Standards for Agricultural Products: Pros and Cons in the WTO

Plantations and agriculture in Indonesia

Standards for agricultural products have been a prominent issue since early 1990s in the World Trade Organization (WTO) committee’s meetings. It is often perceived that the issue was mainly a concern of several big producers and various other stakeholders in developed countries.

A significant change in consumer preference and continuing global health issues are said to be some of the driving factors to implement these standards. Yet, the implementation of standards seems to be arguably debatable in the context of the WTO agreement since the design of these standards is argued to be non-transparent, region-based, and unfairly inclusive, especially towards small economies.

Some of the relevant examples are private standards in the European Union (EU) such as GlobalG.A.P which requires Good Agricultural Practices to be implemented by exporters; region-based standards such as REACH which stands for Registration, Evaluation, Authorization, and Restriction of Chemicals; and many other safety and health standards which regulate export commodities going to the EU.  These standards have led to an exhaustive debate on how significant standards may have affected agricultural trade between the EU and the rest of the world.

These standards may benefit producers in terms of maintaining their markets. To comply with the standards, producers are required to pass through various conformity assessment systems: first-party, second-party, or third-party verification (Liu, 2009). All of these systems may assist producers to run their business more efficiently, improve market access, improve the quality of their products and develop their corporate profiles. This would consequently create trade, as exporters who are able to meet the standards are more likely able to sell their products more easily, and may reduce the production cost thanks to the improved efficiency.

From social and consumer perspectives, these standards would also be beneficial. Standards require producers to improve their natural resources management and this would consequently protect consumers from a full range of risks of invisible hazards, in terms of food safety and health.  Given the increasing size of the world population, improvements in food safety and health standards have become increasingly important.

However, some challenges remain. The proliferation of standards without consultation with related stakeholders may disadvantage producers especially those from small economies. In addition, these standards often conflict with sets of standards issued by governments or international organisations. Regarding the technical aspect, the implementation of these standards is commonly not straight forward especially for the producers from outside the area where the standards are being applied (i.e. the outsiders). The conformity process often takes a long time and requires specific technical support creating problems for producers especially the outsiders to comply. This problem can potentially increase costs and, therefore, hamper trade flows.

An example of how standards can reduce trade is the implementation of the REACH. The REACH aims at ensuring food safety, environmental management, and maintaining fair competition as well as chemical industry development in the EU market. It requires producers from the EU as well as non-EU regions to verify their products before entering the EU market. This regulation is argued to adversely affect the trade flow of Crude Palm Oil (CPO) from Indonesia.

Reviewing research by Yosua, et al (2009) of Trade Ministry of the Republic of Indonesia, the implementation of REACH is predicted to impact a relatively large number of exported product categories, from 1.413 to 1.640 Harmonized System (HS) which have highly sensitive chemical contents. This implies that about 36% to 49% (out of 3,851 HS) of total exported products from Indonesia have to be registered at the REACH process. The impacts of the REACH on exports value are estimated to be between US$ 13,292 billion an US$ 13,332 billion. Regardless how much the exact extra costs needed to be carried out by Indonesian producers, the implementation of REACH is likely to reduce the competitiveness of Indonesian exported products. Yosua, et al (2009) also find that the lack of socialisation could exacerbate this condition.

Another example of the use of ‘standards’ which has put trade barriers for Indonesian producers was when a Non-Government Organisation (NGO) suggests the EU CPO importers to suspend their imports from Indonesian CPO producers. These producers had been allegedly contributing to deforestation in Indonesia. For some parties, the accusation is difficult to understand. Indonesian CPO producers and some EU importers are all the members of the Roundtable of Sustainable Palm Oil (RSPO). This roundtable aims to promote the growth and the use of environmentally-friendly palm oil. Thus, problems in the trade links between Indonesian CPO producers and the EU CPO importers should have been discussed in such a forum rather than those set up by an NGO.

Up to the present, issues with standards for agricultural products have been escalating. For instance, the Australian parliament is considering to amend the food standards act to develop and approve labelling to be used by producers, manufacturers, and distributors of food containing palm oil.  Indonesian palm oil producers consider such a proposal to be discriminatory and could set a bad precedent for other importing countries, although exports of palm oil to Australia valued at US$ 73,000 in 2010 are considered to be relatively small. Furthermore, many argue that this action is a breach of the WTO agreements (read more here).

The above examples have raised concerns over the governance of standards. Who should play the key role in the implementation of standards? Is it the NGO, the importer or the relevant body in the trade destination country (or region)?

In summary, standards would benefit producers, by creating trade and reducing the cost, as well as consumers for food safety and health reasons. There is a serious need to revisit the trade commitments under the WTO which have been agreed by as well as transparently published to all country members. Given the importance of private standards, agreements, for example, on Sanitary and Phytosanitary (SPS) and Technical Barriers to Trade (TBT) should cover how to best  position the role of standards for agricultural products. To achieve full benefits of these standards, multilateral agreements are expected to be more efficient than bilateral ones. To ensure the effectiveness of the standards, collaborations among stakeholders are required. These collaborations will avoid overlapping standards and, for the outsiders, will prevent them from getting into a “spaghetti bowl”, the term used to describe a situation where there are many overlapping standards to comply with. This spaghetti bowl problem will cause standards not contributing to the improvement of the global welfare, and, in fact, it may put trade barriers in the global market.

This article is prepared by Bagus Wicaksena. He works for the Ministry of Trade of the Republic of Indonesia and is currently undertaking a postgraduate study in Global Food and Agricultural Business (Trade Policy) at School of Agriculture, Food, and Wine at The University of Adelaide. The opinions expressed are his own.

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Filed under Economic Integration, Food and agriculture, Indonesia, Trade, WEF

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