Can Aid for Trade Assist Firms in Developing Countries to Comply with Sustainability Standards?
Sustainability standards can help foster sustainable development in developing countries, but also have exclusionary effects. How can aid for trade assist businesses in the developing world to comply with an ever-increasing number of public and private standards?
For a developing country exporter, for example, of fresh bananas from the Philippines seeking market access to the EU, it is necessary to comply with at least seven categories of sustainability standards, from food safety controls to labelling standards, with each category of compliance carrying with it a range of production guidelines and documentation – a somewhat daunting prospect for a semi-literate farming producer in rural Mindanao.
As such, one of the major contemporary challenges facing developing country firms, and especially small and medium-sized enterprises (SMEs) today, is the ever-increasing number of regulations and sustainability standards they are required to conform to if they are to integrate into global value chains (GVCs). The exponential increase in the complexity and diversity of standards and regulations – over 20,000 types of standards according to the International Standards Organisation (ISO) – is in response to a number of factors, including for example consumer demands in terms of health, safety, and environmental protection, as well as private sector-driven demand for quality, efficiency, and corporate reputation.
Sustainability standards such as those governing production processes, quality and safety requirements, or environmental and labour standards can, and do contribute to progress towards the Sustainable Development Goals. Successful exporters can expect an increase in export income and sustainable profits, with flow-on effects for the local community.
However, sustainability standards can also be exclusionary. The cost of compliance is often forbidding for SMEs and small-scale producers in developing countries. Standards compliance may involve for example, certification costs, the purchase of infrastructure, the cost of laboratory testing or protective clothing, packaging and labelling measures, the cost of membership to a relevant standards institution, and a reasonable budget for training management and staff. Inspections from an authorised standards institution can cost around US$310, audits can average US$650, and the laboratory testing which is often required to export agricultural or manufactured goods can reach the thousands of dollars.
So, can aid for trade (AfT), with a key objective of assisting developing countries to overcome supply-side barriers to trade, play a constructive role in supporting developing country firms, and especially SMEs, to comply with the ever-growing number of sustainability standards? To explore this question, consultations were held with a range of SME traders, standards organisations, and donor bodies from around the world, in concert with an examination of recent literature and case-studies.
The compliance needs of developing country SMEs
On the question of key challenges faced by SMES, and therefore of their needs to meet standards compliance, eight categories of needs were identified.
Awareness of standards
One of the common needs identified by SMEs and small producers is access to information about the various standards required for GVC participation in their sector. Women managing SMEs in the textile trade from Cambodia, Sri Lanka, Mauritius and Bangladesh all highlighted difficulties in obtaining the appropriate information, not only about the actual sustainability standards they need to comply with, but in some cases also about the production processes or types of testing required to meet the standards.
A related issue concerns information and intelligence on market access opportunities. Sustainability standards vary considerably between markets. The level of food safety requirements for market entry into Burkina Faso, for example, are significantly different from those required by the EU.
Cost of compliance
SMEs need to develop the capacity to constantly upgrade their products, services, or production processes in order to comply with standards in a particular the value chain. The costs of doing this are not just confined to the expenses related to certification, labelling, and testing requirements, as these are often dwarfed by the cost of the process changes required to meet the demands of lead firms in GVCs.
Conforming with sustainability standards often requires inspections, testing, and certification. Ensuring appropriate and mutually recognised testing is in place is not always easy. For example, an SME exporter of textile toys from Sri Lanka noted the large range of tests and regulations required for market access to the EU, including for example:
- EN 71, Part 1, Safety of Toys, Mechanical and Physical Tests
- EN 71, Part 2, Safety of Toys, Flammability Test
- EN 71, Part 3, Safety of Toys, Migration of Certain Elements
Culture of documentation and customs compliance
SMEs often do not have the skilled staff or the culture of documentation and customs compliance that are necessary to meet a plethora of regulations, licencing requirements, and certifications in order to import or export.
Women managing an SME or working for an SME engaged in international trade usually face a particular set of obstacles in their efforts to comply with standards, whether due to access to finance, discrimination and sexual harassment, or lack of time and skills to implement requirements in the production or service delivery process.
Appropriate and functioning infrastructure
Access to quality trade-related infrastructure is cited by numerous SMEs as a vital component for meeting sustainability standards. While some cases are related to major infrastructure developments, such as high-grade cold storage facilities, for many micro and smaller producers, access to simple but appropriate technology and infrastructure is often the cutting edge between compliance or non-compliance.
Lack of skills both within and outside of SMEs
In Bangladesh, one textile and clothing SME, run by a female entrepreneur and with a staff of 26 mainly women workers, needed to re-evaluate her workforce based on a standard’s requirements in order to meet, among many other requirements, “colour fastness” in her textile and clothing business. In this example, apart from the need for stitchers, sewers, designers, and packaging expertise, what was also required was expertise in monitoring and testing for the standard’s requirements, including for colour fastness. However, she found it difficult and costly to retrain her own staff or find semi-skilled and skilled workers outside of the company to carry out these tasks.
In order to overcome some of these types of obstacles, the lead firm of a GVC, an industry body, or a local government institution can offer compliance support through training, technical assistance, or the provision of guidelines. But unless the firm is already well integrated into the GVC and is, for example, an indispensable supplier of a particular good or service, the lead firm may well look elsewhere, indicating that in many cases the cost of compliance falls on the SME and can act as a means of exclusion.
Aid for trade can therefore play a particularly strategic role by filling the gaps where other institutions or lead firms are unwilling or unable to go. Not unsurprisingly, this can apply to overcoming all eight of the needs mentioned above. A case-study from Tonga serves to illustrate.
Tongan watermelons and aid for trade
In 2010, New Zealand stopped importing watermelons from Tonga due to the high number of contaminated watermelon shipments it had received. Tongan watermelon growers were competitive in terms of production cost but were unable to consistently meet New Zealand’s strict biosecurity regulations, particularly as it applied to fruit flies.
In order to meet sustainability standards, including New Zealand’s biosecurity regulations, as well as the Hazard Analysis and Critical Control Point (HACCP) certification, Tonga producers, principally a mix of female and male run small producers, needed appropriate infrastructure and food safety processes to be in place. Watermelon GVC export pathways require an efficient fumigation chamber as well as HACCP certification. This requires high standards of food production, storage, and sound monitoring systems for identification and control of health hazards, including contamination.
Two key sources of aid for trade were able to gradually address the compliance needs of Tongan SMEs. Initially, the EU provided a fumigation chamber and supported some of the processing facilities and processes. In 2011, the Australian-funded Pacific Horticultural and Agricultural Market Access (PHAMA) program began assisting Tonga’s farmers, SME exporters, and the Tongan Ministry of Agriculture to build their capacity to comply with New Zealand’s biosecurity requirements and HACPP certification. Tonga’s national development goals included private sector development and the growth of agricultural production, meaning that the AfT support it received strategically aligned with the country’s national priorities and allowed for strong local ownership of the program.
The support provided by the EU, and subsequently by Australia, included the following elements: a comprehensive review of production methods; assistance with post-harvest handling and export procedures; the delivery of training and training materials on standards compliance; the compilation of an operational manual and training for the use of the fumigation chamber; and the establishment of a project management team to oversee export pathway compliance in general.
The AfT support has resulted in exports of watermelons increasing from 86 tonnes in 2010 to 271 tonnes in 2013. New Zealand imports 2,500 tonnes of watermelon annually and now provides an opportunity for Tonga to grow its market share.
Impact on the Sustainable Development Goals
Many Tongan families rely for their livelihood on retaining and improving their access to agricultural markets. The reopening of the watermelon export pathway to New Zealand, as well as the HACCP certification and the provision of the fumigation chamber for other agricultural products, has had a significant impact. Both female and male-run SMEs involved in the production and export process have benefited from increased income, with positive welfare effects for the local Tongan community. In terms of the Sustainable Development Goals (SDGs), it has directly contributed to SDG 1 (no poverty), SDG 5 (gender equality), SDG 8 (decent work and economic growth), and SDG 9 (industry, innovation and infrastructure). It is likely to also have had a secondary multiplier effect that will support Tonga’s ability to achieve several other SDGs.
Future policy implications for aid for trade
There are numerous other AfT stories that help to highlight, along similar lines, some important policy implications for AfT targeted at supporting SMEs in standards compliance. These policy implications include:
- The need for a quality infrastructure that is appropriately designed and integrated with existing systems, to also include the servicing and maintenance of infrastructure through the training of existing staff and/or of local service suppliers to be able to provide support at affordable rates – in other words maintaining the hardware as well as the software.
- AfT programs need to supportlocal ownership and ensure the compliance project aligns with national interest. Donor goals and objectives should include capacity building and training of government officials on relevant trade and standards policy regulations, as well as advice on how best to maintain export pathways.
- In conducting the initial value chain analysis, AfT projects need to ensure that reforms and standards compliance will lead to increased market access with key trading partners. Market access to New Zealand was obviously a vital component is the case presented above, with the country remaining open and committed to the import of Tongan watermelons once sustainability standards were met.
- It is important to leverage trade negotiations and agreements. Australia, New Zealand, and Pacific Island countries recently finalised a trade and economic cooperation agreement (PACER Plus) and this, in part, motivated both Australia and New Zealand to examine opportunities to support Pacific Islands to engage and benefit from more integrated and open trading systems through AfT.
For Tonga, the challenge ahead will be to maintain and upgrade agricultural production processes and infrastructure, especially for the fumigation chamber, and to continue to comply with the demands of sustainability standards required for accessing key markets. This will require developing maintenance programs and financial systems resourced by the industry and the government of Tonga where appropriate. A major challenge for all AfT programs is to try and ensure continuity and local ownership once donor funding ceases. That said, there was little doubt among those consulted about the strategic role aid for trade can play in assisting firms to meet sustainability standards into the future.
The author would like to thank ‘Alisi Holani from the Tongan Ministry of Labour, Commerce and Industries, Peter van Diermen from Economic Development Services and the WTO for their assistance in gathering the information and data used for this article.
Author: Jim Redden, Director, Trade and Development, Economic Development Services Ltd., and Senior Visiting Fellow, Institute for International Trade, University of Adelaide.