Do Regulations and Standards Support Sustainability Dynamics in Global Value Chains?

13 October 2017

Compliance with regulations and standards plays a central role in global trade competitiveness, in particular in the context of global value chains. What are the implications of these instruments for the achievement of the Sustainable Development Goals?
 

There has been an important shift in the purview of trade barriers to market entry in the high income economies, from the nation-state to the corporation and transnational agencies. Insofar as governments control import restrictions, there is a reduced emphasis on prices and a growing role for regulations which are generally mandatory for market entry. The lead firms dominating importation into high income economies employ a battery of standards to achieve multiple objectives. Directly and indirectly, standards and regulations not only determine the terms of market entry but also the extent to which different producers position themselves in global value chains (GVCs) in a manner that provides for socially and environmentally sustainable income growth.

International trade, driven by GVC dynamics, is intensely competitive. This requires producers to continuously improve skills and dynamic capabilities, because otherwise firms are unable to protect or upgrade their role in the international division of labour. Economic upgrading is hence crucial to achieving sustainability goals and may well be a precondition for attaining desirable social upgrading within companies and more broadly in the society. At the same time, there are growing demands for social and environmental standards in global export markets, and meeting them provides the social licence for lead firms to operate in these markets. Hence, producers have to develop the capabilities to respond to these multiple “triple bottom line” challenges of economic, social, and environmental upgrading.

This article examines the role played by regulations and standards in GVCs and addresses two related policy issues. First, their implications for achieving the Sustainable Development Goals (SDGs). Second, the extent to which the implementation of procedures required to achieve GVC standards and regulations builds producer capabilities to meet the competitive upgrading challenge required in GVCs if incomes are to be sustained and grow over time, and if social and environmental sustainability is to be assured.
 

The impact on sustainability and producer capabilities 

There are two families of regulations and standards impacting on sustainability. These affect (1) the character of products (raw materials, intermediates, final goods, services), and (2) the character of the processes involved in the production of these products. Although these standards and regulations are in part defined by governments and civil society organisations, it is generally the lead firms governing the chain which are responsible for their deployment.

To ensure these standards are achieved throughout the chain’s operations, and policy is transformed into practice, lead firms have adopted three strategies:

  • Sink or swim in the supply chain:  Lead firms in non-demanding markets adopt a passive policy towards standards and supplier performance by publishing their requirements, simply verifying supplier performance, and then either including or excluding suppliers from the chain.
  • Lead firm supply chain management: In demanding markets requiring adherence to the triple bottom line, lead firms often cannot afford to adopt a sink-or-swim approach. Hence, they engage in supply chain management and supplier development programmes to assist suppliers attain the required standards.
  • Using intermediaries:  Lead firms encourage suppliers to obtain assistance from specialised intermediaries, which may be contracted to run supplier development programmes, particularly with small farmers and enterprises.

The regulations and standards determining market entry in high income markets have complex effects on the achievement of the SDGs. Inclusion is central to the SDG agenda. At face value, many of the triple bottom line standards (particularly the social and environmental) would seem to reinforce the objectives of the SDGs by promoting living standards, better forms of work, greater social inclusion, and the protection of the environment. But is this always the case? Are there contradictory impacts and trade-offs between standards? Are some producers in GVCs beneficially affected at the cost of others in the chain?
 

Regulations and standards in GVCs: A few insights

To examine the role of regulations and standards in GVCs/SDGs, we reviewed a variety of case study experiences drawn predominantly from low- and middle-income economies, and sectors in which small producers and unskilled labour play important roles. These are fresh fruit and vegetables, wine, fish, apparel, organics, handicrafts, leather products, the marine sector and electronics. The economies are Benin, Burkina Faso, Côte d’Ivoire, Gabon, Gambia, Guinea-Bissau, Kenya, Morocco, Senegal, South Africa, and Uganda in Africa; Cambodia, China, India, and Malaysia in Asia; Argentina, Bolivia, Brazil, Chile, Mexico, Paraguay, and Peru in Latin America. The review illustrates the complex and often contradictory sustainability outcomes arising from the incorporation of standards and regulations in GVCs. There are a number of features and conclusions[1].

Regulations affecting market entry are adopted by governments, including through intergovernmental agreements, and are binary in nature: automatic exclusion flows from non-compliance. Standards are set by non-state actors and provide more flexibility for supplier firms in meeting them.

Standards are intrinsic to the operation of GVCs and trade within GVCs is much more demanding for producers in these terms than is arms-length trade outside of GVCs. Dominant lead firms in GVCs use standards to target both an improvement in the competitiveness of the chain and the social licence to operate in global markets.

The intensity of standards in GVCs is affected by the nature of the final market: low-income consumers and low-income economies are less demanding. Regional markets have lower barriers to entry and open up important regional value chain opportunities for smaller farmers and processors who lack the capabilities to export to global markets.

Since global competitiveness is a moveable frontier, for gainful and sustainable insertion into GVCs suppliers are required to develop the capabilities to continually upgrade. Certification in relation to regulations and standards is demonstrably an important contributor to the upgrading of producers’ capabilities.

Standards compliance promotes inclusion in GVCs. The evidence suggests that, as a result, wages have frequently risen, working conditions have improved, health and safety have been enhanced, environmental outcomes have improved, and, in some cases, unionisation has been strengthened. Thus it is clear that the introduction of standards has contributed to the achievement of many of the SDGs, including for example those affecting income generation, gender inclusion, and organic production and the environment.

However, notwithstanding these gains, there is evidence that standards compliance can also exclude marginal and disadvantaged producers and workers. These adverse outcomes arise because of three major obstacles to successfully meeting standards in GVCs:

  • The costs of achieving the necessary certification can exclude disadvantaged groups such as small producers, small farms, women, and older producers. In some cases, small producers who had previously participated in GVCs before standards compliance became widespread are ejected from the chain.
  • There are a series of additional barriers to the entry of marginalised producers, such as illiteracy, innumeracy, and lack of new management skills, which exclude small-scale producers and unskilled workers. This exclusion is often hidden in the monitoring of standards in supply chains.
  • Health and safety standards often require pre-existing knowledge about basic health practices and involve actions by parties (such as local and national governments) which are not directly involved as producers in the chain.

One consequence of these adverse developments is the segmentation of producers. A minimum cadre of skilled core workers and trusted suppliers is retained, and the remaining tasks are outsourced to informal enterprises and casualised (and often migrant) labour.

There are also frequently unavoidable trade-offs between the different dimensions of sustainability. In some cases, the trade-offs occur between the different triple bottom line dimensions (for example, economic versus environmental sustainability); in other cases, there may be trade-offs within the triple bottom line dimensions (for example, between female and male workers).

Hence, in summary, there is considerable evidence that meeting standards and regulations in GVCs contributes to the achievement of many of the SDGs and to the building of dynamic capabilities among many producers. But, at the same time, the very same achievement of standards can be exclusionary in character, and often shut out the least advantaged producers.
 

Policy implications

What are the policy conclusions from this review of the role of standards and regulations for developing country producers?

To varying degrees and with sectoral, locational, and temporal specificities, regulations and standards in GVCs have considerable implications for a large number of the SDGs. As in the case of all multidimensional development processes, conflicts and trade-offs between objectives are an unavoidable fact of life.

Policy actors need to take steps to correct for market failures which limit the capabilities of producers to meet standards and regulations. This requires them to fill information gaps (such as what standards apply in which markets), to help cover the costs of certification for small and marginalised producers, and to assist producers in developing the upgrading capabilities to meet these standards in a dynamic context.

While the policy challenge outlined applies to all producers in GVCs, including those in supply chains, there is a particular need to assist the capacities of poor and marginalised producers (such as women, small producers, and distant producers) to meet these standards. This requires focusing policy support on the least advantaged in the chain.

Civil society organisations play an important role not just in defining and monitoring those standards which address the social licence to operate, but also in assisting disadvantaged and marginalised producers in developing the capabilities to meet these standards.

Governments, lead firms, and civil society organisations must be aware of the danger that the degree of standards compliance is hidden by the exclusion and informalisation of producers in the chain, and must take the necessary action to counter these excluding developments.

Standards impact differentially depending on the final market. Regional markets with lower technical and sanitary and phytosanitary standards have lower barriers to entry and open up important regional value chain opportunities for smaller farmers and firms who lack the capabilities to export to global markets.

Some of the actions required to meet standards and regulations are not under the control of producers, such as dealing with environmental factors which affect phytosanitary conditions and the provision of education for disadvantaged producers. Government action should be targeted to ensure that these external determinants of compliance are supported, particularly for disadvantaged producers and communities.

The intensiveness of standards and regulations in GVC trade has implications for trade policy, including within the WTO, but this issue requires separate discussion and is not considered here.

The meta policy conclusion is that trade-offs are central to the role of standards and regulations in GVCs. Economic, social, and environmental standards do not always align. Moreover, exclusion and inclusion are intrinsic outcomes of participating in GVCs. Consequently, although there is scope for minimising and shaping the nature of these trade-offs, development is an inherently political process.

Authors: Raphael Kaplinsky, Honorary Professorial Fellow, Science Policy Research Unit, University of Sussex. Mike Morris, Director of the Policy Research on International Services and Manufacturing (PRISM), and Professor of Economics, University of Cape Town.


[1] Forthcoming ICTSD paper.

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