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

Understanding transaction costs

• Transaction costs refer to “the cost of using the price mechanism” or “the cost of carrying out a transaction by means of an exchange on the open market” (Coase 1937, 1961).

• In order to carry out a market transaction it is necessary to discover who it is that wishes to deal with, to inform people that one wishes to deal and on what terms, to conduct negotiations leading up to a bargain, to draw up the contract, to undertake the inspection needed to make sure that the terms of the contract are being observed, and so on.

• Transaction cost simplified: the economic value of resources used in locating trading partners and executing transactions.

• Transaction costs: the difference between the prices paid by the buyer and received by the seller

In essence, trade facilitation endeavors aim at the reduction of

transaction costs in trade. • No specific definition of “trade facilitation”. It generally refers to:1. The symplification of trade procedures and administration2. To symplify and standardize procedures and associated

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

3. Trade facilitation is reducing transaction costs (goods and services) in trade

4. 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, etc5. Transaction cost can be addressed through trade facilitation

efforts

Trade facilitation is especially important because it encourages economic growth!

• Failure to facilitate trade causes 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 opportunuties;

. Costs related to lack of predictability.

Trade facilitation reduces the costs for both the producer and consumer

.

The SPS Agreement – to facilitate trade - Origin of problem areas

•The SPS Agreement contains procedural rules for the formulation and application of sanitary and phytosanitary measures in international trade•The Agreement covers all measures to protect human, animal and plant life or health

•risks are seen as arising principally from pests, diseases, disease carrying and disease-causing organisms, additives, contaminants, toxins or disease-causing organisms in foods, beverages or foodstuffs

•Thus the Agreement effectively defines what a “SPS measure” is.

•The Agreement does not, however, establish norms or standards, leaving this to the relevant international organisations or the WTO member states.

Basic principles of the SPS Agreement are:

• The two basic principles of the Agreement are:

• The principle of non discrimination is described in Art. 2.3 of the Agreement. This principle is the SPS Agreement equivalent to the GATT basic principle of most favoured nation status. A measure shall not discriminate against or between trading partners more than is necessary to reach its goal of sanitary and phytosanitary protection

• The principle of scientific justification is spelled out in Art 2.2. of the Agreement.General principles Non discrimination Scientific JustificationInstrumentsRisk Assessment EquivalenceRules on setting protection levels RegionalisationException in the case of insufficientEvidence TransparancyHarmonisation Dispute Settlement

WTO SPS Agreement and IPPC

• The IPPC makes provision for trade in a protection agreement…

• The SPS makes complementary provision for phytosanitary protection in trade agreement

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

• Increasing pressure on Importers by EU, USDA, National Authorities, etc and Consumers to ensure that products they sell are 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.

• 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:

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

Missing trade phenomenon

• Low income countries do not trade up to their potential. Why? High transaction costs

• Transaction costs can be addressed through trade facilitation efforts

<>In today’s global economy, ability to move goods quickly and cheaply will determine whether countries can compete successfully

Major issues in Trade Facilitation Negotiations: Costs and Delays

• Infrastructures for automation

• Rationalization of documents and procedures

• Risks assessments

• Lack of coordination of internal agencies

• SPS legislation

• Physical and human infrastructure

Issues at play – Mandatory sanitary requirements encountered• Risk Assessment• Certification

– Plant and Veterinary HealthSpecifications

• 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”

Cost for 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

Cost for govern-ment, industry organization

-- Prepare compliance, certificates

Negotiations

Inspections

Standard-setting

Dispute settlement

What to do? - actions

• Assess the potential and constraints for facilitation of trade of agricultural and food products

• Develop an institutional framework necessary to strengthen intra-and inter-regional agricultural trade and

• To 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

1. Examine the trade-impeding effects of divergent sanitary requirements, from the perspective of exporters.

2. Explore how exporters minimise trade losses and costs in case of SPS obstacles to trade.

3. Explore possible solutions for timely resolution of disputes over obstacles to trade.

Cost of complying with SPS Agreement

• Institutional and infrastructural cost including: updating of legislation and physical facilities, extension and promotion, enforcement, etc (Government)

• Cost of national capacity building (Government)

• The cost of initial compliance (firms)• The annual cost of maintaining compliance

(firms)

Transaction Costs to Agribusiness

• The bureaucratic costs associated with managing and coordinating integrated production, processing, and marketing

• The opportunity cost of time used to communicate with farmers and coordinate them

• The cost of establishing and monitoring long-term contracts

• The screening costs linked to uncertainties about the reliability of potential suppliers or buyers and the uncertainty about the actual quality of goods

• The transfer costs associated with the legal or physical constraints on the movement and transfer of goods.

Issues impacting on agricultural trade and reduction of transactions costs

• Outdated and inefficient agriculture health and food safety system in CARICOM

• Outdated legislative and regulatory trade framework• Delay in operationalize the Caribbean Agricultural Health

and Food Safety Agency (CAHFSA) and consolidate National Agricultural Health Food Safety system

• Limited volumes and assortiments• Limited transport facilities

Recommendations to reduce transaction cost in SPS

• Update and modernize agriculture health and food safety system in CARICOM

• Update legislative and regulatory trade framework

• Operationalize the Caribbean Agricultural Health and Food Safety Agency (CAHFSA) and

• Establish National Agricultural Health Food Safety systems

• Coordinate trade facilitation measures

Recommendations to reduce transaction cost in SPS

• 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• Establish regional accreditation body (bodies)• Seek technical assistance from international agencies

and importers

Thank you