How can trade facilitation help LDCs cut SPS barriers?

9 April 2014

The World Trade Organization (WTO) trade facilitation agreement aims to reduce transaction costs and boost the growth of global trade. It provides a good opportunity for developing countries and least-developed countries (LDCs) to reduce the compliance costs of sanitary and phytosanitary (SPS) measures and maximise customs efficiency.

The new agreement (TFA) reached at the Ninth WTO Ministerial Conference in Bali, Indonesia, creates binding commitments across the 159 WTO members to expedite the movement, release, and clearance of goods; promote cooperation among WTO members on customs matters; and help developing countries fully implement the obligations. The agreement will increase customs efficiency and cut the associated costs through measures like transparency in customs practices, reduction of documentary requirements, and the processing of documents before goods arrive. According to the Organisation for Economic Co-operation and Development (OECD,2003), reducing global trade costs by 1 percent would increase worldwide income by more than USD 40 billion, most of which would accrue in developing countries. It is estimated that the agreement, if fully implemented, will cut trade costs by almost 14.5 percent for low-income countries, 15.5 percent for lower middle-income countries, 13.2 percent for upper middle-income countries, and 10 percent for high-income countries, and increase global GDP by almost USD 1 trillion (OECD, 2013).

Our concern regarding the TFA is the impact it may have on developing countries and LDCs specifically with respect to SPS issues. How are SPS measures applied to imports, exports, and transit goods? To what extent, if any, do these measures unnecessarily increase the costs of doing business? Does the TFA make it beneficial for the developing countries and LDCs to implement the measures protecting their public health and territorial safety and to break through the SPS barriers for entering high-end markets?

SPS and challenges for developing countries and LDCs

SPS measures refer to regulations, standards, methods and requirements that governments set up to ensure the safety of consumer food, animal and plant life, and the ecological environment. The SPS agreement brought extreme difficulties and challenges for developing counties and LDCs. First, being standard-takers, they faced a double disadvantage of bearing the costs of adjustment in upgrading trade infrastructure and adopting international standards. Second, they lacked the capacity to challenge the foreign SPS measures that they felt were not scientifically based or were unjust and to demonstrate that their SPS measures reached required standards. As a result, they had to bear huge compliance costs or exit high-end markets. In addition, numerous factors prevented them from implementing the SPS agreement due to a lack of compliance capacities. According to the WTO, the notifications submitted by developing countries accounted for about 47 percent of the total, and those by LDCs represented only 0.35 percent by the end of 2009. Therefore, it is absolutely necessary to assist developing countries and LDCs to strengthen their trade facilitation abilities and enhance their SPS fulfillment.

The relation between trade facilitation and SPS measures

Trade facilitation is closely related with SPS measures, because many SPS measures are de facto facilitation measures. For example, adopting international standards made by Codex, the Office International Des Epizooties(OIE) and the International Plant Protection Convention, conducting equivalence assessments, and introducing the quality and safety management system, such as the Hazard Analysis and Critical Control Point (HACCP), will definitely facilitate access to global markets. Thus, the TFA represents a very good opportunity for developing countries and LDCs to implement the SPS standards.

The TFA will cut compliance costs to implement the SPS measures. These costs include unnecessary measures, excessive documentary requirements, inefficient procedures, long inspection times and advance application periods; inadequate transparency, predictability and consistency in the implementation of SPS controls. These costs might be direct (e.g. preparation and submission of documents, charges and fees, inspection costs) or indirect (e.g. border delays, uncertainty about procedures and requirements, inadequate or contradictory documentation). These costs from import and export-related procedures and documentation are estimated to vary from 1-15 per cent of a product's cost, depending on the nature of the product These costs are  quite high for agricultural products and food, which constitute most exports of developing countries and LDCs, and it is even higher for perishable foods, such as fresh seafood, meat, vegetables, and fruits. Combined with poor infrastructure and bureaucracy, these challenges increase transaction costs and lengthen delays for developing countries and LDCs to clear imports, exports, and transit goods. In some African countries, revenue losses from inefficient border procedures are estimated to exceed 5 percent of GDP. Trade facilitation is a means to increase trade revenues and thus development dividends for developing countries' participation in international trade. According to the OECD, harmonising and simplifying documents would reduce trade costs by 3 percent for low-income countries and by 2.7 percent for lower middle-income countries; streamlining procedures would bring further trade cost reductions of 2.3 percent for low-income countries and 2.2 percent for lower middle-income countries. Ensuring the availability of trade-related information, such as SPS standards, for example, would generate cost savings of 1.4 percent for lower middle-income countries and 1.6 percent for low-income countries (OECD, 2013).

Moreover, the TFA will minimise the hidden protectionism related to SPS measures that some developing countries and LDCs face. Complying with the SPS Agreement is associated with border administration, such as import alerts and rapid alert mechanisms, transparency of procedures, fees, etc. Those elements are particularly relevant for trade facilitation, some of which may become SPS barriers. The TFA will decrease SPS barriers by simplifying the required documents, adopting e-documents, cutting down multiple inspections, improving cooperation among SPS authorizers and producers in the supply chain, increasing transparency of information, and expediting clearance of goods.

Finally, developing countries and LDCs are allowed to implement the agreement in a gradual way, and where required, receive Technical Assistance and Capacity Building (TACB). Although, contrary to what developing countries and LDCs expected, the agreement did not bundle relevant SPS provisions with guaranteed technical assistance. However, the agreement links the extent and timing of implementation by developing countries and LDCs to their abilities, providing more freedom for them to determine their catalogue A, B, and C, and notifying the committee of the difficulties and challenges in implementing B and C (WTO, 2013).

These countries will be provided help to implement the agreement until they acquire the abilities. Capacity building in developing countries has substantially improved  custom facilitation in recent years, but modernisation of SPS systems, including improvement based on the adoption and use of information technology and risk management, has generally lagged behind. The LDCs still need substantial support to improve their own internal SPS systems before they engage in trade facilitation issues. Therefore, the TFA provides a further opportunity for developing countries and LDCs to modernise their SPS systems.

However, there are still some obscure points regarding the TACB. For example, it is not clear whether acquisition of capacity and implementation are assumed at the end of the implementation period or subject to an additional notification by the member; whether there should be language on mandatory provision of TACB by developed countries; whether the role of the future WTO trade facilitation (TF) Committee includes its possible link with aid channels/mechanisms and whether financial assistance is included.
Conclusion and possible implications

The SPS agreement has brought a number of problems and challenges for developing countries and LDCs, most of which are related to trade facilitation and capacity building. The TFA will assist in solving the problems, especially on Article 8 and Annex C on Control, Inspection and Approval Procedures. The agreement will greatly reduce the SPS compliance costs by upgrading customs efficiency and modernising the SPS systems, which will provide better protection for domestic public health, animal and plant life, and environmental safety, and, at the same time, cut down the SPS barriers caused by low transparency and complicated inspection requirements.

For better implementation of the TFA,  developing countries and LDCs need, first,  to reform their institutional systems, cut unnecessary additional units, adjust their resources, and make the customs system a transparent and highly efficient organization. Second, government agencies, importers and exporters, experts, and industry associations need to evaluate effectively their trade facilitation needs and priorities. The general principle is to eliminate the measures and regulations that increase costs to producers and consumers but have no essential relation with risk, to list the easily implemented ones in Category A, the most difficult ones in C, and the in-between in B. For example, risk analysis is a difficult point for most developing countries; thus, it is better to put it in category B or C so as to have more time to learn and prepare. Third, there is a need to implement the agreement as scheduled. For the category B and C, especially C, LDCs are entitled to get technical assistance and capacity building. Therefore, they need to inform their trade partners and the relevant WTO committee as early as possible about their difficulties and cooperate with international organisations and trade partners so that they can get stable assistance.

Authors: Yinguo Dong is a Professor at the School of Economics, Shanghai University, Shanghai, China and a visiting scholar at the University of Missouri, USA.

William H. Meyers is Director of international agriculture programs and professor of agricultural and applied economics at the University of Missouri, United States.

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