assessment techniques and encourages standards based on participation and consensus. However, the Agreement
permits Members to introduce or maintain measures which result in a higher level of protection than would be achieved by
measures based on the relevant international standards, guidelines or recommendations, if there is a scientific justification.





2 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES




finds that many developing countries face considerable problems in meeting even basic food hygienic


requirements. However, they also find that the level of compliance increases for more developed


partners. The study by Essaji (2008), which uses the US data on agricultural, mining and manufacturing


imports to examine the impact of regulatory measures on trade patterns, also suggests that foreign


regulations significantly impinge on developing countries' export capacities by providing incentives to


firms with less advanced production processes to specialize away from sectors with regulatory


burdens. This in turn affects developing country export patterns and the probability to export to highly


regulated markets. Distortionary effects of SPS measures are also found in sector specific studies. For


example, Tran et al (2011) find similar results in a case study on the impact of imposing stricter drug


residue standards on crustacean imports to Canada, the European Union, Japan, and the United


States. These authors show how stricter standards result in uneven responses by countries with


different levels of development. Maskus et al (2004), using firm-level data generated from 16


developing countries, show that the exporters from developing countries encounter significant


additional costs while adapting their production processes to comply with foreign regulatory measures.


Maskus et al argue that these costs stem from developing countries’ lack of administrative, technical


and scientific capacities to comply with foreign standards. Further, they argue that even if the relative


impact of compliance costs is small on average, the supply response by enterprises in developing


countries’ is often more sensitive and thus such firms might tend to avoid higher-cost markets while


favoring markets and products with a lower regulatory burden. Similarly, Chen et al (2006), using firm


level data on export performance of 17 developing countries, find that regulatory measures do affect


export decisions. Particularly, these authors find that testing and inspection procedures by importers


reduce exports by 9 per cent and 3 per cent, respectively, and that foreign standards overall impede


exporters' market entry by reducing the likelihood of exporting in different markets. Furthermore, Chen


et al demonstrate that the difference in standards across foreign countries impedes the economy of


scale for producers and thus has a negative impact on decisions about whether to enter export


markets.




The present paper contributes to the discussion above by investigating and quantifying the


effect of SPS measures in a highly regulated market, the European Union (EU), on lower income


countries’ exports. As the EU is by far the largest importer of agricultural products worldwide, its


regulations have large repercussions for developing countries’ exports. The empirical analysis utilizes


econometric methods and relies on the UNCTAD's TRAINS non-tariff measures (NTMs) database. The


data covers EU imports across 21 broad categories of agricultural goods. The main finding of the


paper is that the EU’s SPS measures have distortionary effects against lower income countries.




The remainder of the paper is organized as follows. Section 2 describes the EU regulatory


framework on agricultural products. Section 3 presents the estimating framework to assess the impact


of the EU’s SPS measures on lower income countries and discusses the results. Section 4 concludes.




2. EUROPEAN UNION REGULATORY FRAMEWORK


The stated objective of the EU regulatory framework with respect to agricultural imports is to


minimize related risks and to guarantee a high level of safety for food products marketed within the EU.


For this purpose the EU relies on a regulatory regime that comprises a complex and comprehensive set


of SPS measures. The overreaching regulatory framework laying down the EU’s agricultural SPS


measures resides in the General Principles of Food Law (EC) № 178/2002 which was adopted in


January 2002 by the European Parliament and the Council. The EU regulations define principles and


obligations covering various stages of food production and distribution. These principles are


harmonized among the EU member states and apply both to food products produced within the EU


and those imported from third countries.
3




3 Foreign foodstuffs may also be sold in the EU market under the conditions that the pertinent foreign food safety
requirements are recognized by the EU to be at least equivalent to its own. To facilitate this, the EU legislation also







Trading with Conditions: The Effect of Sanitary and Phytosanitary Measures on Lower Income Countries' Agricultural Exports 3




The EU regulatory framework is generally more comprehensive and stringent than frameworks


implemented in many other countries, especially in those where health-related priorities are different


and where consumers’ advocacy is less established (Henson, 2006). The widespread use of SPS


measures by the EU derives from the adoption of the precautionary principle (i.e. the EU takes an


active stance on managing uncertainty and risk rather than limiting itself to implementing regulatory


policy only when harm is proved) and from the fact that the EU regulatory framework takes into


account diverse pre-existing national frameworks (Wiener and Rogers, 2002). In practice, even though


the EU food law is based on international standards, the EU regulatory framework often adopts more


specific and stringent regulations, when international standards "would be an ineffective or


inappropriate means for the fulfillment of the legitimate objectives of food law or where there is a


scientific justification, or where they would result in a different level of protection from the one


determined as appropriate in the Community"
4
.




The comprehensiveness of the EU regulatory framework, as well as its higher stringency vis-à-


vis frameworks implemented by trading partners, act as an important market access barrier as


compliance with such standards requires production processes and quality controls that are not easily


available on a cost effective basis in many developing countries. Indeed, the disproportionate effect of


the EU regulations related to agricultural products on the exports of developing countries is recognized


within the EU regulatory framework. In this regard, EU Regulation № 882/2004 acknowledges the


special needs of developing countries, in particular of the least developed countries, and furthermore a


need for technical assistance to help developing countries to comply with the EU regulations. Still, the


EU legislation with respect to the preferential treatment of developing countries in the field of food


safety is relatively limited and the above-mentioned regulation is an example of a rather finite package


of provisions devoted to this issue.
5
In practice the EU regulations regarding developing countries’


needs to facilitate compliance with SPS measures are often vague, not binding and without firm


commitments or precise mechanisms to facilitate regulatory convergence.




Issues related to developing countries’ compliance with the EU SPS measures are more


precisely addressed in bilateral preferential trade agreements (PTA). Such agreements usually


incorporate specific clauses on SPS measures with the purpose of either harmonization or mutual


recognition of standards between the PTA members as well as technical assistance programs, which


essentially are aimed to build the capacity of the EU PTA’s partners to apply the EU regulations. For


instance, the EU-Morocco agreement specifically calls for wider use of the EU technical rules and


regulations for agricultural products and certification procedures by the Moroccan exporters.
6
Similarly,


the EU-Mexico agreement calls for the harmonization of health, plant-health and environmental


standards between the parties.
7
In the EU-CARIFORUM agreement, the EU pledges to "assist


CARIFORUM States in establishing harmonized intraregional sanitary and phytosanitary measures also


with a view to facilitating the recognition of equivalence of such measures with those existing in the


European Community Party"
8
as well as to "assist CARIFORUM States in ensuring compliance with


SPS measures of the European Community Party".
9
The EU-Chile PTA assumes "technical assistance




provides for the establishment of bilateral agreements between the EU and third countries that may set specific
requirements for compliance between the parties to such agreements. Art 11 of Regulation (EC) № 178/2002


4 Art 5.3 of Regulation (EC) № 178/2002
5 For example, the Regulations (EC) № 852/2004, № 853/2004 and № 854/2004 (which together with Regulation 882/2004
make up the so-called “hygiene package”) make no reference to developing countries. On the contrary, Regulation
852/2004 in Article 10 provides that third country food business operators exporting to the European Community shall
comply with the Community’s substantive hygiene requirements (from Bromberg, M. (2009)).


6 Article 40.1 of the Euro-Mediterranean Agreement establishing an association between European Communities and the
Kingdom of Morocco.


7 See Article 21.2 (a) of Economic Partnership, Political Coordination and Cooperation Agreement between the European
Community and the United Mexican States


8 See Article 53 (c) of Economic Partnership Agreement between the CARIFORUM States and the European Communities.


9 See Article 53 (d) of Economic Partnership Agreement between the CARIFORUM States and the European Communities.





4 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES




for strengthening of sanitary and phytosanitary control systems, with a view to supporting as far as


possible the promotion of equivalence and mutual recognition agreements". This agreement also calls


for implementing "specific projects aimed at supporting sanitary, phytosanitary, environment and food


quality measures, taking into account legislation in force for both Parties, in compliance with WTO rules


and other competent international organizations".
10
The EU-Egypt agreement aims at "upgrading the


level of Egyptian conformity assessment bodies, with a view to the establishment, in due time, of


mutual recognition agreements in the area of conformity assessment".
11
The EU-South Africa Trade


and Development Cooperation Agreement is another illustration of the EU’s commitment to "facilitate


technical assistance for Southern African capacity-building initiatives in the field of accreditation,


metrology, and standardization"
12
, as well as to "developing practical links between the South African


and European standardization, accreditation, and certification organizations"
13
. Overall, the provisions


and technical assistance projects that are present in the EU PTAs surely add an incentive to cooperate


in streamlining the regulatory policies on the application of SPS measures between the PTA members.


Still, the effectiveness of technical assistance in addressing SPS related issues is debatable as it


depends on how such assistance is allocated (Wiig and Kolstad, 2005).




3. EMPIRICS


The aim of this paper is to identify any distortionary effects that SPS measures may have on


lower income countries.
14
The empirical approach consists of investigating whether products that are


subject to a large number of regulatory measures are also products for which trade flows tend to be


relatively smaller for lower income countries. The rationale is that since regulations result in additional


and exporter-specific costs to trade (due to different compliance capacity), one would expect that the


trade of products subject to regulation would be biased against exporters for which cost of compliance


is larger (i.e. lower income countries).




The initial step in analyzing the effects of regulatory measures on trade is to construct an index


of regulatory intensity. For this purpose we use data from the UNCTAD's TRAINS
15
database on NTMs


on a subset of SPS measures applied by the EU. In particular, we use measures that fall under


tolerance limits, hygienic requirements, production requirements and conformity assessments. All


these measures comprise about 17 different types of SPS measures.
16
UNCTAD raw data is


synthesized into an index of regulatory intensity by taking the number of SPS measures applied to


each HS 6 digit line. Then, to construct the broader aggregates (at the HS 2 digit) we use trade-


weighted means. For example, a regulatory intensity index of 5 implies that there are about five


different SPS measures that are applied on average to imports of that particular goods category. Such


an index has the advantage of taking into account both the number of different SPS measures and the


frequency of their use across the various goods in each product group. The empirical analysis covers


the EU imports across 21 broad categories of agricultural goods and is based on data for the year


2010.




10 See Article 24.2 (a) and (g) of Agreement establishing an association between the European Communities and Chile.


11 See Article 47 (b) of Euro-Mediterranean Agreement establishing an association between the European Communities
and the Arab Republic of Egypt.


12 See Article 47(d) of the Agreement on Trade, Development and Cooperation between the European Communities and
the Republic of South Africa.


13 See Article 47 (e) of the Agreement on Trade, Development and Cooperation between the European Communities and
the Republic of South Africa.


14 Lower income countries are these with a GDP per capita of less than 4,085 $US.


15 TRAINS (Trade Analysis and Information System), available at: http://www.unctad.info/en/Trade-Analysis-Branch/Key-
Areas/TRAINSWITS/


16 More specifically we use the NTM three digit codes that fall under A2, A4, A5, A6, and A8 of the UNCTAD classification
of NTMs.







Trading with Conditions: The Effect of Sanitary and Phytosanitary Measures on Lower Income Countries' Agricultural Exports 5




One important issue to consider is that the intensity of the regulatory framework is specific to


the typology of each product as regulatory measures are applied to products depending on their very


nature and related risk. For example, agricultural products ready to consume such as fruits and


processed foodstuffs are generally subject to a larger number of regulatory measures than raw food


that needs to be cooked or processed. Indeed, regulatory intensity varies greatly across product


groups ranging from an average of just two measures (live plants) to more than ten different measures


applied (fruits and prepared food). As shown in Figure 1, regulatory intensity also varies in relation to


import levels. In general, there is a larger number of regulations on products that are more widely


imported (and consumed) so as to better safeguard consumers from health and safety risks.




Figure 1
Regulatory intensity and total imports


Live Animal


Meats


Fish


Dairy ProductsOther Animal Products
Live Plants


Vegetables


Fruits


Coffee/Tea/Spices


Cereals


Milling Products


Oil Seeds


Gums/Resins


Fats/Oils


Prepared Animal Products


Sugar


Cocoa


Prepared Cereals


Prepared Vegetables


Other Prepared Food


Beverages


20
21


22
23


24
E


U
T


ot
al


Im
po


rts
(l


og
B


ill
io


n
U


S
$)


2 4 6 8 10 12
Regulatory Intensity






The above discussion is reflected in our identification strategy. In practice, the effect of


regulatory intensity on trade flows cannot be isolated by relying exclusively on the variance across


products, as such strategy would both capture product specific differences as well as be biased due to


endogeneity issues. Instead, our identification is based on a cross country variance but taking into


account product specific regulatory differences. More in detail, we examine whether SPS measures


pose an additional burden for lower income countries by testing whether trade gaps (defined as the


difference between potential and observed exports at the product level) are correlated with the


countries’ level of development. The rationale is as follows: if trade costs associated with SPS


measures are more burdensome for lower income countries, then such costs should translate into


relatively larger trade gaps for lower income countries in products for which regulatory intensity is


higher. Conversely, trade gaps should be more similar across countries at different levels of


development when regulatory intensity is lower. At the limit, trade should be undistorted when


regulatory intensity equals zero.




We test whether EU import bias against lower income countries depends on regulatory


intensity by proceeding in two steps. First, we obtain a measure of the trade gap for each bilateral


relationship and product group (HS2-digit), and second we check whether the magnitude of the gap


can be explained by regulatory intensity. The reason for proceeding in two steps is driven by the lack of


comparable cross country and reliable time series SPS data.


In practice, while the first step takes


advantage of the rich cross country gravity dataset, the second step is constrained by a much more


limited dataset on SPS measures.





6 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES




To form predictions about the gap between potential and observed trade we use the canonical


gravity model of bilateral trade by using a Poisson estimation which is robust to the presence of zero


trade flows.
17
We estimate the model for each of the 21 product groups in a cross section comprising


about 150 countries. The results of these regressions are similar to those of the relevant literature.


Gravity variables are generally significant and with the correct sign the model explains about 80 or


more percent of the variation.
18
The gravity model provides us with estimates of potential trade which


we then confront with the observed trade so as to calculate the trade gap for each exporter in each of


the 21 product groups.
19
We address scale-related issues by calculating the percentage deviation of


predicted levels versus observed levels of trade. In practice, a positive trade gap implies that the


observed level of exports is lower than its potential level as measured by the gravity model, while a


negative trade gap indicates the opposite. We calculate aggregate trade gaps in respect to the EU


imports for each trading partner by summing up the gaps of all EU members across each product


group. Average trade gaps for 21 HS2-digit categories along with the regulatory intensity of the SPS


measures are illustrated in Figure 2. As one would expect, trade gaps are on average positive, and


more so for categories of products that are more highly regulated. Still, what matters for our analysis is


not a simple relationship between the trade gap and regulatory intensity, but whether the trade gap is


relatively larger for lower income countries (as compared to the other EU trading partners) when


regulatory intensity is higher. We investigate this in the second step of the econometric analysis.



Figure 2.


Regulatory intensity and trade gap


Live Animal


Meats


Fish


Dairy Products


Other Animal Products


Live Plants


Vegetables


FruitsCoffee/Tea/Spices


Cereals


Milling Products


Gums/Resins
Fats/Oils


Sugar


Cocoa


Prepared Cereals


Other Prepared Food


Beverages


Oil Seeds


Prepared Animal Products
Prepared Vegetables


-5
0


0
50


10
0


15
0


T
ra


de
G


ap
(


%
)


2 4 6 8 10 12
Regulatory Intensity






17 Santos Silva, J. M. C. & Tenreyro, S. (2006).
18
In more formal terms for each product group we estimate the model:


jkkjjkjkjk MDX φψωγβα ]lnexp[ ++++=

where j denotes importers and k denotes exporters and where α is


a proportionality constant, jkD is the 1 x k row vector of explanatory variables with corresponding parameter vector β ,
which represents the different dimensions of transactional distance: geographic distance, contiguity, language, and


colonial links. The term jkM includes terms controlling for the presence of unobserved relative trade impediments that a
country has with all its trading partners (Anderson & Van Wincoop, (2003)) as in Baier & Bergstrand, (2009) and Baier,


Bergstrand and Mariutto, (2010). Finally, kj ψω , are sets of fixed effects controlling for importer and exporter specific
characteristics and )exp( jkujk ≡φ is an error term. In this equation jkD and jku represent respectively observed and
unobserved bilateral trade cost determinants.


19 A limitation of this approach is that cross section gravity models can be mispecified as such models do not fully control


for bilateral effects. In this regard, any systematic deviation of observed trade from predicted trade may be due to omitted
variables. Still, the two step approach remains valid as the second step examines whether any systematic variation can be
explained by trade policy variables.







Trading with Conditions: The Effect of Sanitary and Phytosanitary Measures on Lower Income Countries' Agricultural Exports 7




The dataset for the second step is composed by pooling together trade gaps from all


exporting countries and for all product groups. The econometric estimation follows simple ordinary


least squares while the specification consists of explaining bilateral trade gaps controlling for tariffs and


the presence of a deep trade agreement.
20
In this setup, the issues related to product specific


regulatory intensity discussed above are controlled for by employing product fixed effects. To


investigate whether the SPS result in a relatively larger burden for lower income countries the variable


of interest is the interaction among 3 terms: regulatory intensity, a dummy variable for the lower income


countries, and the presence of a deep trade agreement.
21
The results from the second step regression


are presented in Table 1.


Table 1


Regression results on overall regulatory intensity


Dependent Variable: Trade Gap (percentage)


(1) (2) (3) (4) (5)


Lower Income
-1.079



-1.157



-1.313*



-1.247



0.464


(0.711)


(0.752)


(0.782)


(0.891)


(0.920)


Lower Income * Reg. Intensity
0.076*



0.071*



0.085*



0.085*



-0.022


(0.042)


(0.044)


(0.046)


(0.046)


(0.050)


Tariff (log)
3.648



3.784



3.742



3.811



(3.596)



(3.606)



(3.584)



(3.586)


No Deep Agreement
0.867**



1.669**



1.683**



2.092**



(0.219)



(0.697)



(0.706)



(0.830)


No Deep Agreement * Reg.
Intensity



-0.048



-0.048



-0.073



(0.040)



(0.040)



(0.048)


Lower Income * No Deep
Agreement



-0.081



-2.153



(0.542)



(1.505)


No Deep Agreement * Lower
Income * Reg. Intensity



0.124*



(0.074)


R-Squared 0.026 0.032 0.033 0.034 0.034


Observations 1848 1848 1848 1848 1848


Note: Robust standard errors in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01
All specifications include sector fixed effects.






20 By "deep" agreements we mean the agreements that go beyond tariff liberalization to tackle regulatory and behind the
border issues.


21 The core specification is


ikikikkkikikkkik
EU
ki LRINDLNDRILRINDNDLtgaptrade φωβββββββα ++⋅⋅+⋅+⋅+⋅+++++= )()()()()1ln(_ 7654321


where i denotes product groups and k exporters, ND is the absence of a deep trade agreement with the EU , t is the
bilateral applied tariff, L is a dummy for lower income countries which controls for common factors across all lower income


countries, and RI is regulatory intensity. Finally, iω denotes product group fixed effects and kiφ is an error term. In such
a setup, 7β is the coefficient of interest which captures the effect of the regulatory intensity for lower income countries not
being part of a deep trade agreement with the EU. A positive sign on 7β implies that the higher the regulatory intensity the
larger is the trade gap for lower income countries that have not signed deep trade agreements with the EU.





8 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES




In describing the results we proceed in steps. We start by simply testing whether the trade gap


is different for lower income countries and whether this gap increases with regulatory intensity. The


results of specification (1) indicate that an increase of one point of regulatory intensity increases the


trade gap of lower income countries by about 7.6 percentage points. Specification (2) adds the tariffs


and deep trade agreements as control variables. While tariffs are not significant, the magnitude of the


trade gap depends on whether the exporter is part of a deep agreement with the EU. Most importantly,


the introduction of these two terms does not significantly affect the result on the interaction term.


Specifications (3) and (4) further add interaction terms between various variables. In this case the


results also do not change. Finally, specification (5) adds the triple interaction term so as to investigate


whether there are differences in trade gaps between lower income countries depending on their


membership on deep trade agreements with the EU. These last results suggest that the impact of


regulatory intensity is limited to lower income countries that are not members of deep trade


agreements with the EU. All along, the results seem to indicate two key dynamics with regard to the


significance of regulatory measures. First, regulatory measures result in relatively higher burdens for


lower income countries. Second, while participation in a deep trade agreement seems to facilitate


lower income countries in overcoming the costs related to SPS measures, deep trade agreements have


little effect to reduce SPS’s cost of compliance for middle and higher income countries.


This last result


is consistent with the hypothesis that while more developed countries have the internal capacity to


comply with SPS measures, lower income countries do not. In this regard, the results suggest that the


technical assistance programs present in deep trade agreements facilitate the capability of lower


income countries to cope with SPS measures and therefore to export to regulated markets.
22


Table 2


Regression results on regulatory intensity based on conformity assessment


Dependent Variable: Trade Gap (percentage)


(1) (2) (3) (4) (5)


Lower Income
-1.317*



-1.523*



-1.677*



-1.631*



-0.0047


(0.735)


(0.769)


(0.790)


(0.874)


(0.932)


Lower Income * Reg. Intensity
0.434*



0.446*



0.492*



0.493*



0.006382


(0.207)


(0.216)


(0.222)


(0.222)


(0.223)


Tariff (log)
3.550



3.728



3.698



3.785



(3.594)



(3.600)



(3.581)



(3.582)


No Deep Agreement
0.895***



1.664**



1.675**



2.077**



(0.221)



(0.719)



(0.732)



(0.860)


No Deep Agreement * Reg.
Intensity



-0.231



-0.231



-0.352



(0.197)



(0.197)



(0.237)


Lower Income * No Deep
Agreement



-0.057



-2.048



(0.533)



(1.324)


No Deep Agreement * Lower
Income * Reg. Intensity



0.594*



(0.347)


R-Squared 0.026 0.032 0.033 0.034 0.034


Observations 1848 1848 1848 1848 1848




Note: Robust standard errors in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01.
All specifications include sector fixed effects.






22 Although this last result would require further analysis as there are only four lower income countries that have a deep
trade agreement with the EU.







Trading with Conditions: The Effect of Sanitary and Phytosanitary Measures on Lower Income Countries' Agricultural Exports 9




It is noteworthy that the results presented above are related to an index of regulatory intensity


that takes into account a large number of SPS measures. Many, but not all, of these SPS measures


require proof of compliance or conformity assessments in the form of certificates or tests. In Table 2


we present the results of whether measures requiring conformity assessment matter most, or, in other


words, have most trade-impeding effect. We do this by recalculating the index of regulatory intensity


taking into account only conformity assessment measures and re-estimating the five specifications of


Table 1. The overall results confirm those of Table 1 and suggest a larger distortionary effect of


regulatory measures requiring conformity assessment.
23




As a final caveat it is important to keep in mind that the results are constrained by the SPS


data availability and are based on cross sectional data, which may not completely control for specific


bilateral factors that may in turn affect the magnitude of trade gaps. Still, the identification strategy


controls for possible endogeneity of trade to regulatory intensity as it relies on within- product


variations. Additionally, it is important to note that our results are not exhaustive with respect to the


overall effects that SPS measures may have on international trade. Since the identification relies on


product fixed effects it does not capture any likely underlining effect common to both lower income


and non-lower income exporters.




Now we turn to roughly quantify the distortionary effect of EU SPS measures for lower income


countries across various product groups. To do so we use the results of specification (5) of Table 1 and


apply these to different regulatory intensity across product groups.24 As discussed above these figures


are to be interpreted not as the total effects of SPS measures but as the additional effects that SPS


measures have on lower income countries vis-à-vis other countries. The results are presented in Figure


3. The distortionary effects of SPS measures for exports from lower income countries to the EU are


largely concentrated in a limited number of product groups namely coffee/tea/spices, fish, fruits,


gums/resins vegetables, and prepared animal products. For each of those product groups the effect of


SPS measures are quantified in a loss of exports of more than 200 million $US. In percentage terms


over the existing level of exports these numbers vary from less than 20 percent of coffee/tea/spices


and fish to more than 100 percent in the case of gums/resins. Considering all agricultural products, the


additional trade distortionary effect of the European Union SPS measures is quantified in a reduction of


lower income countries’ agricultural exports of about 3 billion $US, representing about 14 percent of


the total agricultural exports of these countries to the EU.




23 Note that we cannot differentiate between the burden brought by conformity assessment itself vis-à-vis that of
underlining regulatory measures. Instead, these results are to be interpreted in the sense that SPS measures for which
there is a related conformity assessment matter the most.


24 We retrieve the effect of regulatory intensity on the value of exports of lower income countries to the EU by


calculating: )1( 7 −⋅ RITrade β , and capping this value to the trade gap (in value) as estimated from the gravity setup.





10 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES




Figure 3


Effects of SPS measures on low income countries exports to the EU


Fish


Dairy Products


Vegetables


Fruits


Coffee/Tea/Spices


Oil Seeds


Gums/Resins


Prepared Animal Products


Sugar


Cocoa


Beverages


0
20


0
40


0
60


0
80


0
M


ill
io


n
U


S
$


0 20 40 60 80 100
As a Percentage of Exports






4. CONCLUDING REMARKS


The focus of trade policy debates and international cooperation is increasingly sound in the


context of non-tariff measures, related regulatory policies, and trade facilitation especially with respect


to lower income countries. In the present analysis we investigated how SPS measures affect the export


capacity of lower income countries while trading with the EU.




Our results indicate two key dynamics. First, EU SPS measures result in relatively higher


burdens for low income countries. Overall, we quantify the distortionary effect of the EU SPS measures


to reduce lower income countries agricultural exports by about 3 billion $US, representing about 14


percent of agricultural trade from lower income countries to the EU. Second, while participation in a


deep trade agreement seems to facilitate lower income countries in overcoming the costs related to


SPS measures, such agreements have little effect in reducing the SPS’s cost of compliance for middle


and high income countries. This last result is consistent with the hypothesis that while more developed


countries have internal capacity to comply with SPS measures, lower income countries do not.




In broader terms, the results of this paper support two main arguments. First, that the


proliferation and increased stringency of SPS measures can form a basis for the competitive


repositioning of international trade favoring the exporters capable to efficiently achieve SPS


compliance at the expense of exporters originating in countries where the costs of compliance are


higher (Henson and Jaffee, 2008). Second, lower income countries need well targeted technical


assistance to overcome the cost of compliance related to SPS measures (Hoekman, 2002; Athukorala


and Jayasuriya, 2003). Further progress with well-targeted technical assistance programmes both on


bilateral and multilateral levels could generate considerable gains for lower income countries.








Trading with Conditions: The Effect of Sanitary and Phytosanitary Measures on Lower Income Countries' Agricultural Exports 11




REFERENCES


Anderson J and Van Wincoop E (2003). Gravity with Gravitas: A Solution to the Border Puzzle,
American Economic Review, 93(1), 170–192.




Athukorala P-C and Jayasuriya S (2003). Food Safety Issues, Trade and WTO Rules: A Developing
Country Perspective, The World Economy, Wiley Blackwell, vol. 26(9), 1395–1416.




Baier S and Bergstrand J (2009). Bonus vetus OLS: A Simple Method for approximating International
Trade-cost Effects using the Gravity Equaiton, Journal of International Economics, Elsevier,
vol. 77(1), 77–85 .




Baier S, Bergstrand J and Mariutto R (2010). 'The Growth of Bilateralism', CAGE Online Working Paper
Series 12, Competitive Advantage in the Global Economy (CAGE).




Bromberg M (2009). European food safety regulations and the developing countries. Regulatory
problems and possibilities, DIIS Working Paper 2009:09.




Chen M X, Otsuki T and Wilson JS (2006). 'Do Standards Matter for Export Success?', World Bank,
Washington, D.C., Policy Research Working Paper 3809.




Disdier A-C, Fontagne L and Mimouni M (2008). The Impact of Regulations on Agricultural Trade:
Evidence from the SPS and TBT Agreements, American Journal of Agricultural Economics
90(2), 336–350.




Essaji A (2008). Technical Regulations and Specialization in International Trade, Journal of International
Economics 76, pp. 166–176 .




Henson SJ (2006). The Role of Public and Private Standards in Regulating International Food Markets.
Paper presented at the IATRC Summer symposium, May 28–30, Bonn.




Henson SJ and Jaffee S (2008). Understanding Developing Country Strategic Responses to the
Enhancement of Food Safety Standards, The World Economy, 31(1), 1–15.




Hoekman B (2002). Strengthening the Global Trading Architecture for Development: the Post Doha
Agenda, World Trade Review, 1, 23–45.




Maskus K E, Otsuki T and Wilson J S (2004). The costs of Complying with Foreign Product Standards
for Firms in Developing Countries: An Econometric Study, Research Program on Political and
Economic Change, Working Paper PEC 2004-2004.




Santos Silva JMC and Tenreyro S (2006). The Log of Gravity, The Review of Economics and Statistics,
MIT Press, vol. 88(4), 641–658.




Tran N, Wilson N, and Anders S (2011). Standard Harmonization as Chasing Zero (Tolerance Limits):
The Impact of Veterinary Drug Residue Standards on Crustacean Imports in the EU, Japan,
and North America, American Journal of Agricultural Economics. 94(2): 496–502.




United Nations Conference on Trade and Development (UNCTAD), (2012). Non-Tariff Measures to
Trade: Economic and Policy Issues for Developing Countries . Developing Countries in
International Trade Studies. UNCTAD/DITC/TAB/2012/1.




Wiener J B and Rogers M D (2002). Comparing Precaution in the United States and Europe, Journal of
Risk Research, 5, 317–349.




Wiig A and Kolstad I (2005). Lowering barriers to agricultural exports through technical assistance,
Food Policy, 30(2), 185–204.








12 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES






UNCTAD Study Series


POLICY ISSUES IN INTERNATIONAL TRADE
AND COMMODITIES














No. 30 Sam Laird, David Vanzetti and Santiago Fernández de Córdoba, Smoke and mirrors:
Making sense of the WTO industrial tariff negotiations, 2006, Sales No.
E.05.II.D.16.




No. 31 David Vanzetti, Santiago Fernandez de Córdoba and Veronica Chau, Banana split:
How EU policies divide global producers, 2005, 27 p. Sales No. E.05.II.D.17.




No. 32 Ralf Peters, Roadblock to reform: The persistence of agricultural export subsidies,
2006, 43 p. Sales No. E.05.II.D.18.




No. 33 Marco Fugazza and David Vanzetti, A South–South survival strategy: The potential
for trade among developing countries, 2006, 25 p.




No. 34 Andrew Cornford, The global implementation of Basel II: Prospects and outstanding
problems, 2006, 30 p.




No. 35 Lakshmi Puri, IBSA: An emerging trinity in the new geography of international
trade, 2007, 50 p.




No. 36 Craig VanGrasstek, The challenges of trade policymaking: Analysis, communication
and representation, 2008, 45 p.




No. 37 Sudip Ranjan Basu, A new way to link development to institutions, policies and
geography, 2008, 50 p.




No. 38 Marco Fugazza and Jean-Christophe Maur, Non-tariff barriers in computable general
equilibrium modelling, 2008, 25 p.




No. 39 Alberto Portugal-Perez, The costs of rules of origin in apparel: African preferential
exports to the United States and the European Union, 2008, 35 p.




No. 40 Bailey Klinger, Is South–South trade a testing ground for structural
transformation?, 2009, 30 p.




No. 41 Sudip Ranjan Basu, Victor Ognivtsev and Miho Shirotori, Building trade-relating
institutions and WTO accession, 2009, 50 p.




No. 42 Sudip Ranjan Basu and Monica Das, Institution and development revisited: A
nonparametric approach, 2010, 26 p.








Trading with Conditions: The Effect of Sanitary and Phytosanitary Measures on Lower Income Countries' Agricultural Exports 13




No. 43 Marco Fugazza and Norbert Fiess, Trade liberalization and informality: New stylized
facts, 2010, 45 p.




No. 44 Miho Shirotori, Bolormaa Tumurchudur and Olivier Cadot, Revealed factor intensity
indices at the product level, 2010, 55 p.




No. 45 Marco Fugazza and Patrick Conway, The impact of removal of ATC Quotas on
international trade in textiles and apparel, 2010, 50 p.




No. 46 Marco Fugazza and Ana Cristina Molina, On the determinants of exports survival,
2011, 40 p.




No. 47 Alessandro Nicita, Measuring the relative strength of preferential market access,
2011, 30 p.




No. 48 Sudip Ranjan Basu and Monica Das, Export structure and economic performance in
developing countries: Evidence from nonparametric methodology, 2011, 58 p.




No. 49 Alessandro Nicita and Bolormaa Tumurchudur-Klok, New and traditional trade flows
and the economic crisis, 2011, 22 p.




No. 50 Marco Fugazza and Alessandro Nicita, On the importance of market access for trade,
2011, 35 p.




No. 51 Marco Fugazza and Frédéric Robert-Nicoud, The ‘Emulator Effect’ of the Uruguay
round on United States regionalism, 2011, 45 p.




No. 52 Sudip Ranjan Basu, Hiroaki Kuwahara and Fabien Dumesnil, Evolution of non-tariff
measures: Emerging cases from selected developing countries, 2012, 38p.




No. 53 Alessandro Nicita and Julien Gourdon, A preliminary analysis on newly collected data
on non-tariff measures, 2013, 31 p.




No. 54 Alessandro Nicita, Miho Shirotori and Bolormaa Tumurchudur Klok, Survival analysis
of the exports of least developed countries: The role of comparative advantage,
2013, 25 p.




No. 55 Alessandro Nicita, Victor Ognivtsev and Miho Shirotori, Global supply chains: Trade
and Economic policies for developing countries, 2013, 33 p.




No. 56 Alessandro Nicita, Exchange rates, international trade and trade policies, 2013, 29 p.


No. 57 Marco Fugazza, The economics behind non-tariff measures: Theoretical insights and
empirical evidence, 2013, 33 p.




No. 58 Marco Fugazza and Alain McLaren, Market access, export performance and
survival: Evidence from Peruvian firms, 2013, 39 p.




No. 59 Patrick Conway, Marco Fugazza and M. Kerem Yuksel, Turkish enterprise-level
response to foreign trade liberalization: The removal of agreements on textiles and
clothing quotas, 2013, 54 p.




No. 60 Alessandro Nicita and Valentina Rollo, Tariff preferences as a determinant for
exports from Sub-Saharan Africa, 2013, 30 p.






14 POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES




No. 61 Marco Fugazza, Jan Hoffmann and Rado Razafinombana, Building a dataset for
bilateral maritime connectivity, 2013, 31 p.




No. 62 Alessandro Nicita, Marcelo Olarreaga and Peri Silva, Cooperation in the tariff waters
of the World Trade Organization, 2014, 39 p.




No. 63 Marco Fugazza and Claudia Trentini, Empirical insights on market and foreign direct
investment, 2014, 33 p.




No. 64 Marco Fugazza, Céline Carrère, Marcelo Olarreaga and Fréderic Robert-Nicoud, Trade
in unemployment, 2014, 36 p.




No. 65 Christopher Grigoriou, Can mirror data help to capture informal international
trade?, 2014, 42 p.




No. 66 Denise Penello Rial, Study of average effects of non-tariff measures on trade
imports, 2014, 26 p.




No. 67 Cristian Ugarte, Weak Links and diversification, 2014, 28 p.


No. 68 Marina Murina and Alessandro Nicita, Trading with conditions: The effect of sanitary
and phytosanitary measures on lower income countries' agricultural exports, 2014,
20 p.


















































Copies of the UNCTAD study series Policy Issues in International Trade and Commodities may be
obtained from the Publications Assistant, Trade Analysis Branch, Division on International Trade
in Goods and Services, and Commodities, United Nations Conference on Trade and
Development, Palais des Nations, CH-1211 Geneva 10, Switzerland (Tel: +41 22 917 4644).
These studies are available at http://unctad.org/tab.




U n i t e d n at i o n s C o n f e r e n C e o n t r a d e a n d d e v e l o p m e n t


TRADING WITH CONDITIONS:
THE EFFECT OF SANITARY AND


PHYTOSANITARY MEASURES ON LOWER INCOME
COUNTRIES’ AGRICULTURAL EXPORTS


POLICY ISSUES IN INTERNATIONAL TRADE AND COMMODITIES
RESEARCH STUDY SERIES No. 68


Printed at United Nations, Geneva
1425020 (E) – January 2015 – 250


UNCTAD/ITCD/TAB/70


United Nations publication
ISSN 1607-8291




Login