Non-Tariff Barriers Can Connect Trade to Sustainable Development

flagsIn the landscape of the 2030 Agenda for Sustainable Development, trade is a means of implementation towards the Sustainable Development Goals (SDGs). The Addis Ababa Action Agenda (AAAA) on financing for development further specifies the role of trade as “an engine for inclusive growth and poverty reduction, and contributes to the promotion of sustainable development.” That is, trade should function as a means for achieving “sustained, inclusive and sustainable” economic growth. More importantly, trade-led growth should enhance, rather than undermine, the potential for social development and environmental sustainability.

In the past several decades, however, many developing countries witnessed that trade growth contributed to aggregate economic growth, and also increased the within-country income inequality. This would suggest that a country’s trade policy reflects the interests of the country’s economic giants rather than small and marginalized players, and that these interests can override the importance of conservation of natural resources and ecosystems.

There is a need to rethink policymaking in order to link trade growth to sustainable development, including its social and the environmental dimensions. The recent UNCTAD report, ‘Trading into Sustainable Development: Trade, Market Access and Sustainable Development Goals,’ looks into this issue, focusing on the interactions between market access conditions – such as customs duties (tariffs) and non-tariff measures (NTMs) – and achieving the SDGs.

What are non-tariff measures?

Historically, market access conditions in international markets were determined by the level of tariffs on imported products. However, tariff barriers have fallen significantly across countries: the trade-weighted average tariff rate in the world fell from just over 5% in 1995 to 2.5% in 2014/2015. Against the trends of falling tariffs, the influence of NTMs upon trade costs has increased. In 2014, around 70% of agricultural products traded in the world market faced sanitary and phytosanitary (SPS) measures, and over 60% of manufactured products faced “technical barriers to trade (TBT),” such as technical regulations and product standards.

Such regulatory measures are designed to meet important social and/or environmental objectives, such as by setting maximum levels for toxic residues in food, ensuring the sustainable sourcing of natural resources, or limiting trade in polluting substances. But they can directly affect trade flows and economic development when they are applied to imported products. In many cases, NTMs can be more trade-restricting that tariffs. UNCTAD estimates that existence of SPS measures to agricultural exports may increase production cost by 22%, compared to the average tariff facing the same exports at around 5%. NTMs can be particularly restrictive for low-income countries constrained by limited capacity to comply with NTMs thus significantly increasing their trading costs.

Because the vast majority of NTMs directly target key determinants of sustainable development, such as food security, health and environmental protection, countries are likely to implement more such measures for the achievement of the SDGs. That is, the number of NTMs in world trade may be increasing fast.

How to make non-tariff measures work for sustainable development

Will an increase in NTMs squeeze low-income countries’ capacity to use trade as a means of implementation of the SDGs? Not necessarily. In fact, the presence of NTMs can be the source of regional or international collaboration that can help countries to achieve a win-win situation: (i) collectively improve policy environment towards achieving the SDGs; and (ii) reduce trade distortionary impact of NTMs. The key is to eliminate trade-distortionary effect of NTMs.

Trade distortions arise from NTMs when they increase production costs for exporting countries to meet the regulatory requirements, including the costs associated with conformity assessment and certification. These costs will be higher when exporters have to meet different requirements for different markets including domestic market. That is, NTMs can be trade-distorting when the “regulatory distance” between an exporting country and its market countries is large. Therefore, reducing the regulatory distance among trade partners is the way to achieve the win-win situation.

Regulatory distance between countries is measured by the similarity of regulatory patterns of NTM types applied to a specific product classified at the HS 6-digit level. For example, if two countries each apply ten different product requirements to lemons, the regulatory distance is huge and it increases trade costs significantly. UNCTAD has assessed the potential impact of reducing costs related to NTMs in the 15 member countries of the Southern African Development Community. The gains amount to US$6 billion through a 25% reduction of NTM-related trade costs. No member country is worse off from the reforms. The largest gains stem from reducing the restrictiveness of SPS measures and TBT for partners from the whole world through alignment with international standards. In the case where barriers to trade from NTMs are reduced only to SADC exporters, the gains are much lower, with a total of about US$1.3 billion.

Moreover, when regulatory convergence is achieved among countries, it implies that countries will be implementing policy measures in a manner coherent with their trading partners. Such collaboration can jointly improve the effectiveness of policy measures, particularly in the areas where policy impacts can be cross-border, such as environmental regulations.

NTMs provide an important “policy interface” between the SDGs and trade, particularly in the framework of regional economic cooperation among developing countries.

Article originally published here

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