Reducing the Transaction cost of goods traded by dealing adequately with sanitary and phytosanitary requirements

by Hesdie Grauwde, Policy officer,

FAO Sub-Regional Office, Barbados

Agricultural Trade Facilitation Workshop – July 27-31st, 2008 – Barbados, Organized

by

Ectad and Caribbeanfarmers.org

Purpose

This presentation hopes to provide you with:

An understanding of:

1. Transaction costs

2. Define a special category of transaction costs-The costs elements of the SPS Agreement and impact on transaction cost

To inform you of

3. SPS derived private Emerging Codes of Practices and private standards

4. Discuss trade facilitation services and its importance

5. Offer recommendations for action to reduce transaction costs

Understanding transaction costs

Transaction costs:

Costs of market intelligence ( buyers, suppliers, prices, product specifications, trade requirements)

Costs of negotiation

Costs of transport, delivery and inspection

The Competitive Structure of the Firm

Transaction Costs to Agribusiness

Field Activity Production

Transport PackHouse

StorageProcessing

Transport Distribution CentreMarket

TransportStorage Consumer

Inputs:Field

Activity ProductionTransport Pack

HouseStorage

Processing

Transport Distribution CentreMarket

TransportStorage Consumer

Inputs:

Food Supply Control Chain

Market intelligence Costs : information search to reduce risks of reliability of potential suppliers or buyers and the product quality, to obtain information on costs and prices, volumes, product assortment and other product attributes, and other customer/market requirements.

Administrative and Operational costs associated with managing and coordinating integrated production, processing,

and marketing.

Opportunity cost of time and alternate investment forgone used to communicate with farmers and coordinate them

Legal Fees, Administrative and Operational Costs

of establishing and monitoring long-term contracts

Logistical and transfer costs associated with the legal or physical constraints on the movement and transfer of goods

The SPS Agreement : Removing Non Tarrif Barriers to Trade

•The SPS Agreement has brought attention to a category of costs related to food safety, quality and bio-security systems.

•The SPS Agreement contains procedural rules for the formulation and application of sanitary and phytosanitary measures in international trade

•The Agreement covers measures to protect human, animal and plant health from health risks arising principally from pests, diseases, disease carrying and disease-causing organisms, additives, contaminants, toxins or disease-causing organisms in foods, beverages or foodstuffs

Basic principles of the SPS Agreement are:The two basic principles of the Agreement

:

• The principle of non discrimination (Art. 2.3).

A measure shall not discriminate against or between trading partners more than is necessary to reach its goal of sanitary and phytosanitary protection

This SPS principle equivalent to the GATT basic principle of most favoured nation status.

• The principle of scientific justification (Art 2.2)

Non discrimination Scientific JustificationInstrumentsRisk Assessment EquivalenceRules on setting protection levels RegionalisationException in the case of insufficientEvidence TransparencyHarmonisation Dispute Settlement

Complexity of agricultural trade -risk assessment

• An SPS measure has to be backed by a risk assessment that provides a scientific justification for the relationship between the measure and the level of protection targeted (Art 5.1-5.3). The requirement is generally seen as high and countries (even developed countries) face a substantial task when they have to provide a risk assessment robust enough to be judged in conformity with the Agreement’s provisions.

• Measures complying with the standards, guidelines and recommendations developed by Codex Alimentarius Commission, IOE and the IPPC are compatible with the SPS Agreement.

Complexity of agricultural trade - Private sector requirement – Private standards

Why?• Competitive pressure to meet customers expectations

of quality. Firms differentiate their products through labeling and branding and demand suppliers meet quality and product standards

• Regulatory pressures on Importers and exporters by EU, USDA, National Authorities, to ensure that products sold in the market place are completely safe and constitute low risk to human health as can be technically measured.

• This has led to a range of sector oriented Codes of Practice (COP) incorporating standards relating to all the elements of the food chain.

• COPs are not mandatory and have no force in law, but importers will only purchase from exporters who comply with the particular sector requirements set out in these COPs.

Complexity of agricultural trade - principal issuers of COPs

• EUREPGAP - set of standards on behalf of EU retailers of fruit and vegetables (Good Agricultural Practice and Good Packhouse Practice)

• BRC – British Retail Consortium, has three standards: 1. BRC Global Standard on Food Safety and Quality

(incorporates HACCP);2. BRC/IOP Technical Standard and Protocol for companies

manufacturing and supplying food packaging materials;3. BRC/FDF Technical Standard for the supply of non-

genetically modified food ingredients and products;

• MPS – The Milieu Programme Sierteelt – Dutch initiative covering flowers. Concerned about use of pesticides and residues;

• ESA – European Spice Association, covers minimum quality for imported herbs and spices. Concerned legal requirements for pesticides, residues, alflatoxins, trace metals and microbiological contaminants

Trade facilitation: Its Importance

aims at : services to reduce transaction costs in trade. “trade facilitation”: generally refers to:

1. The simplification of trade procedures and administration2. Standard procedures and associated information flows required to

move goods internationally from seller to buyer and to pass payments in the other direction

Trade facilitation has multi-dimensional features:• at the border: tariffs and non-tariff measures, custom procedures,

etc• behind the border: domestic infrastructure, sectoral regulations

and regulatory environment, governance, etc

Transaction cost can be addressed through trade facilitation efforts

Trade facilitation is especially important because it encourages economic growth!

• Good trade facilitation reduces transaction costs

- direct transaction costs

.costs directly related to formalities;. charges for trade-related services.

- indirect transaction costs

. costs related to procedural delays;

. costs due to lost business opportunities;

. Costs related to lack of predictability.

Trade facilitation reduces the costs for both the producer and consumer

.

Missing trade phenomenon

• Low income countries do not trade up to their potential.

Why?

Missing Trade Phenomenon: Why?

• High transaction costs• In today’s global economy, ability to move goods

quickly and cheaply will determine whether countries can compete successfully

• Infrastructures for automation• Rationalization of documents and procedures• Risks assessments• Lack of coordination of internal agencies• SPS legislation• Physical and human infrastructure

Missing Trade Phenomenon: Why?

• Lack of Risk Assessment

• Lack of Certification– Plant and Veterinary Health Specifications

• Lack of Testing– Product standards (tolerances, etc)– Process standards– Conformity assessment standards– Methods of sampling and analysis

How to analyse sanitary requirements in trade

1. TRADE BARRIER

2. RESPONSE

(short term)

3. SOLUTION

(long term)

•Type of impediment•Motivation or cause•Economic impact

•Comply•Negotiate

•Dispute settlement;•Change national policies;•International agreements and standards; •Firm: restructure

Best practice of exporting companies is to seek compliance with whatever regulation put forward (keep trade going)

Economic impact of sanitary requirements

Trade loss Transaction cost

“Response” “Solution”

Co

st fo

r firm

Detained shipment

Markets restricted

Volumes, prices drop

Loss of market position

Scan foreign regulations

Compliance costs: products, labels, tests, certification

Negotiation

Second-best business solutions

Co

st for

go

vernm

ent, in

du

stry o

rgan

ization

-- Prepare compliance, certificates

Negotiations

Inspections

Standard-setting

Dispute settlement

What to do? - actions

At Producer- Processor Associations Level

Research Agenda :Examine the trade-impeding effects of divergent sanitary

requirements, from the perspective of exporters. Explore how exporters minimise trade losses and costs

in case of SPS obstacles to trade. Explore possible solutions for timely resolution of

disputes over obstacles to trade. Form strategic alliances

What to do? - actions

At CARICOM Strategic Level • Assess the potential and constraints for facilitation of

trade of agricultural and food products• Invest / Co-partner in institutional framework necessary

to strengthen intra-and inter-regional agricultural trade– CAHFSA Caribbean Agricultural Health and Food Safety Agency – CROSQ – Invest in regional accreditation body (bodies)

• Strengthen the analytical capacity CARICOM Member States to address the ongoing changes in the international economic environment that affect the agricultural sectors

What to do? - actions

At National Policy and Institutional Level

• Update legislative and regulatory trade framework

• Invest in National Agricultural Health and Food Safety Agency (NAHFSA) Coordinate trade facilitation measures

What to do?

At National Macro Level ( cont’d) • Harmonize national policies and simplifying regulations

and administrative procedures• Reinforce existing and establish new transport trade

facilitation bodies• Simplify and reduce import/border clearance time• Pre-clearance facilities• Adopt legislation related to electronic commerce and

electronic document exchange• Public private sector partnerships• Seek technical assistance from international agencies

and importers

Thank you