world trade report 2012 world trade the world trade report

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World Trade Report 2012

The World Trade Report 2012 ventures beyond tariffs to examine other policy measures that can affect trade. Regulatory measures for trade in goods and services raise new and pressing challenges for international cooperation in the 21st century. More than many other measures, they reflect public policy goals (such as ensuring the health, safety and well-being of consumers) but they may also be designed and applied in a manner that unnecessarily frustrates trade. The focus of this report is on technical barriers to trade (TBT), sanitary and phytosanitary (SPS) measures (concerning food safety and animal/plant health) and domestic regulation in services.

The Report examines why governments use non-tariff measures (NTMs) and services measures and the extent to which these measures may distort international trade. It looks at the availability of information on NTMs and the latest trends concerning usage. The Report also discusses the impact that NTMs and services measures have on trade and examines how regulatory harmonization and/or mutual recognition of standards may help to reduce any trade-hindering effects.

Finally, the Report discusses international cooperation on NTMs and services measures. It reviews the economic rationale for such cooperation and discusses the efficient design of rules on NTMs in a trade agreement. It examines how cooperation has occurred on TBT/SPS measures and services regulation in the multilateral trading system, and within other international forums and institutions. A legal analysis is provided regarding the treatment of NTMs in WTO dispute system and interpretations of the rules that have emerged in recent international trade disputes. The Report concludes with a discussion of outstanding challenges and key policy implications.

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Trade and public policies: A closer look at non-tariff measures in the 21st century

World Trade Organization154 rue de Lausanne

CH-1211 Geneva 21Switzerland

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© World Trade Organization 2012ISBN 978-92-870-3815-9

Published by the World Trade Organization.

The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system.

The 2012 World Trade Report is split into two main parts. The first is a brief summary of the trade situation in 2011. The second part focuses on the special theme of non-tariff measures in the 21st century.

Website: www.wto.orgGeneral enquiries: [email protected]: +41 (0)22 739 51 11

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1

CONTENTS

ContentsAcknowledgements and Disclaimer 2

Foreword by the WTO Director-General 3

Executive summary 5

I World trade in 2011 16

II Trade and public policies: A closer look at non-tariff measures in the 21st century 34 A Introduction 36

1. WhatistheWorld Trade Report 2012about? 37

2. HistoryofNTMsintheGATT/WTO 39

B An economic perspective on the use of non-tariff measures 48

1. Reasonsforgovernmentinterventionandtypesofmeasures 50

2. ThechoiceofNTMsinlightofdomesticandinternationalconstraints 63

3. Measuresaffectingtradeinservices 73

4. NTMsinthe21stcentury 79

5. Summaryandconclusions 87

C An inventory of non-tariff measures and services measures 94

1. SourcesofinformationonNTMsandservicesmeasures 96

2. StylizedfactsaboutNTMsrelatedtotradeingoods 105

3. Servicesmeasures 122

4. Conclusions 126

D The trade effects of non-tariff measures and services measures 134

1. EstimatingthetradeeffectsofNTMsandservicesmeasures 136

2. DisentanglingtradeeffectsofTBT/SPSmeasuresanddomesticregulationinservices 143

3. Harmonizationandmutualrecognition 149

4. Conclusions 152

E International cooperation on non-tariff measures in a globalized world 160

1. TheregulationofNTMsintradeagreements 162

2. Cooperationinspecificpolicyareas:TBT/SPSandservicesmeasures 176

3. GATT/WTOdisciplinesonNTMsasinterpretedindisputesettlement 187

4. AdaptingtheWTOtoaworldbeyondtariffs 203

5. Conclusions 216

F Conclusions 220

Bibliography 224

Technical notes 236

Abbreviations and symbols 240

List of figures, tables and boxes 242

WTO members 245

Previous World Trade Reports 246

World TrAde reporT 2012

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AcknowledgementsTheWorld Trade Report 2012waspreparedunderthegeneral direction of the WTO’s Deputy Director-GeneralAlejandroJaraandsupervisedbyPatrickLow,Director of the Economic Research and StatisticsDivision. The writing of this year’s report wascoordinatedbyMarcBacchettaandCosimoBeverelli.Work on individual sections was coordinated byAlexander Keck, Coleman Nee, Roberta PiermartiniandMicheleRuta.

The authors of the report were: Marc Bacchetta,Cosimo Beverelli, Robert Gulotty, John Hancock,Alexander Keck, Gaurav Nayyar, Coleman Nee,Roberta Piermartini, Michele Ruta and Robert Teh(EconomicResearchandStatisticsDivision);LeeAnnJackson(AgricultureandCommoditiesDivision);AlanYanovich (Appellate Body Secretariat); DevinMcDanielsandErikWijkström(TradeandEnvironmentDivision); Antonia Carzaniga and Hoe Lim (Trade inServices Division). Michael Ferrantino, Paul Kalengaand Robert Staiger wrote background papers. Otherwritten contributions were provided by HildegunnNordås and Melvin Spreij. The International TradeCentreprovidedusefuldataprocessedspecificallyforthis report. Particular acknowledgement is owed toGabrielleMarceau,NadiaRochaandRoySantanafortheirmanysuggestionsontheReport.

StatisticswereprovidedbytheStatisticsGroupoftheEconomic Research and Statistics Division,coordinated by Hubert Escaith, Julia de Verteuil,Andreas Maurer and Jürgen Richtering. TheAgriculture and Commodities Division and the Tradeand Environment Division, along with the StatisticsGroup, provided information and guidance on theSpecific Trade Concerns Database. Research inputswere provided by Claudia Böhringer, Pramila Crivelli,

Liliana Foletti, Filippo Gregorini, Jasmin Gröschl,Abigail Hunter, Shruti Kashyap, Gianluca Orefice,LorenzoRotunno,JoonasUotinenandGiuliaZanvettor.Other divisions in the WTO Secretariat providedvaluable comments on drafts at various stages ofpreparation. The authors wish to acknowledge theadvice received from several colleagues in theAgriculture and Commodities Division (GretchenStanton), the Appellate Body Secretariat (CarloGamberale,MatteoFerrero),theLegalAffairsDivision(Kerry Allbeury, Aegyoung Jun, Maria Pereyra), theTrade inServicesDivision (HamidMamdouh)and theInstitute for Training and Technical Cooperation(HectorTorres).

The following individuals from outside the WTOSecretariat also made useful comments on earlierdrafts: Richard Baldwin, John Beghin, Olivier Cadot,Philippa Dee, Panagiotis Delimatsis, Ian Gillson,Bernard Hoekman, Philip Levy, Mariem Malouche,SébastienMiroudot,AndrewMitchell,JamieMorrison,Alessandro Nicita, Hildegunn Nordås, Dennis Novy,Marcelo Olarreaga, Joost Pauwelyn, Sebastian Saez,Ranil Salgado, Robert Staiger, Joel Trachtman, TaniaVoon,JohnWhalley,RobertWolfeandBoXiong.

TheproductionoftheReportwasmanagedbyPaulettePlanchette of the Economic Research and StatisticsDivision, assisted by Véronique Bernard, and incooperationwithAnthonyMartin,HeatherSapey-Pertinand Helen Swain of the Information and ExternalRelations Division. Anthony Martin and John Hancockedited the report. Acknowledgement is owed toSebastian Arcq and Mike Blank of Mendeley for helpwiththebibliography.ThetranslatorsintheLanguages,Documentation and Information Management Divisionworkedhardtomeettightdeadlines.

disclaimerThe World Trade Report and any opinions reflected therein are the sole responsibility of the WTOSecretariat.TheydonotpurporttoreflecttheopinionsorviewsofmembersoftheWTO.Themainauthorsof the Report also wish to exonerate those who have commented upon it from responsibility for anyoutstandingerrorsoromissions.

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FOREWORD

Foreword by the WTo director-General

Thisyear’sWorld Trade Reporttakesafreshlookatanoldissue.Non-tariffmeasures(NTMs)havebeenwithus since nations have traded and they have certainlyconstitutedakeyelementoftheworkoftheGATTandtheWTOovertheyears.IoffersevenreasonswhyitisagoodtimefortheWTOtobethinkingaboutNTMs.

First, NTMs have acquired growing importance astariffshavecomedown,whether throughmultilateral,preferentialorunilateralaction.Secondly,acleartrendhas emerged over the years in which NTMs are lessabout shielding producers from import competitionand more about the attainment of a broad range ofpublicpolicyobjectives.Youcouldsaywearemovingfrom protection to precaution. This tendency isdiscernible in practically every economy, as concernsover health, safety, environmental quality and othersocial imperatives gain prominence. Moreover, issuessuchasthesetakeonamorecentralroleinpolicyaseconomiesdevelopandincomesgrow.

Thirdly,growingpublicpolicyconcernsaddsignificantlytothecomplexnatureandvarietyofNTMsdeployedbygovernments, calling foranadditional layerofanalysistoteaseoutthetradeeffectsofalternativeapproachestowards the attainment of declared policy goals.Fourthly, the expansion of the public policy agendameans thatNTMswill not followapathof diminishingrelevance like tariffshavedone.Theywillnotshrink inimportance.Regulatoryinterventionsaddressingmarketfailures and international spillovers, with inevitableconsequencesfortradeflowsandinvestment,arehereto stay. Fifthly, the increased role of public policybecomes ever more present in international economicrelations as globalization intensifies interdependencyamong nations. Sixthly, all this takes us to where theWTOcomesin.Iseeeffectiveinternationalcooperationon NTMs as a key challenge facing the multilateraltrading system in the years ahead. Finally, a relatedpointtothelastisthatNTMsfigureprominentlyamongdisputesbroughttotheWTO.

We have to think differently about the challenges ofinternational cooperation. When trade opening is thecorebusiness,the“levelplayingfield”imageryapplies.But with public policy, it does not. The aim is not toreduce public policy interventions to zero; it is torenderthemcompatiblewiththegainsfromtrade.Wecan no longer think about reduction formulae,

becomingimmersed–andsometimeslost–inendlessdebates about the size of reduction coefficients orexceptions to the coefficients. Reciprocity innegotiations does not have the same meaning. Thepolicy tool box is quite different. The challenge isabout findingwaysofmanagingawider set of policypreferences without disrespecting those preferencesorallowingthemtobecomecompetitivenessconcernsthatunnecessarilyfrustratetrade.

Reference is often made to distinctions betweenshallow and deep integration and between bordermeasuresandbehind-the-bordermeasures.Thesearenotclear-cutcategoriesandtheyareusedindifferentways by different commentators. From the currentperspective, where vibrant trade relations must beunderpinned by public policy infrastructure withpotential trade effects, it makes sense to think interms of the deeper end of the integration spectrum.Indeed, one way of thinking about the challenges ofeconomic integration is lessasaquest for free tradeandmoreasprogresstowardsaglobalmarket.

These are some of the issues that the World Trade Report takes up this year. Beginning with a shorthistorical overview, the Report shows how the earlyfocusonremovingNTMsthatwerelargelysurrogatesfor tariffs has given way to a much subtler and morecomplex world in which public policy concerns findgreater expression in trade relations than they did afew decades ago. The Report tries to identify themajor motivations that prompt governments to useNTMs.Asimplethree-folddistinctionisbetweenthoseNTMs that serve public policy (essentially non-economic issues), those thathaveaneconomic focusbased on a national welfare-increasing calculus, andthose that have a political economy motivation thatserves particular interests, and quite possibly do notincreasenationalwelfare.

Thesedistinctionscannotalwaysbeeasilydrawn,butthey make clear why dealing with NTMs is so muchmorecomplicated thansimplyworking formoreopenmarketsbyremovingotherbarrierstotrade.NTMscangenerallybeexpected tohave tradeeffectsand theymayincreaseordecreasetrade.Theoutcomedependsbothonthemotivationforthemeasureandthewayitisdesigned.InkeepingwithpolicytrendsintheareaofNTMs, most of the analysis in the Report focuses


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primarilyonpublicpolicyinterventionsthatarecoveredby the Technical Barriers to Trade (TBT) Agreement,the Application of Sanitary and Phytosanitary (SPS)Measures Agreement, Article XX of the GeneralAgreement on Tariffs and Trade (GATT), and on thedomestic regulation provisions of the GeneralAgreementonTradeinServices(GATS).

Since public policy NTMs are likely to have tradeeffects,wecannot altogether escapeconsiderationoftheseeffects.Policy-makersmaynotostensiblyreflectany trade intent in theirpublicpolicy interventions,butin practice these interventions might be intended toserve a dual purpose. They may be designed oradministered in ways that intentionally restrict tradeeveniftheirprimarypurposeistoserveapublicpolicy.Thishasbeenreferredtoas“policysubstitution”anditarises either where alternative, less opaque policies(suchastariffs)areunavailable,orwherepolicy-makerswish to conceal the objective. Note also that thisproblemcanarisenotsomuchinthedesignofapolicybutinthewayitisadministered.Whenthisisthecase,findingasystematicremedycanbemuchmoredifficult.A good deal of the case load in GATT/WTO disputesettlement has turned on the tension between goodpublicpolicyandhiddenprotection.

The issueofpolicysubstitution isbutoneelementofengagement when it comes to internationalcooperationonNTMs. It isprobablyoneoftheeasieraspects of cooperation. Matters become morecomplicatedwhenwethinkaboutthetradeeffectsofNTMsnotintermsofprotectionistintent,butratherintermsof thetradeeffectsofdivergentapproachestoNTMs. The issue of divergence embodies at leastthree elements. The first is potentially the leastcomplicatedand relates towhatwemight thinkofas“incidental or path-dependent divergence” – that is,localized regulatory cooperation may have led todifferentregulatoryapproachesthatarenotgroundedinanystrongpreference,butratherinhabitorcustom.With no strong vested interest in pursuing divergentapproaches, cooperation to harmonize or mutuallyrecognize such diverging approaches should berelatively straightforward. Indeed, this was very muchthespiritof thesuggestion in last year’sWorld Trade Reportonpreferentialtradeagreementsthattherisksofregulatorydivergencecouldbe lessenedthroughamultilateralizationofpreferentialpoliciesinthisarea.

ThesecondaspectofdivergenceinnationalorregionalapproachestoNTMsismuchmoredelicate.Divergencemay reflectsomethingmoreprofound thatgoes to theroot of societal preferences. Value systems may varyacross societies in ways that make the idea ofharmonizationormutualrecognitionunacceptable.Thiscouldbecalled“preferencedivergence”anditwouldbea brave person who argued that trade should trumpsuch diversity. Yet such realities may carry strong

consequences for the ability of nations to cooperateandbenefitmutuallyfromexchange.Insuchcases,theonlysensibleapproachistoensurethatdifferencesarepreserved and respected at minimum cost in terms ofanyslippagetowardsadual-purposeapproachtopublicpolicyformulationandadministration.

Thethirdaspectofdivergenceconcernsthedifficultiesfaced by poorer countries in meeting standards inmajormarketstheyserve.Onecouldcharacterizethisas“involuntarydivergence”.Developingcountrieshaveno motivation for preferring different standards; it ismerelyaquestionofcapacity.Withthenecessarywilland commitment, this problem is readily amenable tosolution.AsnotedintheReport,anumberofcapacity-buildinginitiativesareattemptingtoaddressthisissue.

The economic gains from joint international action toremove protectionist elements in the design andadministration of NTMs would be considerable. Workon minimizing regulatory divergence, throughharmonization, mutual recognition of standards andaction toensure thatprivatestandardsdonotundulysegment markets, would also promise considerablebenefits.Muchhasalreadybeenachievedinmanagingpublic policy regarding TBT/SPS measures in thegoods area, and domestic regulation in services. Theprogressthathasbeenmadeholdspromiseforfurtheradvances.

A good part of this report is dedicated to identifyinginformation available on NTMs and our capacity toanalyseandassesstheimpactofthesemeasures.Thereviewisveryuseful,butitdoesnotmakeforcheerfulreading. We know far less than we should about theexistenceandeffectsofNTMs.Someofthedifficultyis of a technical nature, as the Report carefullydocuments. The new Integrated Trade IntelligencePortal (I-TIP) information system being developed bythe WTO Secretariat is an effort to increasetransparency. But it is clear that governments bear aresponsibility for the insufficiency of availableinformation. A strong case exists for seekingimprovementsinthedesignandcontentofnotificationobligations and in the level of compliance with theseobligations.Thiswouldseemtobeapre-conditionforserious international engagement, whether regionallyormultilaterally,inmakingprogressonanagendathatpromisessignificantgainstothosewhoengage.

Pascal Lamy Director-General

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EXECUTIVE SUMMARY

executive summaryThisyear’sWorld Trade Reportventuresbeyondtariffsto examine other policy measures that can affecttrade.AstariffshavefallenintheyearssincethebirthoftheGeneralAgreementonTariffsandTrade(GATT)in 1948, attention has progressively shifted towardsnon-tariff measures (NTMs). The range of NTMs isvast, complex, driven by multiple policy motives, andever-changing. Public policy objectives underlyingNTMs have evolved. The drivers of change are many,including greater interdependency in a globalizingworld, increased social awareness, and growingconcerns regarding health, safety, and environmentalquality.Manyof these factorscall foradeepeningofintegration, wresting attention away from moretraditional and shallower forms of cooperation. Tradeinservicesisapartofthisdevelopmentandhascomeunder greater scrutiny, along with the policies thatinfluenceservicestrade.

The continuing multiplication of policy directions andpreoccupations presents challenges for internationalcooperation.TheGATT/WTOhasaddressedsomeofthe challenges created by NTMs, both through itsdisputesettlementmechanismandsuccessiveroundsof GATT/WTO negotiations. The Tokyo and Uruguayrounds, in particular, focused on a number of NTMs,includingstandards,whichwereprogressivelysubjectto heightened multilateral discipline. The UruguayRound also marked the inclusion of services in theWTO.

Regulatorymeasuressuchastechnicalbarrierstotrade(TBT) and sanitary andphytosanitary (SPS)measuresingoodsanddomesticregulationinservicesraisenewandpressingchallengesforinternationalcooperationinthe 21st century. They also pose acute transparencyissues. More than many other measures, they reflectpublicpolicygoals(suchasensuringhealth,safetyandwell-being of consumers). Their trade effects may beincidental,buttheycanalsobedesignedandappliedinamannerthatunnecessarilyfrustratestrade.Moreover,they raise a number of issues that are specific togovernments and firms in developing countries. Thesheer breadth of the subject area has meant that thefocus of this report is on TBT/SPS measures anddomesticregulationinservices.

A. Introduction

Section A of the Report presents an overview of thehistoryofnon-tariffmeasuresintheGATT/WTO.Thisoverview discusses how motivations for using NTMshaveevolved,complicatingthisareaoftradepolicybutnot changing the core challenge of managing therelationship between public policy and tradingopportunities.

SectionBexaminesthereasonswhygovernmentsuseNTMsandservicesmeasuresandtheextenttowhichpublicpolicyinterventionsmayalsodistortinternationaltrade. The phenomenon of offshoring and the cross-effectsofservicesmeasuresongoodstradearealsoconsidered. The section analyses choices amongalternative policy instruments from a theoretical andempirical perspective. Finally, case studies arepresentedon theuseofNTMs inparticular contexts.These include the recent financial crisis, climatechange policy and food safety concerns. The casestudiesconsiderhowfarmeasuresadoptedmayposeachallengeforinternationaltrade.

Section C of the Report surveys available sources ofinformation on NTMs and services measures andevaluates their relative strengths and weaknesses. Itusesthisinformationtoestablishanumberof“stylizedfacts”, first about NTMs (TBT/SPS measures inparticular)andthenaboutservicesmeasures.

Section D discusses the magnitude and the tradeeffects of NTMs and services measures in general,before focusingonTBT/SPSmeasuresanddomesticregulationinservices.Italsoexamineshowregulatoryharmonizationand/ormutualrecognitionofstandardshelp to reduce the trade-hindering effects of thediversity of TBT and SPS measures and domesticregulationinservices.

SectionElooksat internationalcooperationonNTMsand services measures. The first part reviews theeconomicrationaleforsuchcooperationanddiscussesthe efficient design of rules on NTMs in a tradeagreement.Thesecondpartlooksathowcooperationhas occurred on TBT/SPS measures and servicesregulationinthemultilateraltradingsystem,andwithinother international forums and institutions. The thirdpartofthesectiondealswiththelegalanalysisofthetreatmentofNTMs intheGATT/WTOdisputesystemand interpretationsof the rules thathaveemerged inrecent international trade disputes. The sectionconcludeswithadiscussionofoutstandingchallengesandkeypolicyimplicationsoftheReport.

See page 36


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B. An economic perspective on the use of non-tariff measures

Reasons for government intervention and types of measures

Governments employ non-tariff measures to increase national welfare and for “political economy” reasons.

Non-tariff measures, such as TBT/SPS measures(includinglabelling),taxesandsubsidies,areoftenthefirst-best policy instruments to achieve public policyobjectives, including correcting market failures suchasinformationasymmetries(wherepartiesdonothavethe same information) or imperfect competition, andpursuing non-economic objectives, such as theprotection of public health. NTMs such as exportsubsidies and export taxes increase national incomeby exploiting market power in international markets.While many NTMs are concerned with consumerprotection, NTMs can also be utilized by politicalincumbentstoprotectdomesticproducers.

The use of NTMs, irrespective of the motive that underlies them, will often have trade effects.

Insomecases,theuseofNTMscanpromotetradebutinmanyothercases,theyrestrictit.IncaseswheretheNTMsaremeanttocorrectamarketfailure,thetradeeffects are an inadvertent by-product of pursuing apublicpolicyobjective.Atothertimes,whenNTMsareemployed tomanipulate the termsof tradeorprotectdomesticproducers,adversetradeeffectsonpartnersarethemeansthroughwhichgainsarecaptured.ThefactthatthesameNTMusedtopursueapublicpolicyobjectivecanalsobeused forprotectionistpurposesunderlines the difficulty of distinguishing between“legitimate” and protectionist motivations for NTMs,and of identifying instances where NTMs createunnecessarytradecosts.

The choice of NTMs in light of domestic and international constraints

Analysing the choice among alternative instruments in light of the domestic political and economic context can help identify the motivation behind policy interventions.

Neither the declared aim of a policy nor its effect ontrade provides conclusive evidence on whether or notan NTM is innocuous from a trade perspective. Ananalysis of the nature of these measures and of thepolitical and economic conditions leading to theiradoptioncanprovideimportantinsightsinthisregard.Inparticular,theopaquenatureofcertainNTMscomparedwith tariffs and other policy instruments allowspolitically motivated governments to conceal the true

costsandbenefitsof ameasureand, thus, satisfy thedemands of producer lobbies while maintaining theappearance of pursuing a policy of public interest.Variouscircumstancesinthepoliticalenvironment,suchas election cycles or inter-departmental conflicts, cangive further indications as to why the use of NTMspersists. Sector characteristics also play a role.Pressurefromlargeinfluentialfirmsregardingincreasesin fixed costs or the prevalence of internationaloffshoring in certain industries is bound to affectgovernments’decisionsontheuseofcertainNTMs.

As countries make commitments in trade agreements that constrain their ability to pursue certain trade policies, less effectively regulated measures may emerge as a secondary means of protecting or supporting domestic industries.

When tariffs and other trade measures increasinglybecome unavailable to governments, certain NTMs,including behind-the-border NTMs such as TBT/SPSmeasures,maybeusedtoinfluencetrade.Forexample,agovernmentmaybetemptedtoimposemorestringentdomestic technical regulations if domestic firms in animport-competing industry find it easier than foreigncompanies to comply. Existing empirical evidencealludes to increased use of NTMs when tariffs areconstrainedbyinternationalagreements.

Measures affecting trade in services

Despite the peculiarities of services trade, distinguishing when services measures pursue public policy objectives from instances in which they distort trade is fraught with the same fundamental difficulties as in the case of NTMs.

Thecaseforregulatingservicesmarketsisparticularlyevidentgiventheincidenceofmarketfailuresinmanyservices sectors. At the same time, the specificcharacteristics of services trade, notably theintangibility of services and the different modes ofsupply, implythatregulatorymeasures,mostlyapplied“behind the border”, are the only form of tradeprotection. Thus, while some services measures maybe used explicitly for protectionist purposes, muchservices regulation pursues public policy objectives,butmightnonethelesshaveeffectsontrade.

Ensuring that services measures do not unduly distort trade has become of even greater significance in light of the unbundling of production processes.

Tradeinservicesplaysanimportantroleinsupportinginternational production networks. Measures thatrestricttradeandcompetitioninservicesmarketsmayaffect more than the sector directly concerned.Particularly in the case of infrastructural services,spillover effects on other services and goods can besignificant.

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EXECUTIVE SUMMARY

NTMs in the 21st century

The use of NTMs in the financial crisis, and policies addressing climate change and food safety measures are all examples of how challenges arise at the interface of public policy and trade policy.

During the recent financial crisis, a number of“emergency”measuresweretakentostemthespreadof systemic damage. At the same time, it was fearedthat thecrisiscould increasethetemptationtoresorttobeggar-thy-neighbourpolicies.Thishasheightenedthe need for the monitoring of measures taken inresponse to the crisis in order to guard against thespectreofprotectionism.

In regard to climate change, countries with strictregimeswillbetemptedtoresorttoNTMsinordertomanagetheenvironmentalandtradeconsequencesoftheirclimatepolicies.Twooftheseconsequencesarecarbon leakage (whereby reductions of greenhousegasemissionsbyacountrywithstrict regulationsareoffset by increased emissions by a country with lessstrict regulations) and the loss in competitiveness offirmsincountrieswithtoughenvironmentalregulations.WhileenvironmentalreasonscouldmotivatetheuseofNTMs, such as border adjustment measures, thesemeasuresalsohelpcompetitivelychallengeddomesticproducers,givingrisetoariskofregulatorycapture.

Economic, social and technological advances haveresulted in higher consumer demand for food safetyand posed new challenges in managing globallyfragmentedsupplychains.Foodsafetymeasureshaveproliferatedasa tool to respond to thesechallenges.As a consequence, various approaches to mitigatepossiblenegativetradeimpacts,suchasharmonizationofstandards,equivalenceandcommitmenttoasetofrules,arereceivingwidespreadattention.

See page 48

C. An inventory of non-tariff measures and services measures

Sources of information on NTMs and services measures

Transparency is a major issue with regard to both NTMs and services measures. Despite recent efforts aimed at filling the information gap in this area, data remain sparse.

The relative scarcity of information on non-tariffmeasures is partly due to the nature of thesemeasures, which are inherently more difficult tomeasurethantariffs.TheWTOandotherinternationalorganizationshaveundertakensubstantialeffortsandmadegoodprogressinclassifyingandcollectingdataonNTMsinrecentyears,andtheseeffortsarestartingtoextendtoservicesmeasures.However,moreneedsto be done to obtain a clearer and more completepictureofthetradepolicylandscape.

WTOinternalsourcesincludeWTOmembers’schedulesofconcessions/commitments,notifications,WTOtradepolicy reviews, monitoring reports, and information onspecifictradeconcerns(STCs)raisedbyWTOmembersand disputes brought to the WTO. Most of thesesources suffer from limitations and fail to provide theleveloftransparencytheyaresupposedtodeliver.WithWTO members’ notifications, for example, the lowcomplianceratecanbeaseriouslimitation.

Anotherproblemistheaccessibilityofdatawhicharenotalwaysstoredindatabasesandarescattered.Thesituationwith regard to theaccessibilityofNTMdatashould improve considerably with the WTO’s newIntegrated Trade Intelligence Portal (I-TIP), which iscurrentlybeingdeployed.

Withregardtonon-WTOsources,itbecameevidentbythe early 2000s that UNCTAD’s Trade Analysis andInformation System (TRAINS) database, the mostcompletecollectionofpubliclyavailableinformationonNTMs,wasinneedofupgrading.

A multi-agency group including all relevantorganizations updated UNCTAD’s outdated codingsystem.At thesame time,UNCTAD, the InternationalTradeCentreandtheWorldBankstartedcoordinatingtheir efforts to collect official information on NTMs.Theyalsoundertookaseriesofbusinesssurveysthatusefullycomplementofficialinformation.

Other non-WTO sources of NTM data include theGlobal Anti-Dumping Database, the CoRe NTMsDatabaseandtheGlobalTradeAlertDatabase.

None of these data sources provides comprehensivecoverage of NTMs. However, each sheds light on a


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particular aspect, and taken together they providesignificantinformation.

Besides thespecificcommitmentsunder theGeneralAgreementonTradeinServicesandpreferentialtradeagreements,thereisverylittleinformationonservicesmeasures. The OECD’s Product Market Regulationfamily of indicators is the main source of informationonappliedmeasures.However, itdoesnotdistinguishbetween market access and national treatmentlimitationsontheonehandanddomesticregulationonthe other. The most reliable information on domesticregulation comes from sector-specific data, forexampleinfinancialservices.

Stylized facts about NTMs

Despite common perceptions about a rising trend in NTMs, evidence is inconclusive. NTMs appear to have risen in the mid-1990s, but between 2000 and 2008 activity remained relatively flat before picking up again following the financial crisis. However, WTO notifications suggest an upward trend in TBT/SPS measures.

AccordingtohistoricaldatafromtheUNCTADTRAINSdatabase, shares of product lines and trade valuescovered by NTMs rose between the late 1990s andearly 2000s, but then stayed flat or declined slightlyupto2008.

WTO data on notifications, however, show increasinguseofTBT/SPSmeasuressince themid-1990s.Thisincrease in the incidence of TBT/SPS measures isreflectedinanincreaseinthenumberofspecifictradeconcernsraisedbyWTOmembersintheTBTandSPScommittees. Frequency and coverage ratios forspecific trade concerns have also risen over time,althoughnotevenly.

Evidence from WTO disputes in relation to TBT andSPS measures is more nuanced. Over the last fiveyears, only 11 per cent of disputes cited the SPSAgreementand12percentcitedtheTBTAgreement.The General Agreement on Tariffs and Trade (GATT)was cited more than half of the time (55 per cent)during thesameperiod.Onepossibleexplanation forthis discrepancy is that other committee-basedcooperation mechanisms are effective in diffusingconflicts.

TBT/SPS measures are the most frequently encountered NTMs according to data collected from official sources. They are also considered among the most relevant impediments to exports, according to business surveys.

Newly collected official NTM information from30 developing countries, the European Union andJapanshowsahighcross-sectional incidenceofTBTandSPSmeasures.

EvidencefrombusinesssurveysconductedbytheITCin 11 developing countries suggests that TBT/SPSmeasures are the most burdensome for exporters. In2010, the share of TBT/SPS measures in all NTMsperceivedburdensomebyexportingfirmswas48percent.Similarly, survey-baseddata showa large shareofTBT/SPSinmeasuresaffectingEUexporters(justover 50 per cent), but the US share is lower (around20 per cent). This discrepancy might be explainedby differences in methodology between the US andEUsurveys.

Evidence from WTO members’ specific trade concerns and ITC business surveys indicates that TBT/SPS measures applied by developed countries are an important source of concern.

TBT/SPSmeasuresimposedbydevelopedeconomiesraise relatively more specific trade concerns thanmeasuresimposedbydevelopingeconomies.TheITCbusiness surveys show a greater resort to TBT/SPSmeasuresbydevelopedeconomies.

NTMs, and TBT/SPS measures in particular, vary across sectors but are especially prevalent in agriculture.

Specific trade concerns related to SPS measuresoverwhelmingly affect the agricultural sector(94 per cent), which is far from surprising. Moreunexpected is the fact that a large number of TBTconcerns (29 per cent) also relate to agriculture.Additionally,econometricanalysisshowsthatTBTsasmeasured by specific trade concerns are mostimportant,intermsofnumbersoftarifflinesandtradevalue,intheagriculturalsector.

If ITC survey responses are weighted by trade, thereported incidence of NTMs among firms in theagricultural sector is 63 per cent, compared with45percent inmanufacturing.Furthermore,TBT/SPSmeasures are far more prevalent among NTMs inagriculture (59 per cent) than in manufacturing(34percent).

Evidence from WTO disputes also shows a greaternumberofcitationsoftheSPSandTBTagreementsincasesinvolvingagriculturalproducts.Bothagreementswere cited in 28 per cent of disputes involvingagriculturalproducts(asdefinedintheAgreementonAgriculture) between 2007 and 2011. Meanwhile, nodisputes involving non-agricultural products citedthe SPS Agreement and only 2.9 per cent cited theTBTAgreement.

Evidence also suggests that procedural obstacles are the main source of difficulties for exporting firms from developing countries.

ITC business surveys show that, for exporters, morethan 70 per cent of burdensome NTMs also raise a

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procedural obstacle. Time constraints and unusuallyhighfeesor“informal”paymentstogetheraccountformorethanhalfofreportedobstacles.

Services measures

The currently available sources of information on services measures are unsatisfactory in a number of respects. WTO notifications suffer from low compliance rates. WTO members’ schedules of market access and national treatment commitments provide information on bound policies but the regimes actually applied are often more open. Domestic regulation is generally measured using poor proxies.

ProductMarketRegulation(PMR)indicators,themostfrequently used data on services measures, havefollowed a downward trend in OECD countries sincethe late 1990s. This indicates an increase in marketcontestability, but provides limited information ontrends of market access, national treatment anddomesticregulation.Verylittleisknownonthetrendsin services measures in most non-OECD countriesbecausetheyarenotincludedinthePMR.

There is some evidence of discrimination againstforeign services and services providers, in particularfromtheforeigndirectinvestment(FDI)restrictivenessindex calculated by the OECD. Such discrimination,which is likely to generate rents for domesticincumbents, has however followed a downward trendsince the late 1990s, especially via reductions inforeignequityrestrictions.

As far as domestic regulation is concerned, the datasituation is particularly troubling. The trade literaturehas used PMR indicators to proxy for domesticregulation, but such indicators do not provide asatisfactoryaccountofqualificationrequirementsandprocedures and technical standards in services. Oneof thedifficulties inmeasuringdomestic regulation isthat it is often sector-specific. Not surprisingly, themost reliable information comes from sector-specificdatasets,suchastheWorldBankdatasetonbankingregulation.

See page 94

d. The trade effects of non-tariff measures and services measures

The quantification of trade effects

Non-tariff measures are diverse and cannot easily be compared across countries and sectors. The existing literature, however, suggests that NTMs significantly distort trade, perhaps even more than tariffs. Moreover, the relative contribution of NTMs to the overall level of protection appears to increase with the level of GDP per capita.

A number of studies quantify the effect of NTMs oninternational tradebyestimatingan “ad-valoremtariffequivalent” (AVE). Averaging across countries andacross tariff lines, NTMs almost double the level oftrade restrictiveness imposed by tariffs. More recentevidence suggests that with falling tariffs, thecontributionofNTMstooveralltraderestrictivenessislikelytohaveincreasedevenmore.Theevidencealsosuggests that as WTO members become richer, thetrade restrictiveness of NTMs – relative to tariffs –increases. Furthermore, the average AVE foragriculturalproductsappears tobemuchhigher thanthatformanufacturedgoods.

The degree of restrictiveness of services measures is generally higher in developing countries than in developed countries. Yet there is no systematic relationship between the restrictiveness of services measures and income per capita.

The restrictiveness of services measures does notappeartobesystematicallyassociatedwithacountry’slevel of development because there is much variationwithinthegroupofdevelopingeconomies.Furthermore,it appears that the cross-country variation in therestrictiveness of services measures may depend ontheparticularservicesectorunderconsideration.

The methods developed in the trade literature to estimate the degree of restrictiveness of NTMs and services measures suffer from a number of limitations. These are aggravated in the presence of global supply chains.

Themethodologicallimitationscanbetraced,inpart,toalackoftransparencyintheuseofNTMsandservicesmeasures.Problemsalsoarisedue to insufficientdataon different prices, the sensitivity of results from theuse of different econometric techniques and thedifficulty of attributing price increases to a singlemeasure when a market is characterized by multipleNTMsandservicesmeasures.

Efforts so far to measure the trade effects of NTMsandservicesmeasuresdonotaddressthefactthatina global supply chain semi-finished goods have to


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move across international borders more than once.The effect of a marginal increase in trade costs ismuch larger than would be the case if there were asingleinternationaltransaction.

Estimates of the restrictiveness of services measures do not account for their impact on trade in goods.

The trade-restrictive impact of services measuresgoesbeyondtradeinservicesandspillsovertotradeingoods.Transportandtravelaccountforabouthalfofcross-border trade in services and are obviously themost important direct services inputs to internationaltrade. There is evidence that barriers to trade andcompetition intransportand logisticshaveanegativeimpact not only on cross-border trade in transportservices, but also on a country’s overall tradeperformance.Similarly,regulatorybarrierstoFDIflowsand business services are shown to affect exportperformance in manufacturing sectors such asmachinery, motor vehicles, chemicals and electricequipment.

The complementarities between goods and servicesand the spill-over effects of services measures onmerchandise trade are especially strong along globalvaluechains.Openandcompetitivebusinessservicesmarkets are essential for moving up the value chaininto more differentiated and service-intensivemanufacturedgoods.

Estimates of the overall restrictiveness of servicesmeasures should take interactions between trade inservicesandtradeingoodsintoaccount,butempiricalanalysisonthisisstillscarce.

A focus on TBT/SPS measures and domestic regulation in services

A comparative analysis of the role that the various types of NTMs play in the overall level of NTM restrictiveness does not exist. However, the impact on trade is not necessarily restrictive for all measures. TBT/SPS measures and domestic regulation in services, in particular, do not unambiguously increase or decrease trade.

In general, TBT/SPS measures have prevalentlypositive effects for more technologically advancedsectors, but negative effects on trade in fresh andprocessed goods. Furthermore, when negative, theeffectofTBT/SPSmeasureson trade is found tobedrivenbytheimpactondevelopingcountries’exports,especiallysmallcountries.

Empirical evidence on the trade effect of domesticregulation in services is extremely limited. Domesticregulation that reduces competition negatively affectsbilateral trade. In contrast, evidence from the financial

sectorshowsthatdomesticregulationaimedatensuringappropriatestandardshasapositiveeffectontrade.

TBT/SPS measures and domestic regulation in services affect not only how much two countries trade but also the number of countries with whom they trade.

It has been argued that TBT/SPS measures maymainly represent a fixed cost to enter a new market.Forexample,afirmmayneedtopayan initialcostofadaptation to the standard in a foreignmarket that itenters,butthiscostisindependentoftheamountthefirm sells. This is consistent with evidence thatTBT/SPS measures have a stronger effect on smallrather than large firms, and on firms that outsourcetheircomponents.

The importance of the fixed cost component also isconsistentwiththeevidencethatTBT/SPSmeasuresanddomestic regulation in servicesaffect tradeboththrough their impact on the volumeof tradebetweentwo countries, and through their effect on thediversificationofexportmarkets.

There is some evidence that conformity assessment is particularly burdensome.

A study on SPS measures conducted for this reportfinds that conformity assessment measures have astrongernegativeimpactonfoodandagriculturetraderelativetoregulationsonproductcharacteristics.

Negative effects on trade are mitigated by a reduction in policy divergence, whether through convergence to international standards, harmonization or mutual recognition.

The empirical literature measures the extent ofharmonizationofTBT/SPSmeasuresindifferentways.For example, some studies consider a standard to beharmonized if it conforms to an international standardpublished by the International Organization forStandardization(ISO),theInternationalElectrotechnicalCommission(IEC),theInternationalTelecommunicationUnion (ITU) or similar bodies. Other studies treatstandardsasharmonizediftheyarecommontoagroupof countries. Notwithstanding these differences, ageneralfindingintheliteratureisthatharmonizationofTBT/SPS measures increases trade. In particular,harmonization of TBT/SPS measures is shown toenhancethepresenceofsmallandmedium-sizedfirmsinexportmarkets.

Aswithgoods, ithasbeenarguedthatdifferences inservices regulation across countries (policyheterogeneity)constituteregulatorytraderestrictions.There is indeed evidence that a reduction in policyheterogeneity,carriedout throughmutual recognitionof standards or convergence to internationalstandards,hasledtoincreasedservicestrade.

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If harmonization and mutual recognition of standards occur at the regional level, there may be significant trade-diverting effects on outsiders and regulatory “lock-in”. This appears to be the case especially for developing countries.

Existing studies indicate that harmonization at theregional level tends to divert trade. Such tradediversion negatively affects developing countries’exports in particular. The inclusion of specificprovisionsinpreferentialtradeagreementsappearstofollow a “hub and spoke” structure, with a largerpartner representing thehub towhosestandards thespokeswillconform.

Asdiscussedinlastyear’sWorld Trade Report,theriskof a lock-in effect exists in regional provisions onTBTs. Harmonization to a regional standard mayincrease the costs for further multilateral tradeopening. If adopting a certain standard involves thepaymentofsomeformoffixedcost,theriskexiststhatregional provisions may work as a stumbling block inmultilateralcooperation.

See page 134

e. International cooperation on non-tariff measures in a globalized world

Regulation of NTMs in trade agreements

Shallow agreements contain provisions that focus on addressing the problem of tariffs being replaced by non-tariff measures.

Underthemaineconomictheoryfortradeagreements,themainproblemthattherulesonnon-tariffmeasuresin a trade agreement need to address is “policysubstitution”betweentariffsandnon-tariffmeasures.Efficiencycanbeobtainedwithasimplesetof rules,which leave substantial autonomy to nationalgovernmentsinsettingNTMs(“shallow”integration).

The changing nature of international trade and the use of private standards may prompt the need for deeper forms of institutional integration.

The proliferation of global production chains createsnewformsofcross-borderpolicyspillovers.Inaddition,firmsincreasinglyemployprivatestandardstoaddressthe challenges in governing their supply chains, withimplications for market access. This provides arationale for deep cooperation on NTMs within tradeagreements. Because production is international,someofthecostsoftradefrictionsarebornebyfirmsin foreign states. Trade agreements play a role inpreventing governments and firms from distortingtrade and investment decisions across the supplychain.

Moreover, the growing number of reasons why governments resort to NTMs, including for health, safety and environmental considerations, creates a need to develop rules to facilitate cooperation in the identification of efficient and legitimate uses of NTMs.

As consumer concerns become more important inareassuchashealthandtheenvironment,regulationsplayamoreprominentroleingovernmentdecisionsforlegitimatereasons.However,thecomplexityofcertainNTMscancreateinefficienciesbecausepolicy-makersmaynothaveallthenecessaryinformationabouttheirown regulatory needs and the needs of their tradingpartners. The opacity of many NTMs also makesenforcement of regulations a difficult internationalendeavour, because it dependson theability of eachgovernmenttoobservehowtheothersareholdinguptheirendofthebargain.

GATT rules regarding national treatment and non-violation complaints were designed to address the policy substitution problem between tariffs and NTMs. Deep agreements regulate NTMs in different ways, creating trade-offs.


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One of the principal constraints on discrimination viaNTMs is the obligation to treat foreign products atleast as favourably as “like” domestic products(national treatment). When a measure does notexplicitlyviolatenationaltreatmentrules,governmentsmay instead appeal to so called “non-violation”complaints that are allowed if one government canshowthatithasbeendeprivedofanexpectedbenefitbecause of another government’s action. In practice,however,non-violationcomplaintshavebeenresortedtorarelybyWTOmembersindisputesandwheresuchcomplaintshavebeenputforward,theyoftenhavenotprospered.

Three forms of deep integration are often discussed:mutual recognition of regulations, linking tariff andnon-tariff measures in trade negotiations, andharmonization of NTMs. These approaches implytrade-offs that depend on a number of economicconditions (e.g. the extent of trade integration,differences in policy preferences across countries)thatneedtobeclearlyassessed.

Cooperation in specific policy areas: TBT/SPS measures, services measures

Countries cooperate on TBT/SPS measures to address problems that arise when balancing trade restrictiveness and the achievement of policy objectives.

Problemsmayarisewhengovernmentstrytobalancetrade restrictiveness and the achievement of policyobjectives through efficient regulations. To addressthese problems, countries cooperate by developing,disseminating, and adopting common approaches toregulation,suchas“goodregulatorypractices”,andbydeveloping internationalstandardsasbenchmarksformeasures.

TheWTO’sTBTandSPScommitteesalsoallowWTOmembers to address problems regarding lack ofinformation. Transparency procedures developed bythecommitteesforthe“notification”byWTOmembersof draft measures have enhanced the quality andavailabilityofinformationonmeasures.Discussionsofspecifictradeconcernsprovideinformationabouthowothermembersarebalancingtraderestrictivenessandtheachievementofpolicyobjectives.

WTO members cooperate through the GATS by subjecting certain types of services measures to negotiations on progressive trade opening.

Tradeprotectioninservicescanbefoundininternallaw,regulations,rules,procedures,decisions,administrativeactionsandsuchlike.Althoughsuchservicesmeasuresoftendonotprimarilyhaveatrade-relatedfocus,theremay be cases where regulations have unnecessarilytrade-distortiveandrestrictiveeffects.

The GATS provides a framework for distinguishingbetween those regulations which can be consideredas barriers to trade in services, and thus subject toprogressivetradeopening,andothermeasureswhichare domestic regulation. Discriminatory regulation,which violates national treatment, and quantitativerestrictions on market access are already disciplinedby the GATS and their removal is the subject ofnegotiations.

WTO members face the challenge of negotiating disciplines on domestic regulation to complement market access commitments.

Some domestic regulations are outside the scope ofmarketaccessnegotiations,butneverthelesshaveanimpact on trade. The challenge is to find ways toensure that they fulfil their stated objectives in amanner which is not more burdensome thannecessary.

Thus, the focus of work in the GATS has been onnegotiatingasetofdisciplinesondomesticregulationto ensure that these measures are based ontransparent and objective criteria, are not moreburdensome than necessary to ensure the quality ofthe service and, in the case of licensing procedures,are not in themselves a restriction on the supply ofservices. The experience of the SPS and TBTagreementspoints towards theneed fora similar setof disciplines in services to eliminate or reducerequirementswhicharenotnecessaryfortheobjectivesought.

GATT/WTO disciplines on NTMs as interpreted in WTO dispute settlement

GATT rules on NTMs are consistent with a “shallow integration” approach.

TheGATTdoesnotconstraintheregulatoryautonomyofWTOmembersexceptwhereameasure treatsanimported product less favourably than a “like”domestic product (Article III: national treatment),discriminates between two like imported products(Article I: most-favoured nation), or constitutes aborder prohibition or restriction that has a limitingeffect on the quantity or amount of a product beingimported or exported (Article XI). This framework issupplemented by the possibility that challenges maybe brought against GATT-consistent measures thatnullified or impaired benefits accruing to a tradingpartner.

However,evenwhereanNTMisinconsistentwiththenon-discrimination obligations of Articles I and III, ortheprohibitiononquantitativerestrictionsinArticleXI,itmaybejustifiedunderoneofthegeneralexceptionsofGATTArticleXX.

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Different approaches have been advocated to the question of whether NTMs that pursue a legitimate regulatory objective should be found to violate the non-discrimination obligations in the GATT and the other WTO agreements.

Someconsiderthatthenationaltreatmentobligation inArticleIIIshouldbeinterpretedstrictlytoallowforNTMsthat, despite being discriminatory, pursue a legitimateregulatorypurposeorcanobjectivelybesaidnottohavea protectionist intent. For others, such considerationsarenotappropriate in theanalysisunderArticle III,butratherbelongintheassessmentofwhetherthemeasureconcerned can be justified under one of the generalexceptionsofArticleXXoftheGATT.

The role of regulatory purpose for the analysis underArticle2.1oftheTBTAgreementwasrecentlyclarifiedby the Appellate Body in two recent disputes (US – Clove Cigarettes and US – Tuna II (Mexico)). TheAppellate Body held that to run afoul of Article 2.1 oftheTBTAgreement, the technical regulationmustnotonly have a detrimental impact on the competitiveopportunities of the imported product, but also suchdetrimental impact must not stem exclusively froma legitimate regulatory distinction. In interpretingArticle 2.1, the Appellate Body noted that while theGATTand theTBTAgreementseek tostrikeasimilarbalance,thetwoagreementsarestructureddifferently.In the GATT the balance is expressed by the nationaltreatment rule in Article III:4 as qualified by theexceptionsinArticleXX,whereasintheTBTAgreementthebalanceistobefoundinArticle2.1itself.

The SPS and TBT agreements are “post-discriminatory” agreements.

Although the SPS and TBT agreements include non-discriminationobligations,theycontainprovisionsthatgo beyond a “shallow integration” approach. Theypromoteharmonizationthroughtheuseofinternationalstandardsandincludeobligationsthatareadditionaltothe non-discrimination obligation. This includes, forinstance,theneedtoensurethatrequirementsarenotunnecessarily trade restrictive. Some question theappropriateness of these “post-discriminatory”obligations, arguing that the assessment of ameasure’s consistency with such requirements isdifficult without WTO adjudicators “second-guessing”amember’sdomesticregulatorychoices.

Challenges in dealing with non-tariff measures

Recent changes in the global economic environment have altered both the perceived need for NTMs and the structure of government incentives to use these measures for protectionist purposes.

The rules of the GATT were designed for a world oftrade in final goods, but the growing complexity of

production networks across borders is altering thenature of modern international trade. These changespose challenges for governance, as the kinds ofproblems that arise in a world of offshoring requiresome rethinking about the current market accessbasedframeworkofthemultilateraltradingsystem.

Changes in international markets do not only arisefromdifferencesinhowbusinessesorganize,butalsofromanumberof other issues, including thegrowingsensitivity of consumers and voters to health andclimate concerns. On the other hand, it is also likelythattheuseofNTMswillberesponsivetoanumberofforeseeable trends in the global economicenvironment, including the way food is produced andconsumed, the central role of international finance inthe economy and in economic crises, and thefundamentalchallengesofclimatechange.

Transparency provisions in the WTO agreements help address the problems raised by the opacity of NTMs but they are not sufficient. This is, at least in part, because, contrary to what is often claimed, not everyone benefits from transparency.

While every government is interested in its partners’NTMs, it may be reluctant to disclose information onits own NTMs. The WTO’s Trade Policy ReviewMechanismanditsmonitoringreportshelptoaddressthis problem, but resources and the timeframebetweenreportslimittheirusefulness.

Increasing transparency, in effect, opens trade. Thismeansthatforgovernments,theincentivestomaintainopacity are similar to those for imposing a tariff.Despitecommonrhetoricendorsingtransparency, thedistributional impact of transparency provisions istypically ignored in a manner incompatible witheconomicincentives.

Among the options to improve transparency areproviding the WTO with the resources necessary toindependently monitor governments and markets, orrelyingonsomethirdpartytodothesame.Compliancewouldstillbeanissue,asdelegationofthismonitoringrole does not eliminate the lack of incentive forgovernments to be transparent. Members may needbilateral and/or plurilateral negotiations overtransparency obligations in order to improve thesituation.

Limiting the protectionist application of NTMs requires better integration of economic and legal analysis. Economic theory can help in identifying situations in which governments may be more likely to employ NTMs for competitiveness reasons rather than the stated public policy rationale.

Whenthereisa legaldisputeastotheimportanceofthe purpose, rationale, or intent of a measure,


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economic theory could provide insight into agovernment’schoiceofameasure,aswellasthewayit is administered. NTMs can be evaluated usingeconomic reasoning to assess their suitability inaddressingvariouspublicpolicyconcerns.Governmentpolicy could also be screened for evidence ofprotectionism.

While the use of “economic indicators” is certainlyneither exhaustive nor able to provide a conclusiveanswer as to the true policy rationale of an NTMaffecting foreign trade interests, it may neverthelessbethecasethatthistypeofanalysiscouldusefullybeemployedtonarrowevidentiarygapsthatmayariseintheexaminationofcertaintraderules.

While current WTO rules focus on the policy substitution problem between tariffs and NTMs, policy flexibility is in some cases too limited.

A non-violation approach to complaints could play arole in allowing WTO members to retaliate againstother members’ use of NTMs to circumvent theirobligations – the so-called “policy substitution”problem.However,whenamemberwishestochooseadomesticmeasurethatlowersrestrictionstotrade,therules do not allow members to raise their tariffs tomaintain theircommitted levelofmarketaccess.Thislack of flexibility may discourage the adoption ofefficient domestic regulations or even tradeconcessions.Therefore,broadeningthescopeofnon-violationcomplaintsmayimproveeconomicefficiency.

Onthelegalside,thereremainanumberofambiguitiesconcerning the elements that a complainant mustsatisfy for itsclaimofnon-violation tosucceed.WTOmembers have preferred to address NTMs anddomestic regulation in services using other rules.Finally, even if there were a successful case, theremedy available when a non-violation complaint issuccessful is weaker than the remedies available incasesofviolation.

Strong encouragement in the SPS and TBT agreements to follow international standards creates tension in practice.

The SPS and TBT agreements encourage the use ofinternational standards. There is, however, a “line oftension” between, on the one hand, reliance oninternationalstandardsasawaytoavoidunnecessarilytrade-restrictive measures, and, on the other hand,deploying a “relevant” international standard.International standards may be difficult to use andtheremaybedifferences inpreferencesamongWTOmembers, and difficulties in setting internationalstandards, including differing capacities to influencethe desired outcomes. The regular work of the TBTandSPScommitteesandcertainaspectsofon-goingnegotiations in the Doha Round are affected by thistension.

The responsibility of governments with respect to private standards and the role of the WTO are not clear.

TheroleoftheWTOinaddressingthetradeimpactof“private standards” is another important challengefacingthemultilateraltradingsystem.ThistopicarisesacrosstheWTO’sregularwork incontextsasdiverseas green protectionism, food safety and socialresponsibility. Although these standards are cast as“voluntary” in nature (because they are imposed byprivateentities),theymayneverthelesshavesignificantde facto impacts on trade, and this has been ofparticularconcerntodevelopingcountriesintheWTO.Considering that private standards are non-governmentalbydefinition,thisgivesrisetoquestionsregarding the responsibility of governments withrespect to private standards (under WTO disciplines),as well as the role of the WTO itself. While somemembersseenoplaceforthisdiscussionintheWTO,othersarekeentoengage.

It is vital to ensure that market access and national treatment commitments in the GATS are not impaired by unduly burdensome or protectionist practices.

The principal concern is that common rules at themultilateral level will result in a loss of regulatoryfreedom to pursue non-trade objectives for services.One way to overcome concerns regarding regulatoryautonomy would be to focus the discipline on thenecessity of the measure used to achieve its statedpurpose.Anotherwouldbetofostergreaterawarenessofthetradeand investment implicationsofregulatorypractices.

It is important to identify possible areas where trade instruments for pro-competitive regulation of services could be used.

The WTO has the experience of successfullydeveloping a text that supports competition in thetelecoms sector. Such experience could be used inother sectors where there might be potential for theuse of similar instruments. Identifying possible areasfor the use of trade instruments for pro-competitiveregulation would require action by a wide range ofnational, regional and international agencies in ordertoexpandregulatorydialogueandcooperation.

Capacity building is a vital part of improving international cooperation both on TBT/SPS measures and on domestic regulation in services.

Regulationsaimedatdealingwithpublicpolicyarenotsubjecttomarket-openingnegotiationsinthesamewayasprotectionisttradebarriers,andthereforethereisnoplace for thinking about preferential arrangements,such as the Generalized System of Preferences, toassist developing countries to develop and grow.

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Instead, the developmental challenge associated withtrade-friendlypublicpolicyinvolvestechnicalassistanceand capacity-building. In the area of SPS and TBT,developing and least-developed countries often lackthe regulatory institutions, the training capacity, andphysicalinfrastructurethatwouldenablethemtodesignandimplementeffectivemeasuresintheseareas.

TheStandardsandTradeDevelopmentFacility(STDF),a global partnership established by the Food andAgricultureOrganizationof theUnitedNations (FAO),the World Organization for Animal Health (OIE), theWorld Bank, the World Health Organization (WHO)andtheWTO,supportscapacitybuildingeffortsintheSPS area. The Enhanced Integrated Framework andtheAidforTradeInitiativearealsorelevanthere.

Addressing regulatory challenges in trade in servicesrequires doing more than curbing non-transparent orunduly restrictive regulatory practices. Despite over adecade of negotiations, much remains to be done toimprovecooperationandawarenessamongregulators,policy-makers and trade negotiators of the linksbetweenregulatoryissuesandtradeprinciples.Sharingknowledge on good practices and strengtheningregulatory institutions are important priorities for theproperfunctioningofservicesmarkets.

See page 160


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World trade growth decelerated sharply in 2011 as the global economy struggled under the influence of natural disasters, financial uncertainty and civil conflict. A slowdown in trade had been expected after the strong rebound of 2010 but the earthquake in Japan and flooding in Thailand shook global supply chains, and fears of sovereign default in the euro area weighed heavily in the closing months of the year. The civil war in Libya also reduced oil supplies and contributed to sharply higher prices. All of these factors combined to produce below average growth in trade in 2011.

I. World trade in 2011

I – WORLD TRADE IN 2011

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Contents A Introduction 18

B Stateoftheworldeconomyandtradein2011 20

C Appendixfiguresandtables 26


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A. IntroductionThevolumeofworldmerchandisetraderose5.0percentin 2011, accompanied by global output growth of2.4 per cent. This marked a significant slowdown from2010, when trade advanced 13.8 per cent and outputexpandedby3.8percent(seeFigure1.1).1

Slower growth in both trade and output had beenanticipated for 2011, but multiple economic shocksheldbackeconomicactivityandtradeduringtheyear.Theearthquake, tsunamiandnuclear incident thathitJapan in March sharply depressed the country'sexports in the second quarter, while flooding inThailand reduced the supply of key parts andcomponentsinthefourthquarterandfurtherdistortedglobal production networks. Turmoil in North Africancountriestookatollontheregion'sexports,especiallyin Libya, where oil production and exports plunged.Finally,negativegrossdomesticproduct(GDP)growthin theEuropeanUnion reduceddemand for importedgoodsinthefourthquarterastheeurosovereigndebtcrisiscametoahead.

Thesluggishpaceofeconomicgrowthin2011reducedimportdemandinthelargesteconomiesandresultedinglobal export growth below the WTO's forecast of5.8 per cent. Japan's output contracted in the fourthquarterafterrecordingjustone-quarterofexpansiononthe year in the third quarter. Even China’s dynamiceconomyappearedtobeslowingtowardstheendoftheyear as its fourth quarter GDP growth slipped to anannualized rateof7.8percentafteraveragingaround9.5percentover thefirst threequarters,according todata from China’s National Bureau of Statistics.Economic indicators improved in the United States inthe closing months of 2011 as output growthaccelerated to 3.0 per cent annualized in the fourth

quarter and unemployment fell to 8.3 per cent inDecember according to data from the OECD, but thisonlypartlymadeupforearliersetbacks.

Developed economies exceeded expectations withexportgrowthof4.7percentin2011whiledevelopingeconomies (for the purposes of the analysis, thisincludestheCommonwealthofIndependentStates,orCIS)didworsethanexpected,recordinganincreaseofjust 5.4 per cent. In fact, shipments from developingeconomiesother thanChinagrewataslightlyslowerpace than exports from developed economies(includingdisaster-struckJapan).Therelativelystrongperformance of developed economies was driven bya robust 7.2 per cent increase in exports from theUnitedStates,aswellasa5.0percentexpansion inexportsfromtheEuropeanUnion.Meanwhile,Japan's0.5 per cent drop in exports detracted from theaveragefordevelopedeconomiesoverall.

Several adverse developments disproportionatelyaffected developing economies, including theinterruption of oil supplies from Libya that causedAfricanexportstotumble8percent in2011,andtheseverefloodingthathitThailand inthefourthquarter.TheJapaneseearthquakeandtsunamialsodisruptedglobal supply chains, which penalized exports fromdeveloping countries such as China, as reducedshipments of components hindered production ofgoods forexport (seequarterly volumedevelopmentsforselectedeconomiesinAppendixFigure1).

Significantexchangeratefluctuationsoccurredduring2011,whichshiftedthecompetitivepositionsofsomemajor traders and prompted policy responses (e.g. inSwitzerland and Brazil). Fluctuations were driven in

Figure1.1: Growth in volume of world merchandise trade and GDP, 2000-11 (annualpercentagechange)

2000 2001 2002 2003 2004 20062005 2007 20092008 20112010

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Average export growth1991-2011

Average GDP growth1991-2011

Source:WTOSecretariat.


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largepartbyattitudestowardsriskrelatedtotheeurosovereign debt crisis. The value of the US dollar fell4.6percent innominal termsagainstabroadbasketof currencies according to data from the FederalReserve, and 4.9 per cent in real terms according todata from the International Monetary Fund, makingUSgoodsgenerallylessexpensiveforexport.NominalUS dollar depreciation also would have inflated thedollarvaluesofsomeinternationaltransactions.

Thedevelopmentsoutlinedaboverefertotradeinreal(i.e. volume) terms, but nominal flows (i.e. in currencyterms)forbothmerchandiseandcommercialservicesweresimilarlyaffectedbyrecenteconomicshocks.

In 2011, the dollar value of world merchandise tradeadvanced 19 per cent to US$ 18.2 trillion, surpassingthepreviouspeakofUS$16.1trillionin2008.Muchofthe growth was due to higher commodity prices, butmonthlytradeflowsweremostlyflatordeclininginmanymajor tradersover thecourseof theyear (seemonthlynominaldevelopmentsinAppendixFigure2).

TheshareofdevelopingeconomiesandtheCISintheworldtotalalsoroseto47percentontheexportsideand42percentontheimportside,thehighestlevelseverrecordedinadataseriesextendingbackto1948.

The value of world commercial services exportsincreased by 11 per cent in 2011 to US$ 4.2 trillion,with strong differences in annual growth rates for

particularcountriesandregions.AfricanexportswerehithardbytheturmoilinArabcountries,recordingzerogrowth as Egypt’s exports of travel services plungedmore than 30 per cent. Quarterly data on servicesjointly prepared by the WTO and the United NationsConference on Trade and Development (UNCTAD)also showed a sharp slowdown in the fourth quarter,coincidingwiththeheightenedleveloffinancialmarketturmoilsurroundingtheeurodebtcrisis.

The5.0percentgrowthofworldmerchandisetradein2011wasbelowthepre-crisisaverageof6.0percentfor 1990–2008, and was even below the average ofthe last 20 years, including the period of the tradecollapse (5.4 per cent). As a result, trade volume ofworld trade was even further away from its pre-crisistrendat theendof2011than itwasayearearlier. Infact, this gap should continue to increase as long astherateoftradeexpansionfallsshortofearlier levels(seeFigure1.2).

Eliminating this divergence would require faster thanaverage growth at some point in the future.Conceivably, this could happen after governments,businesses and households in developed countriesreducetheirdebtburdenstomoremanageablelevels,butthisprocessofdeleveraging(reducingrelianceondebt) and fiscal consolidation (reducing budgetdeficits) is likely to take years. In the meantime, theworld may have to resign itself to a long period ofslower-than-averagegrowthininternationaltrade.

Figure1.2: Volume of world merchandise exports, 1990-2011 (indices,1990=100)

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Endnote1 Notethatmerchandisetradevolumefiguresrefertogrowth

inrealterms,i.e.adjustedtoaccountforchangesinthepricesofexportsandimports.


20

1. Economicgrowth

Therateofworldoutputgrowthfellto2.4percentin2011from3.8percent in thepreviousyear,weigheddownbytheon-goingsovereigndebtcrisisinEurope,supply chain disruptions from natural disasters inJapanandThailand,andturmoilinArabcountries.Thispace of expansion was well below the 3.2 per centaverageover the20years leadingup to thefinancialcrisisin2008(seeTable1.1).

Japan’s0.5percentcontractioninoutput,broughtonby the catastrophic earthquake in March 2011,contributed to the lacklustre 1.5 per cent growth ofdeveloped economies in 2011. Growth of GDP (totalproduction in the country) in the United States wasslightly faster than the average of all developedeconomiesat1.7percent,while theEU’sratewas inlinewiththeaverageat1.5percent.

The fastest growing regions were the Middle East at4.9 per cent, followed by the Commonwealth ofIndependent States at 4.6 per cent and South andCentral America at 4.5 per cent. Africa, with GDPgrowthof2.3percent,mighthavegrownevenfasterif

not for the uprisings that occurred in Libya, Tunisia,Egyptandelsewhere.

Onceagain,China’sGDPgrowthoutpaced the restofthe world at 9.2 per cent, but this rate was no betterthanwhatthecountryachievedatthepeakoftheglobalfinancialcrisisin2009.Incontrasttothisperformance,the newly industrialized economies of Hong Kong,China, of the Republic of Korea, of Singapore and ofChineseTaipeitogethergrewatlessthanhalftherateofChina(4.2percent).DevelopingeconomiesandtheCIStogetherrecordeda5.7percentincreasein2011.

AggregatequarterlyfiguresforworldGDPgrowtharenot readily available, but such growth likely slowedtowardstheendof2011inthefaceofheadwindsfromtheEuropeansovereigndebtcrisis.Outputoftheeuroarea contracted at a 1.3 per cent annual rate in thefourth quarter, marking the first quarter of negativegrowth since the currency bloc emerged fromrecessionin2009(seeFigure1.3).Atthesametime,China’seconomyslowedandJapanremainedmiredinrecession. Growth picked up in the United States inthe fourth quarter as unemployment eased, but thiswaslikelyoutweighedbydevelopmentselsewhere.

B. State of the world economy and trade in 2011

Table1.1: GDP and merchandise trade by region, 2009-11 (annualpercentagechange)

GDP Exports Imports

2009 2010 2011 2009 2010 2011 2009 2010 2011

World -2.6 3.8 2.4 -12.0 13.8 5.0 -12.9 13.7 4.9

North America -3.6 3.2 1.9 -14.8 14.9 6.2 -16.6 15.7 4.7

UnitedStates -3.5 3.0 1.7 -14.0 15.4 7.2 -16.4 14.8 3.7

South and Central Americaa -0.3 6.1 4.5 -8.1 5.6 5.3 -16.5 22.9 10.4

Europe -4.1 2.2 1.7 -14.1 10.9 5.0 -14.1 9.7 2.4

EuropeanUnion(27) -4.3 2.1 1.5 -14.5 11.5 5.2 -14.1 9.5 2.0

Commonwealth of Independent States (CIS)

-6.9 4.7 4.6 -4.8 6.0 1.8 -28.0 18.6 16.7

Africa 2.2 4.6 2.3 -3.7 3.0 -8.3 -5.1 7.3 5.0

Middle East 1.0 4.5 4.9 -4.6 6.5 5.4 -7.7 7.5 5.3

Asia -0.1 6.4 3.5 -11.4 22.7 6.6 -7.7 18.2 6.4

China 9.2 10.4 9.2 -10.5 28.4 9.3 2.9 22.1 9.7

Japan -6.3 4.0 -0.5 -24.9 27.5 -0.5 -12.2 10.1 1.9

India 6.8 10.1 7.8 -6.0 22.0 16.1 3.6 22.7 6.6

Newlyindustrializedeconomies(4)b -0.6 8.0 4.2 -5.7 20.9 6.0 -11.4 17.9 2.0

Memo: Developed economies -4.1 2.9 1.5 -15.1 13.0 4.7 -14.4 10.9 2.8

Memo: Developing and CIS 2.2 7.2 5.7 -7.4 14.9 5.4 -10.5 18.1 7.9

aIncludestheCaribbean.bHongKong,China;RepublicofKorea;Singapore;andChineseTaipei.



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2. Merchandisetradeinvolume(i.e.real)terms

Worldmerchandisetradevolumegrew5.0percentin2011,andAsia’s6.6percent increase ledall regions(see Table 1.1). One of the more significantdevelopmentsin2011wasthe8.3percentcontractioninthevolumeofAfrica’sexports.ThiswaslargelyduetothecivilwarinLibya,whichreducedthecountry’soilshipments by an estimated 75 per cent. Japan’sexports also fell by the same 0.5 per cent as thecountry’sGDP,whileshipmentsfromtheCISadvancedjust1.8percent.

Although Africa recorded a respectable 5.0 per centincrease in imports, other resource-exporting regions

performedbetter. ImportsoftheCISgrewfasterthanthoseofanyotherregionat16.7percent,followedbySouth and Central America’s at 10.4 per cent.Meanwhile,Japan’s importgrowthwastheslowestofanymajoreconomyorregionin2011at1.9percent.

India had the fastest export growth among majortraders in 2011, with shipments rising 16.1 per cent.Meanwhile, China had the second-fastest exportgrowthofanymajoreconomyat9.3percent.

Thecombinationoflowexportvolumegrowthandhighimport volume growth seen in the Commonwealth ofIndependent States in 2011 can be attributed to the32 per cent rise in energy prices for the year, whichboosted export earnings and allowed more foreigngoodstobeimported(seeTable1.2).

Figure1.3: Real GDP growth and trade of euro area economies, 2008-11 (annualizedpercentagechangeoverpreviousquarter)

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Source:OECDQuarterlyNationalAccounts.

Table1.2:World prices of selected primary products, 2000-11 (annualpercentagechangeandUS$perbarrel)

2009 2010 2011 2000-11 2005-11

Allcommodities -30 26 26 12 14

Metals -19 48 14 15 18

Beveragesa -15 11 20 8 11

Food 2 14 17 10 13

Agriculturalrawmaterials -17 33 23 5 9

Energy -37 26 32 15 15

Memo:CrudeoilpriceinUS$/barrelb 62 79 104 56 76

aComprisingcoffee,cocoabeansandtea.bAverageofBrent,Dubai,andWestTexasIntermediate.

Source:IMFInternationalFinancialStatistics.


22

Appendix Figure 1 shows seasonally adjustedquarterly merchandise trade volumes for selectedeconomies, revealing some of the dynamics ofchanges that occurred in 2011. The decline in extra-EU imports (i.e. imports from outside the EuropeanUnion) measured -3.8 per cent in the fourth quarter,equivalentto14.4percentatanannualizedrate.Sucharateofdeclineisunlikelytogoonforverylong,butithelps to explain the weakness of exports of othereconomies at the time. Imports of the United Stateswereflat rather than fallingduring2011,butboth theUnited States and the European Union saw theirexportsriseoverthecourseoftheyear.

The other major development was the slump inChinese importsthatoccurredaroundthetimeof theJapanese earthquake in the second quarter of 2011.Betweenthefirstandsecondquarters,China’simportsdropped 6.1 per cent, equivalent to 27 per centannually, but in subsequent quarters trade rose4.2percent(18percentannualized)and7.3percent(32 per cent annualized). This is consistent with astrongbutrelativelyshort-liveddirect impactfromthedisaster, although other indirect influences might bejust as important. It also demonstrated the stronginsertionofChinainAsianvaluechains.

Although not shown in the charts, the volume ofThailand’sexportsplunged8.5per cent in the fourthquarter due to flooding that significantly affectedexports of intermediate goods, further disturbingglobalproductionnetworks.

3. Merchandiseandcommercialservicestradeinvalue(i.e.dollar)terms

The total dollar value of world merchandise exportsjumped 19 per cent to US$ 18.2 trillion in 2011(seeTable1.3).1This increasewasnearlyas largeasthe 22 per cent rise in 2010 and was driven in largepartbyhigherprimarycommodityprices.

Commercialservicesexportsalsogrew11percentin2011 to US$ 4.1 trillion. The share of commercialservicesintotalgoodspluscommercialservicestrade(on a balance of payments basis) was 18.6 per cent,thesmallestsuchsharesince1990.

Transportservicesrecordedtheslowestgrowthofanysub-category of services (8 per cent), followed byother commercial services (11 per cent) and travel(12percent).

The slowgrowthof transport services is perhapsnotsurprisingconsidering theclose relationshipbetweenthis category of services and trade in goods, whichstagnatedinthesecondhalfof2011.Anoversupplyofnew container ships may have also depressedrevenuesintheshippingsector.

Appendixtables1to6providedetailedinformationonnominal merchandise and commercial services tradeflowsbyregionandforselectedeconomies.Theyalsoincludetablesofleadingexportersandimporterswithand without intra-EU trade (i.e. trade betweenEU members). Some noteworthy developments formerchandise trade and commercial services aresummarizedbelow.

(a) Merchandisetrade

The dollar value of North America’s merchandiseexports rose 16 per cent in 2011 to US$ 2.28 trillion(equalto12.8percentoftheworldtotal),whileimportsgrew 15 per cent to US$ 3.09 trillion (17.2 per cent)(seeAppendixTable1).

South and Central America’s exports advanced27 per cent to US$ 749 billion (4.2 per cent of theworld total), buoyed by stronger primary commodityprices.Atthesametime,theregion’simportsincreasedby24percenttoUS$727billion(4.0percent).

Europe’s nominal exports grew 17 per cent toUS$ 6.60 trillion, or 37.1 per cent of the world total.The region’s imports were also up 17 per cent toUS$6.85trillion(38.1percent).

Table1.3: World exports of merchandise and commercial services, 2005-11 (US$billionandannualpercentagechange)

Value Annual percentage change

2011 2009 2010 2011 2005-11

Merchandise 18,217 -22 22 19 10

Commercialservices 4,149 -11 10 11 9

Transport 855 -23 15 8 7

Travel 1,063 -9 9 12 7

Othercommercialservices 2,228 -7 8 11 10

Source:WTOSecretariatformerchandiseandWTOandUNCTADSecretariatsforcommercialservices.


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Exportsof theCommonwealthof IndependentStatesjumped34percent toUS$788billion,supportedbyrising energy prices. Imports also increased by30percenttoUS$540billion.SharesofCISexportsand imports in world trade were 4.4 per cent and3.0percent,respectively.

Africa’sexportswereup17percenttoUS$597billion(3.4 per cent of the world total) while imports rose18percenttoUS$555billion(3.1percent).

ExportsfromtheMiddleEastsurged37percentindollarterms toUS$1.23 trillion (or6.9per centof theworldtotal) as a result of rising oil prices. In contrast to this,importsonlyincreasedby16percenttoUS$6.65billion(3.7percent).

Finally,Asia’sexportswereup18percent in2011toUS$5.53trillion(31.1percentoftheworldtotal)whileimports advanced 23 per cent to US$ 5.57 trillion(30.9percent).

Thetopfivemerchandiseexportersin2011wereChina(US$1.90trillion,or10.4percentofworldexports),theUnitedStates(US$1.48trillion,8.1percent),Germany(US$1.47trillion,8.1percent),Japan(US$823billion,4.5 per cent) and the Netherlands (US$ 660 billion,3.6 per cent). The leading importers were the UnitedStates(US$2.27trillion,12.3percentofworldimports),China (US$ 1.74 trillion, 9.5 per cent), Germany(US$1.25trillion,6.8percent),Japan(US$854billion,4.6percent)andFrance(US$715billion,4percent)(seeAppendixTable3).

If we ignore trade between European Union membercountries and treat the EU as a single entity, the topexportersweretheEuropeanUnion(US$2.13trillion,or14.9percentof theworld total),China (13.3percent),the United States (10.3 per cent), Japan (5.7 per cent)and the Republic of Korea (US$ 555 billion, or3.9 per cent). The leading importers, excluding tradebetween EU countries, were the European Union(US$2.34trillionor16.2percentofworldimports),theUnited States (15.6 per cent), China (12.0 per cent),Japan (5.9 per cent) and the Republic of Korea(US$425billion,or3.6percent)(seeAppendixTable4).

There were few significant moves up or down in theworld rankings in 2011. The Russian Federation wentfrombeingthe12thlargestexporterofmerchandisein2010tobeingtheninthin2011(includingEUmembers).

(b) Commercialservicestrade

The region with the fastest growth in commercialservicesexportsin2011wastheCIS,with20percentgrowthinthedollarvalueofitsexports.Africahadtheslowestexportgrowthofanyregionatzeropercent.Allother regions recorded double-digit growth between10and14percent.TheslowgrowthofAfricanexportswaslargelyduetotheturmoilinNorthAfricancountries.

Egypt and Tunisia were especially hard hit as theircommercial services exports fell 20 per cent and19 per cent, respectively. However, Sub-SaharanAfrica'sexportsincreasedinlinewiththeworldaverageof11percent(seeAppendixTable2).

Meanwhile, African services imports rose 9 per cent,slightly lessthantheworldaverageof10percent. Incontrast to exports, there was not as much of adivergencebetweenNorthernAfricaandSub-SaharanAfricaon the import side,as the formergrew7.0percent and the latter 9.5 per cent. The region with thefastest growth in services imports was the CIS at21 per cent, followed closely by South and CentralAmericaat18percent.Otherregionsrecordedgrowthratesforcommercialservices importsbetween8and14percent.

The top five exporters of commercial services in 2011weretheUnitedStates(US$578billion,or14percentoftheworldtotal),theUnitedKingdom(US$274billion,7percent),Germany(US$253billion,6percent),China(US$182billion,4percent)andFrance(US$161billion,4percent).TheUnitedKingdom replacedGermanyastheworld’ssecond-largestexporterofservicescomparedwithlastyear'stables,butthiswasmainlyduetoalargeupward revision in official statistics on UK exports ofother business services and financial services, whichtogether make up roughly half of all UK commercialservicesexports(seeAppendixTable5).

ThetopfiveimportersofcommercialservicesweretheUnitedStates (US$391billion,or10percentof theworld total), Germany (US$ 284 billion, 7 per cent),China (US$ 236 billion, 6.1 per cent), the UnitedKingdom (US$ 171 billion, 4 per cent) and Japan(US$165billion,4.3percent).Therewerenochangesintherankingofthetopimporters.

Theabovefiguresincludeintra-EUcommercialservicestrade, i.e. services trade between European Unionmember countries. If this trade is excluded from theworld total and the European Union is treated as asingle entity, the EU becomes the top exporter ofcommercialservices(US$789billion,24.8percentoftheworldtotal),followedbytheUnitedStates(US$578billion,18.2percent ),China(US$182billion,5.7percent), India (US$ 148 billion, 4.7 per cent) and Japan(US$ 143 billion, 4.5 per cent). The European Unionalso becomes the leading importer (US$ 639 billion,21.1percentoftheworldtotal),followedbytheUnitedStates(US$391billion,12.9percent),China(US$236billion, 7.8 per cent), Japan (US$ 165 billion, 5.4 percent) and India (US$ 130 billion, 4.3 per cent) (seeAppendixTable6).

4. Sectoraldevelopments

Pricesfortradedmanufacturedgoodshavetendedtobe more stable than those of primary products, both


24

before and after the economic crisis. As a result,movements in nominal trade flows reflect changesin quantities reasonably well. With this in mind,Figure1.4showsyear-on-yeargrowthinthequarterlyvalueofworldtradeinseveralclassesofmanufacturedgoods.

All types of manufactured goods saw year-on-yeargrowth fall towards zero over the course of 2011. Forexample, world trade in automotive products slid from44percentinthefirstquarterof2010to10percentinthe fourth quarter of 2011. Office and telecomequipment went from positive to negative, as year-on-yeargrowth rates fell fromaroundplus14percent inthefirstquartertominus2percentinthefourthquarter.

5. Exchangerates

TheJapaneseyenandtheSwissfrancbothrecordedsignificantnominalappreciationsagainsttheUSdollarin 2011. The yen was up 10 per cent year-on-year,partlyduetothesafehavenroleofthecurrencyduringtimes of uncertainty. Meanwhile, the franc jumped17 per cent, prompting interventions by the SwissNationalBank incurrencymarkets to forcedown thevalueofthecurrency,especiallyagainsttheeuro.TheBrazilian real was also up 5.4 per cent against thedollar, and the Chinese yuan and Korean won rose4.7percentand4.3percent,respectively.Despitethesovereign debt crisis in Europe, the euro appreciated5percentagainstthedollar(seeFigure1.5).

Figure1.4: Quarterly world exports of manufactured goods by product, 2008Q1-2011Q4 (year-on-yearpercentagechange)

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Office and telecom equipment Industrial machinery Textiles and clothingChemicals Automotive productsIron and steel

Source:WTOSecretariatestimatesbasedonmirrordataforavailablereportersintheGlobalTradeAtlasdatabaseofGlobalTradeInformationSystems.

Figure1.5:Nominal dollar exchange rates, January 2005 – February 2012 (indicesofUSdollarsperunitofnationalcurrency,2000=100)

Source:FederalReserveBankofSt.Louis.

Jan.

05

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Nominal exchange rates such as these may over- orunder-state the competitive effects of exchange ratemovements. As a result, “real effective” rates thataverage the exchange value of a currency againstmany trading partners while adjusting for differencesininflationratesmayprovideabetterindicationofthecompetitivenessofacountry’sexports.

Real effective exchange rates supplied by theInternationalMonetaryFundshowthattheUSdollar’sdepreciation in 2011 was even stronger in realeffective terms (-4.9percent) than innominal terms.On theother hand, theaverageappreciationof othermajor currencies was over-stated. The Japanese yenonly appreciated 1.7 per cent in real terms while theChinese yuan rose 2.7 per cent. Brazil’s currencyregistered a strong increase of 4.7 per cent in realeffective terms, while the euro’s rise of 1.8 per centwasrelativelysmall.

Endnote1 Worldexportsofgoodsmeasuredonabalanceofpayments

basiswereup20percentin2011.


26

C. Appendix figures and tablesAppendixFigure1: Seasonally adjusted quarterly merchandise trade volume indices, 2008Q1 – 2011Q4 (indices,2008Q1=100)

aHongKong,China;RepublicofKorea;Singapore;andChineseTaipei.

Sources:National statistics andWTOSecretariat calculations.Seasonally adjustedfigures for theUnitedStates, theEuropeanUnion,JapanandHongKong,Chinaaretakenfromnationalsources.Non-seasonallyadjustedvolumefiguresforothercountrieswereseasonallyadjustedbytheSecretariat

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AppendixFigure2: Monthly merchandise exports and imports of selected economies, January 2008-February 2012 (US$billion)

Sources:IMFInternationalFinancialStatistics,GlobalTradeInformationServicesGTAdatabase,nationalstatistics.

2008 2009 2010 2011

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Turkey

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2008 2009 2010 2011

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2520

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28

AppendixTable1: World merchandise trade by region and selected economies, 2011 (US$billionandpercentage)

Exports Imports

Value Annual percentage change Value Annual percentage change

2011 2005-11 2009 2010 2011 2011 2005-11 2009 2010 2011

World 17,779 10 -23 22 20 18,000 9 -23 21 19

North America 2,283 8 -21 23 16 3,090 5 -25 23 15

UnitedStates 1,481 9 -18 21 16 2,265 5 -26 23 15

Canadaa 452 4 -31 23 17 462 6 -21 22 15

Mexico 350 9 -21 30 17 361 8 -24 28 16

South and Central Americab 749 13 -23 26 27 727 16 -25 30 24

Brazil 256 14 -23 32 27 237 20 -27 43 24

OtherSouthandCentralAmericab 493 12 -24 22 27 490 14 -25 24 25

Europe 6,601 7 -22 12 17 6,854 7 -25 13 17

EuropeanUnion(27) 6,029 7 -22 12 17 6,241 7 -25 13 16

Germany 1,474 7 -23 12 17 1,254 8 -22 14 19

France 597 4 -21 8 14 715 6 -22 9 17

Netherlands 660 8 -22 15 15 597 9 -24 17 16

UnitedKingdom 473 4 -23 15 17 636 4 -24 16 13

Italy 523 6 -25 10 17 557 6 -26 17 14

Commonwealth of Independent States (CIS) 788 15 -36 31 34 540 17 -33 24 30

RussianFederationa 522 14 -36 32 30 323 17 -34 30 30

Africa 597 11 -30 29 17 555 14 -15 15 18

SouthAfrica 97 11 -24 31 20 122 12 -27 27 29

AfricalessSouthAfrica 500 12 -31 29 17 433 14 -12 12 15

Oilexportersc 331 11 -38 34 15 160 15 -9 8 11

Nonoilexporters 169 13 -14 21 20 274 14 -14 15 18

Middle East 1,228 15 -31 27 37 665 12 -15 13 16

Asia 5,534 12 -18 31 18 5,568 13 -20 33 23

China 1,899 16 -16 31 20 1,743 18 -11 39 25

Japan 823 6 -26 33 7 854 9 -28 26 23

India 297 20 -15 33 35 451 21 -20 36 29

Newly-industrializedeconomies(4)d 1,290 10 -17 30 16 1,302 10 -24 32 18

Memorandum

MERCOSURe 354 14 -22 29 26 334 20 -28 43 25

ASEANf 1,244 11 -18 29 18 1,151 11 -23 31 21

EU(27)extra-trade 2,131 8 -20 17 19 2,344 8 -27 19 17

Least-developedcountries(LDCs) 203 16 -25 27 25 202 15 -5 11 19

a.Importsarevaluedf.o.b.

b.IncludestheCaribbean.ForcompositionofgroupsseetheTechnicalNotesofWTO,International Trade Statistics ,2011.

c.Algeria,Angola,Cameroon,Chad,Congo,EquatorialGuinea,Gabon,Libya,Nigeria,Sudan.

d.HongKong,China;RepublicofKorea;Singapore;andChineseTaipei.

e.CommonMarketoftheSouthernCone:Argentina,Brazil,Paraguay,Uruguay.

f.AssociationofSoutheastAsianNations:BruneiDarussalam,Cambodia,Indonesia,Laos,Malaysia,Myanmar,Philippines,Singapore,Thailand,VietNam.



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AppendixTable2:World trade in commercial services by region and selected country, 2011 (US$billionandpercentage)

Exports Imports

Value Annual percentage change Value Annual percentage change

2011 2005-11 2009 2010 2011 2011 2005-11 2009 2010 2011

World 4,150 9 -11 10 11 3,865 9 -11 10 10

North America 668 8 -7 9 10 516 6 -8 8 8

UnitedStates 578 8 -6 9 11 391 6 -7 6 6

South and Central Americaa 130 11 -8 15 14 163 15 -8 23 18

Brazil 37 16 -9 15 21 73 22 -1 36 22

Europe 1,964 7 -13 4 10 1,605 6 -13 3 8

EuropeanUnion(27) 1,762 7 -13 4 10 1,480 6 -12 2 4

Germany 253 8 -9 3 9 284 5 -12 3 8

UnitedKingdom 274 5 -14 2 11 171 1 -19 1 7

France 161 5 -13 1 11 141 5 -8 2 7

Netherlands 128 6 -9 4 11 118 6 -3 -2 12

Spain 141 7 -14 1 14 91 5 -17 0 5

Commonwealth of Independent States (CIS) 96 15 -17 13 20 133 15 -19 19 21

RussianFederation 54 14 -19 8 22 90 16 -20 22 24

Ukraine 19 13 -23 24 13 14 13 -30 10 19

Africa 85 7 -10 11 -0 149 13 -12 10 9

SouthAfrica 15 5 -6 17 8 20 9 -13 25 13

Egypt 19 5 -14 11 -20 13 5 -22 2 -0

Morocco 14 11 -7 2 14 6 13 -6 8 11

Middle East 111 … -3 6 10 210 … -7 9 10

SaudiArabia,Kingdomof 12 … 3 10 17 55 … -5 8 8

Israel 26 7 -10 13 6 20 7 -14 6 14

Asia 1,096 13 -11 23 12 1,091 11 -10 21 14

China 182 16 -12 32 7 236 19 0 22 23

Japan 143 6 -14 10 3 165 5 -12 6 6

India 148 19 -13 33 20 130 19 -9 45 12

Singapore 125 14 -6 20 12 110 12 -9 22 15

Korea,Republicof 94 12 -19 19 8 98 9 -17 19 3

HongKong,China 121 11 -6 23 14 56 9 -7 16 10

Australia 50 9 -8 15 6 59 12 -13 22 18

Memorandum item

Extra-EU(27)trade 789 8 -13 6 12 639 7 -13 4 8

a.IncludestheCaribbean.ForcompositionofgroupsseeChapterIVMetadataofWTOInternationalTradeStatistics,2011.

Note:Whileprovisionalfull-yeardatawereavailableinearlyMarchfor50countriesaccountingformorethantwo-thirdsofworldcommercialservicestrade,estimatesformostothercountriesarebasedondataforthefirstthree-quarters.

Source:WTOandUNCTADSecretariats.


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AppendixTable3:Merchandise trade: leading exporters and importers, 2011 (US$billionandpercentage)

Rank Exporters Value ShareAnnual

percentage change

Rank Importers Value ShareAnnual

percentage change

1 China 1,899 10.4 20 1 UnitedStates 2,265 12.3 15

2 UnitedStates 1,481 8.1 16 2 China 1,743 9.5 25

3 Germany 1,474 8.1 17 3 Germany 1,254 6.8 19

4 Japan 823 4.5 7 4 Japan 854 4.6 23

5 Netherlands 660 3.6 15 5 France 715 3.9 17

6 France 597 3.3 14 6 UnitedKingdom 636 3.5 13

7 Korea,Republicof 555 3.0 19 7 Netherlands 597 3.2 16

8 Italy 523 2.9 17 8 Italy 557 3.0 14

9 RussianFederation 522 2.9 30 9 Korea,Republicof 524 2.9 23

10 Belgium 476 2.6 17 10 HongKong,China 511 2.8 16

retainedimports 130 0.7 16

11 UnitedKingdom 473 2.6 17 11 Canadaa 462 2.5 15

12 HongKong,China 456 2.5 14 12 Belgium 461 2.5 17

domesticexports 17 0.1 14

re-exports 439 2.4 14

13 Canada 452 2.5 17 13 India 451 2.5 29

14 Singapore 410 2.2 16 14 Singapore 366 2.0 18

domesticexports 224 1.2 23 retainedimportsb 180 1.0 27


15 SaudiArabia,Kingdomofc 365 2.0 45 15 Spain 362 2.0 11

16 Mexico 350 1.9 17 16 Mexico 361 2.0 16

17 Taipei,Chinese 308 1.7 12 17 RussianFederationa 323 1.8 30

18 Spain 297 1.6 17 18 Taipei,Chinese 281 1.5 12

19 India 297 1.6 35 19 Australia 244 1.3 21

20 UnitedArabEmiratesc 285 1.6 30 20 Turkey 241 1.3 30

21 Australia 271 1.5 27 21 Brazil 237 1.3 24

22 Brazil 256 1.4 27 22 Thailand 228 1.2 25

23 Switzerland 235 1.3 20 23 Switzerland 208 1.1 18

24 Thailand 229 1.3 17 24 Poland 208 1.1 17

25 Malaysia 227 1.2 14 25 UnitedArabEmiratesc 205 1.1 28

26 Indonesia 201 1.1 27 26 Austria 192 1.0 20

27 Poland 187 1.0 17 27 Malaysia 188 1.0 14

28 Sweden 187 1.0 18 28 Indonesia 176 1.0 30

29 Austria 179 1.0 17 29 Sweden 175 1.0 18

30 CzechRepublic 162 0.9 22 30 CzechRepublic 151 0.8 20

Total of aboved 14,835 81.4 - Total of aboved 15,180 82.6 -

Worldd 18,215 100.0 19 Worldd 18,380 100.0 19


b.Singapore’sretainedimportsaredefinedasimportslessre-exports.

c.Secretariatestimates.

d.Includessignificantre-exportsorimportsforre-export.



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AppendixTable4:Merchandise trade: leading exporters and importers (excluding intra-EU (27) trade), 2011 (US$billionandpercentage)


percentage change


percentage change

1 Extra-EU(27)exports 2,131 14.9 19 1 Extra-EU(27)imports 2,344 16.2 17

2 China 1,899 13.3 20 2 UnitedStates 2,265 15.6 15

3 UnitedStates 1,481 10.3 16 3 China 1,743 12.0 25

4 Japan 823 5.7 7 4 Japan 854 5.9 23

5 Korea,Republicof 555 3.9 19 5 Korea,Republicof 524 3.6 23

6 RussianFederation 522 3.6 30 6 HongKong,China 511 3.5 16

retainedimports 130 0.9 16

7 HongKong,China 456 3.2 14 7 Canadaa 462 3.2 15

domesticexports 17 0.1 14


8 Canada 452 3.2 17 8 India 451 3.1 29


domesticexports 224 1.6 23 retainedimportsb 180 1.2 27


10 SaudiArabia,Kingdomofc 365 2.5 45 10 Mexico 361 2.5 16

11 Mexico 350 2.4 17 11 RussianFederationa 323 2.2 30

12 Taipei,Chinese 308 2.2 12 12 Taipei,Chinese 281 1.9 12

13 India 297 2.1 35 13 Australia 244 1.7 21

14 UnitedArabEmiratesc 285 2.0 30 14 Turkey 241 1.7 30

15 Australia 271 1.9 27 15 Brazil 237 1.6 24

16 Brazil 256 1.8 27 16 Thailand 228 1.6 25

17 Switzerland 235 1.6 20 17 Switzerland 208 1.4 18

18 Thailand 229 1.6 17 18 UnitedArabEmiratesc 205 1.4 28

19 Malaysia 227 1.6 14 19 Malaysia 188 1.3 14

20 Indonesia 201 1.4 27 20 Indonesia 176 1.2 30

21 Norway 159 1.1 21 21 SouthAfrica 122 0.8 29

22 Turkey 135 0.9 19 22 SaudiArabia,Kingdomof

112 0.8 5

23 Iranc 131 0.9 30 23 VietNam 107 0.7 26

24 Nigeriac 119 0.8 42 24 Norway 91 0.6 17

25 Kuwait,Stateofc 98 0.7 46 25 Ukraine 83 0.6 36

26 Qatarc 98 0.7 58 26 Israel 76 0.5 24

27 SouthAfrica 97 0.7 20 27 Chile 74 0.5 26

28 VietNam 97 0.7 34 28 Argentina 74 0.5 31

29 Venezuela,BolivarianRep.of

93 0.6 41 29 Iranc 68 0.5 5

30 Kazakhstan 88 0.6 48 30 Philippinesc 64 0.4 9

Total of aboved 12,865 89.8 - Total of aboved 13,085 90.3 -

Worldd (excl. Intra-EU(27))

14,320 100.0 20 Worldd (excl. Intra-EU(27))

14,485 100.0 20


b.Singapore’sretainedimportsaredefinedasimportslessre-exports.

c.Secretariatestimates.

d.Includessignificantre-exportsorimportsforre-export.



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AppendixTable5:Leading exporters and importers in world trade in commercial services, 2011 (US$billionandpercentage)


percentage change


percentage change

1 UnitedStates 578 13.9 11 1 UnitedStates 391 10.1 6

2 UnitedKingdom 274 6.6 11 2 Germany 284 7.3 8

3 Germany 253 6.1 9 3 China 236 6.1 23

4 China 182 4.4 7 4 UnitedKingdom 171 4.4 7

5 France 161 3.9 11 5 Japan 165 4.3 6

6 India 148 3.6 20 6 France 141 3.6 7

7 Japan 143 3.4 3 7 India 130 3.4 12

8 Spain 141 3.4 14 8 Netherlands 118 3.1 12

9 Netherlands 128 3.1 11 9 Italy 115 3.0 5

10 Singapore 125 3.0 12 10 Ireland 113 2.9 6

11 HongKong,China 121 2.9 14 11 Singapore 110 2.9 15

12 Ireland 107 2.6 10 12 Canada 99 2.6 10

13 Italy 107 2.6 9 13 Korea,Republicof 98 2.5 3

14 Switzerland 96 2.3 17 14 Spain 91 2.4 5

15 Korea,Republicof 94 2.3 8 15 RussianFederation 90 2.3 24

16 Belgium 86 2.1 1 16 Belgium 82 2.1 5

17 Sweden 76 1.8 16 17 Brazil 73 1.9 22

18 Canada 74 1.8 10 18 Australia 59 1.5 18

19 Luxembourg 72 1.7 8 19 Denmark 56 1.5 11

20 Denmark 66 1.6 11 20 HongKong,China 56 1.4 10

21 Austria 60 1.4 11 21 Sweden 56 1.4 15

22 RussianFederation 54 1.3 22 22 SaudiArabia,Kingdomof

55 1.4 8

23 Australia 50 1.2 6 23 Thailand 50 1.3 13

24 Taipei,Chinese 46 1.1 14 24 Switzerland 47 1.2 18

25 Norway 42 1.0 7 25 UnitedArabEmiratesa 46 1.2 …

26 Thailand 40 1.0 19 26 Austria 44 1.2 20

27 Greece 40 1.0 7 27 Norway 44 1.1 4

28 Macao,China 39 0.9 36 28 Taipei,Chinese 41 1.1 11

29 Turkey 38 0.9 12 29 Luxembourg 40 1.0 10

30 Poland 37 0.9 12 30 Malaysia 37 1.0 17

Total of above 3,480 83.8 - Total of above 3,140 81.2 -

World 4,150 100.0 11 World 3,865 100.0 10

a.preliminaryestimates.

Note: Figures for a number of countries and territories have been estimated. Annual percentage changes and rankings are affected bycontinuitybreaksintheseriesforalargenumberofeconomies,andbylimitationsincross-countrycomparability.



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AppendixTable6:Leading exporters and importers in world trade in commercial services (excluding intra-EU(27) trade), 2011 (US$billionandpercentage)


percentage change


percentage change

1 Extra-EU(27)exports 789 24.8 12 1 Extra-EU(27)imports 639 21.1 8

2 UnitedStates 578 18.2 11 2 UnitedStates 391 12.9 6

3 China 182 5.7 7 3 China 236 7.8 23

4 India 148 4.7 20 4 Japan 165 5.4 6

5 Japan 143 4.5 3 5 India 130 4.3 12


7 HongKong,China 121 3.8 14 7 Canada 99 3.3 10

8 Switzerland 96 3.0 17 8 Korea,Republicof 98 3.2 3

9 Korea,Republicof 94 2.9 8 9 RussianFederation 90 3.0 24

10 Canada 74 2.3 10 10 Brazil 73 2.4 22

11 RussianFederation 54 1.7 22 11 Australia 59 2.0 18

12 Australia 50 1.6 6 12 HongKong,China 56 1.8 10

13 Taipei,Chinese 46 1.4 14 13 SaudiArabia,Kingdomof

55 1.8 8

14 Norway 42 1.3 7 14 Thailand 50 1.7 13

15 Thailand 40 1.3 19 15 Switzerland 47 1.5 18

16 Macao,China 39 1.2 36 16 UnitedArabEmiratesa 46 1.5 …

17 Turkey 38 1.2 12 17 Norway 44 1.5 4

18 Brazil 37 1.2 21 18 Taipei,Chinese 41 1.4 11

19 Malaysia 36 1.1 9 19 Malaysia 37 1.2 17

20 Israel 26 0.8 6 20 Indonesia 32 1.1 24

21 Indonesia 20 0.6 23 21 Mexico 25 0.8 16

22 Egypt 19 0.6 -20 22 Irana 22 0.7 …

23 Ukraine 19 0.6 13 23 SouthAfrica 20 0.7 13

24 LebaneseRepublica 18 0.6 … 24 Israel 20 0.7 14

25 Philippines 16 0.5 8 25 Angolaa 20 0.7 …

26 Mexico 15 0.5 -0 26 Turkey 20 0.6 7

27 SouthAfrica 15 0.5 8 27 Nigeriaa 17 0.6 …

28 Argentina 14 0.4 10 28 Argentina 16 0.5 16

29 Morocco 14 0.4 14 29 LebaneseRepublica 15 0.5 …

30 Croatia 13 0.4 13 30 Ukraine 14 0.5 19

Total of above 2,920 91.9 - Total of above 2,690 88.9 -

World (excl. intra-EU(27))

3,180 100.0 12 World (excl. intra-EU(27))

3,025 100.0 13

a.Preliminaryestimates.

Note: Figures for a number of countries and territories have been estimated. Annual percentage changes and rankings are affected bycontinuitybreaksintheseriesforalargenumberofeconomies,andbylimitationsincross-countrycomparability.



II. Trade and public policies: A closer look at non-tariff measures in the 21st century

Contents A Introduction 36

B Aneconomicperspectiveontheuseofnon-tariffmeasures 48

C Aninventoryofnon-tariffmeasuresandservicesmeasures 94

D Thetradeeffectsofnon-tariffmeasuresandservicesmeasures 134

E Internationalcooperationonnon-tariffmeasuresinaglobalizedworld 160

F Conclusions 220


36

Non-tariff measures that can potentially affect trade in goods present the multilateral trading system with a basic policy challenge – how to ensure that these measures meet legitimate policy goals without unduly restricting or distorting trade. The same challenge applies to measures that can affect trade in services. This introduction discusses how the motivations for using non-tariff measures and services measures have evolved, complicating the policy panorama, but not changing the core challenge of how to manage the tension between public policy goals and trading opportunities.

A. Introduction

II – TRADE AND PUBLIC POLICIES: A CLOSER LOOk AT NON-TARIFF MEASURES IN THE 21ST CENTURY

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1. WhatistheWorld Trade Report 2012about?

(a) PerspectivesandinsightsintheWorld Trade Report 2012

Thisyear’sWorld Trade Reportventuresbeyondtariffsto investigate other policy measures that can affecttrade. Since the birth of the General Agreement onTariffs and Trade (GATT) in 1948, tariffs have beenprogressively reduced and “bound”.1 Some tariffs stillrepresentsignificantbarrierstotrade,butattentionisprogressively shifting to non-tariff measures (NTMs),suchastechnicalbarrierstotrade,subsidiesorexportrestrictions.Measuresaffectingtradeinserviceshavealso come under greater scrutiny, reflecting the factthatserviceshaveincreasedtheirshareofglobaltradewhile the complementarity between trade in goodsandserviceshasbecomemoreapparent,especiallyininternational supply chains. This report seeks todeepen our understanding of the incidence, role andeffectsofNTMsandservicesmeasures,and tooffernew insights into the scope for further internationalcooperationintheseareas.

Non-tariffmeasuresarenothingnew.Theyhaveraisedpolicyconcernssince theestablishmentof theGATT.Suchmeasurescandiluteorevennullify thevalueoftariffbindingsandaffecttradeinunpredictableways.Draftersof theGATT includedgeneral rulescoveringbroad categories of measures, such as Article XI onthe general elimination of quantitative restrictions,which applies to border measures, and the “nationaltreatment” obligation under Article III (i.e. grantingequal treatment to imported and “like” domesticproducts), which applies to behind-the-bordermeasures. Over time, more specific disciplines werenegotiated, such as those applying to technicalbarriers to trade (TBT) or sanitary and phytosanitary(SPS)measures(i.e.foodsafetyandanimalandplanthealthmeasures).Servicesmeasuresmadetheirentryinto the multilateral trading system in the UruguayRound,whichgotunderwayin1986.Theyarecoveredby the General Agreement on Trade in Services(GATS), which distinguishes between limitations tomarket access and national treatment, on the onehand,anddomesticregulationontheother.

Both non-tariff measures and services measurescontinue to raise challenges for internationalcooperation in trade in the 21st century. Four broadconsiderationsunderpintheanalysisofthisreport.

First,non-tariffmeasuresandservicesmeasurestendtobeopaqueanddrivenbyavarietyofconsiderations.They are diverse in character and this diversitytranslates into highly variable trade and welfareeffects. Moreover, not only do measures themselvesaffecttrade,sotoodoesthemannerinwhichtheyareapplied. Understanding, assessing and comparing

these effects is not only crucial for a sound policystrategy,butalsofromtheperspectiveofinternationalcooperation. Efforts to increase the transparency ofNTMs, however, meet with a number of challenges.Better data on NTMs and services measures areneededtoinformbothourunderstandingofNTMsandthepolicypreferencesthatdrivethem.

Secondly,themixofnon-tariffmeasuresisconstantlychanging. For example, when some measures aresubjected tostrictdisciplines,a temptationmayariseto replace them with other, less regulated measures.Similar forces may be at work in trade in services,althoughthereisverylittleevidenceinthisarea.Such“policy substitution” raises a number of challengeswhichareaddressedintheReport.ThisisthecontextinwhichaprotectionistuseofNTMs ismost likely tobeencountered.

Thirdly,changes in the tradingenvironmentalterboththe need for non-tariff measures and servicesmeasuresandthenatureofgovernment incentivestousethem.TheReportdiscussesthechallengesraisedby developments such as the growth in globalproduction networks, the recent financial crisis, theneed to address climate change, and growingconsumer concerns regarding food security andenvironmental issues inrichcountries.Theincreasingnumber of reasons for using NTMs reflects a moveaway from a focus on the production side of theequation towards the defence of consumer andsocietalinterests.

Fourthly, when it comes to international trade andtrade-related policies, the greater use of non-tariffmeasuresand their increasingcomplexity in termsofdesignandpurposehave intensified thechallengeofsecuringeffectiveandstableinternationalcooperation.These issues are discussed in the Report, includingwith respect to international convergence, privatestandardsanddomesticregulationinservices.

Because of the diversity and complexity of non-tariffmeasuresandservicesmeasures,theReportfocusesonTBTandSPSmeasures in trade ingoods,andondomestic regulation in trade in services. TBT/SPSmeasures are now among the most frequentlyencountered NTMs. By their very nature, they poseacutetransparencyproblems,bothintheirformulationand administration. More than any other NTMs,TBT/SPS measures prompted by legitimate publicpolicy objectives can have adverse trade effects,leadingtoquestionsaboutthedesignandapplicationof these measures. They are also at the forefront oftensions that can arise over producer-driven andconsumer-driven NTMs. Essential policy aspirations,suchasensuring thehealth, safetyandwell-beingofconsumers, for example, may have adverse tradeeffectsconsideredbysomepartiesasindefensibleonpublicpolicygrounds.


38

To address the adverse effects on trade caused byTBT and SPS measures, international cooperationtakestheformofregulatoryconvergence.Thisoccursin many different forms and at various levels. At themultilaterallevel,itraisesanumberofnewchallengesfortheWTOthatarediscussedinthisreport.Someofthosechallengesarespecifictodevelopingcountries,where capacity building rather than preferentialtreatment in the form of lower tariffs can help toaddress them. Domestic regulation in services raisesthe samechallenges.As spelledout in thenext sub-section, these include regulations on licensing/qualification requirements and procedures as well astechnicalstandards.

(b) Terminology

Lawyers, economists and other social scientistssometimes use similar terms to refer to differentconcepts,whileatothertimestheyusedifferenttermstorefertosimilarconcepts.Forexample,inWTOlaw,astandard is non-mandatory by definition (see TBTAgreement, Annex 1:2), while for economists,standardscanbeeithermandatoryorvoluntary.Someterms have a specific definition in WTO law. Forexample, the term “measure” refers to actions and“non-actions” by the private sector and governmentalbodies, while the term “regulation” is limited togovernmental action and excludes private sectormeasures.

In this report, “non-tariff measures” refer to policymeasures,otherthantariffs,thatcanpotentiallyaffecttrade in goods. “TBT/SPS measures” include allmeasures covered by the WTO’s TBT and SPSagreements.Itthereforeincludestechnicalregulations,standardsandconformityassessmentprocedures(asdefined in Annex 1 of the TBT Agreement) and theSPSmeasures listed inAnnexA,paragraph1,of theSPS Agreement. Whenever the discussion excludesanygovernmentalactions,theterm“privatemeasures”isused.

“Services measures” refer to all measures that canaffect trade in services. Services measures listedunder GATS Article XVI:2 are referred to as “marketaccess limitations”. “National treatment restrictions”are services measures that accord services suppliersof another WTO member less favourable treatmentthan that accorded to the WTO member’s own “like”services suppliers (as of GATS Article XVII). Finally,“domestic regulation in services” includes licensingand qualification requirements and procedures, andtechnical standards (as of GATS Article VI:4negotiating mandate). Exceptions to these definitionsmaybemadefromtimetotimewhencitingnon-WTOresearch and/or databases that define their termsdifferently. In such cases, the source’s terms may beused, but any non-standard terminology is clearlyidentified.

The terms “non-tariff measures” and “servicesmeasures” distinguish between policy measures thataffect trade in goods and those that affect trade inservices respectively. In reality, the twocategoriesofmeasuresarenotmutuallyexclusive.Certainservicesmeasures also affect trade in goods and thus shouldalso be considered as NTMs. Conversely, certainNTMs affect trade in services. Such “cross-effects”may continue to grow in importance with thetransformationoftradepatternsandtheexpansionofglobal production sharing, but very little empiricalevidenceexistsontheirsignificance.TheReportalsodiscusses the relevanceof “complementarityeffects”,namely the mutually reinforcing effect of trade ingoodsandservices.

(c) StructureoftheReport

SectionBexaminesthereasonswhygovernmentsusenon-tariff measures and to what extent thesemeasures,whichmaybepursuedforavarietyofpolicypurposes, can have adverse trade effects. Similarquestionsarealsoaddressedforservicesmeasures.Itis argued that governments use NTMs to addressvarious types of market failures or to pursue publicpolicy objectives, but do so sometimes in ways thatrespond to the influence of special-interest groups.Theopaqueness– in termsofpurposeandeffects–of certain NTMs, their appeal in the presence ofdomesticinstitutionalandpoliticalconstraints,aswellas theireffectsonfixedandvariable tradecostscanexplain why governments may give preference toeconomically inefficient measures or to protectionistmeasuresindisguise.

Section B also considers whether, and how, thephenomenon of offshoring provides additionalmotivations for governments to distort domesticpolicies.Moreover, itanalysesgovernments’choiceofalternative measures. The reasons for governmentintervention, and the potential for adverse tradeeffects,arealsodiscussedwithreferencetoservicesmeasures. The section ends by presenting casestudies on NTMs applied in the context of climatechange and food safety, and investigates to whatextent measures taken may pose a challenge tointernationaltrade.

SectionCsurveysavailablesourcesof informationonnon-tariff measures and services measures andevaluates their relative strengths and weaknesses. Italso summarizes the contents of the main databasescontaining information on NTMs and servicesmeasures and uses this information to establish anumberof “stylized facts”, first aboutNTMsand thenabout services measures. Establishing those stylizedfactsturnsouttobesurprisinglydifficultdueto largegaps in the availability of data on both NTMs andservices measures and to numerous shortcomings inexistingdatasets.Despite these limitations,manykeyfeatures of the current regulatory landscape are


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capturedandanumberofimportanttrendsintheuseofNTMsovertimearedocumented.

Section D discusses the magnitude and the tradeeffectsofnon-tariffmeasuresandservicesmeasuresingeneralbeforefocusingonTBTandSPSmeasuresanddomestic regulation.Dueto lackof transparency,aswellas the importanceofadministrativebehaviourindeterminingtheimpactofinterventions,itisdifficulttomeasuretheeffectsofNTMscomparedwiththoseoftariffs.Ad valoremequivalentsneedtobecalculatedbefore making any comparison. However, variousmethodological challenges and shortcomings plaguesuch calculations. Likewise, conceptual andmethodological challenges arise in the calculation oftariffequivalentsofservicesmeasures.

To the extent possible, the trade effects of TBT andSPSmeasuresandofdomesticregulation inservicesare disentangled in several dimensions, including thespecific channel through which trade is affected, theeffects across countries, sectors and firms, and theeffects of the implementation of a measure, distinctfrom the effects of the design of the measure itself.Finally, the section examines whether regulatoryharmonizationand/ormutualrecognitionofstandardshelptoreduceanytrade-hinderingeffectsofTBTandSPSmeasuresanddomesticregulationinservices.

SectionEcoversinternationalcooperationonnon-tariffmeasuresandservicesmeasures.Thefirstpartreviewsthe economic rationale for such cooperation in thecontext of trade agreements. It provides a frameworkforevaluatingtheefficientdesignofrulesonNTMsinatradeagreement.Thesecondpartofthissectionlooksat cooperation on TBT/SPS measures and domesticregulation in practice, both in the multilateral tradingsystem and within other international fora andinstitutions.Thethirdpartofthesectiondealswiththelegal analysis of the treatment of NTMs in the GATT/WTOsystemandtheinterpretationoftherulesthathasemergedinrecentinternationaltradedisputes.Specialattention is devoted to how WTO agreements anddispute settlement have dealt with the distinctionbetweenlegitimateandprotectionistNTMs.Thesectionconcludes with a discussion of the challenges forimprovingandfosteringfurthermultilateralcooperationonNTMsandservicesmeasures.

2. HistoryofNTMsintheGATT/WTO

Non-tariff measures have always presented themultilateral trading system with a basic policychallenge–howtoensurethatNTMsdonotrestrictordistort trade, and at the same time ensure that theycanbeusedfornecessaryandlegitimatepolicygoals.Whilethepolicychallengehasremainedthesame,thespecific issues, debates and solutions have evolvedovertime.

In the early GATT years, the main focus was onmeasuresrelatedtobalance-of-payments,employmentanddevelopment issues.Morerecently, thefocushasbeen on the growing number of measures related totechnical,healthorenvironmentalconcerns.Whereasnon-tariff measures in the past were often driven, orinfluenced in terms of design, by producer interests,today’sNTMsreflectagreaterdiversityinpublicpolicyconcerns,includingconsumerinterests.

Deepeningeconomicintegrationandtheexpansionoftrade rules into new areas, such as agriculture,services and intellectual property, have added to thecomplexity of the debate – generating new tradefrictionsoverdomesticregulatorydifferences,drawingnew constituencies, such as environmentalists andconsumergroups,intothedebate(DalyandKuwahara,1998;LowandYeats,1994)andraisingnewconcernsabout the tension between international rules andpolicy sovereignty. In response to these changingissues and pressures, the multilateral trading systemcontinues to evolve. If in the past, the focus was onnational measures – ensuring non-discrimination andtransparency,whileavoidingprotectionism–inrecentdecades there has been a growing focus ontransnational measures – encouraging regulatorycooperation, mutual recognition agreements and theinternationalharmonizationofstandards.

AlthoughtheGATTwaslaunchedasatariffagreement– and its early decades were focused mainly on thenegotiationand“binding”oftariffreduction–theissueofnon-tariffmeasureswasunavoidablefromtheoutset.OriginallyenvisagedasonepartofafutureInternationalTrade Organization (ITO), the GATT was the productof an initial tariff reduction negotiation among23countries thatconcluded inOctober1947– just intimetoavoidtheexpirationofUSnegotiatingauthority,andsixmonthsinadvanceoftheplannedconclusionoftheparallelITOnegotiations(Gardner,1956).

To ensure that the agreed tariff reductions were notdilutedorundercutbyothertrademeasures,theGATTincorporatedmanyofthecommercialpolicyprovisionsof the draft ITO Charter.2 Even this step was viewedsceptically by the US Congress, since the 1945extensionofthereciprocaltradeagreementsauthorityonly authorized undertakings to reduce tariffs andother trade restrictions. The GATT’s general clausespassedscrutinyonlybecausetheywere justifiedasanecessarybackstoptoanytariff-reductionagreement(J.H.Jackson,1989).Whenitbecameclearby1950that the Havana Charter establishing the ITO wouldnotberatifiedbytheUnitedStates,itfelltotheGATTto assume the commercial policy role that had beenenvisaged for the ITO–butwithout itsorganizationalor procedural provisions, and minus the chapters on“Employment and Economic Activity”, “EconomicDevelopment and Reconstruction”, “RestrictiveBusiness Practices” and “International CommodityAgreements”.


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From a trade-opening perspective, the GATT drew abasic policy distinction between tariff and non-tariffmeasures.Inparticular,itfavouredtheuseoftariffs.Inaddition to being revenue generating, tariffs wereviewedasa “fairer” formofprotection,moreefficientin terms of their economic consequences and moreamenable to reductions through negotiations.Quantitativerestrictionsandothernon-tariffmeasureswere seen as inherently more discriminatory, morevariedandmoredisruptiveofmarketforces.3

Inprinciple,USnegotiatorstookamoreextremeviewofnon-tariffmeasures,claimingtowanttoprohibitallquantitative restrictions and most other non-tariffbarriers to trade – under a comprehensive codegoverning world trade – and to initiate internationalnegotiations to reduce tariffs (although the UnitedStates was also intent on protecting the quotas andrestrictionsthatbuttresseditsownagriculturalsupportprogrammes). However, other countries were just asintentonpreserving their freedomtousequantitativerestrictions, exchange controls and other NTMs fordomesticpolicypurposes.

The United Kingdom and other European countriesfaced serious balance-of-payments difficulties at theendoftheSecondWorldWar,andwereunpreparedtogiveuptradeandexchangecontrolsthattheybelievedwere needed to preserve macroeconomic stability.Under the influence of Keynesian economics and itswartimeexperience,theUnitedKingdomwasintentonpreservingitsfreedomtousetraderestrictionsinthepursuit of domestic “full employment”. Meanwhile,developing countries resisted interference in theirambitious efforts to devise more stable internationalcommodity agreements or to pursue domesticdevelopmentandindustrializationstrategies.Thus,thenegotiations leading to the Havana Charter for theplanned International Trade Organization weredominated by intense debates about non-tariffmeasures–andquantitative restrictions, inparticular– as nations struggled to construct a universal legalsystem that could also encompass their oftenconflictingdomesticobjectivesandinterests.

Giventhecomplicatednegotiatinghistoryonnon-tariffmeasures, thevarietyof formsthey tookand thefactthatmanymeasureshadapolicyintentonlyindirectlyrelatedtotrade, theGATT’sarchitectsfailedtoarriveat a comprehensive approach encompassing all non-tariffmeasuresandtreatedvarioustypesofmeasuresdifferently. Consistent with the GATT’s basic policythrust, certain NTMs were prohibited outright.Quantitativerestrictionswerethemostimportantnon-tariffmeasureswhentheGATTwasbeingdrafted,soitisnotsurprisingthattheyaresubjecttodetailedandcomplexprovisions.

Article XI of the GATT clearly prohibited theintroduction of new quantitative restrictions andrequired theeliminationofexistingones,but this rule

was subject to three main exceptions. ReflectingEurope’sbalance-of-paymentsandcurrencyconcerns,the most important exception was for quantitativerestrictions (and exchange controls) maintained forbalance-of-paymentspurposes,detailedinArticlesXIIto XV. The second exception was for quantitativerestrictions used in support of certain agriculturalsupport programmes that aimed to keep domesticprices above world prices – a key objective of theUnited States. The third exception was limited toquantitative restrictions used by least-developedcountries (LDCs) to promote infant industries andeconomic development, or to manage their ownparticularforeignexchangeproblems.

Other non-tariff measures were regulated, notprohibited, by GATT rules to ensure that necessaryand legitimate domestic policies were non-discriminatory and least trade restrictive. The basic“national treatment” obligation, Article III, outlawedinternal taxes or charges on imported products thatwere not applied equally to “like” domestic products.National treatment also required that domestic lawsand regulations related to sales, purchases,transportation and distribution be non-discriminatoryin their application. Although the GATT made nospecific reference to technical or health standards,Article III’s coverage of “laws, regulations, andrequirements”wasgenerallyassumedtoapply.

Significantly, Article XX explicitly recognized thatmeasures “necessary to protect human, animal orplant life and health” were justified – confirminggovernments’responsibilityforensuringthatgoodsofallkindsmeetcertainnationalstandards–butonlysolongasthesemeasuresmetthe“necessity”standard,and did not “constitute a means of arbitrary orunjustifieddiscriminationoradisguisedrestrictiononinternational trade”. The GATT also regulated certainnon-tariff measures in an affirmative way through itsArticleXrequirementthatimport-relatedlaws,judicialdecisionsandregulationsbe“publishedpromptly”.

Other non-tariff measures were considered toocomplex or controversial to be addressed throughgeneral rules or “codes of conduct” alone. Article VIestablished rules regarding anti-dumping andcountervailing duties – which were allowed only incertain prescribed cases, and at levels deemedsufficient to accomplish approved objectives. ArticleVII specified that customs valuation systems shouldnotbebased“onarbitraryorfictitiousvalues”assignedto imports. Article VIII aimed to limit administrativefees assigned to imports and tried to simplify thedocumentationrequiredbycustomsofficials.ArticleIXsoughttopreventdiscriminatoryrestraintson importsthrough the use of rules of origin (i.e. procedureswhich determine a product’s country of origin andconsequently how it is treated). Often the scope orcoverage of such agreements was limited. Onsubsidies, for example, GATT Article XVI merely


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required notification and consultation, with a view toreducing subsidization. Although the United Statesand several other delegations viewed state tradingactivities–whichwerewidespreadduringtheSecondWorld War and its aftermath – as a significant tradedistortion,GATTrules (Articles II:4, III:4andXVII)didnotprohibitstatetradingagenciesbutsimplyrequiredthat their purchases and sales be subject to marketforces.

To further protect bound tariff reductions from beingunfairly undermined by non-tariff measures, theoriginalGATTarchitectsalsointroducedanexpansiveand controversial “non-violation” provision4 – underArticle XXIII:1 of the dispute settlement procedure –which allowed a WTO member to argue, even in theabsence of any breach of GATT obligations, that itsmarketaccess“benefits”hadbeennullifiedorimpairedby“anymeasure”introducedbyanothermember,orby“any other situation”, and to seek compensation. Theinherent ambiguity of the non-violation provision wasintentional, designed to cover not only governmentNTMs that fell outside the scope of existing GATTprovisions, but measures that governments mightinvent in the future to circumventor dilute their tariffcommitments.

The first five GATT negotiating rounds – Geneva(1947),Annecy(1949),Torquay(1951),Geneva(1956)andDillon(1960-61)–weredevotedalmostexclusivelyto tariff negotiations and the accession of newmembers. However, during the 1954-55 “reviewsession”, members separately drafted protocolsrevising several GATT provisions dealing with non-tariff measures. While these early rounds, especiallythe first one, resulted in significant overall tariffreductions, the trade-opening impact was oftenfrustrated by countries’ use of non-tariff measures –furtherincreasingthepressureontheGATTsystemtoclarify the distinction between protectionist andlegitimate NTMs. Most European countries were stillapplyinga rangeofquantitative restrictions,althoughless for balance-of-payments reasons,5 andincreasingly to limit growing import competition fromAsia,especiallyJapan,whichhadrecentlyaccededtotheGATT.

Concerns were also growing about the expansion ofanti-dumpingactions,especiallyby theUnitedStatesand Canada, and the lack of rules governing the useandapplicationofnationaltechnical,healthandsafetystandards. The negotiation of the 1962 Long-TermArrangementRegardingInternationalTradeinTextiles(LTA) – which embodied a complex network ofrestrictions on textiles and clothing exports – wentsome way towards appeasing industrial lobbies andhelped the US administration secure congressionalnegotiating authority for what became the KennedyRound (Low, 1993). However, there were growingworries,especiallyamongdevelopingcountries,aboutthe extent to which such “voluntary” arrangements

were substituting trade regulation for markets andweakeningtheintent,ifnottherules,ofthemultilateraltrading system. In these and other areas, it wasbecoming clear that GATT rules often failed to givesufficiently precise guidance for the internationalregulation of non-tariff measures. The problem wasmade worse by the GATT’s “Protocol of ProvisionalApplication”,which requiredcountries to respectPartIIrules–i.e.thosecoveringnon-tariffmeasures–only“to the fullest extent not incompatible with existinglegislation” (Dam, 1970; J. H. Jackson, 1989). As aresult, non-tariff measures that could be related tonational legislation in existence prior to 1947effectively“escaped”theGATT’sdisciplines.

BythetimetheKennedyRoundwaslaunchedin1964,pressurewasbuildingfromgovernmentstoaddressabroad range of non-tariff measures, including thosefallingunderthe“escapeclause”,“residual”quantitativerestrictions, anti-dumping, state trading, governmentprocurement,customsvaluation,discriminatory importrestrictions, border tax adjustments, and increasinglytechnicalandhealthstandards.6Atameeting inMay1963, preparing the ground for the Kennedy Round,trade ministers agreed that the forthcomingnegotiations“shoulddealnotonlywithtariffsbutalsowithnon-tariffbarriers”.7

Unfortunately, the Kennedy Round’s success ingrappling with non-tariff measures was limited. Aninitially positive result was an agreement on anti-dumpingmeasures,theso-called“Anti-dumpingCode”,aimedatspeedierandmoretransparentproceduresinthe application of national anti-dumping laws.8 TheCode was negotiated separately from the Round’stariff negotiations, and agreement was reached withsurprisingly little difficulty (Winham, 1986). Anotherpositive result was an American Selling Price (ASP)agreement, whereby the United States would haveended its use of a valuation system for benzenoidchemicals thatEuropeclaimedwas incompatiblewiththeGATT,andtheEuropeanCommunitieswouldhaveprovidedadditionaltariffreductionsonchemicalsandothertradeconcessions(J.H.Jackson,1989).

The anti-dumping and ASP agreements representedimportantpotentialprogress in the regulationofnon-tariffmeasures.However,evenbefore theconclusionoftheKennedyRoundin1967,opponentsinCongressargued that both agreements had been negotiatedwithout an explicit congressional mandate, and a billwas subsequently passed prohibiting the US TariffCommission from implementing the codes (Winham,1986). The agreements died as a result (Destler,1986). Although the Kennedy Round was againsuccessful in reducing tariffs, it did not bring aboutany significant changes to the GATT rules governingNTMs(Preeg,1995).

ItfelltotheTokyoRoundbetween1973and1979toundertakeamajorreformandexpansionoftheGATT’s


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non-tariff rules– inmanywayspickingupwhere theKennedy Round had left off. Despite the GATT’ssuccessinloweringtariffs,memberswereincreasinglyaware that tariff reductions alone were not sufficientto guarantee market access. Concerns were againexpressed that non-tariff measures were frustratingthe intent of tariff commitments, and that existingGATTruleswereinsomecasesnotpreciseordetailedenough to ensure that certain NTMs were notdiscriminatory or unnecessarily trade restrictive. Thisview was especially prevalent in the United States,which was already worried about the effects on itsexportsofanovervalueddollarand theconsolidationoftheEuropeancommonmarket.

TheUnitedStatesCommissionon InternationalTradeand Investment, the so-called “Williams Commission”,appointed in 1971 to advise the administration onfuture trade policy, stressed that American exportswere being increasingly impeded by “non-tariffbarriers”inoverseasmarkets,andproposedthelaunchof new multilateral negotiations which, among otherthings, would draw up “codes of conduct” to addressnon-tariffissues.Inseekingcongressionalnegotiatingauthorityin1973,theUSSpecialTradeRepresentative,William Eberle, argued that “the forthcoming tradenegotiationsmustdiffersubstantiallyfromthoseofthepast ... Thenegotiationsmust coverall barrierswhichdistorttrade”.

The Europeans, for their part, wanted to return toissuesthattheyhadunsuccessfullypushedduringtheKennedyRound,especiallycustomsvaluation(andtheremoval of the ASP), anti-dumping and governmentprocurement(Winham,1986).Thegrowingimportanceof non-tariff measures was further highlighted by aNon-TariffMeasure Inventory thathadbeencompiledby theGATTSecretariat, basedonmembers’ reversenotifications,since1967.

TheTokyoRoundgavecentrestagetothenegotiationof improved and expanded rules on non-tariffmeasures. In theministerialdeclaration launching theRound, a key stated objective was to “reduce oreliminate non-tariff measures or, where this is notappropriate, to reduce or eliminate their traderestricting or distorting effects, and to bring suchmeasures under more effective internationaldiscipline”. Reflecting this priority, the TradeNegotiationsCommitteecreatedaspecialnegotiatingsub-committee on non-tariff measures in February1974; this committee was itself divided into sub-groups on quantitative restrictions, technical barrierstotrade,customsmatters,subsidiesandcountervailingmeasures, and (after July 1976) governmentprocurement. The main outcome of their efforts wasthenegotiationofsixnewplurilateralagreements–or“codes” – which, with the exception of governmentprocurement, built on existing GATT provisions.Despite their limited membership – for example, just39countries, a thirdof theGATTmembership, opted

to sign the Technical Barriers to Trade Code (alsoreferred toas theStandardsCode) at theendof theRound – these agreements marked a significantadvance in the system’s efforts to clarify rules in anumberofnon-tariffareas.

The Customs Valuation Code brought greateruniformityandstandardizationtothewaythatimportswerevalued.New rules in the ImportLicensingCodereduced the scope for discrimination in the way thatcustoms authorities could apply licences. The codeson government procurement and subsidy/countervailwerealsoimportantbreakthroughsintheTokyoRound– the formerbecause it broughtamajornewareaofeconomicactivityunderGATTrules,thelatterbecauseit demonstrated the willingness of countries tonegotiate on an increasingly high-profile andcontentiousnon-tariffmeasure(Winham,1986).

As a clear signal of the way that the fast-expandingarray of domestic technical, health and safety non-tariffmeasureswouldbeaddressedbyGATTrules inthefuture,thenewStandardsCodewasarguablyoneof the most significant and important Tokyo Roundresults. Not only did the Code explicitly reiterate theGATT’s existing non-discrimination obligationsregardingtheadministrationoftechnicalregulations,italsoobligedcountriestoadoptexistinginternationallyacceptedstandards–unlessinappropriatefordefinedreasons – while urging them to work towards thefurther harmonization of standards. Furthermore, theCode encouraged countries to adopt a “mutualrecognition”policy,wheneverpossible,fortestresults,certificatesandmarksofconformity.

AlthoughtheTokyoRound’stariffreductionagreementwas significant, the Round’s main achievement wasthedevelopmentofa comprehensive regime fornon-tariff measures. The Tokyo Round codes were notwithoutweaknesses–someofwhichweretoprovidean impetus for launching the Uruguay Roundnegotiations. Since the codes’ membership waslimited, they were sometimes accused of not beingfully “multilateral”, of creatinga two-tieredGATT, andof weakening the principle of non-discrimination. Thecodes’ separate committees, provisions and disputesettlement procedures also open them to the chargeof “balkanizing” themultilateral trading system.Someof these concerns were addressed in the November1979 GATT Decision, which affirmed that theseagreements (except government procurement) wouldbe applied in a manner fully consistent with most-favoured nation (i.e. non-discrimination), so non-signatoriespreservedtheirexistingrights.

TheDecisionalsosecuredtherightofnon-signatoriesto participate in the various code committees asobservers – addressing a concern of developingcountries. Despite these shortcomings, the TokyoRoundclearlymarkedthemostsignificantadvance inthe system’s efforts to deal with non-tariff measures


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sincetheGATT’sruleswerefirstnegotiatedafter theSecondWorldWar.

Non-tariff measures remained a main focus of theUruguay Round – in part to build and expand uponwhathadbeenachievedintheTokyoRound.The1986Punta del Este Declaration, launching the Round,provided a broad mandate: “negotiations shall aim toreduce or eliminate non-tariff measures, includingquantitative restrictions”. Japan, the first country toformallyproposelaunchingthenewRound,specificallysought strengthened GATT disciplines on NTMs,especially voluntary export restraints and othermanaged trade arrangements (Croome, 1996). TheUnited States, for its part, not only sought improvedmarket access for its manufactured and agriculturalexports,butexpandedopportunitiesforitsincreasinglycompetitive services exports, and to strengthenforeign protection and enforcement of its intellectualpropertyrights–allofwhichinvolvedamuchbroaderfocusonnon-tariffmeasuresthanhadbeenenvisagedinthepast.

Like the United States, the European Communitiesalsohadan interest inopeningupservicestradeandstrengthening intellectual property protection.Meanwhile, a critical mass of developing countrieswere prepared to contemplate new services andintellectual property rules in exchange for improvedaccess to developed-country markets for theirmanufactured exports, including by dismantling theMulti-FibreArrangement(whichhadreplacedtheLTAin1974),amendingthesafeguardclause,andgenerallystrengtheningtheGATT’snon-discriminatoryrules.

TheUruguayRoundmarkedanothermajorexpansionof the system’s coverage of non-tariff measures. Thewideningofmultilateralrulestoincludeservicestradeand intellectual property protection – through theGATS and the Trade-related Aspects of IntellectualProperty Rights (TRIPS) Agreement – involved newdisciplines across a whole range of measures.However, these were not the only areas where theUruguay Round expanded international regulation ofNTMs.

Agricultural trade had largely been exempted fromprevious GATT negotiations and the use of non-tariffmeasures, such import quotas and subsidies, inagricultural policy had enjoyed special status underGATT rules. Under the Uruguay Round’s agricultureagreement, however, most remaining non-tariffrestrictionswerereplacedbytariffs–aprocessknownas tariffication – and new commitments wereundertaken to discipline domestic support and exportsubsidies. InadditiontoimprovementstotheTechnicalBarriers to Trade Agreement, a new Sanitary andPhytosanitary Measures Agreement was negotiateddealing specifically with agriculture-related standards.Bytreatingsanitaryandphytosanitary(SPS)measuresunder a separate (and more rigorous) agreement,

negotiators not only acknowledged the growingimportanceandprominenceoffoodsafetyissues–andtheir increasing relevance to agricultural trade – butalso the possibility that countries might be temptedto compensate for negotiated tariff and subsidyreductions through increased use of SPS measures(Croome,1996).

GATT disciplines on import licensing and rules oforiginwerealsostrengthened,whileexistingrulesonsubsidies–includingtheirclassificationintoprohibited,permissibleandpossiblypermissiblesubsidies–wereexpanded. Countries also agreed to dismantleprogressively theMulti-FibreArrangement,whichhadevaded GATT rules since 1962, ending one of themostprominentandcontroversialtradearrangements.

ThechangingfocusandscopeofeachroundofGATTnegotiationssince1947notonlyreflectstheon-goingrelevance of non-tariff measures to the internationaltradingsystem,butalsohowtherelativeimportanceofvariousmeasureshasshiftedovertime(seeTableA.1).Quantitative restrictions were the most pressingproblem facing the early GATT negotiators becausecountrieswereslowtodismantlewartimecontrolsandEurope was preoccupied with balance-of-paymentsproblems and dollar shortages. However, thesegradually diminished in importance during the 1950sas the dollar shortage resolved itself and as importandexchangecontrolswerelifted.

Later, during the Kennedy Round, attentionincreasingly turned to customs valuation anomalies,anti-dumping actions, and the expansion of tradeagreements between countries. Notwithstanding theefforts made to address these issues during theRound, quantitative restrictions and embargoes stillaccounted for more than a quarter of the non-tariffmeasuresnotifiedinthe1968inventoryandcontinuedto be relevant after the Uruguay Round. Rising tradeconflicts over production subsidies and health andsafety standards were added to the list of emergingproblemsduringtheTokyoRound(i.e.6.6percentand9.2 per cent of the measures notified in the 1973inventory).During theUruguayRound,discussionsonNTMs expanded dramatically to include the host ofdomestic regulations related to services andintellectual property, in addition to the wide array ofagriculture and textile measures that had previouslybeenexemptfromGATTrules.

In the current Doha Round, “standards” and “customsandadministrativeprocedures”havere-emergedasthetwo most important categories of non-tariff measuresbeing addressed in the negotiations on manufacturedproducts (NAMA, or non-agricultural market access)andtradefacilitation(at37.6percentand26.5percentrespectively,thesewereamongthetopthreecategoriesofNTMsnotified in the2005 inventory).The fact thatthe GATT’s transit, administrative and transparencyprovisions (Articles V, VIII and X), largely neglected in


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TableA.1: Non-tariff measures notified by GATT/WTO members for non-agricultural products (shareofNTMsbyinventorycategory)

Parts and sections

DESCRIPTIONInventory (1968)1

Inventory (1973)2

Inventory (1989)3

NAMA, 1st Inv. (2003)4

NAMA, 2nd Inv. (2005)5

Part IGovernment participation in trade and restrictive practices tolerated by governments

11.9 15.3 20.9 7.1 7.0

A Governmentaids 2.7 6.6 7.3 1.8 1.7

B Countervailingduties 0.6 0.4 0.5 0.2 0.0

C Governmentprocurement 3.7 3.4 6.4 0.9 0.7

D Restrictivepracticestoleratedbygovernments 0.0 0.8 2.0 3.8 4.3

EStatetrading,governmentmonopolypractices,etc.

4.9 4.1 4.6 0.4 0.3

Part IICustoms and administrative entry procedures

14.8 14.6 11.9 23.5 26.2

A Anti-dumpingduties 1.1 1.5 2.3 1.5 2.3

B Valuation 5.5 4.8 4.1 2.3 5.3

C Customsclassification 1.3 0.7 0.5 0.7 3.3

D Consularformalitiesanddocumentation 4.7 6.4 3.4 2.3 3.0

E Samples 0.7 0.4 0.2 0.1 0.0

F Rulesoforigin 1.3 0.0 0.4 7.4 2.6

G Customsformalities 0.2 0.8 1.1 9.1 9.6

Part III Technical barriers to trade 6.1 9.2 8.2 29.9 37.1

A General 0.0 9.2 1.6 3.2 8.9

B Technicalregulationsandstandards 5.2 0.0 3.0 15.8 13.2

C Testingandcertificationarrangements 0.9 0.0 3.6 11.0 14.9

Part IV Specific limitations 36.7 31.5 31.7 34.9 26.8

A Quantitativerestrictionsandimportlicensing 20.7 15.6 13.9 12.8 7.0

BEmbargoesandotherrestrictionsofsimilareffect

5.0 5.6 5.3 0.8 4.0

CScreen-timequotasandothermixingregulations

1.9 3.6 1.6 0.0 0.7

D Exchangecontrol 2.3 1.2 1.2 1.3 1.3

EDiscriminationresultingfrombilateralagreements

0.8 1.5 1.1 0.1 0.7

F Discriminatorysourcing 0.5 1.0 0.0 0.3 1.7

G Exportrestraints 1.6 0.4 0.4 0.2 1.0

H Measurestoregulatedomesticprices 1.6 0.5 1.2 0.2 0.3

I Tariffquotas 0.2 0.3 0.5 0.3 1.3

J Exporttaxes 0.0 0.0 2.1 0.2 1.0

KRequirementsconcerningmarking,labellingandpackaging

1.6 1.6 2.1 7.2 6.3

L Otherspecificlimitations 0.3 0.1 2.1 11.5 1.7


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Parts and sections

DESCRIPTIONInventory (1968)1

Inventory (1973)2

Inventory (1989)3

NAMA, 1st Inv. (2003)4

NAMA, 2nd Inv. (2005)5

Part V Charges on import 29.2 29.4 27.3 4.4 1.7

A Priorimportdeposits 1.9 1.9 1.6 0.2 0.0

B Surcharges,porttaxes,statisticaltaxes,etc. 13.5 10.5 10.5 3.0 1.3

C Discriminatoryfilmtaxes,usetaxes,etc. 11.1 4.0 4.5 0.2 0.3

D Discriminatorycreditrestrictions 1.3 1.4 1.2 0.2 0.0

E Bordertaxadjustments 0.9 11.2 8.6 0.2 0.0

F Emergencyaction 0.5 0.4 0.9 0.8 0.0

Other 1.4 0.0 0.0 0.2 1.3

Total 100.0 100.0 100.0 100.0 100.0

Memo: Number of items in the categories 873 731 561 2556 302

Source:SantanaandJackson(2012).

Note: The information presented in this table is largely based on “reverse” notifications according to the inventory categories in documentTN/MA/S/5.Becausethecategoriesusedineachoftheinventoriesdiffer,severalelementshadtobeadjustedasdescribedbelow.Whereanitemcorrespondedtotwoormoreinventorycategories,theitemwascountedunderalltherelevantcategories.Thismeansthatthenumberofitemspresentedinthistableoverestimatestheactualnumberofitemsintheinventory.

1BasedontheInventoryonNon-TariffMeasuresoftheCommitteeonIndustrialProducts,documentCOM.IND/6andAddenda,of11December1968.Thecategoriesof this inventorydivergeconsiderably fromtheonesusedfor this table.Thefrequencyofmeasureswasgroupedandreassigned accordingly. Some of the differences include inter alia.: countervailing duties were classified under Part II (customs andadministrativeprocedures)andnotunderPartI;the“customsclassification”ofII.Bdidnotexist,buttherewerecategoriesfor“HarmonizationofNomenclature”and“Arbitraryclassification”;consularformalitieswereincludedunderPartIIandnotinPartI;quantitativerestrictionsandlicensingrequirementswerepresentedas twoseparate items;markingandpackagingrequirementswereclassifiedunderPart III (technicalbarrierstotrade);the“restrictivepracticestoleratedbygovernments”wereincludedinthe“other”category,etc.

2 Based on the Note by the Executive Secretariat of the GATT entitled “Inventory of Non-Tariff Measures – Balance sheet of notifications”,documentCOM.IND/W/102of11April1973.Theinventorycategoriesdifferslightlyfromtheonesusedinthistable.Forexample,inthe1973inventory,PartIIIwasentitled“Standards”andwassub-dividedinto:A)Industrialstandards;B)Healthandsafetystandards;C)Otherstandardsconcerningproductcontents;andD)Requirementsconcerningmarking,labellingandpackaging;thecategoryof“exporttaxes”didnotexist,etc.

3Basedon theGATT’sSecretariatAnalysisof thedocumentationof theTechnicalGrouponQuantitativeRestrictionsandotherNon-TariffMeasures,GATTDocumentNTM(TG)/W/5of28February1989,Annex10(QRs)and12(NTMsotherthanQRs).

4 The summary is based on the WTO Secretariat’s report JOB(03)/128, which compiled information of notifications in the TN/MA/W/25series.ThesecondnotificationexercisenotifiedbymembersintheTN/MA/W/46serieswasnottakenintoaccount.Datawasprocessedandrearranged inamannerthatwouldallowforthecountingof individualmeasuresasperthe inventorycategories.Becauseseveralmeasuresrelatedtotwoormoreinventorycategorieswerenotified,thereisanoverlapandmultiplecountingofthesamemeasure.TheWTOSecretariatnotedinthisreportthatinformationwasofteninaccurateorincomplete,towhichtheauthorswouldaddthatthemannerinwhichproductsweregroupedalsodiverged,rangingfromgroupingofcategoriesofproductsto identifyingtariff linesattheten-digit level.Thissummaryshould,therefore,beinterpretedwithcaution.

5ThesummaryisbasedontheWTOSecretariat’sreportJOB(04)/62/Rev.7,whichcompiledinformationofnotificationsintheTN/MA/W/46documentseries.TheinformationnotifiedbyBrazil indocumentTN/MA/W/46/Add.16wasadded.ThesameprocessingnotesofdocumentJOB(03)/128apply.

previousrounds,areonceagaininthespotlightthroughthe trade facilitation negotiations demonstrates howenduring the non-tariff measures agenda remains. Inshort, few of the non-tariff issues on the multilateraltrade agenda are completely new or have completelydisappeared.

Ifnon-tariffmeasuresareemergingasanevenmorecritical focus of the WTO’s work, it is largely areflection of the system’s successes, not its failings.The expansion of world trade, the deepeningintegration of economies, and the widening andstrengtheningoftraderuleshaveinevitablyresultedinnon-tariff measures emerging as an increasinglysalient feature of the international trade landscape.Declining tariff protection has led some countries tomake more creative and extensive use of non-tariff

measures. Many countries, particularly in thedeveloped world, have also expanded health, safetyand environmental regulations in recent decades(TrebilcockandHowse,1999)–whosetradeimpactisoften magnified by cumbersome administrative andcomplianceprocedures(ashighlightedinSectionC).

Another major reason why non-tariff measures havegrown inprominence intheWTOisbecausethefocusonthemhas increased–asthe linebetween“foreign”and“domestic”issuesandpoliciesbecomesincreasinglyblurred.9 This development has also increased thecomplexity of the WTO’s work, since the system hashistoricallyfoundithardertoaddressNTMsthantariffs.This is partly because they are more complex andcountry-specific,partlybecausetheydonoteasilylendthemselves to negotiations that have traditionally


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focusedontheexchangeoftariffreductions,butmainlybecause they can involve domestic policy objectivesonlyindirectlyrelatedtotrade.

Yet over the decades, the multilateral trading systemhas developed an increasingly effective means ofregulating non-tariff measures – by prohibiting themost protectionist measures, by constrainingdiscriminatory and unnecessarily trade-restrictive

measures, by strengthening general and specifictransparency obligations, and by encouragingtransnationalregulatorycooperationandconvergence– building on the GATT’s surprisingly adaptable and“modern” foundations. This suggests that the futuretradeagenda, like thepastone,will focuson refiningand improving existing disciplines, while taking intoaccount changing contexts as they arise, rather thanstartinganewinentirelyunchartedwaters.


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1 Atariffis“bound”whenaWTOmemberhascommittednottoraiseitabovealegallyagreedrate(theso-calledtariff“binding”).

2 TheGATT’soriginswerealsoreflectedintheagreement’sstructureandsubstantiveobligations.ArticleIsetsoutthemost-favourednation(MFN)obligation,wherebymembersagreetoapplytariffsonanon-discriminatorybasis.ArticleIIcoversthetariffreductionsschedulestowhichGATTmembershadagreed.Together,thesetwoarticlescomprisedPart1oftheagreement.Part2oftheGATT,ArticlesIIItoXVII,containsalmostalloftheGATT’sothersubstantiveobligations–themostimportantofwhichisnationaltreatment(ArticleIII),clearlyaimedatpreventingNTMs,especiallydomestictaxandregulatorypolicies,frombeingusedasprotectionistmeasuresthatwoulddefeatthepurposeoftariffbindings.Inadditiontonationaltreatment,Part2alsocontainsrulesgoverningotherNTMs,suchasanti-dumpingandcountervailingduties,customsvaluation,customsadministration,rulesoforigin,quantitativerestrictionsandsubsidies.

3 AsClairWilcox,oneoftheUSchiefnegotiatorsinGeneva,putit:“Quantitativerestrictions…imposerigidlimitsonthevolumesoftrade.Theyinsulatedomesticpricesandproductionagainstchangingrequirementsoftheworldeconomy.Theyfreezetradeintoestablishedchannels.Theyarelikelytobediscriminatoryinpurposeandeffect.Theygivetheguidancetopublicofficials;theycannotbedivorcedfrompolitics.Theyrequirepublicallocationofimportsandexportsamongprivatetradersandnecessitateincreasingregulationofdomesticbusiness.Quantitativerestrictionsareamongthemosteffectivemethodsthathavebeendevisedforthepurposeofrestrictingtrade”(Wilcox,1949).

4 ThepartingSouthAfricandelegatetotheGenevaGATTdraftingsessioninthesummerof1947observedthat“ofallthevagueandwoollypunitiveprovisionsthatonecouldmake,[nullificationandimpairment]seemstometoholdtheprize.Itappearstomethatwhatitsaysisthis:Inthiswideworldofsintherearecertainsinswhichwehavenotyetdiscoveredandwhichafterlongexaminationwecannotdefine;buttherebeingsuchsins,wewillprovidesomesortofpunishmentforthemifwefindoutwhattheyareandifwefindanybodycommittingthem”(Hudec,1975).

5 Post-wartraderelationsweredominatedbythescarcityofconvertiblecurrenciesthatcountries(withthenotableexceptionoftheUnitedStates)experiencedasaconsequenceofwartimedisruptionsandthecostsofreconstruction.MostEuropeancountrieshadextensivesystemsofexchangeandimportcontrolsinplaceuntilaftertheKoreanWar,whenthedollarshortagediminishedandcountriesslowlybegantodismantlethesesystems(Gardner,1956).

6 Alistofpossiblenon-tariffmeasurestobeconsideredfornegotiationwaspreparedbytheGATTSecretariatfromitsNon-TariffMeasuresInventory.Some150ofthe900measuresnotifiedtotheInventorywereintheareaofstandards.

7 SeeAnalysis of United States Negotiations, 1960-61 Tariff Conference,DepartmentofStatepublication7349,p.203(Evans,1971).

8 ArticleVIoftheGATThadallowedmemberstoimposeanti-dumpingdutiestooffsetthemarginofdumpedgoods(providedtheycausedorthreatenedtocause“materialinjury”todomesticindustry),butthereweregrowingconcernsthatthewaysthatanti-dumpingprocedureswereapplied(delays,theinjurytest,calculationsofmargins,etc.)couldserveasahiddenrestrictionontrade.

9 Thereisevidence,however,thatnon-tariffmeasures,suchastraderemedyactionsandotherlessconventionalmeasures,increasedafterthe“tradecollapse”thatfollowedthe2008financialcrisis(Gregoryetal.,2010).

Endnotes


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Governments use non-tariff measures and services measures for a growing number of reasons. This section examines what these are and how they may affect trade. It also analyses the choices available to governments among a variety of policy instruments, from a theoretical and an empirical perspective. The section ends with case studies on non-tariff measures in the context of the recent financial crisis, climate change and food safety.

B. An economic perspective on the use of non-tariff measures


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Contents 1 Reasonsforgovernmentinterventionandtypesofmeasures 50

2 ThechoiceofNTMsinlightofdomesticandinternationalconstraints 63

3 Measuresaffectingtradeinservices 73

4 NTMsinthe21stcentury 79

5 Summaryandconclusions 87

Some key facts and findings

• Non-tariff measures (NTMs) are often first-best policies to correct

market failures. However, as the same NTM used to pursue a public

policy objective may also be employed to distort international trade,

it can be difficult to distinguish “legitimate” from protectionist

motivations for NTMs.

• Neither the declared aim of a non-tariff measure nor its effect on

trade provides conclusive evidence of whether it is innocuous

from a trade perspective. However, analysing the nature of these

measures – their opaqueness, efficiency and effect on various

groups in society – and their political and economic context can

provide important insights.

• Non-tariff measures, including behind-the-border measures,

may take the place of tariffs and border NTMs that are disciplined

in trade agreements. This raises important questions regarding

the regulation of NTMs at international level.

• Similar issues arise in relation to services measures, which have

become increasingly significant in light of the international

fragmentation of production processes.

• Developments such as the recent financial crisis, current debates

on climate change and heightened concerns about food safety

have led to the increased use of NTMs and services measures in

the 21st century, illustrating the difficulties involved in dealing with

public policy measures and their impact on international trade.


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Trade agreements are meant to discipline policiesthat distort trade without constraining governmentsin their pursuit of other legitimate public policyobjectives, such as consumer health and safetyprotection – even if these happen to affect trade.Thus,whilecertainnon-tariffmeasures(NTMs)entailtrade costs, these costs can be justified for otherreasons. This section seeks to shed light on theimportance of making this distinction and on how itcanbemade,akeyquestionfromtheperspectiveoftheWTO.

Section B.1 introduces different types of non-tariffmeasures and discusses how they are employed toachievearangeofpolicyobjectives. Inanalysingthewelfare and trade effects of NTMs in more detail, itbecomes clear that usually more than one measurecanbeusedtopursueagivenpolicygoal, inamoreor less efficient manner. While a specific NTM canrepresent the first-bestpolicy topursuea legitimatepublicpolicyobjective,thesamemeasurecanalsobeusedforprotectionistpurposesorcreateunnecessarytradecosts.Makingthisdistinctionisnotalwayseasyand represents a major challenge for tradeagreements that target the latter, while seeking nottointerferewiththeformer.

Section B.2 identifies situations in whichgovernments may be prone to employ non-tariffmeasures for trade competitiveness reasons, evenif the stated policy rationale is a different one,or implement an inefficient instrument that mayaffect trade more than necessary to achieve agiven objective. From this analysis, a number offactors relating to the choice of NTMs andthe sectors and political context in which theyareappliedcanhelpdistinguishbetween“legitimate”and “protectionist” (or excessively trade-restrictive)use. Another reason why governments may turn toNTMs relates to “policy substitution” – that is, theuse of certain NTMs when tariffs or other NTMsare effectively regulated in international tradeagreements.

Thespecialcharacteristicsofservicestrade,notablythe intangibility of services and the different modesoftrade,makeitnecessarytoask, inSectionB.3,towhatextentthepreviousanalysisappliestoservicesaswell.

The penultimate part (Section B.4) examines casestudies on the rise of non-tariff measures duringthe recent financial crisis, in the context ofclimate change and in relation to food safety.The objective of this sub-section is to illustratehow recent developments have led to an increaseduse of NTMs and to what extent the measurestaken may pose a challenge for internationaltrade. Finally, the main results are summarizedinSectionB.5.

1. Reasonsforgovernmentinterventionandtypesofmeasures

(a) ClassifyingNTMsandgovernmentmotives

There are various ways to categorize both non-tariffmeasuresandthereasonswhygovernmentsusethem.Theclassificationsdiscussedinthissectionprovideausefulwaytoconsidermanyoftheissuesraisedinthisreport.

The trade literature typically distinguishes betweeninterventionsaimedatincreasingnationalwelfareandthose motivated by “political economy” goals. Theformerincludesinterventionstocorrectmarketfailuresandtoexploitacountry’sorafirm’smarketpower(bymanipulating the terms of trade and shifting profits).One key point is that interventions to exploit marketpower come at the expense of one’s trade partners(beggar-thy-neighbour practices), whereas thosefocused on correcting market failures have tradeeffects that are unintended consequences of thepolicy.

Political economy motives reflect the response ofpoliticalincumbentstospecialinterestgroups,usuallyassumed to be organized producer groups. Althoughtheeconomicliteraturegenerallyassumesconsumersaretoonumerousanddiversetocoordinateeffectively,theycanputeffectivepressureonpoliticiansonissuesthat involve consumer health and safety. In addition,civilsocietyandnon-governmentalorganizationshavebecome powerful advocates for issues such as theenvironment. Political economy motives are likely tolead to policies that shelter favoured producers andreducetradeflowsattheexpenseofnationalwelfare.Thissuggestsafurtherdistinctionbetweennon-tariffmeasures motivated by public policy objectives andthose motivated by competitiveness concerns. Thisdoesnotmeanthatpublicpolicyandcompetitivenessconcerns cannot overlap – for example, whenprotecting an infant industry whose expansion canincreasenationalwelfare.However, thereare likely tobemanymore instanceswherepromotingadomesticproducer’s interests comes at the expense of thesocial good. Lastly, motives can be distinguishedaccording to their intended distributional effects –specifically, whether they benefit consumers orproducers.

So far, the discussion has focused on the economicmotives of governments for employing non-tariffmeasures.However,nationalwelfareandpublicpolicyobjectivesmayembracefarmorethanpurelyeconomicissues.Governmentsareresponsibleforsafeguardingnational security. Governments may wish to firmlyuphold certain moral and religious tenets. Where asociety is made up of different ethnic or religiousgroups, a high value will be placed upon the


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preservation of social cohesion. These goals may becompromised if certain goods are freely available inthecountry,requiringgovernmentstouseNTMssoastorestricttheirsupplyviainternationaltrade.

The classification and quantification of non-tariffmeasuresisalong-standingareaofresearch(apartiallistingincludesBaldwin,1970;LairdandYeats,1990;DeardorffandStern,1997;DeeandFerrantino,2005).ThisresearchhasprovidedtheconceptualframeworkforthevariousNTMdatabases–includingtheWTO’s– that will be relied on extensively in this report,especiallyinSectionC.

Following Staiger (2012), non-tariff measures can beclassifiedaccordingtowhethertheyareappliedattheborder, to exports (e.g. export taxes, quotas or bans)and imports (e.g. importquota, importban),orbehindthe border. This latter category can be further sub-dividedaccording towhether theNTMsaredomestictaxes, other charges, and subsidies, or whether theyare regulatory. The distinction between border andbehind-the-border NTMs appears frequently in theeconomic literature. In one sense, it is a distinctionbasedonwherethemeasuresareapplied.However,inanother sense, it involves a distinction betweenmeasuresappliedtoforeigngoodsonly(attheborder)and those applied equally to domestic and foreigngoods. This raises a key question about behind-the-border measures – i.e. whether, intentionally or de facto,theytreatdomesticandforeigngoodsdifferently.

What is common about the interventions collectivelycalled non-tariff measures, irrespective of their

motives, is that they have trade effects (either liberalorrestrictive).Sometimesthetradeeffectsaresimplythe by-product of pursuing a particular public policyobjective. Other times, the trade effects are theprimary goal. Since governments usually claim thattheir policies have laudable objectives, declaredintentions may offer little insight into the motivesbehind interventions. Instead, motives can best bededucedfromthetypeofNTMchosen,fromthesectorto which it is applied, from its design andimplementation, and from its impact – i.e. whetherconsumers or producers benefit and whether foreigngoodsarediscriminatedagainstornot.

For the purpose of later analysis of the trade andwelfare effects of non-tariff measures, a distinctionwill also be made between NTMs that are price,quantityor“quality”focused.Apricemeasure(suchasasubsidy)operatesbychangingrelativepriceswhileaquantity measure (such as a quota) works by directlylimitingthequantityofsomeactivity.Qualitymeasures(such as a technical barrier to trade measure or asanitary and phytosanitary measure) change somefeatures of a product or the process by which it isproduced. This categorization helps to simplify theanalysisof the tradeandwelfareeffectsofNTMsbyusingexamplestakenfromeachcategoryratherthanbyexaminingexhaustivelyallNTMs.

Anotherimportantthemeintheliterature–andinthisreport – is the transparency of non-tariff measures.Although there is no agreed definition of whatconstitutesatransparentNTM,BoxB.1discusseshowtheissuemightbeapproachedandconceptualized.

BoxB.1: Defining transparency in non-tariff measures

Criteriaforassessingthetransparencyofnon-tariffmeasuresarenotreadilyavailableinthetradeliterature,so the following analysis draws on several papers that address public policy transparency more broadly.TheseincludeGeraats(2002)whichdefinestransparencyincentralbankingandintheconductofmonetarypolicy,Wolfe(2003)whichdiscussestransparencyrequirementsfoundinWTOagreements,Collins-WilliamsandWolfe(2010)whichdevelopswhat theauthorsdescribeasan“analyticframework” for thinkingaboutWTO transparency provisions and Helble et al. (2009) which discusses the transparency of the tradingenvironmentandconcludesthatitexertsanindependentimpactontradeflows.1Noneprovideadefinitionoftransparencythatcanbetaken“off-the-shelf”andapplieddirectlytoNTMs.However,thepapersdoprovideanumberofusefulideasforapproachingthetaskofassessingthetransparencyofNTMs.

First,ataconceptuallevel,transparencycanbedefinedastheabsenceofinformationasymmetry,asituationwherepolicymakersandrelevanteconomicagentshavethesameinformation(Geraats,2002).Informationasymmetry generates uncertainty for the agents with less information. Those with access to privateinformationmaytrytomanipulatethebeliefsofothersandtherebyindirectlyaltereconomicbehaviour.Thus,economicefficiency requires informationbemadepubliclyavailable. In thecaseofnon-tariffmeasures, itmay be important to distinguish between different economic agents – the private sector and othergovernments–becauseeach is likelytobeconcernedwithdifferentaspectsof information.Governmentsarelikelytowantinformationthatallowsthemtobetterevaluatewhethertheirtradepartnersareabidingbyinternational commitments. The private sector is likely to be more concerned with information asymmetrythathampersitsabilitytotakeadvantageofcommerciallyprofitableopportunities.

Secondly,giventherangeanddiversityofnon-tariffmeasures,removinginformationasymmetrymayrequiredevotingmoreefforttosomemeasuresthanothers.


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Any discussion of the motives and impacts of non-tariff measures needs to take into account theincreasingfragmentationandoffshoringofproduction.Unfortunately, there is very little literature about howfragmentation affects government motives to employNTMs so what can be said is rather limited andconjectural.

The international fragmentation of production acrossmanypartsof theworld iswelldocumented in recentempiricalresearch.Hansonetal.(2005) illustratetheextent of US multinationals’ trade in intermediateinputsbetweenparentfirmsandtheirforeignaffiliates.Hummels et al. (2001) demonstrate the degree ofvertical specialization among ten OECD and fouremerging countries. Kimura and Ando (2005) show

the extent of international production/distributionnetworks in East Asia. Theoretical research into thefragmentationofproductionhasalsogrownintandemwith this expanding empirical work (see the recentsurveybyBaldwinandRobert-Nicoud,2007).

The economic theory of fragmentation (Jones andKierzkowski, 1990; 2000) contends that increasedmarketsizemakesitprofitabletosplituptheprocessof production and allow specialization to reduce perunitcost.3Thisdivisionoflabourcantakeplacewithina country, but if countries differ in their comparativeadvantages, greater cost savings from specializationcanbeobtainedbyoffshoringproduction.Thisprocessoffragmentationrequiresfirmstobeabletocoordinatebetween production locations and to move parts and

Regulations involvinghumanhealth, foodsafetyor theenvironmentusually requirespecializedknowledgeandwillbeintrinsicallymorecomplexthananad valoremtariff.AsCollins-WilliamsandWolfe(2010)putit,tradingpartnerscannotseewhatisgoingon“behindtheborder”withouthelp.Thismeansthatmechanismsto achieve regulatory transparency may have to be designed or structured differently than other types ofnon-tariffmeasuresgiventheirgreatercomplexity.

Thirdly,amoresystemicviewoftransparencyisneededwhichtakesintoaccountthepolicy-makingprocessasawhole.Oneofthekeydifficultiesisdistinguishingwhetheranon-tariffmeasureisputinplacebecauseofpublicpolicyconcernsoradesiretoprotectdomesticproducers.Itismucheasiertoresolvethisquestionif onehasknowledgeof thedecision-orpolicy-makingprocessasawhole, and isnot limited todrawinginferencessolelyfromtheNTM’sdesignoritsimplementation.

Fourthly, in this connection, it may be possible to take the stages of policy-making identified in Geraats(2002)andadaptthemtoatradeorNTMcontext.Thepaperdistinguishesbetweendifferentstagesofthepolicy-makingprocess–political,economic,procedural,policyandoperational–andmakesthepointthattransparencywillneedtoapplytoeachofthesestagesandthatitmaycallfordifferentrequirementsateachstage.2 In the NTM context, political transparency refers to openness about policy objectives and theimportanceassignedto them.Scientificor technical transparencymeansmakingavailable the informationused as the basis for implementing a measure, including the underlying data, expert opinion and riskassessment.Proceduraltransparencydescribesthewaypolicydecisionsaretaken,includingthescopeforpublicconsultationsandaccesstoindependentadjudication.Italsoincludesthepublicationandnotificationof measures and the establishment of enquiry points. Operational transparency concerns the design andimplementationoftheNTM.BycomparingthetransparencyofNTMsinthis“systemic”way,thewholepolicy-makingprocesscouldbetakenintoaccount,orjustoneparticularstageofit.

Fifthly,thepapersbyHelbleetal.(2009)andWolfe(2003)associatetransparencywithpredictabilityandsimplicity.Predictabilityreducesthecoststemmingfrompolicyuncertaintywhilesimplificationreducestheinformationcostsfromanoverlycomplextradingenvironmentthatmayhindereconomicagents.A“bound”import tariff is more transparent than an unbound tariff because the tariff binding creates greaterpredictability for exporters to that country. These papers suggest that predictability and simplicity areimportantdimensionsof transparencyandprovideanotherwayofcomparingthetransparencyofdifferentnon-tariffmeasures.At theoperationalstage forexample, the transparencyofanNTMmaybe judgedbywhethertradersfinditsdesignorimplementationtobesimpleandpredictable.

Finally,anunstatedassumptioninallthesepapersisthataggregatewelfareshouldincreasewithenhancedtransparency.Whilethisislikelytobethecase,noteveryonewouldnecessarilybebetteroffiftradepartnersbecome more transparent with one another. Some import-competing firms may lose out if, as a result ofgreatertransparencyofthehomecountry’snon-tariffmeasures,foreigncompetitorsexportmorebecauseofthereductioninuncertainty.AswillbeexplainedinSectionB.2,somepolicy-makersmayhavenointerestintransparencybecauseopaquenessallowsthemtorewardpoliticalbackerswithoutpayingapoliticalprice.This may explain why introducing more transparency in NTMs is likely to be a difficult undertaking, notnecessarily because of the technical challenges involved, but because there are interests that will beopposedtoit.


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componentsacrossnationalborders.Thisunderscoresthe crucial role of services, particularlytelecommunications and transport, in connectingfragmentedproductionblocks.

Production fragmentation has an impact on whygovernments use non-tariff measures and how theyinfluence trade. First, where global supply chains areprevalent,itisnotpossibletodisentanglemerchandisetradefromservicestradeandforeigndirectinvestment(FDI).ThismeansthatNTMs,whichaffectmerchandisetrade,arealsolikelytohaveanimpactonservicesandFDI flows. Conversely, services and investmentregulations are likely to impact merchandise trade aswell. Secondly, while governments’ usual motives foremploying NTMs remain – i.e. to address marketfailures, to exploit market power or to respond topolitical economy pressures – productionfragmentation makes some motives more pressingthan others. For instance, governments may seeinformation asymmetry as more critical given thatproducts are now made from parts and componentscoming from distant and multiple sources (see thecase study of food supply chains in Section B.4).Clearly, the role of NTMs in a world of increasinglyfragmented production is a fertile area for futureresearch.

(b) Howdonon-tariffmeasuresachievepolicyobjectives?

The discussion here illustrates how non-tariffmeasurescanbeusedtoachievepublicpolicyaswellas political economy objectives. Although it is not anexhaustive discussion of all possible governmentmotivesforusingNTMs,twobroaderobservationscanbemade.First,morethanoneNTMcanfrequentlybeused to pursue the same policy objective. From the

standpoint of economic efficiency, governmentsshouldusetheNTMthatmaximizesnationalwelfare–i.e. the first-best NTM (see Box B.2 which discusseshow this decision-making process is akin to cost-benefit analysis). Secondly, NTMs used to pursuelegitimate policy objectives can also be used forprotectionist purposes, underlining the difficulty ofdistinguishing “legitimate” from “protectionist”governmentmotives.This sectionbeginswithseveralcasesofmarketfailures,looksatinstancesofbeggar-thy-neighbourpolicies, touchesonequitymotivations,andendswithpoliticaleconomyexamples.

(i) Correcting market failures

Health and safety of consumers and consumer choice

AsdiscussedinBoxB.1,informationasymmetryrefersto a situation where one set of agents involved in aneconomictransactionorexchangehasaninformationaladvantageoverotherparties.Anexampleisthesellerof a used car who has better information about thestate of the car than the potential buyer (Akerlof,1970). Another example is the job seeker who hasbetter informationabouthisproductivityandaptitudefor work than the potential employer (Spence, 1973).Athirdexample isthecaseofaproducerwhosellsasub-standard product which can compromise thehealthandsafetyofunwittingconsumers.

Theexistenceofinformationasymmetrycanleadtoanumberofinefficienciesinthemarket.Intheusedcarexample, since buyers know that they are at aninformationdisadvantagetheywillonlybewillingtobida low price – with the result that owners of good-qualityusedcarsdonotbothertoputtheircarsupforsale, and the used car market ends up being

BoxB.2: Choice of NTMs and cost-benefit analysis

There are a number of methods that governments can follow in choosing non-tariff measures. Trachtman(2008)providesarelativelycomprehensivelistingofthesemethods(e.g.balancing,means-endsrationality,proportionality). Theeconomically coherentway to thinkaboutgovernment interventionand thechoiceofNTMsisinthecontextofacost-benefitanalysis(BownandTrachtman,2009).Inbroadterms,acost-benefitanalysis involvescalculating thenetgains tonationalwelfareby implementingonemeasure relative toanalternative. (Note that the Bown and Trachtman paper goes one step further than this by including thechange in the welfare of the trade partner as well because they are concerned with global and not justnationalwelfare.)

Thepresumptionisthatnon-tariffmeasureswillvaryintheirabilitytoachievethepolicygoalandthattheywillalsodifferintheircosts.Governmentswillthereforeneedtoevaluatethebenefitfromachievingagivenpolicyobjective (e.g. thewelfaregain from reducingpollution), thecontribution that aparticularNTMcanmake to achieving the policy goal, and the cost incurred in applying the NTM. The outcome of the cost-benefit analysis determines not only whether government intervention is called for in the first place (thebenefitmustexceedthecost)butalsoprovidesarankingoftheNTMs.Inparticular,themethodshouldbeabletoidentifythefirst-bestmeasure–thatwhichproducesthelargestdifferentialinbenefitovercost.Itislikely thatacost-benefitanalysiswouldbemore information-intensiveandtechnicallychallengingtoapplythansomeofthesimplermethodsmentionedabove.Benefitsandcostsneedtobequantifiedandmonetaryvalues assigned to them. Informational and resource constraints may explain, at least partly, why somegovernmentsdonotmakemoreextensiveuseofcost-benefitanalysisindecision-makingonNTMs.


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overwhelmedby low-qualitycars, i.e. there isadverseselection. In the job-seeking example, informationasymmetry may lead the job seeker to expendresources to “signal” his productivity to the potentialemployer (e.g. attend a more expensive school) eventhough that decision will not necessarily increase hisproductivity. In thecaseof the sub-standardproduct,saleoftheproductcancauseinjuriesorevenfatalities.Astheseexamplesshow,marketswillnotnecessarilydeliver the most efficient outcomes, and this failureprovidesarationaleforpublicaction.Thisexplains,forexample,whyawiderangeofconsumergoods–food,drugs,vehicles,electricalappliances,safetyequipment– facemany typesof requirements, fromdesign (e.g.toys) to ingredients (e.g.chemicals) to theprocessofmanufactureorproduction(e.g.pasteurizationofmilk)and to performance (e.g. helmets) (World TradeOrganization (WTO), 2005a). What these measuresare designed to do is to weed out those products,whetherdomesticorforeign,thatwillcompromisethehealthorsafetyofconsumers.

Informationasymmetryisalsorelevanttointernationaltrade. Suppose that countries differ in the safety orqualityofthegoodsthattheyproduce,withthehomecountry specializing in high-quality products and theforeign country specializing in low-quality ones.Imaginethatconsumersinbothcountriesdifferintheirpreference for quality, with some willing to pay morefor high-quality products, and others unwilling to paymore. In this scenario, consumers are also unable totell the difference between high-quality and low-quality products because these goods are notdistinguished by origin. Under these circumstances,Bond(1984)shows that thecountrywithhigh-qualityproducts may lose if it trades with the countryproducing low-quality products. This arises becausetrade reduces theaveragequalityofproducts sold inthe market of the high-quality producing country,whichspillsover toaffect theexpectedwelfareofallconsumersintheimportingcountry.

Thefirst-bestpolicyislabellingtoallowconsumerstodistinguish between home (high-quality) and foreign(low-quality) products.4 Consumers with a taste forhigh-quality goods will purchase home goods andconsumers satisfied with low-quality goods willpurchaseforeigngoods,resultinginatwo-waytradeinequilibrium.Eachproductwill sell for the “right”price– high-quality goods at higher prices and low-qualitygoods at lower prices. The ability to distinguishbetween home and foreign products leaves bothcountries better off as a result of trade because itexpandsthevarietyofproductsavailabletoconsumers,andleadstoabettermatchbetweenconsumertastesandproducts.AsimilarresultisestablishedinPienaar(2005) where requiring foreign goods to be labelledaccordingtotheircountryoforigingivestheconsumerall the necessary information, and unambiguouslyimprovesthewelfareoftheimportingcountry.

Under certain circumstances, export subsidies canalso help reduce or eliminate information asymmetry(Bagwell and Staiger, 1989). Consumers in theimportingcountrydifferintheirtasteforquality.Someconsumers like high-quality goods and are willing topayahigherpriceforthem;otherswouldratherpayalowerpriceforthelow-qualitygood.Unfortunately,thegroupsareunabletotellthedifferencebetweenhigh-quality and low-quality products until they make thepurchase, i.e. these are “experience goods” (Nelson,1970).5

Producers in the exporting country, who make thehigh-qualityproduct,incurahighercostofproductionthanproducersintheimportingcountry,whomakethelow-quality good. If both goods circulate in theimportingcountry,consumerswillbeunabletotellthedifferenceandthepricewillreflecttheaveragequalityofthesegoods.Atsuchaprice,high-qualityproducerswill notbeable toexport theirgoodssince itwill notcovertheircostofproduction.6Ifthehigh-qualityfirmsare aided by an export subsidy, they can sell theirgoods at the average price and still earn a profit.Having been introduced to the high-quality product,consumers preferring high-quality goods will be abletomakerepeatpurchases,payingapricethatreflectsthe quality of the good. At this later stage, the high-quality producer receivesaprice that covershis costof production, and the government can withdraw theexportsubsidies.Consumerssatisfiedwithlow-qualitygoods benefit as well since they can now identifythesegoodsandpayalowerpriceforthem.7

Pollution and the environment

Another type of market failure that can justifygovernment action is a negative externality such aspollution.Negativeexternalitiesarisewhenanagent’seconomic activity generates costs to others that theagent does not fully absorb. Hence, the scale of hisactivityexceedsthesociallyoptimalamount.Inrecentdecades, the public and policy-makers have becomeincreasinglyawareoftheenvironmentalconsequencesof certain economic activities. Much of the economicliterature focuses on the use of taxes to correctnegative externalities – the so-called Pigouvian tax.Nevertheless, many governments have chosen topursue environmental objectives using non-pricemeasures, such as performance standards, emissionquotas,andmandatedtechnologies.8

One drawback of trying to reduce pollution throughgovernment-mandated technologies is that theincentivetofindlesscostlywaystoachievethesameenvironmental objective is removed. Nevertheless,governments may prefer these measures fordistributional or competitive reasons, because ofuncertaintyaboutthecostsandbenefitsofabatement,or to avoid the cost of monitoring and enforcement(Bovenberg and Goulder, 2002). Regardingdistributional or competitiveness concerns, for


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example, governments may be sensitive to the factthatapollutiontaxrequiresfirmstopayforeachunitof emission while an emission quota does not. Whileboth instruments might lead the firm to curtailemissions by the same amount, the tax saddles thefirm with an additional liability that it does not facewithaquota. Ifpolicy-makersareuncertainaboutthetruecostofmitigatingenvironmentaldamage,butarecertain that passing beyond a threshold level ofenvironmental damage would be catastrophic,quantity-based measures will be preferred to price-basedmeasures.9

Some of the more complicated and contentiousenvironmental issues involve cross-borderexternalities. One type of cross-border externalityinvolvescountrieswhoseeconomicactivitypollutesorreduces a common resource, damaging all countries.A notable example of this is global warming (see thediscussion in Section B.4). Another type of cross-border externality is where the activity occurs in onejurisdiction,buttheadverseimpactsarepartlyorfullyfeltinanotherjurisdiction.

Cross-border externalities are often compounded bydifferencesincountries’ incomelevels,or institutionaland environmental capacities. Since adoptingenvironment-friendlyproductionmethodsoftenentailshighercosts, thiscanleadtodisagreementsbetweencountries about the distribution of the costs andbenefits of correcting the externality. A number ofGATT/WTO disputes – tuna-dolphin10 and shrimp-turtle11–appeartofallwithinthiscategory.Whilesuchdifferencesmake itdifficult forcountries to reachanagreement, markets could play a role in mitigating oreliminating a cross-border externality. Assuming thatcredible informationabout theenvironmentalcostsofproducingagoodwereavailable,consumersmightbewilling topaymore for theproduct if itwasproducedwithout causing environmental harm. Higher priceswouldprovidean incentive forproducers toswitch tomore environment-friendly methods, thereby reducingpressureontheenvironment.

However, products made by environmentally-friendlyprocesses may not be distinguishable from thosemadebylessenvironmentally-friendlyprocesses.Tunacaught by fishing methods which leave dolphinsunharmedtastesthesameastunacaughtbymethodslethal to dolphins. This introduces a second marketfailure–informationasymmetry(seediscussionabove)–totheoriginalproblemofacross-borderexternality.Beaulieu and Gaisford (2002) analyse the effects ofattemptingtoaddresstheseproblemsthroughvariousnon-tariffmeasures–fromoutrightbanstolabelling.

Given the existence of market failures, open trade isnotnecessarilyoptimal.Dependingonthestrengthofconsumer preferences for the environment-friendlygood, an outright ban of imports from countries thatarethesourceoftheenvironmentalexternalitymaybe

evenbetterthanopentrade.Therationaleisthatabanimproves consumer confidence in the products sincetheyknowthatonlyenvironment-friendlygoodscanbesold.Thisleadstoanincreaseindemand,i.e.ashiftinthe demand curve, and to greater consumer surplus.For the importingcountry, thedrawbackof an importban is that some consumers may be indifferent toenvironment-friendly and environment-unfriendlyproducts, and unwilling to pay a premium for theformer.Thebanadverselyaffects themsince it limitstheir choice to the expensive, environment-friendlygood.

While there are good reasons to question theadvantagesofimportbans,therearenotableexamplesof products whose trade the international communityhas banned for environmental reasons, includingendangeredspecies(bannedundertheConventiononInternational Trade in Endangered Species of WildFauna and Flora) and ozone-depleting substances(banned under the Montreal Protocol).12 Of course,consumer confidence can also be enhanced by alabellingschemethatcorrectlydistinguishesbetweengoodsmadewith littleornoharmto theenvironmentandthosethatimposeanenvironmentalcost.Effectivelabellingwouldbesuperior toabansince it improvesconsumer confidence without artificially restrictingimports.Consumersunwillingtopayapremiumfortheenvironment-friendly good are still able to purchasetheir preferred (low-price) environmentally-unfriendlygood.

Infant industry protection

Insomecases,anagent’seconomicactivitygeneratesbenefits for others that the agent does not fullycapture. These “positive externalities” represent animportantclassofmarketfailurethatcanjustifypublicinterventionsincethescaleofactivityislessthanthesociallyoptimalamount.Oneexampleisinfantindustryprotection.

Suppose the conditions for supporting an infantindustry exist.13 The home country has a high-costindustry that finds it difficult to compete with foreigngoods,buttherearedynamiclearningeffectsthatareexternal tothefirmandbeneficial tothecountry.Theexperience that domestic firms accumulate byproducing the good will reduce their costs over time.Furthermore, these learning effects cannot becontained within the firm but are also of benefit tootherfirmsintheindustry.Thisspill-overeffectmeansthatafirmdoesnotfullyinternalizethegainsfromitslearning,andsotheprospectoflaterprofitmaynotbesufficiently attractive to warrant absorbing lossesduring the initial learning period. This situationprovides the necessary justification for extendingtemporarygovernmentsupport to the industry.Underthese conditions, the first-best solution is forgovernmentstouseaproductionsubsidyratherthanatariff to assist the infant industry (Bhagwati and


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Ramaswami, 1963). It directly targets the source ofthe market failure by supporting learning in thedomesticindustrywithoutpenalizingconsumerswithahigherpricefortheproduct,theprincipaldrawbackofusingatariff.

Ideally, the support extended to the infant industryshould decline as learning takes place. However,information about the pace of learning may not beknown with certainty by the policy-maker. Applying afixedsubsidyratemeansthattheprotectionextendedtotheinfantindustrywillbebelowtheoptimumlevelatthestartoftheleaningperiodandtoohighattheend.Under these circumstances, Melitz (2005) proposesusing a quota instead of a subsidy, noting that it willallow the level of infant-industry protection to adjustautomatically as the industry’s costs decline.14 Overtime, the quota will become less distortive as thedomesticindustry’scompetitivenessimproves.

Network effects/externalities

Certain products or services are more valuable to abuyerwhenmoreconsumersusethesameproductorservice. For example, the greater the number ofsubscribers toa telephonesystem, themorevaluablethatnetworkwillbetopotentialsubscribers.Likewise,Facebook, Twitter or LinkedIn accounts are morevaluablethemore“friends”,“followers”,orprofessionalcontactsaredrawnintothesesocialnetworkingsites.Such products or services are subject to what havebeen called “network effects/externalities” (Katz andShapiro,1985).15

Potentially there is a market failure associated withthesenetworks.Anindividualdecidestojoinanetworkbecause of the benefits he or she will obtain, notbecause of the benefits existing members will derivefrom him or her joining. As a result, the size of thenetwork is smaller than the socially desirable size. Ifthere are competing networks, each one of which isowned by a different firm, one way the problem ofnetwork size can be resolved is by making themcompatiblesothatclientsofonenetworkareconnectedto the clients of all other networks (Katz and Shapiro,1986). Given that each user’s utility increases as thesize of the network expands, compatibility amongnetworksincreasessocialwelfare.

Compatibility can be achieved through adoption ofcommonstandards.Thekeyquestioniswhetherfirmshave enough incentives to develop compatibilitystandards on their own without governmentintervention.Onereasontobescepticalofgovernmentinterventionisthatgovernmentsareunlikelytohaveasignificant informational advantage relative to privateparties when emerging technologies are concerned,andsocannotbepresumedtoknowwhichstandardistheoptimalone(KatzandShapiro,1994).Ontheotherhand, because of the network effects, a product’scompatibilityincreasesitsvaluetoconsumerswhowill

thenbewillingtopaymoreforitthanforacompetingbutincompatibleproduct.Theremayalsobeamarket-mediated effect, as when a complementary good(spare parts, servicing, software) becomes cheaperandmorereadilyavailablethegreaterthecompatibilityof markets (Farrell and Saloner, 1985). Based onevidence from the United States, these incentivesappear tobesufficiently large to induceanumberofprivate institutions–from lumbercompanies toLocalArea Networks – to get involved in standardizationactivity (Farrell andSaloner,1988).BoxB.3providesotherexamplesofthedevelopmentanduseofprivatestandardsbyindustrygroups.

Monopoly power

Imperfectcompetition representsanother instanceofmarket failure which occasions various forms ofgovernment intervention. Typically though, suchmeasures are directed at the behaviour of firms andnot at the products or services they produce.Competition rules will prevent a firm from colludingwith others, limit its merger and acquisition activity,andguardagainstabuseofadominantposition.

A specific example illustrates the role of non-tariffmeasures in addressing this particularmarket failure.

A small country is only able to source a specificproduct from a foreign monopolist because it is notproduced domestically. The importing government’sobjectiveistoexpandimportsandreducetheartificialscarcityresultingfromtheforeignmonopolist’scontrolof the domestic market. Instead of NTMs being usedtorestricttrade, inthiscaseNTMswillbeusedtotryto expand trade and/or reduce the price charged bythemonopolist.Theoptimalpolicyisapriceceilingonthe imported product set equal to the monopolist’smarginal cost of production (Helpman and Krugman,1989). In other words, the foreign monopolist will beallowed to sell to thehomecountryonly if it caps itsprice at the ceiling established by the importingcountry.(Ifthemonopolisthadbeenadomesticfirm,acompetition authority would have adopted a similarpolicy of marginal-cost pricing.) More elaborateexamples are discussed in Helpman and Krugman(1989)involvingtheuseofotherNTMs,suchasimportsubsidies and minimum import volume requirements,to induce foreign firms with market power to supplymoretotheimportingcountry.

(ii) Beggar-thy-neighbour policies

Acountrywithmarketpowerininternationaltradecanincrease national welfare by improving its terms oftrade (the ratio of export to import prices). If firmscompeting in international tradehavemarketpower–sothatonefirm’sactionshaveaneffectontheprofitsof its rival(s) – then government actions can shiftprofitsfromtheforeignfirmtothehomefirm,resultingin a gain in national welfare. In both instances, non-tariff measures can be used by the home country to


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pocket terms-of-tradeandprofit-shiftinggains.Thesewelfare gains will come at the expense of othercountries – i.e. these are beggar-thy-neighbourpolicies. Unlike the motives discussed before, wherethetradeeffectsmaybeunintendedconsequencesofthe policy, in this instance the trade effects are theintended aim of the policy. They are the means bywhich the country appropriates gains at the expenseofitspartner.

Manipulating the terms of trade with NTMs

Muchof the literatureonhow the termsof tradecanbe shiftedby trade policy has focused on the role ofimport tariffs (Johnson, 1954, Mayer, 1981; Bagwelland Staiger, 1999). An import tariff reduces thedemand for imports, so for a large country this willhave the effect of reducing the world price of itsimports relative to the price for its exports. However,

an export tax can have a similar effect on a largecountry’s termsof tradesincethereducedavailabilityof a country’s export good in world markets shouldleadtoariseinitspricerelativetotheimportproduct.16It turns out that an export subsidy can also shift theterms of trade in favour of the exporting countryprovided that it has another good that it exports andtherearedifferencesinconsumptionpatternsbetweenthe importing and exporting countries (Feenstra,1986).17

If a country is not constrained in its use of thesemeasures, such as by international agreements, theywouldbewidelyusedtomanipulatethetermsoftrade.Regulatory instruments, such as technical barriers totrade (TBT) and sanitary and phytosanitary (SPS)measures, would be used to correct market failuresand would be set at their socially optimal levels(BagwellandStaiger,2001;StaigerandSykes,2011).

BoxB.3: Network effects/externalities and private standards

Where network effects/externalities exist, private standard-setting is a common outcome. Indeed,compatibility and integration are paramount to exploit such externalities. The following two examplesillustrate the huge incentive to develop and implement private standards in industries characterized bynetworkexternalities.

Oneexampleise-business.TheInternethasbecomeanincreasinglyimportantcommercialmarketplaceinrecent decades, thanks tomass Internet connectivity, and the expansion of web browsers and interactivewebsites(PantandRavichandran,2001).

Itisreasonabletoassumethatthevalueofane-businessinformationsystemincreaseswiththenumberofpeople, IT products, and networks interacting through it – and in general, systems of e-business thatconstructglobal communitiesof customers, suppliers andbusinesspartners achieveahigher value (Pantand Ravichandran, 2001). However, in order to function and to provide customers with timely informationaboutproducts,e-businesssystemsneedtobeintegratedwithcompanies’ internalsystemsandsuppliers’informationsystems.Suchintegrationcanbeeffectivelyachievedthroughstandardizationactivities(Chen,2003).E-businessstandardsallowaspecificationofbusinessobjects,dataandprocessesinvolvedinweb-based commerce. Therefore, their adoption represents a step towards compatibility and inter-operabilityamongcompanies,generatinganenhancedvalueforthefirmsinvolvedandtheindustryasawhole(Zhaoetal.,2007).

Electroniccardpayments(ElectronicFundsTransferatPointofSaleor“EFTPOS”)provideasecondexampleoftheincentivetodevelopstandardsincontextscharacterizedbynetworkexternalities(Guibourg,2001).Inthelastdecades,theEFTPOSmarkethasdevelopedinmanyindustrializedcountries,evolvingfrompaper-based instruments to debit and credit card payments. Usually, these payments are used for face-to-facetransactions,andrepresentmoreefficientalternativestocashastheyallowareduction inbothcostsandrisks related to such payments. Network externalities are evident in this context. The usefulness to thecardholderincreasesastheacceptanceofthecardasameansofpaymentgrowsbroaderandthenumberofcompatibleterminalsincreases.

Inorderforelectronicpaymentstotakeplace,andfornetworkexternalitiestocometofullrealization,someconditions must apply. Complementarities between users need to be in place. Indeed, the utility of anindividualinanEFTPOSmarketiszeroifnoretaileracceptselectronicpayments.However,thepresenceofcomplementaritiesisnotawhollysufficientcondition.Fornetworkexternalitiestoplayarole,compatibilityamongproductsisalsocrucial.Thefinaltransferisbasedonanexchangeofinformationtoauthenticateandauthorizethepayment,andretailersneedtoownaterminalthatallowscommunicationwiththecustomer’sbankwhichinturnauthorizesthetransfer.Thisrequiresatelecommunicationsinfrastructurethatconnectstheretailer’sterminalwithboththeretailer’sandthecustomer’sbank.Inter-operabilityisthereforeparamounttoexploit networkexternalities, and it canbeachieved throughcommon rules, operational standardsandformats(Guibourg,2001).


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However, this result may not necessarily hold in aworld where production is increasingly offshored andinternationaltradeflowsaredominatedbyintermediateinputs,manyofwhichappear tobehighlyspecializedto their intendeduse (Staiger,2012).SectionB.2willprovideamoredetaileddiscussionofthisresult.

Profit-shifting non-tariff measures

Non-tariff measures can also be used to shift profitsfrom the foreign to the home country. This is mostrelevant in imperfectly competitive markets wherefirms have market power, and can effectively useNTMs, suchas subsidies, export taxesandTBT/SPSmeasures,totakemarketshareandprofitsawayfromforeignrivals.

Suppose that two firms, the home and foreign firm,compete in selling to a third market. Competitionbetween them can take many forms but for thepurpose of this discussion two types of competitionareexamined–throughtheirchoiceofoutput(Cournotcompetition)orthroughtheirchoiceofprice(Bertrandcompetition).

Under Cournot competition, Brander and Spencer(1985)demonstratethatagovernmentcanuseexportsubsidiestohelpthehomefirmexpandoutput,therebyforcing its foreign rival to contract production andconcedemarket share. Thesubsidyhas theeffectofcommitting the domestic firm to a more aggressivestrategy which in turn induces the foreign firm toproduce less.18 From the point of view of the homecountry, even though the subsidy payment is just atransfer from the government to the home firm, theprofit-shiftingeffectresultsinthefirm’sprofitrisingbymore than the amount of the subsidy, creating a netgaintothehomecountry.Notethattheexportsubsidycreatesaterms-of-tradelossforthedomesticcountry,butthisismorethanmadeupforbytheprofit-shiftingeffectofthepolicy(Brander,1995).

Iffirmscompeteinprices,EatonandGrossman(1986)show that the optimal policy will be an export taxrather than an export subsidy. Under Bertrandcompetition, both firms would like to charge a higherprice but if only one firm does so it will face lowerexportdemand.However,apricehikewouldnotprovedetrimental to thehomefirm if its rival followswithapriceincreaseof itsown.Bothfirmswillearnpositiveprofits as a result. By imposing an export tax on itsfirm,thehomegovernmentineffectcommitsthehomefirmtochargeahigherpriceforanygivenpricechosenby the rival. Thispersuades the foreignfirm to followsuit – match the home firm’s higher price – whichbenefitsitandthehomefirmaswell.19

Domestic subsidies in the form of research anddevelopment(R&D)subsidiescanalsobeusedtoshiftprofitsfromforeignrivalstodomesticfirms.Thispolicyturns out to be optimal regardless of whether firms

engageinBertrandorCournotcompetition.Basically,the R&D subsidy provides an incentive to the homefirm to increase its R&D investments, therebygenerating cost-reducing innovation.20 If the foreignfirmisnotsubsidizedinturnbyitsgovernment,onlyasmall level of R&D spending will be optimal withunfavourableconsequences for itsability togeneratecost-reducing innovation. The home government’ssubsidy forcesacontraction in theoptimalamountofR&Dspendingbytherivalfirm,therebyshiftingprofitsfromtheforeignfirmtothehomefirm.

Although such subsidies dominate discussion in theprofit-shifting literature, other non-tariff measures,such as TBT/SPS measures, can play a similar role(Fischer and Serra, 2000). Consider a situation inwhich home and foreign firms are competing in thehome market. The home government can impose anewTBT/SPSmeasurewhichraisesbothfirms’costs.This measure also burdens consumers, as both firmstrytopassontheadditionalcostintheformofhigherprices.Despite this, thehomegovernmentmayfind itworthwhile to impose the measure if, as aconsequence, the foreign firm is forced to exit thehome market, leaving the home firm free to earnmonopoly profits, and if the resulting gains outweighthe loss in consumer surplus. The reason that theTBT/SPSmeasureweighsmoreheavilyontheforeignfirm is because it must re-organize production toconform with two different sets of regulations – oneforproductssoldinthehomemarket,andtheotherforproductsdestinedfortheforeignmarket.

(iii) Equity

Governments are not only concerned with increasingnational incomebutalsowithdistributingincomemoreequitably. This type of motive could be hard todistinguishfromtheprotectionforsalemotivediscussedbelow. First-best policies for income redistribution arenottariffsornon-tariffmeasures.Inadvancedcountries,thefiscalsystem–bothonthetaxandexpenditureside–isusedtoalterthedistributionofincome.Particularlyin least-developed countries (LDCs), where fiscalsystemsarelessdevelopedandsocialsafetynetsoftennon-existent, governments appear to use trade policyinstrumentsandNTMs inparticular toachieve incomedistributiongoals.21

Kalenga (2012) provides evidence that import andexportbansandquotarestrictionsoncommoditytradecontinuetomakeupasignificantpartofNTMsinsub-Saharan Africa. The use of export restrictions by anumber of emerging economies when commoditypricesspikedin2008wasmotivatedinparttoalleviatethe pressure of high food prices on the mostdisadvantaged (Organisation for Economic Co-operationandDevelopment (OECD),2009a).SectionB.3andBoxB.7provideotherexamplesofmeasuresin the services sector whose underlying motive isequityandincomeredistribution.


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(iv) Political economy (protection for sale)

Allthemotivationsdiscussedaboveinvolveincreasingsocialwelfarebyusingnon-tariffmeasurestocorrectmarketfailuresortotakeadvantageofacountry’sorafirm’s international market power. However, politicalleadersmayhaveothermotivationsbeyondthewelfareofcitizens.Forexample,theymaydependonfinancialcontributionsfromspecialinterestgroupswhowantasay in tradepolicy (GrossmanandHelpman,1994).22

In these cases, trade protection is “for sale” to thehighest bidder. If policies are being influenced byspecialinterestgroups,itshouldbeapparentfromthestructure of the protection being offered andthenatureofthelobbyingbehindit.This isdiscussedingreaterdetailinBoxB.4.

The original study by Grossman and Helpman onlyconsidered the use of trade taxes – tariffs, importsubsidies, export taxes and export subsidies – by“captive”policy-makersunder the influenceofspecial-interest groups. The subsequent protection for saleliteratureextendstheanalysistocoverothernon-tariffmeasures. Maggi and Rodríguez-Clare (2000), forinstance, consider a situation where importers makecontributionstothepoliticalincumbent.Theinterestsofimportersareopposedtothoseofdomesticproducerswho benefit from import restrictions. However, ifprotection is to be given anyway, importers will preferthatittakestheformofimportquotasratherthantariffsbecausetheywillbeabletoobtainthequotarents(i.e.theincomegeneratedbyimportswithinthequotalimit).Rather than being motivated by some public policy

objective,theuseofquotassimplyreflectstheinfluenceof importers’ interests on policy-makers. Maggi andRodríguez-Clare point out that political contributionsmay be made by foreign exporters as well. This couldexplain the use of voluntary export restraints (VERs)sincethequotarentsaccruetoforeignexportersratherthanhome-countryimporters.

Politicianscaptive to special interestsmight alsouseTBT/SPS measures or customs procedures as ameans of transferring profits to their benefactors(Abel-Koch,2010).Oneofthe“stylized”findingsfromthe“newnew”tradetheory(Melitz,2003;Helpmanetal., 2004; Chaney, 2008) is that only the mostproductivefirms inacountryareengaged inexports.Thisstylizedfactisexplainedbyfirms’widelydifferingproductivity(“firmheterogeneity”)andtheexistenceoffixed costs to exporting. These are costs that areincurredbyfirmsonlyonceinordertoaccessaforeignmarket,suchasmarket informationcosts, thecostofsetting up a distribution system, or the cost ofcomplyingwithforeigntechnicalregulations.Thefixedcostofexportingturnsouttobecriticalindeterminingwhichfirmswillbeabletoaccessforeignmarketsandwhichfirmswillfailtodoso.

SupposethattheimportingcountryrequiresallforeigngoodstocomplywithitsnationalTBT/SPSmeasures.Since this increases the fixed cost of exporting, lessproductivefirmscannotgenerateenoughrevenuestocover thehigher fixedcostsof accessing the foreignmarketandthereforeexit it.Thisreducescompetitionin the importing country and increases the market

BoxB.4: Is it possible to identify disguised protectionism in NTMs?

Asnotedat thestartof thissection,non-tariffmeasures thatareused toachievepublicpolicygoalsmayalsobeusedtopursueillegitimateends.ThismakesitdifficulttoascertainwhatmotivatesagovernmenttoapplyaparticularNTM.Withoutunderestimatingthechallengethisposes,theeconomicliteratureidentifiesanumberofbenchmarksthatcouldbeusedtoanswerthequestion.Tocomplementthisanalysis,asetoflegaltoolstoidentifydisguisedprotectionismbasedonWTOjurisprudenceisdiscussedinSectionE.3.

The “protection for sale” literature predicts that organized or lobbying sectors would be favoured. Withinorganized groups, the import-competing members typically obtain protection while exporting membersreceiveanexportsubsidy.GrossmanandHelpmanalsopredict thatunorganizedsectorswillbepenalized,with import-competingproducers facingan importsubsidyandexportingsectorspenalizedwithanexporttax.23Sectorswithlowelasticitiesofimportdemand(exportsupply)willenjoyhigherlevelsofprotectionorsupport. The rationale for this is that thegovernmentwill prefer to raise contributions from thosesectorswhereincreasedprotectioncreatestheleastlossestosociety.

Finally, sectorswhere import penetration is low will enjoy greater protection.24This is because in sectorswithlargedomesticoutput,producershavemuchtogainfromanincreaseinthedomesticprice,whiletheeconomy has relatively little to lose from protection when the volume of imports is low. Using US data, anumberofempiricalpapershavebeenabletoconfirmthattheobservedpatternofprotectionandlobbyingisconsistentwiththepredictionsoftheprotectionforsalemodel(GoldbergandMaggi,1999;GawandeandBandyopadhyay,2000;Facchinietal.,2005;Bombardini,2008).

The lack of transparency of a measure may also be a tell-tale sign of lurking protectionism. Politicalincumbentshaveaninterestincamouflagingthetransferofincometospecialinterests.Thelesstransparentthemeasures,thegreaterleewayincumbentshavetoservetheirprincipals.


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share and profits of domestic firms. A governmentcaptive to domestic producers can use compliancewith TBT/SPS measures as a way of increasing theprofitsoftheseproducers.

In theprotectionforsale literature, it isassumedthatnon-tariff measures are more widely used nowbecause trade agreements and multilateral rulesincreasinglyconstraintheuseoftariffs.However,thismay not be the only reason why NTMs are used bypolitical incumbents. As is explained in Section B.2,political leaders might prefer to use TBT/SPSmeasuresbecause theirgreateropaqueness reducestheelectoralriskposedbytheiruse(CoateandMorris,1995;Kono,2006;Sturm,2006).

(c) WhatarethetradeandwelfareeffectsofNTMs?

The previous discussion established that, apart frompolitical economy motives, governments use non-tariffmeasurestoincreasenationalwelfare.Thismeansthattrade and welfare effects need not move in the samedirection.TheapplicationofanNTMmayreducetradeand yet increase the welfare of the NTM-applyingcountry.Theeffectslargelydependonthenatureofthemarketfailure,thetypeofNTMused,andothermarket-specificcircumstances.Nevertheless,thetradeeffectsofthespecificmeasuresarehighlyrelevant.

Thetradeeffectsofnon-tariffmeasurescanbelargein a world of deepening economic integration andshaped by complex cross-border production in theform of global supply chains. Using NTMs to pursuebeggar-thy-neighbour policies – to manipulate acountry’stermsoftradeortostealprofitsfromforeignenterprises – is a game that can be played by everycountry. A government tempted to employ suchmeasures, but concerned about national welfare, willneed toworryabout thepossibilityof similarbeggar-thy-neighbour NTMs being used against it by tradepartners.Themagnitudeofthepossiblewelfarelossesfrom others’ opportunistic actions is linked with thesizeof the tradeeffects.This issue,and the role thatinternational cooperation can play in addressing it, isthefocusofSectionE.

Even in the absence of explicit beggar-thy-neighbourpolicies, and where non-tariff measures are onlytargetedatgenuinemarketfailures,themeasuresmaybe opaque, poorly designed, or badly implemented,thus increasing uncertainty and trade costs. Anycountry – whether the home country or its tradingpartner–canbeguiltyofthesefailings,whichwillendupreducingtradeandthepotentialwelfaregainsthattheNTMswere intended toachieve in thefirstplace.One area that illustrates the potential problem isconformityassessment.25

Conformity assessment procedures are technicalprocedures—suchastesting,verification,inspection

andcertification—whichconfirm thatproducts fulfilthe requirements laid down in regulations andstandards. Generally, exporters bear the cost, if any,oftheseprocedures.Ideally,attestationofconformityshould be carried out only once in the most cost-effective manner and, subsequently, be recognizedeverywhere. However, in many instances, authoritiesin the importing country are not willing to rely onforeign manufacturers’ own declarations orreports/certificationsbythirdpartiesthattherequiredspecificationshavebeenmet.WhatevertheTBT/SPSmeasure may be, assurance of compliance will besoughtfromdomesticbodiesintheimportingcountry.This will unnecessarily raise trade costs if foreignconformity assessment bodies already possess thecompetence to assure them that products meet therequirements of the importing country. See SectionC.2 and Section D.2 for evidence about conformityassessmentproceduresandestimatesofthecosts.

Sinceitisimpossibletoanalysethetradeandwelfareeffect of every non-tariff measure, the followingsectionfocusesonexamplesregardingquantity,priceandqualitymeasures.

(i) Quantity measures

Theclassicexampleofaquantitative restriction isanimport quota which fixes trade flows at a given level.Sincethetradeimpactofaquotaisunambiguous,theinteresting issue is its effects on other economicvariables. Section B.1(b) highlighted instances whenan import quota was an instrument used to transferincome (quota rent) to special interest groups andwhen a government might use an import quota toachieveapublicpolicygoal.

If the level of infant industry protection needs todecline over time, and policy-makers lack reliableinformationabout the requiredpolicy setting, aquotamayservebetter thanasubsidy (Melitz,2005). If thesafety of foreign products cannot be assured andthere isnowayforconsumerstodistinguishbetweensafe and unsafe products, an import ban might bewarranted. However, a careful consideration of theselatter instances suggests that extenuatingcircumstances in the form of high information costswere required to justify the use of import quotas. Inalmost all other circumstances, other non-tariffmeasureswouldbepreferabletoquotas.Forexample,in the case of infant industry protection, a subsidy issuperior to an import quota. Likewise, TBT/SPSmeasuresorlabellingschemesworkbetterthanabanin addressing all but the most extreme forms ofinformation asymmetry. The following discussionaddresses other issues related to the effects of aquota.

In principle, it is possible to calculate an ad valoremtariffratethat, ifappliedinplaceofaquota,willhavethesametradeeffect.Eventhoughimportlevelswould


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be identical, there are critical differences betweentariffs and quotas that have an important bearing onwelfare. If demand expands because of income orpopulation growth, for example, imports will growunder a tariff but not under a quota. A quota alsogenerates income (quota rent) for importers whereastariffsgenerate revenues forgovernment. Inaddition,the existence of quota rent can lead to an unhealthystruggleamonginterestgroupstoacquiretheserents,abehaviourknownas “rent-seeking” (Krueger,1974),whichcaneitherbelegalorillegal(e.g.takingtheformof bribery or corruption of officials). Since competinggroups expend resources to capture the quota rent,rent-seeking adds to the welfare losses orinefficienciesunderquantitativerestrictionthatdonotexistundertariffs.

Ifdomesticproducershavemarketpower,aquotaalsogives them greater scope to restrict imports than atariff(Bhagwati,1968).Whiletotalimportsremainthesameasunderatariff,domesticproducersareabletochargeconsumersapricegreaterthantheworldpriceplus the tariff equivalent of the quota. This effect isdemonstratedmostclearly inthecaseofamonopoly.Underatariff,thedomesticmonopolistcannotchargeanypriceabovetheworldpriceplusthetariffwithoutimports flooding in. However, a quota insulates thedomesticmarketfromtradeonceagiventhresholdofimports isreached,allowingthemonopolisttochargethe monopoly price because there is no offsettinginflowofimports.

Thecasewheretheimport-competingindustryismadeup of an oligopoly (i.e. a market dominated by a smallnumber of sellers) is more complicated. If theoligopolistscompetewithoneanother,itwillstillbetruethataquotagivesthedomesticfirmsgreaterscopetoexercise market power. The domestic price ends upbeingabovetheworldpriceplusthetariffequivalentofthe quota but less than the monopoly price (Helpmanand Krugman, 1989).26 If the oligopolists collude, itturns out paradoxically that the cartel may charge alowerpriceunderaquotathanunderatariff(Rotembergand Saloner, 1988) because cartels are subject todefectionbymembers.Thehigherthepricechargedbythe cartel, the greater the temptation for any singlemembertocheatbysellingmorethanitsallottedshareof total output. Thisopportunisticbehaviour is rationalfor a cartel member even if it risks breaking up thecartel, so long as the additional profit made fromcheating is greater than the present value of thereduction in future profits resulting from the cartel’scollapse.27Given thepossibilityofabreakdownof thecartel and the lower profits it implies, cartel membersmaychoosetochargealowerpricewhichisjustenoughtopreventdefections.

(ii) Price measures

InSectionB.1(b),severalexamplesofpricemeasures(a domestic tax, a production subsidy, and an export

subsidy) were examined, as well as their use inaddressing market failures (such as externalities andinformationasymmetry)and inshifting termsof tradeandprofits.

Sinceexternalities involvea failure to incorporate thebenefitorharmcausedbyacertaineconomicactivityinto market prices, price measures should be thepreferred tool to address this type of market failure.Such measures can result in either an expansion orcontractionoftradeflows.Ifthereisalegitimatecaseforinfantindustryprotection,forexample,aproductionsubsidy reduces imports but also improves economicefficiencybygivingdomesticfirmstimetoaccumulateexperience, whose learning in turn benefits theindustryasawhole.Ineffect,thereis“toomuch”tradesince the market fails to price in domestic firms’capacitytolearnandbenefitotherfirmsintheindustry.A different pattern will result if a Pigouvian tax isappliedtocorrectpollutionathomeandthedomesticindustry is import-competing. Domestic outputexceeds the socially optimal amount and “too little”trade is being generated because the market fails toprice in the environmental harm created by domesticproducers. In this case, the Pigouvian tax results inboth the imports and the welfare of the importingcountryrising.

Byitsnature,anexportsubsidyisintendedtoincreasethe subsidizing country’s trade. Leaving aside theexamplediscussedbyFeenstra(1986), ifmarketsareperfectly competitive, an export subsidy moves theterms of trade against the subsidizing country andreducesitswelfare.Tradeandwelfarethereforemovein opposite directions. Despite the loss in socialwelfare, this may well be the chosen trade policy ifpolicy-makers are beholden to producer groups. Asnotedabove, oneof thepredictionsof theprotectionforsaleliteratureisthatorganizedgroupsintheexportsector will be supported with export subsidies. Ifmarkets are oligopolistic, and firms compete inquantity, an export subsidy will move profits to thesubsidizing country and increase its welfare. In thiscase, both trade and welfare move in the samedirection. If firms compete in price, an export tax willbe required to shift profits from the foreign to thehome firm. Since an export tax reduces trade, tradeand welfare of the country applying the non-tariffmeasuremoveinoppositedirections.

Althoughwedonotnormallythinkofpricemeasureswhen confronted with problems of informationasymmetry, we saw an example of how an exportsubsidycouldbeusedtoovercomethatmarketfailureinSectionB.1(b).Uncertaintyintheimportingcountryabout thequalityof foreigngoodsacts likeamarketbarrier. The export subsidy allows the foreignproducer with the high-quality good to introduce itsproduct to consumers in the importing country byselling at a lower price. If enough consumers therehaveatasteforthehigh-qualitygood,tradeexpansion


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willbecoupledwithawelfaregain for the importingcountry.

(iii) Quality measures

As explained above, a quality measure will requirechangestothetechnicalfeaturesofimportedproductswhich can be either an obstacle to or a catalyst fortrade.Requiringexporterstocomplywiththeimportingcountry’sTBT/SPSmeasurescanincreasetradecostsanddiminishtheirexportprospects.Ontheotherhand,if compliance with the TBT/SPS measure resolvesuncertaintyaboutthequalityorsafetyoftheimportedproduct, greater consumer confidence can increasethedemandfortheitemandincreasetrade.Thetradeand welfare effects of a quality measure depend onwhether it addresses genuine market failures. If themeasureisappliedonlytoprotectdomesticproducers,both trade and welfare in the importing countrydecrease. If,on theotherhand, themeasurecorrectsanexistingmarketfailure,welfareis likelytoincreasewithambiguouseffectsontrade.

Take the extreme case where there are no marketfailures but where the importing country requires allimportedproductstocomplywithanewly introducedTBT/SPSmeasure.28 It ispossible todistinguish twotypes of trade costs that would be increased by therequirement to comply with the importing country’sregulation.Compliancecanincreasethevariablecostof exporting, with each unit of export incurring anadditional cost. Alternatively, compliance can requiretheexportingfirmtorevampitsproductionprocessorupgrade its technology. In this case, irrespective ofthe volume of exports, the firm will incur a fixedamountofexpenditureifitwantstoaccesstheforeignmarket.

Anincreaseineitherfixedorvariablecostswillhavetwo effects. First, it will decrease the volume ofexports of those firms who continue to serve theexport market. This is sometimes referred to as theintensive margin of trade. Secondly, the leastefficient exporters will no longer be able to covertheirfixedcostsofexportingandsowouldbeforcedto quit exporting altogether, sometimes referred toastheextensivemarginof trade.29WhereTBT/SPSmeasures are imposed in the absence of a marketfailure, social welfare will fall in the importingcountry.Consumersintheimportingcountryloseoutboth because the variety of goods is reduced, assomeexportersexit themarket,andbecausepricesrise as the volume of trade declines. This is not tosay that there will be no winners in the importingcountry. Domestic firms stand to gain because thewithdrawal of some exporters and lower sales fromremaining exporters reduces competition in thehomemarket.

However, suppose that there is a genuine marketfailure involving informationasymmetry.Consumers intheimportingcountryareuncertainaboutthesafetyofthe foreign good. Firms in the exporting country maybe newcomers to global trade and have little or noreputationtobuildon.Foreignproducersknowiftheirproductissafeornot,butconsumersintheimportingcountry have no reason to trust their claims. Underthesecircumstances,theremaystillbedemandfortheforeign product, but it is likely to be low. Requiringforeignproductstocomplywiththeimportingcountry’sTBT/SPSmeasurescanresolvethisuncertaintyinthemindofconsumers.Compliance,however,addstotheexportingfirms’costofproduction.

Under these conditions, the regulation will have twoopposingeffectsontrade(seeBoxB.5).Theneedtoconform to the new regulation raises the cost of theimportedgoodwhichwill tend to lower thevolumeoftrade.However,enhancedconsumerconfidenceinthesafetyoftheforeignproductwill increasedemandforit. While it is possible that the increased compliancecosts will force some exporters to exit the market,otherswillusetheircompliancewiththeregulationasa competitive advantage and increase their marketshare. In the context of food safety regulations, forinstance, Jaffee and Henson (2004) note that morestringent SPS measures in rich importing countrieshave different impacts on the competitive position ofdeveloping countries, exposing the weaknesses ofsome producers but accentuating the underlyingsupply-chainstrengthsofothers.

Furthermore, some countries use high-quality andsafetyregulationstosuccessfullypositionthemselvesinglobalmarkets.Like trade, theeffectonwelfare isambiguous and depends on the relative strengths ofthe forces acting on consumers and domesticproducers. The increased cost incurred by foreignexporterstocomplywiththemeasureshouldincreaseoutput and revenues for domestic producers. Forconsumers,therearetwoopposingeffects–ahigherprice for the product which needs to be weighedagainst the improvement in the product’s safety orquality.

Finally, while Box B.5 seems to suggest that anincrease (decrease) in trade leads to an increase(decrease) in welfare, this does not necessarily holdundermoregeneralconditions.ThisisshowninDisdierand Marette (2010) for example, where despite areduction in trade, welfare improves when theapplicationofaTBT/SPSmeasurecorrectsanexistingmarket imperfection.Thisresult isconsistentwiththeargument that sometimes theadverse tradeeffect ofa non-tariff measure is a by-product of pursuing alegitimatepublicpolicygoal.


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2. ThechoiceofNTMsinlightofdomesticandinternationalconstraints

In theprevious sub-section itwasshown that inmanyinstances,non-tariffmeasures,eventhoughtheyaffecttrade, are first-best policies to address a legitimatepublic policy objective, such as consumer health andsafety protection. However, the same measures canalso be employed in a way that distorts internationaltrade.InordertodecideinsuchcaseswhetheranNTMis innocuous, it is useful to determine whether themeasure is likely to be pursued for competitivenessreasonsratherthanthestatedpublicpolicyrationaleorwhether itmayaffect trademore than isnecessary toachieveitspolicyaim.30SectionB.2(a)exploresarangeof scenarios in the domestic political and economiccontextinwhichgovernmentsmaybeinclinedtomisuseNTMsinthismanner.SectionB.2(b)considershowfarsub-optimalpolicychoicesreflectgovernment-imposedconstraints on alternative options. The question ofpossible “policy substitution” may arise wheninternational trade agreements limit the use of tariffs

and certain types of NTMs but regulate other, lessefficientoptionslesseffectively.

(a) UseofNTMsanddomesticpolicyconsiderations

An important reasonwhygovernmentsmaychoose topursue trade policy objectives by applying non-tariffmeasuresassociatedwithotherpublicpolicygoals,or,more generally, may not choose the most efficientmeasure for this purpose relates to the lack oftransparency of certain NTMs regarding their ultimateeffectandpurpose.This“opaqueness”maymakesuchmeasures more attractive for politically motivatedinterventions where beneficiaries and the size of theeffectsarenoteasily identified.Otherexplanationsforsuchpolicychoicesemphasize institutionalconstraintsthat entice politicians to choose NTMs with certaincharacteristicsevenifthesemeasuresareeconomicallywastefulcomparedwithalternativemeans.

The fact that some NTMs entail a fixed rather thanvariablecost isanotherfactor thatmayexplainwhyagovernmentsubjecttopressurefromparticulargroups

BoxB.5: Effect of TBT/SPS measures on trade and welfare

AssumethatacountrydoesnotproducethegoodXandmeetsallitsconsumptionthroughimports.Theseimported goods differ widely in quality and consumers are unable to tell them apart. Because of thisuncertainty,demandislow(givenbythelineBDinFiguresB.1(a)and(b))andpriceisequaltoOW.ImportsareequaltoOA.Thegovernmentoftheimportingcountryrequiresforeignproducerstocomplywithaqualityassuranceprogramme;otherwisetheirgoodswillnotbeallowedtobesoldinthecountry.ComplianceraisesthecostsofforeignproducerssothatthepricetheychargerisesfromOWtoOW’.However,consumersarenow assured that only high-quality products are being sold in the market which leads to a shift in theirdemandtoBD’.OnepossibleoutcomeisthattotalimportsrisetoOA’inspiteofthehighercostofimportedgoods (see Figure B.1(a)). Some consumer surplus is lost, given by the area labelled WW’EF, as aconsequence of the cost of compliance. However, the increased confidence in the higher-quality importsresultsinagainequaltothearealabelledBEC.Overall,therehasbeenanincreaseinconsumerwelfaresoin thiscasebothsocietalwelfareandtrade increaseat thesametime.Anotherpossibleoutcome involvesimportsdeclining(seeFigureB.1(b)).Theincreaseinconsumerconfidenceisnotsufficienttoovercomethehighercostofcompliance. Inthissecondexample,bothtrade(fallingfromOAtoOA’)andsocietalwelfaredecline(thelossofWW’EFoutweighsthegainofBEC).

Figure B.1(a): Effect of TBT/SPS measures on trade and welfare: both increase

O A A’ Imports

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FigureB.1(b):Effect of TBT/SPS measures on trade and welfare: both decrease

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may favour NTMs over tariff protection. Finally, theexistence of market power in a context of offshoring(andthepossibilityofextractingprofitsfromexporters)mayexplainwhytradeconcernscanleadbothwelfare-and politically oriented governments to tamper withdomestic policies rather than border policies alone.Eachoftheseexplanationsisdiscussedinturn.31

(i) Transparency

Although it has been argued that in competitivepolitical systems, politicians who favour specificinterestgroupsinaninefficientmannerwouldbevotedout of office (Stigler, 1971), the political economyliteraturehasincreasinglypaidattentiontotheformofgovernment intervention.Onebranchof the literaturepresumes that citizens are poorly informed as to theeffects of various policies and the extent to whichdifferentpoliticiansmaybereceptiveto lobbying. It isnot unrealistic to assume that politicians have betterinformationthancitizensaboutwhethertheconditionsforawelfare-improvingpolicyinterventionareactuallysatisfied.32 In addition, it may be true that citizensremain unsure after a policy is implemented whetherthe government has acted in the national interest orsimplycateredtoorganizedinterests.

Inparticular,asTullock(1983)observes,policiesmaybechosenthatbenefitorganized interestgroupsand,at the same time, are justifiable on other widelyaccepted grounds, such as environmental protection,and, hence, may affect positively the government’sreputation with the public at large. This mismatch ininformation between citizens and the governmentabout both policies and politicians’ motivations canlead to the implementation of “inefficient ‘sneaky’methods of redistribution over more transparentefficient methods” (Coate and Morris 1995: 1212),evenwhenthelatterareavailable.

Inthefieldoftradepolicy,non-tariffmeasuresmaybeameanstoincreasetheincomeofproducerlobbieswhileconcealing the associated costs and/or the truebenefits of the alleged policy objective (e.g. health,environment)tothepublicatlarge.33Ratherthantariffsthatarestraightforwardintheirpriceimpactandcosttoconsumers,an“opaque”NTM,suchasanenvironmentalregulation, may shelter an import-competing sectorfrom foreign competition and, at the same time, beperceivedasbeinginthepublicinterest,eventhoughapropercost-benefitanalysismaynotshowanetwelfaregain.Uncertaintyaboutthejustificationfor,andimpactof,differentpoliciescannotexplainon itsowntheuseof opaque non-tariff measures, as competition amongpoliticians would allow voters to sanction thosepoliticiansthatpursuelessefficientpolicies.

However, this changes when the possibility of“government failures” is taken intoaccount.CoateandMorris (1995) describe a situation where different“types”ofpoliticiansarecompetingforofficeandvoters

areunsureastothetruenatureofpoliticians’intentions.Insuchacase,reputationmatters.“Bad”politicians,i.e.those who wish to increase the income received byspecial interest groups at the expense of the generalpublic, may have an incentive to implement a “public”policy that indirectly benefits the preferred interestgroup, even though it is not warranted on grounds ofnational welfare, because open favouritism to certaingroupswouldentailagreaterreputationaldamage.34

In other words, by increasing the income of specialinterest groups through “opaque” rather than directmeans,thesepoliticianslimitthenegativereputationalimpact. This is because voters cannot be sure that agivenpublicpolicyisbeingmisusedby“bad”politicians,as “good” politicians would pursue the same policy,albeitonly if it resulted inanoverallnetwelfaregain.As noted above, this presupposes that citizens areunable todetermine theoverall costs/benefits of thepublicpolicyinquestionwithanydegreeofconfidenceboth before and after it is implemented. This is aplausible assumption for policy decisions in manyareas(CoateandMorris,1995).35

Theauthorsspecificallycitetheexampleoftemporaryinfant industry production subsidies pursued toencouragelearningbydoing.Whetherthesesubsidiesbenefit the public or not ultimately depends on theamountoflearningbydoingtheyengender,anditwillbedifficultforcitizenstoverifywhethersuchsubsidieswereintheirinterest.Sturm(2006)citesanumberofrecent trade disputes over environmental or healthregulations to construct a similar model, in whichuncertaintyabouttheoptimallevelofregulationallowspoliticianstoprovidedisguisedprotectiontothe localindustry and, hence, to limit possible negativeconsequences in future elections.36 Like Coate andMorris(1995),Sturm(2006)characterizessuch“greenprotectionism”(i.e.theunwarrantedimplementationofa product regulation in view of the limitedenvironmentalrisk)asapoliticalfailure,aspreferableinstrumentsfromawelfareperspectiveareavailable–in this case, direct subsidies to local producers.However, these are not chosen by “bad” politiciansowing to their potentially negative impact on thepoliticians’re-electionprospects.

In an interesting extension to the Coate and Morris(1995)set-up,Sturm(2006)alsoconsidersthepoliticalconditions in the exporting country. It is assumed thattheforeigncountryhasacomparativeadvantageintheproductinquestionandthatitwouldbemorecostlyforforeign producers to comply with an environmentalregulation than for domestic producers. Politicians inthe exporting country (both “good”, i.e. solely socialwelfare-oriented, and “bad”) would therefore opposethe product regulation for its negative impact on thecountry’s terms of trade. However, due to the samepoliticalfailuredescribedabove,“bad”foreignpoliticianswould oppose compliance with a product regulationeven if the environmental risk was sufficiently high to


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affect welfare of consumers in their own country. Inotherwords, althoughadherence to theenvironmentalregulation would increase welfare in the exportingcountry as well, bad politicians would continue tooppose it to the benefit of their constituency in theexportsector,asituationtheauthorcalls“environmentaldumping”.

A situation where politicians in the importing countryimplement the product regulation, while politicians inthe exporting country do not (i.e. a potential face-offonthetradeimpactofenvironmentalpolicy),canhaveimplicationsfortheirreputationsinanyoneofthetwocountries. While voters may be unable to distinguishwhether theforeignenvironmentalpolicy is too laxorthedomesticregulationtoohigh,theyknowthatsuchdisagreement over the appropriate environmentalpolicy implies that at least one of the two incumbentgovernmentsisofthe“bad”type,i.e.pronetoinfluencefromproducerlobbies.

In other words, the “politician who is distorting theenvironmentalpolicy…imposesanegativereputationalexternalityontheotherincumbent”(Sturm2006:576),and, by implication, disagreement over the appropriatepolicy with a respectable politician in another countrycan entail a reputational damage for a domesticincumbent. In practice, this implies that transparencyandthefreeflowofinformationonpoliciesandpoliticalprocesses across countries can help to constrainspecial interest-oriented policy choices.37 Section Ediscusses further the rationales for cooperation ongovernment regulations, for example in the fields ofSPSmeasuresandTBT,andothertypesofNTMsandhighlightstheimportanceoftransparency.

(ii) Institutional constraints

Institutional constraints can make economically lessefficientnon-tariffmeasuresbetterfortheinterestsofpoliticians or social groups that hold political power.First, governments may be limited in their ability todirect benefits to important constituents. They maylack the information necessary to target resourcestowardstheirsupporters,orthecredibilitytomaintainthose policies, without an otherwise inefficient non-tariffmeasure.

Secondly, if the public elects a new government, theinterest groups that support the incumbent may loseinfluence. Inconsistency problems between thegovernmentanditssupportersleadpoliticianstotrytoenact policies that are difficult to reverse. CertainNTMs may be less exposed to the winds of politicalchange.Finally,governmentpolicy isnota “monolith”,but rather reflects the interests of parochialdepartments, bureaucrats and legislators. Intra-governmentalconflictcancreatefrictionsthat leadtothe implementationof inefficientNTMsfavouringoneparticularinterestoveranother.

Targeting political supporters

Some non-tariff measures that are comparativelyinefficient, such as a market-distorting regulation, canhelp the government to target policies towards theirfavoured constituency. Concretely, a government maypreferapolicythatislessefficientifitsoutcomeismorepredictable. In order to illustratewhy such distortionarypolicies persist, Mitchell and Moro (2006) describe acase in which removing an inefficient trade measurecreates winners and losers in society.38 The authorspresume that the NTM in question is “informationally”efficient, as compensating those that would lose fromtrade opening requires knowing the extent to whichforeign market competition actually causes the harm,while keeping the NTM in place requires no suchadditional knowledge. It is assumed that informationabout actual losses is private, i.e. “losers” from tradeopeninghavetheincentivetoover-reporttheirlosses.

If the government worries about excessive spendingon compensation policy, it may prefer to sustain theNTM rather than make decisions about how much tocompensate.39 Here, a key assumption is that theeffectsofanNTMareeasiertoverifythantheeffectsoftradeopening.Thisargumentislessplausibleifthecostsofover-compensationareloworthegovernmentis equally informed (or equally ignorant) about theeffects of an NTM compared with a more efficientredistributivepolicy.

Acemoglu and Robinson (2001) address a similarproblem in the following example. If farmers holdsignificantpoliticalsway,thegovernmentmayconsiderproviding either a lump-sum transfer (i.e. incomesupport) or price support in order to maintain favourwiththisgroup.Pricesupportrepresentsalessefficientinstrument because of its effects on product markets,andfromanationalwelfareperspective,thegovernmentshouldpreferalump-sumtransfer.However,despiteitsnegativeeffectsonconsumersandtrade,governmentsmaypreferpricesupport,whichefficientlytargetsthosewho are genuinely farmers in the short-run, as farmoutput is a prerequisite for receiving the subsidy.Conversely, lump-sum payments might go to a largernumberofbeneficiarieswhomerelyclaimorpretendtobefarmers(Stigler,1971).

In addition, Acemoglu and Robinson (2001) highlightthat price support increases the returns to farmingand, inthelongrun,encouragesmoreentry intofarmactivities, which further entrenches farmers’ politicalpower. Hence, for the government the distortiveeffects of the price support policy are potentiallyoutweighedby thebenefitsof solidifying thepoliticalpowerofitsfavouredconstituency.

Policy reversals

In competitivepolitical systems,governments inpowerchange, which can lead to policy reversals. From the


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perspectiveofaninterestgroup,relativelymoreefficientpolicymeasuressuchasaone-timesubsidyora tariffmayhavethedisadvantageofbeingsubjecttoreviewbynew legislaturesorotherelectedofficials.Bycontrast,certainnon-tariffmeasures,suchasproductregulations,maybedefinedandimplementedbyregulatoryagenciesunaffectedbypoliticalchangeandmaynotbesubjectto a regular renewal process. Rubin (1975) notes thatsuch long-lived but inefficient policies can benefitpoliticiansbyincreasinginterestgroupsupport.

Politicianswhoareunsureabouttheirownre-electionprospectsreceivelessfromlobbyistsforashort-term,reversiblepolicy.However,politiciansmaynonethelessreceive benefits from special interests if they put inplacemeasures, suchasproduct regulationsand therelated bureaucratic apparatus that last beyond theirexpectedcareers.InefficientNTMswhichlackregularoversight also call upon fewer resources to influencethepoliticalprocessand, thus,are lessexpensive forlobbyistswithsufficientlylong-termhorizons.40

Intra-governmental conflict

Even if legislators do have regular oversight ofregulatorypolicymeasures, thebargainingnecessaryto pass legislation can distort policy decisions. Eachlegislator must decide how to allocate resourcestowards policies that benefit the whole country andthose that primarily benefit their local constituency.Politiciansmaybewilling topassapolicyof nationalinterest only if, for example, a subsidy is given to anindustrylocatedintheirhomedistrict.Asalllegislatorsmay need to cater to special interests, inefficientpoliciescanproliferate(Weingastetal.,1981).41

Further inefficiencies can arise if each legislatorrepresents a number of constituents with conflictinginterests.Dixitetal. (1997)developamodel inwhichinterest groups spend resources on lobbying forgovernment policy. As with the farming case above,lump-sum cash transfer policies by the governmentwould be more efficient from a welfare perspective,buttheauthorsdemonstratethatcompetitionbetweenindividual interestgroups formore transferscan leadto an inefficient allocation of resources to lobbying.Thiscanexplainwhythe interestgroupsmayseektoagree on a comparatively less efficient non-tariffmeasure that may not require them to lobby. Whilesuch an NTM reduces overall efficiency, it ultimatelychannelsmoreresourcestothegroups.

Theoversightproblemalsoarisesbecauseofalackofcoordination within governments and across agenciesthatproduceandregulatenon-tariffmeasures.Becauseagency jurisdiction is often allocated according to afunction,agivenkindofNTMcanbetheresponsibilityofanumberofoverlappingdepartmentsorcommitteeswithin a government. Efficient policy-making requiresthe contribution and cooperation of a number ofagencieswithdifferentinstitutionalinterests,butthese

agenciesmaynotvaluetheoverallpolicygoalasmuchas a parochial interest. As a result, intra-departmentmiscommunication or competition can producepersistently inefficient policies. This implies thatreforming NTMs that involve a range of domestic andpossibly sub-national regulatory agencies may requirebroaderattentiontothepotentialbureaucraticfrictionsthatpreventcooperation(Gulotty,2011).

(iii) Firm preferences for trade measures inducing fixed costs

Recent economic research on the diverse nature offirmswithinaparticularsectorintermsofproductivityand size has led to another rationale why tradeprotection may come in the form of “behind-the-border” non-tariff measures rather than borderprotection. A range of NTMs, such as TBT/SPSmeasures,haveanimportantfixedcostcomponent,ascostly production adjustments have to be made, butperunitcostssubsequentlydeclineasmoreoutput issoldintherespectivemarket.42

Owingtoproductivityandsizedifferencesamongfirms,fixed cost increases affect firms differently, unlikevariableleviesthatraisecostsforeveryfirmbythesamepercentage.43 Hence, although a technical productregulationaffectsbothdomesticand foreignfirms, thefixed costs it entails represent a higher burden forsmallerandlessproductivefirmsinbothcountries.Asaconsequence, the least efficient firms will cease to becompetitive and exit the market, while the moreproductiveandlargerfirmsbothdomesticallyandabroadwill see their profits and market shares increase.Ultimately,behind-the-bordernon-tariffmeasuresofthissortonlybenefitthecountryintroducingthemeasureasa whole if the ratio of very efficient to very inefficientfirms is larger at home than in the exporting country(Rebeyrol andVauday,2009;Abel-Koch,2010).44Thisisincontrasttobordermeasures,whichalwayspenalizeforeignfirmstothebenefitofdomesticproducers.

Underwhatcircumstances, then,wouldabehind-the-border non-tariff measure rather than borderprotection be introduced? Of course, like bordermeasures, distortionary behind-the-border measuresmayalsohaveanegativeimpactonconsumerwelfare.However,asdiscussedintheprevioussub-sections,apolitically-oriented government may yield to lobbypressurefromdomesticproducers.Assumingthatonlythelargestandmostefficientfirmshavethemeanstolobbythegovernment,45theymaygainmorefromtheintroduction of a behind-the-border NTM at theexpense of small, less productive producers at home(evenifsomeofthegainsalsogotomoreproductivecompetitors abroad) than from border protection thatshieldsalldomesticfirms(includingthosethatdonotlobby)fromforeigncompetition.

Lobbying foramoredemandingproduct regulation ismore likely the less the government is concerned


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about social welfare and the fewer foreign firms areactiveinthedomesticmarket.Thereasonforthelatteris that when trade is already low (e.g. due to largelyinefficient foreignfirmsorexistingborderprotection),an increase in behind-the-border non-tariff measureshas a relatively more important effect on domesticcompetition.Tosomeextent,thisiscounter-intuitivetothe idea of policy substitution, i.e. the increase ofbehind-the-border NTMs when border measures areliberalized.Thisisfurtherdiscussedinthesub-sectionthat follows, where empirical evidence in support ofpolicysubstitutionisalsopresented.

At higher levels of regulation, the marginal gain frombehind-the-border non-tariff measures declines (andhence the political contributions lobbying firms arewilling to make) and at some point becomes smallerthan the marginal loss in social welfare (despite thelargerweightgiventoorganizedproducerinterest).Asaresult,behind-the-borderNTMsmaybesetatsome“intermediate”level.

Conversely,forbordermeasurestargetedexclusivelyatforeign producers, the domestic producer lobby’smarginal gain in profits (and related politicalcontributions) do not decrease with higher levels ofprotection and lobbies who gain a lot from keepingforeigncompetitionoutandgovernmentsthatcarelittlefor social welfare may implement a prohibitive level ofborderprotection,orvice-versa,noneatall(Abel-Koch,2010). In sum, although the author formally does notconsider lobbyingforbehind-the-borderasopposedtobordermeasuressimultaneously,itisinterestingtonotethatwhenbehind-the-borderNTMsareintroduced,theconflictofinterestbetweendomesticproducerspittinganorganizedlobbyofproductivefirmsagainsttherestmay lead to less restrictive measures than if borderprotectionwerepursued.

(iv) Offshoring and bilateral bargaining

Theincreasedroleofinternationalproductionnetworksintoday’sglobaleconomyandthefragmentationoftheproduction process across borders have required afresh look at the impact of non-tariff measures andservices measures on international trade and at theincentivesforgovernmentintervention.InSectionB.1,itwas noted that international production sharing mayadd to market imperfections, such as informationasymmetries(KimuraandAndo,2005)thatcanprovokeregulatoryintervention,forinstanceinrelationtosafetyand quality control. In their seminal work, Jones andKierzkowski (1990; 2000) emphasize the effects thatgovernmental measures in “services links” connectingfragmented production blocs can have on trade inintermediates,whilesuchmeasuresplay lessofa rolewhen the production of goods is integrated and tradetakesplaceinfinalproducts.

In regard to political economy rationales, Grossmanand Helpman (1994) mention that the protection for

sale framework can easily be extended to allow forimported intermediates, without changes to itsfundamental outcomes. Protection would still beprovidedtopoliticallyorganizedfinalgoodsproducersrather thanproducersof intermediates,as the formerwouldlobbyagainstprotectionforthelatter.46

While the fragmentation of the supply chain affectsgovernments’motivationstointerveneandenlargetheambit of relevant policy areas, as established inSection B.1, it may also involve new constraints andconsiderations in the choice of policy measures. In arecent set of papers, Staiger (2012) and Antràs andStaiger(2008)formalizeanovel,explicitmechanisminrelation to the international fragmentation of thesupply chain that could lead to an increased use ofnon-tariffmeasures. In their frameworkofoffshoring,thedeterminationofinternationalpriceschangesfromonegovernedbymarket clearingmechanisms toonecharacterized by bilateral bargaining between foreignsuppliers and domestic buyers. As noted in SectionB.1,insuchasituation,governmentscanbeexpectedtousetariffsasa“first-best”instrumentforextractingprofits from foreign exporters.47 However, withinternational offshoring, even though the governmentmay be free to use tariffs, other policies, includingbehind-the-border NTMs,mayalsobeused, resultinginadistortionoftheirefficientlevels.

The key feature in international offshoring emphasizedbytheauthorsistherelationship-specificnatureoftradebetween importers and their specialized suppliersabroad. Owing to the specificity of the input, foreignsuppliers hold some market power over the importingproducer.Atthesametime,oncetheinput isproducedbytheexporteraccordingtotheimporter’sspecificationsand the related investment is sunk, the importer canwield its bargaining power to obtain a share of theforeignsupplier’sprofits.Asaresult,internationalpricesare determined by bilateral bargaining rather thanmarket clearing. This phenomenon, which has becomeknown as the “hold-up” problem in the economicsliterature,leadstothesituationof“under-investment”byforeign suppliers and, hence, an insufficient supply ofinputstodomesticproducers.48

The domestic government now faces a tension in itsobjectivetomaximizenationalwelfare:itmustprovideincentives to foreign input suppliers to produce moreand,atthesametime,itmusthelpdomesticproducersimportingtheseinputstoappropriatemaximumprofitsinthebilateralbargainingwiththeforeignsupplier.

In order to pursue these different objectives in itsforeigntraderelationship,thegovernmentwillnotonlyadjust its tariff policy on inputs, but also employmeasures in regard to final products. It will do theformertoincreasethesupplyofforeigninputsandthelatter in order to affect prices received by producersand, hence, profits all along the supply chain.Concretely,AntràsandStaiger(2008)seektodevelop


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a realistic scenario, where a politically motivatedgovernment (i.e.one thatattachesahigherweight toproducer benefits) may reduce tariffs on importedinputs(whichhasapositiveeffectonsupply),butseekto increase the price of the final product, e.g. via animport tariff or an export subsidy. A disproportionatepart of the costs of these distortions is borne byconsumers, but a government that is sufficientlyinfluenced by organized producer interests may bewillingtoallowthistohappeninordertohelpdomesticproducersto increasetheirprofits,eventhoughsomeof these profits may also be dissipated along thesupplychaintoforeigninputproviders.

Buildingonthisapproach,Staiger(2012)constructsamodel in which the government applies non-tariffmeasuresontopoftariffstothesameproductinordertomaximizenationalwelfare inasituationofbilateralbargainingwithforeignproducers.49 Inhisset-up, theconsumption of a good that is subject to bilateralbargaining when imported and also domesticallyproducedentailsanadverseeffectontheenvironment.Aconsumptiontax is imposed inorderto“internalize”thisenvironmentalexternality– that is, to reduce theover-consumptionof theproduct inquestionowingtothe lack of consideration by consumers of theenvironmentalharmimposedonothers.Itcanthenbeshownthatthelevelofthedomesticconsumptiontaxused to address the environmental externality wouldbe set “inefficiently”, as part of the costs of the taxwouldbebornebytheforeigninputsupplier.

Concretely, under certain conditions, the importingcountrycanbemadebetteroffwhenimporttariffsontheproductarereducedandthedomesticconsumptiontaxisincreased.ThereasonforthisisthatinStaiger’smodel, lower tariffs directly affect the pricing andproductiondecisionsof exportingfirms.On theotherhand, because consumers experience diminishing“utility”fromhigherlevelsofconsumptionofthesameproduct,thetaxdoesnotalterconsumerbehaviour inalinearfashion.

While the tax partially induces consumers to cutconsumption,someoftheburdenofthetaxisimposedontheforeignproducersbyloweringproducerprices.50Through this mechanism, the government is able toensureagivensupplyofthegoodinquestionbyloweringtariffs,whileatthesametimereducingforeignprofitstothe benefit of domestic importers. This adjustment iseventually stopped when the distortion of domesticdemand, taking into account the marginal costs andbenefits of containing the environmental externality,becomestoohighintermsofnationalwelfare.Whilethegovernment’s motivation to use non-tariff measures insuch a situation is discussed in relation to a domesticconsumption tax (as a targeted product-specific anddetailedpriceinstrument),Staiger(2012)brieflyexplainsthattheunderlyinglogiccouldalsoapplytootherformsof“behind-the-border”NTMs,suchasTBTmeasures.Inparticular, the author asserts that in practice

governmentstendtoapplyuniformsalesorvalue-addedtaxesacrosswiderangesofproductsratherthanlevyingdifferentiatedtaxeson individualgoods.Heshowsthatwhere product-level domestic taxes are unavailable ordifficulttoimplement,offshoringandbilateralbargainingcanleadtoasituationinwhichproductregulationsaresettobeinefficientlyhigh.

(b) UseofNTMsandinternationalconstraints

Governments can use multiple policies to achieve agiven objective. In the case of a market failure, the“first-best”policytoaddressasingledistortion isonethat offsets the source of the distortion directly. Forinstance,ifthedomesticproductionofacertaingoodis associated with positive externalities for aneconomy,aproductionsubsidyisthe“first-best”policy– it is welfare-superior to an import tariff. What thenhappens in a situation where an economy faces adomestic distortion, an externality for example, butalsohasmonopolypowerintradeinthat itcanaffectthe world price of the given product? In a non-cooperativeframework,agovernmentwouldintroducetwo “first-best” or most efficient policies – a non-distortionary non-tariff measure to tackle the formerand a suitable tariff for the latter (Bhagwati andRamaswami, 1963). However, the “first-best” or mostefficient measures may not always be used bygovernments.

The previous section showed that governments maychoose to pursue trade policy objectives using non-tariffmeasuresratherthantariffsevenwhenthelatter,more efficient, measure is available to them. Itattributed this to institutional factors, the lack oftransparency of certain NTMs, the fact that someNTMsentail afixed rather than variablecostand theexistenceofmarketpower inacontextofoffshoring.However, it may also be the case that the moreefficient measures are not always available togovernments.ThissectiondiscussestheuseofNTMsin light of constraints imposed by international tradeagreements–bothmultilateralandregional.

(i) International constraints

Under the auspices of the GATT/WTO, the last60yearshaveseenadramaticmultilateralreduction intariffbarriersowingtoagreementsthatrequiremembersto respect the negotiated tariff bindings – ceilings onappliedtariffs.Ifmemberssettariffsabovethatbinding,they may be subject to a costly dispute initiated byanother member. Similar constraints also affect othertrade policy measures – for example, non-tariffmeasuressuchas importandexportquotasaswellasexportsubsidiesaregenerallyprohibited,althoughtheiruseisallowedfor“legitimate”reasonsinspecificcases.Eveninpreferentialtradeagreements(PTAs),countriesagreetopreferentialtariffsbetweenthemselvesand,in


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customsunions,tosetacommonexternaltariff,wherebynon-enforcementof these tariffscouldgeneratecostlyretaliationbyotherPTAmembers.

Unlike border measures, disciplining behind-the-border non-tariff measures explicitly under themultilateral trading system, for instance, is morechallenging for the following reasons. First, they aretypically less transparent. Secondly, as alluded to inSection A, NTMs are often highly complex andcountry-specific. This means that the formulation ofgeneral rules to discipline them is likely to involvedifferentauthoritieswhoarenotusedtocoordinatingwith others. Thirdly, while NTMs may have adversetrade effects, some of them are associated withlegitimate public policy objectives. Despite thesedifficulties, NTMs are not left entirely unregulatedbecause members of a trade agreement couldotherwise undo any negotiated tariff restrictions by,for instance, imposing different sales taxes forimported and domestic products (Horn, 2006). Ofcourse, to theextent thatcountriescanuseNTMs inimport-competing sectors as a means of reducingtrade flows, they can undermine commitmentspreviously made with respect to trade policy (BajonaandEderington,2009).

(ii) Policy substitution

It is likely thatascountriessignsuccessiveroundsoftradeagreementsthatconstraintheirabilitytopursuetrade goals through trade policy (tariffs and certainborder non-tariff measures), other NTMs, includingthose behind the border, become attractive tools forterms-of-trade manipulation that shifts costs ontoforeign exporters. In other words, there will beincentivesforgovernmentstodistort theirNTMsasasecondary means of protecting import-competingindustries(Copeland,1990;Ederington,2001;Bagwelland Staiger, 2001; Bajona and Ederington, 2009). Inthis context, it isevenargued that there is a “LawofConstantProtection”(Bhagwati,1988).

According to Anderson and Schmitt (2003), whentariffsareconstrainedcooperatively,quotaswouldbethepreferredmeasureamongthesetofborderNTMsfor governments looking for alternative measures.Anti-dumpingpoliciesare likely tobeusedonlywhenthe use of quotas is also sufficiently constrained byinternationalagreements.51

Similarly, if a government cannot respond tocompetitivepressuresabroadbyunilaterallyrestrictingmarketaccesswithan increase in its tariff, itmaybedrawn into imposing a behind-the-border NTM. Forexample, it may be tempted to improve the relativecostpositionofadomesticfirmby relaxing technicalregulations in its import-competing industry, therebyrestricting access to foreign suppliers. Some foreignsuppliers who export to these markets may actuallylowertheirpricestoremaincompetitivewithdomestic

producers.52 However, even such terms-of-trademovementleadstoforeignproducersabsorbingsomeof the costs of the weakening of domestic technicalregulations (Bagwell et al., 2002). Hence, in light offallingtradebarriers,thisregulatorycostshiftingcouldresult in a “race-to-the-bottom” problem wheregovernments might be tempted to relax technicalregulations that apply to import-competing industriesin the name of international competitiveness – thoserelating to labour and the environment are prominentexamples (Bagwell and Staiger, 2001; Bagwell et al.,2002).

AccordingtoBagwelletal.(2002),thetruesourceofthe “race-to-the-bottom problem” is not that weakforeign technical regulations generate competitivepressures that induce inefficiently low domestictechnicalregulations.Rather,itistheimperfectionsinproperty rights over market access commitments intradeagreements–agovernmentisnotfreetoadjustitspolicymixsolongasitmaintainsitsmarketaccesscommitment. For instance, if a government increasestechnical requirements in its import-competingindustry,thisindustrywouldbesubjectedtoincreasedcompetitive pressure from abroad. However, becausetrade policy is constrained by an internationalagreement,thegovernmentwouldnotbeabletoraiseits tariff (without a penalty) and maintain its marketaccesscommitment.

Itisworthnotingthatinsteadofa“race-to-the-bottom”problem, it may even be the case that increasedconstraints on tariff policy imposed by internationalagreements are accompanied by rising technicalregulations. The international cost-shifting incentivedescribed above may instead create a tendency forgovernments to impose more stringent domestictechnicalregulationsifthedomesticfirminanimport-competingindustryfindsiteasiertocomplywiththem,i.e. if the technical regulation improves the relativecostpositionofthedomesticfirm(StaigerandSykes,2011). However, even when a technical regulationincreasesthecostsofproductionmorefortheforeignfirm than the domestic firm, the substitution oftechnicalregulationsfortariffswhichareconstrainedby an international agreement is far fromstraightforward.

In a recent study, Essaji (2010) considers twoscenarios.First,whentariffsareprohibitiveandhencewhen a small tariff reduction enables minimalparticipation by the foreign firm, governments arelikelytohaveanincentivetoraisetechnicalregulations.This is because the tariff cut increases the marginalbenefit of the regulation – because imports becomecheaper,theregulationbecomestheinstrumentwhichcan improve thedomesticfirm’s relativecostpositionandhence itsprofits.At thesametime,byworseningthe foreign firm’s production costs, and reducingimports, the technical regulation reduces tariffrevenues.Hence, ifthegovernmentcaresabouttariff


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revenues,itsoptimalregulatoryresponsetotariffcutsis less clear. However, prohibitive tariffs areincreasinglyrare.

Secondly, in the case where the foreign firm alreadyhas a significant market presence, the relationshipbetweentariffcuts–thatdeepenforeignpenetrationevenfurther–andrisingtechnicalregulationsismoretenuous. Technical regulations reduce consumersurplus.However,areductionintariffsdiminishestheregulation’s marginal impact on consumer surplusbecause it lowers prices faced by consumers.Similarly,whileregulationsshiftprofitstothedomesticfirm, tariff cuts – by making imports cheaper –diminish theregulation’smarginaleffectondomesticfirmprofits.

Given theabove, if thegovernmentonlycaresaboutconsumer surplus and the domestic firm’s profits, itwould respond to tariff cuts by relaxing technicalregulations. This suggests that because constraintson the use of tariffs weaken the effectiveness of atechnical regulation as an instrument, tariffs andtechnical regulations are actually complements. Itunderscoresthatwhatmattersforpolicysubstitutionis not the direct effects of measures, but how theweakening of one measure affects the marginaleffectiveness of the other. The government’sresponse is more ambiguous when it also worriesabout tariff revenues and negative consumptionexternalities.

A reduction in tariffs, bound by an internationalagreement,enhances the regulation’smarginaleffectontheconsumptionexternalitybecauseitremainstheonly instrument to reduce demand in the economy.Similarly, tariff reduction enhances the regulation’smarginaleffectonraisingtariffrevenues–constraintson increasing tariffs imply that altering technicalregulations is the only way in which the governmentcaninfluenceimportsandhencetariffrevenue.Hence,if the impact of the regulation on the consumptionexternality is large and/or if the initial tariff rate ishigh, the improvement in the regulation’s capacity toreducetheexternalityandraisetariffrevenues,onthemargin,mayoffsetthereductionofitsmarginaleffectsondomesticprofitsand theconsumersurplus. In thissituation, governments may respond to tariffreductions by technical requirements, i.e. policysubstitution.

The findings of Essaji (2010) suggest that theproliferation of technical regulations in recent yearsmay not be driven by a desire to protect domesticfirms’ profits when tariffs are constrained by aninternational agreement, but rather it may reflect agrowing awareness of consumption externalities.Governments will have an incentive to increasetechnicalregulationsonlyifthenetmarginalbenefitoftheregulationincreaseswithfallingtariffs.

(iii) What does the evidence suggest?

There is an empirical literature which uses formalstatistical methods to analyse whether or notconstraints imposedby internationalorbilateral tradeagreementsongovernments’ability toset tariffsmayinducesomecountriestoreplacethemwithnon-tariffmeasures. Usingdata fromColombiaduring themid-1980s (and early 1990s), Goldberg and Pavcnik(2005) find that tariffs and NTMs were positivelycorrelated, i.e. tariffs were reduced, not simply to bereplacedbyNTMs.

Analysing data for a large cross-section of countries(91) for a more recent time period (the early 2000s),Kee et al. (2009) find that the average ad valoremequivalent (AVE) of non-tariff measures appears toincreasewithGDPpercapita.However,theyalsofindthattheoveralllevelofprotectiondecreaseswithGDPper capita, mainly driven by average tariff levels thattend to be significantly lower as countries becomericher. It suggests that, in general, tariffs may besubstituted by NTMs. This is reinforced by theirfindings at the tariff line level, where tariffs arenegativelycorrelatedwiththeAVEsofNTMs.Similarly,Brodaetal. (2008)showthatafterGATT/WTOtariffcommitments constrained the United States in itsability touse tariffs for thepurposeof terms-of-trademanipulation, the country set significantly higherNTMs in import-competing sectors where it hadgreaterabilitytoaffectforeignexporterprices.

Inamorerecentstudy,usingdataontariffsandnon-tariff measures for about 5,000 products, Limao andTovar (2011) exploit the variation in tariff constraintsgenerated by the two most common commitmentdevices – multilateral and preferential tradeagreements(PTAs). Importantly, theauthorsestablisha causal impact of the resulting tariff constraints ontheuseofNTMs–notmerelyacorrelationwhichmaybeinfluencedbyotherfactors.Considerthefollowing.Differences in the size of member states in a PTA,whichisacustomsunion,leadtothecommonexternaltariff being determined by the tariffs of the largerpartner.Thiscangeneratealargechangeintariffsforthe smaller partner that is likely to be “exogenous” –that is, independentofotherdeterminantsof itstradepolicy.

The aforementioned argument is relevant for theanalysisinLimaoandTovar(2011)becausetheyfocuson a single country, Turkey, which had to adopt pre-existingEUtariffsinalargenumberofproducts.SoifthecommonEUtariffconstrainedTurkey in its tariff-setting, this could have had a causal impact onprotection via non-tariff measures on non-EUexporters. Limao and Tovar (2011) find evidence ofpolicy substitution – tariff commitments imposed viathe WTO and the PTA with the European Unionincrease the probability of Turkish NTMs. They alsofind that the likelihood and restrictiveness of Turkish


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NTMs increase with the stringency of those tariffcommitments.Furthermore, it isworthnotingthat theauthors find imperfect policy substitution, therebyimplying that tariff commitments – while partiallyoffset by higher NTMs – may have still reduced totalprotection.

The studies discussed above analyse a broad set ofnon-tariff measures, including domestic productstandards, technical regulations and voluntary exportrestraints. There is also a literature which analyses apossible substitution effect between tariffs and aparticular class of NTMs – anti-dumping (AD)initiations. Evaluating data for 24 countries(17developingandsevendevelopedcountries)duringtheperiodfrom1996to2003,FeinbergandReynolds(2007)find that tradeopeningcommitmentsmade intheUruguayRound–measuredbychanges inboundtariffs – have a statistically significant, albeit small,positive effect on the likelihood53 of a WTO memberusingADprotection.Inaddition,theyuseasimulationexercise to show that had tariffs not been reducedby the Uruguay Round, there would have been23percentfewerADcasesfrom1996to2003.Whenonly considering the AD cases brought by thedeveloping countries in their sample, Feinberg andReynolds(2007)findamuchlargerpositiveeffectofapromised reduction in tariffs under the UruguayRound.ThisholdstruebothforthelikelihoodofaWTOmemberusingADprotectionand the totalnumberofADpetitionsfiledbyWTOmembers.

To view the above as evidence of policy substitution,however, onemustbecautious.Developingcountriesdid not reduce in the Uruguay Round the tariffs thatthey actually applied. Their commitments were toreduce the gap between the bound (i.e. the upperceiling)andtheappliedrates(the“tariffoverhang”)bypledging to keep within the lower bound rates.However, what firms actually face in practice are theappliedtariffs,whichareverydifferentfromtheboundrates,especiallyindevelopingeconomies.

Forthedevelopedcountriesintheirsample,FeinbergandReynolds(2007)findthatcommitmentstoreducetariffsunder theUruguayRoundareassociatedwithless frequent AD activity. According to the authors,this surprising result may reflect a move towardsalternative measures of protection, such as TBT andSPSmeasures.Itmayalsobeattributabletoahostofomittedvariables, suchas the increasing importanceof services and FDI, which could have diverted theattentionof firms in theseeconomies away from theADinstrument(FeinbergandReynolds,2007).Giventhe limitations of the study described above, it isdifficult to identifyacausal impactoftariffreductioncommitments under the Uruguay Round on ADactivity.

More recently, using data for 35 countries(29developingandsixdevelopedcountries)over the

periodfrom1991to2002,MooreandZanardi(2011)also examine the relationship between sectoral tradeopening and subsequent AD initiations.54 UnlikeFeinberg and Reynolds (2007), however, the authorsanalyseappliedratherthanboundtariffs.Furthermore,theytakeaccountofadditionalfactorsthatmayaffectAD initiations, include a larger set of importing andexporting countries. They also cover a longer timespan,workwithmoredisaggregatedindustrialsectorsanduseamorecompleteADdatabase.

In general, Moore and Zanardi (2011) find thatreductions in applied tariffs do not lead to a higherprobabilityofADpetitions.However,forasmallgroupofdevelopingcountriesthathavebecomeheavyusersofAD in recentyears, theydofindevidenceofpolicysubstitution–astatisticallysignificantimpactoftradeopeningon theprobabilityofADfilings.For thissub-sample, a one standard deviation increase in tariffliberalizationresultsinabouta25percentincreaseinthe probability of observing an AD initiation. Theabsence of a statistically significant “substitutioneffect” for other developing countries or for the sixdevelopedcountries in thesamplemaybedue to thefactthattheformerinitiatedrelativelyfewADpetitionswhile the latter already had very low tariff rates overtheentireperiodcoveredintheanalysis.

TheresultsofMooreandZanardi(2011)arereinforcedby the recentworkbyBownandTovar (2011)on thetradereformsundertakenbyIndia inthe1990s.Theyfind that taking other factors into account, productsthatunderwentlargertariffcutsasaconsequenceofthe tradereformwere,by theearly2000s,subject toanincreaseintheuseofsafeguardsandADmeasures.Inparticular,theyshowthattheprobabilityofinitiatingan AD investigation and safeguard proceeding is50 per cent higher as a result of a one standarddeviationincreaseintradeopening.

The Specific Trade Concerns (STCs) databasescreatedbytheWTOSecretariat(discussedindetailinSection C.1) have been used to shed new light onwhether applied tariffs and TBT/SPS measuresmay have been used as substitutes over the period1995-2010.55Applyingananalysissimilar inspirit toKee et al. (2009) – who seek to identify a “clean”correlation between tariffs and their estimated ad valorem equivalent of non-tariff measures,56 ratherthan identifying a causal link – the results indicatesome evidence that TBT measures may have beenused to take the place of tariffs, but there is verylimited evidence of substitution between tariffs andSPSmeasures(seeBoxB.6).Thisresultisinlinewithexpectations:SPSmeasurescoverarelativelynarrowareaofhealthandsafetythatisoftendirectlyrelatedtoconsumerprotectionandmayoffer lessscope forpolicy substitution than the wider set of TBTmeasures.


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In conclusion, the use of less efficient non-tariffmeasures instead of tariffs is facilitated by the factthat while bindings on import tariffs are rigid, theexplicit disciplining of NTMs within the framework ofinternational trade agreements is more difficultbecausetheyarelesstransparent.Inaddition,certainNTMs can be used to address a legitimate publicpolicyconcern(health, theenvironment,etc.), therebymakingitpossibletoconcealapotentiallyprotectionistintentbehindthemeasure.However,isitthecasethatgovernments choose to exclude NTMs from suchinternationalagreements?And,ifso,whatdeterminesthischoice?

Thetradeliteraturesuggestsanumberofpossibilities.Thedecisiontoexcludemaysimplyreflectthecostsofwritingandenforcinganagreementthatcoversawiderangeofbehind-the-bordernon-tariffmeasures(Horn,2006;Hornetal.,2010).Itmayalsobeattributabletouncertainty about the circumstances that will prevailduringthelifetimeoftheagreement,therebymakingit

difficulttoforeseeallregulatoryneedsthatmayarise(Battigalli and Maggi, 2003). There are furtherpossibleexplanations.

Thenon-explicitregulationofnon-tariffmeasuresmayrepresent “escape clauses” for members of theagreements – providing them with the flexibilityrequired to maintain a self-enforcing agreement in avolatileworld(BagwellandStaiger,1990).Itmayevenbe the case that governments can improve theirbargaining power vis-à-vis special interest groups bycommitting to constrain tariffs through internationalagreements, and then using less efficient NTMsinstead(LimaoandTovar,2011).Finally,countriesmaywant to retainpolicyspace in issues theyconsider tobe “too important” to be subject to trade rules, e.g.nationalsecurity.Ananalysisofsuchfactorsthatmayexplain the “endogenous determination” of thecoverageofNTMsininternationaltradeagreementsiscarriedoutinSectionE.

BoxB.6: Policy substitution – evidence from specific trade concerns

FromtheSpecificTradeConcerns(STCs)databases,coverageratio(theamountoftradecoveredbyanSPSorTBTmeasure)andfrequencyratio(theshareofproduct linescovered)havebeencomputed.Frequencyandcoverageratiosareinventory-basedmeasuresthatdonotnecessarilycapturethetraderestrictivenessof a measure. However, they indicate how much trade is affected by it.57 These measures have beencomputedforeachcombinationofmaintainingcountry (thecountry thatmaintains themeasuresubject tothe specific trade concern), HS2 sector (a two-digit classification in the Harmonized System) and year.ToanalysewhetherthereisevidenceofsubstitutionbetweentariffsandSPSorTBTmeasures,thefollowingeconometricmodelhasbeenestimated:

From the Specific Trade Concerns (STCs) databases, coverage ratio (the amount of trade covered by an SPS or TBT measure) and frequency ratio (the share of product lines covered) have been computed. Frequency and coverage ratios are inventory-based measures that do not necessarily capture the trade restrictiveness of a measure. However, they indicate how much trade is affected by it.1 These measures have been computed for each combination of maintaining country (the country that maintains the measure subject to the specific trade concern), HS2 sector (a two-digit classification in the Harmonized System) and year. To analyse whether there is evidence of substitution between tariffs and SPS or TBT measures, the following econometric model has been estimated: 𝑦𝑦!"# = 𝛽𝛽!ln (𝑡𝑡𝑡𝑡𝑡𝑡)!"# + 𝜀𝜀!"# where y is the (log of ) the coverage ratio (or the frequency index) of the maintaining country i in HS2 sector j in year t, and tar is the (log) average applied tariff in sector j. Year, country, sector and country-sector fixed effects have then been progressively added to this baseline model.

1 Details about the construction of frequency index and coverage ratio can be found in Section C

(Box C.1).

whereyisthe(logof)thecoverageratio(orthefrequencyindex)ofthemaintainingcountryiinHS2sectorjinyeart,andtaristhe(log)averageappliedtariffinsectorj.Year,country,sectorandcountry-sectorfixedeffectshavethenbeenprogressivelyaddedtothisbaselinemodel.

Asarguedinthemaintext,theestimatedregressiondoesnotpurporttoidentifyacausallink,butrathera“clean”correlationbetweentariffsandTBTorSPSmeasures.ItissimilartotheoneestimatedbyKeeetal.(2009), who find evidence of substitution between tariffs and non-tariff measures when considering thevariationwithincountryandwithin sector. Incontrast toKeeetal., there isalso timevariation in theSTCdatabases,allowingtheuser to identifyvariationwithincountry-sectorandtimeusingarichersetoffixedeffectsthanKeeetal.(2009).

Table B.1 reports the results of the regressions. In columns (1) (for the coverage ratio) and (5) (for thefrequencyindex),nofixedeffectisincluded.Incolumns(2)and(6),countryandtimefixedeffectsareadded.In columns (3) and (7), sector fixed effects are added. Finally, in columns (4) and (8), there are time andcountry-sectorfixedeffects.

TheupperpanelofthetablepresentsresultsfortheSPSspecifictradeconcerns.Thecoefficientonthetariffisnegative(asitwouldbeifSPSmeasuresandtariffsaresubstitutes)butnotalwayssignificant.Inparticular,itisnot significant for thecoverage ratio in thepreferredspecificationwith the timeandsector-countryfixedeffects(column(4)).Overall,thereislittleevidencethattariffsandSPSmeasuressubstituteeachother.

TheresultsoftheregressionswithTBTconcerns,however,revealaclearerpatternofsubstitutionbetweentariffsandTBTmeasures(seebottompanelofTableB.1).AsinKeeetal.(2009),thecoefficientturnsfrompositivetonegativeasmorefixedeffectsareincluded.Itisnegativeandstatisticallysignificant–bothintheregressionusingthecoverageratioandintheregressionusingthefrequencyindexasdependentvariable–whentimeandcountry-sectorfixedeffectsareincluded(seecolumns(4)and(8)).


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3. Measuresaffectingtradeinservices

(a) Whyaseparatediscussion?

Cross-border delivery alone does not fully captureinternationalservicestransactions.Theintangibleandnon-storable nature of many services implies thatsuppliersandconsumersoftenhave tobe inphysicalproximity for servicesprovision to takeplace. Indeed,trade in services takes place through four different“modesofsupply”:beyondthetraditionalcross-bordermode,itencompassestheconsumptionofaserviceina foreign territory and the movement of the supplierabroad,eithertoestablishacommercialpresenceorinperson.Asaresult,capitalandlabourmobilityisofteninextricablylinkedtoservicestrade.

Against this background, measures affecting trade inservices warrant a separate discussion for at leastthree,relatedreasons.

First, the feasibility of applying a tariff, and an ad valoremtariffinparticular,totheinternationalprovisionofservicesisremote.Inmostinstances,itwillbenexttoimpossible for customs officials to observe a service“crossingaborder”,andthevalue(volume)ofaservicestransactionwillonlybeknownaftertherelevantservicehasbeenproducedorconsumed(HoekmanandPrimoBraga, 1997). Trade protection in services is thusessentially in the form of regulatory measures.58 In aliteral sense, all limitations to services trade are “non-tariff”.Thus,itmakesnosensetodiscusswhynon-tariffmeasuresareusedand toanalyse theireconomicandtradeeffectsinjuxtapositionwithtariffsas,inthecaseofservices,tariffsarenotstrictlyavailable.

Secondly,ananalysisbasedonwhethermeasuresareappliedatorbehind theborderisalsolargelyunhelpful.Many services transactions involve the presence ofeitherthesupplierortheconsumerinsidetheterritoryofthe“importing”country.Hence,servicesrestrictionsmostlyapply“behind-the-border”.

TableB.1:Coverage ratio and frequency index of STCs and tariffsSPS

Dependent variable Coverage ratio (ln) Frequency index (ln)

(1) (2) (3) (4) (5) (6) (7) (8)

Tariff (ln) -0.00847 -0.0250 -0.0911*** -0.0256 -0.0444*** -0.0125 -0.0906*** -0.0598***

(0.00886) (0.0159) (0.0143) (0.0242) (0.00909) (0.0155) (0.0139) (0.0193)

Fixed effects:

Country No Yes Yes Yes No Yes Yes Yes

Sector No No Yes Yes No No Yes Yes

Time No No Yes Yes No No Yes Yes

Country*sector No No No Yes No No No Yes

Observations 3,259 3,259 3,259 3,259 3,259 3,259 3,259 3,259

R-squared 0.000 0.160 0.337 0.279 0.006 0.223 0.431 0.330

Number of id 223 223

TBT

Dependent variable Coverage ratio (ln) Frequency index (ln)

(1) (2) (3) (4) (5) (6) (7) (8)

Tariff (ln) 0.0215*** 0.00642 -0.0126*** -0.0439*** 0.0234*** 0.0150*** -0.00512 -0.0394***

(0.00308) (0.00417) (0.00453) (0.0113) (0.00334) (0.00425) (0.00460) (0.0123)

Fixed effects:

Country No Yes Yes Yes No Yes Yes Yes

Sector No No Yes Yes No No Yes Yes

Time No No Yes Yes No No Yes Yes

Country*sector No No No Yes No No No Yes

Observations 9,788 9,788 9,788 9,788 9,788 9,788 9,788 9,788

R-squared 0.005 0.084 0.170 0.107 0.005 0.100 0.185 0.108

Number of id 657 657

Notes:Robuststandarderrorsinparentheses;***p<0.01;columns(4)and(8):withinestimation,idvariable:country-sector.

Source:WTOSecretariatestimates.


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Thirdly, given the modal definition of services trade,theanalysisneedsto includemeasuresapplyingbothto the product (i.e. the service) and to the producer(i.e. the services supplier). Furthermore, the producermay be physically present in the territory of theimporting country. While in the case of goods, factormovement represents a substitute for cross-bordertrade, with many services it is a precondition, or animportantcomplement,foranytradetotakeplace.Allmeasuresthatgovernhowservicesareproducedandconsumed in an economy are thus potentiallymeasures affecting services trade. This is whymeasures discussed here that might appear to gobeyond traditional “trade” instruments need to befactoredinwhenconsideringservicestrade.

While it would be impracticable to lump together adiscussion of services measures and non-tariffmeasures, this does not imply, however, that servicesandgoods trade,and the respective trade limitations,shouldbeconsideredinisolation.Notonlyaretradeingoodsandtradeinservicesmutuallysupportive,59butalso many services trade restrictions affect goodstrade,andviceversa.

Services play a key role in supporting productionnetworks. Transport and logistics services areobviously the most important direct services input tointernational goods trade, but communication,insuranceandbankingarealsokeyenablingservices.Aprominent role isadditionallyplayedbydistribution,businessandotherafter-salesservicessuchasrepairandmaintenance.

Measures that restrict trade and competition inservices markets thus affect not only the economicperformance of the sector concerned, but may,particularly with infrastructural services, also havespillover effects on the economic and exportperformance of goods and other services industries(seediscussioninBoxD.3).60

Restrictionson trade incertaingoodsmay impair theefficiency and export competitiveness of servicessuppliers that rely on those particular products asinputs. Restrictions on the importation of certainmedicalequipmentmayraisecostsforhospitalswhenproviding related medical services to national andforeign patients, for instance. Measures raising thecost of imported consumer goods would likewisenegatively affect retailers, and particularly foreignretailers sourcing many of their products from theirhomecountry.

Suchcross-effectsareespeciallyimportantinlightofthe growing fragmentation of production processesacross countries. As much as three-quarters ofservicestradeisinintermediateinputs(Miroudotetal.,2009),whileintra-firmtradeaccountsfor22percentofUSservicesimportsand26percentofitsservicesexports (Lanz and Miroudot, 2011).61 Together, these

datado indeed paint a picture of services tradeas aprominent, though probably still underestimated,componentofglobalorregionalvaluechains.62Inlightof their spillover effects beyond the industryconcerned,restrictionstotradeinsuch“intermediate”services can be argued to be of even greatersignificance.

Similartotheanalysisofnon-tariffmeasuresforgoodstrade,thissectionwillfirstdiscussthemotivationsforgovernments’ intervention in services markets. It willthen try to categorize the main forms of interventionused and, to the extent possible, examine theireconomicandtradeeffects.

(b) Whydogovernmentsinterveneinservicesmarkets?

This section discusses why governments mayintervene in services markets. To a large extent,the analysis in sections B.1(a) and 1(b)(ii) aboveremains pertinent. A number of services-specificcharacteristics,however,needtobefactoredin.

(i) Public interest considerations

From a public interest theory standpoint, governmentintervention in services markets may be justified onefficiencygrounds,aswellasonequityconsiderations.Efficiencyconcernsrelateprimarilytotheexistence,inmanyservicesindustriesofinstancesofmarketfailure,suchasasymmetric information (i.e.onepartyhavingmore information than the other), imperfectcompetition and externalities (see below).63 Whilethese failures also appear in goods industries, theyseemtobemorepervasiveinthecaseofservices.Thediscussionthatfollowsislargelyillustrative.

Instances of asymmetric information in services arefrequent.Thisis,essentially,becauseoftheintangiblenature of many services. Immateriality implies thatconsumers cannot easily assess the quality of aservicebeforeconsumingit.Producerswilltendtobebetter informed. However, they might not have anincentivetosupplymoreinformationtoconsumers,asthismightbecostlytoprovide,orretaininginformationmayaffordacommercialadvantage.Atthesametime,consumersmay lack theexpertise required toassessmuch of the technical information they receive. As aresult, consumer choice is insufficiently informed forcompetition to function effectively. This problem isaccentuatedbythefactthatrepeatpurchasesmaynotalwaysbeanavenuetodisciplineproducerbehaviour.Services,bytheirnature,tendtobemuchmorediversethangoods.Consumersmaynotbewilling,orable,tocontinuallypurchaseidenticalservices.

Though market-based solutions could see producerssignalling a commitment to quality, for instance byinvesting in reputation,customerservice,brandnameor easily accessible complaint procedures, they are


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unlikely to be sufficient for high-risk activities(Pelkmans, 2006). Governments thus often intervenetocurb services suppliers fromexploiting informationasymmetries. As it is generally impossible to impose,verify and ensure compliance with performancerequirements by focusing exclusively on the service,governments frequently intervene at the level of thesupplier. They may, for instance, require producers todisclose certain information to consumers, or imposequalification or licensing requirements that seek toensure the competence of the services supplier andthusthequalityoftheservicesprovided.

Information asymmetries may also be problematic forproducers where consumers possess privateinformation, for example about their health status. Alack of generally available information may alsoengender situations of “moral hazard”. For example.wheresomeoneotherthantheconsumerbearsthefullresponsibility and consequences of his actions,excessiveconsumptionmayresult. Insurancemarketsareacaseinpoint.

Imperfect competition is another market failure oftenencounteredinservices industries.Manyservicesaresupplied through networks: telecommunications,postal services, electricity distribution, environmentaland rail transport services are prominent examples.Standardized services provided over suchinfrastructure or distribution networks often exhibitsuchlargeeconomiesofscalethattherelevantmarketcan be served most cheaply by a single or smallnumber of firms, i.e. they are often naturallymonopolistic/oligopolistic. Unchecked, these marketsresult in under-supply and prices set above marginalcost. Government intervention is thus warranted, andmay imply instituting price controls or enablingcompetition (e.g. through unbundling services,regulating access to essential facilities, franchisingandconcessions).

Finally, both negative and positive externalities occurin service markets when the price of a service doesnot reflect the true cost or benefit to society ofproducing that service. This results, respectively, inexcessive or insufficient consumption. Theenvironmental consequences of heavy road transportor intensive tourism are instances of negativeexternalities. Network expansion intelecommunicationsservices, increased investment ineducation or vaccination programmes, on the otherhand,areexamplesofpositiveexternalities.

Government intervention in services industries mayalsobedrivenbyequityconsiderations.Manyservicesare inputs into human capital development and, assuch, they underpin governments’ social objectives.Health and education services are typical examples,but similar considerations may also play a role insectors such as audio-visual, telecommunications,transport, energy and water services. Unfettered

markets would leave certain geographical areas orgroups of consumers without affordable prices oradequatesupply.Theimpositionof“universalservicesobligations” has been one government response tocountertheseproblems.

Box B.7 provides some sector-specific examples ofservices measures that governments may use toaddressefficiencyandequityconcerns.

(ii) Political economy considerations

According to the economic theory of regulation,government intervention is not driven exclusively bythe pursuit of the “public interest”, but rather, oradditionally,bytheconcernsofspecialinterestgroups.Governments may therefore intervene irrespective ofthe existence of a market failure. Even whenintervention is warranted on public policy grounds,governmentsmaystill,indecidingwhichinstrumenttoemploy, be “bought” into relying on those measuresthatbenefitmoreorganizedgroups,generallydomestic(orincumbent)producers.

WhilethediscussioninSectionB.1remainspertinent,whenitcomestoservicesindustries,politicaleconomyconsiderations are particularly significant in at leastfourrespects.

First and foremost, the most transparent form ofinterventionwhenitcomestotradepolicy, i.e.atariff,is not available in services markets. By definition,governments need to resort to other, often moreopaqueinstruments.Thisoffersgreaterscopetomaskany private interest motivations, and thus potentiallyreducestheriskofelectoralpunishment.

Secondly, much less scientific evidence exists onwhich services intervention might be based and itseffectiveness tested. The diverse nature of manyservices,theirintangiblenature,andthefrequentneedto regulate at the producer level all imply thatregulationtendstobenotonlycomplex,butalsomuchmoredifficult toassesson thebasisofexact criteriaappliedattheproductlevel.Thismay,onceagain,helpcamouflagegovernments’trueintentions.

Thirdly, the complexity of much services regulationimplies that regulators who are less experienced orless resourced might be more easily “captured” byspecial interest groups even if they intend to act inpursuitofthe“publicinterest”.Givensuchinformationasymmetries, protection might not even need to be“bought”.

Fourthly,giventheequityandsocialconcernsattachedtomanyservices, consumersmightactually sidewithdomesticproducers.Consumersmaymisguidedlyfearthat, if the interests of domestic producers are nolongerupheld,servicequalitywillsufferand/orpriceswillincrease(Hoekmanetal.,2007).


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BoxB.7: Examples of services-specific measures to pursue public policy objectives

Equitable access

In the transport or telecommunications sectors, governments often want remote regions to be served bysuchservicesregardlessofprofitability.Basicequityobjectivesalsopromptgovernmentstoensurethatallcitizenshaveaccesstoeducationandessentialhealthcareatloworzerocosts.

Measuresincludecross-subsidizationschemestoensurethatrevenuesinprofitableareasarereinvestedinfavour of under-developed regions or persons in financial need and licensing conditions which includeuniversalservicesobligations(forexample,commercialhospitalsarerequiredtotreatacertainpercentageofpatientsfreeofcharge).

Consumer protection

Withregardtoprofessional,financialorhealthservices,thecomplexityoftheservicethatisprovidedmakesit verydifficult forconsumers toappreciatequalityor safetyprior toconsumption.Servicessuppliersmayexploitsuchinformationasymmetries.

Measures include prudential and other technical standards to be complied with by services suppliers;publicationrequirementsoncosts,risks,side-effects,etc.,soastoenabletheconsumertomakeinformeddecisions;educationandtrainingrequirementstoensurecompetence;andmandatoryprofessional liabilityinsurance.

Reduction of environmental impacts and other negative externalities

Roadandairtransportcausepollutionandnoise;tourismcouldputtheenvironmentunderstressanddisturbnaturalhabitats,etc.

Measuresincludetrafficrestrictionsoverweekends,duringnighthoursorinsensitiveareas;zoninglawsandbuildingcodes;tax/subsidyschemestomobilizefundsforthepreservationofculturalheritage.

Macroeconomic stability

Financial institutions may engage in imprudent lending or design complex financial instruments that areinsufficiently understood. As a consequence, depositors may lose confidence and withdraw their money,inter-banklendingmaysuffer,creditsupplytotherealeconomymaybehampered,andsoforth.

Toensurestability,financialinstitutionsmustcomplywithmeasuressuchasminimumcapitalrequirementsandhighercapitalreserveswhennewfinancialinstrumentsareprovided.Theymustalsodiversifyassetstolimitexposuretoindividualclients,reportontheiractivities,orputlimitsonremunerationofmanagement.

Avoidance of market dominance and anti-competitive conduct

Concernsaboutanti-competitiveconductariseinsectorspronetomarketconcentration(includingserviceswithnetworkeffectsandinterconnectionneeds,suchastransportandtelecommunications,andliberalizedformermonopolies).

Measures include limitationsonmarketshares, introductionofpricesurveillanceormandatorypricecaps,interconnection guarantees, and government-mandated technical standards to replace company-specificrequirements.

Source:WorldTradeOrganization(WTO)(2005a)

(iii) Pervasiveness of government intervention

Services industries exhibit hugely differentcharacteristicsandmarketstructures.Thereisabroad

rangeofsectorsinwhichgovernmentsplaynospecificrole. Nonetheless, it is widely acknowledged that,giventhegreaterlikelihoodofmarketfailuresandthepotentially bigger role played by private interestconsiderations, government intervention in services


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markets as a whole is more prominent than in goodsmarkets.

The formof this interventionhaschangedover time,however.Historically,severalinfrastructuralandsocialservices, especially those provided to the generalpublic (traditionally called “public services”), weredirectly supplied by government entities, usually inmonopoly situations. Recent decades have seen amove away from state ownership towards morerelianceonprivatemarketstoprovidetheseservices.Governments progressively moved back from theirroleof suppliersand increasingly tookon the roleofregulators. Once such services were no longerpublicly financed and provided, governments wereforced to introduce new measures, with the statedobjective of promoting economic and social welfare.Indeed, regulation of these services markets hasexpanded at the same time as the industriesconcerned have been privatized and opened up tocompetition.64

(c) Howdogovernmentsinterveneinservicesmarkets?

Thissectionhighlights themain typesofgovernmentmeasures that have an effect on trade in services. Itonlysketchesbroadcontours.Giventhatthedefinitionoftradeinservicesincludesservicesthatareproducedlocallyintheimportingcountry,thescopeofmeasurespotentially impacting such trade is vast, ranging fromcorporate taxation to labour laws, to consumersubsidies,tolandownershipprovisions,andsoon.Thelist is much longer than in the case of measuresclassified as non-tariff measures in a goods tradecontext.

The fact that a measure negatively affects trade inservicesdoesnotimplythatitshouldbeautomaticallyviewedasprotectionist.Onthecontrary,asdiscussedabove, governments often intervene in servicesmarkets in pursuit of a variety of public policyobjectives that are unrelated to trade policyconsiderations.Theirinterventionsmightneverthelessraisethecostforservicessupplierstoenter/establishoroperateinamarket.

Thissectionpresentsatypologyofservicesmeasuresand draws on the (limited) available literature todiscuss to what extent such measures may beconsideredastraderestrictions.

(i) Types of services measures

As highlighted, the concept of “border” is notnecessarilyahelpfulcriterionwhentryingtocategorizeservices measures. Francois and Hoekman (2010)classify services interventions according to whetherthey affect domestic and foreign services andservices suppliers differently, i.e. are discriminatory,and whether they affect the ability of firms toenter/establish ina foreignmarketorhavean impactontheiroperations(seeTableB.2).

Suchaclassification,which isbasedon theeffectofthe measures, captures virtually all forms ofgovernment intervention in services markets. It isalso helpful in that it enables a rough distinctionbetweenmeasures thatusually reducethenumberofsuppliers in a market (i.e. those related to marketentry/establishment),andthusthequantitysuppliedata given price, and measures that raise costs once amarket is entered into (i.e. those that impactoperations) and result in a given quantity beingsuppliedatahigherprice.

It also helps to highlight that services interventionscomprisemeasuresthataffectinthesamewayforeignand domestic producers seeking access to thedomestic market. Measures impacting either entry orestablishment in a non-discriminatory fashion mayprotect national, or incumbent, suppliers, at theexpenseof foreignornewdomestic suppliers. In thisregard, some of the measures under discussion mayactuallybe restrictive tocompetitiongenerally, ratherthanto“foreigncompetition”,i.e.trade.

Thus, what matters for services trade is not just theremoval of discriminatory measures but thecontestabilityofthemarket.Eveninasituationwhereall discriminatory measures were removed, a sectorwould still remain highly restricted if only a fixednumber of suppliers were permitted to operate.Though there would be no discrimination in favour ofnationals,theentryofanynewsuppliertothemarket,betheyforeignordomestic,wouldstillbeconstrained.

Alternative classifications have also been proposed.Theyfocusmoreonthetypeofinstrumentbeingused,rather than its effects. Hoekman and Primo Braga(1997), for instance, distinguish between four maincategories: (i)quotasand localcontent requirements;(ii) price-based instruments; (iii) standards, licensingand procurement; and (iv) discriminatory access to

TableB.2:Typology of measures affecting services trade

Measures impacting entry/establishment Measures impacting operations

Non-discriminatory Restrictiononthenumberoflicencesforpharmacies,forexample

Reserverequirementforbanks,forexample

Discriminatory Alimitonthenumberofforeignarchitects,forexample

Higherportdutieschargedonforeign-flaggedvessels,forexample

Source:WTOSecretariat,basedonFrancoisandHoekman(2010).


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distribution networks. Copeland and Mattoo (2008)propose a fairly similar classification. Theseclassifications,whicharemoreakintothoseemployedtoclassifynon-tariffmeasuresapplyingtogoodstrade(seeSectionB.1),appearbettersuitedtoanalysetheeconomic effects of the various measures, preciselybecause available literature borrows heavily fromtraditional(i.e.goods)internationaltradetheory.65

Oneinstancethatisnotcapturedbyeitherclassificationis when trade is affected by the absence, rather thanthepresence,ofameasure.Forexample,asdiscussedfor non-tariff measures, when there is significantuncertainty about the quality of a service, demand for(andtradeof)theserviceconcernedmightonlyincreaseifcertificationrequirementsforsuppliersareintroducedasthesehelpraiseconsumerconfidence. Instancesofnaturalmonopoliesoroligopoliesprovideafurthercasein point. Unless pro-competitive measures areintroduced,dominant incumbentsupplierscan,throughtheir control of essential facilities, obstruct access tothemarket(MattooandSauvé,2003).

(ii) When is a measure a trade restriction?

Much services regulation pursues public policyobjectives. Nevertheless, such regulation mayunintentionallyalsohavetrade-restrictiveeffects.Or,atthesametimeasaimingatdomesticefficiencyorsocialequity objectives, it might be captured by specialinterest groups to protect domestic suppliers at theexpenseofconsumers.Economicpolicyconsiderationsmay also lead to services measures being usedexclusivelyforprotectionistpurposes.Theymayfurtheraffect the choice, among all possible alternatives, ofparticularlyinefficientpolicyinstruments.

Giventhepervasivenessofservicesregulationanditscomminglingwithtradeprotectionaclearidentificationof which measures are trade restrictions, or a neatseparation of the protective component in suchmeasures, is fraught with difficulty. As Copeland andMattoo(2008)observe,thetrade-relatedimplicationsof services measures depend on the specificcharacteristicsoftheserviceindustryinquestion,andparticularly on the market imperfections suchmeasuresaredesignedtocorrectorequityobjectivesthey are pursuing. Market structures differ widelyamong services sectors (Francois and Hoekman,2010). Services trade includes transactions in highlycontestable sectors as well as network industriescharacterizedbylargefixedcostsofentry,forinstance.The trade effects of services measures can thus beexpected to be different in these two types ofindustries.66

Indeed,atthesectorallevel,agreatdealofliteratureisavailablethatassessestherelativeefficiencyofdifferentregulatory measures in attaining specific public policygoals. Though rarely explicitly trade-oriented, manyfindings lead to trade-relevant policy conclusions. At a

generallevel,however,verylittleanalysisseemstohavebeen undertaken on the relative efficiency of servicesmeasures. Nevertheless, the limited literature that isavailable does point to some broad observations. Thefollowingdiscussionisorganizedaroundthetypologyofservices measures in Francois and Hoekman (2010),complementedbyan instrument-basedclassification. Itaddressesfirstdiscriminatorymeasures,and thennon-discriminatoryones.

First, discriminatory measures that impact eitherentry/establishment or operations place foreignservices and suppliers at a competitive disadvantagerelative to domestic services and suppliers. They canbe considered trade restrictions almost by definition.They include “traditional” trade measures, such asquantitative restrictions, that impact foreignentry/establishment, and discriminatory taxes orsubsidies that affect the cost of foreign suppliers’operations.

International trade theory suggests a ranking of suchinstruments of protection for goods trade (seeSectionB.1).Iftheobjectiveofapolicyistoexpandtheoutputofanimport-competingindustry,outputsubsidiescanbeshowntobeasuperiorinstrumenttotariffs,andtariffs normally superior to quotas. As Hindley (1988)indicates,thisrankingshould,inprinciplebeasvalidforservices as it is for goods. Nonetheless, applying asimilaranalysis toservices tradepresentsanumberofchallenges,asMattoo(2003)highlights.First,tariffsarenotnecessarilyafeasibleoptionforservices.Secondly,measures that may have tariff-like effects in terms ofraisingforeigncostsperunitofoutputarenottariff-likewhenitcomestogeneratingrevenue.Thirdly,andmostsignificantly, the modal definition of services tradeimplies the possibility that trade restrictions will bringabout mode-switching and that factor movements willdirectlyaffectmarketstructures.

Tariff-likemeasures thatdonotproduceany revenuewould imply a much greater loss in national welfarethanastraight tariff if incomefromquotas (i.e.quotarents) does not accrue domestically.67 Generallyspeaking,quotarentsaccruetotheownersoftherighttoimporttheproductinthedomesticeconomy.Inthecaseofservices, foreignsuppliersgenerallysell theirservice directly to domestic consumers, so they aremuchmorelikelytocollectthequotarentsthaninthecase of goods. Additionally, quotas are oftenassociated with wasteful administration and rent-seeking activities, including corrupt practices, thatpush their social cost above that of tariffs. Inimperfectlycompetitivemarkets,quotasareshowntobeevenmorewasteful(CopelandandMattoo,2008).

Iftradeispossiblethroughonlyonemode,alimitationonthatmodemayrender theserviceconcernednon-tradable.Ifmodescanbesubstitutedforeachother,aprohibitiverestrictionmaynothavemucheffect iftheunconstrainedmodeisthemostefficientone(Francois


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andHoekman,2010).If,however,itisnotthefirst-bestoption,theswitchtothealternativemodemayresultindeadweightlossesinducedbytradediversion(thoughpossibly moderated by lower price increases than inthe case where this mode-switching option was notavailable). Thus, any benefits resulting from themultiplemodesofservicesprovisionatthedisposalofsuppliers faced with a trade restriction need to beweighed against the additional cost to the importingeconomyofacquiringtheservicethorougharelativelyinefficientmode(CopelandandMattoo,2008).

For thoseserviceswherecross-borderdelivery isnotfeasible, limitations to entry on foreign investmentimply that the price and quality of the servicesconcernedaredeterminedexclusivelybythedomesticmarket structure. These restrictions on foreign directinvestment (FDI) generally take the form of eitherentry quotas and/or restrictions on foreign equityparticipation.Whilethe latterrestrictionsmaypreventtransfers of technology, skills and know-how, theformerhavebeenshowntobemoresociallywasteful.Foreign FDI might be attracted by returns toinvestment that have been artificially raised byrestrictions on competition and the true socialproductivityoftheinvestmentmaythusbelowerthanthereturnstotheinvestor(Mattoo,2003).68

Asfornon-discriminatorymeasures,limitedtheoreticaland empirical work has been undertaken on thesemeasures at a general level on the part of tradeeconomists. This is most probably a consequence oftheir primarily domestic nature. Literature relating totheeconomiceffectsofnon-discriminatoryrestrictionstoentry in individualsectors ismorereadilyavailable,but a review of this literature would be beyond thescopeofthisreport.

Nevertheless, it is possible to point to some generalobservations. First, non-discriminatory measuresaffecting entry/establishment, most notablyquantitative restrictions,wouldseem tobedifficult tojustify on efficiency grounds, as Hindley (1988) andCopeland and Mattoo (2008) argue. By protectingincumbent suppliers from competition, such entrylimitationsreducemarketcontestability.Theyhaveonoccasion been defended for infant-industry typereasons and the fulfillment of universal servicesobligations through cross-subsidization. However,alternative means have been shown to achieve thesame objectives without the need to restrictcompetition, so that entry limitations are at bestsecondorthird-rankingalternatives.

Secondly, non-discriminatory measures that impactsuppliers’ operations would seem to be the servicesmeasures furthest removed from protectionistpurposes. Even when they are pursuing public policygoals, however, they may, intentionally or otherwise,havespillovereffectsontrade.Forinstance,Copelandand Mattoo (2008) observe that, though responding

primarily to problems of asymmetric information,certificationrequirementsforprofessionalshavetradeand welfare effects that may vary depending on thescreening mechanisms chosen. Moreover, suchmeasures might yet again affect supply patterns byinducing suppliers to switch to alternative modes oftradingservices(Delimatsis,2008).

Assuch,acrucialchallengeposedbythesemeasuresis how to distinguish between when they are usedexclusively for public policy objectives and when theyare also being used for protectionist purposes(see Section E.2). Mattoo and Sauvé (2003) argue infavour of a “necessity test”. Such a test would enablegovernmentstoattaintheirchoseneconomicandsocialobjectives, but to do so in a manner that does not“unnecessarily”restricttrade.Theycontendthatsuchatestwouldencouragetheuseofthemosteconomicallyefficient measure among those available to remedy amarketimperfectionandpursuenon-economicgoals.

The ranking of instruments of protection in servicestradethatemergesfromeconomictheoryis,toalargeextent,reflectedintheGeneralAgreementonTradeinServices(GATS).Bydesign,andasdiscussedinmoredetail in Section E, the GATS distinguishes broadlybetweenthreetypesofservicesmeasures:thosethatrestrictentry/establishment,whetherdiscriminatoryornot; measures that are discriminatory, modifying theconditionsofcompetitioninfavourofnationalservicesand services suppliers; and measures that are non-discriminatoryandnon-quantitativeinnature.Thefirsttwotypesofmeasures(essentiallymarketaccessandnational treatment limitations as defined in GATSArticles XVI and XVII, respectively) are subject tonegotiationstoprogressivelyeliminatethem.Thethirdtype of measures (“domestic regulation”) are notconsidered trade restrictions as such, but the GATSacknowledgesthattheymayneverthelesshavetrade-restrictiveeffectsandmandatestheestablishmentofrelevantdisciplinesunderArticleVI:4.

4. NTMsinthe21stcentury

This section describes how recent or foreseeablechanges in the trading environment have affected ormay affect governments’ use of non-tariff measuresandservicesmeasures.Thisallowsustoillustratethepracticaldifficultiesinvolvedindealingwithmeasurespursuedforpublicpolicyreasonsandthetradeimpactof suchmeasures.Examples includemeasures takeninthecontextoftherecentfinancialcrisis,policies inrelation to climate change and measures addressingfoodsafetyconcerns.

(a) NTMs,servicesmeasuresandtherecentfinancialcrisis

Economiccrisestypicallyresult intheimplementationof economic stimulus measures by governments.


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Theuseofnon-tariffmeasuresisapartofsuchcrisis-inducedgovernment intervention.Therecentfinancialcrisis,whichhashadanimpactontheuseofNTMsbygovernments worldwide, is a case in point. In thissection, an analysis of the NTMs implemented in thewake of the crisis will enable us to illustrate thepracticaldifficultiesinvolvedindistinguishingbetweenmeasures taken for public policy reasons and thosethat constitute disguised protectionism. This sectionwill also discuss how recent changes in the tradingenvironmentbroughtaboutby thefinancialcrisismayaffect governments’ use of NTMs in the future. Itemphasizes that better monitoring of non-tariffmeasures,whichensuresgreatertransparencyintheiruse, is imperative in preserving consumer interestsand preventing a proliferation of protectionistmeasures. Italsoalludes to the fact that insituationswhere governments have a preference to protectdomestic industry, a monitoring mechanism needs tobe accompanied by legally enforceable rules (thatenable retaliation if an agreement is violated) to limittheuseoftrade-distortingNTMs.

(i) The recent financial crisis: attributing motive to the use of NTMs and services measures

It is well-established that the origin of the recentfinancialcrisiscanbetracedtoinstitutionalfailuresinthe regulationoffinancial systemsatanational level.Its effects were then transmitted across manycountries through international trade and financelinkages. In response to the crisis, subsidies, in theform of direct funding, special loans and guarantees,were provided to bail out a number of financialinstitutions in various advanced economies (Baldwinand Evenett, 2010). These “emergency” measures inthefinancialsectorwereassociatedwithpublicpolicyobjectives; they were deemed necessary to stem thespread of systemic damage and help restore thenormal functioning of financial markets – critical forbothconsumersandproducersacrosstheworld.

A number of countries also introduced subsidies toencourage consumers to buy specific productsthrough, for instance, refunding a certain amount ofthe purchase price. For example, the ConsumerAssistance toRecycleandSave(CARS)Actof2009in the United States – referred to as the “cash-for-clunkers”programme–providedcreditstoconsumerswhotradedinold,fuel-inefficientvehicleswhenbuyingor leasing new, more fuel-efficient vehicles(Congressional Quarterly, 2009). Such consumersubsidy schemes, implemented in a number of otheradvanced economies including Germany, France andthe United Kingdom, were used as measures tostimulate domestic demand – once again, a publicpolicy objective. Moreover, they were non-discriminatoryinternationally.

Intimesofeconomicrecession,however,highlevelsofunemploymentcanresult ingovernmentsresortingtonon-tariff measures and services measures thatdiscriminate against imports competing with “like”domestic products. Hence, as highlighted earlier, itoften becomes difficult to distinguish practicallybetween measures taken for public policy reasons(although their imposition may have adverse tradeeffects) and those that constitute disguisedprotectionism.Thisambiguityingovernmentmotivationisfurthercomplicatedbytheincreasedimportanceofintermediate goods trade in global supply chains(Hummels et al., 2001; Koopman et al., 2010). Forinstance, consider the industry-specific subsidiesintroduced by a number of developed economies toassisttheirstrugglingautomotiveindustriesduringtherecentcrisis.Thisispotentiallytrade-distortingforthefinal product market in the short-run. However, it ispossible that by disrupting an established globalsupply chain, their collapse would have led to asubstantialdecline inworld intermediategoodstrade,therebyresultinginsignificantjoblossamongseveralcountriesoverthemedium-run.

Identifyingthemotivebehindnon-tariffmeasuresandservicesmeasuresbecomesespecially important inacrisis situation because it can easily lead to beggar-thy-neighbour policies, i.e. trade-restrictive actionstaken by one country can trigger similar actions byother countries, leading to a spiral of ever morethreatening restrictions. Consider, for example,subsidies to financial institutions. If bailout funds areconditional on financial service firms redirectinglendingtowardsthehomemarket,thismaybeseenasdiscriminatory despite the apparent prudentialconcerns. The same holds true if subsidies areconditionalonthepurchaseofadomesticallyproducedproduct.

(ii) Impact of the recent crisis on future use of NTMs and services measures

Monitoring and coordination

The recentcrisismayaffectgovernments’useofnon-tariff measures and services measures in the future.Earlier in the section, we argued that the increasedincidence of NTMs may be linked, in part, to the factthat they are less transparent than border measuressuch as tariffs, and hence harder to discipline underinternational agreements. An outcome of the recentcrisis was the revival of the WTO’s trade monitoringmechanism in October 2008 (see Section C.1).69TherevivalofthismonitoringmechanismrepresentsanadvanceinaddressingtransparencyintheuseofNTMsandservicesmeasures. Itcanactasacommunicationdevice to solve a coordination problem that leads toexcessiveprotectionism,viatheuseofsuchmeasures.Inthefollowinghypotheticalexampleofhowthismightwork,itisassumedthatgovernmentspreferopentradepoliciestoprotectionism(seeTableB.3).


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Giventhepayoffsspecifiedfortwotradingpartnersinthe above table, there are two equilibria. If country 1resistsprotectionismthroughnon-tariffmeasures, forinstance, country 2’s best response is also not torestricttrade(andviceversa).If,however,country1isimposingtraderestrictions,country2’sbestresponseis also to impose similar restrictions (and vice versa).This reflects a beggar-thy-neighbour policy – if, forexample, country 1’s exporters cannot compete on alevel playing field in country 2, the government ofcountry 1 would not want the country’s firms to alsolose out on domestic market share to importcompetition from country 2. For both countries, thefirst equilibrium outcome is preferable to the second.But if the two are unable to communicate andcoordinatetheiractions,theymayendupwiththelesspreferred equilibrium outcome. Hence, by improvingthe transparency of NTMs, WTO’s monitoringmechanism can guide members to a better welfare(“Pareto-superior”)outcome.

Ofcourse,itmaybethecasethatgovernmentspreferto protect their domestic industry. If so, the strategicinteraction between governments is not simply acoordination game – the payoffs presented in theprevioushypotheticalexamplewouldchange.Supposeone country chooses “no protectionism”, the otherwouldwant to choose “protectionism”as itwouldgetfull market access to the former without having toopen up to competition itself. Table B.4 reflects thisargumentwithrelevantpayoffsforthetwocountries.Itshows that the situation is representative of what isknown as a prisoner’s dilemma game, whereby bothparties are motivated by the fear of what the othermightdo.

Giventhepayoffsspecifiedfortwotradingpartnersinthe above table, the equilibrium is both countrieschoosing the strategy of protectionism. Unlike thecoordinationgame,however,amonitoringmechanismthat helps the countries to communicate with eachotherwouldnotbesufficienttoguidethemtoabetterwelfareoutcomewherebothchoosethestrategyofnoprotectionism. This is because despite thecommunication,eachcountrywouldhaveanincentivetodefectfromtheiragreeduponstrategy,fearingthattheothermightdoso.Hence,alongwithamonitoringmechanism, legally enforceable rules – that enableretaliation in the event either country violates anagreementofchoosing“noprotectionism”–wouldberequired to control the use of trade-distorting non-tariff measures and services measures. It is worthnoting,however,thatduringtherecentfinancialcrisis,

governments of both advanced and developingeconomieshavereaffirmedtheirfaithinthemultilateraltradingsystemwithrepeatedpledgestoguardagainstprotectionistpolicies.

Measures in the financial services sector

Given that the origin of this economic crisis lay in afinancialcrisis,itislikelytoaffectgovernments’futureuseofmeasuresinthefinancialservicessector,whichmayaffect internationalmarketaccess.The literatureidentifiestheheterogeneityofregulatorypracticesasa major constraint on services trade (see Section D).Therecentfinancialcrisismayaffectthemotivationofgovernmentstopursueregulatoryconvergence inthefinancial services sector due to the reasons outlinedbelow.

First, the recent crisis was anchored in advancedindustrialized nations – those perceived to haverelatively sophisticated regulatory regimes. In fact,certain developing economies may associate theactivitiesofsomeforeignfinancialoperatorswithwhatthey perceive to be legitimate macro-prudentialconcerns. Secondly, unlike several developedeconomieswhichareassociatedwithhighly liberalizedcapital accounts, those which maintained greaterrestrictions on capital transactions and took a stricterstanceonfinancialleverageappeartohaveweatheredthestormbetter (DelimatsisandSauvé,2010).Thirdly,global liquidity growth, induced by expansionarymacroeconomicpoliciesimplementedacrosstheglobeduring the recent crisis, resulted in a surge of capitalflows to emerging economies. This has compoundedconcerns about the intrinsic volatility of short-termcapital flows, thereby giving developing countries anadditionalreasontoring-fencetheireconomiesagainstasuddenreversal(Sidaouietal.,2011).

(b) NTMsandclimatechange

(i) The future scenario

TheDurbanClimateChangeConferenceinDecember2011endedwithacommitment(“DurbanPlatformforEnhancedAction”)toworktowardsanewglobaltreatytoreplacetheKyotoProtocolby2015atthelatestandto establish a new climate fund (the “Green ClimateFund”)tohelppoorcountriesbothmitigateandadaptto climate change. Two years earlier, the UN ClimateChange Conference in Copenhagen established atargettokeeptheincreaseinglobaltemperaturefrompre-industrial times below 2 degrees Celsius.

TableB.3:Coordination game

Country 1

Country 2

Noprotectionism Protectionism

Noprotectionism (2,2) (0,0)

Protectionism (0,0) (1,1)

TableB.4:Prisoner’s dilemma game

Country 1

Country 2

Noprotectionism Protectionism

Noprotectionism (2,2) (0,3)

Protectionism (3,0) (1,1)


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A number of observers (Houser, 2010; Bodansky,2010)saw that targetunder theCopenhagenAccordasasignificantstepforwardsfortheglobalcommunitysince the lack of an explicit long-term goal meantcountries had no clear direction for national andinternational policy.70 Furthermore, under the Accordboth developed and developing countries notifiedemission reduction targets to the United NationsFramework Convention on Climate Change(UNFCCC).71

Nevertheless,bothmeetingsfellshortofexpectationsthat they would produce binding mitigationcommitments from both developed and developingcountries.Withoutprejudgingtheoutcome,shouldthenegotiations on a post-Kyoto agreement proveprotracted,whatwilllikelyemergeintheneartermisapatchwork of regional and national climate changeregimeswithsomecountriesimplementingfairlystrictmitigation measures, others taking no meaningfulaction,andafairnumberofcountrieswithpoliciesthatlie somewhere in between. This may lead toenvironmentalandeconomicoutcomesthatcountrieswouldthentrytomanagethroughtheuseofnon-tariffmeasures.

(ii) Carbon leakage and concerns about loss of competitiveness

Two related concerns are likely to deepen if nointernational agreement emerges about the specificactionsthatallcountriesneedtotaketotackleclimatechange.One is “carbon leakage”and theother is thepossible loss incompetitivenessoffirmsor industriesin countries which take more stringent mitigationmeasures.

Carbon leakage refers to a situation in whichreductionsofgreenhousegasemissionsbyonesetofcountries (“constrained” countries) are offset byincreased emissions in countries which do not takemitigationactions(“unconstrained”countries).Muchofthe discussion of carbon leakage has taken place inthe context of the Kyoto Protocol where so-calledAnnexIcountries(predominantlydevelopedcountries)hadcommitmentstocutbackontheiremissionswhilenon-AnnexIcountries(developingcountries)didnot.72

Theleakagecanoccurthroughanumberofchannelsinvolvingchangesininternationalpricesofenergyandenergy-intensive goods as well as the relocation ofproduction. Basically, the mitigation measures inconstrained countries reduce the production ofenergy-intensive goods and raise their internationalprices.Thedecreaseinproductionofenergy-intensivegoods also reduces the demand for fossil fuels andleadstoadropintheirprices.Unconstrainedcountriesexpand their production of energy-intensive goods inresponsetotheirhigherinternationalprices.Thelowerprice of fossil fuels will also induce unconstrainedcountriestousemoreofit,thusincreasingemissions.

Finally, energy-intensive industries may relocate fromconstrainedcountriestounconstrainedcountries.

However,therearealsooffsettingeffectswhichneedto be considered. The first one is the income effectfrom the increase in the price of energy-intensivegoods (Copeland and Taylor, 2005). The same pricechange which drives unconstrained countries toincrease production of energy-intensive goodsincreases their income. Assuming that environmentalquality is a normal good, this income effect will prodthem to take measures to mitigate emissions. Thesecond effect that can counteract carbon leakage isinnovation towards more energy-efficient means ofproduction(DiMariaandWerf,2008).Thesamepricechange responsible for carbon leakage also inducesfirmstodevotemoreoftheirresearchanddevelopment(R&D) resources to find energy-efficient means ofproduction. This is similar to the argument made byPorterandvanderLinde(1995)thatproperlydesignedenvironmental regulations can spur innovation thatmay partially or more than fully offset the costs ofcomplyingwiththem.

Because of these possible offsetting effects,estimates of the magnitude of carbon leakage varyconsiderably although it is always greater than zero.The standard method of measuring carbon leakageexpressesitasaratiooftheincreaseinCO2emissionsof unconstrained countries and the reduction in theemissions of constrained countries. Most of theestimates of the global rate of carbon leakage varybetween5percentand20percent(Sijmetal.,2004).However, much higher estimates reaching up to130 per cent have been calculated (Babiker, 2005).Estimatesofcarbonleakageabove100percentimplythat mitigation policies in the constrained countriesare actually counter-productive since they lead tohigher global emissions as production shifts tounconstrained countries that employ more emission-intensivetechnologies.73

Unlikecarbonleakage,thereisnoprecisedefinitionofcompetitiveness in the climate change literature. Itmight refer to the impact of the mitigation measureson firms’ or industries’ cost of production, profits,output,employment,ormarketshare.Theseindicatorshavebeenvariouslyemployed inanumberofstudiestomeasurelossofcompetitiveness.74Notwithstandingthis imprecision, the shift in production of energy-intensive goods from constrained to unconstrainedcountries, which is what makes leakage possible,capturestheessenceofthiscompetitivenessconcern.

(iii) Measures to address climate change, carbon leakage and loss of competitiveness

The need to mitigate climate change will spur manycountries to take unilateral mitigation measures,


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manyofthemfalling inthe listofnon-tariffmeasuresthat have been discussed in this report. However,carbon leakage introduces a strategic dimension toconstrained countries’ mitigation efforts since theymayconsider itnecessary to take intoaccount “free-riding”byunconstrainedcountrieswhichcandiluteorreversetheeffectoftheirmitigationactions.Thefree-riding refers to the argument that unconstrainedcountries bear no cost of mitigation efforts, yetassuming carbon leakage is less than 100 per centthey benefit from the reduction in global emissionsdue to the mitigation activity of the constrainedcountries. It is argued that trade measures provide awayforconstrainedcountriestoaltertheincentivestofree-rideontheirendeavours.

Theoretical work exists on the effect of linkinginternational environmental cooperation with trade(Barrett, 1994; Barrett, 1997; Botteon and Carraro,1998).Thebasicinsightfromthesestudiesisthatthenumber of cooperating countries in an environmentalaccordwouldbelargerandtheagreementmorestable(e.g. self-enforcing) if there are provisions for tradesanctionsagainstnon-members.Inotherwords,usingtrade measures against non-cooperating countriescan be an effective way of increasing the number ofcooperating countries and of guarding againstdefectionbycurrentlyconstrainedcountries.Asnotedpreviously (in Section B.1), a number of internationalenvironmentalagreements,namelytheConventiononInternational Trade in Endangered Species of WildFauna and Flora (CITES) and the Montreal Protocol,included provisions allowing for the use of trademeasures.

Non-tariff measures that might be taken to mitigateclimatechangeaswell as tocounter carbon leakageor to reducethe lossof internationalcompetitivenessbycountrieswith stringentmitigationpolicies includeborder tax adjustments, subsidies, and regulatorymeasures (includingTBT/SPSmeasures).There isbynowalonglistofpapersthathaveexaminedtheWTOconsistencyofthesetypesofmeasuresinthecontextof climate change. A partial list includes Bordoff(2009),Lowetal.(2011),Pauwelyn(2007),andWorldTrade Organization (WTO) and United NationsEnvironmental Programme (UNEP) (2009). Thefollowing discussion will focus on the economicaspects rather than the legality or WTO-consistencyofthemeasures.

Border adjustment measures

Border adjustment measures would impose costs onimports of emission-intensive goods commensuratewiththecostsofcompliancewithdomesticemissionsregulations. On the import side, border adjustmentscantaketheformofataxonimportedproducts,ortoa requirement for importers to purchase emissionpermitsorallowances for those foreignproducts thatthey are importing. On the export side, border

adjustments can take the form of an export rebate,where exporters shipping items to unconstrainedcountries are compensated for the cost of complyingwith emission requirements. This discussion focuseson a domestic tax on imports since that has drawnmoreinterest.

Whenconstrainedcountriessettheiroptimalpolicies,theywillneedtotakecarbonleakageintoaccount,i.e.theywill have to act strategically.Hoel (1996) showsthat the first-best policy of constrained countries willbetoimposeatariffontheemission-intensiveimportandapplyauniformcarbontaxonbothdomesticandforeign emission-intensive goods.75 The import tariffwill be set so as to (i) shift the terms of trade in theimportingcountry’s favourand (ii) reducedemand foremission-intensiveforeigngoods.Thissecondelementreflectstheconstrainedcountry’sstrategicrecognitionofcarbonleakageandtheneedtorespondtoit.

Ifacountrycannotfreelyadjustitstariffs,thesecond-bestpolicywillrequireanon-uniformcarbontax,sinceitnotonlyneedstoreflectthesocialcostofemissionsbut also shift demand away from emission-intensiveforeign goods.76 There are two main challenges toimplementingsuchabordertaxadjustment.Thefirstisthe administrative difficulty of implementing such ascheme given the enormous amount of informationrequired to determine the emissions of foreign-producedgoods.77Thesecond is theriskthatonceasystemofbordertaxadjustmentsisputinplace,itwillbe captured by protectionist interests. Moore (2010)observes that the carbon-intensive sectors that arelikelytobeatthecentreoftheissue–steel,chemicals,paper,cement,andaluminium–areintensiveusersofanti-dumping measures, suggesting that they will beaggressive in their attempts to use border taxadjustments as a means of limiting internationalcompetition.

Subsidies

Asdiscussed inSectionB.1, theexistenceofpositiveeffects can provide a legitimate reason forgovernmentstousesubsidiestosupportaneconomicactivitywithsocietalbenefits thatarenot reflected inmarket prices. In the case of climate change, thereare strong reasons to believe that technologicalchange offers the main avenue for reducing futureemissions and achieving the eventual stabilization ofatmospheric concentrations of greenhouse gasemissions. The Intergovernmental Panel on ClimateChange (IPCC) identifies several reasons why R&Dsubsidies are warranted, particularly in the energysector(Metzetal.,2007).

ThebenefitsofR&Dmaynotberealizedfordecades,which is beyond the planning horizons of even themost forward-looking firms. Industry can onlyappropriate a fraction of the benefits of R&Dinvestmentsandasaresult,firmsunder-investinR&D.


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Moreover,firmsfacedifficultiesinevaluatingintangibleR&D outputs and regulatory interventions can capprofitsinthecaseofpath-breakingresearchsuccess.Finally, given that the agricultural sector is a majorsource of emissions, there is also a potential role forsubsidies to facilitate the adoption of “climate smart”agriculturaltechnologies.

Ontheotherhand,itisalsotruethatsubsidiesprovidegovernmentswithameansofsupportingcompetitivelychallenged domestic firms and industries. One areawhere the role of subsidies has gained increasedattention is in biofuels. Thereareno readily availabledata on the amount of these subsidies at the globallevel. However, a recent study by Steenblik (2007)using informationonfiveOECDmembers–Australia,Canada, the European Union, Switzerland and theUnited States – provides an estimate of biofuelsubsidiesofaboutUS$11billionayear.Ajointreportby several international organizations including theWTO(FoodandAgriculturalOrganization(FAO)etal.,2011) estimates that during the 2007-09 period,biofuelsaccountedforasignificantshareoftheglobaluse of several crops – 20 per cent for sugar cane,9 per cent for vegetable oil and coarse grains and4percentforsugarbeet.

Thepoliticaleconomyofsubsidieshasbeenraisedinthe context of biofuel subsidies, where it is claimedthat a primary objective of some countries’ biofuelpolicyistoincreasefarmers’andlandowners’incomes(Rubinetal.,2008).Anumberofconcerns,economic,environmentalandsocial,havealsobeenraisedaboutthe wisdom of large biofuel subsidies. Some biofuelsemit more greenhouse gases than they save. Anyexpansion of biofuel production will have indirecteffects on greenhouse gas emissions through landuse expansion.Subsidies for biofuels have also beenimplicated in the recent spike in commodity priceswhich has been particularly detrimental to food-importingdevelopingcountries(Mitchell,2008).

Regulatory measures

AsnotedinSectionB.1,regulationsarewidelyusedtodealwithenvironmentalproblems.Thediscussiontherealso suggested that governments may prefer thesemeasuresfordistributionalorcompetitivenessreasons,uncertaintyaboutthecostsandbenefitsofabatement,andthedifficultyofmonitoringandenforcement.

In the field of climate change, it is possible todistinguish between technology standards thatmandatespecificpollutionabatementtechnologiesorproductionmethods, andperformancestandards thatmandate specificenvironmental outcomesperunit ofproduction (Sathaye et al., 2007). An example of atechnology standard is a regulation that requires theuseofspecificCO2captureandstoragemethodsonapowerplant;anexampleofaperformancestandardisonethatlimitsemissionstoacertainnumberofgrams

of CO2 per kilowatt-hour of electricity generated(Sathaye et al., 2007). Beyond these types ofregulations,somehavealsopointedtotheprospectofmore sanitary and phytosanitary measures beingtakenbycountriesgiventhatclimatechangewillalterthe impactofpestsanddiseases (Jackson,2008). Inthe face of greater uncertainty about pestinvasiveness,countriescouldbecomemoreriskaverseand use emergency trade restrictions as a way ofmanagingthoseuncertainties.

Assumingforeignproducershavehigheremissionsortheir products are less energy efficient, requiringforeign producers to comply with more stringentdomestic requirements can reduce carbon leakage.Foreignproductionofthegoods,andtheirsale inthehome country can continue, but it will be employingtechnology or standards that are as environmentallyfriendly as those in the home country. Since therequirements also raise the trade costs of foreignproducers, domestic firms are able to secure someadvantageandtheoveralleffectmaybeareductionofimportsbythehomecountry.

(iv) Conclusions

Nothing speaks to the intertwining of public policygoalsanddomesticproducer interestsmore than theissue of carbon leakage and competitiveness. Thecloselinkbetweenthesetwoissuesconfrontsuswithone of the main themes of this report: distinguishingbetween the pursuits of public policy goals and ofdomesticproducer interests.There isclearlyaglobalinterestinreducingcarbonleakageandcountriescanhave strong environmental reasons for using trademeasurestopreventfree-riding.Theothersideofthecoin, however, is that the same trade measure alsohelpscompetitivelychallengeddomesticproducerssothat the risk of regulatory capture cannot be easilydismissed. We may see increasing use of non-tariffmeasures in the future to deal with carbon leakageand competitiveness concerns as well asdisagreementsabouttheunderlyingmotivationbehindthosemeasuresandtheirtradeeffects.

(c) Foodsafetymeasures

This section discusses why food safety measures78

appear to have become more and more important inrecent times and what the challenges are thatcountries face regarding their impacton internationaltrade. It concludes that more transparency is neededto ensure the pursuit of consumer interests and topreventprotectionistabuse.

(i) Increased importance of food safety measures

Thegrowinginterestofconsumersworldwideinsafetyand quality attributes of food has drawn a lot of


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attention to the role of food safety and qualitymeasures in international trade, both governmentaland private (Henson and Caswell, 1999). On the onehand, governments intervene in food markets asmarkets alone fail to provide the socially desirablelevelofqualityandsafety(Smith,2009).Ontheotherhand, agri-food enterprises employ private standardsasatoolforproductdifferentiationandquality-basedcompetition(HensonandReardon,2005).Hence,thewidespread incidence of both governmental andprivate measures in the agri-food sector relates todevelopmentsonboththedemandandthesupplysideoftheagri-foodsystem,withclear linkagesand inter-dependencies.

Demand-driven developments

Technological, social and economic developmentshavetransformedconsumerdemand,andrecentfoodsafety incidents have amplified this trend. A renewedfocus on consumer awareness has resulted in agrowing demand for higher levels of regulation andcommunication, and appears to have shifted foodmarkets from price-based towards quality-basedcompetition.

Growing attention by consumers to quality and safety attributes

Demographicandsocialtrends–suchasurbanizationand the evolving role of women in the workplace –have modified eating habits and patterns of fooddemand (Reardon and Barrett, 2000). At the sametime, increasing levels of income, technologicaladvances, more sophisticated information about theinfluenceofdietonhealthanditsmasscommunicationhave influenced consumer attitudes towards foodattributes, increasing their awareness of risks andopportunitiesrelatedtoeatingbehaviour(CaswellandMojduszka, 1996; Kalaitzandonakes et al., 2004;Grunert, 2005). This change in focus has ledconsumerstoconsideraspectsoffoodthatcannotbeverified at the time of consumption (Caswell andMojduszka,1996). Inaddition, scientificprogresshasfacilitatedamorepreciseidentificationofhealthrisks,thus allowing consumers to increase their evaluationstandards(Mafraetal.,2007).

Moreover, when assessing food quality, consumersappearincreasinglytopayattentiontoabroaderrangeof product and process characteristics, such as theimpactoffoodproductionontheenvironment,workerwelfare and global poverty (Henson and Reardon,2005). These developments, which are increasinglyprominentalsoindevelopingcountries(Reardonetal.,2001), have led to a market for quality and safetycharacterizedbyimperfectinformationandsubstantialtransaction costs in obtaining and using information(Caswell and Mojduszka, 1996). Governments andprivatesectoractorshaveintervenedtocorrecttheseinefficiencies, introducing governmental measures

thatregulatefoodproductsandproductionprocessesanddevelopingprivatestandards,respectively.

Food safety scares

A number of high-profile food safety scandals haveheightened public and private attention to foodattributesevenfurther.Thedioxincrisis inthepoultrysector in the Netherlands in 2006, the bovinespongiform encephalopathy (BSE) in the beef sectorinvariousEuropeancountriesoveranumberofyearsand the Chinese melamine-adulterated milkcontamination in 2008 are prominent examples(Latouche et al., 1998; Marucheck et al., 2011).Considerable media attention towards these crisesamplifiedtheireffectsonconsumerattitudes,andthisprocess of “social amplification” has resulted in animportant decrease in consumer trust in relation topublicandprivateassurances regarding thesafetyoffood(Latoucheetal.,1998).

The subsequent need to restore confidence in publicauthoritiesandfoodproducershasledtoanincreaseintransparency in regard to the operation of the supplychain(BöckerandHanf,2000;Mazzocchietal.,2008),and governmental and private food safety measureshave proliferated as tools to guarantee such levels oftransparency (Henson and Humphrey, 2010). Whilepublic actors have tightened existing measures andinstituted new measures for emerging and previouslyunregulatedissues,foodcompanieshavefelttheneedtocontrol reputationalandcommercial risks related tofoodsafety(HensonandReardon,2005).

Supply-driven developments

Besides demand-driven changes, developments onthesupplysideoffoodmarketshavecontributedtoanincrease in both governmental and private measuresrelatedtofoodsafetyandquality.Thestructureofthesupply chain has evolved towards increasedfragmentation across multiple enterprises andintegration intoglobalmarkets.Thisdevelopmenthasbeendrivenby technologicalchangeswhichhave ledtoare-organizationoffarmactivitiesandanincreasedprovisionofgoodsandservicesbyoff-farmenterprises(Reardon and Barrett, 2000). The large number ofplayers involved in the supply chain has heightenedthe need for both coordination among firms andgovernmentassuranceofqualityandsafetyinrelationtofoodproductsandproductionprocesses.Theglobalreach of today’s agri-food supply chains, driven byadvances in communication, distribution andtransportation systems, has further amplified thechallenge to ensure traceability and compatibilityamongfoodsafetymeasuresindifferentjurisdictions.

Coordination costs and global supply chains

Fragmented supply chains face coordination andmonitoring challenges. Agri-food supply chains may


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involve a high number of supplier-buyer relationshipsacross which the quality and safety of the final foodproduct needs to be ensured (Henson and Reardon,2005). Coordination and monitoring efforts increasetransaction costs and are further complicated bydifferent levels of information between buyers andsuppliers(Gereffietal.,2005;Hammoudietal.,2009).This has led firms to adopt “hands-on” forms ofcoordination or even to strive for complete verticalintegration. Alternatively, coordination costs andinformationproblemsat the inter-firm levelhavebeenmanaged at arm’s length via product and productionstandards (Ponte and Gibbon, 2005; Gereffi et al.,2005).Asagri-foodchainsbecomeglobalandinvolvedifferent regulatory environments, the role of theseinstruments in the coordination of supply chains andthe standardization of product requirements amongsuppliersbecomesofgreaterimportance(HensonandReardon,2005;Maruchecketal.,2011).

Importance of, and challenges related to, traceability

Allowing for the precise tracking of food productsalongthesupplychain, traceabilitysystemsrepresentimportant instruments to assure food quality andsafetyinagri-foodsupplychains.Theirprincipalaimisto collect the necessary information for theidentificationand theeventual recall of products thatrepresent a risk to consumers (Meuwissen et al.,2003).Theadoptionoftraceabilitysystemsisrelatedto the broader phenomena of increased consumerattention to food safety and quality, technologicalprogress and the global extension of food supplychains.Thesafetyscandalspreviouslyreferredtohaveincreased the interest of consumers in theseinstruments (Souza-Monteiro and Caswell, 2004;Dickinson and Bailey, 2002). In order to functionadequately, traceability systems must allow for theidentification of all partners in the supply chain, andgrant complete information transfers. The trendtowards an increased internationalization of supplychains has posed considerable challenges to theaccomplishment of these requirements, and led to agrowing need for regulation and cooperation(Meuwissenetal.,2003).

(ii) Trade impacts of food safety measures and mitigation strategies

Given the important role that food safety measuresplay on both the supply and demand side of food,thesemeasuresareboundtoaffectinternationaltradein these products.79 This part describes some of theprincipal ways in which food safety measures affectproducer strategies and considers mechanisms formitigatingpossiblenegativetradeimpacts.

Trade impact

Foodsafetymeasurescancreatebothchallengesandopportunities for producers. Some of the main

challengesrelatetothecostsassociatedwithdiverserequirements.By investing in thecapacity toproduceproducts that achieve higher safety requirements,producers may also benefit from accessing higher-valuemarkets.Producersmayalsoinvestindevelopingtheirownstandardsasamarketingstrategyandasameans of managing product quality along the value-chain.

Compliance costs and loss of economies of scale

Costs of compliance can result in the loss ofeconomies of scale for foreign producers if differentrequirements apply in different export destinations.These costs will be a function of the exporters’administrative and technical capacity for managingdiverse requirements (Henson and Mitullah, 2004;Mathewsetal.2003;Otsukietal.,2001). Inaddition,foodsafetymeasuresusually includebothaspecifiedlevel for particular substances and systemicrequirements associated with record-keeping andconformity assessment. Therefore, when they areconsidered cumulatively, regardless of whether thelevelofthesefoodsafetymeasuresisthesame,iftheconformityassessmentproceduresaredifferent,costsmayincreaseduetoduplicativetestingrequirements.

Increase in value-added

Food safety/quality measures may also embodyadvanced regulatory “technology” and help increasevalue-added in the exporting country. Some analystsstress that rising food safety requirements cancatalysetrade,creatingincentiveforfirmstoinvest inorder to re-position themselves in competitive globalmarkets (Jaffee and Henson, 2004; Swinnen andMaertens, 2009). Of course, food safety measuresimpactthecompetitivepositionofindividualcountriesanddistinctmarketparticipantsdifferentlydependingon their strengths and weaknesses.80 Highrequirements typically are associated with high-valuetrade,whichmeansproducersparticipatinginthistypeof trade will be able to receive higher returns. In asupportive policy environment, poor producers maybenefitdirectlythroughcontractedparticipationinthevaluechain(see,forexample,Jaffeeetal.,2011).

Private standards and market power

Privatesectorfoodsafetystandardsplayanimportant,and increasing, role indetermining international tradeoutcomes,addinganadditional layerofcomplexity tounderstandingtradeinfoodproducts.81Whenretailershave buying power, such standards can become de facto market entry barriers for certain producers(Henson and Humphrey, 2009; World TradeOrganization (WTO), 2005b). This is particularly thecasefordevelopingcountrieswhichactas“standard-takers” rather than “standard-makers”. Researchindicatesthatinmanycases,developingcountriesarestandard-takers because developing their own


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standards ismorecostly thanadopting thestandardsoftheirmajormarkets(Stephenson,1997).

Increasingly, private companies or groups of retailershavecreatedtheirownstandardstosatisfyconsumerdemandforparticularproductcharacteristicsandasatool to segment markets. For example, the UKsupermarket chain Tesco has a standard that all itssuppliers of fresh fruits, vegetables and salads mustmeet (García Martinez and Poole, 2004). Privatestandards often go beyond food quality and safetyspecifications and include ethical and environmentalconsiderationsaswell(SwinnenandMaertens,2009).The implications for themultilateral tradingsystem inregard to private standards as well as furtherchallenges in regard to multilateral cooperation onfoodsafetymeasuresmoregenerallyarediscussedinSectionE.

Mitigation of negative trade impacts

Several approaches are available to mitigate thepossiblenegativeimpactsoffoodsafetymeasuresontrade. Countries may seek to harmonize their foodsafetymeasurestoaparticularbenchmark.Theymayalso negotiate an agreement to recognize othernational food safety systems as achieving thenecessary levelof foodsafety.CountriesalsocommittoacommonsetofrulesembeddedintheWTO’sSPSAgreementthatseektolimitthepotentialuseoffoodsafetymeasuresforprotectionistpurposes.

Harmonization and equivalence

While protectionist incentives may contribute toregulatory diversity in food safety regulations, thisdiversity persists for a variety of other reasons. Riskperceptionsandpreferencesandtheinterpretationofscientific evidence may vary among countries. Thesedifferencesmayleadtotheadoptionofdifferentlevelsof food safety regulations. Food safety measures,however, are typically more complex than aspecification of a particular level for content of riskymaterial. A large proportion of food safety measuresare process requirements which define particularapproaches for achieving specified levels of foodsafety.Since the conditionswithineachcountry vary,the optimal approach for achieving the same level ofsafety may also vary. There are various collectiveapproaches for reducing the potential negative tradeimpactsassociatedwiththisdiversity.

One approach would be for countries to seek toharmonize foodsafetymeasures toasinglestandardor standards system. Harmonization can take manyforms and the impact of harmonization will dependupon what level is chosen as the benchmark. WTOrules in relation to food safety encourageharmonization towards international standards set bythe Codex Alimentarius Committee. Thisintergovernmental body collectively decides on

standards, guidelines and recommendations in theareaoffoodsafetyand,inprinciple,shouldincorporatethe preferences of all countries participating in thestandard-setting (for more detailed discussion,seeEngleretal.,2012;Hooker,1999;Sykes,1999).

Another approach for addressing regulatory diversityamong countries is for countries to recognize foodsafety measures of trading partners as equivalenteven if these measures differ from their own.82 Thisapproach would enable countries to develop foodsafetysystemstofittheirspecificcontext,ratherthanforcing a one-size-fits-all approach to achieving aparticular level of safety (Josling et al., 2005).Equivalence is particularly important in the case ofprocess requirements due to their complexity. Bycontrast, product requirements are typically definedalong fewer dimensions and are thus more easilycompared. Inpractice,thedeterminationofwhetherasystem of food safety requirements achieves areasonable level of safety may be administrativelyburdensome because it requires an evaluation of thesystem of risk management interventions, includinginfrastructure,programmeimplementationandspecifictechnicalrequirements.

Other means to prevent trade distortions

Asfoodsafetymeasurecanbeabusedforprotectionistpurposes,83 countries can commit to a range ofdisciplines that constrain such behaviour. Someprincipal obligations contained in the WTO SPSAgreementinthisregardareoutlinedbelow.

First, the right to implement trade-distorting foodsafetymeasuresislinkedtoascientificjustificationofthe measure, specifically that the measure be basedonscientificassessmentoffoodsafetyrisks.Anotheraspect of the rules emphasizes that the level of risksought within countries should be consistent indifferent situations. Of course, as noted above, whilefood safety measures will include a target level forcontent of risky material, the measures usually alsoinclude other dimensions. Some analysts havequestioned whether consistency is a realisticexpectationgiven thecomplexsystemof factors thatcontribute to the development of regulations (Sykes,2006).Finally,theWTOrulesforfoodsafetyexplicitlystate that food safety measures should be “not moretrade restrictive than required to achieve theirappropriate level of sanitary or phytosanitaryprotection”. As in the case of recognition ofequivalence across countries, this requirementrecognizes that there may be alternative approachesthatcouldbetakentoreachdesiredlevelsofsafety.

5. Summaryandconclusions

This section has introduced different categories ofnon-tariff measures and measures affecting trade in


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services,analysedtheirpolicyrationalesandeconomiceffects and elucidated the difficulties involved inidentifying possible protectionist abuses. In SectionB.1, reasons for government intervention have beenreviewed,ashave thepolicies implemented inpursuitofthesegoalsthatmayaffecttrade.Thishasresultedinthefindingsoutlinedbelow.

National welfare-maximizing policies that seek tomanipulate the terms of trade or shift profits fromforeigntodomesticfirmsareexplicitlytrade-oriented.Measures affecting foreign producers may also betakeninordertoprivilegespecificindustrylobbiesforpolitical economy motives. Other policies addresspublic policy concerns, such as environmentalprotection or consumer health. As such, they are nottargeted at distorting trade, but may neverthelessaffecttradeinordertoreachtheirobjective.84

A range of instruments are available to pursue thesepolicies.Tradeobjectivescanbepursuedusingtariffsoropenlytrade-distortingnon-tariffmeasures,suchasquotas, export taxes or subsidies. For many publicpolicy objectives, non-discriminatory NTMs, such asregulatory measures or product taxes, are first-bestpolicies. However, governments can also implementorigin-neutral measures in ways that de factodiscriminate against foreign producers or employNTMs that are inefficiently reducing trade more thannecessarytofulfillapublicpolicygoal.85

Whileagovernmentmaydeclareitsintentiontopursueapublicpolicyobjective,suchasconsumerprotection,it may employ a non-tariff measure in a way thatcreates an artificial advantage for domestic overforeignproducers.Behind-the-bordermeasuresofthissort pose a particular challenge to trade cooperationbecause their effects and motivations are often lessclearthanbordermeasures. Ingeneral, thecostsandbenefits of regulatory measures are more difficult toevaluate than classical price and quantityinstruments,86 which is why the remainder of thisreport putsaparticular focusonTBT/SPSmeasuresanddomesticregulationinservices.

Section B.2 has discussed a number of situations inwhich governments may be inclined to use certainnon-tariff measures rather than more efficientinstruments. Under certain conditions, governmentsmayspecificallyprefer“opaque”measuresintermsofboth their cause and effect or choose NTMs thatincrease fixed rather than variable costs. Politicalmotives and institutional constraints can explain thepersistence of inefficient NTMs more generally. Therecent phenomenon of offshoring, where businessrelations are characterized by bilateral bargainingrather than market clearing, provides another reasonwhy, also from a national welfare perspective,governmentsmaydistortNTMs, includingbehind-the-borderpolicyinstrumentssuchasTBT/SPSmeasures,inadditiontotariffsinordertoinfluencetrade.Finally,

SectionB.2hashighlightedthatgovernmentsemployNTMs that are not effectively regulated at theinternational level anduse these to take theplaceoftariffs or other NTMs that are constrained by tradeagreements.

Oneofthemaininsightsfromthisdiscussionhasbeenthatneitherthedeclaredaimofapolicynoritseffectontrade,whichmaybecoincidentalinthepursuitofa“legitimate”publicpolicyobjective,inandofitselfcanoffer a conclusive answer to the question whether anon-tariff measure is innocuous from a tradeperspective or not. A number of factors have beenidentified in Sections B.1 and B.2 that can beexaminedinordertoassesswhetheranNTMmaybeemployed for competitiveness reasons despitestatements to the contrary or may otherwise undulyinfluence trade. These include an analysis of theefficiency of the measure in achieving its objectivecompared with alternative means as well as of itsincidence – that is the distribution of costs andbenefits among producers and consumers bothdomestically and abroad. An examination of sectorcharacteristics,suchas thedegreeoforganizationorextentofbilateralbargainingininternationalbusinessrelations, and the wider political context in terms ofinstitutions, political processes, information problemsand the like also informs this assessment. Theseissues are further elaborated in Section E.4, wherechallengesfacedby themultilateral tradingsystem inrelation to NTMs and possible ways forward arediscussed.

SectionB.3hasbrieflypresentedthespecificfeaturesof services trade, the types of services measuresencountered and the principal reasons whygovernments intervene in services markets. Despitethepeculiaritiesofservices trade, thediscussionhasrevealed the same fundamental difficulty indistinguishing situations when services measurespursueexclusivelylegitimateobjectivesfrominstancesin which they also have a trade-related purpose.Section E.2 provides a more detailed account of theprogress made and challenges faced in regulatingservicesmeasuresattheinternationallevel.

Finally,thecasestudiescontainedinSectionB.4havehighlightedtheprominenceofnon-tariffmeasuresinanumber of current high-profile areas of governmentactivityandtheneedforabetterunderstandingofthetypesofNTMsused,theirobjectivesandeffects.Therecentfinancial crisishasgiven rise toahostofnewNTMs taken for “emergency” reasons. However, theglobalextentof thecrisishasquicklyheightened theneedforwidespreadmonitoringofthemeasurestakeninordertoforestalltemptationstopursuebeggar-thy-neighbour policies or to engage in such practices inretaliationforperceivedprotectionism.

The issue of carbon leakage and competitiveness inthecontextofclimatechangepolicyhasgivenriseto


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extensive debates about the use of non-tariffmeasures in this regard and provides a powerfulexample of the difficulties involved in distinguishingbetween the pursuit of legitimate public policyconcernsandtheabilitytoservesector-specifictradeinterests. The lack of progress in climate changenegotiations and the desire by certain countries toforge ahead unilaterally have the potential to lead toan increased use of NTMs and trade rows over theirtruepurposeandimpact.

Lastbutnotleast,economic,socialandtechnologicaldevelopments have fuelled the rise of food safetymeasures as an important tool in supply chainmanagement and consumer protection. Food safetymeasures offer opportunities and pose challenges toproducers, and efforts to mitigate negative impactshave received renewed attention, not least with thecreation of the Standards and Trade DevelopmentFacility (STDF), an inter-organizational initiative forenhancingdevelopingcountries’capacitytomeetSPSrequirements.

All of these concerns have in common the need forappropriate data, and the challenges faced inimproving transparency through notifications,monitoringandothertechniquesarefurtherdiscussedin Section E.4. Section C takes stock of the existinginformation base on non-tariff measures, which formanytypesofmeasuresisfoundtobewanting.Widegaps in thecoverageandcontentof thedatamake itdifficulttogaugetheextenttowhichtheuseofNTMsintheareasdescribedabove(andmoregenerally)hasindeed increased over time and whether this hasresulted in additional impediments to internationaltrade,aswillbefurtherdescribedbelow.

1 Wolfemakesasimilarargumentaboutthepositiveeffectoftransparencyontrade,pointingtotheroleoftheWTO’smonitoringmechanisminreducingtheincidenceofprotectionismduringtheglobaleconomiccrisis.

2 Inthepaper,politicaltransparencyreferstoopennessaboutpolicyobjectivesandinstitutionalarrangementsthatclarifythemotivesofmonetarypolicy-makers.Thiscouldincludeexplicitinflationtargets,centralbankindependenceandcontracts.Economictransparencyfocusesontheeconomicinformationthatisusedformonetarypolicy,includingeconomicdata,policymodelsandcentralbankforecasts.Proceduraltransparencydescribesthewaymonetarypolicydecisionsaretaken.Thisincludesthemonetarypolicystrategyandanaccountofpolicydeliberations,typicallythroughminutesandvotingrecords.Policytransparencymeansapromptannouncementandexplanationofpolicydecisions,andanindicationoflikelyfuturepolicyactionsintheformofapolicyinclination.Operationaltransparencyconcernstheimplementationofmonetarypolicyactions,includingadiscussionofcontrolerrorsfortheoperatinginstrumentandmacroeconomictransmissiondisturbances.

3 ThisisanideaasoldasAdamSmithintheWealth of Nations:“Asitisthepowerofexchangingthatgivesoccasiontothedivisionoflabour,sotheextentofthisdivisionmustalwaysbelimitedbytheextentofthatpower,or,inotherwords,bytheextentofthemarket”.

4 Alabellingrequirementmaynotbeapanaceaifforexampleitrequiredadetailedbreakdownoftheoriginofeachcomponentpartasthisinformationcouldbedifficultandcostlytotrackdown.

5 Wherethereislessthanperfectinformationaboutgoods,economistsgenerallydistinguishbetweensearch,experienceandcredencegoods.Searchgoods(e.g.clothes)needtobeinspectedbeforebuyinginordertoobservetheircharacteristics.Experiencegoods(e.g.wine)haveunknowncharacteristics,buttheseattributesarerevealedafterbuyingorconsumingthem.Credencegoodshavethecharacteristicthatthoughconsumerscanobservetheutilitytheyderivefromthegood(orservice)ex post,theycannotjudgewhetherthetypeorqualitytheyhavereceivedistheex anteneededone.SeeDullecketal.(2011).Anexampleofacredencegood(orservice)isadoctor’sadviceaboutmedicaltreatment.Thepatientmayrealizethatheorsheisgettingbetterfromthetreatmentbutdoesnotknowifheorsheisbeingover-treated–beingprescribeddrugsandtherapiesthatarenotstrictlyrequiredoraremorecostly.

6 BagwellandStaigerrecognizethatthefactconsumerslearnaboutthequalityofthegoodsafterpurchasingopensthedoorforthehigh-qualityfirmtoofferalowintroductorypriceatwhichitsuffersalossbutenticeenoughconsumerstopurchaseitandlearnaboutitstruequality.Thus,therecouldbecircumstanceswhereexportsubsidieswillnotbeneededtoovercomethebarrierposedbyinformationasymmetry.

7 AsBagwellandStaiger(1989)note,exportsubsidiesinthissituationimprovethewelfareofboththeexportingandimportingcountriesanddonothavethebeggar-thy-neighboureffectsusuallyassociatedwiththeiruse.

8 ThereareonlyafewexamplesofenvironmentaltaxesintheUnitedStates,notablytaxesongasoline,motorfuels,oilspillsandchemicalfeedstocks.SeeBovenbergandGoulder(2002).

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9 TheclassicdiscussionofpriceversusquantitymeasuresunderpolicyuncertaintyisfoundinWeitzman(1974).

10 TheUS-tunacaseisaGATT-eradisputebetweenMexicoandtheUnitedStatesconcerningthelatter’sbanonimportsoftunacaughtusingfishingmethodsthatresultedinratesofaccidentalkillorinjuryofdolphinsexceedingUSrequirements.

11 TheUS-shrimpcaseinvolvedadisputebetweenanumberofdevelopingcountrycomplainants(India,Malaysia,PakistanandThailand)andtheUnitedStates.ItconcernedaUSprohibitionofimportsofshrimpandshrimpproductsfromcountriesthatdidnotuseaparticulartypeofnetincatchingshrimp,anetthatwouldallowendangeredturtlesthatwereaccidentallycaughttoescapeandavoiddrowning.

12 TheMontrealProtocolbannedthetradeofozone-depletingsubstancesandrequiredthephasingoutoftheirproduction.

13 Thesearespecifiedmoreformallyin,forexample,Meade(1952),Kemp(1960)andCorden(1974).

14 Anaturalchoiceofquotalevelisthepolicy-maker’sforecastofthelong-runlevelofimportswhenthedomesticindustryachievesfullmaturity.Therestrictivenessofthisquotadeclinesastheindustry’sexperienceaccumulatesuntilthequotanolongerbindswhenlearningiscomplete.

15 AlthoughKatzandShapiro(1985)originallyappliedtheterm“networkexternalities”fortheseeffects,LiebowitzandMargolis(1994)disputedwhetherthesewerereallyexternalities.InlaterworkbyKatzandShapiro(1994),theyswitchedtotheterm“networkeffects”suggestedbyLiebowitzandMargolis(1994).Seealsothediscussionofnetworkeffects/externalitiesinWorldTradeOrganization(WTO)(2005b).

16 ThissymmetrybetweenimportandexporttaxeswasfirstformallyarticulatedbyLerner(1936).

17 Thereasonforthisresultisasfollows.Anexportsubsidygivenbythehomecountrytoitsexportgood1wouldleadtoafallinthatgood’sworldpriceandanincreaseinitspriceathome.Totaldemand(foreignplushomeconsumers)forthecountry’sotherexportgood2willincreaseifthetwoproductsarecomplementsabroadandsubstitutesathome.Undercertainconditions,theincreaseddemandforgood2willleadtoaterms-of-tradeimprovementinthatproduct,whichwillmorethanoffsettheterms-of-tradelossingood1.

18 UnderCournotcompetition,outputdecisionsare“strategicsubstitutes”.Theincreaseintheoutputofthehomefirminducesareductionintheoutputoftheforeignfirm.Strategiesaresaidtobestrategicsubstitutesiftheoptimalresponsebyonefirmtomore(less)aggressiveplaybyanotherfirmistobeless(more)aggressive(Bulowetal.,1986).

19 UnderBertrandcompetition,pricesare“strategiccomplements”.Anincreaseinthepricechargedbythehomefirminducesanincreaseinthepricechargedbytheforeignfirm.Strategiesaresaidtobestrategiccomplementsiftheoptimalresponsebyonefirmtomore(less)aggressiveplaybyanotherfirmistobemore(less)aggressive(Bulowetal.,1986).

20 Thisistobedistinguishedfrom“product”ordemand-enhancinginnovation.SeeAtheyandSchmutzler(1995).

21 Forlessresource-strappeddevelopingcountries,conditionalcashtransferprogrammeswhichprovidemoneytopoorfamiliescontingentoncertainbehaviour,usuallyinvestmentsinhumancapitalsuchassendingchildrentoschool,havebecomemorewidelyemployedgiventheirapparentsuccess(FiszbeinandSchady,2009).

22 However,seeLevy(2003)foracritiqueoftheGrossman-Helpmanapproach.Inhisview,theGrossman-Helpmanapproachpositsfully-informedrationalactorswhodivideupasurplus.Thiswouldnotexplaintheuseofavoluntaryexportrestraint(VER),whichisaninefficientmeansoftransferringincometospecialinterestssincethecountryincursaterms-of-tradeloss.

23 Thisisbecauselobbiesalsohaveconsumerinterestsandtheybenefitfromlowerprotectioninsectorsotherthantheirown.

24 Onthislastpoint,oneshouldnotethattheempiricalstudybyMaggiandRodríguez-Clare(2000)arrivesattheoppositeconclusion.Theyfindthattheprotectionlevelincreaseswithimportpenetration,bothinsectorsthatareprotectedwithtariffsandinsectorsthatareprotectedwithquantitativerestrictions.

25 SeethediscussionofconformityassessmentintheWorld Trade Report 2005(WorldTradeOrganization(WTO),2005b).

26 ThisassumesthattheoligopolistsareCournotcompetitors.Thismeansthateacholigopolistusesthelevelofitsoutput,ratherthansaythepriceitchargesforitsgood,astheinstrumenttocompeteagainstitsrivals.Ifitwantstobemoreaggressivetowardsitsrivals,itexpandsthevolumeofitsproduction.Ifitwantstobemorepassive,itreducesthelevelofitsoutputorcapacity.

27 Itisassumedthatcartelmembersfollowa“grimtrigger”strategy.Theycooperatewithothercartelmemberssolongaseveryoneelseiscooperating.Theyceasetocooperateandpursuethatpathforeveratthefirstinstanceofamembercheating.

28 Alternatively,onecanassumethatthemeasureappliestobothdomesticallyproducedandforeign-madegoods,butcompliancewiththeregulationraisesthecostsofforeignproducersmorethandomesticproducers.Abel-Koch(2010)andRebeyrolandVauday(2009)discussthecasewherecompliancecostsareidenticalfordomesticandforeignfirmsbutwherefirmshavedifferentproductivities.

29 Animportantparameterthataffectsthesetradeadjustmentsisthedegreeofsubstitutabilityoftheproducts,ormorepreciselytheelasticityofsubstitution(Chaney,2008).Thedegreeofproductsubstitutabilityhasoppositeeffectsoneachmargin.Ahigherelasticitymakestheintensivemarginmoresensitivetochangesintradecosts,whileitmakestheextensivemarginlesssensitive.ChaneyisabletoshowthatiftheproductivityoffirmsfollowsaParetodistribution,adjustmentalongtheextensivemarginwilldominate.

30 Here,itisgenerallyassumedthatgovernments,whenenactingpolicy,onlytakeintoaccountnational,notglobalwelfare.Or,inthecaseofpoliticaleconomy,governmentsonlyconsidertheinterestsofdomestic,notforeignfirmsand,hence,actdifferentlythantheywouldifallproducerswerelocateddomestically.See,forinstance,FischerandSerra(2000)orMaretteandBeghin(2010)foraformalizationofthisapproach.Thesepapersaskmoregenerallywhenprotectionismoccurs,whilethefocusofthissub-sectionisspecificallythechoiceofpolicyinstruments,i.e.ontheconditionsunderwhichspecifictypesofNTMsarechosenratherthanotherpolicyoptions.

31 Thereisnonarrowlydefinedliteratureineconomicsonthissubjectandsomeofthestudiesreviewedherebelongrathertoapoliticalscienceliterature.Thelistofexplanationsprovidedhereregardinggovernments’constraintsinthechoiceofpolicyinstruments,whileimportant,isnotnecessarilyexhaustive.


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32 Inexaminingthedegreeof“welfare-mindedness”ofgovernmentsacrossalargesampleofcountries,Gawandeetal.(2005)showempiricallythatthemoreinformedcitizensare,thegreaterisgovernments’concernwithaggregatewelfareratherthanspecialinterestsinshapingtradepolicy.

33 Asnotedintheprevioussub-section,inourconsiderationsofpoliticaleconomy,wemainlypresumeproducerstobeorganizedandconsumerstobeunorganized.Formanypolicyissues,thishasfoundtobeareasonableassumption.However,whereconsumerorganizationsexist,theymayhaveconsiderablepoliticalinfluenceaswell,forexampleintheareaoffoodsafety(SwinnenandVandemoortele,2011).GulatiandRoy(2007)showthatpoliticallinksarecreatedbetweendifferentpolicyinstrumentswhengovernmentsneedtotakeintoaccountbothproducerandconsumerinterestgroups.Suchlinksmayenhanceorcushionthetradeimpactofrelevantpolicies.Inturn,suchlinkagesalsoimplythatwhentradeagreementsdealwithbehind-the-borderissuesthathavetraditionallybeenseenasbeingofpurelydomesticconcern,specialinterestgroupsthatpreviouslyhavenotengagedintradepolicymaybegintotakeanactiveinterestinthisdomain.SectionEdealswithinternationalcooperationonNTMsandwilltouchfurtherontheseissuesandtheimplicationsthattheymaygiveriseto,forinstanceinregardtotransparency.

34 Asimilarargumentfortheuseofpublicpolicymeasuresasdisguisedprotectionistdevicesariseswhenseveralinterestgroupslobbyforprotectionbutthegovernmentcannotprovideprotectiontoeveryonethroughtariffs(becauseofsomeexternalconstraint,e.g.intheformofaninternationaltradeagreementlimitingtheoverallleveloftariffprotection).Inthiscase,thegovernmentcouldprotectoneindustrywithanNTM,e.g.aregulatorymeasure,assumingthatinterestedparties(competitors,consumers)areunabletoverifyitsrealprotectionistimpact.AgovernmentmayalsopreferacomparativelyopaqueNTMifithasspecifictieswithcertaininterestgroups(e.g.ofanethnicorculturalnature),butseekstohideitsdiscriminatorytreatmentamonglobbies(RobinsonandTorvik,2005).Inaseminalpaper,LaffontandTirole(1991)showthatinterestgroupsthemselvesmayhaveaninterestininefficientregulationsiftheyareprivytorelevantinformationaboutpoliciesthatisnotavailabletopolicy-makersandthissituationmayaffordthemadditionalpoliticalinfluence.

35 Theauthorshighlightthatforquestionsofpublicpolicyitisrationalforanindividualtoremainignorant,whentheexpectedbenefitsaresmallrelativetothecostsofacquiringthenecessaryinformation.

36 Theauthorexplainsquitesuccinctlythat,allelsebeingequal,a“bad”politicianwouldprefertoprovideadirectsubsidytoproducers,“sinceimplementingtheproductstandardisdistortionaryinthelow-riskstate[i.e.notoptimalonwelfaregrounds]andevenbadincumbentscareaboutwelfare”(Sturm2006:575).However,there-electionperspectivecandominatethiseffect,i.e.“bad”incumbentswhoattachlowimportancetosocialwelfareandforwhomre-electionissufficientlybeneficialprefertodistorttheenvironmentalpolicyinordertomakeanindirecttransfertolocalproducersratherthantoprovideasubsidythatwouldsignaltheir“bad”politicalbehaviourtovotersandentailelectoraldefeatwithcertainty.

37 SeealsoYu(2000)whodevelopsaparsimoniousmodelinwhichchangesinthedegreeoftransparencyofanNTM,inthiscaseavoluntaryexportrestraint(VER),comparedtoatariffandtherelativemarketdistortionsthattheseinstrumentsentailhaveanimpactongovernmentsintheirchoiceofsubstitutinganNTMforatariff.

38 Thisisdifferentfromastrandinthetradeliteraturethathasexplainedtheexistenceoftradepoliciesmoregenerallywhentheidentityofwinnersandlosersfromtradeopeningisuncertain.See,forexample,FeenstraandLewis(1991).

39 Ineconomicterms,thismeansthatthecostsofanexcessiveoverpaymentmustbetradedoffagainstthe“deadweight”lossassociatedwithadistortionarypolicy.

40 Asimilarresultholdsiflegislatorsaremotivatedbypolicyratherthanlobbyingcontributions,solongasthelegislatorcaresaboutthepolicieschosenafterleavingoffice(Martimort,2001).

41 Therelationshipbetweenpoliciesinthenationalinterestandpoliciesorientedtowardsindividualconstituenciescanbecomplex.Somenationalpolicies,suchasanation-wideeducationprogramme,canhavelong-lastingimpacts.BattagliniandCoate(2007)warnthatoncesuchapolicyisinplace,futurelegislatorscanleveragethegainsfromtheinvestmenttodivertresourcestowardslessefficientmeasuresthatfavourtheirconstituency.Anticipatingthedistortionaryeffectsofasurplusofpublicgoods,theauthorsnotethatinsomecaseslegislatorsmaydobetterbypartiallylimitinginvestmentinpublicgoodstodiscourageinefficientNTMs.

42 Ofcourse,conformityassessmentforindividualshipmentsstillentailssomeformofvariablecostrelatedtothemeasure.

43 SeealsoSchmittandYu(2001)andJorgensenandSchroder(2008)foraperspectiveonthewelfareeffectsoftariffsinthepresenceoffixedexportingcosts.

44 Tobemoreprecise,unlikeinRebeyrolandVauday(2009),Abel-Koch(2010)showsthatevenifforeignfirmsaremoreproductiveonaverage(and,consequently,importpenetrationishigh),theintroductionofabehind-the-borderNTMmaystillshiftprofitstowardsdomesticfirmsifinthelattertheParetodistributionoffirmproductivitiesislessskewedthanabroad.Insuchcase,theratioofhighlyefficientfirmstoratherinefficientfirmsandhencetheratioofwinnerstolosersfrombehind-the-bordermeasuresishigherfordomesticthanforeignfirms,and,overall,profitsareshiftedfromabroadtowardsthecountryintroducingthemeasure.ThispropositionmaybeseenasapossiblecontradictiontothepredictionbyGrossmanandHelpman(1994)thatthelevelofprotectionvariesinverselywithimportpenetration.However,aswillbediscussedfurtherbelow,itisstillgenerallytrue,albeitfordifferentreasons,thatthelevelofe.g.aregulatorymeasurewillbehigherthefewerforeignfirmsareactiveinthedomesticmarket,asinsuchsituationscompetitionamongdomesticfirmsandthepotentialfordomesticprofit-shiftingarerelativelymoreimportant.

45 Bombardini(2008)showsthatwhenthechannelingofpoliticalcontributionsentailsfixedcosts,thelargestfirmsinasectorwillformaninterestgroup.Theauthorgoesontoconfirmempiricallythatsectorswithahighershareoflargefirmsexhibitahigherlevelofpoliticalactivity.

46 ForanempiricalconfirmationseeYi(2003).

47 SeealsoFischerandSerra(2000),forexample,fortheapplicationofanenvironmentalmeasureinaninternationalduopolysituationwheretheregulationissetinefficientlyhighinordertoshiftrentsfromtheforeigntothedomesticproducerandimposepartofthecostsofreducingtheexternalityontheforeignproducer.Theauthorsonlyshowthatenvironmentalmeasurescanbeusedasaprotectionistdevice,theydonotseektoexplainwhythegovernmentwoulduseaninstrumentthatappliestodomesticand


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foreignproducersalike(butimposesahighercostonthelatterwhoareassumedtoproduceforseveralmarketsaccordingtodifferentrequirements)ratherthantradetaxes.

48 See,forinstance,Antràs(2011)forarecentoverviewofthisliterature.

49 UnlikeAntràsandStaiger(2008),Staiger(2012)obtains“realistic”policypredictions,i.e.policiesofincreasedprotectionfromimportsviaNTMs,alsoinamodelwithoutpoliticaleconomyconsiderations.Intheformerpaper,thebasicmodelpredictsasubsidizationofimportsofintermediatesbythehomegovernmentandataxationofintermediatesbythegovernmentintheexportingcountry.Whilethissituationisnotunrealisticperse,itmaybemorerelevantinregardtotradeinnaturalresourcesandotherrawmaterials,whereescalatingprotection(and,hence,ahighereffectiverateofprotectionforfinalproducts)aswellascounteractingexportpolicieshavebeenobserved,ratherthaninregardtotradeinmanufacturedinputs.SeealsoWorldTradeOrganization(WTO)(2010).

50 Inotherwords,pricesfacedbyconsumerswillincreaselessforagivenreductioninquantityequaltotheincreaseinquantityinresponsetothemarginaldecreaseintheimporttariff,aspartofthetaxincidencefallsonproducers.

51 AndersonandSchmitt(2003)alsoarguethatwhencompetitionwithinanindustryislower,tariffliberalizationislower,andtheendogenousresponseofimposingNTMs,suchasquotasandanti-dumpingduties,isgenerallymoremodest.

52 Thisappliesifa“large”countryreducestherequirementsappliedtodomestically-producedgoods.

53 DefinedastheprobabilityofacountryfilinganADpetition.

54 Thedatadonotdistinguishbetweentariffliberalizationthatwasunilateralordrivenbyaninternationalagreement–multilateralorregional.

55 Appliedratherthanboundtariffsareusedintheanalysisbecauseinthepresenceofbindingoverhang,areductionintheboundtariffmaynothaveanyeffectontheappliedtariff,thereforeitwouldnotcreateanyincentiveforpolicysubstitution.

56 Detailsoftheestimationofad valoremequivalentofNTMscanbefoundinSectionD.1.

57 DetailsabouttheconstructionoffrequencyindexandcoverageratiocanbefoundinSectionC(BoxC.1).

58 Inanarrowconnotation,theterm“regulation”maydesignatethepromulgationofabindingsetofrules(Baldwinetal.,2012).Inabroadersense,itcanbeusedtodefineallstateactionsdesignedtoinfluenceeconomicorsocialbehaviour,referringbothtolegislativeactsandfiscalmeasures.IntheterminologyoftheGATS,thecorrespondingnotionisthatof“measures”,asintheAgreement“regulation”referstoaspecifictypeoflegislativeact(see,forinstance,GATSArticleXXVIII).

59 Lennon(2009),forinstance,arguesthat“tradeingoodsandinothercommercialservicesreinforceeachother.Bilateraltradeingoodsexplainsbilateraltradeinservices:theresultingestimatedelasticityiscloseto1.Reciprocally,bilateraltradeinservicespositivelyaffectsbilateraltradeingoods:a10%increaseintradeinservicesraisestradedgoodsby4.6%”.

60 Two-ormulti-sidedplatforms(i.e.platformsthatservetwoormoredistinctgroupsofcustomerswhovalueeachother’sparticipation,suchasmediaplatformsthatselladvertisingtoonegroupofcustomersandcontenttoanother)or

clustersofhorizontallycomplementaryorverticallyintegratedservices(e.g.telecommunications,audio-visualandrecreationalservices,orverticallyintegratedretailersprovidingwholesale,warehousingandlogisticsservices)areexamplesofsomeoftheinterrelationsbetweendifferentservicesectors.

61 TheUnitedStatesisoneofthefewcountriesthatprovideinformationonintra-firmtrade.

62 Theroleofservicesininternationalproductionmaybesignificantlyunderestimatedintradedata,becauseservicesaretoamuchlargerextentthangoodstradedindirectly,embodiedingoodsandotherservices.Thus,itisestimatedthatlocalmanufacturingvalueaddedembodiedinexportsaccountsforlessthan50percentofthegrossvalueofmanufacturingexports,whilelocalservicesvalueaddedaccountfor150percentofgrossvalueofservicesexports(JohnsonandNoguera,2012).TheauthorscalculatedtradeinvalueusingtheGTAP7.1.databasefor94countriesand57sectors.Asharehigherthanoneispossiblewhendirectexportsofservicesislow,butlocalservicesareembodiedinmanufacturedexports.

63 Themanipulationofthetermsoftradetoincreasenationalwelfareisnotconsideredarelevantjustificationinthecaseofservicestrade,essentiallybecauseoftheoft-associatedfactormovement(FrancoisandHoekman,2010;MarchettiandMavroidis,2011).

64 Theshiftawayfromstateownershipandresponsibilityfortheprovisionofaservicetoprivateownershipandprivateprovisionwithenhancedstateregulationhasbeendescribedastheriseofthe“regulatorystate”(Majone,1994).

65 Foradiscussionoftheapplicabilityoftraditionaltheoreticalmodelstoservicestradesee,forexample,WorldTradeOrganization(WTO)(2008).Foralternativeviews,seeWhalleyandChia(1997),forinstance.

66 Forinstance,measuresthatraisethecostofforeignfirmswhentheysellinthedomesticmarketaremoretraderestrictiveinthepresenceofincumbentdomesticmonopolyoroligopolythanunderperfectcompetition(seeDeardorffandStern,2008andHelpmanandKrugman,1989).FrancoisandWooton(2001)showthat,inthepresenceofanimperfectlycompetitivedomesticindustry,aforeigncompetitormightchoosewhethertojointhehomecartelorcompetewithitdependingontheextentofrestrictionstocross-bordertrade.

67 Tariff-likeinstrumentscouldbeapplicableincertainsectorsforgivenmodes.Onemightconceive,forinstance,ofataxperpassengerorpervolumeofcargoincross-bordertransportservices,giventhataphysical,visibleentityisassociatedwiththeservicebeingsupplied.Alternatively,entry,outputandprofittaxescouldbeapplicabletolocallyestablishedforeignfirms(seeCopelandandMattoo,2008).

68 However,Laffont(1999)showsthat,inthepresenceofweakdemocraticinstitutions,stimulatingcompetitionmightnotalwaysbewelfareenhancing.

69 TheGlobalTradeAlert,asimilarprivateinitiativethatprovidesinformationonstatemeasurestakenduringtherecenteconomicdownturn,wasestablishedin2009.

70 SeeCorfee-MorlotandHohne(2003)forexample.

71 Theseemissionreductiontargets,whichareconditionalonothersmeetingtheirs,canbefoundintheUNFCCCwebsite:http://unfccc.int.


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72 UnderArticle3oftheKyotoProtocol,countrieslistedunderAnnexIoftheUnitedNationsFrameworkConventiononClimateChangeweretoreducetheiroverallemissionsofgreenhousegasesbyatleast5percentbelow1990levelsinthecommitmentperiod2008to2012.

73 SeeCopelandandTaylor(1994)foradiscussionofhowdifferencesinthestringencyofenvironmentalregulationsbetweenhigh-incomeandlow-incomecountriesleadstheformertospecializeincleanindustriesandthelattertospecializeinpollutingindustries.Furthermore,theyestablishthattheresultingincreaseinpollutionlevelsinlow-incomecountriesmorethanoffsetsthedeclineinhigh-incomecountries.

74 Togetasenseofthediversityoftheindicatorsused,weexaminedarandomsetofstudies.DemaillyandQuirion(2006)usechangesinprofitsandoutputasindicatorsofthechangeincompetitiveness;ZhangandBaranzini(2004)usetheincreaseincostofproduction;Reinaud(2008)usesprofitsandmarketshare;theSternReview(Stern,2007)usesthechangeinproducercostandthepassthroughtoconsumerprices.

75 Markusen(1976)derivessimilarresultsinamodeloftradewithtransboundarypollution.

76 ThereisaninterestingpaperbyLockwoodandWhalley(2008)whichrelatesthecurrentdebateoncompetitivenessandbordertaxadjustmentstoa1960sdebateontheValueAddedTax(VAT)andbordertaxadjustmentsintheEU.Astheymakeclear,theacademicliteratureofthetimeshowedthatachangebetweenoriginanddestinationbasisintheVATwouldbeneutralandhencetheuseofabordertaxadjustmentintheEUtoaccompanytheVATofferednotradeadvantagetoEurope.However,thatargumentrestsontheneutralityoftheVAT–relativepricesintheEUareleftunchangedbytheVAT.Thiswillnotbethecasewithcarbontaxessincetheintentofthemitigationmeasuresistoincreasetherelativepriceofcarbon-intensivegoodstoreflecttheirsocialcost.

77 SeeMattooetal.(2009),though,forhowthismaybesimplifiedbyassumingforeigngoodshavethesamecarbonfootprintasdomesticgoods.SeeIsmerandNeuhoff(2007)foraproposalonhowtosimplifyandmakeWTO-consistentaborderadjustmentschemeinvolvingpurchasesofemissionpermits.

78 Forthesakeofbrevity,thediscussionhereprincipallyreferstofoodsafetymeasures,butalsomentionsrelevantaspectsofmeasuresrelatingtoqualityandbroaderattributes,suchasenvironmentalimplicationsoffoodproduction.SwinnenandVandemoortele(2009)emphasizetheextenttowhichthenatureofsuchmeasuresaffectstheirpoliticallyoptimallevelandthelikelihoodoftradeconflicts,pointingoutimportantdifferencesinthisregard.Thisdiscussionisbeyondthescopeofthepresentsub-section.

79 SwinnenandVandemoortele(2011)buildamodeltoillustratethatfoodsafetymeasures(almost)alwaysaffecttradeand,inapoliticaleconomycontext,derivetheconditionsunderwhichsuchmeasuresactasacatalystorbarriertointernationaltrade.AsnotedinSectionB.1,theauthorsalsoshowthatapossiblenegativeeffectontradeflowsdoesnotautomaticallyrelatetoproducerprotectionism.

80 Mangelsdorfetal.(2012),forinstance,findapositiveimpactofvoluntarystandardsandmandatoryrequirementsonChinesefoodandagriculturalexports,withthebenefitsoutweighingincreasedcompliancecosts.

81 Foranextensiveliteraturereviewonprivatestandards,seeInternationalTradeCentre(ITC)atwww.standardsmap.org,lastvisitedon9March2012,aswellasOrganisationforEconomicCo-operationandDevelopment(OECD)(2006)andrelatedpublications.

82 ArecentexampleistheagreementonorganicfoodproductssignedbetweentheEuropeanUnionandUnitedStatescomingintoeffectinJune2012.AgenceFrance-Presse(AFP)reportsthatbeforethedeal,companieshadtoconformtotwodifferentsetsofrequirementsonbothsidesoftheAtlantic.

83 Theliteratureonthissubjectisratherlimited.Foletti(2011)examinesthevariationinmaximumresiduelimits(MRLs)forvariouspesticidesandproductsinarangeofcountries.Analysingtherelativecontributionof“consumerprotection”(atthepesticidelevel)and“producerprotection”(attheproductlevel),shefindsthatwhilehealthmotivesexplainasignificantamountofthevariationinMRLs,protectionistmotivescanexplainuptoonethirdofthevariation.AsfarasMRLlevelsareconcerned,shefindsthathigherlevelsoftoxicityresultinstricterregulation,aswastobeexpected.However,whetherapesticideisproduceddomesticallyalsoplaysarole,resultinginmorelenientregulatorythresholds.

84 InSectionE.1theincentiveforcountriestocooperateisestablishedinordertoavoidbeggar-thy-neighbourpoliciesorprovideacrediblecommitmentdevicethathelpstocontainpressurefromdomesticinterestgroups.Butcountriesmayalsocooperateonpublicpolicyobjectivesinordertopursuethemostefficientpolicynotonlyfromanational,butglobalwelfareperspective,oriftheyshareacommonpublicpolicygoal.

85 Although,atfacevalue,therequirementsofameasuremaybethesamefordomesticandforeignproducers,certainaspectsinitsapplicationmaybeinherentlymoredifficulttofulfillbyforeignthanbydomesticmanufacturers.Forconceptualworkonthisissue,seeSwinnenandVandemoortele(2009;2011).Awell-knownexampleistheobligationforimportstobetestedfortheirconformitywithtechnicalrequirementsinspecificlaboratoriesentailinghigheraccesscostsforforeignersthanfordomesticproducers.Anotherexamplerelatestoproducttaxes,wherethresholdsaresetsuchthatcompetingforeignproductsfallinthehighertaxbracket.

86 Cost-benefitanalysiswasbrieflyintroducedinBoxB.2.Forthedevelopmentofacost-benefitframeworktoassessregulatorymeasuresanditsapplicationtoTBT/SPS,seeVanTongerenetal.(2009;2010).


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This section reviews available sources of information on non-tariff measures (NTMs) and services measures, evaluating their relative strengths and weaknesses. It uses available information to establish a number of “stylized facts” regarding the incidence of NTMs and services measures in general. It looks in particular at technical barriers to trade, sanitary and phytosanitary measures and domestic regulation in services.

C. An inventory of non-tariff measures and services measures


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• Progress is being made on improving the quality and availability

of data on non-tariff measures and services measures, but much

remains to be done.

• Availabledatadonotshowanyclearincreasingtrendin

the overall use of non-tariff measures in the last decade.

• Technicalbarrierstotradeandsanitaryandphytosanitary

measures appear to have become prominent, according to official

WTO information. This is confirmed by survey data from both

developing and developed economies.

• Proceduralobstaclesareaparticularsourceofconcernfor

exporters from developing countries.

• Althoughthereissomeevidencethatmeasuresrestrictingtrade

in services have decreased over time in developed economies,

a serious limitation of available data on applied regimes in

the services area makes it difficult to distinguish between market

access, national treatment and domestic regulation.

Contents 1 SourcesofinformationonNTMsandservicesmeasures 96

2 StylizedfactsaboutNTMsrelatedtotradeingoods 105

3 Servicesmeasures 122

4 Conclusions 126

AppendixC.1:DatahandlingmethodologyintheUNCTAD’sTradeAnalysisInformationSystem(TRAINS) 131

AppendixC.2:Regressionresults 133


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Thissectionsurveysavailablesourcesofinformationonnon-tariff measures (NTMs) and services measures,evaluates their relative strengths and weaknesses,summarizesthecontentoftheprincipaldatabases,andusesthisinformationtoestablishanumberof“stylizedfacts” about these types of measures. This last taskturnedout tobesurprisinglydifficultduetosignificantgapsindataandtonumerousshortcomingsinthedatathat do exist. Despite these limitations, the followingdiscussionattemptstocapturemanykeyfeaturesofthecurrentNTM landscapeand todocumentanumberoftrends in their use over time. As far as servicesmeasuresareconcerned,thedatalimitationsappeartobe even more severe than in the case of NTMs. Inparticular,thecurrentdataonservicesmeasuresdonotallow clear distinctions to be drawn between marketaccess, national treatment (i.e. the principle of givingothersthesametreatmentasone’sownnationals)anddomesticregulationissues.

The scarcity of data on non-tariff measures andservicesmeasuresstemsinlargepartfromthenatureofthesemeasures,whichfindtheirultimateexpressionin complex legal documents rather than in easilyquantifiable tariff schedules. The universe of NTMsencompassesallmeasuresthataffecttradeotherthantariffs,butsincemostregulatoryactionundertakenbygovernments can at least potentially influence trade,the set of possible NTMs is huge and its bordersindistinct. Similar considerations apply to servicesmeasures. On the goods side, this section examinesthe available evidence, with a particular attention totechnical barriers to trade (TBT) and sanitary andphytosanitary (SPS) measures (covering food safetyand animal and plant health). Traditional quantitativeandprice-basedmeasuresarealsodiscussed,butthefact that TBT/SPS measures are among the mostfrequently encountered NTMs and raise some of themostdifficult challenges from theWTO’sperspectivejustifiestheadditionalattentionpaidtothesekindsofmeasures. On the services side, the section takesstock of all measures affecting trade in services, tothe extent possible, before focusing on domesticregulation.

Statistics on non-tariff measures and servicesmeasuresare collectedbymanydifferent institutionsfor a variety of purposes. As a result, data are oftenpresented in formats that are not amenable toquantitativeanalysis,withsignificantgapsincoverageforparticularcountriesandtimeperiods.Whenreliableinformation isavailable, itmaystillprovidenoclueastohowstrictlymeasuresareapplied,orwhether theyareapplied inadiscriminatorymanner.Mostdatasetssimply present counts of the number of measures ineffectataparticularplaceandtime,butthesecountshave no natural economic interpretation and saynothing about the restrictiveness of individualmeasures.Forthesereasonsandothers,theavailabledata on NTMs and services measures can only becharacterizedassparseandincomplete.

The remainderof the section is organizedas follows.Section C.1 reviews the main sources of statisticalinformation on non-tariff measures and servicesmeasures, paying particular attention to areas wherethedataaredeficient.SectionC.2extractsanumberofstylized factsonNTMs ingoods fromtheprincipaldatabases. Section C.3 provides a similar account ofstylized facts about services measures. Section C.4containsconcludingremarks.

1. SourcesofinformationonNTMsandservicesmeasures

This sub-section presents the main sources ofinformation on non-tariff measures and assesses thecoverage and quality of the data they provide. BothinternalWTOsourcesandexternalnon-WTOsourcesare examined. The following overview highlights thediversityofthesourcesandofthemodesinwhichthedata are collected, distinguishing betweennotifications, monitoring, specific trade concerns,official data collection or business surveys. AdistinctionismadebetweeninformationonNTMsandinformationonimpedimentstotraderelatedtoNTMs.It also shows that despite this diversity, the data arepatchyatbest.Eachdatasourceshedslightonasmallpartoftheuniverse.Thelightitshedsdependsonthespecific purpose for which the data have beencollectedaswellasonhowtheyhavebeencollected,i.e. whether a measure is simply reported/notified orwhether there isacomplaint relating to themeasure.In any case, considerable caution is warranted ininterpretingtheavailableevidence.

(a) WTOinternalsourcesofinformation

One important source of information on WTOmembers’ trade policies are their schedules ofconcessions/commitments.Theseschedules,however,provide useful information on the policies thatmembershavecommitted toapply rather thanon thepolicies they actually apply. WTO agreements alsoinclude multiple provisions aimed at improving thetransparency of policy measures affecting trade.These provisions can be grouped into the followingfour categories: (a) publication requirements;(b) notification requirements; (c) the Trade PolicyReviewMechanismandthemonitoringreports;(d)thepossibility of raising specific trade concerns in theSPS and TBT committees and in the disputesettlementmechanism(DSM).

(i) Schedules of concessions/commitments

Theschedulesofconcessionsforgoodsmostlycontaininformation on members’ tariff commitments but theyalso cover their commitments regarding the use of anumber of non-tariff measures that affect trade inagricultural products as well as their so-called “non-tariffconcessions”.TheagriculturalNTMcommitments


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includetariffquotas(wherebyquantitiesinsideaquotaarechargedlowerimportdutyratesthanthoseoutside)as well as commitments limiting subsidization inagriculture (total Aggregate Measurement of Support(AMS)commitmentfordomesticsupport,andbudgetaryoutlaysandquantityreductioncommitmentsforexportsubsidies). As for the non-tariff concessions (Part III),theywereeither addedaspart of theUruguayRoundnegotiations (but only by a few members) or after theUruguayRoundaspartofacountry’sWTOaccessionprocess.1 Both tariff and non-tariff commitments arealso available electronically in the Consolidated TariffSchedules database. Note that the commitments ascompiled in the database are not easily comparableacrossproductsandmembers.2

The schedules of commitments for services set outmarket access and national treatment commitments.Foreachserviceonwhichacommitmentismade,theschedule indicates, under each of the four modes ofsupply, any limitations on market access or nationaltreatment which the member is allowed to maintain.Limitations not recorded in the schedules in this wayareillegal.Theschedulesthuscombinea“positivelist”ofcoveredserviceswitha“negativelist”oflimitations.They guarantee a minimum standard of access;members are always free to grant more favourablelevels of market access and national treatment thanare specified in their schedules, on a most-favourednation(MFN)orequaltreatmentbasis,andmanydoso(seeSectionD.3).

(ii) Publication requirements and enquiry points

Article X.1 of the General Agreement on Tariffs andTrade (GATT) requires the prompt publication of alltrade regulations “in such a manner as to enablegovernments and traders to become acquainted withthem”. Several other WTO agreements contain morespecific publication requirements. In the TBTAgreement, for instance, Article 2.9.1 requires thepublicationofanoticewhenthegovernmentenvisagesintroducing a technical regulation which is not basedon internationalstandardsandmayhaveasignificanteffect on trade. Similarly, Article 2.11 requires thepublication of all technical regulations which havebeen adopted. Identical provisions also apply toconformity assessment procedures. Besides thosepublication requirements, the TBT Agreement alsoincludes provisions requiring the establishment ofenquiry points able to answer enquiries and providerelevant documents regarding technical regulations,standardsandconformityassessmentprocedures.

The purpose of publication requirements and enquirypoints is to contribute to transparency by informingothermembersingeneral,andproducersinexportingmembers in particular (see Article X as well as, forinstance, Articles 1, 2 and 3 of Annex B of the SPSAgreement).Publicationrequirementsandnotifications

(seebelow)tendtocomplementeachother.TheSPSand TBT agreements require the notification of draftregulationstotheWTOSecretariatandthepublicationof the adopted regulations. An important differencebetween notification and publication requirements isthat the former is centralized in the WTO Secretariatwhile the latter merely involves making informationpublicly available. Another difference is that whilenotificationsmustbetransmittedtotheWTOinoneofthe three official languages (English, French orSpanish),publicationsareinthenationallanguage.

(iii) Notifications

TheWTOframeworkcontainsmorethan200differentlegal notification requirements, the large majority ofwhich relate to non-tariff measures. NotificationrequirementsundertheWTOarehighlydiverse.3First,whileavastmajorityofrequirementsobligememberstoprovideinformationontheirownpolicies,someare“reverse”notifications,whichallowmemberstoidentifymeasures imposed by other members. Secondly,notificationsdifferfromeachotherwithregardtohowfrequently they are required. Most of those coveringlawsandregulationsareone-off requirements,withaseparate obligation to notify any changes thereafter.The notifications that provide information on themeasures themselves typically take two differentforms:theyareeitheradhocor(semi-)annual.Thirdly,abouthalfofthenotificationrequirementscoverNTMsthattypicallyapplytospecificproducts.Inthosecases,notification templates generally require members toindicate which products are covered. The other halfrelates to measures (e.g. laws and regulations) thataffect, or could potentially affect, all products(e.g.pre-shipmentinspectionorcustomsvaluation).

A comparison of the list of notifications with the2010versionoftheInternationalClassificationofNon-tariffMeasures suggests that notifications covermostof the categories (see Table C.2). The internationalclassification comprises 16 broad categories ofmeasures, of which only three do not seem to becoveredatallbyWTOnotificationrequirements.Thoseare finance measures, distribution restrictions andrestrictions on post-sales services. All the othercategoriesareat leastpartlycovered(i.e.anumberofsub-categoriesarecoveredwhileothersarenot).

Where notification requirements broadly match NTMcategories, however, they do not necessarily cover themeasuresthatcouldbeclassifiedtherein.Inthecaseofsanitary and phytosanitary measures, for example,Article 7 and Annex B of the SPS Agreement requiregovernmentstonotifynewSPSregulationswhicharenotbasedon internationalstandardsandhaveasignificanteffectonthetradeofothermembers,andtonotifythoseat an early stage, i.e. when amendments can still beintroduced.Measuresthatwereinplacebeforetheentryinto force of the SPS Agreement need not be notified,nor is there an obligation to notify the final measures


98

whentheyenterintoforce.Thismeansthatsomeofthemeasures in place were not notified and that some ofthose notified may have been amended before beingimplementedorevennotimplementedatall.

Notifications provide an incomplete and sometimesmisleading account of the incidence of non-tariffmeasures.4 First, WTO members do not necessarilycomplywith theirnotification requirements.While thelevel of compliance is not easy to measure, a simplecount of notifications for selected requirementssuggeststhatatleastinsomeareas,itisrelativelylow.AsdiscussedinmoredetailinSectionE.4,difficultiesfacedbymembersinmakingtheirnotificationsmaybepartofthereasonforthelowcompliance,butthemainexplanation is certainly that governments have noincentivetonotify,or,worse,mayhaveanincentivenotto notify. Secondly, notifications serve variouspurposes (Bacchetta et al., 2012). Some of themclearlydonotaimatprovidinganexhaustiveinventoryofallthemeasuresintheareatheycover. IntheSPSandTBTagreements, forexample,notificationsservetoallowothermemberstoparticipateintheformationof new regulations. This explains why there is norequirement tonotifymeasures inplacebefore1995(when the agreements came into effect) or finalmeasures. Thirdly, the “quality” of the informationprovided varies significantly among notifications.5Again, the quality criteria may be debatable, but inmany cases, notifications fail to provide preciseinformationonimportantdimensionsofthemeasures,such as product coverage or the time period duringwhichthemeasureremainsinplace.

Only a sub-set of the information collected throughnotifications is stored in searchable databases.6 TheWTO Secretariat has developed informationmanagement systems to facilitate access to all theinformation on SPS and TBT measures provided bymembers through the various existing transparency

mechanisms. The TBT Information ManagementSystemandtheSPSInformationManagementSystemare “one-stop” systems that allow users to accessinformation on TBT or SPS measures that membergovernments have notified to the WTO as specifictradeconcernsraisedintheSPSorTBTCommitteeorthroughmembergovernments’enquirypoints.ThetwoinformationmanagementsystemsarenotexactlyNTMdatabases.Theyaredocumentdatabaseswhichmakeit possible to search relevant documents by code,bynotifyingmember,bydate,byproductorbykeyword.

Access to all information from notifications will besubstantially improved with the new Integrated TradeIntelligence Portal (I-TIP) which is currently beingdeveloped by the WTO Secretariat to provide unifiedaccess to all information on trade and trade policymeasuresavailableattheWTO.

In services, the transparency-related notificationobligation is contained in Article III:3 of theGeneral Agreement on Trade in Services (GATS). Itrequires WTO members to notify measures that“significantlyaffecttrade”inservicescoveredbytheirspecific commitments. As of end-2011, just over400 notifications in total had been received.7FigureC.1showsthenumberofnotificationsreceivedperyearsince2000.

Considering the high number of sectors withcommitments by the 153 WTO members as of end-2011 (on average, developing countries havecommitments inmorethan50sectorsanddevelopedcountries nearly 110 sectors), it seems apparent thatthenumberofnotificationsreceivedinanygivenyearcannot account for the entire set of measures thatshouldhavebeennotifiedbymembers.OnedifficultyformembersregardingtheGATS is that thescopeofmeasurestobenotifiedisnotnecessarilyclear,astheGATS provides no further guidance on the

FigureC.1:GATS Article III:3 notifications received, 2000-2011 (numberofnotifications)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

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interpretationoftheterm“significantlyaffecting”tradein services. However, as already mentioned, lowcompliancewiththenotificationrequirementsismostlyan incentive issue. In committed sectors, memberswouldhavenoincentiveto“incriminate”themselvesbynotifying measures that somehow violated theircommitments. They might also have an interest inbeing non-transparent about measures that“significantly”liberalizedaccesstocommittedsectors,astheymightbefacedwithrequeststobindanysuch,notnecessarilyknown,liberalization.

(iv) Trade policy reviews and monitoring reports

Trade policy reviews

ThetradepoliciesandpracticesofallWTOmembersaresubjecttoperiodicreview:everytwoyearsforthefour countries with the largest share of world trade,every four years for the next 16 countries and everysix years for the others. The review is carried out bythe WTO’s Trade Policy Review Body (TPRB) on thebasisoftworeports:onebythememberunderreviewand another by the WTO Secretariat on its ownresponsibility.Inadditiontothetworeports,thereviewprocessincludesaquestionsandanswersmechanism.Twomonthsbeforethereviewmeeting,thereportsarecirculatedamongallmemberswhohaveonemonthtosubmitwrittenquestionstothememberunderreview.Thelattermustrespondinwritingbeforethemeeting.

The report by the WTO Secretariat reviews a broadrange of non-tariff measures and is typically in fiveparts:8 economic environment, trade and investmentregimes,tradepoliciesandpracticesbymeasure,tradepolicies by sector and Aid for Trade. The chapter ontrade policies and practices by measure distinguishesbetweenmeasuresdirectlyaffectingimportsandthosedirectlyaffectingexportsorthoseaffectingproductionandtrade.TableC.1liststhemeasuresexaminedundereach of the three headings in the 2011 Trade PolicyReview for Cambodia, which has been used forillustrativepurposes.Policiesaffectingtradeinservicesareexaminedsectorbysector.

Toprepare itsreport, theWTOSecretariatusesvarioussourcesof information.Thestartingpoint isusually thepreviousreport,whichcanbeupdatedusinginformationfrom notifications. The Secretariat also sends aquestionnaire to the government of the member underreview. This questionnaire, which addresses all areascovered in the report, followsageneral templatebut isoften customized. To complement the informationcollected through these institutional channels, otherpublicsourcesofinformationareusedtoidentifyissuesworthy of investigation. Despite considerable efforts,trade policy reviews (TPRs) do not and cannot provideexhaustive coverage of all non-tariff measures in allareas.Forexample,asalreadysuggestedinWorldTradeOrganization (WTO) (2006), informationonsubsidies in

TPRs is highly variable. Similarly, only a sub-set ofservices sectors is covered and, in the best possiblecase,selecteddomesticregulationisexamined.

WhiletheinformationontariffsandtradeusedforthereportsfeedsintotheWTO’sIntegratedDatabaseandis thus accessible electronically, information on non-tariff measures and on measures affecting trade inservices is not stored systematically in electronicformat and thus is neither easily comparable acrossWTO members, nor readily usable for quantitativeanalysis. Similarly, the questions asked and answersreceived as part of the review process are publishedasanannex to theminutesof theTPRBmeetingbutthey are not systematically coded and stored in adatabase. This may change with the new IntegratedTrade Intelligence Portal (I-TIP) which will provideaccess to all information from TPRs. Efforts will bemade to codify this information and thereby facilitatequantitativeanalysis.

Monitoring reports

The WTO publishes two types of monitoring reports.The first type is published twice a year by the WTOSecretariat for the Trade Policy Review Body.9 Thereportscovertradeandtrade-relateddevelopmentsingoods and services of all WTO members as well asobservers. They monitor changes in both tariffs and

TableC.1:Measures covered by trade policy reviews

Measures directly affecting imports

(i) Customsprocedures

(ii) Tariffsandothertaxesandchargesaffectingimports

(iii) Customsvaluation

(iv) Pre-shipmentinspection

(v) Rulesoforigin

(vi) Importprohibitions,quotas,andlicensing

(vii) Anti-dumping,countervailingduties,safeguardregimes

(viii)Governmentprocurement

(ix) Statetradingenterprises

(x) Othermeasures

Measures directly affecting exports

(i) Procedures

(ii) Exporttaxes

(iii) Exportrestrictions

(iv) Exportsubsidies

(v) Exportpromotion

(vi) Specialeconomiczones

Measures affecting production and trade

(i) Regulatoryframework

(ii) Technicalbarrierstotrade

(iii) Sanitaryandphytosanitarymeasures

(iv) Trade-relatedintellectualpropertyrights

Source:WorldTradeOrganization(WTO)(2011a)


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non-tariff measures as well as in a broad range ofmeasuresaffectingtradeinservices.ThesecondtypeofreportispublishedbytheWTOSecretariattogetherwith the secretariats of the OECD and UNCTADfollowing a request by the G20 to monitor trade andinvestment measures.10 These reports, which onlycoverG20countries,arealsoissuedtwiceayear.

Thesourcesof informationused for the two typesofreportsaresimilar.Bothreportsmostlyuseinformationcollected through a request for information sent toWTOmembers, informal reversenotificationsand thepress. This information is then submitted to therespective members for verification. The data aremadeavailableinpublicreportsandstoredinspread-sheets, but not in a database. Like all the otherinformationontradeandtradepolicycollectedbytheWTO, however, it will be made available through thenewIntegratedTradeIntelligencePortal(I-TIP)portal.

WTOmembershaverecognizedtheusefulnessofthetrade monitoring exercise. There is broad consensusfor its continuation and strengthening as well as forthe related briefings by the Director-General ininternationalforasuchastheG20.11

(v) Specific trade concerns and disputes

Specific trade concerns

WTOmembershaveusedboth theTBTand theSPScommittees as fora to discuss issues related tospecificmeasurestakenbyothermembers.Thesearereferred to as “specific trade concerns” and relatevariouslytoproposedmeasuresnotifiedtotheTBTorSPS committees in accordance with the notificationrequirements in the relevant agreement, or tomeasures currently in force. Committee meetings, orinformal discussions between members held on themargins of such meetings, afford members theopportunity to review trade concerns in a bilateral ormultilateralsettingandtoseekfurtherclarification.

Specific trade concerns raised by members are asource of potentially interesting information on theeffectsofnon-tariffmeasures.Specifictradeconcernspointoutparticularobstaclesfacedbyexportersfromthe country raising the concern in a given exportmarket.TheinformationtheyprovideontheeffectsofNTMs is thus similar to that provided by businesssurveys. The main difference is that specific tradeconcerns are channelled through governments.Exporters facing an obstacle may complain to thegovernment, which may or may not raise the issue attheWTO.Thismeansthatspecifictradeconcernsmayprovide a distorted picture of the trade-restrictive ortrade-distortiveeffectsofTBTandSPSmeasures.Anumberofconcernsmayneverbe raised.12Moreover,therearenoreasonstobelievethattheonesthatgetraised are statistically representative of all theTBT/SPSrelatedtradedistortionsfacedbymembers.

As already mentioned, the TBT InformationManagement System and the SPS InformationManagementSystemallowuserstotrack,andperformsearcheson,specifictradeconcernsraisedintheTBTor SPS committees but they are not suitable forquantitative analysis. The WTO Secretariat has thuscoded all the relevant information on specific tradeconcerns and created two databases: one on TBTmeasures and one on SPS measures. The TBTSpecific Trade Concerns (STC) Database providesinformation on the 317 concerns raised in the TBTCommittee between January 1995 and June 2011.13The SPS STC Database provides information on the312 concerns raised between January 1995 andDecember 2010. Each of these corresponds to aconcernraisedbyoneormoremembersinrelationtoameasuretakenbyoneoftheirtradingpartners.Sincesome of these measures might have been notified tothe WTO, the concern might be related to one orseveral notifications of the member taking themeasure.Themaindifficultywiththecodificationwasto attribute product codes from the HarmonizedSystem(thesystemusedbyparticipatingcountriestoclassifytradedgoodsonacommonbasis).14

Disputes

Disputes initiatedbymembersunder theWTOdisputemechanismareanothersourceofpotentiallyinterestinginformationon theeffectsofnon-tariffmeasures.TheWTOSecretariatmaintainsadatabaseon“requestsforconsultations”, the first step in formally initiating adispute in the WTO. As of 31 December 2011, thedatabase had information on 427 such requests.15These data do not indicate the type of non-tariffmeasure at issue in the disputes, but the WTOagreement(s)andprovision(s)citedineachdisputearelisted. Using the latter, it is possible to obtain anestimateofthenumberofcasesinvolvingeachtypeofnon-tariff measure. When doing this, however, it isimportanttobearinmindthatforeconomicandpoliticalreasons,anumberofNTM-relatedtradedistortionsmaygounchallenged.Aswithspecifictradeconcerns,thereis no reason to believe that the measures challengedwerestatistically representativeofall theNTM-relatedtradedistortionsfacedbymembers.16

Another problem with this approach is that for anydispute, complainants tend to cite a large number ofprovisionswhichhaveallegedlybeenbreached,whilein fact some of the provisions are duplicates orintimately related to other provisions. The GATT, forexample,iscitedinmostdisputesbecauseitincludesthebasicrulesthatapplytotradeingoods.Moreover,even when a complainant brings a dispute under amorespecificagreement,suchastheTBTAgreement,it may also include claims under the GATT, such asunder Article III:4. This means that a simple count ofthenumberofprovisionscitedinthecaseswouldleadtoanover-estimationofthenumberofNTMsthathavebeenchallenged.


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Santana and Jackson (2012) proposea methodologytoobtainamorepreciseviewofthetypesofmeasuresthat are the subject of WTO dispute settlement byadjusting for the citation to the GATT in disputeswhere that agreement may have played a secondaryrole. Using this methodology, they have compiled adataset on WTO disputes based largely on thedatabaseof requests for consultationsmaintainedbythe WTO legal division.17 This dataset is not publiclyavailable,butit isconsistentwithadatabaseonWTOdisputes accessible on the World Bank’s website(seebelow). Intheirdataset,JacksonandSantanadonot“doublecount”requestsforconsultationsthatreferto the GATT when the reference is likely to be ofsecondary importance to the main claim of violation(i.e.aspecializedagreementoranotherGATTarticle).Theyhavealsorestrictedcoveragetodisputesrelatedtotrade ingoods.Thiscoversa totalof393disputesout of the 427 filed under the Dispute SettlementUnderstanding(DSU)asof31December2011.

(b) Non-WTOsourcesofinformation

(i) Data collected from official sources

TRAINS and Market Access Map

The most complete collection of publicly availableinformation on non-tariff measures is the TradeAnalysisandInformationSystem(TRAINS)developedby the United Nations Conference on Trade andDevelopment (UNCTAD). UNCTAD started collectingNTM information in 1994 and simultaneouslydeveloped the TRAINS database.18 TRAINS providesinformationontrade,tariffsandNTMsbyHarmonizedSystem(HS)tariffline.NTMswereclassifiedaccordingto a customized Coding System of Trade ControlMeasures, which distinguished six core categories ofNTMs.Thedatabaseincludesbetweenoneandsevenyears of NTM information for 86 countries over theperiod 1992 to 2010. For some countries/years, inparticular after 2001, data were collected only for asub-setofNTMcategories.Varioussourceswereusedto provide data, including, where available, WTOsources such as notifications.19 Overall, the coverageis patchy, resulting in blank cells which are difficultto interpret.Theycansignifymissingdataor indicatethat a particular NTM is not applied to a particulartariffline.

In the early 2000s, it became clear that the TRAINSdatabase required substantial improvement and thatthe Coding System needed an update to reflect newpractices.In2005,theSecretaryGeneralofUNCTADlaunchedaprojectaimedat revamping thedefinition,classification, collection and quantification of non-tariff measures.20 Under the guidance of a Group ofEminent Persons, a multi-agency team composed ofexperts from all international agencies active in theNTM area started working on the project. In 2009,the multi-agency team proposed an updated and

modified version of the old Coding System including16 categories (see Table C.2) which brought theclassification closer to the regulatory framework.21A pilot project on the collection and quantification ofNTMs was carried out by UNCTAD and theInternationalTradeCentre(ITC),withaviewtotestingthe new classification. With the support of two UNregional commissions, UNCTAD and ITC collectedNTM information in seven developing countries.22Basedon the lessons learned in thepilotproject, theupdatedNTMclassificationwasfinalizedandadopted.

Theupdatedclassificationalsointroducedtheconceptof“proceduralobstacles”,definedas“issuesrelatedtothe process of application of an NTM, rather than tothe measure itself” (United Nations Conference onTrade and Development (UNCTAD), 2010: xvii). Aninitiallistofproceduralobstacleswasestablishedandtested in a series of interviews with exportingcompaniescarriedoutaspartofthepilotproject(seethe discussion of business surveys below).23 On thebasisof lessonslearnedinthepilotproject,theinitiallistofproceduralobstacleswasrevisedandexpanded.

Table C.3 presents the ten broad categories ofproceduralobstacles in the listcurrentlyusedby ITC.The distinction between a non-tariff measure and aprocedural obstacle can sometimes be very subtle,and is best illustrated with an example. To import aproduct, it may be necessary to have a specificcertification (an NTM); however, the certification

TableC.2:International classification of non-tariff measuresA Sanitaryandphytosanitarymeasures

B Technicalbarrierstotrade

C Pre-shipmentinspectionandotherformalities

D Pricecontrolmeasures

E Licences,quotas,prohibitionsandotherquantity controlmeasures

F Charges,taxesandotherpara-tariffmeasures

G Financemeasures

H Anti-competitivemeasures

I Trade-relatedinvestmentmeasures

J Distributionrestrictions*

K Restrictionsonpost-salesservices*

L Subsidies(excludingexportsubsidies)*

M Governmentprocurementrestrictions*

N Intellectualproperty*

O Rulesoforigin*

P Exportrelatedmeasures*

Source: United Nations Conference on Trade and Development(UNCTAD)(2010).

Note: *indicatesthatnoofficial information iscollectedbyUNCTADfor this category which is only used to collect information from theprivatesectorthroughsurveysandwebportals.


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authority or testing laboratory can be excessivelycostly,slowinresponseorbelocatedinaremotearea(proceduralobstaclesrelatedtotheNTM).Informationonproceduralobstaclescanonlybecollectedthroughsurveysorothermechanismsthatrecordcomplaints.

Following the pilot project phase, ITC, UNCTAD andtheWorldBankstartedtocollectofficialdataonnon-tariff measures.24 Their strategy consisted of hiringlocalconsultants(universities,thinktanksorconsultingfirms) and giving them assistance and guidelines todraw up NTM inventories in collaboration with theministriesandagenciesconcerned.Relyingonoutsideconsultantsisintendedtoaddresstwooftheproblemsthat plague self-notification: (i) the wide variety ofbodies involved in initiating NTMs; and (ii) theincentivesforauthoritiesnottonotifyinordertoavoidexposure. The data collected by consultants areformatted according to international classification byproduct(ateitherthetariff-lineorHS6level),togetherwith information on legal sources and enforcingagency, in order to ensure verifiability of theinformation. The inventories are then approved bynational authorities during validation workshops.Finally, the data are verified and added to both theTRAINSandMarketAccessMap,adatabaseoftariffsandNTMsdevelopedbyITC.

To consolidate cooperation and expand the recentcollection efforts, an ambitious multi-agencypartnership, Transparency in Trade (TNT), waslaunched in 2011 by the African Development Bank,ITC, UNCTAD and the World Bank. Using donorfinancing,theTNTinitiativeaimsatgivinga“bigpush”to data collection, creating a one-stop globalinformation source. It provides a framework throughwhich the four agencies coordinate their datacollection efforts to fill key data gaps and worktogether to strengthen the capacity of institutions indevelopingcountriestocollectandreport informationon trade policies. TNT has four major components:(i)tools(theMarketAccessMapandtheWorldBank’sWorldIntegratedTradeSolutionportalsprovideaccessto the data); (ii) tariff data collection; (iii) non-tariffmeasures data collection; and (iv) policies affecting

tradeinservices.Oncethefirstwaveofdatacollectioniscompleted,thechallengefacingtheTNTpartnershipwill be to move to a more sustainable structure thanthatprovidedbydonorfinancingalone.

World Bank Temporary Trade Barriers Database (TTBD)

The World Bank’s Trade Barriers Database (TTBD)website hosts detailed and freely available data onmore than 30 different national governments’ use ofanti-dumping and countervailing duties since 1980and of global safeguards since 1995 as well as onChina’suseofitsspecifictransitionalsafeguard.25TheGlobal Anti-Dumping Database, developed by ChadBown,withfundingfromtheWorldBank,usesoriginalnational government documentation to organizeinformation on affected countries, product category(at theHS8 level), typeofmeasure,dateof initiation,final imposition of duties, and revocation dates, andeveninformationonthecompaniesinvolved.

TheTTBD website also hosts a public database withinformation on WTO disputes developed by HenrikHorn and Petros Mavroidis.26 It contains informationonallstagesofWTOdisputesettlementproceedings(e.g.panelreports,appeals,compliancepanelreports)forallWTOdisputesupto11August2011.

OECD product market regulation

The OECD Economics Department has developed adatabase consisting of indicators of product marketregulation for member states. The aim is to turnqualitativedataonlawsandregulationsthatmayaffectcompetition into quantitative indicators. The indicatorsmostly measure regulations that are potentially anti-competitive in areas where competition is viable. Withthe exception of the foreign direct investment (FDI)restrictiveness index, they do not distinguish betweendiscriminatory and non-discriminatory measures (seeSectionC.3). Themain sourceof informationused forthis database is official government responses to theOECDRegulatoryIndicatorsQuestionnaire,withonlyasmallfractionofinformationbeingdrawnfromexternaldatasets, thereby guaranteeing a high level ofcomparability across countries. The indicators aresubjecttopeerreviewbythenationaladministrationsofOECDmembercountries.

The database proposes several different indicatorswhich have been calculated for various years. First,there is the economy-wide product market regulation(PMR) indicator, which covers domestic regulationsboth in the manufacturing and services sectors. Thishasbeenestimatedfor1998and2003for30OECDcountries (Conway et al., 2005). The economy-widePMR indicator was subsequently replaced with theintegrated PMR indicator, which has been estimatedmostly for 2008 for 34 OECD countries (the fouradditional countries are Chile, Estonia, Israel and

TableC.3:ITC list of procedural obstaclesA Administrativeburdens

B Information/transparencyissues

C Inconsistentordiscriminatorybehaviourofofficials

D Timeconstraints

E Payment

F Infrastructuralchallenges

G Security

H Legalconstraints

I Other

Source:InternationalTradeCentre(ITC)(2011).


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Slovenia)aswellasforBrazil,China, India, Indonesia,Russia and South Africa (Wölfl et al., 2009). Theintegrated PMR indicator covers general regulatoryissues in fields such as public control and pricecontrols, legal and administrative barriers to marketentry, and barriers to trade and investment. It alsocovers some industry-specific regulatory policies,notably in air and rail passenger transport, rail androadfreight,telecommunicationsandretaildistribution.

Secondly,inparallelwiththePMRindicator,theOECDhas developed a set of indicators covering regulationin specific sectors or specific aspects of regulation.Thesectoralindicatorscoverthreenon-manufacturingsectors, and in particular network industries such asenergy(electricityandgas),transport(air,railandroadtransport), and communication (post andtelecommunications) as well as retail trade andprofessional services (Conway and Nicoletti, 2006).The energy, transport and communications (ETC)regulationindicatorcoversmeasuresaffectingmarketentry and public ownership plus vertical integrationandmarketstructure,butonlyinasubsetofthesevenindustries.The retaildistribution indicatorcovers fourentry regulations (registration, licences and permits,largeoutletrestrictions,andprotectionofincumbents)andtwoconductregulations(shopopeninghoursandprice controls). Finally, the professional servicesindicator covers three market entry and four conductregulations.TheFDI (regulatory) restrictiveness indexcovers four types of measures: (i) foreign equityrestrictions; (ii) screening and prior approvalrequirements; (iii) rules for key personnel; and(iv) other restrictions on the operation of foreignenterprises (Kalinovaetal.,2010).The latest revisionof the index covers these four typesofmeasures forall primary sectors (agriculture, forestry, fishing andmining),investmentsinrealestate,fivemanufacturingsub-sectors and eight services sectors. The FDIrestrictiveness indicator is available for 1997, 2003,2006and2010for48countries.

Comparedwithotherindicatorsofservicesmeasures,thefamilyofOECDregulationindicatorshasanumberof advantages. First, the information summarized bythe indicators is “objective”, in the sense that it isbased on rules, regulations and market conditionsrather thanonperceptionscaptured throughsurveys.Secondly, these indicators provide the broadestcoverage of sectors and areas, and the longest timeseries currently available to compare product marketregulation across countries. As discussed in moredetailinSectionC.3,thePMRindicatorscoverawidearrayofmeasures relevant to theservicessectorbutthey do not match the GATS categories of measures(marketaccessandnationaltreatmentlimitations;anddomesticregulation).Moreover,theyareonlyavailableforarelativelysmallgroupofmostlyrichcountries.27

(ii) Business concerns

Most of the sources discussed so far are sources ofofficial information, whether notified to the WTO orcollected from governmental sources. Officialinformationhasanumberofdistinctadvantages.First,it isgenerallyreliable. Itcanbelinkedbacktoa legaltextand,at least for theWTOsources, it isapprovedbygovernments.Secondly,inmostcasesitiscollectedin a systematic way.28 However, it also has a fewdisadvantages,foremostamongthemthatthedataaregenerated/reported by the countries imposing thenon-tariff measures. Some of these countries maywant toavoidattractingattention to theiradoptionofnewNTMs,ortheymaysimplynotdeemthemworthyofreporting, inwhichcasethe incidenceofNTMsforindividualcountriesand inaggregatemeasurescouldbeunderstated.Furthermore,whileevidencesuggeststhat how NTMs are applied or administered canbecome a “procedural barrier to trade”, governmentshave absolutely no incentive to document obstaclesrelating to the specific way in which measures areapplied.

Questions relating to procedural obstacles may bebetteraddressedusingbusinesssurveysorinformationonfirms’ownperceptionsof thedifficulties they facedoing business in various markets. Data on exporterperceptions provide a valuable complement to datafromofficialsourcesbecausetheyhelpidentifythosemeasuresthatareperceivedasimpedimentstotrade.Thesesortsofdata,however,reflectfirms’ judgmentsandmaybesubjecttovariousbiases.Businessesmayexaggerateproceduralobstacles–or,onthecontrary,minimize them – depending on the circumstances.They may also be unable to identify the specificpoliciesofconcern,ormaymisidentifythem.Moreover,surveys, because of problems related to sample sizeand self-selection of respondents, do not alwaysguaranteerigorousandsignificantresults.29Similarly,with websites where exporters can file complaints,self-selectionleadstoabiasedstatisticalsample.

Two sources of business data are presented in thissub-section and used in the next sub-section sincetheydealdirectlywithnon-tariffmeasures.Thefirstisa set of 11 business surveys conducted by ITC indeveloping countries. The second is the CoRe NTMs(compilationofreportedNTMs)DatabasecompiledbyMartinezetal.(2009),whichincorporatesinformationfrom the United States Trade Representative’sNational Trade Estimate Reports on Foreign TradeBarriers and the European Union’s Market Access –Trade Barriers database. These two sources give anoverview of barriers faced by firms from two of thelargestdevelopedeconomies.Otherbusinesssurveysfocusingon“easeofdoingbusiness”indicatorsarenotdiscussedhere(eventhoughtheymaycontainrelevantinformation)sincetheyrequiremoreattentiontomakesurethecorrectmeasuresareidentified.30


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ITC business surveys

Since the end of the pilot project in 2009 (see sub-section 1(b)(i) above), the ITC has carried out large-scalecompanysurveysonnon-tariffmeasuresinmorethanadozendevelopingandleast-developedcountriesonallcontinents.31Thesurveyscoverat least90percent of the total export value of each participatingcountry(excludingmineralsandarms).32Theeconomyis divided into 13 sectors, and all sectors accountingformorethan2percentoftotalexportsareincludedinthesurvey.Bothexportingandimportingcompaniesare covered. The survey methodology involves atwo-stepapproach.

Inthefirststep,companiesthatexperienceburdensomenon-tariff measures are identified through phoneconversationswithallthecompaniesinthesample.Thesecond step then consists of face-to-face interviewswiththecompaniesthatreporteddifficultieswithNTMsinthephoneconversations.Atrainedinterviewerhelpsrespondentsidentifytherelevantregulation,thenatureoftheproblem,theaffectedproducts(six-digit leveloftheHarmonizedSystem),thepartnercountryexportingor importing the product and the country applying theregulation (partner, transit or home country). The ITCdoesnotimplementthesurvey,butguidesandsupportsalocalsurveycompanyandexpertsindoingthis.Uponfinalizing the survey, its results are presented anddiscussed at a dissemination workshop, which bringstogetherallnationalstakeholdersandfostersadialogueonNTMissues.

Compilation of NTMs reported by US and EU exporters

Over the lastdecade, theOfficeofEconomicsof theUnitedStatesInternationalTradeCommission(USITC)has been engaged in compiling a unified databaseusing the EU’s Market Access – Trade BarriersDatabaseand theNationalTradeEstimateReportonForeign Trade Barriers issued by the United StatesTrade Representative (USTR), as well as the WTO’strade policy reviews. The first version of the USITCNTMdatabasedatesbackto2002andisdescribedinManifold (2002) and Donnelly and Manifold (2005).ItwaslaterupdatedbyMartinezetal.(2009).

The EU’s Market Access – Trade Barriers Databaseprovidesasnapshotofnon-tariffbarriersfacedoutsideoftheEUbyexportersfromEUmembers.ItisbasedoncomplaintsregisteredbyEUexportersandprocessedbytheEuropeanCommission.Thedatabasehas32sectorsand seven main categories of measures: tariffs andduties, trade defence instruments, non-tariff barriers,investment-relatedbarriers, intellectual property rights-related barriers, other (export-related) measures andservices-specificmeasures.Eachofthosecategoriesisfurther divided into a number of sub-categories. Non-tariff barriers, for instance, are sub-divided into:registration, documentation and customs; quantitative

restrictions and related measures; competition issues;standards, sanitary and other technical measures;government procurement; subsidies; other non-tariffmeasures; and sanitary and phytosanitary measures.TheUSITCdatabasedoesnot includetariffsandtradedefence instruments and EU data are reclassifiedaccordingtotheUSITCclassification.

TheNationalTradeEstimate(NTE)ReportonForeignTrade Barriers is issued annually by the USTR. ItsprimaryfocusisonforeignbarrierstoUSexports.TheNTE isnotasimplebusinesssurvey. It isbaseduponinformationcompiledwithintheUSTR,theDepartmentofCommerceand theDepartmentofAgricultureandother US government agencies. It is supplementedwith information provided in response to a noticepublished in the Federal Register (the official journalof the US Government), and with information frommembers of the private sector trade advisorycommittees and US embassies abroad. While eachcountry is reviewed in a different way, the discussiontypicallyfocusesonindividualmeasuresbysector.

Global Trade Alert

In 2009, the Centre for Economic Policy Research(CEPR) teamed up with independent researchinstitutes from around the world to create the GlobalTrade Alert (GTA) initiative.33 Their objective was toincrease the information available on state measuresthatmayaffecttradingpartners’commercialinterests,broadly defined as imports, exports, foreigninvestments (including intellectual property), andforeignemployees.CEPRbelievedthatacombinationof peer pressure plus up-to-date, comprehensiveinformation would help avoid the historic mistakes ofprotectionismofpreviouseras. Inaddition to trackinggovernmentmeasurestakenduringthecurrentglobaleconomicdownturn,theGTAprovidesresearchersandgovernmentofficialswithinformationonnewpatternsof state intervention that are problematic from theperspectiveofmaintainingopenborders.

Regional nodes, a network of independent researchinstitutesandtradeexpertsfromallovertheglobe,areresponsible formonitoringstatemeasures introducedintheirownregion(andelsewhere).TheGTAinitiativealsoencourages thirdparties to submitmeasures forscrutiny, and welcomes dialogue with implementingjurisdictions concerning the measures they haveintroduced. The Evaluation Group, consisting of theleaders of the regional nodes and chaired by therepresentative of the network hub (CEPR), isresponsibleforassessingthisinformationanddecidingwhether to publish it on the GTA website. The GTAdoes not confine itself to the measures that arecoveredbytheexistingbodyofWTOagreements.NordoestheinitiativepronounceontheWTOlegalityofameasureorwhetherameasureis“protectionist”.


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2. StylizedfactsaboutNTMsrelatedtotradeingoods

Currently available databases on non-tariff measures,despitetheshortcomingsdiscussedabove,canbeusedto address important questions about trade in goods,includingwhether such measures have increased overtime, how important SPS and TBT measures arecompared with other types of NTMs, and how firmsperceive the obstacles they face in internationalmarkets.Thissub-sectionposesseveralsuchquestionsabout NTMs and provides answers in the form ofdescriptive statistics inorder toestablish anumberofstylized facts about NTMs. Only with a reliable setof facts can researchers hope to make progress inaddressingmorefundamentalquestionsaboutNTMs.

(a) Isthereevidenceofanincreasingmedium-tolong-termtrendinNTMs?

To grasp the general trends in non-tariff measuressince the mid-1990s, information was first collectedfrom the UNCTAD TRAINS database.34 Panel (a) ofFigureC.2presentstheaverageshareofproductlinesand share of trade value affected by NTMs for allcountriesforwhichinformationhasbeencollected.Asexplained in more detail in Box C.1, these areinventory-based measures of the intensive margin(value of trade) and the extensive margin (number oflinesaffected)oftradecoveredbyNTMs,respectively.Thesharesof linesandtradevaluecoveredbyNTMshave increased between 1996-2000 and 2001-04,but there isnoevidenceofa further increase for the2005-08period.35

It is well known that the TRAINS database suffersfrom inconsistent data collection across years. Toaddress this problem, in Panel (b) of Figure C.2 thesame information is presented for selected LatinAmerican countries with the most complete NTMinformation in the database.36 The qualitative results

aresimilartotheonesinPanel(a):thesharesoflinesand trade value covered by NTMs have increasedbetween 1996-2000 and 2001-04, but there is noevidenceofafurtherincreasesincethemid-2000s.

Beyond the well-known data limitations, the absenceof conclusive evidence of an increasing use of non-tariff measures may be due to different trends ofspecificNTMs.Thefocusofthisreportis,however,onTBT/SPS measures. WTO internal sources ofinformation on notifications and specific tradeconcerns can be used to display the trends inTBT/SPSmeasuressince1995.FigureC.3showsthenumberofnotificationstotheWTOandthenumberofnotifyingcountriessince1995forbothSPSandTBTmeasures.Bothseriesexhibitupwardtrends.37

As a caveat, it should be emphasized that WTOmembers do not have the obligation to notify allmeasures imposed, but only the new ones beingintroduced(seeSectionC.1).Moreover,themechanismunderlying such trends (increasing number ofmeasures or increased compliance with WTOobligations)cannotbeclearlyidentified.

TheevidenceofanupwardtrendinthenumberofSPSandTBTmeasuresnotified issupportedbycomplaint-based information contained in the Specific TradeConcerns Database. In Figure C.4, the left axisrepresents the number of SPS concerns initiated andresolved per year.38 The right axis represents thecumulativenumberofconcerns.Itisusefultodistinguishbetween new and resolved concerns because newconcerns may signal an increasingly adverse effect ofmeasuresoran increasingparticipationofcountries inthe specific trade concerns mechanism.39 The rate atwhich concerns are resolved conveys (partial)informationontheeffectivenessofthemechanism.Thefigureshowsthatboththenumberofconcernsinitiatedand the number of concerns resolved fluctuate widelybetween1995and2010.However,duetothefactthatthe formernumber is larger than the latter inall years

FigureC.2:Shares of product lines and trade value covered by NTMs, 1996-2008 (percentage)

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Note: Latin American countries in Panel (b) include Argentina, Colombia, Ecuador, Peru, Uruguay and the Bolivarian RepublicofVenezuela.

(a)Allavailablecountries (b)SelectedLatinAmericancountries


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FigureC.3:SPS and TBT notifications, 1995-2010 (numberofnotifyingcountriesandnumberofnotifiedmeasuresperyear)

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(b)TBT

except2004, thecumulativenumberofSPSconcernsincreasesovertime.

Atotalof312SPSspecifictradeconcernswereraisedbetween1995and2010.Ninety-five(30percent)werereported as resolved by WTO members to the SPSCommittee. Eighteen (6 per cent) were reported aspartially resolved – meaning, for instance, that trademay have been allowed for selected products or bysome of the members using the measure in question.Nosolutionswerereportedfortheremaining215tradeconcerns (64 per cent). However, it is possible thatsomeoftheseconcernswereresolvedwithouttheSPSCommittee being made aware of these developments.Therefore, the number of resolved concerns inFigure C.4 should be taken as a lower estimate.TableC.4belowdocumentsthefactthatdisputescitingSPSmeasureshavenot increasedover time,eitherasan annual total or as a share of all disputes. This

suggests that the specific trade concerns mechanismmay be functioning better than the rising number ofdisputesandnotificationsinthisareawouldsuggest.

In the case of TBT specific trade concerns, onlyinformation on initiation of concerns, but not on theirtermination,isavailable.Thedata,showninFigureC.5,indicate an upward trend in initiations (but withreductionsbetween1998and1999;2002and2005;and2009and2010).

Consistentwiththemeasures-basedinformationfromnotifications, there is also some indication that anincreasing number of countries is involved in raisingspecific trade concerns or maintaining TBT/SPSmeasures subject to STCs (see Figure C.6).40 A keyelement is that developing countries are becomingimportantusersof thesystem–an issue thatwill beexploredinmoredetailinSectionC.2(c).


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Because thenumber of “resolved” concerns is basedonanassumption in the caseofTBT, thedescriptivestatistics on TBT are to be interpreted with somecaution.Moreover,nodirectcomparisoncanbemadebetween SPS concerns (upper panel) and TBTconcerns(lowerpanel).

The specific trade concerns data can also provideinformation on the amount of trade affected byTBT/SPS concerns. Firstly, Figure C.7 shows theaverage amount of trade per concern initiated. Thefigure shows that, onaverage, the import valueof aninitiated trade concern has been quite stable since1995, with the exception of two peaks at the end ofeachdecade.InthecaseofSPSconcerns,thepeaksoccurred in 1997-98 and in 2008. As for TBTconcerns,therewasapeakin1999-2000andanothersmalleronein2010.41

Thesepeaksareduetothefilingofconcernsinvolvinga wide set of HS2 lines between two or more majortrading countries. In the case of the SPS peaks,the first is mainly due to two separate concerns, oneon pharmaceutical products raised by the UnitedStates, Switzerland, Brazil, Canada, Australia andothers against the European Union in 1997, andanother on dairy products raised by the EuropeanUnionagainstPolandin1998.TheSPSpeakin2008ismainlyduetoacomplaintbytheUnitedStatesandChina,amongothercountries,againstJapanonmeat,dairyandmostvegetableproducts.

For TBT concerns, the earlier peak is also a “doublepeak” spanning the years 1999 and 2000. In 1999,aTBTconcernwasraisedagainsttheEuropeanUnionbyalargesetofcountries includingtheUnitedStates,China and Japan, involving a wide range of sectors

FigureC.4:New and resolved SPS specific trade concerns, 1995-2010 (numberofconcerns)

FigureC.5:New TBT specific trade concerns, 1995-2010 (numberofconcerns)

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including miscellaneous chemical products, variousmetals,electricalmachineryandtoys.Anotherconcernwas raised in 2000 by the United States, Canada,Japan and others against the European Union onelectrical machinery and instruments. Finally, a TBTpeakin2010wasmainlyduetoaconcernraisedbytheEuropeanUnionagainst theUnitedStates, involvingawidesetofsectors,includingchemicalsandplastics.

Secondly, inventory-based measures of the incidenceofnon-tariffmeasures,namely frequencyandcoverageratios, have been calculated (see Box C.1 formethodology). In this case, too, a specific tradeconcern inTBT is assumed tobe “resolved” if, after itsinitiation, it is not raised again for two years; no directcomparison can be made between SPS concerns (seeFigure C.8(a)) and TBT concerns (see Figure C.8(b)),especiallyontheabsoluteamountoftradecovered.The

general message is, however, that frequency andcoverage ratios are increasing (although not evenly),indicatingthatSPSandTBTmeasuressubjecttospecifictrade concerns are affecting an increasing number ofproductlinesandanincreasingamountoftrade.42

Evidence from disputes on trends in TBT/SPSmeasures is inconclusive. According to Santana andJackson(2012),thenumberofdisputescitingtheSPSandTBTagreementsfellbetween1995and2011,butthedropwasconsistentwiththeoveralldeclineinthenumberofdisputesduringthisperiod(seeTableC.4).Requests for consultations related to SPS measuresfellfrom18in1995-2000tosevenin2007-11,buttheshare of SPS cases in the total number of disputesincreased to 11 per cent from 9 per cent betweenthesetwoperiods.DisputescitingtheTBTAgreementnumbered24intheearlierperiodandjusteightinthe

FigureC.6:Maintaining and raising countries in specific trade concerns, 1995-2010 (numberofcountries)

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Note:IntheTBTdataset,aconcernisassumedtobe“resolved”ifnotraisedagainfortwoormoreyears.A“raising”countryistheonewhichcomplainsaboutaTBT/SPSmeasureimposedbya“maintaining”countryintherelevantWTOcommittee.

(a)SPS

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FigureC.7:Average value of initiated SPS and TBT concerns, 1995-2010 (US$billion)

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Average import value per new TBT concern (right axis)

Average import value per new SPS concern (left axis)


FigureC.8:Coverage ratio and frequency index of STCs aggregated by year, 1995-2010

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(a)SPS

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BoxC.1: Methodology for constructing indices from UNCTAD TRAINS and STC databases

TheUNCTADTRAINSdatabase,asdescribedinAppendixC.1,containsinformationonnon-tariffmeasuresbycountryandsectorforHS6productlines(asix-digitsub-headingintheHarmonizedSystemclassification)andyear.FollowingBoraetal.(2002),foragivencountrycinagivenyeart,theshareofimportlinesthataresubjecttoNTMsisdefinedasfollows:

19

(a) SPS (b) TBT Source: WTO STC Database. Note: In the TBT dataset, a concern is assumed to be “resolved” if not raised again for two or more years. Box C.1: Methodology for constructing indices from UNCTAD TRAINS and STC databases The UNCTAD TRAINS database, as described in Appendix C.1, contains information on non-tariff measures by country and sector for HS6 product lines (a six-digit sub-heading in the Harmonized System classification) and year. Following Bora et al. (2002), for a given country c in a given year t, the share of import lines that are subject to NTMs is defined as follows:

𝑆𝑆𝑆𝑆𝑆𝑆 =𝐷𝐷!𝑀𝑀!!

𝑀𝑀!!

In the formula, i indexes HS6 products, Di is a dummy variable taking value equal to one if an NTM is in place and Mi is a dummy variable equal to one if there are imports of product i.43 The share of import values affected by NTMs is defined as follows:

𝑆𝑆𝑆𝑆𝑆𝑆 =𝐷𝐷!𝑉𝑉!!

𝑉𝑉!!

where Vi is the value of imports at the HS6 level and tariff line level and Di is as above. Simple averages over countries for each of the years are used. Thus, each year’s share of import lines and share of trade value represents the average of a different sample of countries. However, the results with Latin American countries in Figure C.2 are based on a set of countries with information on the same years. Information on the countries to which the NTMs apply was not included. Therefore, the trade partner was chosen to be the world. The STC Database contains bilateral information at the HS4 sector disaggregation (a four-digit heading in the Harmonized System classification level). The coverage ratio and the frequency index were computed using the following formulae:

𝐶𝐶𝐶𝐶!,!"!,! =𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑁𝑁𝑁𝑁𝑁𝑁!,!,!,!"!!"!∈!"!!

𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 !,!,!,!"!!"!∈!"!

𝐹𝐹𝐹𝐹!,!"!,! =𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓 𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢𝑢 𝑁𝑁𝑁𝑁𝑁𝑁!,!,!,!"!!"!∈!"!!

𝑡𝑡𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 𝑜𝑜𝑜𝑜 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓𝑓!,!,!,!"!!"!∈!"!

where c indexes maintaining countries, j indexes raising countries, i indexes HS4 sectors and t indexes time. In other words, CR is the share of trade under a complaint over total trade for country c, in sector HS2 (a two-digit chapter in the Harmonized System classification level) at time t. This is an inventory-based measure of the intensive margin of trade covered by NTMs. FI is the share of the number of product codes covered by a certain NTM over the total number of product codes for which import flows are positive. It is an inventory-based measure of the extensive margin of trade under NTMs. Note that the set of j countries is not the world, but rather the set of raising countries per specific trade concern. This is very different from the TRAINS data. Given this difference, it is not

43 Subscripts c and t are omitted for expositional simplicity.

Intheformula,iindexesHS6products,DiisadummyvariabletakingvalueequaltooneifanNTMisinplaceand Mi is a dummy variable equal to one if there are imports of product i.43 The share of import valuesaffectedbyNTMsisdefinedasfollows:

19



𝑀𝑀!!



𝑉𝑉!!








whereViisthevalueofimportsattheHS6levelandtarifflinelevelandDiisasabove.

Simpleaveragesovercountriesforeachoftheyearsareused.Thus,eachyear’sshareofimportlinesandshare of trade value represents the average of a different sample of countries. However, the results withLatinAmericancountriesinFigureC.2arebasedonasetofcountrieswithinformationonthesameyears.Informationon thecountries towhich theNTMsapplywasnot included.Therefore, the tradepartnerwaschosentobetheworld.

TheSTCDatabasecontainsbilateral informationattheHS4sectordisaggregation(afour-digitheading inthe Harmonized System classification level). The coverage ratio and the frequency index were computedusingthefollowingformulae:

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𝑀𝑀!!



𝑉𝑉!!








19



𝑀𝑀!!



𝑉𝑉!!








wherecindexesmaintainingcountries,jindexesraisingcountriesand tindexestime.Inotherwords,CRistheshare of trade under a complaint over total trade for country c, in sector HS2 (a two-digit chapter in theHarmonizedSystemclassificationlevel)attimet.Thisisaninventory-basedmeasureoftheintensivemarginoftradecoveredbyNTMs.FIistheshareofthenumberofproductcodescoveredbyacertainNTMoverthetotalnumberofproductcodesforwhichimportflowsarepositive.Itisaninventory-basedmeasureoftheextensivemargin of trade under NTMs. Note that the set of j countries is not the world, but rather the set of raisingcountriesperspecifictradeconcern.ThisisverydifferentfromtheTRAINSdata.Giventhisdifference,itisnotsurprising that the shares of trade and lines covered computed from the TRAINS data is larger than thecoverageratiosandfrequencyindexescomputedfromtheSTCsdata.44

ForthedescriptivestatisticsusedinSectionC.2,weaverageCRandFIacrosssectorswithinmaintainingcountrycandtimet,andthenoverallmaintainingcountriesinyeart.TheformeraverageisweightedbytheHS2sectorimportshareintotalimportsofc.Thelatterisasimpleaverage.Theendresultisatime-varyingcoverageratioandfrequencyindex.45

Itshouldbeemphasized that these indexesare inventory-basedmeasures thatdonotnecessarilycapturethetraderestrictivenessofameasure,but justhowmuchtradeisaffectedbyit(SectionD.1isconcernedwiththemethodsusedtocomputethetraderestrictivenessofNTMs).Wheninterpretingthem,onehastotakeintoaccounttheissueofendogeneity.Forthecoverageratio(ortheshareofimportvaluesaffected),theproblemisthatthevalueofimportsinagivenproductlineisnegativelyaffectedbytheNTMsimposedonit.Forthefrequencyindex(ortheshareofimportlinesaffected),thisendogeneityproblemisattenuated,unlessthemeasureeliminatestradealtogether.However, thismeasure is less indicativeof theoverallandrelativeimportanceoftheNTM.

latterone,buttheirshareintotaldisputeswasroughlythe same in both periods, at 12 per cent. ThepercentageofdisputesmentioningTBTmeasuresfellto 4.5 per cent during the 2001-06 period before

returningto12percent,sowhiletherearesomesignsofarecentriseinthisarea,thereisnoindicationofalonger-termtrend.


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(b) AreTBT/SPSmeasuresmoreprevalentthanothertypesofnon-tariffmeasures?

(i) Evidence from official sources

RecentanalysisbytheUnitedNationsConferenceonTrade and Development (UNCTAD) (2012), usingnewly collected data on non-tariff measures in30developingcountriesplustheEuropeanUnionandJapan suggests a significant prevalence of TBT andSPSmeasuresoverotherNTMs.Together, theycovermoreproductsand trade value than “hardmeasures”,such as price and quantity control measures. Thisanalysis, using the new classification of NTMsdiscussed in Section C.1, includes separate sub-categories allowing TBT and SPS measures to bedistinguished.Theformeraremoreprevalentthanthelatter – a fact that is in line with the descriptiveevidence on the number of measures notified to theWTO (see Figure C.3). In particular, the averagecountry imposesTBTmeasuresonabout30percentof products and trade and SPS measures on about15percentofproductsandtrade.46

(ii) Evidence from business surveys

The ITCbusinesssurveysprovide furtherevidenceofthepredominanceofTBT/SPSmeasuresinnon-tariffmeasures, or at least in those NTMs perceived asburdensome by firms in the 11 developing and least-developed countries where surveys have beenconducted.Thedataclassificationusedinthesurveysis similar but not identical to the multi-agencyclassificationoutlinedinTableC.2andTableC.3.TBTand SPS measures are not shown separately in theITCsurveysduetothedifficultyofdistinguishingthesemeasures from survey responses, but taken together

they correspond to the sum of the categories“technicalrequirements”and“conformityassessment”.ReportsofburdensomeNTMs includebothmeasuresappliedbyimportingcountriesandmeasuresimposedby the home country. The former are referred to as“import-related measures” while the latter areclassifiedas“export-relatedmeasures”.

FigureC.9showsthebreakdownofreportednon-tariffmeasures by type of measure averaged over the11 countries surveyed to date. Since some countriesare larger than others, a simple average (i.e. thearithmetic mean) may give undue weight to smallercountries at the expense of larger ones. However,using a trade-weighted average (taking the value ofeach country’s exports in 2010 as weights) does notappeartohaveamajorimpactonshares.

Theshareoftechnicalrequirementsintotalnon-tariffmeasures is somewhat smaller when the simpleaverage is used (17 per cent) than when the trade-weightedaverageisused(23percent),butthereverseis true for conformity assessment (31 per centcompared with 24 per cent). The sum of thesetwo categories is roughly the same in either case(around 48 per cent), which means that TBT/SPSmeasurescomprisenearly half of allNTMs, includingexport-relatedmeasures.Theirshareinimport-relatedmeasures is even higher at around 64 per cent,regardless of the weighting structure. Of all“challenging”NTMsreportedbyexportingcompanies,about75percentareappliedbypartnercountriesand25percentbyhomecountries.Around10percentoffirms reportanegative impacton theirbusiness fromrules of origin, whereas other measures are seen aslesschallenging.

TableC.4:Agreements cited in disputes related to trade in goods, 1995-2011 (percentageandnumber)

1995-2000 2001-2006 2007-2011 1995-2011

Anti-dumping 16.0 29.1 29.2 22.6

Agriculture 19.1 14.9 13.8 16.8

Textilesandclothing 7.7 0.7 0.0 4.1

Customsvaluation 4.6 2.2 4.6 3.8

GATT(adjusted)a 55.7 59.0 53.8 56.5

Governmentprocurement 2.1 0.0 0.0 1.0

Importlicensing 13.4 6.0 1.5 8.9

Rulesoforigin 1.5 1.5 3.1 1.8

Subsidiesandcountervailingmeasures 19.6 25.4 24.6 22.4

Safeguards 6.2 17.2 6.2 9.9

Sanitaryandphytosanitarymeasures 9.3 9.0 10.8 9.4

Technicalbarrierstotrade 12.4 6.0 12.3 10.2

Trade-relatedinvestmentmeasures 8.2 4.5 6.2 6.6

Total number of disputes in goods 194 134 65 393


Note:Although therewere427 requests forconsultationsfiledunder theDisputeSettlementUnderstandingasof31December2011, thistablefocuseson393disputes ingoods, i.e. itexcludes25disputeswithclaimsmainly involvingTRIPSandninedisputeswithclaimsmainlyinvolvingtheGATS.aThistablefollowsthemethodologyofSantanaandJackson(2012)toeliminateduplicatecitationsoftheGATT.


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The ITC data can be further broken down by sub-category of non-tariff measures. These are shown inFigure C.10 for TBT/SPS measures (i.e. technicalrequirements plus conformity assessment). Productcertification, which is perceived as burdensome by37per centof reportingfirms, is themost frequentlycited type of measure in this group. It is followed byproduct testing at 9 per cent, and inspectionrequirementat8percent.Together,thesethreeNTMsub-typesareresponsibleformorethanhalfofallfirmcomplaintsaboutTBT/SPSmeasures.

FigureC.9:Burdensome NTMs by type of measure, 2010 (percentage)

Simple averageTechnical requirements 17%

Conformityassessment

31%

Pre-shipmentinspection

5%

Para-tariffmeasures

6%

Quantity controlmeasures 4%

Rules of origin10%

Other import-related

measures 2%

Export-relatedmeasures 25%

Technical requirements 23%


24%

Pre-shipmentinspection

4%

Para-tariffmeasures

5%


Rules of origin9%

Other import-related

measures 4%


Trade-weighted average

Source:ITCbusinesssurveysonNTMs.

Note: Surveys were conducted in 11 developing and least-developed economies: Burkina Faso, Egypt, Jamaica, Kenya,Madagascar, Mauritius, Morocco, Paraguay, Peru, Rwanda andUruguay.Mineralsandarmsareexcludedfromthesurvey.

Complying with product certification requirements inexport markets can entail significant costs forexporting firms. Some recent numerical examples ofthese costs are summarized in Section D, Box D.5.These examples relate to costs confronting firmsexporting from the United States, but productcertification may pose an even greater challenge forexporters located in developing and least-developedeconomies, since they may have fewer financial andinstitutional resources to draw upon than firms indevelopedcountries.

Problems relating to home country certification ofexportsarenearlyasextensiveforfirmsascertificationindestinationcountries,ascanbeseeninFigureC.11.Theexport-relatedmeasuresmostfrequentlycitedbyfirms are certification requirements (26 per cent),export inspection (23 per cent) and obtaining exportlicences/permits (13 per cent). Together, thesethreecategoriesaccountformorethan60percentoffirmcomplaintsaboutexport-relatedmeasures.

AsnotedinSectionC.1,theITCsurveysarebasedoninterviewswithfirms inasmallnumberofdevelopingeconomies, and as a result the responses do notrepresent the concerns and experiences ofbusinesses indevelopedcountries.The three largestdeveloped economies (the United States, theEuropeanUnionandJapan)allcollectdataandissuereports on trade barriers facing their exporters inforeignmarkets, but ingeneral these figuresarenotpublicly available in a format that is amenable toempirical analysis. This situation has been partlyremediedbyresearchersattheUSInternationalTradeCommission,Martinezetal.(2009),whoseCoReNTMdatabase merges business surveys from the UnitedStatesandtheEuropeanUnionwithinformationfromWTOtradepolicyreviewsusingasingle(idiosyncratic)data classification. Figure C.12 makes use of thisdatabase,butitexcludestheWTOfiguresinordertofocus solely on the concerns of developed economyexporters.

Data for the United States are sourced from theUSNationalTradeEstimate(NTE)whilefiguresfortheEuropean Union come from the EU’s Market AccessDatabase. Strictly speaking, the US NTE is not asurvey, but rather a report based on the findings ofseveral US government agencies and embassiesabroad, as well as from private firms. However, thefigures should still provide important insight into theprioritiesofAmericanexporters.

ThetopfiveproblemsfacingUSexportersareimport-relatedmeasures (24percent), investmentmeasures(20percent),standardsandtesting(12percent),SPSmeasures(10percent)andintellectualpropertyrights(9percent).TheleadingconcernsofEUfirmsareSPSmeasures (35 per cent), standards and testing(16 per cent), anti-competitive practices (9 per cent),intellectual property rights (7 per cent) and import-


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related measures (6 per cent). The sum of “SPSmeasures”and “standardsand testing” inFigureC.12shouldberoughlyequivalenttoTBT/SPSmeasuresasdefined inSectionA.1.TBT/SPSmeasuresappear tobe a major concern for the European Union,representingmorethanhalf(52percent)ofallissuesreported by EU exporters. However, the equivalentshare for the United States is much lower, at22percent.Reasonsforthisdisparityareunclear,butitcouldbeattributable todifferences inmethodologybetween the US NTE data and the EU’s MarketAccessDatabase.

An important difference between the ITC surveys andthe US/EU reports is the relatively high importanceattached to intellectual property rights by the largedeveloped economies. According to the CoRe NTMdata,intellectualpropertyrightsaccountfor9percentof complaints from US exporters and 7 per cent ofcomplaints from EU firms. On the other hand, just0.3 per cent of firms reporting burdensome NTMs intheITCsurveyscitedintellectualpropertyasaproblem.

The data on disputes in Table C.4 show that requestsfor consultations citing the SPS and TBT agreementsrespectivelyrepresented11percentand12percentofallcasesoverthelastfiveyears.Althoughthesesharesarenotexactlysmall,otheragreementswerecitedmoreoften, including GATT-adjusted (54 per cent), anti-dumping (29 per cent), subsidies/countervailingmeasures (25 per cent) and the Agreement onAgriculture (14 per cent). This could lead one toconclude that firms’ complaints about TBT/SPSmeasuresdonotnecessarilytranslateintogovernmentaction at the level of the multilateral trading system.On theotherhand, it couldalsobe takenasevidencethat the specific trade concern mechanism may beresolving complaints before they develop into fully-fledgedtradedisputes.

(c) IsthereanydifferenceinNTMusebetweendevelopedanddevelopingeconomies?47

TheSTCDatabaseshedslightonthetypeofcountriesmostinvolvedinthemechanism.FigureC.13presents

FigureC.10:TBT/SPS import-related measures by sub-type, 2010 (percentage)

0 5 10 15 20 25 30 35 40

Product certification 37.3

Special authorization due to riskof food-borne disease

Others

Restricted or prohibited useof substances(other than food)

Regulation on GMOs andother foreign species

Product identity requirements

Hygienic practices during production

Importer registration for health,safety, etc.

Restricted or prohibited useof substances in food

Prohibition for health, safety, etc.

Packaging

Authorization requirement for health,safety, etc.

Product registration

Tolerance limits for residuesor contaminants

Product characteristics including quality,performance

Fumigation

Origin of materials and parts

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Testing

Inspection requirement

8.7

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Note:Surveyswereconducted in11developingand least-developedeconomies:BurkinaFaso,Egypt, Jamaica,Kenya,Madagascar,Mauritius,Morocco,Paraguay,Peru,RwandaandUruguay.Mineralsandarmsareexcludedfromthesurvey.


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thenumberof“maintaining”and“raising”countriesbyincome group, calculated as their share in the totalnumberofcountriesintherespectiveincomegroup.48The results are clear-cut: developed countriesparticipate more in the specific trade concernsmechanism than developing countries. Moreover,

econometric analysis shows that theamountof tradecovered by concerns (coverage ratio and frequencyindex) is higher when the maintaining country isdeveloped than when the maintaining country isdeveloping, both for SPS and for TBT measuressubject to specific trade concerns.49 However, the

FigureC.11:NTMs applied by home country on exports by sub-type, 2010 (percentage)

0 5 10 15 20 25 30

Other export quantitative restrictions

Export price control measures

Export prohibitions

Measures on re-export

Export subsidies

Export quotas

Export registration

Other export related measures

Other technical export measures

Licensing or permit to export

Export taxes and charges

Export inspection

Certification required bythe exporting country 26.1

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FigureC.12:Non-tariff measures facing US and EU exporters, 2009 (percentage)

0 5 10 15 20 25 30

State-trading

Taxes

Export-related

Corruption

Customsprocedures

Anti-competitivepractices

Governmentprocurement

SPS measures

Intellectualproperty

Investment-related

Standards,testing, etc.

Import-related 24

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10

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7

5

5

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2

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0 5 10 15 20 25 403530

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Governmentprocurement

Customsprocedures

Investment-related

Taxes

Intellectualproperty

Import-related

Standards,testing, etc.

Anti-competitivepractices

SPS measures 35

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7

6

6

5

6

4

4

0

0

Source:Martinezetal.(2009).

UnitedStates EuropeanUnion


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participation of developing countries has steadilyincreasedovertheyears,notonlyasraisingcountriesbutalsoasmaintainingcountries.

The ITC business surveys also find greater use ofTBT/SPS measures by developed economies.Figure C.14 shows the share of TBT/SPS measures(i.e. technical requirements plus conformityassessment) in import-related non-tariff measures,broken down by level of development. According tothis figure, around three-quarters of burdensomeNTMs reportedbyfirms relate toTPT/SPSmeasureswhentheimportingcountryisdeveloped,whereasthisshare falls toaroundhalfwhen the importingcountryisdeveloping.

Other survey-based evidence suggests that intra-regional trade between African countries may besubjecttoaverydifferentsetofnon-tariffmeasures.Insupport of efforts to establish a tri-partite free tradearea between the Common Market for Eastern andSouthern Africa (COMESA), the East AfricanCommunity (EAC) and the Southern AfricanDevelopment Community (SADC), an online reportingsystem has been set up to register complaints about

NTMs and to seek resolution through a consultationprocess.Kalenga(2012)reviewscomplaintssubmittedtotheonlinesystembetween2008and2011andfindsthat administrative procedures are the most commonsource of problems for traders, while TBT/SPSmeasures play a minor role (see Table C.5). “Customsand administrative entry procedures” were cited in41 per cent of complaints and “Other proceduralproblems” were mentioned in another 24 per cent ofcases, for a combined total of 65 per cent. SPS andTBTmeasureswereonlyresponsiblefor7percentand5 per cent of complaints, respectively, for a total of12 per cent. This combined share is the same as thesharefor“Specificlimitations”,acategorythatincludesquantitativerestrictionsandprohibitions.Itisdifficulttodrawstrongconclusionsfromsuchasmallandpossiblynon-representative sample, but the data do suggestthat TBT/SPS measures are much less widely usedthanothermeasuresbetweenAfricancountries.

(d) DoestheincidenceofNTMsvaryacrosssectors?

AsdiscussedinSectionB,therearegoodreasonstoexpect the use of non-tariff measures to vary

FigureC.13:Number of STC “maintaining” and “raising” countries as a share of the total number of countries by level of development, 1995-2010 (percentage)


Note:IntheTBTdataset,aconcernisassumedtobe“resolved”ifnotraisedagainfortwoormoreyears.A“raising”countryistheonewhichcomplainsaboutaTBT/SPSmeasureimposedbya“maintaining”countryintherelevantWTOcommittee.

1995-2000 2000-2005 2005-2010

0.6

0.8

0.5

0.7

0.9

0.4

0.3

0.2

0.1

0

Developed Developing

1995-2000 2000-2005 2005-2010

0.5

0.6

0.4

0.3

0.2

0.1

0


1995-2000 2000-2005 2005-2010

0.6

0.80.9

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0


(a)SPS(maintaining)

(c)TBT(maintaining)

(b)SPS(raising)

(d)TBT(raising)


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significantly across sectors. Indeed, NTMs appear toaffect certain sectors disproportionately, but theextentoftheimpactissensitivetothewaythatsectorsaredefined.Unfortunately,thereisconsiderablescopefor confusion due to the existence of multiplecompetingstatisticaldefinitions.Forexample,at leastthree definitions of agricultural products are widelyused: the definition from the WTO Agreement onAgriculture (AOA), the definition that appears in theWTO’s statistical publications based on the StandardInternational Trade Classification (SITC), and the first24 chapters of the Harmonized System (HS) tradenomenclature.

The AOA definition is the narrowest as it reflectsnegotiating concerns rather than analyticalrequirements. The SITC-based WTO definition is the

broadest, but it is poorly suited toempirical researchsince tariffsaregenerallydefined in termsof theHSclassification.Chapters1to24oftheHSclassificationrepresent a reasonable compromise between anintuitiveunderstandingofwhatconstitutesagriculturalproductsandanalytical tractability.For this reason, itis adopted as our standard definition, with non-agricultural products defined negatively as all otherproducts. This should not be confused with non-agriculturalproductsasusedinon-agriculturalmarketaccess(NAMA)negotiations,whicharedefinedasallnon-AOA products. The main difference betweenthese definitions is the treatment of fish and fishproducts,whichare taken tobeagricultural productsin this report but are treated as non-agriculturalproductsinAOA/NAMA.NeithertheAOAnortheHSdefinitionincludeswood,whichmaybehighlyrelevanttotheSPSAgreementsincewoodproductshavebeenknown toharbour invasivespecies thatcanbehighlydamagingtotheimportingcountry.50

Using theSTCDatabase,onecangetasenseof thetype of sectors most affected by specific tradeconcerns.Afirstdistinctionisbetweentheagricultureand non-agricultural sectors. Concerns about SPSmeasuresoverwhelminglyaffecttheagriculturesector(251of the267specific tradeconcerns forwhichanHS sector could be identified, that is 94 per cent).51For TBT measures, out of the 283 specific tradeconcerns for which an HS sector could be identified,82 (29 per cent) are in agriculture and 184(65percent)inothersectors.52However,econometricanalysis shows that the coverage ratio and thefrequency index of TBT measures subject to specifictradeconcernsarehigher inagriculturalsectors thannon-agriculturalones.53

For both SPS and TBT measures, frequency indexesandcoverageratiosarelowerinsectorscharacterizedby a higher incidence of intermediate products.54 Asargued in Section B, the theory of trade agreementsunderoffshoringpredictsthat,inthepresenceoftrade

FigureC.14:Burdensome NTMs applied by partner countries by level of development, 2010 (percentage)


50

60

70

80

90

100

40

30

20

10

0

TBT/SPS All other measures

74.4

25.6

50.6

49.4



TableC.5:Complaints about NTMs in COMESA-EAC-SADC, 2008-11 (numberandpercentage)

Number of complaints

Share in total

1:Governmentparticipationintradeandrestrictivepracticestoleratedbygovernments 37 10

2:Customsandadministrativeprocedures 151 41

3:Technicalbarrierstotrade(TBT) 19 5

4:Sanitaryandphytosanitary(SPS)measures 24 7

5:Specificlimitations 43 12

6:Chargesonimports 7 2

7:Otherproceduralproblems 87 24

Total 368 100

Source:COMESA-EAC-SADConlineNTMcomplaintsystem,Kalenga(2012).


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in intermediate inputs and bilateral price bargainingbetween foreign suppliers and domestic buyers, thelevel of the behind-the-border non-tax regulatorypolicies applied to foreign exports is set higher thanwouldbeefficient,becauseofrent-shifting(i.e.shiftingprofits from the foreign to the domestic producer)(Staiger,2012).55Theregressionsof the incidenceofTBT/SPS measures on the sectoral share ofintermediateproductsdonotconstitutearigoroustestof the theory of trade agreements under offshoring.Suchatestwouldrequiredetaileddataontheintensityof intermediate products and the amount of bilateralbargaining. However, the result that the amount oftrade covered by specific trade concerns is lower inintermediate-intensive sectors seems to indicate thatmotivationsother thanrent-shiftingmaydrivetheuseof TBT/SPS measures in these sectors (see SectionE.4foradetaileddiscussion).

Evidence that agricultural products aredisproportionately affected by non-tariff measures isechoed in the ITCbusinesssurveysand illustratedbyFigureC.15,whichshowstheincidenceofburdensomeNTMsbysectorofthereportingfirms.56Intotal,about53 per cent of businesses said they were negativelyaffected by NTMs or related obstacles to trade, butthissharewashigherforbusinessesintheagriculturalsector (60percent)and loweramongmanufacturingfirms (51 per cent). These shares were calculated bytaking the simple average over the 11 availablecountriesintheITCsurveys,butthecontrastbetweenagriculture and manufacturing is somewhat strongerwhenaveragesareweightedbyexportsineachsector.Inthiscase,theincidenceofNTMsinagriculturewas63 per cent, whereas it was only 45 per cent formanufacturing.

Notonlyistheincidenceofnon-tariffmeasureshigherin the agricultural sector, but different types of

measures are also used compared with themanufacturing sector. Figure C.16 shows thedistributionofNTMsbytypeofmeasureinagricultureandmanufacturing.Exportersofagriculturalproductsreport more problems related to TBT/SPS measures(i.e. technical requirements plus conformityassessment) than exporters of manufactured goods(59percentfortheformer,34percentforthelatter).Ontheotherhand,pre-shipmentinspection,para-tariffmeasures57 and rules of origin (i.e. laws, regulationsand administrative procedures which determine aproduct’s country of origin) are comparatively more

FigureC.15:Incidence of NTMs by sector, 2010 (percentage)

Total Agriculture Manufacturing

50

60

70

40

30

20

10

0

Simple average Trade weighted average

53.4 51.2

60.1 62.5

50.845.1



FigureC.16:Type of NTM by sector, 2010 (percentage)

Para-tariffmeasures 4%




Rules of origin6%

Finance measures 2%

Other import-relatedmeasures 1%





36%

Conformity assessment 24%

Pre-shipmentinspection 3%

Pre-shipment inspection 8%Para-tariff measures 8%

Rules of origin 14%

Agriculture

Manufacturing

Other import-relatedmeasures 2%




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challengingforexportersofnon-agriculturalproducts.Export-related measures seem to present fewerproblems for agricultural exporters than formanufacturers, since the share of these measures inallreportedNTMcasesis4percentagepointslowerinthe agricultural sector (23 per cent) than inmanufacturing(27percent).

Data on disputes from Santana and Jackson (2012)alsopointtoahigherincidenceofTBT/SPSmeasuresin agricultural products (AOA definition) than in non-

agricultural products (see Table C.6). SPS and TBTmeasures were both cited in 28 per cent of disputesduringthe2007-11period,whereasdisputesinvolvingnon-agricultural products only mentioned the TBTAgreement 3 per cent of the time and the SPSAgreement not at all. This 28 per cent share incitations was greater than for any other agreementotherthantheGeneralAgreementonTariffsandTrade(GATT),whichwasmentionedin60percentofcasesafter adjustment to eliminate duplicate citations.TBT/SPScitationsinagriculture-relateddisputeshave


Note:Although therewere427 requests forconsultationsfiledunder theDisputeSettlementUnderstandingasof31December2011, thistablefocuseson393disputes ingoods, i.e. itexcludes25disputeswithclaimsmainly involvingTRIPSandninedisputeswithclaimsmainlyinvolvingtheGATS.

aThebreakdownbyagriculture/non-agricultureisbasedonSantanaandJackson(2012).Thetableexcludes55disputesinvolving“genericormixed”products.

bThistablefollowsthemethodologyofSantanaandJackson(2012)toeliminateduplicatecitationsoftheGATT.

TableC.6: Agreements cited in disputes related to trade in agricultural and non-agricultural productsa (percentageandnumber)

1995-2000 2001-2006 2007-2011 1995-2011

Agricultural products (AoA definition)

Anti-dumping 12.3 11.1 12.0 11.8

Agriculture 45.6 31.5 24.0 36.0



GeneralAgreementonTariffsandTrade(GATT) 59.6 61.1 60.0 60.3




Safeguards 8.8 18.5 0.0 11.0




Total number of agriculture disputes 57 54 25 136

Non-agricultural products (NAMA)

Anti-dumping 22.0 42.6 47.1 33.2

Agriculture 0.0 1.5 0.0 0.5



GATT(adjusted)b 47.0 54.4 41.2 48.5

Governmentprocurement 2.0 0.0 0.0 1.0




Safeguards 7.0 19.1 11.8 119.0




Total number of non-agriculture disputes 100 68 34 202


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also increased over time, rising from 18 per cent in1995-2001to28percentin2007-11.

(e) WhatkindsofproceduralobstaclesareassociatedwithNTMs?

Non-tariff measures pose many challenges forexporting firms, but more often than not it is themanner of implementation rather than the measureitself that causesproblems for businesses.Asnotedin Section C.1, these implementation issues arereferredtoas“proceduralobstacles”inthenewmulti-agency data classification on NTMs. For example, acountry could have very high standards for importedgoods,makingitdifficultforexporterstocomplywiththese standards. On the other hand, exporters thatmanaged to comply with the regulations might stillhave problems demonstrating their compliance, orelse might face long delays before their goods areadmitted into the importingcountry. In the firstcase,an exporter could perceive the NTM itself to be themain impediment to trade, whereas in the secondcase they might view the procedural obstacle as thesourceoftheirdifficulty.

Inpractice,dataonproceduralobstaclescanonlybecollected through surveys such as the ITC businesssurveys. Figure C.17 shows shares of reported non-tariff measures in the ITC surveys with and withoutprocedural obstacles associated with them. Theaverageshareofproceduralobstaclesis77percentifwe take the simple average over the 11 countrieswhere surveys have been conducted. The use of atrade-weightedaverage reduces this share slightly to72percent.

The types of procedural obstacles that businessesreportareshown inFigureC.18.Themostcommonlymentioned obstacle is “time constraints”, includingdelays related to regulations and short deadlinesfor submitting documentation. This accounts for35 per cent of reported obstacles, followed by“high/informal payments” at 22 per cent, and“administrative burdens” at 17 per cent. There aresmallersharesforotherreportedproceduralobstacles.

The incidence of procedural obstacles varies widelyacross different types of non-tariff measures(see Figure C.19). For example, nearly 80 per cent offirms reporting burdensome conformity assessmentmeasures also encountered procedural obstacles. Ontheotherhand,theincidenceofproceduralobstaclesintechnicalrequirementswasjust55percent.Proceduralobstacleswerereportedlessfrequentlyforgovernmentprocurement restrictions (0 per cent), subsidies (also0 per cent) and price control measures (25 per cent),including anti-dumping and countervailing measures.They occurred most frequently in measures related tointellectual property (100 per cent) and export-relatedmeasures(88percent).

(f) HowhaveNTMsevolvedsincetheglobalfinancialcrisis?

The sharp declines in global trade and output thatfollowedthefinancialcrisisin2008-09raisedfearsofare-runofthe1930s,whenprotectionismexacerbatedand prolonged the Great Depression. Efforts by theWTOandotherstomonitortradepolicydevelopmentsin the aftermath of the crisis initially found that mostcountrieshadmanagedin2009-10toavoidtheworst

FigureC.17:Share of NTMs with and without procedural obstacles, 2010 (percentage)

FigureC.18:Shares of reported procedural obstacles by type, 2010 (percentage)

Simple average Trade-weighted average

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60

70

80

90

100

40

30

20

10

0

NTM only NTM with PO

23.5

76.5 71.7

28.3

Time constraints 35%

Discriminatorybehaviour

6%

Information ortransparency

issues 5%

Informal orunusually highpayment 22%

Lack offacilities 8%

Recognition,accreditation 1%

Other 2%

Unspecified 4% Technical requirements17%






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forms of protectionism, but developments in 2011point to increasing trade friction and a rise in thenumber of restrictive trade measures. To the extentthattradepolicyhasbecomemorerestrictiverecently,itappearsthatmostoftheincreaseisduetonon-tariffmeasures.

TableC.7summarizesevidencefromWTOmonitoringreports since 2008. The number of new restrictivemeasuresrosefrom53in2008to346in2009attheheightofthecrisis.Newrestrictivemeasuresthenfellbackto306in2010butincreasedagainto344inthefirst 10 months of 2011. The number of liberalizingmeasures was slightly greater than the number ofrestrictive ones in 2010, which suggests little or nochange in theoverall level of protectionism that year.However, there was a net increase in the number ofrestrictivemeasuresin2011,asliberalizingactionsfellto304from323inthepreviousyear,whilerestrictiveonesroseto344from306.

Only 8 per cent of restrictive measures introduced in2008 were tariffs, but this share rose to 16 per centin2009,thento20percentin2010beforefallingbackto19percentinthefirsttenmonthsof2011.TableC.7excludesTBTandSPSmeasures,sothetariffshareissomewhat exaggerated. SPS and TBT measures areintentionally not tracked in WTO monitoring reports inorder to avoid having to make any judgment as towhether such measures are justified on public policygrounds.

In the aftermath of the crisis, countries immediatelyresorted to trade “remedies”, such as anti-dumpingactions and countervailing duties, as evidenced by asharp increase in the number of restrictive measuresfrom38 in2008to196 in2009,but this later fell to132in2010andto104in2011.In2010,thenumberofrestrictivetraderemedieswasroughlyequaltothenumber of liberalizing measures, bringing their netcontributiontothestockofrestrictivetrademeasuresclose to zero, while in 2011 liberalizing actionsoutnumberedrestrictiveones.

One notable feature of Table C.7 is the spike in thenumber of restrictive non-tariff measures from 30 in2010 to81 in2011.At thesame time, thenumberofliberalizing NTMs fell from 23 to 13. The recentincrease in restrictive measures is attributable to anumber of developments, including stricter importcontrolsandlicensingrequirementsinsomecountries,as well as import prohibitions imposed on someJapanese goods following the Fukushima nuclearaccident in March 2011. Some of the main countriesimposing the new measures in 2011 were Indonesia,IndiaandArgentina.

EvidencefromtheWTO’smonitoringreports leadsusto conclude that the use of non-tariff measures hasrisen relative to tariffs since the financial crisis,althoughthereareexceptionsfor individualcountries.In every year since 2008, new restrictive non-tariffmeasures have outnumbered liberalizing actions.Meanwhile, thenumberof liberalizing tariffmeasures

FigureC.19:Shares of NTMs with and without procedural obstacles by type of NTM, 2010 (percentage)

0 10 40 50 70 80 100603020 90

Rules of origin

Export-related measures

Government procurement

Intellectual property

Anti-competitive measures

Subsidies

Price control measures

Quantity control measures

Finance measures

Pre-shipment inspection

Para-tariff measures

Conformity assessment

Technical requirements 44.7

20.5

28.9

32.9

28.2

27.5

75.0

100.0

19.4

100.0

100.0

18.8

12.5

55.3

79.5

71.1

67.1

71.8

72.5

25.0

80.6

81.2

87.5

NTM only NTM with PO




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TableC.7: Trade and trade-related measures, 2008-2011 (numberofnewmeasures)

2008a 2009 2010 2011b

Restrictive Liberalizing Restrictive Liberalizing Restrictive Liberalizing Restrictive Liberalizing

Trade Remedy 38 30 196 127 132 134 104 118

Anti-dumping 31 29 133 95 97 106 79 107

Countervailing 2 1 23 12 11 8 12 6

Safeguards 5 0 40 20 24 20 13 5

Border 10 12 117 68 98 145 154 137

Tariff 4 11 57 43 61 122 66 124

Tax 0 0 0 0 7 0 7 0

Non-tariff barrierc 6 1 60 25 30 23 81 13

Export 2 3 13 10 47 19 66 35

Duty 2 3 4 6 19 3 15 7

Quota 0 0 0 0 3 3 12 6

Ban 0 0 1 1 14 9 23 14

Other 0 0 8 3 11 4 16 8

Other 3 1 20 12 29 25 20 14

Total 53 46 346 217 306 323 344 304

aCoverstheperiodfromOctobertoDecember2008.bUptomid-October2011.cExcludingSPSandTBTmeasures.

Source:WTOSecretariatMonitoringReports.

hasbeengreater than thenumberof restrictive tariffmeasuresineveryperiodexcept2009.Regardingtherelative importance of tariffs and NTMs, data fromtheGlobalTradeAlertare largelyconsistentwith the

findings of WTO monitoring reports. According tothe Ninth GTA Report, tariffs accounted for just13 per cent of all new, clearly restrictive trademeasuresintroducedsince2009(seeFigureC.20).58

FigureC.20:Composition of new restrictive trade measures, 2008-2011 (percentage)

Source:Evenett(2011).

Bail out/state aid 25%

Trade defence (anti-dumping, countervailing duties, safeguards) 22%Tariffs 13%

Non-tariff barrier n.e.s. 7%

Investment measure 2%

Export subsidy 2%

Import ban 2%

Export taxes/restriction 7%

Migration measure 4%

Public procurement 3%

Trade finance 2%

Quota (including tariff rate quotas) 1%

SPS measures 1%

Local content public procurement 1% Consumption subsidy 1%

TBT measures 1%

Other 8%


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3. Servicesmeasures

This sub-section discusses trends in servicesmeasures. As mentioned in Section C.1, the WTO’sinternal sources of information on services measuresinclude notifications and GATS schedules ofcommitments. GATS Article III.3 notifications, whichpotentially cover all measures relevant to theAgreement, are plagued with very low compliancerates. Schedules of market access and nationaltreatmentcommitmentsprovide informationonboundpolicies,but the regimes thatareactuallyappliedareoften more liberal.59 Such WTO internal sources ofinformation are of very limited use when assessingservices measures applied by WTO members.Therefore, this sub-section considers non-WTOsources of information, asking whether they help toshedlightonthetrendsinservicesmeasures.

A serious limitation of the current data on servicesmeasuresisthattheyallowtoaverylimitedextentthedistinction between market access and nationaltreatment measures and domestic regulation. Thisdistinction is important because these topics raisedifferent issues: improving market contestability(through low barriers to entry and exit) and reducingdiscrimination, and improving the governance of non-discriminatory regulation, respectively. Moreover, theavailableinformationondomesticregulationis limitedincoverageandtimeframeand,inmostcases,itonlyincludesrelativelypoorproxies.

International organizations, such as the Organisationfor Economic Cooperation and Development (OECD)andtheWorldBank,arecurrently runningprojects toproduce Services Trade Restrictiveness Indexes(STRIs). STRIs were first estimated by the AustraliaProductivity Commission (APC), but only for a cross-section of countries (no time series information isavailable). The STRI produced by the APC cannottherefore be used to analyse trends over time. The

indexes produced by the World Bank and the OECDhave not been made publicly available, yet. For thisreason, a discussion of STRIs is restricted to themethodology(seeBoxC.2).

(a) Whatarethetrendsinservicesmeasures?

AsdiscussedinSectionC.1,themainavailablesourceof internationally comparable information on servicesmeasures is the Product Market Regulations (PMR)data from the OECD. The PMR indicators includeinformation on economy-wide laws and regulationsthat are potentially anti-competitive in areas wherecompetition is viable. The sub-set of the Non-Manufacturing Regulation (NMR) indicators, in turn,only covers specific services. NMR indicators alsomeasure regulations that curb efficiency-enhancingcompetition(ConwayandNicoletti,2006).

AsdocumentedbyWölfletal.(2009),therehasbeena downward trend in the regulatory barriers tocompetition,measuredbythePMR,inOECDcountriessince the late 1990s.60 Regulatory barriers tocompetition have also decreased in network servicessectors,suchasenergy,transportandcommunicationssince the mid-1970s, as shown in Panel (a) ofFigure C.21. For professional services, too, there hasbeenadownwardtrendinoverallregulation(averagedacrossallprofessions)overtime,asshowninPanel(b)ofFigureC.21.61

ItisnotpossibletoestablishalinkbetweenthetypesofindicatorsdiscussedaboveandtheGATScategoriesof market access (Article XVI), national treatment(Article XVII) and domestic regulation (Article VI.4).As an illustration, consider the NMR indicators forprofessional services. Entry regulations includelicensinglimitations(thataremarketaccesslimitationscoveredbyGATSArticleXVI),educationrequirements(that are domestic regulation covered by GATS

FigureC.21:Time trend of NMR indicators in selected services sectors (numberofregulations)

Source:OECDNMRdataset.

1996 2003 2008

2.5

3

2

1.5

1

0.5

0

Overallregulations

Entryregulations

Conductregulations

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

5

6

4

3

2

1

0

ETC regulation indicator Entry barriers

(a)Energy,transportandcommunications(ETC)sectors (b)Professionalservices


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Article VI.4) and quotas/economic needs tests forforeignproviders(thatareatthesametimelimitationstomarketaccessandnational treatment, respectivelycoveredbyGATSArticlesXVIandXVII).Theindicatorfor conduct regulation covers anti-competitiveregulations on prices and fees, advertising, form ofbusiness and inter-professional cooperation. Whileregulationsontheformofbusinessaremarketaccess

limitations covered by GATS Article XVI, the otherregulations are more generally covered by the GATSunder Article I as “measures affecting trade inservices”. A downward trend of product marketregulation in services may reflect a reduction inlimitationstomarketaccessornationaltreatment,butit may also be due to changes in the stringency ofdomesticregulation.

BoxC.2: Trade restrictiveness indexes for services

TheAustralianProductivityCommission(APC)pioneeredtheestimationofaServicesTradeRestrictivenessIndex (STRI) (Findlay and Warren, 2000). The APC compiled information on measures in the 1990s thatpotentially restricted trade in services, covering a wide range of sectors across countries. Most of theinformationwasbasedonthetextsofregulations,butsomesectorsalsoincludeinformationfromoutcomemeasuresandthede facto implementationofregulations.Inconstructingtheindex,theAPCdistinguishedbetweenmeasuresaffectingmarketentry (fixedcosts)and thoseaffecting thepost-entryoperationsofafirm(variablecosts).Withineachcategory,measurescaneitherbenon-discriminatoryordiscriminatory.Forexample,anon-discriminatorymeasureaffectingmarketentrymaylimitthenumberofserviceproviders inthetelecommunicationssectorofagivencountryregardlessofnationality,whereasadiscriminatorymeasurewouldimposenationalquotasforforeignfirmsorceilingsonmaximumforeignequityparticipation.Similarly,anon-discriminatorymeasureaffectingpost-entryoperationsmaystipulate,forinstance,aminimumcapitalrequirement for all insurance firms, whereas a discriminatory measure would entail additional capitalrequirementsforforeignsuppliers(FrancoisandHoekman,2010).

Scoreswereassignedforeachrestrictionbyexpertsonthebasisofajudgementaboutitsstringency.Forinstance, aneconomy that restricts thenumberofbanking licenceswasassignedahigher score thananeconomythatissuesnewbankinglicenceswithonlyprudentialrequirements.Next,thedifferentrestrictionswere combined in a weighted average, once again according to an expert value judgement about theirrelative economic cost. For example, restrictions on banking licences were assigned larger weights thanrestrictions on the temporary movement of people. The weights were chosen so that the resultingrestrictiveness index score ranges from zero to one. De facto, the trade restrictiveness index for eacheconomycomprisestwoindexes–aforeigntraderestrictivenessindexandadomestictraderestrictivenessindex. The foreign index score includes both discriminatory and non-discriminatory restrictions, while thedomesticindexscorecoversonlynon-discriminatoryrestrictions.Hence,thedifferencebetweenthescoresofthetwoindexesisameasureofthediscriminationagainstforeigners(McGuire,2008).SomestudiesinthetradeliteraturehaveusedtheseSTRIstoestimatethepriceeffectsofservicesmeasures,takingaccountofstandarddeterminantsofperformanceforthesectorconcerned.

Beyond the limited country and time coverage, there are several limitations of such an STRI, outlined byGrünfeldandMoxnes(2003).Firstly,theSTRIisnotatariffequivalent;thusitdoesnotprovideinformationon price or cost impacts. Secondly, it does not measure anti-competitive practices, such as price-fixing,market-sharingarrangementsandcartels,whichconstituteimpedimentstoservicestrade.Thirdly,itisonlycomputed for six industries: banking, telecommunications, maritime services, distribution (wholesale andretail),educationandprofessionalservices(engineering,architecturalandlegal).

TheconstructionofSTRIsusingamethodologyofscoresandweightsbasedonexpert judgement isalsobeingcarriedoutinon-goingWorldBankresearch.Discriminationagainstforeignsuppliersforeachservicessectorandmodeofsupply ismappedonafive-pointscalerangingfrom0(fornorestrictions)to1(highlyrestricted), with three intermediate levels of restrictiveness (0.25, 0.50 and 0.75). Sector results areaggregated across modes of supply using weights that reflect the judgement of experts on the relativeimportanceofthedifferentmodesforasector.Forexample,“temporarymovementofsuppliers”(mode4)isimportant for professional services, but not for telecommunications, whereas “commercial presence” orforeigndirect investment (mode3) is thedominantmode for contestingamarket.Next, sectorSTRIsareaggregated into a single measure for the services sector as a whole in each country using sector GDPsharesorFDIsharesasweights(GootiizandMattoo,2009a).

Themajor limitationof theestimatesbasedon theSTRIs is that they relyon the judgementofexperts todeterminetheseverityofdifferentrestrictions.Thislendsanunavoidableelementofsubjectivitytotheindex(GootiizandMattoo,2009b).Inaddition,thereareconceptualproblemswiththeweightsused.


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Another distinction that is only partially captured byPMR indicators is theonebetweendiscriminatoryandnon-discriminatory services measures (as defined inSection B.2).62 This distinction is important for policy-making. Using data for 34 economies in the AsiaPacific,EuropeanandAmericanregions,Nguyen-Hong(2000) finds that price-cost margins of engineeringfirms are negatively affected by non-discriminatorymeasures that restrictentryandpositivelyaffectedbydiscriminatory measures on foreign establishment andoperation. Increases in price-cost margins areinterpretedasindirectevidenceoftherent-creating(i.e.profit-generating) effects of restrictions, whilereductions in such margins are interpreted as indirectevidence of cost-creating effects. This suggests thatnon-discriminatory measures are likely to raise costs,while discriminatory policies such as nationality orresidency requirements generate additional profits fordomesticincumbents(FrancoisandHoekman,2010).

TheAustraliaProductivityCommission’sSTRIisafirstsourceofinformationondiscriminationagainstforeignproviders of services. Findlay and Warren (2000)present ample evidence that there is significantdiscrimination, both in the establishment of foreignservices providers and in the conduct of theiroperations. As argued in Box C.2, the amount ofdiscriminationiscalculatedasthedifferencebetweentheforeignSTRIandthedomesticSTRI.

Secondly,someevidenceontheextentofdiscriminationcan be gathered from the OECD PMR indicator“discriminatory procedures” (DPs). This indicatorincludes information on whether there is “general”discrimination and “competition” discrimination againstforeign firms. Among the questions pertaining to“generaldiscrimination”,thereisoneaskingwhetherthecountry “has specific provisions which require orencourageexplicitrecognitionofthenationaltreatmentprinciplewhenapplyingregulations,soastoguaranteenon-discriminationbetweenforeignanddomesticfirms,goods or services”.63 Like the general PMR indicator,discriminatory procedures have also, on average,decreasedovertime.64

A third source of information on discrimination inservices regulations is contained in the OECD’s FDI

Restrictiveness Index. The index summarizes, for anumber of manufacturing and services sectors, theextent to which foreign investment is restricted. Thisconstitutes, by definition, a discriminatory restriction.Based on the OECD data, three indexes that arerelevant to services sectors have been created: anoverall index; an index for electricity, transport andcommunicationssectors;andanindexforprofessionalservices.65 These indexes provide information onGATSmode3restrictions.

FDI restrictiveness in services varies acrosscountries,asshowninKalinovaetal.(2010).66Thereis also some evidence of a downward trend in FDIrestrictiveness indicators, both for the overall indexand for the ETC and professional services indexes.Fortheoverallindex,Panel(a)ofFigureC.22clearlyshowsthat theunweightedaverageacrosscountriesdecreasesovertime,whiletheGDPweightedaverageis more stable over time, probably because richcountries start from low levels of FDI restrictions.Likewise,Panel(b)ofFigureC.22showsadownwardtrend in the unweighted averages, and a less clearpattern of GDP weighted averages, of the ETC andprofessionalservicesindicators.Regressionanalysis,however, reveals that the overall, ETC andprofessional services indexes all decrease over thesampleperiod.67Moreover,asdiscussed inBoxC.3,most of the reduction in the FDI restrictivenessindexes is driven by a reduction in foreign equityrestrictions.

(b) Domesticregulation

Measuringdomestic regulation inservices isdifficult.Most, ifnotall,domestic regulation issector-specific.Toprovideacoupleofexamples,specificqualificationand licensing requirements and procedures apply toprofessional services providers, such as architects orengineers;technicalstandardsoncapitalrequirementsdisciplinetheprovisionoffinancialservicesbyfinancialintermediaries. Moreover, a regulation may not beburdensomeper se, but ratherbecauseof theway inwhichitisimplemented.Giventheinherentdifficultiesinmeasuringdomesticregulation,itishardlysurprisingthatmostavailableproxiesareratherpoor.

Forexample, theuseofactualFDIflowsasweights introducesabiasbecausehighly restrictedsectorsarelikelytoexperiencelessFDIandthereforeareallocatedtoolowaweight.Similarly,usingGDPweights,sectorssuchashealth,withrelativelylargesharesofGDP,aresubjecttoalownumberofrestrictions,whereasthosewithlowsharesofGDP,suchastransport,electricityandfinance,aregenerallyhighlyrestrictedsectors.

ArecentstudybytheOECD(2009)analysesalternativestotheexpert-basedmethodologyforconstructingSTRIs.Itarguesthatalesssubjectiveweightingschemecouldbebasedonimpactanalysis–estimatingthedirectimpactofdifferentservicesmeasuresontradeusingregressiontechniques.Thestudyalsoidentifiesprincipalcomponentanalysis(PCA)asapossibleweightingscheme.Exploringthestatisticalpropertiesoftheunderlyingdata,thismethodfirstgroupstogetherindividualmeasuresthatarehighlycorrelated.Itthencreates weights based on each group’s contribution to the overall variation in the observed outcome, i.e.servicestrade.


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FigureC.22:FDI restrictiveness in services, evolution over time (indexbetween0and1)

Source:OECDFDIrestrictivenessdatabase.

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professionalservices(PS)

DespitetheabsenceofaclearcorrespondencewiththeGATS, PMR indicators have been used in the tradeliteraturetoproxyfordomesticregulationmentionedinGATSArticleVI.4.Inparticular,KoxandNordås(2007)selectthesub-setofindicatorsthat,accordingtothem,comesclosest tocovering the regulationmentioned inGATS Article VI.4. They drop all of the state controlmeasures,reconstructingthePMRindicatorusingonlytwomain components (with equal weight): “barriers toentry”and“barrierstotradeandinvestment”.

Barriers to entry is an equal-weight aggregation of“regulatoryandadministrativeopacity”,“administrativeburden on start-ups” and “barriers to competition”.Barriers to trade and investment is an equal-weightaggregation of “discriminatory procedures” and“regulatory barriers”. As partly acknowledged by theauthors themeselves, it is however unclear to whatextentthereconstructedPMRcapturestheregulatorybarriers that come closer to the ones falling underGATSArticleVI.4.

Among the PMR indicators, the one that is mostcloselyrelatedtodomesticregulationinGATSArticleVI.4 is “licences and permits system” (LPS). Thisindicator comprises three questions (with equalweights): (i) whether the “silence is consent” rule isused (i.e. licences are issued automatically if thecompetentlicensingofficehasnotactedbytheendofthe statutory response period); (ii) whether there aresingle contact points (“one-stop shops”) for gettinginformationonnotificationsand licences; (iii)whethertherearesinglecontactpointsforissuingoracceptingnotificationsandlicences.

A“yes”answerreceivesascoreofzero;thereforethelower the indicator, the less burdensome are thelicensing requirements. For the sample of 39 OECDand large developing countries on which PMRinformation exists in 1998, 2003 and 2008, there issome evidence that licence and permit systems havebecomelessburdensomeovertime.68

BoxC.3: Decomposition of changes in FDI restrictiveness

The FDI restrictiveness index is constructed as the sum of four components: foreign equity restrictions(FER), screening and approval (SCR), restrictions on key foreign personnel (KPE) and other restrictions(OTR).Theaveragepercentagecontributionofeachcomponenttothegrowthrateinthetotalindexbetween1997and2010isdecomposedusingthefollowingformula:

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and for the ETC and professional services indexes. For the overall index, Panel (a) of Figure C.22 clearly shows that the unweighted average across countries decreases over time, while the GDP weighted average is more stable over time, probably because rich countries start from low levels of FDI restrictions. Likewise, Panel (b) of Figure C.22 shows a downward trend in the unweighted averages, and a less clear pattern of GDP weighted averages, of the ETC and professional services indicators. Regression analysis, however, reveals that the overall, ETC and professional services indexes all decrease over the sample period.67 Moreover, as discussed in Box C.3, most of the reduction in the FDI restrictiveness indexes is driven by a reduction in foreign equity restrictions. Figure C.22: FDI restrictiveness in services, evolution over time (index between 0 and 1) (a) Overall index (b) ETC and professional services (PS) Source: OECD FDI restrictiveness database Box C.3: Decomposition of changes in FDI restrictiveness The FDI restrictiveness index is constructed as the sum of four components: foreign equity restrictions (FER), screening and approval (SCR), restrictions on key foreign personnel (KPE) and other restrictions (OTR). The average percentage contribution of each component to the growth rate in the total index between 1997 and 2010 is decomposed using the following formula:

𝛾𝛾!""#!!"#" = 𝛾𝛾!"#!""#!!"#"𝜃𝜃!"#!""# + 𝛾𝛾!"#!""#!!"#"𝜃𝜃!"#!""# + 𝛾𝛾!"#!""#!!"#"𝜃𝜃!"#!""# + 𝛾𝛾!"#!""#!!"#"𝜃𝜃!"#!""# where γ’s represent growth rates between 1997 and 2010 and θi is the share of sub-indicator i in the FDI restrictiveness index in 1997. The results, averaged across countries, are presented in Table C.8. FER constituted the most important component of the overall index in 1997 (64.6 per cent) and represented the component with the largest percentage change (-33.7 per cent). All other components accounted for smaller shares in 1997 and smaller growth rates (in absolute value). Table C.8: Decomposition of growth of FDI restrictiveness in total services, 1997-2010

Source: OECD FDI restrictiveness database. The same decomposition was performed for ETC and professional services. The results are similar for ETC sectors, where most of the change in the ETC indicator (-38 per cent) was driven by the change in FER (-33.6 per cent). In professional services, FER still represent the most important component of the index. However, this component did not change much over time. Thus, the overall reduction of 29 per cent in the professional services index was mainly driven by reductions in SCR and OTR, with very small contributions from SCR and KPE. b) Domestic regulation

Measuring domestic regulation in services is difficult. Most, if not all, domestic regulation is sector-specific. To provide a couple of examples, specific qualification and licensing requirements and

differences across regions, with lower levels of restrictions in Latin America and European economies in transition (in 2004) compared with East Asia and the Middle East.

67 Specifically, the index is regressed on a time trend, with inclusion of country fixed effects to control for country-specific unobserved heterogeneity. The estimated coefficient on the time trend is negative and statistically significant. Results are available upon request.

whereγ ’s representgrowthratesbetween1997and2010andθi is theshareofsub-indicator i intheFDIrestrictivenessindexin1997.

The results, averaged across countries, are presented in Table C.8. FER constituted the most importantcomponent of the overall index in 1997 (64.6 per cent) and represented the component with the largestpercentagechange(-33.7percent).Allothercomponentsaccountedforsmallersharesin1997andsmallergrowthrates(inabsolutevalue).


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Themost reliable informationondomestic regulation,comingcloser to thetypesofmeasuresmentioned inArticle VI.4 of the GATS, is derived from sector-specificdata,namelyinfinancialservices.TheworkbyBarth et al. (2008) compiles information on bankingregulation in more than 140 countries.69 Thisinformationisgroupedinfourmaincomponents:entryrequirements, capital regulation, official supervisorypowersandprivatemonitoring.

Indicators of licence requirements, capital regulation,officialsupervision,accountingstandardsandfinancialstatementtransparencycomeclosesttothedefinitionofdomestic regulationused in this report.Asarguedin Section D.2, empirical analysis by Kox andNordås(2007)findsthatregulationaimingatensuringappropriate standards is positively associated withtradeinfinancialservices.

4. Conclusions

Although this section of the Report has documentednumerous trends and developments in non-tariffmeasures and services measures, only a few strongresultsemerge from theanalysis for several reasons.First,existingdatasourcesarecompromisedby largegaps incountrycoverage, intermittentdatacollectionand a lack of shared terminology. Secondly, somesourcesofinformation,suchasspecifictradeconcernsand notifications, reflect not only the level of NTMactivity but also the degree of engagement with theWTO on the part of its members. Consequently, anyvisible trends must be viewed with caution. Finally,changes in NTM activity may be relatively small,

makingfluctuationsinthedatamoredifficulttodetect.Despite these problems, some tentative conclusionscanbedrawn.

The incidence of non-tariff measures does not showanyclear trendsince themid-2000s.Suchmeasuresappear to have increased in the late 1990s, butbetween 2000 and 2008 NTM activity was relativelyflat, before picking up again in the aftermath of thefinancial crisis. Whether the post-crisis increase inNTMsisdurableremainstobeseen,butitcertainlyisacause forconcern.However, the relativestabilityofoverallNTMactivityinrecentyearsmustbeconsideredin the context of declines in tariff rates, which havemade NTMs more important in relative terms.Moreover, TBT/SPS measures appear to be on therise. This is important because these types ofmeasuresrepresentalargecomponentofNTMs.

TheshareofTBT/SPSmeasuresinnon-tariffmeasuresis largeacrossmostof themajordatabases, includingthe ITC surveys. Their lack of prominence in WTOdisputesdatamaybeinterpretedassuggestingthatthespecific trade concerns mechanism is effectivelydefusingissuesbeforetheycometoahead.Moreover,econometricandsurveyevidenceshows thatTBTandSPSmeasuresareemployedmoreoftenbydevelopedthanbydevelopingeconomies.Suchmeasuresappeartobelessproblematicthancumbersomeadministrativeprocedures, i.e. “red tape”, only in the case of intra-regional trade in Africa. Implementation issues appearto be the most important source of concerns forexportersfromdevelopingcountries,includinginAfrica.

TableC.8:Decomposition of growth of FDI restrictiveness in total services, 1997-2010

Observations Mean Standard deviation Minimum Maximum

γ(FDIrestrictiveness) 38 -37.5 34.2 -92.6 85.6

γ(FER) 38 -33.7 35.7 -91.8 85.6

θ(FER) 38 64.6 25.2 10.2 100.0

γ(SCR) 38 -19.1 38.6 -100.0 12.6

θ(SCR) 38 14.0 23.0 0.0 83.6

γ(KPE) 38 -18.4 34.1 -100.0 0.0

θ(KPE) 38 5.0 9.9 0.0 44.2

γ(OTR) 38 -28.6 61.4 -100.0 150

θ(OTR) 38 16.4 16.9 0.0 71.8

Source:OECDFDIrestrictivenessdatabase.

Thesamedecompositionwasperformedforenergy,transportandcommunications(ETC)andprofessionalservices. The results are similar for ETC sectors, where most of the change in the ETC indicator(-38percent)wasdrivenbythechangeinFER(-33.6percent).Inprofessionalservices,FERstillrepresentthemostimportantcomponentoftheindex.However,thiscomponentdidnotchangemuchovertime.Thus,theoverall reductionof29per cent in theprofessional services indexwasmainlydrivenby reductions inSCRandOTR,withverysmallcontributionsfromSCRandKPE.


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Although available data are problematic in severalrespects, thefactthatsimilarresultsareobtainedfrommultiple data sources lends some confidence to thesefindings. Other research on non-tariff measures alsopoints in a similar direction. In particular, the greaterimportance of TBT/SPS measures is echoed by Andoand Obashi (2010), who find that “non-core” NTMs(including SPS and TBT measures) have higherfrequency ratios than other types of measures incountriesintheAssociationofSoutheastAsianNations(ASEAN),andFliess(2003),whoreportsthat“technicalmeasures”faroutweighothertypesofmeasures.Beghin(2006)alsodocumentsanincreaseintheshareof“non-core”measuresinNTMsfrom55percentto85percentbetween 1994 and 2004. In the future, better datacollectioncouldprovideamuchmoredetailedpictureofthestateofNTMs,andTBT/SPSmeasuresinparticular.

Turningtoservicesmeasures,thedatasituationisevenmore problematic than for non-tariff measures.A major issue is the weakness of the transparencyprovisionsintheGATS.Thenotificationrequirements,inparticular, are very limited. Using available non-WTO

sourcesof information, this reporthasdocumentedanincreasingtrendinmarketcontestabilityinanumberof(mostlyOECD)countriesduringthelastdecades.Thereisalsosomeevidencethatdiscrimination(inthesenseof domestic services and service suppliers beingtreated differently than their foreign equivalents) hasdecreased in the last decade. However, a seriouslimitation of available data is the difficulty indistinguishing between market access, nationaltreatmentanddomesticregulation.

Theproxiesfordomesticregulationaregenerallypoorand not very informative, except for some sector-specificdatainfinancialservices.Clearly,transparencyisamajorchallengeintheareaofservicesmeasures.Current efforts are geared towards collectinginformationonapplied regimes inmarketaccessandnationaltreatment.Fordomesticregulation,adifficultyistoidentifythemeasuresthatpotentiallyaffecttradein the regulatory regime of a country. Section E.4discussesvariousoptionsfortheWTOifitistoplayamore significant role in improving transparency inthisarea.


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Endnotes1 Thememberswhoincludednon-tariffconcessionsintheir

schedulesofcommitmentsduringtheUruguayRoundareBelize,Cameroon,Egypt,ElSalvador,Malta,Indonesia,Senegal,andTrinidadandTobago.Inmostcases,theseconcessionsprovidefortheeliminationofnon-automaticlicencerequirementsoncertainproducts.Thosewhoincludednon-tariffconcessionsintheirschedulesaspartoftheirWTOaccessionprocessareChina,SaudiArabia,ChineseTaipei,UkraineandVietNam.

2 Thetariffquotasareexpressedinvariousquantityunitsandthein-quotaandout-of-quotatariffsareoftenspecificormixed.Asforthecommitmentstolimitdomesticsupport,theyareexpressedinnationalcurrenciesfrom1994.

3 Foradetaileddiscussionofthediversityofnotificationsanditscauses,seeBacchettaetal.(2012).

4 Bacchettaetal.(2012)discussinmoredetailthemetricsofthecomplianceandqualityofnotificationsandthereasonswhybothareoftenlow.

5 Collins-WilliamsandWolfe(2010)discussthequalityoftheinformationprovidedbysubsidiesnotifications.

6 NotethatlikeallotherWTOdocuments,notificationsareaccessiblethroughtheWTO’sDocumentsOnlineportal.

7 Thenumberofnotificationscorrespondsroughlytothenumberofmeasuresnotifiedaseachchangeinlegislationisnotifiedseparatelyandeachchangeinlegislationtypicallyinvolvesonemeasure.

8 Reportsbroadlyfollowastandardtemplatebutthereisanadhoccomponent.

9 ItisapreparatorycontributiontothereportbytheDirector-GeneralthatiscalledforinParagraphGofAnnex3oftheMarrakeshAgreementandthataimstoassisttheTPRBtoundertakeanannualoverviewofdevelopmentsintheinternationaltradingenvironmentwhicharehavinganimpactonthemultilateraltradingsystem.SeeWT/TPR/OV/W/1toWT/TPR/OV/W/3andWT/TPR/OV/1to13.

10 Thesecondseriesstartedinlate2008(thefirstreportwasdistributedinJanuary2009)inthecontextoftherecentglobalfinancialandeconomiccrisis.See,forexample,theReportonG20tradeandinvestmentmeasures(May2010toOctober2010)dated4November2010.

11 InthecontextoftheFourthAppraisaloftheTPRM,delegationsindicatedtheirdesiretobringthismattertotheattentionofMinistersattheEighthMinisterialConference,andtoprepareaMinisterialDecisionaimedatthecontinuationandstrengtheningofthetrademonitoringexerciseundertheTPRB.SeeSectionVIIIofWTOdocumentWT/MIN(11)6of25November2011.TheAppraisalwasapprovedbyallmembers.

12 MemberssometimesrequesttheWTOSecretariattoputconcernsontheagendabutwithdrawthembeforetheyarepresentedtotheCommittee,arguingthatabilateralarrangementhasbeenfound.

13 DocumentsG/SPS/GEN/204/Rev.11andG/TBT/GEN/74/Rev.9providesummariesofthespecifictradeconcernsraisedrespectivelyintheSPSandtheTBTcommittees.

14 Thedatasetandthemethodologyareavailableathttp://www.wto.org/english/res_e/publications_e/wtr12_dataset_e.htm.

15 Whilethisdatabaseisnotpublic,theWorldBankmaintainsapublicdatabaseonWTOdisputes.SeeSectionC.1(b).

16 Thedisputesthemselvesareonlyasub-setofalltheconflictsthatarisebetweenmembers.Inthisperspective,AppellateBodycasescanbeseenasthetipofthe“greatpyramid”oftheWTOlegalorder,withmostoftheimportantnormativeandconflictresolutionworkdonemuchclosertothebaseofthepyramid(Wolfe,2005).

17 SantanaandJackson(2012)havealsoreviewedandcomplementedadatasetofrequestsforconsultationsundertheGATTdisputesettlementcoveringtheperiod1948-1989.TheoriginaldatasetwaspreparedbyReinhardt(1996)onthebasisofHudec(1993).

18 UNCTAD’scollaborationwithAsociaciónLatinoamericanadeIntegración(ALADI)standsoutasitsmostsuccessfulattemptatengagingregionalorganizationsinthecollectionofNTMinformation.Since1997,ALADIhasbeencollectingNTMinformationforanumberofcountriesintheregionandprovidingthisinformationtoUNCTADonanannualbasis.ThedatacollectedbyALADIisfullycompatiblewiththeUNCTADTRAINSdatabase.ALADImembercountriesareamongthefewforwhichtheNTMinformationinTRAINShasbeenregularlyupdatedovertheperiod1997to2010.SeeSectionC.2.

19 Amongthesourcesusedwerevariousgovernmentpublications(officialjournals),publicationsfrominternationalorganizationssuchasESCAP’sTISNET,WTOnotifications,theGermanForeignTradeInformationOffice(BFAI),theFrenchInternationalTradeMonitor(MOCI),theGermanInstituteforEconomicResearch(IFO)ortheBritishBusinessJournal.

20 Formoredetailsonthisproject,seeUnitedNationsConferenceonTradeandDevelopment(UNCTAD)(2010).

21 Thisinternationalclassificationwillberevisedonaregularbasis.ThenextupdatewillbereleasedinApril2012.

22 ThesevenpilotprojectcountrieswereBrazil,Chile,India,Philippines,Thailand,TunisiaandUganda.

23 TheinitiallistofproceduralobstaclescanbefoundinAnnex3ofUnitedNationsConferenceonTradeandDevelopment(UNCTAD)(2010).

24 ByMarch2012,datahadbeencollectedforabout40countriesandithadbeendisseminatedforeightofthem.

25 Accessibleat:http://go.worldbank.org/W5AGKE6DH0.

26 SeealsothediscussionofdisputesasasourceofinformationonNTMsinSectionC.1.(a).

27 Moreover,itisnotclearwhetherthePMRindicatorstakeintoaccounttheenforcementofmeasures.However,ConwayandNicoletti(2006)arguethatNMRindicatorspartlytakeintoaccounttheimpactofpolicyenforcement.

28 Thisisnotalwaystrueinthecaseofnotifications.Asdiscussed,therearereasonstobelievethatcompliancewithcertainrequirementsmaybelow.

29 SeePartIIofUnitedNationsConferenceonTradeandDevelopment(UNCTAD)(2010)foradiscussionofquantificationmethodologiessuitedtosurveydata.OneproblemdiscussedinAppendix1ofInternationalTradeCentre(ITC)(2011)isthatmanycountrieslackasystematicbusinessregistercoveringallsectors,whichmakesrandomsamplingineachsectordifficult.


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30 Foranoverviewofbusinesssurveys,seeOrganisationforEconomicCo-operationandDevelopment(OECD)(2005).WorldBank(2008a,2008b)reporttheresultsoftworecentWorldBankinitiativestocollectNTMdatathroughinterviewsrespectivelyin13mostlyAsiancountriesandinEastAfricancountries,respectively.

31 SelectedNTMsurveycountriesincludeBurkinaFaso,Egypt,Jamaica,Kenya,Madagascar,Mauritius,Morocco,Paraguay,Peru,RwandaandUruguay.

32 SeethedetaileddescriptionofITC’sNTMsurveymethodology,includingthesamplingtechniqueinInternationalTradeCentre(ITC)(2011).

33 Wolfe(2012)comparestheGTAandWTOmonitoringmechanisms.

34 AsexplainedinAppendixC.1,thedataavailableonUNCTADTRAINSrefertotheoldNTMclassification.Thereisnoexactcorrespondencebetweentheoldandnewclassification.TheuseofdatafromUNCTADTRAINSupto2008ismadebecauseitistheonlysourceofofficialdatathatallowsidentifyingtrends.

35 Cautionshouldbetakenininterpretingtheseresults,however,becauseofgapsinthedataandalsobecausepartoftheinformationcomesfromWTOnotifications.Theincentivestonotifyandcompliancerateschangeovertime.

36 Panel(b)ofFigureC.2hasbeenconstructedwiththesub-setofLatinAmericancountrieswithNTMinformationin1999,2001,2003,2004,2005,2006and2008.ThiscomprehensiveinformationwasdevelopedbyALADIandincludedinUNCTADTRAINS.Notethatthetimeperiodsslightlydifferinthetwopanelsbecauseofdataavailability.

37 TheaveragenumberofSPSnotificationsissuedpermemberhasfluctuatedwidelybetween2005and2009,thoughintheprioryearsithasshownanincreasingtrend.ForTBTnotifications,thetrendinthenumberofnotificationspermembersomehowreverses,withwidefluctuationsuntil2005andamarkedincreasesincethen.

38 TheSPSSTCDatabaseincludesinformationontheterminationofeachconcern,whichisprovidedbymembersinthecontextoftheSPSCommitteediscussions.Thedataincludedinthefigurearebetween1995and2010.Sixteennewconcernswereissuedin2011,butthereisnoinformationonthenumberofconcernsresolvedin2011.

39 Unfortunately,withtheinformationathand,itisnotpossibletodistinguishbetweenthesetwochannels.Athirdhypothesisisthattherecouldbesomesubstitutionbetweenthedispute-settlementmechanismandthespecifictradeconcernsmechanism.

40 BecauseinformationonthedateofresolutionofTBTspecifictradeconcernsisnotavailableintherawdata,wemakethefollowingassumptionintheconstructionofFigureC.6:weclassifyaTBTconcernas“resolved”inyeartifitisnotraisedagainfortwoormoreyearsafteryeart.Forinstance,ifaspecifictradeconcernisfirstraisedintheTBTCommitteein1999,re-raisedin2000,andnotre-raisedinanyfollowingyear,itisassumedtobe“resolved”in2000.AscomparedtoSPS,thenumberofTBTconcernsassumedtobe“resolved”isthereforerelativelyhigh.ThispartlyreflectsthefactthatasignificantshareofTBTconcernsareraisedononlyoneortwooccasions,asamatterofclarificationorfurtherinformation.Theseconcerns–forthepurposesofthisanalysis–areassumedtobe“resolved”.

41 Theresultsareessentiallyunchangediftradevaluesareexpressedinrealterms,deflatingthemwiththeUSConsumerPriceIndex(CPI).

42 Theseresultsarestatisticallysignificant.Thecoefficientofatimetrendinaregressionwiththecoverageratio(orthefrequencyindex)asdependentvariableispositiveandsignificantatthe1percentlevel,bothforSPSandforTBTconcerns.Theregressionsincludesector,countryandcountry-sectorfixedeffectstocontrolforunobservedsector-,country-andcountry-sectorspecificvariables.

43 Subscriptscandtareomittedforexpositionalsimplicity.

44 Infact,themeasurescomputedfromthetwodatabasesarenotcomparable;therefore,theyareassigneddifferentnames.

45 TheregressionsinBoxB.6useinsteadthecountry,HS2sectorandtime-specificindexesindicatedintheequations.

46 Pre-shipmentinspections,whichunderthepreviousclassificationweregroupedtogetherwithTBTandSPSmeasuresunderthecategoryof“technicalmeasures”,coveronaverage20percentofproductsandoftradevalue.

47 DevelopedeconomiescomprisethemembersoftheEuropeanUnion(27),Switzerland,Norway,theUnitedStates,Canada,Japan,AustraliaandNewZealand.Developingeconomiescompriseallothercountries,includingtheCommonwealthofIndependentStates(CIS).Countrycoveragedependsondataavailability.

48 ThistakesintoaccountthefactthatWTOmembershipincludesmanymoredevelopingthandevelopedcountries.ItshouldberemindedthatintheSTCDatabasetheEuropeanUnionisconsideredasingledevelopedcountry.Asnotedabove,a“raising”countryistheonewhichcomplainsaboutaTBT/SPSmeasureimposedbya“maintaining”countryintherelevantWTOCommittee.

49 Werunregressionsofthecoverageratioorthefrequencyindexonadummyequaltooneifthemaintainingcountrybelongstothegroupofdevelopedcountriesandzerootherwise.Thecoefficientsonsuchdummyarepositiveandsignificant.Theregressionisatthetwo-digitlevelofdisaggregationintheHS1988-92nomenclature,becausethisisthehighestlevelofdisaggregationatwhichfrequencyandcoverageratioscanbecalculated.Regressionanalysisispreferredinthiscontextbecauseitallowstocontrolforomittedvariablesusingfixedeffects.Inparticular,theinclusionofsector-yearfixedeffectsallowstocontrolforunobservedheterogeneitywithinasectorovertime.Countryfixedeffectscannotbeincluded,duetocollinearitywiththevariableofinterest(developedcountrydummy).Theresultsareavailableuponrequest.

50 AnexampleistheEmeraldAshBorer,abeetlethatwasintroducedintoNorthAmericafromAsiainthe1990s,andwhichhassincedevastatedashtreepopulations.ThetotaldiscountedcostoftheinfestationtotheUnitedStatesaloneisestimatedatUS$10.7billionbyKovacsetal.(2010).

51 AsarguedbyUnitedNationsConferenceonTradeandDevelopment(UNCTAD)(2012),theuseofSPSmeasuresislargelylimitedtoagriculturalsectorsandproductsfromanimaloriginbecausetheircontrolisessentialforensuringthehealthandwell-beingofconsumersandtheprotectionoftheenvironment.

52 Twentyconcerns(6percent)coverbothagriculturalandnon-agriculturalproducts.TheresultsarequitesimilarwhendistinguishingbetweenAOAandNAMAproducts.Inthiscase,theresultsforSPSandTBTconcernsareasfollows.ForSPS,85percentofspecifictradeconcernsareinAOAproductsand7percentinNAMAproducts,with8percentcoveringboth.ForTBT,22percentofspecifictradeconcernsareinAOA,57percentinNAMAand21percentinboth.


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53 Werunregressionsofthecoverageratioorthefrequencyindexonadummyequaltooneifaspecifictradeconcernaffectsanyofthefirst24chaptersoftheHarmonizedSystem(HS)tradenomenclature.Thecoefficientonsuchadummyvariableispositiveandsignificant.Theregressionsincludecountry-yearfixedeffectstocontrolforunobservedheterogeneitywithina(maintaining)countryovertime.Sectorfixedeffectscannotbeincluded,duetocollinearitywiththevariableofinterest(agriculturalsectordummy).Theresultsareavailableuponrequest.

54 SeeAppendixTableC.1inAppendixC.2.IntermediateintensityismeasuredastheshareofHS6productsclassifiedaspartsandcomponentsinthetotalnumberofHS6productsbelongingtoachapter(HS2).

55 TheinstitutionalimplicationsofthetheoryoftradeagreementsunderoffshoringareanalysedindetailinSectionE.

56 Companiesthatcouldnotbeaffiliatedtoasectorareexcludedfromthiscalculation.

57 Para-tariffmeasurescomprisevarioustaxesandchargesotherthantariffsandcustomsduties.

58 Referstomeasuresclassifiedas“RED”inGTAreports,whichclearlyrestricttrade.

59 SeeHoekman(1996),Barthetal.(2006),AdlungandRoy(2009)andGootiizandMattoo(2009a).Barthetal.(2006),forinstance,showthat,inthefinancialservicessector,appliedpolicyinasampleof123countriesismuchmoreliberalthanwhatwascommittedtointheGATS.

60 Thisgeneraltrendofincreasedmarketcontestabilitycanbeexplainedbytheraisingawarenessthatreformsthatpromoteprivatecorporategovernanceandcompetition(wheretheseareviable)havethepotentialtoboosteconomy-wideproductivitygrowth(NicolettiandScarpetta,2003).Moreover,strongercompetitioninproductmarketsmayalsohaveapositiveeffectonemployment.Wölfletal.(2009)argue,however,thattheaggregatetrendmaskswidedifferencesinreformacrosscountriesandovertime.

61 FigureC.21(b)alsoincludesthetrendsdisaggregatedbytypeofregulation,entryorconduct.Itsuggeststhatconductregulationshavedecreasedovertimemoremarkedlythanentryregulations.Regressionanalysisconfirmsthatthedownwardtrendisstatisticallysignificantonlyforoverallandconductregulation,notforentryregulation.Intheregressions,theNMRindexisregressedonatimetrend,includingcountry-professionfixedeffects.Thecoefficientonthetimetrendisnegativeandstatisticallysignificant.Theresultsareavailableuponrequest.

62 Discriminatory(non-discriminatory)measuresaffectdomesticandforeignservicesandservicessuppliersdifferently(equally).

63 OtherquestionsusedtocompiletheDPsindicatorgobeyondnationaltreatment.Forthisreason,DPsisanimperfectproxyfordiscriminationinthesenseofnationaltreatmentlimitations(GATSArticleXVII).

64 Inparticular,aregressionofDPonatimetrendandthefullsetofcountryfixedeffectsgivesanegativeandstatisticallysignificantcoefficient.Thesampleincludeshoweveronly39countries(mostlyOECDmembersandsomelargedevelopingcountriessuchasBrazil,ChinaandtheRussianFederation,amongothers)forthreeyears(1998,2003and2008).

65 Theoverallindexincludesthefollowingsectors(withequalweights):electricitydistribution,wholesaletrade,retailtrade,transport,hotelsandrestaurants,media,telecommunications,banking,insurance,otherfinanceandbusinessservices.Theelectricity,transportandcommunicationsindexonlyincludes(withequalweights)electricitydistribution,transport(landandair,withrespectivesub-weightsofonehalf)andtelecommunications.Theprofessionalservicesindexincludeslegalservices,accountingandaudit,architecturalservicesandengineeringservices(alwayswithequalweights).

66 SeealsoUnitedNationsConferenceonTradeandDevelopment(UNCTAD)(2006).ThisstudyclassifiesandscoresFDIrestrictionsinservicessectorsfor50developingandtransitioneconomiesin2004.ItalsofindsconsiderablevariationinFDIrestrictivenessacrosscountries.Moreover,itreportssystematicdifferencesacrossregions,withlowerlevelsofrestrictionsinLatinAmericaandEuropeaneconomiesintransition(in2004)comparedwithEastAsiaandtheMiddleEast.

67 Specifically,theindexisregressedonatimetrend,withinclusionofcountryfixedeffectstocontrolforcountry-specificunobservedheterogeneity.Theestimatedcoefficientonthetimetrendisnegativeandstatisticallysignificant.Resultsareavailableuponrequest.

68 Inparticular,aregressionofLPSonatimetrendandthefullsetofcountryfixedeffectsgivesanegativeandstatisticallysignificantcoefficient.Theresultsareavailableuponrequest.

69 Thefirstsurveyincluded117countriesin1998-2000.Thesecondincluded152countriesin2002-03.Thelastsurveyincluded142countriesin2005-07.


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The“HistoricalNon-TariffMeasures”datausedforthisreportweredownloadedfromtheWorldBank’sWorldIntegrated Trade Solution (WITS) database, usingUNCTAD’s Trade Analysis Information System(TRAINS). The data were only downloaded in thecaseswheretheNTMclassificationwasbasedontheoldtradecontrolmeasures(TCM)code(before2009),since there is no exact correspondence between oldandnewTCMcodes.

Thedataweredownloadedforeachcountry-yearandinclude information about the nomenclature, theproduct code at the most disaggregated level (at themostdetailedcommoditylevelofthenationaltariffs–forsomecountriesupto12-digitcodes),thestartyear,a partial coverage indicator, and the source. Thecountries were chosen on the condition that theyreported two or more duty codes per year. Only thecountries that had available information for at leasttwo years were retained. These data were thenmatchedwiththedescriptionandthetypeofmeasurecorrespondingtoeachNTMcode.

ThedatawerethenharmonizedattheHS6digitlevel,1usingthefollowingmethodology.Allproductcodesofless thansixdigitswereexpanded to include thesix-digit codes belonging to the chapter or heading. Theunderlying assumption is that all products within anHS6categoryarehorizontallyaffectedbyanon-tariffmeasure if it is reported at lower levels ofdisaggregation (the correctness of this assumptionhas been verified with the compilers of the originaldata). In the cases where NTMs were reported at alevel of disaggregation higher than HS6, it wasassumed that the entire HS6 line was horizontallyaffected. For instance, for an NTM applied to HS8product51051015,theHS6line510510wascodedasaffected. This procedure can potentially inflate theshares of products and trade affected by NTMs. To

obtainasenseofwhetherthiswasarealconcern,wecalculated incidence ratios – the number of productlines reported to be affected by NTMs over the totalnumber of product lines belonging to that six-digitproduct code (downloaded from the Tariff DownloadFacility of the WTO). The partial coverage indicatorcouldnotbeused forcalculating theNTM incidence,since there were duplicate observations. Thus, thisvariablewasnotused.2

Whenusingincidenceratios,Diintheformulasfortheshareoftradeandtheshareoflinesaffectedisnotadummy variable, but an incidence ratio that can takevaluesbetweenzeroandone.Resultsusingincidenceratiosare,however,notreportedinthisreportbecausetheyareverysimilartotheonesobtainedwithDiasadummy variable (the correlation among the indices isashighas0.98).Resultsareavailableuponrequest.

Thenextstepwastoobtaintheinformationaboutwhichproducts were actually imported by the reportercountries,intheyearsforwhichtheNTMwasreported.ImportdataarefromUNComtrade,atthesix-digitlevel,withtheworldastradepartner.FortheEuropeanUnion1999, the trade data were not available directly; thus,thegrossimportsofthecountriesthatbelongedtoitatthattimeweredownloadedseparatelyandsummedup.Other data were not directly available when thenomenclature did not correspond with the years. Forthese, the available import data were downloaded inanothernomenclature,andthenmatchedtotheactualnomenclaturesviacorrespondencetables.Thecountry-years handled in such a way were the Philippines(1998), Tunisia (1999) and the Bolivarian Republic ofVenezuela(2003,2004,and2005).

Data availability

Thecountry-yearobservationsavailableareasfollows:

Appendix C.1: data handling methodology in the UNCTAd’s Trade Analysis Information System (TrAINS)

Argentina 1999 2001 2003 2004 2005 2006 2008

Bolivia, Plurinational State of 1999 2001 2003 2004 2005 2006

Brazil 1999 2001 2003 2004 2005 2006

Chile 1999 2001 2003 2004 2005 2006

Colombia 1999 2001 2003 2004 2005 2006 2008

Cuba 2003 2004 2005 2006

Ecuador 1999 2001 2003 2004 2005 2006 2008

EU 1999 2007

Japan 1996 2001 2004


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Mexico 1999 2001 2003 2004 2005 2006

Paraguay 1999 2001 2003 2004 2006 2008

Peru 1999 2001 2003 2004 2005 2006 2008

Philippines 1998 2001

South Africa 1999 2006

Thailand 2001 2003

Tunisia 1999 2002

Uruguay 1999 2001 2003 2004 2005 2006 2008

Venezuela, Bolivarian Republic of

1999 2001 2003 2004 2005 2006 2008

Viet Nam 2001 2004

Forthegraphicalrepresentationofthedescriptivestatistics,theevolutionisshownoftheratios,indices,andthecountsovertimebyaveragingtheyearlyobservationsintothreeperiods.Thereasonsforthisweretheunbalancedpanel,andthecompletelymissingyears1997and2000.

1 Thenomenclaturewaschoseninaccordancewiththereportedyear,assuggestedbythecompilersoftheoriginaldata.

2 Thesamehappenedwithduplicateobservationswhoseonlydifferencewasinthevariablesstart-yearandstart-monthorsources.Thesevariableswerealsodroppedfromthedataset.

Endnotes


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AppendixTableC.1: Coverage ratio and frequency index: intermediate-intensive sectors

SPS TBT

Coverage ratio Frequency index Coverage ratio Frequency index

(1) (2) (3) (4)

Intermediateintensity -0.225*** -0.0991*** -0.00987** -0.0300***

(0.0434) (0.0207) (0.00402) (0.00254)

Observations 3,808 3,614 11,760 10,715

R-squared 0.411 0.381 0.273 0.314

Notes:Country-yearfixedeffectsincludedinallregressions.Robuststandarderrorsinparentheses.***p<0.01,**p<0.05.

Appendix C.2: regression results


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This section discusses the trade effects of non-tariff measures and services measures in general before focusing on technical barriers to trade (TBT), sanitary and phytosanitary (SPS) measures and domestic regulation in services. It also examines whether regulatory harmonization and/or mutual recognition help to reduce the trade-hindering effects caused by the diversity of TBT/SPS measures and domestic regulation in services.

d. The trade effects of non-tariff measures and services measures


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Contents 1 EstimatingthetradeeffectsofNTMsandservicesmeasures 136

2 DisentanglingtradeeffectsofTBT/SPSmeasuresanddomesticregulationinservices 143

3 Harmonizationandmutualrecognition 149

4 Conclusions 152

AppendixD.1 157


• The contribution of non-tariff measures to overall trade

restrictiveness is significant, and in some estimates NTMs

are far more trade restrictive than tariffs.

• TBT/SPSmeasureshavepositivetradeeffectsformore

technologically advanced sectors, but negative effects

in agricultural sectors.

• ThereisevidencethatTBT/SPSmeasureshaveanegativeeffect

on export market diversification.

• ThenegativeeffectsontradecausedbythediversityofTBT/SPS

measures and domestic regulation in services are mitigated

by the harmonization and mutual recognition of these measures.


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This section examines the trade impact of non-tariffmeasures. Unlike tariffs, NTMs often vary acrosscountriesandsectors,so“advalorem”equivalentsarecalculatedforNTMsinordertomakethiscomparison.Evidence is then presented on the trade effects oftechnical barriers to trade (TBT) and sanitary andphytosanitary (SPS) measures in goods and ofequivalentdomesticregulationmeasuresinservices.1

The rationale for focusingon thesemeasures is that,independent of their policy objectives, economictheory offers a mixed picture – both negative andpositive – of how these measures affect the volumeand direction of trade. For example, standards andtechnical regulations can raise producer costs –because compliance is more expensive – but reduceconsumercosts–becauseproductqualityinformationis more readily available. Trade will increase or falldependingonwhether thepositiveeffectondemandisgreaterthanthenegativeeffectonsupply.

Inordertohighlightthedifferencesbetweennon-tariffmeasures and tariffs, this section also attempts todisentangle the trade effects of these measures byfocusing on: (a) the specific channel through whichtrade isaffected (thevolumeof tradeor thedecisionto export); (b) their specific impact across countries,sectorsandfirms;and(c)whether themeasure itself,orthewayitisapplied,constitutesthemainrestrictionto trade. This section also considers the degree towhich the harmonization or mutual recognition ofTBT/SPS measures and domestic regulation inserviceshelpstoreduceanytrade-inhibitingeffects.

1. EstimatingthetradeeffectsofNTMsandservicesmeasures

A number of studies attempt to quantify the effect ofnon-tariff measures on international trade. Averagingacrosscountries,theyfindthatNTMsarealmosttwiceas trade restrictive as tariffs. They also find that, inseveralcountries,NTMsactuallycontributemuchmorethan tariffs to theoverall levelof trade restrictiveness.Theseresults,however,arebasedonNTMsdatawhichhave not been updated for about ten years. Given thedeclineintariffratessincethen,therelativecontributionofNTMstooveralltraderestrictivenessislikelytohaveincreased, perhaps making them even more importantthantariffsinmostcountries.

Furthermore, evidence suggests that the relativecontribution of non-tariff measures to the overall levelofprotectionincreaseswiththelevelofGDPpercapita.Thetrade literaturealsofindsthatNTMs inagricultureappear to be more restrictive and widespread thanthose in the manufacturing sector. In the case ofservices,whilerestrictionstotradearegenerallyhigherindevelopingcountriesthaninOECDcountries,theydonot appear to be systematically associated with acountry’s level of development. The cross-country

pattern of restrictiveness of services measures variesacross services sectors. It is worth noting that themethods developed in the literature to estimate thesetradeeffectssufferfromanumberoflimitationswhichcanbe traced, inpart, toa lackof transparency in theuse of NTMs. In addition, they do not address thepotentialimpactofglobalsupplychains.

(a) MagnitudeofNTMsasrestrictionstotrade

Earlier sections of the Report have highlighted thatnon-tariff measures can take many different forms –quotas, taxes, subsidies, technical regulations etc. Inorder to facilitate a comparison between the tradeeffects of these different NTMs, studies analyse theimpact of NTMs on international trade by estimatingan“ad-valoremtariffequivalent(AVE)”,i.e.thelevelofanad-valoremtariffthatwouldhaveanequallytrade-restrictingeffectastheNTMinquestion.Thisenablesacomparisontobemadewithtariffs,andisimportantforanyanalysisof thewelfare implicationsof varioustradepolicymeasures. Inthetradeliterature,theAVEof different NTMs is computed using one of twoapproaches – the “price gap” or the “econometrics-basedmethod”(SeeBoxD.1).

(i) Do NTMs matter?

Usingdatafor91countries,Keeetal.(2009)evaluatethetradeimpactofnon-tariffmeasureseconometricallyforeachof4,575six-digitcategoriesoftheHarmonizedSystem (HS) of classifying goods where at least onecountryimposeswhattheycategorizeaseithera“coreNTM” (defined as including price control measures,quantitative restrictions, monopolistic measures, anti-dumping and countervailing measures and technicalregulations)or“agriculturaldomesticsupport”.2

Theyestimate theaverageAVEofcoreNTMsfor theentire sample at 12 per cent. When weighted byimports,thisnumberfallsto10percent.Thenumbersare much higher – 45 per cent and 32 per centrespectively – if the averages are calculated only fortariff lines affected by core NTMs.3 In contrast, thesimple and import-weighted averages of AVEs ofagricultural domestic support are much smaller(generallybelow1percent).Accordingtotheauthors,this is because a small number of products areaffected by agricultural domestic support in mostcountries. The importance of NTMs is reinforced byavailable firm survey evidence. For example, a recentsurvey on non-tariff trade costs between Arabcountries revealed an average AVE of 6 per cent(HoekmanandZarrouk,2009).

Estimatesofthetradeimpactofnon-tariffmeasuresarelargely consistent with the AVEs computed. HoekmanandNicita(2011)findthatreducingtheAVEofNTMsbyhalf, from around 10 per cent to 5 per cent, would


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BoxD.1: Methodology used for estimating the AVE of NTMs

Price gap method

Non-tariffmeasures increase thepricepaidbyconsumers.4Thebasic strategyof the “pricegap”methodinvolvesacomparisonofpricesbeforeandaftertheNTMmark-up,wherethisdifferenceisexpressedasatariffequivalent.Makingthiscomparison,however, isnotstraightforward.ManyfactorsunrelatedtoNTMsalsoaffectcostsandpricesatdifferentpointsinthesupplychain.Forinstance,the“free-on-board”(f.o.b.)priceatthepointofexportincludesthecostoftransporttothepointofexportaswellasthecostsofloadingthe goods, while the “cost-insurance-freight” (c.i.f.) price also includes the cost of international transportandinsurance.Furthermore,thepriceafterborderproceduresincludesanytariffschargedontheproduct.Finally,wholesaleand retailprices include internal transportcostsanddistributionmargins.These factorsmust be removed from the observed price difference before the mark-up can be attributed to non-tariffmeasures(Ferrantino,2006).

However,differentNTMsoccuratdifferentpointsinthesupplychain,whichmeansthatthepriceimpactofaparticularNTMcanonlybeidentifiedbycomparingtwopricesattherelevantstagesintheproductionanddistributionprocess.Forexample,customsproceduresaffectthedifferencebetweenthec.i.f.priceandthelanded duty-paid price. In sum, it is possible but not straightforward to measure and compare therestrictivenessofdifferenttypesofNTMs(Ferrantino,2012).

Econometrics-based method

An alternative to the direct “price gap” method described above is to estimate the impact of non-tariffmeasuresoneitherpriceorquantity(tradeflows)usingeconometricmodels.Estimatingthe“quantityimpact”isparticularlyusefulbecausedataontradeflowsaremoreeasilyavailableatadisaggregatedlevel.Moreover,whentheNTMisabsolutelyprohibitive,nopricesareobserved,orwhentheproductishighlydifferentiated,pricesarenotparticularlyinformative(Ferrantino,2012).

Inmuchof thetrade literature, theAVEsofnon-tariffmeasuresareestimatedthrough“gravityequations”.TheseareeconometricmodelsoftradewhichacquiretheirnamefromthesimilaritiestoNewton’stheoryofgravitation.Theypredict that thevalueof tradebetweenany twocountrieswillbepositively relatedto thesizeoftheireconomiesand inverselyrelatedtothedistance(andothermeasuresoftradecosts)betweenthem.InordertoestimatetheeffectofpoliciessuchastariffsandNTMsontrade,gravityequationsincludemeasures,whichcapturethesepolicyfactors,asexplanatoryvariables.

In order to estimate the effect of policies such as tariffs and NTMs on trade, gravity equations include measures, which capture these policy factors, as explanatory variables. 𝑙𝑙𝑙𝑙 𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉𝑉 = 𝑎𝑎 + 𝑏𝑏!𝑙𝑙𝑙𝑙 1 + 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 + 𝑏𝑏!𝑁𝑁𝑁𝑁𝑁𝑁 + 𝑐𝑐𝑐𝑐 where “X” is a set of variables that may also affect trade flows. It typically where“X”isasetofvariablesthatmayalsoaffecttradeflows.IttypicallyincludesGDP,distanceandothertradecosts.Whenprecisedataare lacking,thepresenceofNTMsiscapturedbyadummyvariable,whichassumesavalueofonewhentheNTMinquestionappliesandzerootherwise.

Thegravitymodeloftradeenablesanestimationofthepredictedvalueoftradebetweenacountrypairwithandwithoutthenon-tariffmeasures.TheeffectoftheNTMontradeisestimatedasthedifferencebetweenthetwovalues.Asimilarcalculationcanbemadefortheeffectofatariffcomparedwithnotariff.TheAVEoftheNTMcanthenbederivedbycomparingthesetwopredicteddifferences.Morespecifically,theAVEoftheNTMisatariffthathasthesameeffectonthevalueoftrade.

Thetradeliteraturereferstotheaboveasthe“directapproach”.Thereisalsoan“indirectapproach”whichcomparesactualtradeflowstothetradeflowspredictedbyahypotheticalfrictionlessbenchmarkscenario.ThedeviationofactualfrompredictedtradeflowsistakentobeindicativeoftheimpactofNTMsbecausespecific explanatory variables measuring NTMs are not included in the estimated equation. This “indirectapproach” isparticularlyuseful ifdirectmeasuresof traderestrictionsaresparseor imprecise,as isoftenthecaseforNTMs(ChenandNovy,2012).

increase tradeby2 to3percent.TheroleofNTMs inreducing trade is further highlighted by the followingexamplescitedinAndriamananjaraetal.(2004).Fortheapparelsector,pricesintheUnitedStates,theEuropeanUnion and Canada were 15 per cent, 66 per cent and25percenthigher,respectively,duetothepresenceof

NTMs. In South-East Asia, South Asia and Japan,paper products were 67 per cent, 119 per cent and199percentmoreexpensiverespectivelyduetoNTMs,whileNTMsonleathershoesraisedtheirpricesinJapanby 39 per cent and in Mexico/Central America by80percent.


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In the agricultural sector, non-tariff measures onvegetable oils and fats increased their prices inMexicoby30percent, inSouthEastAsiaby49percentandinSouthAfricaby90percent,accordingtoAndriamananjara et al. (2004). Analysing bilateralindustry-specific trade flows for countries in theEuropean Union, Chen and Novy (2011) find thatamong the different NTMs, TBT measures are themost important factor. An analysis of the tradeeffects of TBT/SPS measures, in particular, ispresentedinSectionD.2.

The resultsdescribedabovehighlight the importanceofnon-tariffmeasuresinanabsolutesense.Butwhatdo thedata reveal about the significanceofNTMs inrestricting trade relative to tariffs? Kee et al. (2009)findthatfor55percentof tariff lines intheirsamplesubjecttocoreNTMs,theAVEofthesecoreNTMsishigherthanthetariff.Similarly,in36percentoftarifflinessubjecttodomesticagriculturalsupport,theAVEof domestic agricultural support is higher than thetariff. Furthermore, aggregating core NTMs anddomestic agricultural support across all tariff linesunderconsiderationinanoverall traderestrictivenessindex, Kee et al. (2009) find that NTMs – averagingacross countries – almost double the level of traderestrictivenessimposedbytariffs.Infact,inabouthalfof the countries in the sample, the contribution ofNTMs to the overall level of trade restrictiveness ismuchhigherthanthecontributionoftariffs.

Usingtwoindicesoftraderestrictivenessthatestimatehow trade policies affect a country’s imports – thetarifftraderestrictivenessindex(TTRI)andtheoveralltrade restrictiveness index (OTRI), where the latterincludes the effect of both tariffs and non-tariffmeasures – Hoekman and Nicita (2011) find that,averagingacrosscountries,a10percentreductionintheTTRIincreasestradevolumesbyalittlemorethan2percent,whiletheremovalofNTMsincreasestradeby an additional 1.8 per cent.5 This discussionillustrates that NTMs are an important restriction ontrade, even more important than tariffs in severalcountries. Measuring restrictiveness faced byexporters in all destination markets, Hoekman andNicita(2008)comparethemarketaccessversionsoftheTTRIandtheOTRItoshowthattheAVEofNTMsisgenerallymuchhigherthanexistingtariffs.6

In a recent report, UNCTAD (2012) argues that non-tariff measures contribute much more than tariffs tooverall trade restrictiveness. Inparticular, it finds thatNTMscontributemorethantwiceasmuchastariffstooverallmarketaccesstraderestrictivenes.7Thisresultmust be viewed with caution because unlike thestudies described above (which compare NTMs andtariff data in 2001), the UNCTAD report compares2001NTMdatawith2010tariffdata–aperiodoverwhich tariffs have fallen. Hence, the contribution ofNTMs tooverall trade restrictiveness is likely tohaveincreased,assumingthatNTMsdidnotdeclineduring

thesameperiodand that the trade-restricting impactofNTMsdidnotfallbymorethanthatoftariffs.

In fact, using product-level analysis, a study by Hennand Mcdonald (2011) finds that while trade flows fellby5percentasaresultofbordermeasures,suchastariffs, implementedduring the recentfinancial crisis,theyfellby7percentasaresultofbehind-the-bordermeasures (i.e. non-tariff measures). Even within thecategory of border measures, the authors find thattariffsandothertraditionaltradepolicymeasureshavehad a relatively small impact on trade flows, whereasNTMs such as anti-dumping duties have had asubstantialeffect.

(ii) NTMs: variation across countries and sectors

Keeetal. (2009)findthatthevariation intheAVEsofnon-tariff measures across countries is large. Forexample, thesimpleaverageAVEofcoreNTMsvariesfromalmost0to51percent,andfrom0to39percentwhenimport-weighted.TheAVEsfordomesticsupportaregenerallybelow1percent.Thecountrieswith thehighestaverageAVEofcoreNTMsareall low-incomeAfrican countries, including Algeria, Côte d’Ivoire,Morocco,Nigeria,Tanzania,andSudan.Severalmiddle-incomecountries,suchasBrazil,Malaysia,MexicoandUruguay,alsohaverelativelyhighAVEsofcoreNTMs.8The countries with the highest AVEs of agriculturaldomesticsupportareEUmembers.9

AccordingtoKeeetal.(2009),whenconsideringbothcore non-tariff measures and agricultural domesticsupport, the AVEs of NTMs increases with GDP percapita,althoughsomemiddle-incomecountriesseemto have the highest AVEs of NTMs. However,Figure D.1 shows that there is no discerniblerelationshipbetweentheAVEofNTMsandthelevelofGDPpercapitaacrosscountries.Thisisconfirmedbyregression analysis which shows that the associationbetween the AVE of NTMs and the level of GDPper capita is not statistically significantly differentfromzero.10

At the same time, Hoekman and Nicita (2008) findthat tariffs arenegatively associatedwitha country’slevel of income per capita. This evidence, combinedwith the result in Figure D.1, suggests that thecontributionofNTMstotheoverall levelofprotectionis likely to increase with the level of GDPper capita,i.e. as countries become richer, the traderestrictiveness of NTMs relative to tariffs increases.The findings of UNCTAD (2012), which show thatNTMs are relatively more restrictive in high- andmiddle-incomecountriessupportthisinterpretation.

TheworkbyKeeetal. (2009)also reports significantvariation in the AVEs of non-tariff measures acrosstarifflines,amountingtoanaveragelevelof27percentforagriculturalproductscomparedwith10percentfor


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Smanufactured goods. The greater trade-restrictingimpact of NTMs for agricultural goods relative tomanufactured products is reinforced by the results ofHoekman and Nicita (2008). They also show that therestrictiveness of NTMs for agricultural trade isespeciallyimportantindevelopedeconomies.

However, using data for 2001 to estimate the tradeeffect of non-tariff measures on prices directly in aneconometricmodel,Andriamananjaraetal.(2004)findalmost no statistically significant impact for theagriculturalsector.11Theauthorsexplainthatthismaybe attributable to the definition of NTMs used in thestudy,whichincludesimportquotas,prohibitions,non-automatic licensing, voluntary export restraints,environmental standards and SPS measures, butexcludes tariff-rate quotas. The latter are likely to bethe economically binding constraints on agriculturaltrade.12

Andriamananjaraetal. (2004) identifyapparelas thesector with the largest number of significant NTMs.They estimate a simple average AVE of NTMs of73 per cent across countries. The correspondingestimateinKeeetal.(2009)is39percent.Thehigherorder of magnitude in Andriamananjara et al. (2004)may be explained by the fact that they excludeproducts for which they found a very small impact ofNTMsonimportsordomesticprices.Andriamananjaraetal.(2004)identifypaperproducts,leatherproducts,and vegetable oils and fats as other sectors withmultiplesignificantNTMs.

(b) Methodologicallimitations:Aproblemoftransparency

The previous section outlined the existing empiricalliterature which quantifies the impact of non-tariffmeasures on trade by estimating an ad-valoremequivalent.ItshouldbenotedthattheuseofAVEs–and

thechoicetomodeltheeffectsofNTMsasanegativetax for subsidies, and as a tariff for trade-restrictingNTMs – can be misleading at times. For example, theequivalencebetweentariffsandquotasbreaksdowninthe presence of market uncertainty. Furthermore, theAVEofNTMsdoesnotcaptureanyrelevantfixedcosts,suchasthoseassociatedwithmeetingcertaintechnicalregulations.Beyondtheselimitations,quantificationisachallenging exercise. The methods developed in theliteraturesufferfromanumberoflimitations.

(i) Price gap method

Acomparisonoftwopricestoinferthetradeeffectofa non-tariff measure is indicative of the lack oftransparency associated with the use of NTMs.Unfortunately, given insufficient data on differentprices, even theestimationof apricegap is far fromstraightforward.

The appropriate prices to compare when measuringthepricegapattributabletomostnon-tariffmeasuresare the invoice (c.i.f.) price of the imported good andthe price of the domestic alternative (Deardorff andStern, 1998). However, in reality, the observabledomesticpriceofagoodtypicallydoesnotdistinguishbetweendomesticproductsandimports.Itmeansthatthe actual comparison is between the invoice (c.i.f.)priceandthepriceofthegoodinthedomesticmarket,whether produced at home or imported. This isproblematicfortworeasons.

First,atacertain levelofaggregation,goodsthatareimported into a country are seldom identical to “like”goods produced domestically. The two may be poorsubstitutes for each other – for example, because ofqualitydifferences.Secondly,evenifthedomesticandimported good are perfect substitutes, the price gapmay be suppressed to the extent that the imports ofthe same good from other countries are subject to anon-tariffmeasure.

An additional issue relates to the choice of domesticpricestouseincomputingthepricegap.Manystudiesuseretailpricedatasimplybecausetheyareeasiertoobserve than prices at other stages of the supplychain. Retail price data contain transport, wholesaleand retail margins. Although these can potentially beseparatedout,theyintroduceconsiderableuncertaintyin the identification of the NTM mark-up.13 It is alsodifficulttonetoutthepriceincreaseduetoconsumers’willingnesstopayforhigherquality.

Furthermore, once a price gap is calculated for aparticular good in a particular market, it provides asingle measure of the trade effect of non-tariffmeasures.Sowhenthereisasingle,transparentNTM,the tariff equivalent reflects the effect of that policy.However,inthecaseofmultipleNTMs,thesinglepricegaportariffequivalentreflectsthecumulativeeffectsofallNTMsthatarepresentinthemarket.Thismakes

FigureD.1:AVEs of NTMs and economic development

5 6 7 8

Log of GDP per capita

Log

of A

VE

of N

TMs

9 10 114

-4

-3

-2

-1

0

-5

-6

-7

-8

Source:Author’sestimatesbasedondatafromKeeetal.(2009)


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it difficult to ascertain the percentage of the priceincrease that is attributable to each of the separateNTMs. It may be that there is one NTM which, whenremoved, eliminates most of the distortion. If so, theprice gap would largely reflect the effect of thisparticularNTM.

Conversely, it may also be true that the removal of anon-tariffmeasuredoesnotpermitmarketaccess. Inthiscase,the“true”tariffequivalentofasinglepolicychangemay in factbe zeroevenwhen themeasuredtariffequivalentofallNTMsjointlymaybequitelarge(Ferrantino,2012).Finally,thepricegapmethodisonlysuitable for analysing NTMs of a single importingcountry for a few products of particular interest. Thedata requirements to address NTMs across multiplecountriesandproductscanbeunmanageable.

(ii) Econometrics-based method

Anotableadvantageofeconometricanalysis,relativetothe “pricegap”method, is that itcanbeused tostudythetradeeffectsofmultiplenon-tariffmeasuresacrossmultiple industries and countries simultaneously. Inaddition, therelativeabundanceofdataontradeflowsmakes it particularly attractive for analytical purposes.However, the econometrics-based methods havecertainshortcomingsaswell.

First, given the lack of transparency, observing non-tariffmeasuresprecisely isdifficult.Hence,adummyvariablewhichequalsoneifthemeasureispresentisunlikelytocaptureseveralNTMs.UsingthedifferencebetweenactualandpredictedimportsasameasureofNTMs is also problematic because it may capturefactorsotherthantradepolicies.

Secondly, like the “price gap” method, this approachcannot disentangle the individual effects of a singlenon-tariffmeasurewhenmultipleNTMsarepresentinamarket.Inmanycases,however,onlyoneNTM–orasmallnumberofNTMs–isappliedtoanygivengood.Cross-countryvariationintheapplicationofNTMscanthen potentially be used to disentangle their tradeeffects (Carrère and De Melo, 2009). Thirdly, theresultsobtainedarelikelytobesensitivetothedetailsoftheeconometrictechniquesused.

(iii) Global supply chains

Themeasurementexercisesdiscussedintheprevioussub-section do not explicitly address the advent ofinternational production networks. They assume alinear supply chain in which a single good is movedfrom place to place without being transformed.However, with the location of different stages ofproduction in different countries, it takes many morecross-bordertransactionstoprovideasingleunitofafinal good than before. This is particularly true formanufactured goods with multiple components, suchaselectronicsandmotorvehicles.

Consider the global supply chain of producing acomputer disk drive as discussed in Hiratsuka (2005)and Baldwin (2008). The disk drive is assembled inThailand,whichactsasthehubofthesupplynetwork,using 43 components from ten other countries inaddition to 11 components produced in Thailand.Hence,thereareatleasttenmovesacrossinternationalborders,andperhapsmore,dependingontheextenttowhich shipments can be bundled. Furthermore, sincethe disk drive will be shipped to the location of finalcomputerassembly(e.g.China),wheretheothermajorcomputer components are gathered, the number ofcross-bordermovesmultipliesevenfurther.

Importantly,inaglobalsupplychainthatrequiressemi-finished goods to move back and forth acrossinternational borders more than once, the effects ofnon-tariff measures (and other trade costs) arecompounded.Thisimpliesthattheeffectofamarginalincrease in trade costs is much larger than would bethecaseiftherewereasingleinternationaltransaction.Box D.2 illustrates this argument with a numericalexample. In addition, the price increase at each stepwould include not only the monetary costs of movingalong thesupplychain,but thecostsassociatedwiththewaitingtimeaswell(Ferrantino,2012).

(c) Servicesmeasures

Themethodologyemployedtoassessthetradeimpactof services measures follows that used in goods. Inaddition,thetradeliteraturealsodevelopsanapproachbased on the construction of Services TradeRestrictivenessIndices(STRIs).14Anumberofstudiesuse these indices to estimate the price effects ofservicesmeasures(controllingforallrelevantindustryand economy-wide determinants of economicperformance of firms) for several services sectorsacross a large sample of countries (McGuire, 2008;FrancoisandHoekman,2010).

(i) Empirical estimates

For a sample of 78 countries across four servicessectors,Walsh(2006)findsanaveragetariffequivalentof72percentforservicesmeasures.15Analysingdatafor 11 services sectors16 across 63 countries, Guillin(2011) finds a much lower average tariff equivalent ofaround40percent.Acomparisonof theseestimates,however, is not very meaningful because differentstudies use different data samples and differentparametersintheeconometricspecification.

Ingeneral,itappearsthatrestrictionstoservicestradeare higher in developing countries than in OECDcountries (Walsh, 2006; Francois et al., 2003;Fontagné et al., 2010). At the same time, traderestrictions in services do not appear to besystematically associated with a country’s level ofdevelopment.Forexample, theworkof theAustralianProductivity Commission shows that some OECD


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countries have restrictions comparable with theaveragesprevailinginmajordevelopingeconomies.

Furthermore, Gootiiz and Mattoo (2009b) find thatalthoughhigh-incomecountriesarequiteopenoverall,there is much more variation in the restrictiveness ofservices trade in developing countries. The authorsshow that some low-income countries in Asia andAfrica are relatively open. So too are some middle-incomecountriesinLatinAmerica,AfricaandEasternEurope. In contrast, some of the most restrictiveservices measures are found in the fast-growingeconomiesofAsiaaswellasintheMiddleEast.Otherstudies also find the emerging economies in Asia tohaverelativelyprotectionistservicesmeasures(Walsh,2006;Park,2002;McGuire,2008).

It appears that variations in the restrictiveness ofservices measures across countries may depend ontheparticularsectorunderconsideration.Forinstance,Indonesia’s tariff equivalent in business servicesappears to be lower than that in more developedcountries, such as Japan and the Republic of Korea,but higher in construction services (Park, 2002;Guillin, 2011). Similarly, analysing members of AsiaPacific Economic Cooperation (APEC) in 1997,McGuire (2008) found that while the United Stateswas among the least restricted markets intelecommunications services, it was among the mosthighly restricted in maritime services. At the sametime, middle-income economies in South Americawerefoundtohaverelativelyhighrestrictivenessindexscoresforfinancialservices,butwereamongtheleastrestrictedmarkets indistribution, telecommunicationsandprofessionalservices.

According to a set of studies, averaging acrosscountries, transport and business services appear tobe the most open sectors, with an average tariffequivalentof21percentand28percentrespectivelyfor services measures. The most protected isconstructionservices,withanaveragetariffequivalentof 58 per cent (Park, 2002; Fontagné et al., 2010;Guillin, 2011). In a different study, however, foreigndirect investment (an important mode of trade inservices) in transport services is among the mostrestricted, while that in construction services is theleast restricted (UNCTAD, 2006). The contradictoryresultssuggestthattheaccuracyandreliabilityoftheaforementioned estimates of the restrictiveness ofservices measures may be questionable. This lack ofprecision and consistency may be attributable to anumberofmethodologicallimitations.

(ii) Methodological limitations

In analysing the trade-restricting effect of servicesmeasures,anestimatedAVEmusttakeintoaccountthepossiblesubstitutionbetweendifferentmodesofsupplywhen one particular mode is affected. For instance,there may be a switch from mode 3 trade (a foreigncompanysettingupsubsidiariesorbranchestoprovideservicesinanothercountry)tomode2trade(consumersorfirmsmakinguseofaservice inanothercountry) inhigher education services as a result of restrictiveservices measures affecting the former (Dee, 2010).Such intermodal substitution is likely in the case ofinsurance services as well (from mode 3 to mode 1,servicessuppliedfromonecountrytoanother).

In order to derive a meaningful AVE, other policyinterventionsthataffect thetrade-restricting impactof

BoxD.2: Cumulation of trade costs in a global supply chain

Supposethatthetotalvalue-addednecessarytoproduceaproductisequaltoone.Theproductisproducedinstages in“n”countries,eachofwhichadds (1/n) to the totalvalueof theproduct.Afterproduction, theproductisexportedtoafinaldestination,sothatitismoved“n”timesaltogether.Letthecostofanon-tariffmeasureonmoving theproduct fromonecountry to another equal “t” onanad-valorembasis.Hence, ateachstage, thecost “t” ischargedon theentirevalueof theproductproducedup to thatpoint, includingprevious trade costs. The total cost of the product (produced in n stages) when delivered to the finalconsumerisrepresentedbyc(n),sothat:

Box D.2: Cumulation of trade costs in a global supply chain Suppose that the total value-added necessary to produce a product is equal to one. The product is produced in stages in “n” countries, each of which adds (1/n) to the total value of the product. After production, the product is exported to a final destination, so that it is moved “n” times altogether. Let the cost of a non-tariff measure on moving the product from one country to another equal “t” on an ad-valorem basis. Hence, at each stage, the cost “t” is charged on the entire value of the product produced up to that point, including previous trade costs. The total cost of the product (produced in n stages) when delivered to the final consumer is represented by c(n), so that:

𝑐𝑐 1 = (1 + 𝑡𝑡) 𝑐𝑐 2 = !

!1 + 𝑡𝑡 ! + !

!(1 + 𝑡𝑡)

𝑐𝑐 3 = !!(1 + 𝑡𝑡)! + !

!(1 + 𝑡𝑡)! + !

!(1 + 𝑡𝑡)

( )in

it

nnc +=∑

=

11)(1

1

𝑐𝑐 𝑛𝑛 =1𝑛𝑛1 + 𝑡𝑡 !

!

!!!

SupposethattheAVEofanNTMateachstageis10percent,i.e.“t”=0.1andc(1)=1.1.Astheglobalsupplychainisfragmentedfurther,tradecostscompoundfairlyquickly:c(5)=1.343(anAVEof34.3percent)andc(10)=1.753 (anAVEof75.3percent).Moreover,marginal increases in tradecostsarecompounded.Forinstance,iftheAVEofNTMs“t”increasesfrom0.1to0.2,adoublingateachstageofthesupplychain,tradecostsalongthesupplychainmorethandouble,withmorecompoundingformorefragmentedsupplychains:c(5)=1.786andc(10)=3.115.


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aservicesmeasurealsoneedtobetakenintoaccount.For example, in the case of international air services,firmsmay respond toownership limits imposedby thewithholding clauses in air services agreements(affecting mode 3 trade) by negotiating code-sharingarrangements.Moreover, ifmode3 is thepredominantmode of trade (as it is for telecommunications, forexample),highfixedcostsofmarketentry/establishmentwouldnotevenbecapturedbytheconceptofa“tariffequivalent”.

In addition, the methodological limitations associatedwithanalysingthetradeeffectsofnon-tariffmeasuresarealsoapplicabletoservicesmeasures.Forexample,giventhelackoftransparency,itisdifficulttoobserveprecisely different services measures. Attributing thedifference between actual and predicted imports(derivedfromaneconometricestimation)totheimpactof services measures highlights this problem.Furthermore,theremaybemultiplerestraintsontradein services, and it may not be clear which are

economicallybindingandwhicharenot.RepresentingtheseNTMsasanAVEcanthusbemisleadingforthisreasonaswell.Theuseofsubjectivecriteriatoweighthe relative importance of diverse measures whenconstructingSTRIsalsoillustratesthemethodologicaldifficulties involved in estimating the price effects ofservicesmeasures.

Finally, AVEs of services measures calculated usingservices trade flows do not take into account theindirecteffects that thesemeasureshaveon trade ingoods.Sucheffectsarelikelytobestrongbecauseofthe complementarities between goods and services(see Box D.3). For example, a services measure thatrestricts trade and competition in transport andlogistics services has a negative impact onmerchandise trade. However, this is not taken intoconsideration when AVEs of services measures arecalculated using services trade flows only. The rolethatservicestradeplaysinglobalsupplychainsmakesthisanimportantproblem(seeSectionB.3).17

BoxD.3: Complementarities between trade in services and trade in goods

Evidencesuggeststhatexportcompetitivenessinmanufacturingsectors,suchasmachinery,motorvehicles,chemicalsandelectricequipment,ispositivelyassociatedwithinwardforeigndirectinvestmentandimportsof business services (Francois and Woerz, 2008) and negatively affected by regulations that hinder suchtrade(Nordås,2010).Suchcomplementaritybetweentradeinservicesandtradeingoodsmaybeexplainedbyvariousmechanisms.

Afirstmechanism isconstitutedby transportand logistics links.Transportand travelservicesaccount forabouthalfofcross-bordertradeinservicesandarethemostimportantdirectservicesinputtointernationaltrade in goods. For instance, Yeung et al. (2012) find that Chinese manufacturing firms that make use ofthird-partylogisticssuppliers(largelyfromHongKong,China)tendtoperformbetterinexportmarketsthanfirmsthatdologisticsin-houseorpurchasethemlocally.Evidencealsosuggeststhatmeasuresthatrestricttrade and competition in transport and logistics services have a negative impact on merchandise tradeperformance. Market power in the shipping industry, for example, raises trade costs, particularly fordevelopingcountries(Hummelsetal.,2009).

Secondly, goods and services are often bundled in final markets. After-sales services, for instance, areimportantforahostofdurablegoodssuchascars.Aviationengines,printers,vendingmachines,andotherequipmentarealsoincreasinglyrentedorleasedwithaservicescontract.Anotherrecenttrendistoconsidergoodsmainlyasaservicesplatform.Mobiletelephones,forinstance,areoftensoldforanominalamountonthe condition that customers sign up for a fixed-period service contract. When goods and services arecomplementaryorbundled,servicesmeasuresstronglyaffectthetradedgoodinquestionaswell(Lodefalk,2010).EvidencesuggeststhatmanufacturingfirmsinSwedenandtheUnitedKingdom(andalsominingandoilcompanies intheUnitedKingdom)arevigoroustraders inservices,andthattheservicesshareoftheirtotalrevenuehasincreasedovertime(Lodefalk,2010;BreinlichandCriscuolo,2011).

Thirdly,thecomplementaritybetweentradeingoodsandtradeinservicesisincreasedfurtherbytheroleofintermediaries(retailersandwholesalers)ininternationaltrade.18Bernardetal.(2010)findthat35percentofUSexportersarewholesalers,accountingfor10percentofthevalueofUSexports.Similarly,morethan25percentofItalianexportersareintermediaries,accountingfor10percentofthevalueofItalianexports.19Intermediaries, such as leading multinational retailers tend to source their products directly frommanufacturersorfarmers,andtypicallyhaveacentralizedsourcingunitservicingallsalesoutlets,globallyorregionally.Hence,theytendtocontributetoincreasedtradeinconsumergoodsbetweentheirhomecountryandthehostcountriesoftheiraffiliates.20

Marketconcentrationinasectorcomprisingintermediariesmayalsoaffectmerchandisetrade.Forexample,intheeventoftradeopening,retailerswithsignificantmarketpowermayfailtopassreducedtradecostsontoconsumers(FrancoisandWooton,2010).Atthesametime,regulatoryheterogeneity(suchasdifferencesinproduct standards, labellingand recycling requirements)may imposeconsiderablecostson retailersbyrequiringthemtomodifyproductsforeachdestination.21


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2. DisentanglingtradeeffectsofTBT/SPSmeasuresanddomesticregulationinservices

This section focuses on TBT/SPS measures andequivalentdomesticregulationinservices,andreviewswhatweknowabouttheireffectsontradeflows.Onereason to focus on this sub-set of measures is thateconomic theory does not provide simple predictionsas to their trade effects. Assessing their effects istherefore an empirical issue. In contrast, economictheoryprovidesclearguidanceastothetradeeffectsof other non-tariff measures – for example, importquotas reduce imports, export duties reduce exports,whileexportsubsidiesincreaseexports.

Another specific characteristic of these measures isthat they are commonly regarded as having animportant fixed-cost component, which significantlydifferentiatesthemfromtariffs.Forexample,toadapta product to new technical requirements may requirean initial investment independent of the level ofexports.Thepresenceofafixedcosttoenteramarketmay,however,haveeffectsontradethataredifferentfromatariff,andthisaspectdeservesattention.

Inparticular,thissub-sectionexamineshowTBT/SPSmeasures and domestic regulation in services affectthe volumeof tradeand thedecisionsaboutwhetherto export to a certain market. This sub-section alsoconsiders whether these measures affect developinganddevelopedcountriesdifferentlyandwhethertheseeffectsdifferby sectorandfirm.Wherepossible, theimpactofthesemeasuresontradeinindustrieswherethe production process is fragmented is highlighted.Finally,anattemptismadetodistinguishbetweentheimpactofthemeasuresthemselvesandtheimpactofthewayinwhichmeasuresareimplemented.

Economictheoryandassociatedempiricalresearch,ingeneral, do not distinguish between mandatory andnon-mandatory TBT/SPS measures, and the termstandardisoftenusedtodenoteboth.Intheabsenceofatheoreticalpredictionastoadifferentimpactofamandatory versus a non-mandatory measure – evenwhenusingdatabases thatcoveronlynon-mandatorystandards or only mandatory ones – the results areinterpretedmoregenerallyasthe impactofTBT/SPSmeasures.

Empirical economic literature clearly distinguishes,however, between national or country-specificstandards (standards that are different from those inanothercountry)andsharedstandards(standardsthatare identical or equivalent between two countries,including international and regional standards). ThedistinctionismadetodisentangletheimpactontradeofharmonizationofTBT/SPSmeasures.Thereviewoftheliteratureinthissectionfollowsthisapproach.

As far as services are concerned, the economicliterature generally looks at overall indexes of therestrictiveness of domestic regulation – and includesmeasuresthatgobeyondthefocusofthisreport.Thefollowing review of the relevant studies mainlyhighlights an important gap in the existing empiricalliterature.

(a) Overalleffectontrade

WhenexploringtheeffectsofTBT/SPSmeasuresontrade, one would ideally like empirical evidence todistinguishamongdifferenttypesofmeasures.Thisisbecause TBT/SPS measures affect trade throughdifferentchannels.

For example, the introduction of product safetyregulationwill increaseproductioncostsbutcanalsoserveasanimportantqualitysignal,therebyhelpingtopromote the competitiveness of those products thatmeet stringent standards. Product safety regulationsalso increase trust in the quality of foreign products,thus reducing transaction costs and fostering trade.Whether these effects will translate into higherimports or export depends on the effect of themeasureontherelativecostsofdomesticandforeignproducts,andonthewillingnessofconsumers topayhigherpricesforsaferproducts.

Asafurtherexample,considerthecaseofcompatibilitystandards. Innetworkindustries,wherethevalueofaproduct increaseswith thenumberofconsumersandcomplementary goods, compatibility standards arelikelytoincreasetrade.Withoutsuchstandards,thesemarkets may oversupply varieties and the networksizesmayremaintoosmall.Standardsinthesemarketsare generally voluntary and can help consumersacquire information about preferences abroad, andhelp producers to coordinate their activities moreefficiently. This general prediction needs to bequalified, however, since compatibility standards canalsoreflectanti-competitivebehaviour.

Except for environmental and food safety regulation,the existing trade literature does not distinguishamong different types of measures (for example,whethertheyaddressasafetyorcompatibilityconcern,orwhethertheydefinethecharacteristicsofaproductor a testing procedure). Rather, the literature hastendedtorelyonanindexofstandardizationactivities– usually the number of standards or the number oftechnicalmeasuresmaintainedbyacountry.ThefocushasthenbeenontherelationshipbetweenthisbroadmeasureofTBT/SPSmeasuresandtradeflows,oronthecost-raisingimpactofthesemeasures.

Notwithstanding these limitations, the existingempirical literature finds that, at the aggregate level,TBT/SPSmeasuresmaynotbeassociatedwithlowertrade. For example, in a pioneer study on therelationship between standards and aggregate trade


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performance,Swannetal.(1996)foundthatstandardspromoted trade. They estimated that a 10 per centincrease in the number of country-specific standards(as opposed to “shared” standards)22 increased UKimportsfromtherestoftheworldby3.3percentandexportsby2.3percent.Withadifferentspecificationof themodel,but thesamedataset,TempleandUrga(1997) found an insignificant effect of standards ontrade. Although their findings differed, both studieschallenged the predominant view that nationalstandardsrestricttrade.

Literature that looks at licensing and qualificationrequirementsandproceduresandtechnicalstandardsinservicesisverylimited.Itwouldappearthattheonlystudy that attempts to measure the effects of suchdomesticregulation isKoxandNordås(2007). In thefirstpartoftheirstudy,theauthorsuseareconstructedProduct Market Regulation (PMR) index23 based ontheselectedindicatorsthatintheirview“comeclosestto covering the types of regulation mentioned in[GeneralAgreementonTradeinServices]ArticleVI.4”,that is, domestic regulation as defined in this report.WhiletheestimatedtradeeffectofthisreconstructedPMRonoverallservicestrade(coveringmodes1and2 and mode 4, individuals travelling from their owncountry tosupplyservices inanother) isnegative, theestimatedcoefficienton“licencesandpermitssystem”(that is mostly closely related to domestic regulationasofGATSArticleVI.4)ispositive,thoughsmall.

In otherwords, burdensome licensingproceduresarefound to increase services trade. One possibleexplanation is that restrictive licensing proceduresinduce intermodal substitution between export andforeign direct investment (FDI). The finding that thestringency of the “licences and permits system”indicator reduces inward and outward FDI supportsthis view. In the second part of the study, Kox andNordås (2007) use banking regulatory indexesdeveloped by the World Bank (Barth et al., 2008).They show that regulation aiming at ensuringappropriate standards (such as accounting standardsand financial statement transparency) is positivelyassociatedwithcross-bordertradeandFDIinfinancialservices.24

(b) Differencesacrosssectorsandcountries

StudiesbasedondisaggregatedtradedatashowthattheeffectofTBT/SPSmeasuresdependsonthetypeofsector.Oneofthesestudies isbyMoenius(2004).Using a gravity model25 to assess the impact ofnational standards on trade for a dataset covering471 sectors at the four-digit Standard InternationalTradeclassification(SITC) levelandbilateraltradefor12 developed countries, he finds that import-specificstandards have a negative impact on imports inthe non-manufacturing sectors (namely, food,beverages, crude materials and mineral fuels), but

haveapositiveimpactonimportsinthemanufacturingsector (including oils, chemicals, manufacturing andmachinery).

Moenius’s interpretation of the results is thatstandards, by providing exporters with valuableinformation about market preferences, reducetransactioncostseveniftheyimposeadaptationcosts.In more differentiated sectors, such as certainmanufacturing sectors (for example, high-technologysectors), information costs may be higher. Therefore,informationcosts’reducingeffectoutweighadaptationcosts’increasingeffectandtradeincreases.

Moenius’s (2004) conclusions are supported byseveral studies. For example, Blind (2001) finds apositiveandsignificanteffectofstandardsontradein“instruments for measurement and testing”, as doesMoenius (2006) for “electrical products”. Usinginformation on the measures notified under the SPSand TBT agreements, Disdier et al. (2008b) find anoverallnegative impactofSPSandTBTmeasuresontradeinagriculturalproducts.

Focusing on notified TBT/SPS environment-relatedmeasures(ERM)(seeBoxD.4),Fontagnéetal. (2005)also tend to find a positive effect of ERM onmanufacturing trade, but a negativeeffect on trade infreshandprocessedfood.Morerecently,LiandBeghin(2012)performananalysisof27papersthatusegravityequationstoestimatetheeffectofTBT/SPSmeasuresontrade.Theyfindthatestimatesofthetradeeffectsofthesemeasuresonagricultureand food industriesarelesslikelytobepositivethaninothersectors.

In linewiththegeneralfindingofanegativeeffectofTBT/SPSmeasureson trade in agricultural products,thetradeliteraturethatusesmaximumresidual levels(MRLs)ofpesticidesasanindicatorofthestringencyofSPSmeasuresconsistentlyfindsnegativeeffectsofMRLson imports.Otsukietal. (2001)findanegativeeffect of the EU standard on aflatoxin on Africanexports. In particular, they estimate that moving fromthe Codex Alimentarius standard, established by theUNFoodandAgricultureOrganizationand theWorldHealth Organization, to the more stringent uniformEuropean Commission standard decreases Africanexportsofcereals,driedfruits,andnutstoEuropebyUS$ 670 million. Wilson and Otsuki (2004) find asimilar effect for MRLs on chlorpyrifos on bananasexportsfromLatinAmerica,AsiaandAfricatoOECDcountries.

Chenetal.(2008)findanegativeeffectofregulationsontheutilizationofpesticidesandmedicatedfishfeedon Chinese exports of fresh vegetables, fish andaquatic products between 1992 and 2004. Inparticular,theyfindthata10percentstrictermeasurein the level of pesticides (medicated fish feed)decreases vegetable (fish and aquatic product)exportsby2.8(2.7)percent.


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Several studies show that any negative effects ofTBT/SPSmeasuresontradeareconcentratedmainlyindeveloping-countryexportstodevelopedcountries.Incontrast,exportsfromdevelopedcountriestootherdeveloped countries are not significantly impeded bythesemeasures.26

For example, focusing on SPS measures, Anders andCaswell (2009) find substantially different effectsbetween developed and developing countries. Theyestimatethetradeimpactofmandatory“hazardanalysisandcriticalcontrolpoints”(HACCP)27requirementsforseafood products in the United States between 1990and 2004. US seafood imports across all exporterswere reduced. SPS measures caused a loss in tradevalueofbetweenUS$11.4milliontoUS$30.6million.The impact on developing countries as a groupamountedtoanexportvaluereductionof0.9percentunderHACCPstandards,whiledevelopedcountriesasagroupgainedfromthemeasure.

However, there is wide variation across developingcountries. Anders and Caswell (2009) find that largerseafood exporters gained trade shares with the UnitedStates, while smaller exporters lost ground. Developingcountries were found among both the gaining and thelosinggroup.ThetradeimpactofSPSmeasuresappearsto depend in part on the size of the exporter. Similarly,

examining the trade effects of notified SPS and TBTmeasures adopted by the United States, the EuropeanUnion,Japan,Canada,AustraliaandSwitzerland,Disdieret al. (2008a) find an overall negative effect on totalexportsfromAfrican,CaribbeanandPacific(ACP),LatinAmerican and Asian countries. While ACP countryexports appear to have been significantly negativelyaffected by such measures, the impact on Asiancountriesisnotstatisticallysignificant.

Empiricalresearchondomesticservicesregulationhasnotexaminedwhetherthesemeasureshaveadifferentimpactondevelopedanddevelopingcountries.This ismainly due to lack of data on services measures fordeveloping countries. As regards differences acrosssectors,theabove-mentionedstudybyKoxandNordås(2007) finds that regulation matters more for “otherbusinessservices”(includinglegalservices,accounting,architecture and engineering) than for “total services”(asmeasuredbytotaltradethroughmodes1,2and4).Thisisconsistentwiththeimportantrolethatbusinessservicesplay inproductionchainsandhowamarginalincreaseintradecostscanhaveamagnifiedimpactonoverall trade costs when the production process isfragmented across countries (see Section D.1 andBoxD.2).

BoxD.4: Environment-related measures

One of the basic concerns with environmental regulation is that, in a world where countries differ in thestringency of their environmental regulations and industries differ in their pollution intensities, pollution-intensivefirmswilllocateproductioninlessregulatedcountries.Therefore,pollution-intensiveproductswillbeexportedbylessregulatedcountriesandimportedbycountrieswithmorestringentregulation.

IntheirsurveyontheeffectofenvironmentalregulationsonUSmanufacturing,Jaffeetal.(1995)concludedthat therewas littleempiricalevidencethatdifferences inenvironmental regulationsaffected internationaltradeandinvestmentflows.

Morerecentstudieshaveattemptedtoexplainthisfinding,examiningmoredisaggregateddataandtreatingsamplevariationsmorecarefully.Thegeneralfindingisthattheimpactofenvironmentalregulationontradechangesbycountryandsector.Forexample,Ederingtonetal.(2005)arguethatenvironmentalregulationshave strongereffectson thepatternof tradebetweendevelopedanddeveloping economies thanamongdevelopedcountries.

Using data for 21 OECD countries and a gravity model of trade augmented with an indicator of strictenvironmentalregulation,vanBeersandvandenBergh(1997)findthatstrictenvironmentalregulationdoesnot increase imports.However,while theydonotfind thatenvironmental regulations inpollution-intensivesectorshaveasignificantoveralleffectonexports,theydofindthatthesemeasureshaveasignificantandnegative effect for those pollution-intensive sectors that are resource based (being less geographicallymobile).Thefindingthatstricterenvironmentalstandardshaveanegativeimpactonexportsfrompollution-intensiveindustriesisalsoconfirmedinthestudybyOtsukietal.(2001).

Focusing on environment-related measures notified under the SPS and TBT agreements, Fontagné et al.(2005)findthatfortradeinfreshandprocessedfood,thesemeasurestendtorestricttradefromdevelopingcountries and least-developed countries (LDCs). However, exports from developed countries are notrestricted.On theotherhand, for themajority ofmanufacturedproducts, theseenvironmental regulationshave either no significant effect or a positive effect, and this result applies to countries at all stagesofdevelopment.


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(c) Volumeoftradeandexportmarketsdiversification

TheeconomicliteratureexaminesTBT/SPSmeasuresin goods and equivalent domestic regulation inservices as possible fixed costs of entry in a market(Baldwin, 2000 and 2005, and Deardorff and Stern,2008;KoxandLejour,2005)–thatis,aninitialcosttobepaidtoaccessamarket.Forexample,alargeinitialinvestmentmayberequiredforafirmtocomplywithacertainforeignstandard,butoncethenewtechnologyisacquiredtheremaybenoadditionalvariablecosts.28Similarly,aqualificationorcertificationrequirementforservice-providingpersonnelmayinvolveaninitialfixedcostofobtaining thequalificationor certification,butnoadditionalvariablecosts.

AsdiscussedinSectionB,assumingtheexistenceoffixedcoststoenteracertainmarket,modelsoftradewith heterogeneous firms show that only the mostproductive firms in an industry will export. As tradecosts are lowered, high-productivity exporting firmsexpand. The most productive firms enter exportmarkets,whilelow-productivityfirmsshrinkorexitthemarket.Inthesemodels,thevolumeoftradebetweentwo countries changes both because incumbentexportingfirmsexpandtheirtrade(thusincreasingtheso-called intensivemarginoftrade)andbecausenewfirms enter the foreign market (thus increasing theextensivemarginoftrade).29

Relatively little is known about how TBT/SPSmeasuresaffectindividualfirmsand,inparticular,theirexport decisions. In order to shed light on this issue,thefollowinganalysisstudiesfirms’decisiontoexportto a market and the volume of their exports.30 Theadvantageofusingfirm-leveldataisthatitallowsustodistinguishbetween thenumberof varietiesexportedbyfirms,thenumberofexportingfirms,andthevalueofexportsbyfirms.

Tomeasurethestringencyofregulatorymeasures,thestudy uses the database on specific trade concernsraised by WTO members in the SPS and TBTcommittees.31 While databases typically used32 tocapturetheimpactofTBT/SPSmeasuresincludebothmeasuresthatrestricttradeandthosethatdonot,thisdatabasecontainsinformationonlyonthosemeasuresperceivedtobeapotentialobstacletotrade.Acountrywouldnotraiseaconcernifitdidnotseethatmeasureasanobstacletotrade.33

Drawing on French firms’ custom data34 from 1995to 2005, the study uses a gravity model of trade toevaluate theeffectofSPSandTBTmeasures raisedas specific tradeconcerns onexport performancebyfirms.Thefirms’exportsareassumedtobedeterminedby demand-side factors (such as income), supplyfactors (such as sectoral productivity), trade costs(such as distance) and by an additional variableindicatingthestringencyofSPSandTBTmeasures.35

Although further research is needed to test therobustness of results, preliminary findings show thatTBT/SPS measures raised as concerns in WTOcommittees are associated with a fall in trade. Inparticular,TBT/SPSmeasuresraisedasspecifictradeconcerns appear to reduce the value of exports. Theeffectonthenumberofexportingfirmsisstatisticallynot significant, but the sign of the coefficient isnegative (results of the estimations are reported inAppendixTablesD.1andD.2).

OtherstudiesalsofindthatTBT/SPSmeasureshaveanegative effect on export market diversification. In astudy (not at firm level) focusing on textile, clothingand footwearexports,Shepherd (2007)shows thata10 per cent increase in the total number of EUTBT/SPS measures is associated with about a6percentdecrease in theproductvarietyofexports(measured as the number of six-digit HS productsunderatwo-digitHSsector)totheEU.

UsingdatafromaWorldBankTBTssurvey,Chenetal.(2006) also find that TBT/SPS measures impededeveloping-country exporters’ entry into developedmarkets.Inparticular,Chenetal.(2006)estimatethatthese measures reduce the likelihood of firmsexporting to more than three markets by 7 per cent.The study, however, is based on a sample of only619 firms located in 17 developing countries. Themeasure of a technical barrier to trade is based onfirms answering “yes” to the question “Have quality/performancestandardsimpactedyourabilitytoexportproducts?” In other words, this study finds that firmsthat claim to find TBT/SPS measures an obstacle totradealsotendtoexporttofewermarkets.36

There is also some evidence that the effects ofTBT/SPS measures on export-market diversificationchanges depending on the type of firms. Standardsandtechnicalregulations(ifnotharmonized)appeartobe particularly harmful to trade for firms that importinputs. In fact, outsourcingfirmsappear less likely todiversify their export markets than firms that do notoutsource. The underlying reason may be that, wheninputs are produced, their ultimate destination isunknown and thus they may not meet the technicalrequirements imposed in the market of the finalproduct(Chenetal.,2006).

In addition, TBT/SPS measures appear to negativelyaffect market entry even more for small firms.Focusing on the electronics sector, Reyes (2011)examines the response of US manufacturing firms tothe harmonization of EU product standards withinternational norms. He finds that harmonizationincreases the entry of firms, and that the effect isstronger forUSfirms thatalreadyexport todevelopedcountriesbutnottotheEuropeanUnion.Asexpected,these firms are on average smaller than firms alreadyexportingtotheEuropeanUnion.FocusingonSenegal,Maertens and Swinnen (2009) show that vegetable


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exports have risen sharply despite increasing sanitaryrequirements, resulting in important income gains andpoverty reduction. However, tightening food regulationalsoinducedashiftintheprofileofexportersfromsmallfarmerstolarge-scaleintegratedestateproduction.

Overall, firm-level studies show a negative effect ofTBT/SPS measures on trade, both through a lowervolume of trade per firm and reduced market entry.This result may be partly explained by the type ofvariable used in some of these studies for TBT/SPSmeasures, which tend to capture only restrictivemeasures. In addition, some evidence points toTBT/SPSmeasuresbeingparticularlytraderestrictivefor small firms and outsourcing firms. However, moreresearch is needed to understand how these resultsvaryacrosssectorsandfirms.

There isnofirm-levelstudy lookingspecificallyat theeffectsofdomesticregulation(narrowlydefinedasofGATSArticleVI.4)onexport-marketentryforservices.Using aggregate data, Kox and Nordås (2007) findthatthedeterminantsofmarketentryandthevolumeof trade are largely the same. In particular, domesticregulationsaimedatensuringhigherqualitystandardsin financial services (accounting standards andfinancial statement transparency) appear to beassociated with both higher export values andincreased entry. However, existing evidence onservicesistoolimitedtodrawgeneralconclusions.

(d) Doesconformityassessmentmatterforgoodstrade?

Conformity assessment refers to testing, inspectionandcertification,aswellastoasupplier’sdeclarationof conformity.37 Conformity assessment proceduresare necessary for achieving important policyobjectives,suchastheprotectionofconsumers’healthand safety. They can, however, also be unnecessaryobstaclestotradewhentheyareduplicative,inefficientorappliedinadiscriminatorymanner.

Testing, inspection and certifying compliance with acertain TBT/SPS measure entails costs. These costsare necessary because they assure compliance withthe required standard. Yet, they can also be anunnecessaryobstacletotrade,whenforeignprovidersare competent to provide the required level ofassurance in a cost-effective manner, but thiscompetence is not recognized by the importingcountry. Ideally, attestation of conformity would becarried out just once in a cost-effective manner andthen recognized everywhere. Yet, even the existenceof a well-functioning technical infrastructure in manycountries does not automatically lead to singleconformityassessment,thusunnecessarilyincreasingtransactioncosts(seeSectionB.1).38

There are several dimensions of conformityassessment costs. It is not just that the fees for

testing, inspection or certification may beunnecessarily high. Unnecessary costs also arisebecause exporters need to comply with testing andcertification requirements in each of the countries towhich they are exporting. Even if importing countriesrelyoninternationallyharmonizedproductstandards–oracceptanothercountry’sstandardsasequivalent–theymaystillhaveaseparateconformityassessmentrequirement.Thiscansubstantiallyincreasethecostsofexporting,notleastbecauseexportersfacetheriskthatgoodsarerejectedbytheimportingcountryaftershipment.

When conformity assessment requirements differsignificantlyacrosscountries,andtheproceduresareopaque, companies may face additional costsassociated with obtaining the necessary information,and redesigningproducts tomeetdifferentcountries’conformityassessmentstandardsandrequirements.

Inaddition,lengthyconformityassessmentproceduresalso imply additional costs associated with salesrevenues forgone while the product is under review.Forsometime-sensitiveproducts,suchastextilesandclothingandhigh-technologyproductswithashortlifecycle, time delays can have a severe impact onprofitabilityandmarketpenetration.

Conformity assessment costs have not beensystematically quantified. This is because someaspects,suchastheopportunitycostoflostsales,aredifficult to measure. However, the extent to whichconformity assessment costs are perceived asobstacles to trade clearly emerges from severalsurveysandcasestudies(seeBoxD.5).

Little is known about the impact of conformityassessment procedures on trade. Focusing on asampleofdevelopingcountries,astudybyChenetal.(2006) claims that conformity assessment issuessignificantly impede trade. On the basis of firm-levelsurveydata,theyfindthatfirmsanswering“yes”tothequestions “Have testing procedures impacted yourabilitytoexportproducts?”and“Doyouhavedifficultyobtaining information about applicable regulations inthe countries listed?” also have a significantly lowerpropensity to export. They also find that testingproceduresareparticularlyburdensomeforagriculturalfirms.

In all likelihood, the impact of conformity assessmentprocedureson trade variesacross sectors. TheOECD(1999) survey stresses that even the nature ofconformity assessment costs varies by productaccording to their technical characteristics. Terminaltelecommunications equipment and automotivecomponents, forexample, requirean initialapprovalofthe product before it can be exported. In the caseofdairyproducts,eachindividualconsignmentmustbetestedbothprior toexportand/orat theportofentry.Thus conformity assessment procedures are a fixed


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cost of exporting telecommunications equipment andautomotivecomponentmarkets–borneinadvance.Ontheotherhand,theyareavariablecostfordairyexports.

AstudybySchlueteretal.(2009)looksattradeeffectsof different types of SPS measures imposed on meatproducts. After grouping 21 types of measures in sixclasses, they find that whereas disease-preventionmeasures, tolerance limits for residues andcontaminants, and conformity assessment andinformation requirements increase trade, production-processrequirementsandrequirementsforhandlingofmeatafterslaughteringrestricttrade.

The paper by Fassarella et al. (2011) looks at theimpactofSPSandTBTmeasuresonexportsofpoultrymeatbyBrazilianexporterstothemainworldimportersintheperiod1996to2009.Theyfindthattheimpactof aggregated TBT and SPS measures on Brazilian

poultrymeatexportsare insignificant.However,whenmeasures are disaggregated, conformity assessmenthasanegativeandsignificantimpactonthevolumeofBrazilian poultry meat exports, while packaging andlabelling requirements, and/or disease-preventionmeasures (regionalization or quarantine treatment)haveapositiveandsignificantimpactonthevolumeofBrazilianpoultrymeatexports.

This report attempts to assess the importance ofconformity assessment requirements relative toproduct-characteristicsregulationsonoverallfoodandagricultural trade.39 Relying on the database onspecific trade concerns regarding SPS measuresdescribed in Section C, the analysis distinguishesbetween concerns related to conformity assessment(such as certificate requirements, testing, inspection,andapprovalprocedures)assetoutinAnnexCoftheSPSAgreement,andconcernsrelatedtootherissues

BoxD.5: Reporting of conformity assessment procedures as barriers to trade: selected examples

The fact thatconformityassessmentcostsareperceivedas importantobstacles to tradeclearlyemergesfromseveral surveys. In thebusiness surveyonnon-tariffmeasures conductedby the International TradeCentre (see Section C.2), product certification, product testing and inspection requirements appliedin importing countries represent more than half of all firms’ complaints about TBT/SPS measures in the11developingcountriesanalysed.

CostsofcertificationalsoappearasaprominentobstacletotradeinasurveyontheeffectsofSPS-relatedprivatestandardsconductedby theWTOSecretariat (seeG/SPS/GEN/932/Rev.1).Seventeenoutof the22 respondents included a reference to high certification costs. The survey also notes that developing-countryexportersconsidercompliancewithprivatestandards tobeaprerequisite forexporting toa largenumberofdeveloped-countrymarkets.

Compliancecostsforprivatestandardsarehigh,andtheyaresignificantlyaffectedbythecostofcertification.While the cost of certification varies depending on the sector, the examples provided indicate that theaverageannualcertification feemay reachbetweenUS$2,000andUS$8,000 foraprivatestandard. Inaddition,countriesreportsignificantcostsassociatedwiththetime-consumingprocessofmeetingprivate-standardrequirements,especiallyformicrobiologicalandchemicalanalyses,nottomentionthedifficultyoffindingaccreditedlaboratorieswithadequatedetectiontechniques.Thesecostsrisesignificantlywhentestshavetobeconductedabroad.Overall,thesecostsaredeemedasignificantimpedimenttotradeforsmall-scaleproducersthat,asaconsequence,areexcludedfromproductionchains.

Testingandcertificationcostsalsoappeartobeasignificantobstacletotradeforexportsfromdevelopedcountries.The2011NationalTradeEstimateReportonForeignTradeBarriers (NTEReport)–anannualsurvey carried out by the United States Trade Representative to identify foreign barriers to US exports –offers several examples. For instance, it claims that “Thailand imposes food safety inspection fees in theformof importpermit feesonall shipmentsofuncookedmeat.Currently, imports face feesof5bahtperkilogram(approximately$160perton)forredmeat(beef,buffalomeat,goatmeat,lamb,andpork)andforoffal, and 10 baht per kilogram ($320 per ton) for poultry meat. Fees for domestic meat inspections aremuchlowerandareleviedintheformofaslaughteringorslaughterhousefee.Thefeesare$5pertonfordomesticbeef;$21pertonforpoultry;$16pertonforpork;andzeroforoffal”.

Lengthycertificationprocedurescanalsobethemainobstaclestotrade.Forexample,the2011NTEReportrelatesUSindustryconcernsabout lengthyapprovalproceduresfornewpharmaceuticalproductsinHongKong,China,whichinhibitstheirabilitytomarketproductsonatimelybasis.Similarly,theNTEReportraisesa concern over Paraguay’s “non-automatic import licenses on personal hygiene products, cosmetics,perfumesand toiletries, textilesandclothing, insecticides,agrochemicals,andpoultry.Obtaininga licenserequires review by the Ministry of Industry and Commerce and sometimes by the Ministry of Health. Theprocessisslow,takingupto30daysforgoodsthatrequireahealthcertification.Onceissued,thecertificatesarevalidfor30days.”


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(suchasrequirementsondiseasetreatment,maximumresidual levels, or thegeographical applicationof themeasure).The impactof thesetwotypesofconcernson the probability that firms will export and on thevolumeoftradeisanalysedusingbothasimpledummyfortheexistenceofanSPSmeasureandafrequencymeasure.40

Theanalysissuggests that, ingeneral,SPSmeasuresimposedbyanimportingcountryandraisedasspecifictrade concerns have a negative impact on theprobability that firms will export to the marketconcerned(resultsarereportedinAppendixTableD.3).However, conditional on the probability that firmsexport (that is, forfirmsalready in theexportmarket),the value of exports increases.41 In particular, theresultssuggestthatitisconformityassessment-relatedfactors that have the most negative impact on theprobabilityofenteringamarket,whilemeasuresrelatedtothecharacteristicsoftheproductexplainmostofthepositive impact on the value of trade. Although moreresearch is needed, one possible explanation is thatSPS measures, by enhancing consumers’ trust inimportedproducts, increase trade for thoseexportersthatmanage toovercome thefixedcostofenteringamarket.

In sum, the empirical evidence suggests thatconformityassessmentcosts(mostlyrelatingtotradein food and agricultural products) are an importantobstacletotrade.

3. Harmonizationandmutualrecognition

Thediscussion in theprevioussub-sectionssuggeststhat the use of TBT/SPS measures and domesticregulation in services by the importing country canhave ambiguous effects on trade. In the event thatthey have adverse trade effects, it is imperative toconsider how these harmful trade impacts may bealleviated.

Harmonization and mutual recognition of TBT/SPSmeasuresarecommonlybelievedtobestepstowardsmoreopen trade.However,economic theoryprovidesan ambiguous answer to the question of whetherharmonizationincreasesordecreasestrade,aswellaswhether harmonization has more impact than mutualrecognition on boosting trade (see Box D.6). Thissection, therefore, reviews the empirical evidence ontheseissues.

(a) Isharmonizationtradecreating?

The empirical literature measures the extent ofharmonization of standards in different ways. Somestudies consider a standard as harmonized if itconforms with an international standard published bythe International Organization for Standardization

(ISO), the International Electrotechnical Commission(IEC),theInternationalTelecommunicationUnion(ITU)or similar bodies. Other studies treat standards asharmonizediftheyarecommontoagroupofcountries.

Notwithstanding these differences, a general findingin the literature is thatharmonization increases trade.For example, using the number of bilaterally-sharedstandardsreportedinthestandards-relateddatafromthe Perinorm database, and taking country-specificstandards into account, Moenius (2004) finds thatsharedstandardshaveapositiveandsignificanteffectonbilateraltrade.

Using a gravity model of trade for the period 1995-2002, Clougherty and Grajek (2008) find thatconformity with ISO 9000 in developing countriesappearstoenhanceexportstodevelopedcountries(asimilar effect was estimated in Grajek (2004)). Theauthorsdonot,however,findthatconformitywithISOstandards in developed countries has a significanteffectoneitherexportsorimports.FocusingontradewithintheEuropeanUnion,VancauterenandWeiserbs(2005)findthatharmonizationhasasignificanteffecton a country’s exports.42 In particular, they find thatcountries that have a larger than average share oftrade in sectors covered by the EU harmonizationdirectiveexportmore.Morerecently,usinganindexofvariations in regulation on veterinary drugs andpesticides across countries, Gervais et al. (2011)estimatethatdifferencesinstandardshaveanegativeeffectontradeinpigmeatandbeef.

Harmonization is also found to have a positive effectonthediversificationofexportmarkets(theso-calledextensivemarginoftrade)–that is,onthenumberofexported varieties and export destinations. Albeitlimitedbythelackoffirm-leveldata,Shepherd(2007)isthefirststudytoexploretheimpactofharmonizationat the extensive margin of trade. Focusing on theexportsoftextiles,clothing,andfootwear,hefindsthatharmonizationisassociatedwithhigherexportvariety,mainly for low-income countries’ exports to theEuropeanUnion.

Focusing on the electronics sector, Reyes (2011)examines the response of US manufacturing firms tothe harmonization of EU product standards withinternationalnorms.Theauthorusestheshareofnon-harmonizedstandardsinanindustry43asameasureoftradecostsduetoavarietyofstandards.

Reyes’ study finds that increasing harmonizationincreases US exports to the European Union. Inparticular,thisincreaseisduetomoreUSfirmsenteringtheEUmarket.Exports fromUSfirmsalreadypresentin the EU market before the harmonization decrease.Overall, exports increase. Product standardharmonizationseemstobemoreimportantthantariffsforthepropensitytoexport.Furthermore,newexportingfirms are smaller than those already exporting to the


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BoxD.6: Harmonization versus mutual recognition

This box explores the possible role of harmonization and mutual recognition of TBT/SPS measures andcompares their advantages and disadvantages. For the purposes of this box, TBT/SPS measuresanddomestic regulation inservicesare treated togetheras “standards”becausetheconclusionsfromthetheoreticalliteratureapplygenerallytogoodsandservicesregulation.

Supposethattwotradepartnersareconfrontedwiththesamemarketfailurebutaddressitwiththeuseofdifferentstandards.Thismeansthatexistingexporterswillhavetobearthecostsofadaptingtheirproductsto the requirements of the destination country or produce goods that meet both standards. The differentstandardsofregulationhaveanegativeeffectonmarketentry–theextensivemarginoftrade–asitactsasafixedmarketentrycost(KoxandLejour,2005).

Now, consider a case in which a firm operating under increasing returns to scale44 serves the domesticmarketandcanpotentiallyexporttothreeforeignmarkets,uponpayingafixed(sunk)marketentrycost.Ifthiscostismarket-specific,thefirmcanonlyrealizemarket-specificeconomiesofscaleineachoftheexportmarkets.Sincethetwocountrieshavethesamemarketfailure,aneffectivesolutionforbothcountrieswouldbetochooseacommonstandardorrecognizeeachother’sstandard.

Harmonization impliesacommondefinitionofboth thepolicyobjectiveand the technical requirements toachieve it, while mutual recognition refers to the reciprocal acceptance of the measures applied in bothcountries.Bothapproachesareconsideredtrade-enhancingastheyproduceeconomiesofscaleandpermitamoreefficientallocationofresources(ChenandMattoo,2008).Takingtheexampleofthefirmdescribedinthepreviousparagraph,ifthefixedcostofentryisthesameforallexportmarkets,asisthecaseundermutual recognition and harmonization, the firm can realize global economies of scale, and realize costsavings.However,eachsolutionaffectstrade inadifferentwayand, ingeneral, it isnotpossibletodefinewhetherharmonizationormutualrecognitionismoretrade-enhancing.

Ingeneral,harmonizationisexpectedtoboosttrademorethanmutualrecognitionforthefollowingreasons.As countries adopt the same standards, products are more homogenous and better substitutes for bothproducersandconsumers than inamutual recognition framework, thus reducinghome-bias– that is, thegeneral preference for domestically-produced goods (World Trade Organization (WTO), 2005b). Commonstandardslowertheinformationcostsfacedbyconsumersandincreasetheirconfidenceaboutthequalityofimportedproducts(Dissanayakaetal.,2001).Thisalsoappliesforbusiness-to-businessrelationships,whereharmonizationenhancescommunicationeffectiveness(Grajek,2004).Theyalsoallowcompatibilitybetweenimportedanddomestically-producedproducts(Baller,2007).

However,itispossiblethatharmonizationcanhaveanegativeimpactontradethatcanbeavoidedthroughmutualrecognition.Harmonizationreducesthenumberofvarietiesinthemarket(forexample,harmonizationtoacertainhigher-qualitystandardremovesfromthemarket lower-qualityproducts thatsomeconsumersmayhavebeenwillingtobuy).Whendemandforforeignproductsisdrivenbyloveforvariety,alowerdegreeof differentiation among products will diminish trade. Moreover, harmonization may generate compliancecoststhatvaryfordifferentcountriesifcertaincountrieslacktheexpertisetotakefullpartinthesettingofinternationalstandardsoriftheylackbargainingpower.Inthiscase,thegainsfromharmonizationwillnotbeequallydistributedamongparticipatingcountries.

In contrast,mutual recognition allowsan equal distribution of gains from removing TBTamong countries.Whenthisapproachisinplace,firmscansellinforeignmarketswithoutbearingthecostofharmonization.Therefore,when love for variety is important for tradeorwhencostsofadaptation toanew (harmonized)technologyarehigh,mutualrecognitionshouldbeexpectedtoboosttrademorethanharmonization.

Harmonization and mutual recognition also take place within regional agreements, with differentconsequencesfortradewithcountriesthatarenotpartoftheagreement(WorldTradeOrganization(WTO),2005b;ChenandMattoo,2008;MattooandSauvé,2003).Ontheonehand,harmonizationdecreasesthecostsoflearningabouttheregulationofeachmemberoftheagreementandavoidstheassociatedcostsofcompliance, thus benefiting producers that are not in the agreement. On the other hand, it can increasecompliance costs for firms outside the agreement, especially for firms in less developed countries, whichoftenlacktheinfrastructureandexpertiserequiredtocomplywithnewregulations(Otsukietal.,2001).Withmutual recognition, external producers can choose to produce according to the standards adopted in thecountrythatbettersuittheirproductionadvantages,implyinglowercosts.


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European Union before harmonization. These resultssuggest that working towards a harmonization ofproduct rules across markets could assist small- andmedium-sizedfirmsinenteringnewexportmarkets.

Economistshavearguedthatdifferencesinregulationacross countries (policy heterogeneity) reduceservicestradeinthesamewaythatitdoesforgoods.AsdiscussedinBoxD.2,KoxandLejour(2005)showthat in a standard monopolistic competition model oftrade, different standards of regulation acrosscountries reduce bilateral trade.45 In support of thistheoretical prediction, empirical evidence shows thatmutualrecognitionorregulatoryharmonizationhaveapositiveeffectontrade.46

De Bruijn et al. (2008) consider the prospectiveeffects of the EU Services Directive, proposed in2004 by the European Commission to reduce theimpedimentstotrade,onbilateraltradeincommercialservices. By combining the changes in regulatorydiversity with the empirical results of the gravityanalysis, theyestimate that total trade of commercialservices within the European Union increases by anaverage of 28 per cent as a result of the ServicesDirective, as approved in 2006. This rises to 44 percent for the original proposal by the EuropeanCommission, which included the country of originprinciple.47 As they argue, such large differencesimplicitly show the economic benefits of mutualrecognitionofregulatorystandards.

In addition, Kalemli-Ozcan et al. (2010) consider theretrospective effects that regulatory harmonizationbased on the EU’s Financial Services Action Plan(FSAP) had on cross-border banking activities. Suchactivities increased significantly among Europeancountries that quickly adopted the financial servicesdirectives of the FSAP. Their results suggest thatlegislative harmonization in financial markets had apositive effect on cross-border banking integrationthat is additional to the generally positive effects ofeuroareamembership.48

(b) Regionalintegration

A growing number of regional/preferential tradeagreementsincludeprovisionsonTBT/SPSmeasures.The analysis of the content of preferential tradeagreements (PTAs) in last year’s report (WTO, 2011)showthatapproximately60percentoftheagreementsincludesuchprovisions.

In particular, mutual recognition of conformityassessmentandharmonizationoftechnicalregulationare among the most common approaches ofintegration in the TBT area. While the objective offosteringmutualrecognitionofconformityassessmenttendstobeafeaturethatoccurswithequalfrequencyacross several types of PTAs, significant differencesexist in terms of their tendency to include

harmonization of technical regulations between EU-type and North American-type agreements. Forexample,whiletheagreementssignedbytheEuropeanUniontypicallyincludeharmonizationprovisions,PTAsinvolving North American countries tend to includemutualrecognitionoftechnicalregulations.

Furthermore,lastyear’sreporthighlightstwofeaturesof PTAs. First, PTAs that harmonize standards arelikelytopresent“hub-and-spoke”characteristics,withthe larger partner representing the hub to whosestandards the spokes conform. Therefore, the reportcautions that this tendency may hinder further tradeopening among major regional groupings. Secondly,“deep”PTAs(thatis,moreambitiousPTAsintermsofthe depth of integration of TBT provisions) are morelikelybetweencountriesathigherandsimilarlevelsofdevelopment. Therefore, the report warns about therisksofmovingtowardsatwo-tieredworldthatwouldfurthermarginalizedevelopingcountries.

Thisyear’sreporttakestheanalysisastepfurtherandlooksattheevidenceofhowharmonizationandmutualrecognition provisions in PTAs affect trade.Harmonization and mutual recognition, when theyoccurattheregionallevel,affectcountriesoutsidetheregion differently. While harmonized standards allowentry into the whole regional market once theharmonized standard is adopted, mutual recognitionmaynotprovideaccesstothirdcountries.Forexample,agreementsinvolvingmutualrecognitionofconformityassessment procedures are likely to have trade-divertingeffects for countriesoutside theagreementif they are subject to strict rules of origin (i.e. laws,regulations and administrative procedures whichdetermineaproduct’scountryoforigin).

Suppose, for example, that following an agreementbetweencountryAandcountryB,onlygoodsmadeincountry A (satisfying specific rules of origin) cancirculate freely in country B after being tested andcertified in A. This privilege does not extend toproducts originating in third countries. Therefore, afirm located in country C will have to pay twice asmuch as a firm located in A (or B) for conformityassessmentinordertoaccessmarketsAandB.Inthecaseofservices,supposethatcountriesAandBhavesignedanagreementprovidingformutualrecognitionofqualificationrequirements.Aservicesproviderfromcountry C willing to serve both A and B markets willhave to pay twice as much to obtain the necessaryqualification requirements. Mutual recognition ofconformity assessment procedures (in the formerexample)orofqualificationrequirements(inthelatterexample)betweenAandBwhenaccompaniedbyruleoforiginthereforeincreasesthecostsforfirmslocatedin thirdcountries relative tofirms located inAandB,thusdivertingtrade.

Very few empirical studies have looked at howSPS/TBT-relatedpoliciesinPTAshaveaffectedtrade


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both within and outside the region covered by theagreement. Existing studies indicate that regionalagreementsonharmonizationtendtodiverttradeandthat trade diversion affects exports negatively,especially from developing countries. For example,Cadot et al. (2010) show that the existence of PTAsbetweendevelopedanddeveloping countries (North-South agreements) hurts trade between developingcountries(South-Southtrade)andimpedesdevelopingcountries’attemptstodiversifyintonewmarkets.

ChenandMattoo (2008)estimateagravitymodelofbilateral trade of 28 OECD countries and 14 non-OECDcountriesat the three-digitSITCproduct level.Theiranalysisindicatesiftwocountrieshavesignedamutual recognition agreement (MRA) for a certainsector and the number of harmonization directivesbetweenthetwocountriesforaproduct.TheanalysisalsoindicateswhetherMRAsincluderulesoforigin.

ChenandMattoofindthatharmonizationagreementscanincreasetradebetweenparticipatingcountriesbutwillnotnecessarilyincreasetradewithothercountries.In particular, they find that harmonization increasesexports from developed countries outside the region,but it reduces exports from developing countriesoutsidetheregion.MRAstendtoincreasetradewithinthe region. MRAs also increase trade with countriesoutsidetheregioniftheyarenotassociatedwithrulesof origin. However, when the MRAs contain rules oforigin, trade with countries outside the region isnegativelyaffected,especiallyexportsfromdevelopingcountries.

Finally, focusing on two sectors, telecommunicationsequipment and medical devices, Baller (2007)examines the impact of MRAs and harmonizationagreements on bilateral trade among 26 OECDcountries and 22 non-OECD countries.49 Her resultsindicatethatwhileMRAsincreaseboththeprobabilityof entering a new market (the extensive margin oftrade)and thevolumeof trade (the intensivemargin),harmonizationofstandardsortechnicalregulationhasambiguouseffects.LikeChenandMattoo(2008),herfindingssuggestthatregionalharmonizationincreasestradewithdevelopedcountriesbuthinders tradewithdevelopingcountries.

Thereisnoempiricalanalysisthatlooksspecificallyatthe discriminatory effects of MRAs concerningdomestic regulation in services. The few empiricalstudiesontradediversionintheservicessector50usedummy variables indicating the existence of apreferential trade agreement between two givencountries.Suchvariablesdonotallowustodistinguishbetween market access and national treatmentcommitments (i.e. the principle of giving others thesame treatment as one’s own nationals), on the onehand, and mutual recognition of standards andrequirements,ontheotherhand.

As argued by Fink and Jansen (2009), the scope fordiscriminationislikelytobelimitedbytwofactors.OneisthatMRAs tend toapplymostly to restrictions relevantformode4movements,amodeoftradethatevenattheregionallevelhasnotbenefitedfromsignificantlevelsoftrade opening. The other factor is that MRAs tend toapply to only a small number of professional servicessectors,notablyaccounting,architectsandengineering,andonly a fewMRAs featureautomatic recognitionofqualifications(OECD,2003).

Tosumup,evidencesuggeststhatregionalintegrationof TBT/SPS measures has trade-diverting effects,especially to the detriment of developing countries.Thisfinding isconsistentwith theevidencethatdeeppreferentialtradeagreementsintheareaofTBT/SPSmeasures are more likely among countries with ahigher and more similar level of income. This findingalso highlights the risk that regional integration onTBT/SPS measures may lead to a multi-tiered worldwherecertaindevelopingcountriesaremarginalized.

4. Conclusions

The trade literature estimates the degree ofrestrictiveness of non-tariff measures and servicesmeasuresbyestimatingan“ad-valoremtariffequivalent(AVE)”, i.e. the level of an ad-valorem tariff that wouldhaveanequallytrade-restrictingeffectasthemeasuresatissue.TheuseofAVEstomeasurethetradeimpactof NTMs, however, presents conceptual andmethodologicallimitations.Forexample,theequivalenceof tariffs and quotas breaks down in the presence ofmarket uncertainty, or when NTMs take the form offixedmarketentrycosts,suchasthoseassociatedwithmeetingcertaintechnicalrequirements.

AVEs do not adequately capture the trade-restrictiveimpact of certain non-tariff measures when theproduction process is fragmented across countriesbecause they fail to take intoaccount thecumulativeeffect of measures along the production chain.Additionally, in the case of services measures, theestimated AVEs neither account for the possiblesubstitutionbetweendifferentmodesofsupplynorforthe complementarity between trade in services andtradeingoods.

Notwithstanding these limitations, existing empiricalevidence suggests that non-tariff measures andservices measures can significantly restrict trade. Inparticular,NTMscanbeastrade-restrictiveastariffs,and even more so in the case of certain high- andmiddle-income countries. In the case of servicesmeasures, while restrictions to trade are generallyhigher in developing countries than in developedcountries, they do not appear to be systematicallyassociatedwithacountry’slevelofdevelopment.

Acomparativeanalysisoftherolethatvarioustypesofnon-tariff measures play in the overall level of NTM


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restrictivenessdoesnotexist.However,itisclearthattheimpactontradeisnotnecessarilyrestrictiveforallmeasures.TBT/SPSmeasuresdonotunambiguouslyincrease or decrease trade. In general, TBT/SPSmeasures have positive effects for moretechnologicallyadvancedsectors,butnegativeeffectson trade in freshandprocessedgoods.Aseconomictheory suggests, the introduction of a new TBT/SPSmeasure yields a trade-off between higher costs ofadaptation to new requirements for producers andlower information costs for consumers, who can beconfidentaboutthequalityoftheproductinquestion.The prevalence of a positive effect of TBT/SPSmeasures on manufacturing goods may suggest thatinformation costs are more important or adaptationcostslowerinthesesectorsthaninnon-manufacturingsectors.

WhenTBT/SPSmeasureshaveanegativeeffect,theimpact tends to be greatest for developing-countryexports. There is also evidence that TBT/SPSmeasures have a more negative impact on trade infood and agriculture – mainly because of the costsassociatedwithconformityassessmentprocedures.Inaddition, TBT/SPS measures appear to reduce thelikelihoodofexportmarketdiversification.Smallfirms–andfirmsthatoutsourcetheir intermediateinputs–appeartobemostaffectedbyTBT/SPSmeasures.

Harmonization and mutual recognition of standardsare ways in which any negative effects of TBT/SPSmeasurescanbemitigated.Harmonizationisshowntoenhance the presence of small and medium-sizedfirms in export markets. However, if harmonization ormutual recognition occurs within regional tradeagreements, there may be significant trade-divertingeffects on countries outside the agreement. Thisappears to be especially the case for developingcountries. Furthermore, as stressed in last year’sWorldTradeReport,thereisariskofa“lock-in”effect,wherebytheregionalharmonizationofstandardsmayreduce incentives for further trade opening. There isalsoariskofamulti-tieredregulatoryworldemerging,inwhichdevelopingcountriesaremarginalized.

The economics literature on domestic regulationrelatedtoqualificationandlicensingrequirementsandprocedures and technical standards is extremelylimited. Most studies look at a much wider set ofservicesmeasuresandare, therefore,not informativefor this report. In relation to the financial servicessector, the existing literature finds that regulationaimed at ensuring appropriate standards (such asaccounting standards and financial statementtransparency) is positively associated with cross-bordertradeandforeigndirectinvestmentinfinancialservices. As with TBT/SPS measures, there is alsosome evidence that a reduction in policy diversity,carriedoutthroughmutualrecognitionorconvergenceof international standards, has increased servicestrade.

Regardlessoftheirobjective,TBT/SPSmeasuresanddomesticregulationinservicesmayormaynotreducetrade. Negative trade effects, when they exist,generate negative spillovers across countries. Thisprovides a rationale for international cooperation.Harmonizationandmutual recognitionhelp to reducethe undesired negative trade effects of legitimatepublicpolicy.However, bothapproacheshighlight theneed for capacity building to address regulatorychallengesindevelopingcountries.

The costs related to compliance and conformityassessment impinge particularly on developingcountries. This is because they lack the technicalinfrastructure necessary to effectively develop anddesigntechnical regulation,standardsandconformityassessment procedures. Also, they lack thelaboratoriesandaccreditedcertificationbodiestotestandcertifycompliancewithacertainstandard.TheseissuesarethefocusofSectionE.


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1 Thissectiononlyfocusesondomesticregulationmeasuresrelatingtoqualificationandlicensingrequirementsandprocedures,andtechnicalstandards.ThisnarrowsetofmeasuresistheequivalentinservicesofTBT/SPSmeasuresingoods.

2 TheagriculturalsectormayalsobesubjecttocoreNTMs.

3 ItisworthnotingthattheseAVEswereconstrainedtobetradeimpedingthroughanexponentialtransformationintheestimatedequation.ThistakesawayfromthefactthatNTMsmayactuallyenhancetradeattimes.

4 SeeBoxD.1foradescriptionoftheTTRIandOTRI.

5 Thisassumesperfectinformation.If,forexample,qualitydifferencesbetweenproductsaresignalledbytechnicalregulations,suchNTMscouldlowerpricesandincreasetrade.

6 SeeBoxD.1foradescriptionofthemarketaccessversionsoftheTTRIandOTRI.

7 AsexplainedinBoxD.1,thisisameasureoftherestrictivenessfacedbyexporters.

8 ThisfollowsaWorldBankclassificationofthesecountriesaccordingtodatain2001.

9 Usingthe“pricegap”methodtoestimatetheimpactofNTMsontrade,Bradford(2003)findstheAVEsofNTMstobeofthesameorderofmagnitudeforasampleofdevelopedcountries,therebyreinforcingtheresultsofKeeetal.(2009).However,theformer’sestimatesaredistinctlyhigherbecausethestudyusesthe“pricegap”method–AVEsaremeasuredasthedifferencebetweenimportandretailprices,aftercorrectingfortransportanddistributioncosts,andhenceincludemorepolicyrestrictionsintheirdefinitionofNTMs(Keeetal.,2009).Atthesametime,itispossiblethatforcertainNTMs,quantity-basedeconometricmethodsgivebiasedestimates.InthecaseofTBTandSPSmeasures,forinstance,ifcompliancecostsarepassedontounitvalues,regressingthevalueofimportsonameasureofNTMswillunderestimatetheirtradeimpact.Similarly,ifthereismarketpowerintheimportingcountry,thedomesticpricewillrisebymorewithaquantitativerestriction(QR)thanatariffreducingimportsbythesameamount.Hence,theAVEofaQR,derivedfromaquantity-basedestimation,wouldbeunderestimated.

10 RegressingthenaturallogarithmoftheAVEofNTMsin2001onthelevelofGDPpercapitain2001,wefoundap-valueof0.133.

11 TheestimatedtradeeffectrepresentsthepercentagepremiumonproductsrestrictedbyanNTMinacountryrelativetothepriceofthoseproductsincountrieswithoutNTMs.

12 Thisisdifferentfromtheimplicationof“binding”inalegalsense.ItreferstothefactthatconditionalonpresenceoftariffsandotherNTMs,thetradeeffectofaparticularNTMmaynotbestatisticallysignificantlydifferentfromzero.

13 Eventhelandedduty-paidpricemaycontainwholesaleandretailmarginsbecauseimporters,wholesalers,andretailersmaysharetheNTMrentsamongthemselves,especiallysincelargeretailersareintegratedintotheearlierstagesofthedistributionprocess(Bannister,1994;KrishnaandTan,1992).

14 SeeSectionCforadescriptionofthemethodology.

15 Thefourservicescategoriesaretravel,transport,governmentandcommercialservices.

16 Transport,travel,communicationsservices,construction,insurance,financialservices,royaltiesandlicencefees,computerandinformationservices,otherbusinessservices,governmentservicesandpersonal,culturalandrecreationalservices.

17 Fordevelopedcountries,asmuchasthree-quartersofservicestradeisinintermediateinputs(Miroudotetal.,2009).

18 Manufacturersmaychoosetoexportdirectlyorthroughintermediarieswhomovegoodsthroughwholesaleandretaildistributionnetworks.Ahnetal.(2011)showthattheshareofexportthroughintermediariesispositivelycorrelatedwiththedifficultyofaccessingdestinationmarkets.Thisisbecausewhenbarrierstotradearelarge,relativelysmallandlessproductiveexportersuseintermediariestoexport.

19 AccordingtoBernardetal.(2011),however,therearelargevariationsintheimportanceofintermediariesacrosscountries(andproducts).

20 Multinationalretailersalsotendtosourcetheirprivatelabelsfromdevelopingcountries(Nordås,2008)andtherearecaseswheretheyhaveprovidedthescaleandstabilityofdemandnecessaryfordevelopingcountryfarmerstoinvestinmodernproductiontechnology(DolanandHumphrey,2010).

21 Thetradeeffectsofregulatoryheterogeneity(withafocusonTBT/SPSmeasuresanddomesticregulationinservices)arefurtheranalysedinSectionD.3.

22 Perinormcontainsinformationonallstandardsdevelopedinthe21countriescovered,includinginformationontherelationshipamongstandardsoriginatedindifferentcountries.Thisinformationdefineswhethertwostandardsareidentical,equivalentornon-equivalent,onthebasisofISO/IECGuide21.

23 ThereisalargeliteraturethatstudiestheeffectofregulationinservicesontradeusingProductMarketRegulation(PMR)indicators.SeeforinstanceNicolettiandMirza(2004),Lennonetal.(2009)andSchwellnus(2007).Ingeneralthisliteratureestimatesanegativeeffectofregulationonservicestrade.However,PMRcoversarangeofmeasuresthatgoesbeyonddomesticregulationasofGATSArticleVI.4.Therefore,theyarenottakenintoaccountinthisreview.ThesameissuepertainsalsotootherstudiessuchasNicolettietal.(2003)thatusetheindexofnon-manufacturingregulations(NMR)andKimuraandLee(2006)thatusean“EconomicFreedomoftheWorld”(EFW)indicator.

24 TheAnnexonFinancialServicesintheGATSexplicitlyallowscountriestotakeprudentialmeasurestoprotectinvestorsanddepositorsandtoensuretheintegrityandstabilityofthefinancialsystem.TheanalysisofKoxandNordås(2007)showsthatmostsuchmeasureshaveapositiveeffectonservicestrade.Thiseffectislargerforregulationintheexportingcountrythanforregulationintheimportingcountry.

Endnotes


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25 GravitymodelsareeconometricmodelsoftradewhichacquiretheirnamefromtheirsimilaritytoNewton’stheoryofgravitation.Thegravitymodeloftradepredictsthatthevolumeoftradebetweenanytwocountrieswillbepositivelyrelatedtothesizeoftheireconomies(usuallyGDP)andinverselyrelatedtothedistance(andothermeasuresoftradecosts)betweenthem.

26 See,forexample,OECD(1999);Otsukietal.(2001);WilsonandOtsuki(2004);Gebrehiwetetal.(2007);andDisdieretal.(2008a).

27 HACCPisafoodsafetyandqualitymanagementsystemthatinvolvesmonitoring,verifyingandvalidatingcompliancewithregulatoryrequirementsinallstagesofproductionatalltimes.

28 Fixedcostsareindependentoftheamountproducedorexported,whilevariablecostsincreasewiththelevelofproductionorexports.

29 Forareviewofthetheoreticalliteratureonheterogeneousfirms,seeHelpman(2011)andRedding(2010).

30 DetailsofthisanalysiscanbefoundinFontagnéetal.(2012).

31 Foradescriptionofthisdatabase,seeSectionC.

32 MeasuresnotifiedatWTOorPerinorm.

33 SeeSectionC.1foradiscussiononavailabledatasets.

34 FrenchCustomdatacontainfirm-leveldataonannualshipmentsbyallexportingFrenchfirmsintheperiod1995-2005toallpartnercountriesaroundtheworld.WethankCEPIIforprovidingaccesstothesedata.

35 Theestimatedequationis:

29

20 Multinational retailers also tend to source their private labels from developing countries (Nordås, 2008) and there are cases where they have provided the scale and stability of demand necessary for developing country farmers to invest in modern production technology (Dolan and Humphrey, 2010). 21 The trade effects of regulatory heterogeneity (with a focus on TBT/SPS measures and domestic regulation in services) are further analysed in Section D.3. 22 Perinorm contains information on all standards developed in the 21 countries covered, including information on the relationship among standards originated in different countries. This information defines whether two standards are identical, equivalent or non-equivalent, on the basis of ISO/IEC Guide 21. 23 There is a large literature that studies the effect of regulation in services on trade using Product Market Regulation (PMR) indicators. See for instance Nicoletti and Mirza (2004), Lennon et al. (2009) and Schwellnus (2007). In general this literature estimates a negative effect of regulation on services trade. However, PMR covers a range of measures that goes beyond domestic regulation as of GATS Article VI.4. Therefore, they are not taken into account in this review. The same issue pertains also to other studies such as Nicoletti et al. (2003) that use the index of non-manufacturing regulations (NMR) and Kimura and Lee (2006) that use an “Economic Freedom of the World” (EFW) indicator. 24 The Annex on Financial Services in the GATS explicitly allows countries to take prudential measures to protect investors and depositors and to ensure the integrity and stability of the financial system. The analysis of Kox and Nordås (2007) shows that most such measures have a positive effect on services trade. This effect is larger for regulation in the exporting country than for regulation in the importing country. 25 Gravity models are econometric models of trade which acquire their name from their similarity to Newton’s theory of gravitation. The gravity model of trade predicts that the volume of trade between any two countries will be positively related to the size of their economies (usually GDP) and inversely related to the distance (and other measures of trade costs) between them. 26 See Box D.4. 27 See, for example, OECD, 1999; Otsuki et al., 2001; Wilson and Otsuki, 2004; Gebrehiwet et al., 2007; and Disdier et al., 2008a. 28 HACCP is a food safety and quality management system that involves monitoring, verifying and validating compliance with regulatory requirements in all stages of production at all times. 29 Fixed costs are independent of the amount produced or exported, while variable costs increase with the level of production or exports. 30 For a review of the theoretical literature on heterogeneous firms, see Helpman (2011) and Redding (2010). 31 Details of this analysis can be found in Fontagné et al. (2012). 32 For a description of this database, see Section C. 33 Measures notified at WTO or Perinorm. 34 See Section C.1 for a discussion on available datasets. 35 French Custom data contain firm-level data on annual shipments by all exporting French firms in the period 1995-2005 to all partner countries around the world. We thank CEPII for providing access to these data. 36 The estimated equation is:

y!,!,! = β!STC!,!,! + D! + D! + D! + D!,! + D!,! + ε!,!,!, where subscripts s, ii) the average value exported by firms, (iii) the number of new firms, (iv) the total number of exporters. The explanatory variable STC is: (i) a dummy variable equal to one if a specific trade concern was raised by France against an SPS or a TBT measure to be adopted in an export market, (ii) the frequency ratio of the number of HS4 sectors affected by the measure within each HS2 sector and the number of HS4 sectors in that HS2. Explanatory variables are lagged one year to capture the possibility that the measure related to a specific trade concern can affect trade with a

wheresubscriptss,dandtindicatesector,destinationcountryandyear.yisinturn:(i)theaveragenumberofvarietiesexportedbyfirms,(ii)theaveragevalueexportedbyfirms,(iii)thenumberofnewfirms,(iv)thetotalnumberofexporters.TheexplanatoryvariableSTCis:(i)adummyvariableequaltooneifaspecifictradeconcernwasraisedbyFranceagainstanSPSoraTBTmeasuretobeadoptedinanexportmarket,(ii)thefrequencyratioofthenumberofHS4sectorsaffectedbythemeasurewithineachHS2sectorandthenumberofHS4sectorsinthatHS2.Explanatoryvariablesarelaggedoneyeartocapturethepossibilitythatthemeasurerelatedtoaspecifictradeconcerncanaffecttradewithadelay.Infact,STCsmayrelatetodraftmeasuresnotyetinforce.Fixedeffectsincludedintheregressionaddresstheomittedvariableproblembycontrollingforalldestination-timespecificvariables(suchasincomeandalldemandsidevariablesindestinationcountries)andsector-timespecificaspects(suchassectoralproductivityshocks).

36 Itisuncleartowhatextentaproblemofself-selectionmaybiastheseresults.

37 Inawidersense,italsoincludestheareaofmetrology,whichisanimportantprerequisiteforconformityassessmentandaccreditation(theevaluationofthecompetenceofanyinstitutioninvolvedinconformityassessment).

38 Forthisreason,governmentsencouragecooperationbetweenconformityassessmentbodiesandsometimesareactivelyinvolvedinmutualrecognitionagreements(MRAs).

39 DetailsofthisstudycanbefoundinCrivelliandGröschl(2012).ThestudyusesaHeckmanmodeltoestimatetheresults.Theyestimateaprobitbinarychoicemodeloftheform

Little is known about the impact of conformity assessment procedures on trade. Focusing on a sample of developing countries, a study by Chen et al. (2006) claims that conformity assessment issues significantly impede trade. On the basis of firm-level survey data, they find that firms answering “yes” to the questions “Have testing procedures impacted your ability to export products?” and “Do you have difficulty obtaining information about applicable regulations in the countries listed?” also have a significantly lower propensity to export. They also find that testing procedures are particularly burdensome for agricultural firms. In all likelihood, the impact of conformity assessment procedures on trade varies across sectors. The OECD (1999) survey stresses that even the nature of conformity assessment costs varies by product according to their technical characteristics. Terminal telecommunications equipment and automotive components, for example, require an initial approval of the product before it can be exported. In the case of dairy products, each individual consignment must be tested both prior to export and/or at the port of entry. Thus conformity assessment procedures are a fixed cost of exporting telecommunications equipment and automotive component markets – borne in advance. On the other hand, they are a variable cost for dairy exports. A study by Schlueter et al. (2009) looks at trade effects of different types of SPS measures imposed on meat products. After grouping 21 types of measures in six classes, they find that whereas disease-prevention measures, tolerance limits for residues and contaminants, and conformity assessment and information requirements increase trade, production-process requirements and requirements for handling of meat after slaughtering restrict trade. The paper by Fassarella et al. (2011) looks at the impact of SPS and TBT measures on exports of poultry meat by Brazilian exporters to the main world importers in the period 1996 to 2009. They find that the impact of aggregated TBT and SPS measures on Brazilian poultry meat exports are insignificant. However, when measures are disaggregated, conformity assessment has a negative and significant impact on the volume of Brazilian poultry meat exports, while packaging and labelling requirements, and/or disease-prevention measures (regionalization or quarantine treatment) have a positive and significant impact on the volume of Brazilian poultry meat exports. This report attempts to assess the importance of conformity assessment requirements relative to product-characteristics regulations on overall food and agricultural trade.1 Relying on the database on specific trade concerns regarding SPS measures described in Section C, the analysis distinguishes between concerns related to conformity assessment (such as certificate requirements, testing, inspection, and approval procedures) as set out in Annex C of the SPS Agreement, and concerns related to other issues (such as requirements on disease treatment, maximum residual levels, or the geographical application of the measure). The impact of these two types of concerns on the

1 Details of this study can be found in Crivelli and Gröschl (2012). The study uses a Heckman

model to estimate the results. They estimate a probit binary choice model of the form Pr import!"#$%& > 0 = 𝛟𝛟(α! + α!SPS!" !!! !"# + α!𝐗𝐗𝐢𝐢𝐢𝐢𝐢𝐢 + D! + D! + D! + D!"# + ε!"#$%&),

where ϕ (•) is a standard normal distribution function. And an outcome equation of the form

ln import!"#$%&|import!"#$%& > 0 = α! + α!SPS!" !!! !"# + α!𝐗𝐗𝐢𝐢𝐢𝐢𝐢𝐢 + α!λ(𝛂𝛂) + D! + D! + D! + D!"# + ε!"#$%&,

where D denotes dummy variables and X is a vector of standards gravity control variables and multilateral resistance terms and λ(𝛂𝛂) is the inverse mills ratio.







whereϕ(•)isastandardnormaldistributionfunction,andanoutcomeequationoftheform













whereDdenotesdummyvariablesandXisavectorofstandardsgravitycontrolvariablesandmultilateralresistancetermsandλ(α)istheinversemillsratio.

40 ThisisthecountofthenumberofSPSmeasuresinplaceonHS4productlineswithinanHS2sectordividedbythenumberofproductswithinanHS2sector.

41 ThislastresultisincontrastwiththefindingofFontagnéetal.(2012)discussedabovethatexportsofFrenchfirmsarenegativelyaffectedbyTBT/SPSmeasuresonwhichspecifictradeconcernshavebeenraised.ThismaybeduetothefactthatCrivelliandGröschl(2012)’ssampleincludesdevelopingcountries.Forthesecountries,thepositivedemandeffectsofSPS/TBTmeasuresarelikelytobemorerelevantthanforFrenchexporters.

42 SimilarresultsarefoundinDeFrahanandVancauteren(2006)forfoodproducts.

43 DefinedasthenumberofCENELECstandardsthatarenotidenticaltoanexistingIECstandardoverthetotalnumberofstandardsineachSIC4industry.

44 Aproductiontechnologyischaracterizedbyincreasingreturnstoscalewhenaveragecostsfallasthelevelofproductionincreases.

45 Policyheterogeneityisconsideredasafixedsunkcost.Duetoitsfixedcostnature,policyheterogeneityhastwoeffectsonthelevelofbilateralservicestrade.First,itreducesthenumberofexportingfirms.Secondly,itincreasestheaveragesizeoftheexportingfirms.InthetheoreticalframeworkofKoxandLejour(2005),thefirsteffectdominates.Therefore,thelevelofbilateralexportsisnegativelyrelatedtothedegreeofbilateralpolicyheterogeneity.

46 AsarguedbyFinkandJansen(2009),mutualrecognitioninthecontextofservicescancoverawiderangeofpracticesincludingrecognitionofprudentialregulationsunderfinancialservices(tofacilitatemode3),recognitionofeducationalqualificationswithaviewtoenrolmentinhighereducationorfurthertraining(tofacilitatemode2),aswellasrecognitionofprofessionalqualifications(tofacilitatemode4).

47 The“countryoforiginprinciple”(CoOP)wasakeyelementintheoriginalproposalbytheEuropeanCommission.Accordingtothisprinciple,operatorsprovidingcross-borderservicesintoanothermemberstatewithoutestablishingtherepermanentlywouldberequiredtorespectonlytherulesandregulationsoftheircountryofestablishment,withoutbeingsubjecttoothermemberstates’ruleseachtimetheycrossedaborder.TheCoOPinfactwouldhaveappliedmutualrecognitionofregulatorystandardsbetweenEUmemberstates(withsomelimitations).However,theamendedServicesDirectiveadoptedbytheEuropeanParliamentandtheCouncilattheendof2006excludedtheCoOP,whichhadcomeunderfirebecauseoffearsofsocialdumping.Asfarasdomesticregulationisconcerned,theServicesDirectiveprovidesforthesimplificationofqualificationandlicensingrequirementsandprocedures.


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48 OtherstudiessuchasKoxandLejour(2005)andKoxandNordås(2007)alsoattempttoestimatehowanynegativeeffectofburdensomeregulationonservicestradecanbereducedthroughharmonizationormutualrecognition.However,theyuseindicatorsofregulatoryheterogeneitybasedonthePMRdata,measuringheterogeneityinamuchwidersetofmeasuresthanjustdomesticregulationcoveredinthisreport.

49 Baller(2007)’sdatabasecontainsinformationoneightMRAsrelevanttomedicaldevicesand14MRAsrelevanttotelecommunicationsequipment.Italsocontainsinformationon22EUharmonizationagreementsand19ASEANharmonizationagreements.

50 ParkandPark(2011)applyagravityregressionanalysistofourmajorservicessectors–financial,business,communicationsandtransportationservices.TheyfindthatthePTAscreateservicestradeamongmembersanddonotdivertservicestradefromnon-members.VanderMarelandShepherd(2011)findevidencethatfromanumberofsectors–transport,communications,businessservices,finance,andtradeservices–PTAsarenotonlytradecreatingbetweenmembercountries,butalsowithrespecttonon-members.FrancoisandHoekman(2010)istheonlystudythatisolatespossibletradediversioneffectsinservices,inparticularwithintheEuropeanUnion.Inthiscase,evidenceoftradediversionisfoundonlyforbusinessandinformaticsandtelecomsservices,wheretheyestimatea13.3percentincreaseintradevolumeswithintheEUrelativetothirdcountries.


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AppendixTableD.1:Effects of SPS measures on export performances by firm

Dependentvariables

Lnn.ofvarietiesexportedbyfirms

Lnn.ofvarietiesexportedbyfirms

Lnexportsvaluebyfirms


Numberofexportingfirms

Numberofentryfirms

OLS OLS OLS OLS Poisson Poisson

(1) (2) (3) (4) (5) (6)

SPSd,s,t-1 -0.130*** -0.725*** 0.065

(0.021) (0.106) (0.314)

SPSFreqd,s,t-1 -0.167*** -0.910*** -0.166

(0.036) (0.197) (0.671)

Observations 86850 86850 86850 86850 86850 86850

R-squared 0.343 0.343 0.425 0.425 - -

Note: The variable SPS denotes a dummy for the existence of a measure (against which a concern was raised) in the sector. The variableSPSFreqisacountoftheconcernsraisednormalizedbythenumberofproducts(HS4)withinanHS2sector.Resultsareobtainedusingone-year lagexplanatoryvariables(aggregateestimationatHS2 level, thesample includesonlyfirmsexportingforat leastfiveyearsduringtheperiod1995-2005).All regressions include time,sector,destinationcountry, time-sectorand time-destinationcountryfixedeffects.Robuststandarderrorsinparentheses.***indicatesasignificancelevelof1percent.

Source:Authors’calculationsusingthedatabasefromFontagnéetal.(2012).

Appendix d.1


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AppendixTableD.2:Effects of TBT measures on export performances by firm

Dependentvariables

Lnn.ofvarieties

exportedbyfirms

Lnn.ofvarieties

exportedbyfirms



Numberofexportingfirms

Numberofentryfirms

OLS OLS OLS OLS Poisson Poisson

(1) (2) (3) (4) (5) (6)

TBTd,s,t-1 -0.065*** -0.661*** -0.193

(0.018) (0.098) (0.319)

TBTFreqd,s,t-1 -0.062*** -0.876*** -0.217

(0.023) (0.133) (0.503)

Observations 86850 86850 86850 86850 86850 86850

R-squared 0.342 0.342 0.425 0.425 - -

Note: The variable TBT denotes a dummy for the existence of a measure (against which a concern was raised) in the sector. The variableTBTFreqisacountoftheconcernsraisednormalizedbythenumberofproducts(HS4)withinanHS2sector.Resultsareobtainedusingone-year lagexplanatoryvariables(aggregateestimationatHS2 level, thesample includesonlyfirmsexportingforat leastfiveyearsduringtheperiod1995-2005).All regressions include time, sector,destinationcountry, time-sectorand time-destinationcountryfixedeffects.Robuststandarderrorsinparentheses.***indicatesasignificancelevelof1percent.

Source:Authors’calculationsusingthedatabasefromFontagnéetal.(2012).

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D. THE TRADE EFFECTS OF NON-TARIFF MEASURES AND SERVICES MEASURES

AppendixTableD.3:Impact of SPS measures on agricultural and food trade, 1996-2010

SPSVariable: SPSFreqij(t-1)HS2 SPSij(t-1)HS4

DependentVariable: Pr(importijtHS4) ln(importijtHS4) Pr(importijtHS4) ln(importijtHS4) Pr(importijtHS4) ln(importijtHS4) Pr(importijtHS4) ln(importijtHS4)

(1) (2) (3) (4) (5) (6) (7) (8)

SPSmeasureij(t-1)HS4 -0.160*** 0.641*** -0.144*** 0.661***

(0.06) (0.15) (0.05) (0.14)

SPSConformityij(t-1)HS4 -0.309*** -0.473* -0.270*** -0.406*

(0.08) (0.28) (0.07) (0.23)

SPSCharacteristicij(t-1)HS4 0.019 0.988*** 0.012 0.962***

(0.07) (0.24) (0.06) (0.19)

Controls YES YES YES YES YES YES YES YES

FixedEffects YES YES YES YES YES YES YES YES

Estimatedcorrelation(rho)0.461 0.508 0.460 0.460

(0.01) (0.01) (0.01) (0.01)

Estimatedselection(lambda)1.372 1.091 1.370 1.371

(0.04) (0.04) (0.04) (0.04)

Logpseudolikelihood -7773030 -7772832 -7772958 -9756160

WaldChi2 49855.54 49752.98 49914.95 49838.46

Observations 5,452,530 5,452,530 5,452,530 5,452,530

Note:EstimationmethodistheHeckmanSelectionModel(maximumlikelihood).SPSFreqisacountoftheconcernsraisednormalizedbythenumberofproducts(HS4)withinanHS2sector(resultsusingthesevariablesarereportedincolumns(1)to(4)).SPSdenotesadummyfortheexistenceofameasure(againstwhichaconcernwasraised)inthesector(resultsreportedusingthisvariablearereportedincolumns(5)to(8)).ControlsincludethelogoftheproductofGDPs,thelogoftheproductofpopulations,thelogofdistance,adjacency,commonlanguageandcolonialheritage.Commonreligionistheselectionvariableinthefirststageestimation.Importer,exporter,HS4product,yearfixedeffects,andmultilateralresistance(MR)termsàlaBaierandBergstrand(2009)areincludedinallregressions.Standarderrorsinparentheses.***,*indicateasignificancelevelof1and10percent,respectively.

Source:CrivelliandGröschl(2012).


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The focus of this section is international cooperation on non-tariff measures (NTMs) and services measures. The section first reviews the economic rationale for such cooperation in the context of trade agreements. It then looks at the practice of cooperation in the areas of technical barriers to trade (TBT), sanitary and phytosanitary (SPS) measures and domestic regulation in services. The third part deals with the legal analysis of the treatment of NTMs in the GATT/WTO system and the interpretation of the rules that has emerged in recent international trade disputes. The section concludes with a discussion of the challenges of adapting the WTO to a world where NTMs are a growing concern.

e. International cooperation on non-tariff measures in a globalized world


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Contents 1 TheregulationofNTMsintradeagreements 162

2 Cooperationinspecificpolicyareas:TBT/SPSandservicesmeasures 176

3 GATT/WTOdisciplinesonNTMsasinterpretedindisputesettlement 187

4 AdaptingtheWTOtoaworldbeyondtariffs 203

5 Conclusions 216


• WTO rules help to deal with the problem of countries replacing

tariffs with non-tariff measures, but the changing nature of trade

creates new complexities that call for deeper forms of institutional

integration.

• Countries cooperate on TBT/SPS measures and domestic regulation

in services to address information problems and to complement

market access commitments.

• Distinguishing legitimate NTMs from measures designed for

protectionist purposes has been the key issue in GATT/WTO dispute

settlement concerning NTMs and in establishing new disciplines

for domestic regulation in services.

• The tension between economic analysis and legal practice can

inform future efforts to address NTMs in the WTO system in an

evolving trading environment.


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Thissectionbeginsbyreviewingtheeconomicreasonsforinternationalcooperationonnon-tariffmeasuresinthe context of trade agreements. This theoreticalapproach provides a framework for considering theefficientdesignofrulesonNTMsinatradeagreementandhowtheymaybeaffectedbydiversefactors,suchas the development of global production chains andtheopaquenatureof variousNTMs.ThesecondpartlooksathowcooperationonNTMshastakenplaceinthe multilateral trading system and within otherinternational fora and institutions. Specifically, thefocus ison technicalbarriers to trade (TBT), sanitaryand phytosanitary (SPS) measures (regarding foodsafety and animal and plant health) and servicesregulation, stressing the similarities and thepeculiarities of the underlying problems and of thewaysinwhichcooperationhastakenplace.

The third part of the section deals with the legalanalysisofthetreatmentofnon-tariffmeasuresintheGATT/WTOsystemandtheinterpretationoftherulesthat have emerged in recent international tradedisputes. Special attention is given to how theagreements and the dispute settlement system havedealt with the distinction between legitimate andprotectionist NTMs. The section concludes with adiscussionofthechallengesofadaptingtheWTOtoaworld where non-tariff measures are a growingconcern.Thisbringstogetherthemaininsightsoftheprecedinganalysisofthetheory,evidenceandevolvingpracticesofNTMscontained inthedifferentsectionsoftheReport,andofferssomepolicyobservations.

1. TheregulationofNTMsintradeagreements

Whydocountriescooperateontrade?Why is thereaneed for cooperation on non-tariff measures? HowshouldNTMsberegulatedinatradeagreement?Thissection anchors the discussion of internationalcooperationonNTMs inatheoretical framework.Thefollowing section provides a specific focus on threerelevant policy areas: TBT measures, SPS measuresand services measures, particularly with respect todomesticregulation.

SectionE.1firstreviewsthetwomaintheoriesoftradeagreements: the terms-of-trade approach and thecommitment approach (see below). These theoriesprovide a rationale for trade cooperation and offer aframeworkforconsideringtheroleanddesignofNTMregulation in a trade agreement, such as the WTO’sagreements.

Asdiscussed inmoredetailbelow, theterms-of-tradeapproach has a simple and powerful result. Ifgovernmentssetpolicytomeettheirobjectivesinthemost efficient way possible, they would not choosenon-tariff measures to distort international trade intheirfavour.Tariffswouldbetheonlypolicyinstrument

involved.Inthisbasictheoreticalsetting,governmentssetNTMstoaddresslegitimatepublicpolicyconcerns,andrulesonNTMsinatradeagreementonlyneedtoaddresspotential “policysubstitution”between tariffsand non-tariff measures (see Section B). Efficiencycan be obtained with a simple set of rules, such asnational treatment and non-violation (see SectionE.1(b) below). This set of rules leaves substantialautonomy to national governments in setting NTMs(“shallow”integration).

Whilecertainfeaturesoftradeagreementscorrespondtothebasicpredictionoftheterms-of-tradeapproach,actualcooperationonnon-tariffmeasuresintheWTOandotherarrangements(particularlypreferentialtradeagreements) goes generally beyond a “shallow” level,encompassing “deep” forms of integration. Thissuggests that governments may be trying to addressproblems beyond substitution between tariffs andNTMs.Whataretheseproblems?

SectionE.1reviewssomeoftheseadditionalrationalesfor cooperation on non-tariff measures. A firstexplanation may be provided by the commitmentapproach. In that framework, it can be shown thatcertain features of WTO rules on NTMs can bejustifiedwhengovernmentssuffercredibilityproblemsvis-à-vis domestic constituencies, such as special-interest groups. Another issue is that the changingnatureofinternationaltradeandtheriseinoffshoringcreatesnewpolicyexternalities thatmayalsopromptdeeperformsofinstitutionalintegrationbeyondsimplemarket preservation rules. Finally, cooperation onNTMsintradeagreementscanbemotivatedbysomeadditional complexities that are not captured by thebasic model, but that may be relevant in practice. AfirstissueisthatseveralNTMsarehighlyopaque.Thissuggeststhatmembercountriesneedtocooperatetoidentifywhatconstituteanefficientandlegitimateuseof NTMs. Another issue is that market actors, ratherthangovernments,cansetde factoNTMsbyadoptingvoluntaryprivatestandards.

Finally, this analysis turns to a consideration of theefficient design of a trade agreement that deals withnon-tariff measures. Specifically, using the terms-of-trade approach as a benchmark, the last sub-sectionevaluates the efficiency of certain GATT/WTOprinciples. While this analysis is by necessityspeculative,itmaybeusefultoinformadiscussiononinstitutional strengths and weaknesses. The sectionconcludeswith adiscussionof the trade-offs impliedby different forms of deep integration, such asharmonizationofstandards.

(a) WhydocountriescooperateonNTMs?

Recent economic literature has developed two maineconomic theories regarding trade agreements: theterms-of-tradetheoryandthecommitmenttheory.Theensuingdiscussionconsiderswhateachtheoryhasto


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say about the treatment of non-tariff measures intrade agreements. The terms-of-trade approach andthe commitment approach argue that governmentsnegotiate international treaties to address certaininternational and domestic externalities associatedwith trade policy. These effects were also touchedupon in Section B. While the two economic theorieswere developed primarily for explaining the use oftariffs,similarmotivesmightapply forcooperationontheuseofNTMs.

The logic of the terms-of-trade and commitmentapproachesdoesnotprovideasatisfactoryexplanationof the economic rationale for services tradeagreements. While some of the insights from thesetheoriesarerelevanttoexplaincertainfeaturesoftheGeneral Agreement on Trade in Services (GATS),economists recognize that there are importantdifferences between trade in goods and trade inservices. A discussion of the current debate oninternational cooperation on services trade iscontainedinBoxE.1.

(i) The terms-of-trade approach

Accordingtotheterms-of-trade(ortraditional)theory,governments are attracted to trade agreements as ameans of escaping from a terms-of-trade drivenPrisoners’ Dilemma (Bagwell and Staiger, 1999,2002), i.e.anon-cooperativesituation in internationaltradepolicy.The“problem” thatarises in theabsenceofatradeagreementcanbeexpressedasfollows.

When a government chooses the level of a tariffunilaterally, or a non-tariff measure that takes theplace of a tariff, it will not consider the welfareconsequences for foreign exporters in its decision.Section B describes how the incentive to use tradepolicy inways thatbenefitdomesticproducersat theexpense of foreign exporters causes governments toimpose high trade restrictions that alter the terms oftrade (i.e. the price of exports relative to imports) totheadvantageof thedomesticeconomy.However,asthis logicapplies toallcountriesandeachoneseekstoraisetariffs,theresult–knownasNashequilibrium–isthatthetermsoftradeareunaffectedoverall,butthevolumeoftradeisinefficientlylow.Thisoutcomeisthewell-knownPrisoners’Dilemma.

Accordingtotheterms-of-tradetheory,thepurposeofatradeagreementistogiveforeignexportersa“voice”in the tariff choices of their trading partners, so thatthrough negotiations they can make their tradingpartners responsive to the costs that these traderestrictions impose on foreign exporters. Inaccomplishing this, a trade agreement based onreciprocity and non-discrimination (the most-favourednation–MFN–clause)naturallyleadstolowertariffsand an expansion of market access to internationallyefficientlevels.

Governments can use non-tariff measures instead oftariffs to alter trading partners’ market access andtherebymanipulatethetermsoftrade(seeSectionB).This indicates that the principal design features oftariff agreements, reciprocity and MFN, can facilitatecooperationonNTMs.However,eveninthecontextofa complex policy environment, there is no need forgovernments to negotiate directly over the levels oftheir NTMs. Rather, in the traditional approach, themain purpose of a trade agreement is to raise tradevolumes without introducing distortions into theunilateral choices of NTMs, such as domesticregulatory and tax policies, as a result of thenegotiatedconstraintsontariffs(BagwellandStaiger,2001; Staiger and Sykes, 2011). Intuitively, a tariff isthefirst-bestinstrumentformanipulatingthetermsoftrade: if governments have both tariffs and NTMs attheirdisposal,theyhavenoreasontousethelattertorestricttrade(Staiger,2012).

The terms-of-trade theory of trade agreementsprovidesstrongsupportfor“shallow”integrationasthemost direct means to solve the policy inefficienciesthatwouldariseintheabsenceofatradeagreement.Negotiations over tariffs alone, coupled with a set ofrules that address the policy substitution problembetweentariffsandnon-tariffmeasures(e.g.a“marketaccesspreservationrule”),canbringgovernmentstoahigher efficiency level (the efficiency frontier). At aconceptual level, this resonates with the approach oftheGeneralAgreementonTariffsandTrade(GATT)todomestic NTMs, whereby negotiations focus on tariffreductions as a means to expand market access.Under this approach, various GATT provisions aremeant to protect the value of negotiated marketaccess agreements against erosion by NTMs. Inaddition,WTOmembersarerequiredtoforgotheuseofquotasandotherquantitative restrictions in favourof tariffs. This institutional solution allows WTOmemberstoachievetheefficientcombinationoftradepolicy and domestic NTMs, even when governmentsfacetheincentiveofusingthesemeasurestoundothemarket access granted to trading partners throughtariffreductions(BagwellandStaiger,2001).

Notwithstanding this important result, two relatedquestions remain open. Are there features of thetreatmentofnon-tariffmeasures intradeagreementsthat thebasic versionof the terms-of-tradeapproachfailstoexplain?Whydogovernmentsoftencooperatespecifically on NTMs in the context of tradeagreements? These questions are addressed in twosteps. First, we introduce an alternative rationale fortrade agreements, the commitment approach, andargue that the treatment of NTMs in treaties mayrespondtotheneedto“buy”crediblecommitmentstoefficient policies. In the following sub-section, wediscussadditionalconcernsrelatingtocooperationonNTMsthatarenotcapturedbythebasicversionoftheterms-of-tradeapproachdiscussedabove.


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BoxE.1: Economic theories of the GATS

Economic analysis of the GATS tends either to emphasize the economic advantages of efficient andliberalized services markets or to use the theories borrowed from trade in goods to explore the logic ofservicestradeopening.Whiletheseapproacheshavegonesomewaytowardsexploringtheroleofservicestrade in the broader economy and identifying the parallels between trade in goods and trade in services,neitherapproachspeaksdirectlytothequestionofinternationalcooperationonservices.

This box first outlines the reasons why the frameworks laid out in Section E.1 are unsatisfactory forcooperationinservices,andsummarizestwoapproachestoexplaininginternationalcooperationonservicestrade. The first argues that services commitments in international trade agreements provide a credibleinstrument for anchoring unilateral policy reforms and limiting policy substitution. The second sees theprocessofservicestradeopeningaspartofgovernmentresponsestochangesinthenatureofproductiontowardsinternationalsupplychains.

The principal argument for applying theories developed for trade policy cooperation in goods to servicestradeistherecognitionthatpolicy-makerscansufferfromthesameincentiveproblemsinbothsectors. Inparticular, the international terms-of-trade theory and the domestic commitment theory may extend toservicesmeasures (CopelandandMattoo,2008).However, thedistinctive featuresof servicesmaymeanthatthetheoriesusedtoexplaintheGATTmaynotbesufficienttoexplaincooperationundertheGATS.Forexample, one of the main modes of services provision is through local establishment or foreign directinvestment. This mitigates the incentive to manipulate international terms of trade because with verticalintegration, international firms partially internalize the foreign costs of trade policy (Blanchard, 2007). Inaddition,MarchettiandMavroidis(2011)suggestthattheGATSisflexibletothepointthatitishardtoarguepersuasivelythatcommitmenttheoryexplainsitsadvent.

Copeland and Mattoo (2008) point to another challenge of applying the terms-of-trade and commitmenttheories to trade agreements in services. Services play an important role in the broader economy bycomplementing outcomes in other markets. For example, a well-functioning financial sector transformssavings into investment and can allocate capital towards higher returns. Transport services reducethe frictions in exchange, facilitating both domestic and international trade. Finally, communicationstechnologydoesnotjustfacilitatetransactionsbutmayleadtothedisseminationandcreationofknowledge(Copeland and Mattoo, 2008). These potential efficiency gains would motivate a government to open upservices markets unilaterally, without the need for international cooperation or a services agreement.

Inadditiontounilateralincentivestoopenupservicesmarkets,technologicalchangeshaveledtoanexpansioninservicestrade,whichitselfleadsgovernmentstoseekmultilateralcommitments.AccordingtoMarchettiandMavroidis(2011),somecountriesworriedthatwhiletheopeningofservicemarketswasprogressingthroughthe1980s,barriers loomedon thehorizon.Specifically, theconcernwas thatservices trade thatwasenabledbytechnologicalchangewouldleadgovernmentstoreplacethelosttechnologicalbarrierswithnewpolicybarrierstoservicestrade,akintopolicysubstitutiondiscussedwithregardstogoods.Thethreatofpolicysubstitutionledthesecountriestoadvocateamechanismtoopeninternationalservicestrade,includingtheGATS.

Ontheotherhand,HoekmanandKostecki(2001)arguethatchangesinthefragmentationoftheproductionled firms to require more access to efficient services inputs, which in turn encouraged governments to putservicestradeopeningontheagenda.Similarly,Deardorff(2001)findsthatbecauseservicesplayanimportantroleinfacilitatinginternationalproduction,openingtradeinservicesincreasesthereturnstotradeopeningingoods.Becauseglobalproductionchainsplayan important role in international trade,enactingprotectionistpoliciesinservicesandinvestmentmayenduprestrictingtradeingoods.Recentworkontheeffectsassociatedwithinternationalproduction(discussedinSectionE.1(b))maythereforeprovideusefulinsights.

Inbrief,currenteconomictheoriesoftheGATSprovideonlyapartialpictureofthecomplexworldofservicesnegotiations.Thisissomehowincontrasttothemoredevelopedframeworkthateconomistsusetoanalyseinternational cooperation on trade in goods. This is an area where more economic research would haveimportantpay-offs.


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(ii) The commitment approach

Thus far, we have described a theory of tradeagreementsthatemphasizesthecontrolofthebeggar-thy-neighbour motives associated with terms-of-trademanipulation.Adistinct,thoughpossiblycomplementary,theoryoftradeagreementspositsthatthepurposeofatrade agreement is to tie the hands of its membergovernments,andtherebyofferanexternalcommitmentdevice. Governments might benefit from a tradeagreement that couldhelp themcommit to apolicyofopen trade as tariffs benefit the protected sector, butcreate distortions that lower aggregate welfare(see Maggi and Rodríguez-Clare, 1998, 2007;Matsuyama,1990;StaigerandTabellini,1987).1

Most research adopting the commitment approach totradeagreementshas focusedon tariffs only, and theimplications of the commitment approach for thetreatmentofnon-tariffmeasuresintradeagreementsislesswellunderstood than in thecaseof the terms-of-trade theory. Two recent papers, however, use thecommitmentapproachtooffer insightsintofeaturesofthe treatmentofNTMs in theGATT/WTOsystem thatcannot be understood through the terms-of-tradeapproach. Brou and Ruta (2009) show that anagreement that allows tariffs to be constrained, butleavesotherNTMssuchasdomesticsubsidiesunboundor open to manipulation, will not provide an effectivecommitmentdevice.Thiswouldallowpolicy-makers tosimplyuseNTMsmore intensivelyonce tariffbindings(i.e.ceilings)havebeennegotiated(aclearexampleofpolicy substitution). In this context, a government isbetter off under an agreement that imposes rules onNTMs because only under a more complete tradeagreement can policy credibility be achieved. Thisapproach, therefore, provides insights into policyprerequisites for handling domestic NTMs, such asdomesticsubsidiesorregulations,intheWTOsystem.

In a similar modelling environment, Potipiti (2006)offers an explanation for the different treatment oftariffs and export subsidies in the WTO. Both tariffsand export subsidies may distort the allocation ofinvestment,whichgeneratesasocialwelfare loss.Ontheotherhand, thegovernmentmaybenefit from thelobbying contributions from the protected import andexport sectors. The rules that the policy-maker willchose to sign in a trade treaty reflect this trade-off.Potipiti (2006) shows that, because of the differentgrowth perspectives of the import and the exportsectors, a government finds it efficient to commit todifferentrulesonexportandimportpolicy.Specifically,ahighergrowthprospectoftheexportsectorrelativetotheimportsectormakeslobbyingcontributionsfromexporters less attractive, while increasing the socialcostofexportsubsidy.Hence,WTOrulesthatbanthelatterbutonlylimittheuseoftariffs,whichisdifficultto explain in the terms-of-trade approach, can beunderstood from the perspective of the commitmenttheory.

(b) WhydocountriescooperateonNTMs?Beyondpolicysubstitution

The previous section emphasized the similaritiesbetween tariffs and non-tariff measures and arguedthat NTMs can be used by governments to take theplace of tariffs. This provided a first rationale for theregulationofnon-tariffmeasuresintradeagreements.ThereplacementoftariffswithNTMs,however, isnottheonlyproblemthattheregulationofNTMsintradeagreementsattemptstoaddress.Thissectionfocusesontheseadditionalconcerns.

Non-tariffmeasuresdifferfromtariffsinseveralways;these differences and the changing nature ofinternational trademayprovideadditional reasons forcooperation on non-tariff measures within tradeagreements. NTMs often address vital domestic andinternational public policy concerns. They may bedirectedatprotectingbroadconsumer interestsmorethan narrow producer concerns. Protecting plant,animal and human health, food safety, and theenvironment,orestablishing thestandardsnecessaryfor fair market exchange are public policy objectives.These objectives, while broadly shared by WTOmembers, often present a wide spectrum of policypreferences. In addition, non-tariff measures andtariffs are different in terms of their longevity. NTMsaresubject tochangebecause regulatoryneedsvaryin line with changes in the economic and socialenvironment. What is the role of the WTO in thiscontext?

This section provides two sets of reasons forincorporating disciplines on non-tariff measures intothe tradesystembeyond thedisciplinesnecessary topreventpolicy substitutionbetween tariffs andNTMs(the next section offers specific examples based onTBT/SPSmeasuresandservicesmeasures).

The first explanation focuses on the differencesbetween tariffs and non-tariff measures and therationalefortheregulationofNTMsthatrelatetothesedifferences. From this point of view, there are threeadditionalconcernsintheregulationofNTMs.Thefirstis the opacity of certain NTMs in terms of intent andeffect.Secondly,NTMsandtariffsaffectcompetitionindifferentways,asanNTMregulationmayincreasefixedcosts and therefore deter market entry. Finally, not allNTMsare imposedbygovernments,andmay take theformofprivatestandards.

Thesecondexplanationconcernsthechangingnatureof international trade. The rise in global productionchainsmaycreatenew formsofpolicy spillovers thatalsorequiredirectcooperationonnon-tariffmeasures.The toolbox to deal with NTMs also depends onwhethertheproblemthatthetradeagreementistryingto solve is tariffs being replaced by NTMs or theseadditional dimensions of cooperation. This issue isaddressedinSectionE.1(c).


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(i) Opaque instruments

SectionsBandCdocumenttherise intheuseofnon-tariffmeasures.Asconcernsaboutfoodsafety,financialstabilityandenvironmentalissuesincrease,governmentswill rely more on NTMs to achieve domestic policyobjectives. The wider use of NTMs, along with thecomplexity and opacity of several non-tariff measures,pose three new and related challenges for domesticregulators and international trade negotiators. First,there can be uncertainty on what constitutes theefficient level of a non-tariff measure. Secondly,cooperationonNTMscansufferbecauseenforcementof agreements requires observing the compliance ofeach government, whereas some NTMs are not easilyobservable.Finally,ifNTMsareopaque,theymaybeonlyoflimiteduseasamechanismforsecuringcommitmentsbygovernmentsunderaninternationalagreement.

Shallowintegrationisefficientinasettingwheretherearenoinformationproblems,asshownintheworkbyBagwell and Staiger (2001. However, the lack ofperfect information can itself bea reason for deepercooperation on non-tariff measures in tradeagreements.Specifically, thecomplexityofNTMscancreateinefficienciesevenifgovernmentsareperfectlyinformed about their own regulatory needs and theeffects of their own policy choices, but do not knowthe efficient level of NTMs for their trading partners.This is because governments may mislead theirpartners about their policy intentions, making evenmutually beneficial communication difficult. Thisinformationasymmetry(i.e.whereonepartyhasmoreor better information than the other) poses problemsfor many areas of international cooperation, but isparticularly important in the context of domesticregulation, as disagreement over public policy goalscanmaskfundamentallyuncooperativebehaviour.

In addition, the efficient level of a non-tariff measuremaychangeovertime.For instance,regulatorytargetsdepend on factors such as the state of technology,awareness of the effects of market failures, industrypractices and societal needs (see Section B). Whennew situations arise, either governments remainunconstrained by their international commitments orthey may seek new regulatory provisions byrenegotiatingtheirtradeagreementswiththeirpartners.

Updating commitments to reflect the new regulatoryneeds may affect the agreement’s existing balance.For example, suppose two governments come to anagreement on health and environment inspectioncertificates for dairy product imports and chickenexports. If there is a discovery of a new pollutant incheeseproductsthatisnotcoveredintheagreement,the dairy-consuming state may seek to imposeregulationsnotcoveredintheinspectionagreement.Ifthe dairy producer seeks to renegotiate, they do sohavingalreadymadeconcessionsonchickenexports.Inexpectationofrenegotiation,bothgovernmentsmay

seek to avoid efficient agreements for fear that theirpositionwouldbeeroded.Withoutsomemechanismtoaddress these new contingencies, governments’inabilitytoputallfuturecontingenciesintoacontractprecludes writing an efficient agreement for the longrun(BattigalliandMaggi,2003).2

Another concern is that the opacity of non-tariffmeasuresoftenmakesitdifficulttoenforceagreements.A government can theoretically threaten to withholdfuturecooperation ifapartnerrenegesonadeal.Thisthreat, however, depends on the ability of eachgovernmenttoobservehowtheotherisrespectingtheagreement.Inthecaseoftrade,thisrequiresmonitoringofthelevelofmarketaccess.While lawsaregenerallypublished for the public, the actual application of thelawmaybeopaqueandvaryaccordingtothechoicesofregulatoryagenciesandprevailingeconomicconditions.

In an uncertain economic environment, governmentsmay have difficulty distinguishing whether a drop inimports is due to higher productivity of the import-competing sector or due to help from the governmentthrough hidden protection (Bajona and Ederington,2009).Thismakesenforcementchallenging;retaliationmaybetriggeredwithoutcause,oragreementviolationsmay go unpunished. Moreover, the potential formistakenretaliatoryactionsmaymakepartieshesitanttoagreetomoreliberalcommitments,thusharmingtheprospectsforinternationalcooperation.

The opacity intrinsic to the application of non-tariffmeasuresandthechallengeofidentifyingtheireffectsmay also exacerbate commitment problems betweengovernments and domestic investors. Tradeagreementsaregenerallythoughttohelpgovernmentsmake policy commitments to investors and voters.However, international agreements may lose theirbinding power if domestic actors are unclear aboutpolicychoices.Firmsmustdecidetomakecostlyandirreversible investments inorder tosell newgoodsorenter new markets. Uncertainty over trade policycreatesanincentiveforfirmstowaitandevaluatetheeffects of regulations before investing. This delayreduces the positive effects of trade opening andreducesthecommitmenteffectsofatradeagreement.

Handley (2011) finds that uncertainty over theapplication of trade policy in Australia reducedthe level of firm market entry after trade opening by30 per cent. In a related study, Handley and Limao(2011) show that uncertainty over trade policysignificantly suppressed Portuguese firms’ access toECmarketspriortotheaccessionofPortugalin1986.Theseresultsindicatethatthecomplexityandopacityofnon-tariffmeasuresmay limit theefficacyof tradeagreementsinsolvingcommitmentproblems.

(ii) Private standards

The majority of this report focuses on measuresimposed by governments to address behaviour by


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private actors in the market, but the emphasis ongovernment policy somewhat obscures the capacityfor collective action on the part of non-governmentalagents.Privatestandardsadoptedbyeconomicagentscanserveasnon-tariffmeasures,affectingtradeandworld welfare in the same way as governmentmeasures (Robert E. Baldwin, 1970). Therefore, thesame type of problems that characterize the use ofNTMs,andthathavebeendiscussedsofar,mayarisefor private standards. To address these impacts,governmentscansigntradeagreementsinwhichtheycommit to regulate private standards and standard-setters.BoxE.2providesexamplesofcommonlyusedprivate standards. This sub-section evaluates theconditions under which governments would developtrade agreements that cover private standards invariousmarketconditions.

When trade is in final goods and standards remainvoluntary, private standards primarily address marketfailures. Section B describes conditions under whichthese standards can serve as a signal to the marketregarding theparticular characteristicsof theproduct.Suchvoluntarystandardscanenhancetradebyallowingfirmstoestablishsystemsthatprovideconsumerswithinformationabouttheirproductswithouttheneedforatrade agreement. Consider an economy with a singlestandardthatopensuptrade.Evenwithoutgovernmentintervention, coalitions of firms may alter standards tomatchtheneedsofdifferentconsumersineachmarket.Trade opening may produce harmonization “from thebottom”(initiatedbyprivateindustrygroups)thatavoidswasteful replicationof national standardsanda largernumber of specialized international-standard groups(Casella,2001).

BoxE.2: Examples of private standards

Privatevoluntarystandardsaredevelopedbyanumberofdifferent typesofentities, includingcompanies,non-governmental standardizing bodies (including regional or international bodies), certification and/orlabelling schemes (e.g. the Forest Stewardship Council and the Marine Stewardship Council schemes),sectoral trade associations (Florverde for flowers; the Better Cotton Initiative for cotton), and other non-governmentalorganizations.Somebodiesmaybebothsectoral innature (e.g. covering forestryproducts)and international.3 Among the very many examples of private voluntary standards, we consider the threeareasdescribedbelowforillustrativepurposes.

Forests and certification

TheForestStewardshipCouncil(FSC),establishedin1993asaresponsetoconcernsaboutdeforestation,isaninternationalnon-profitorganizationaimedatprovidingforestmanagementcertification.4TheFSChasten principles and associated criteria for responsible forest management; these describe, among otherthings, how forests have to be managed to meet social, economic, ecological and cultural needs – theyinclude managerial aspects as well as environmental and social requirements.5 Another example is theProgrammefortheEndorsementofForestCertification(PEFC),anumbrellaorganizationthathasendorsedsome30nationalforestrycertificationsystems.

Thesetwoorganizationsrepresentthelargeststandardschemesintermsofcertifiedforestarea,withsome15percentoftheworld’sproductiveforests.Apartfromforestmanagementcertification,standardschemesin theareaof forestrycommonlyofferchain-of-custodycertification tomanufacturersandtraderswhodonot grow and harvest trees. This type of certification is based on requirements to ensure that the woodcontainedinproductsoriginatesfromcertifiedforests.Chain-of-custodycertificationshaverisenrapidly inrecentyears,reflectinggrowingconsumerdemand.6

Carbon labelling

Carbonfootprintlabellingschemesandtheirrelatedstandardsaimtoreflectthetotalamountofgreenhousegasesemittedduringaproduct’s lifecycle, including its production, transportation, sale, useanddisposal.Existinginitiativesdifferinrationale,context,informationdisplay,andassessmentmethodology.Whilesomelabellingschemesindicatetheamountofcarbonemittedduringaproduct’slifecycle,othersmentionthattheproducerhascommitted to reducingoroffsetting itscarbonfootprint,or that theproduct ismorecarbon-efficientthanacomparableproduct.

Thefirstcarbon-labellinginitiativewaslaunchedin2007bytheCarbonTrust,anindependent,not-for-profitcompanycreatedbytheUKgovernment;itwasfollowedbyseveralotherinitiatives.Effortstoharmonizetheunderlying methodology of carbon footprint labelling schemes are on-going at the international level.7 Anincreasing number of governments have adopted, or are in the process of developing, carbon-labellingschemes.Todate,however,theseareallvoluntaryinnature(Brentonetal.,2009;BolwigandGibbon,2009).


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On the other hand, once production expands beyondborders,governancebetweenandwithinfirmsrequiresincreased coordination and monitoring. In thisenvironment, firms increasingly employ privatestandards to address these challenges in governingtheir supply chains, with implications for marketaccess. For example, in a world of local production,private food safety and quality standards werepredominantlybusiness-to-businessrequirementsandnotasignificantchallengetotrade,butwiththeriseofoffshoring, these private standards have evolved intocollective standards as leading firms have madeefforts to manage the transaction costs associatedwith their global supply chains (Henson, 2008). Asthese supply chains have begun to span nationalborders, private standards have become increasinglyprevalent(HusseyandKenyon,2011).

Theestablishmentandadoptionofaprivatestandardentails costs that have different effects across firmsand countries. For example, the global adoption of astandardusedinthedomesticmarketentailscostsforforeign firms that domestic counterparts do not face(BütheandMattli,2011).Whenprivatestandardshavedistributional consequences, governments may usetrade agreements to limit the negative tradeconsequencesofinternationalanddomesticstandard-settingbodies.

Even without a trade agreement, firms may limit theinfluence of a particular standard by creating acompetingprivateregulatortodevelopmorefavourablerules. For example, the World Wide Fund for Naturehelped create a private standard-setting body, theForest Stewardship Council (FSC) to promotesustainableforestry.Inresponse,producersdevelopedcompeting standard-setting programmes to satisfyconsumers without undertaking the costly measurespromotedbytheFSC(Cashore,2002).

Depending on the needs of citizens and firms,governments may sign agreements to promote orconstraincompetitionamongstandard-settingbodies.Such an agreement can significantly alter theregulatory environment. For instance, Büthe (2010)points out that in the electronics sector, theInternational Electrotechnical Commission (IEC)managed to leverage WTO recognition and its ownincumbentpositiontoplayacentralroleininternationalregulation. Besides this example, the experience ofthe European Union shows that the designation orsubsequent recognition of a particular private rule-maker affected competition (Cafaggi and Janczuk,2010).

Moreover, a “private” standard that becomes widelyused may be a precursor to government regulation(whether in the form of a technical regulation,conformityassessmentprocedureoranSPSmeasure).One recent example, relevant to the issue of carbonfootprint labelling, is France’s Grenelle 2 Law.8 Thislaw includes provisions on product carbon footprintlabelling and environmental lifecycle analysis. Somedelegations at the WTO have expressed concern (inthe TBT Committee) that carbon-labellingrequirementscouldbecomemandatoryinthefuture;infact, an earlier draft of the measure had foreseenmandatory carbon footprint labelling. The EuropeanUnion has clarified that the law is not compulsory: itwas designed to introduce consumers to additionalenvironmentalinformationprovidedonproducts.

The analysis above examines voluntary standard-setting and the role of agreements in regulatingstandard-setting bodies when production is localizedin a single country. However, when productionnetworks are global and tasks are traded acrosscountries, firms may set standards for their inputsuppliers, establishing an additional reason for

Food safety standards

In responsetoevolvingeconomicconditions, including increasedconsumerdemandforquality,safetyandprocess attributes and increased concentration in the agro-food retail sector, private firms have beendevelopingagrowingnumberoffoodsafetystandards(HensonandReardon,2005).Thesestandardsaretypically higher than public mandatory standards and are integral to the contracting obligations of firmsalongasupplychain.

Private standards can contribute to the governance of food safety across regions and sectors but whenthere isamultitudeofcompetingstandards,compliancecosts forsuppliersalso increase(Fulponi,2006).Thus,anotherrecenttrendintheareaofprivatefoodsafetystandardsistheemergenceofglobalcoalitionsforsettingstandards.Thesecoalitionsrepresentanattempttoharmonizeeffortstoachievefoodsafetyandmutualrecognitionofnationaland/orregionalstandardsamongfoodretailers.Forexample,theGlobalFoodSafetyInitiative(GFSI)waslaunchedin2000toencourageconvergencebetweenfoodsafetymanagementsystemsthroughmaintainingabenchmarkingprocessforsuchsystems.

Throughthebenchmarkingprocess,theGFSIseekstoidentifyfoodsafetyschemesthatproduceconsistentfoodsafetyresults.RetailersguidedbyGFSIrecommendationsshouldbeabletoidentifysuppliersthatmeettherequirementsofrelevantstandardswithoutrequiringanaudit.Thistypeofinitiativecouldprovideretailerswithflexibilitytosourceacrosstheworldandcontributetoenhancedefficiencyoftheglobalfoodsystem.


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international agreements on voluntary standards. Asmentionedabove,firmschoosestandardstoensurealevel of quality or to make the input compatible withotherstagesoftheproductionprocess,oftenrequiringinputmanufacturers topurchaseor licensestandardsfrom private firms. However, in industries with only afew input purchasers, these firms may be able to setstandardsinwaysthatleveragetheirmarketpower.

Forexample,supposethatanumberoffirmsproduceoranges for sale to one large orange juicemanufacturer. Themanufacturer canset standards inawaythatextractprofitsfromtheorangefarmers,forexampleby requiringorangesselectedbyapatentedorange-grading machine, or that orange growersobtainalicensedmanagementcertification.Ifthefirmis vertically integrated, the standard can be set toensurethatprofitsremaininhouse,effectivelyshuttingout competition for the input. Imperfect competitioncreates conditions under which governments canprofitablysignagreementstolimittheextenttowhichprivatestandardsaffecttrade.Ifthestandard-setterisinadifferentcountrythantheinputsuppliers,theuseof that private standard could inefficiently decreasetrade.Inthisenvironment,thegovernmentoftheinputsuppliers would prefer to limit the ability for thedownstreamfirmtosetstandards.

Because both incumbent firms and their governmentshaveanincentivetoinfluenceprivatestandardssothattheycancapturemarketsattheexpenseofcompetingfirms and economies, reciprocal negotiation of privatestandardizing organization regulations may improveefficiency.However,whiletherearesignificantpotentialwelfare gains for improving market access for non-incumbentfirms,foreignexportersandtheirrespectivegovernments, each of whom lack influence in privatestandard-setting,thesegainsmaycomeattheexpenseof some domestic regulatory interests. For example,while some governments require private standardizingbodies to include consumer representatives in thedevelopment of a standard, in an internationalcooperative environment, consumer interests wouldcompete with foreign firms or governments whoseinterestsaretoopenmarkets.

Inmany cases,market access considerationsarenotaligned with consumer concerns, such asenvironmental and safety protection. Moreover,because producer interests generally face lowercollectiveactioncosts,theytendtobemorepoliticallyorganizedthandiffuseconsumerinterests.Becauseofthese political forces, it is possible that internationalcooperationonprivatestandard-settingmayaffecttherepresentation of consumer interests in thedevelopmentandgoalsofstandards.

(iii) Compatibility standards, technical regulations and fixed costs

AsdiscussedinSectionB,severalnon-tariffmeasuresmay differ from tariffs in their effects in imperfectly

competitive markets. This sub-section argues thatgovernments may cooperate to limit the strategiccompetitive effects of NTMs under three differentmarket conditions. Specifically, a rationale for NTMcooperation emerges in markets with horizontallydifferentiated goods and services, when productsexhibit quality differences, and when NTMs createfixed costs that alter firm entry and industrycomposition.

When goods and services are not consumed inisolation and there are differences in compatibilityacross types of products, it may be necessary to setup rules to reduce unnecessary conflicts betweenformats. In perfectly competitive markets, goods andservicesareassumedtobeeconomicallyidentical,butin many markets consumers exhibit preferences forone or another variety of goods. These consumerpreferences inducefirmstoalter thefeaturesof theirproduct to distinguish it from those of competitors,producing what the economic literature callshorizontallydifferentiatedproducts.

Moreover, each variety can exhibit higher or lowerlevelsofcompatibilitywithcomplementaryproductsinthe market. To encourage compatibility acrossproducts, firms and occasionally governments mayappeal to a compatibility standard. Because thesestandards can affect trade, international cooperationonsuchstandardscanpromotebothmarketefficiencyand consumer welfare (World Trade Organization(WTO), 2005b). For example, while there may be noobjective quality differences between two possiblecomputer ports, one of the two may interface betterwith a popular portable music device. A compatibilitystandardwouldensure that theport set-up increasesthe compatibility with the other devices available onthemarket.Internationalcooperationonthatstandardcan ensure that foreign devices do not need to berefittedtomeetlocaldemandspecifications.

One consideration to bear in mind is that whilecompatibility standards improve welfare, thebeneficiary of this policy reform may depend on whosets the standard. To the extent that promoters ofcompeting standards can come from differentcountries and the winner can claim profits from theadoption of its standard, strategic trade policyconsiderations can come into play (World TradeOrganization(WTO),2005b).Governmentsmayrefrainfrom eliminating certain non-tariff measures in aneffort to promote the standards adopted by theirdomestic firms. However, when production involvespurchasing parts from foreign affiliates or unrelatedparties, promoting standards reduces search costsand production costs. As production becomesincreasingly reliant on global production chains, theneed for deeper policy integration becomes morepressing, lowering the attractiveness of strategicstandard-setting.


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A second rationale for cooperation over non-tariffmeasuresistheneedtoaddressgovernments’strategicbehaviour in setting these measures. For example, inmarketswithqualitydifferentiation,consumerstakethequality of a product into account when makingpurchasingdecisions.Ifconsumerscanobservequality,economic theory indicates that firms that produce agood of higher quality replace the previous vintage ofgoods on the market, taking market share fromcompeting firms’ product lines. In the short run, thetechnology leadercanbehaveasamonopolist, raisingpricesandprofits,butnotraisingthepricesohighastoallowcompetitorstoenter.Laggingfirmswouldhavetoovercome the costs of innovation as well as themonopolist’s prices to sell any products (Motta et al.,1997). This process generates a ladder effect, witheachnew incumbentsellingahigher-qualitygoodatahigh price and all other firms exiting, a phenomenonSchumpetertermed“CreativeDestruction”.

The main danger in such a scenario is thatgovernments may strategically adopt technicalregulations to favour domestic firms.9 Whatever firmends up producing, the higher-quality good receiveshigher profits, benefiting the host country andgovernment (Lehmann-Grube, 1997). This potentialadvantage has important implications for domesticwelfare, and creates powerful incentives for laggingindustriesaswellastheirnationalgovernmentstosetpolicies that allow domestic firms to leapfrog leadingfirms and take over the market in high-quality goods(Herguera and Lutz, 1998). Boccard and Wauthy(2005)describehowgovernmentsmayusenon-tariffmeasures in thisprocess toensure that thedomesticfirm comes out as the quality leader. For example, atechnicalmeasurethathastheeffectofrestrictingthequantity of imports may allow the domestic firm todevelop products in the high-quality range whileforcing the foreign firm to produce lower-qualityproducts.Becausetheforeignfirmlosesitsleadershipstatus, the advantages of “leapfrogging” come at thecost of lowering foreign profits. Because bothgovernments face this incentive, each may seek tomutuallytietheirhandstoavoidthissortofcompetitionbyenteringintoaninternationalagreementonNTMs.

A third rationale for cooperation on non-tariffmeasures relates to the fact that these measurescreate a fixed cost for the entry of foreign firms(seeSectionsBandD).Theabovediscussionassumesthattechnologyorsomeotherfactorcausesimperfectcompetition,butNTMscanalsodetermine theextentofcompetition.Everyfirmthatentersaforeignmarketwould have to file paperwork, familiarize itself withcustoms procedures, and pay licensing fees, thusincurring fixed costs of doing business rather than aper unit charge. While adding fixed costs affects theinternationaltermsoftradeinthesamewayasatariff,NTMswouldhaveanadditionaleffectonmarketentrydecisions in the foreigncountry. The larger theNTM,the more firms will have to be able to produce to

engage in trade. If firms are not identical and NTMsimposefixedcosts,tradewillbeconcentratedinlargerand more productive firms, while at the same timeincreasing the number of small, less productive firms(NockeandYeaple,2008).

Countries have several reasons to cooperate onreducing fixed costs of market entry. For instance,governmentsmay limitnon-tariffmeasurestopreventthe over-reliance of the domestic economy on a fewlargefirms thatareable toovercome thefixedcosts.Policy-makersmaybewaryoftheeffectsofeconomicshocks, which can propagate faster and be moredifficult toabsorbwhentherearetoofewlargefirms.In particular, if an industry is highly concentrated,capitalmisallocationsthatwouldbereducedinamorecompetitive market may reverberate, increasing thefrequencyandcostofeconomicshocks.Theseeffectswould not only depend on regulations in the goodssector;asdiscussedinSectionE.4(e),pro-competitiveregulation in the context of domestic regulation inservicesisanimportantareaofactivecooperation.

(iv) Offshoring

Theproliferationofglobalproductionchains increasesinternational interdependency and may provide arationale for deep cooperation on non-tariff measureswithintradeagreements.AsdiscussedinSectionE.1(a),theories of international trade until recently identifiedone main international spillover associated with tradepolicy:howitaffectstermsoftrade.Thebreak-upoftheproduction process across different countries createsnewformsofcross-borderpolicyspillovers.AntràsandStaiger(2008),forinstance,buildamodelwherepricesare determined by bilateral bargaining becauseinternational production involves exclusive contractswithinputsuppliers.Inthisenvironment,thegainsfromtrade are divided between the two or more firmsinvolved, and the prices of traded goods and servicesreflect the relative contribution of each node of thesupplychain.Becauseproductionisinternational,someof the costs of trade frictions are borne by firms inforeign states. An international externality occursbecausegovernmentsdonottakeintoaccountthefullvalueof the internationalproductionchain,butonlyofitsdomesticcomponent.

Specifically, when prices are set by bargaining, theinput producers experience rent-shifting (i.e. shiftingprofits from the input supplier to the domesticproducer),whiledownstreamproductsexperiencethetraditional terms-of-tradeeffects.Toaddress thenewconcern, a trade agreement should ensure that tradepolicies over the later stages of production do notdistort bargaining between producers and inputsuppliers.Whenpricesaresetinacompetitivemarket,it is sufficient for an input-exporting country tonegotiate over the tariff directly tied to the inputproduct. However if prices are set via bargaining, inaddition to obtaining market access, or a lower tariff


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on the imports of the input, governments mustadditionallynegotiatethetariffsanddomesticpolicieswhich affect the final product. For example, supposecountryAisseekingtoexportautopartstocountryB.Country A’s interest is no longer only to seekreductions in tariffs on auto parts, but also thedomestic regulations and standards in country B forthe sale of completed automobiles. Without such acommitment, countryBmay inefficiently regulate, taxorprotectthefinalgoodmarket,knowingthatpartofthe pain is suffered by auto parts manufacturers incountry A. With a rise in offshoring, these deepercommitmentsmaybecomeincreasinglyimportant.

The internationalization of production exemplifies whythe traditional trade opening toolbox (i.e. tariffreductions) fails to offer a satisfactory solution in thecase of non-tariff measures. Consider the concept ofreciprocity. In the current system, this principle isintendedasreciprocalmarketaccessopeningforfinalgoods. It is not hard to see why this concept fails toprovideausefulguidingprinciple for tradenegotiatorsin thecontextofnon-tariffmeasuresandglobal valuechains.Morebroadly,existingtraderuleswereoriginallydraftedforaworldofinternationaltradeinfinalgoods.The extent to which this institutional framework canaddress thenew formsof interdependencyassociatedwith global production networks is a complex matter.ThisissueisdiscussedinSectionE.4.

(c) DifferentapproachestotheregulationofNTMsintradeagreements

Thissection reviews the recenteconomic literatureonthedesignofdisciplinesonnon-tariffmeasures.First,itargues that shallow integration can ensure thatgovernments have the ability to efficiently employNTMs,solongastheydonotreplaceboundtariffswithnon-tariffmeasures.Inparticular,thesectionexaminestwo rules that enable the legitimate use of NTMs –national treatment and non-violation provisions – andhighlightstheirinstitutionalstrengthsandweaknesses.Theserulesrelyonwell-informedgovernments,whichisatoddswiththecomplexityandopacityofmanyNTMs.In light of this, the role of disciplines to improvetransparencyintradeagreementsisdiscussed.

Secondly, the section maintains that the differencesbetweennon-tariffmeasuresand tariffs requireanewset of institutional tools that go beyond shallowintegration. Specifically, we review the literature ondeep integrationanddiscuss the trade-offs impliedbymutualrecognitionofdomesticregulatoryrequirements,thejointnegotiationoftariffandnon-tariffmeasuresintrade agreements, and the harmonization of NTMs atthemultilateralandregionallevel.

(i) Shallow integration

Shallow agreements are those that directly regulatetariffs and other border measures, but stop short of

intervening in domestic measures beyond therequirement of non-discrimination of foreign goodsand services. As seen in previous sections, thefundamental goal of a shallow trade agreement is toguard against the possibility that governments mayreplacepolicymeasuresexplicitlyboundinascheduleofcommitmentswithunconstrainedpolicy inorder todiscriminate against their trade partners. In thefollowing, we discuss two rules which aim at limitingthis sort of non-cooperative behaviour, assumingperfectly informed governments. When governmentsare not perfectly informed, there is a role fortransparencyprovisionswhichwillbetakenupfurtherinSectionE.2aswellasinSectionE.4.

National treatment

According to economists, trade agreements areincompletecontracts.By this, it ismeant thatno tradeagreement can possibly cover the myriad ways thatgovernments may wish to regulate economic life and,therefore,agreementshavegaps.However,ifnotboundbyagreement,governmentsmaybetemptedtosetnon-tariff measures without regard to the implications forforeignmarketaccess.Thisposesanobviouschallengeinthedesignoftradetreaties.Addingspecificprovisionsto the agreement may partially address some of itsgaps, but each new rule adds to the complexity andenforcement costs of the agreement. For this reason,trade treaties sometimes include explicit and rigidlimitationsonNTMs(BattigalliandMaggi,2003).Hornetal. (2010)show thatsimpleandbroad rules,even ifoccasionally inappropriate in certain circumstances,maygenerallybemoreefficient.

One of the principal constraints on discrimination vianon-tariff measures is the obligation to treat foreignproducts at least as favorably as “like” domesticproducts. This obligation for national treatmentappears in Article III of the General Agreement onTariffs and Trade (GATT), Article 2.1 of the TBTAgreement, is implied in Article XVII of the GeneralAgreement on Trade in Services (GATS) as well asArticle 3 in the Trade-related Aspects of IntellectualPropertyRights(TRIPS)Agreement.10

Agreements including national treatment obligationslimit the use of internal measures that affect theeconomic conditions of imported products. Nationaltreatment requires that any internal tax or regulationmust not discriminate between domestic and foreignsources of supply and is therefore deemed not to beprotectionist.Supposethatacountrywantedtouseahealthwarninglabeltolimittheimportofforeignpaint,increasingthesalesofdomesticpaintmanufacturers.A national treatment provision requires that the labelon foreign products would have to be applied todomesticproductsaswell.Becausethelabelwouldnolongerdistributecompetitivebenefits,thegovernmentmaybedissuaded fromusing thehealthmeasure forprotectionist reasons.Asa result, only tariffs are left


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to restrict trade, and under the most-favoured nation(MFN)clause,thosetariffsmustbenon-discriminatory.

While national treatment limits the use of non-tariffmeasures for discriminatory purposes, some authorshavearguedthat incertaincasestherulecanbetooblunt to meet the legitimate policy objective ofcountries.11 Horn (2006) describes ways in whichnational treatment can be insufficient to limit theprotectionist use of NTMs (in this case a Pigouviandomestic tax). First, a national treatment provision isonlyeffectivewhenthereisa“like”domesticproduct.If there are no domestic paint manufacturers, thegovernmentwillnotbeinviolationofnationaltreatmentwhatever themotivesor severityof theNTM,despitethe fact that such NTMs would still confer anadvantagetoacountry’stermsoftrade.

Secondly, when a negative externality is associatedwith the consumption of a foreign product – forinstance, if foreignpaintsaremoreharmful tohumanhealth than the domestically produced ones, and yetare“like”productsfromtheperspectiveoftherule–anational treatment provision constrains thegovernment’s ability to limit the scope of a costlyregulation to just the goods that produce theexternality.12 This limitation on regulation requirestrade negotiators to set their tariff commitmentscarefully.Note,however, thatwhilenational treatmentrules set a blanket requirement that may constrainregulatory authority, rigid rules decrease contractingcosts and may facilitate agreements in uncertainregulatoryenvironments(Hornetal.,2010).

Recent research has suggested that the WTO’sdisputesettlementmechanismcan lowerthecostsofusing rigid national treatment rules while stilladdressing potential policy substitution by WTOmembers.BattigalliandMaggi(2003)characterizethework of the WTO panels and Appellate Body asproviding arbitration that improves the efficiency ofpreviously bargained agreements when the explicitterms of the agreement are insufficient. The authorsargue that, while panellists and Appellate Bodymembers may be less informed about the optimalobligations of member states than the membersthemselves,thepresenceofanarbitratorcorrectsthemisuse of a non-tariff measure caused by the rigidapplicationofanationaltreatmentrule.

For example, suppose that governments negotiatedmarket access while assuming that all computermonitors have equal, and environmentally acceptable,amountsofmercury. If foreignproductionofcomputermonitors switches to a more mercury-intensivemanufacturing process, a rigidly applied nationaltreatment provision may not allow governments torespond to the change. Because each WTO membercanhave recourse todisputesettlement,governmentscanefficientlyfulfiltheobligationsoftheagreementonthenewproductwhilemaintainingnationaltreatment.

So far, it has been assumed that the mechanismthrough which WTO panels and the Appellate Bodyimprove the efficiency of trade agreements whennational treatment is too rigid or incomplete has notbeen analysed. However, what practical role do WTOpanels and the Appellate Body play in reaching ajointlyefficientoutcome?

Maggi and Staiger (2011) argue that the disputesettlement mechanism can play an important role intheinterpretationoftradeagreementswhentherulesare incomplete and it is difficult to write efficientagreements.Theauthorsconsideravarietyofpotentialroles of WTO panels and the Appellate Body thatrange from fairly conservative, applying the existingobligations to ensure enforcement, to more “activist”,inwhich theymayfill gaps in theobligationsofWTOmembers, or even going as far as to modify existingobligations.Theauthorsevaluate the idealscopeandspecificityoftherulesembodiedintradeagreements,such as national treatment, under each of thesehypothetical degrees of court involvement. They findthat more flexible disciplines are preferable to rigidrules when it is difficult for WTO panels and theAppellateBodytocorrectlyidentifytheefficientpolicy.

Non-violation

TheframersoftheGATTsoughttoassuagefearsthatcontractingpartiesmightactinwaysthat,whilenotinviolation of the agreement, could underminecommitments made in the course of negotiations.Article XXIII of the GATT and Article XXIII:3 of theGATSpermitgovernmentstoseekdisputesettlementthrougha “non-violation”complaint.Suchacomplaintisallowedifonegovernmentcanshowthatithasbeendeprived of an expected benefit because of anothergovernment’saction,orbecauseofanyothersituationthatexists.Theaimistohelppreservethebalanceofbenefits struck during multilateral negotiations. Forexample,acountrymayhaveagreedtoreduceitstariffonaproductaspartofamarketaccessdeal,butlateraltered itsregulatorystancesothattheeffectontheconditionsofcompetitionarethesameastheoriginaltariff.Anon-violationcaseagainst thiscountrywouldbe allowed to restore the conditions of competitionimpliedintheoriginaldeal.Thissub-sectionillustrateshow non-violation complaints address the problem oftariffsbeing replacedbyNTMsand the limitationsofthisapproach.

As described in Section B, in a setting where the onlycross-borderspilloverofapolicy ishowitaffectstermsof tradeandwherethereareno institutionstofacilitateinternationalcooperation,governmentswouldefficientlyregulatethedomesticmarketbutwouldhaveanincentiveto set inefficiently high trade restrictions (Bagwell andStaiger, 2001). The reason for this is that the onlyinefficiency associated with unilateral policy choicesderivesfromthedesiretoobtainaterms-of-tradegainattheexpenseoftradingpartners.Becausetheexternality


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addressedbythedomesticregulationdoesnotaffectthewelfare of foreign citizens, the government has noincentive to under- (or over-) regulate from a globalwelfareperspective.

Onthecontrary,whentariffsarecommittedinatradeagreement, governments may be tempted toinefficiently use domestic regulatory policy to affectthetermsoftrade,alteringnon-tariffmeasurestotakethe place of tariff measures. In this context, BagwellandStaiger (2001)showthat theexistenceofanon-violationrule inatradeagreementdiscouragespolicysubstitution. Specifically, in the presence of a non-violation remedy, governments understand that theyrisk a legal challenge if they manipulate theirregulations for protectionist purposes after agreeingtoatariffbinding. Ifagovernmentdoesneedtoalterits regulation to address a new domestic marketfailure, the non-violation rule allows that governmentto lower its tariff to compensate trading partners foranytrade-restrictiveeffectofthenewmeasure.

A separate issue is the extent to which the economicviewofthenon-violationruleisreflectedinthepracticeof the GATT/WTO system. For instance, Staiger andSykes(2011)arguethatnon-violationclaimsareunlikelytobeusedtolimitnon-discriminatoryregulationseveniftheydistort trade. The three successful casesof non-violation claims address discriminatory bordermeasures.Accordingtotheauthors,undertheJapan – Film panel’s interpretation of the non-violation rules,discrimination is a prerequisite for a claim, whichprevents the use of non-violation claims to addressmany of the regulatory balance concerns describedabove. This interpretation would suggest that non-discriminatory changes in regulatory policy appear tofalloutsidethescopeoftheGATT,asubjectdiscussedinmoredetailinSectionE.3andE.4.

Anotherissue,whichwasdiscussedintheWorldTradeReport2010(WorldTradeOrganization(WTO),2010),is whether the non-violation doctrine could beextended to cover other situations where the use ofnon-tariffmeasuresgrantsmore(andnotless)marketaccesstotradingpartners.Underthesecircumstances,should governments be allowed to adjust (bound)tariffsupwardsonceregulatoryneedshavechanged?Ifsuchapossibility isnotallowed, itcouldbearguedthat governments may hesitate to enact efficientregulations whenever such a policy changedifferentiallyimpactsdomesticproducers.

Consider a specific example. Suppose there is anegativeexternality,suchaspollution,generatedbyadomestically produced good. If the governmentaddressestheexternalityby tighteningenvironmentalregulations, itsdomesticproducersbearaproductioncost that foreign producers do not, shifting marketshareawayfromdomesticfirms.Intermsofeconomicefficiency, an increase in a tariff that preserves thelevelofmarketaccessofforeignproducersatthelevel

implied by the previous regulatory stance may bejustified inthesecircumstances.Thechangeinpolicymix in the domestic economy improves welfare,becauseitallowsgovernmenttoaddressthepollutionproblem, while preserving the level of market accessgrantedtoforeignexporters.

Transparency

As discussed above, transparency on non-tariffmeasures is a necessary condition to achieve (andenforce) trade policy cooperation. This explains whythe multilateral trading system aims at improvingtransparencyofNTMs.TheGATT, theGATS,and theSPSandTBTagreements includevariousobligations– requiring publication and notification of NTMs andservicesmeasures–thatseektoimprovetransparency.Thesetransparencyobligationshavebeenthesubjectof important discussions in the relevant WTOcommittees, and several actions have been taken tofurtherimprovetransparency.Forinstance,duringtheFourth Triennial Review of the TBT Agreement, theTBTCommitteeagreedtoshareexperiencesongoodregulatorypractices.AreportbytheSwedishNationalBoard of Trade goes as far as to argue that “goodregulatorypracticeatnational level isthesinglemostimportant aspect in the efforts to avoid unnecessaryTBT” (Kommerskollegium, 2010). These efforts, aswellassimilareffortsonservicesmeasuresandSPSmeasures,arediscussedfurtherinSectionE.2.

The principal idea behind these efforts is thatgovernmentscanbenefitfromthetechnicalknow-howand experiences of other governments’ efforts inpromotingefficientandtransparentpolicy.Cadotetal.(2011) argue that documenting and understandingnon-tariffmeasuresandtheireffectsisthefirststageinaneffort tomakeNTMsmoreefficient,particularlyin countries that are struggling with legacies ofcomplicated and penalizing regulations. Governmentsmaypursuesub-optimalpoliciesbecausetheyarenotfully aware of their effects and of the existence ofbetteralternatives.

This said, economic reasoning in Section E.1(b)indicates that governments also have an incentive touse opaque instruments to gain advantage at theexpenseofothergovernments.AswillbediscussedinSectionE.4(b),governmentsmaylacktheincentivetoadopt transparency measures because they aresuccessful in lowering barriers to trade. Throughgovernmentcommitmentstonotifydomesticmeasuresandengage ingood faithdiscussionsabout reducingthe trade impact of non-tariff measures, the WTOSecretariat may be able to play an important role inilluminating opaque measures (Collins-Williams andWolfe, 2010). The economic role of the notificationprocess and the efficient design of rules to addressgovernments’ incentive problems to offer informationare areas of research where more work would behighlydesirable.


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(ii) Deep integration

Asargued in thehistoricaloverview inSectionA, thetreatment of non-tariff measures in the multilateraltradingsystemhasevolvedovertime. InitialemphasiswasontheneedtoassurethattariffreductionswerenotoffsetbyNTMs.Theshallowintegrationapproachbuilt into rules such as national treatment and non-violationdiscussedabovefollowspreciselythislogic.

Overtime,traderelationshaveevolvedinresponsetoa number of factors, including the increasingimportanceof internationalproduction, theexpandingregulatory needs to protect consumers and otherbroadsocietalinterests,suchaspublichealthandtheenvironment. These changes have put pressures ontheinstitutionsgoverningtrade,andgovernmentshavelooked for ways to go beyond shallow integrationarrangementsintodeeperformsofcooperation(atthemultilateralorregionallevel).Thedesignofdeeptradeagreements to regulate non-tariff measures is thetopicofthissub-section.

There is no generally agreed definition of “deep”integration. According to Lawrence (1996), who firstusedthisterm,tradeagreementsthatincluderulesondomesticpoliciesthat“fallinsidetheborder”aredeepagreements.Ontheotherhand,oftendeepintegrationis simply defined in contrast to the shallowarrangements presented in the previous sub-sectionasanyagreement that imposes further limits to localregulatory autonomy. While the World Trade Report2011 (WorldTradeOrganization (WTO),2011b)hasamore detailed discussion of the concept of deepintegration,thefocushereisonthreedeepapproachesthatoftenemerge intheacademicandpolicydebate:mutual recognition, linking tariffs and non-tariffmeasuresintradenegotiationsandtheharmonizationof domestic measures. These different approachesofferdiversetoolstocooperateonnon-tariffmeasureswithinatradeagreement.

Mutual recognition

Governments have adopted rules beyond nationaltreatment to limit the discriminatory use of non-tariffmeasures, ranging from “regulatory competition” to“harmonization” (Hussey and Kenyon, 2011). Mutualrecognition of domestic regulations is one suchapproachwhichhasbeenadopted,mostnotablybytheEuropean Union. Specifically, so long as another EUmember sells a product within its border, it ispresupposedtomeetdomesticregulatoryrequirementselsewhere in the Union (see also Section D.3). Undermutual recognition, this means that each governmenthas full sovereignty over its own technical regulationsfordomesticallyproducedproductsbutalimitedabilityto project those policies onto its trade partners or todetermine the characteristics of products consumeddomestically.

Mutual recognition has benefits and costs comparedwith national treatment disciplines discussed above(Costinot, 2008). Consider a specific example.Suppose that there is an externality associated withthe consumption of either a domestic or foreignproduct. Ifthereisanationaltreatmentprovision(andgovernments are not otherwise coordinating ontechnical regulations), whatever regulation is chosenwill be extended to products from the foreign state.There is effectively one technical regulation for all“like”products.Inthissetting,theproblemisthatpartofthecostsofmeetingtheunifiedtechnicalregulationis borne by foreign producers, whose welfare is nottaken intoaccount by thedomesticgovernment. Thismay result in an excessively stringent regulation.Becausethegovernmentonlyinternalizesthecostsofregulations on the domestic and not on the foreignproducers, it weighs domestic consumers’ concernsmoreheavily.

On the other hand, if countries adopt mutualrecognition,governmentsmaybetemptedtosetlooseregulations, leading to a “regulatory race to thebottom”, because the rules will not account forexternalities on the foreign market. Keeping in mindthese trade-offs that characterize national treatmentand mutual recognition, Costinot (2008) findsconditionsunderwhichoneapproachissuperiortotheother. Specifically, the author finds that nationaltreatment tends tobemoreefficientwhenthe tradedgoodsareassociatedwithahighlevelofcross-borderspillovers.

Governmentscanalsoaltertheagreementtoaddresssome of the weaknesses of this approach. A set ofpre-negotiated minimal standards may serve thepurpose of avoiding extreme (and socially inferior)outcomes. For instance, in 1985 when the EuropeanUnion adopted mutual recognition of member states’legislationconcerningproducts, theEUdirectivessetout “the essential requirements to be fulfilled toprovide for protection of life, health and environmentetc.”, with the specific intent of avoiding a regulatoryracetothebottom(Kommerskollegium,2010).

Linking tariffs and NTMs in trade negotiations

Commentatorshavedevelopedtwosetsofargumentsthat support the view that tariffs and non-tariffmeasures, for instance domestic environmental orlabour regulations, should be linked in tradenegotiations.Below,theyarereferredtoasthe“grandbargain”andthe“enforcement”argument.

According to the “grand bargain” perspective,cooperation on tariff and non-tariff policy is mutuallybeneficial and self-reinforcing. Therefore, linkingdifferent measures in a single grand bargain, forinstanceexchanginglowertariffsfornewenvironmentalregulations,maysucceedinachievingmutuallywelfare-enhancingcooperationtoalargerextentthanseparate


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negotiations(Abregoetal.,2001).Whilethisargumenthasacertainappeal,linkingnegotiationsoverdifferentmeasures and diverse policy areas also comes at thecost of increasing complexity. The probability of asuccessfuloutcome,therefore,maywellalsodependonthismorearticulatedcontractualenvironment.

A second argument to regulate and link non-tariffmeasures in a trade agreement is the possibility ofusing tariffs as an enforcement device (Ederington,2002; Limao, 2005; Spagnolo, 2001). In a settingwheregovernmentshaveanincentivetousedomesticmeasurestomanipulatethetermsoftrade,Ederington(2002) argues that retaliation through tariffs is themost efficient way to enforce cooperation on bothtariffsandnon-tariffmeasures.Bycontrast,itisneverefficient to permit governments to distort theirregulatorychoicesformarketaccesspurposes.

Inadifferentsetting,whereregulatorycooperationonnon-tariff measures is beneficial but suffers from anenforcementproblem,embeddingthesemeasuresinatrade agreement may provide a means of punishingviolators and, hence, increasing welfare (Spagnolo,2001).On theotherhand, linkagesmayworkagainsttrade opening efforts. According to Limao (2005),linkingtheregulationoftariffsandNTMsmaystillbewelfare improving whenever cross-border spilloversare sufficiently large (i.e. when policies are strategiccomplements).

Harmonization

Section D defines harmonization of non-tariffmeasuresastheestablishmentofcommonmeasures,suchastechnicalorsafetystandards,acrossdifferentjurisdictions.Thefocus in thatsection isonthetradeeffects of these common measures. The emphasishere is on an institutional design issue: under whatconditionsdocountriesbenefitfromtheharmonizationofNTMs.

Economists have developed a simple principle tounderstandthecostsandbenefitsoftheharmonizationofpoliciesacrossdifferentjurisdictions,knownastheOates’ Decentralization Theorem (Oates, 1972). Thistheoremshowsthatthereisabasictrade-offinsettingcommon policies, such as harmonized technicalregulations. The benefits depend on the extent ofcross-border policy spillovers, for instance the extentto which a certain national environmental regulationimpacts on the welfare of foreign citizens. The costsdependontheimportanceofthedifferencesinpolicypreferences across countries. Specifically, forindividualcountriesthecostofharmonizationofanon-tariffmeasureisthatitmovesthemeasureawayfromits preferred national policy (i.e. a loss in nationalsovereignty); the benefit is that a harmonized NTMtakes intoaccounthow themeasure impactsonboththe national and the foreign welfare (i.e. the policyspilloverisinternalized).

TheOates’DecentralizationTheoremhasasimpleandintuitivepredictionthatcanserveasaguidingprincipleforpolicy-makers.Harmonizationofnon-tariffmeasuresis an efficient institutional response whenever cross-borderpolicyspilloversareconsideredtobelargeand/or differences in policy preferences across countriesarenot important.For instance,BirdsallandLawrence(1999) argue that deep integration with advancedeconomies may create advantages for developingcountries that import best regulatory practices, butthesebenefitsneed tobe tradedoffwith thecosts togovernmentsofadoptingcommonrulesthat, incertaincases,donotmatchnationalpreferencesandtheneedsof developing countries. This theoretical framework,therefore, offers important insights to negotiators toidentifyareaswheresocialwelfareconsiderationsmayjustifypolicyharmonization.

A related issue is the proper forum where thisharmonization should take place. Insofar as non-tariffmeasurescreatecross-borderpolicyspillovers,asinthecaseof climate change relatedpolicies or food safetystandards,thereisaneedforinternationalcooperation.However,thiscooperationmaywellbecarriedoutinthecontext of a sector-specific agreement orstandardizationbody,whichareoutsidethecompetenceoftheWTO.Fromtheperspectiveofatradeagreement,thequestion isoneof internationalcoherence.That is,how the environmental measures or the food safetystandards relate to the international trade rules. WecomebackonthispointinSectionsE.2andE.4.

Asecondissueiswhetherharmonizationofnon-tariffmeasures ismoreappropriateat themultilateral levelorattheregional/bilaterallevel(i.e.withinpreferentialtrade agreements – PTAs). The World Trade Report 2011 (World Trade Organization (WTO), 2011b)documentsthatagrowingnumberofPTAsgobeyondtariff reductionsand includecommonrulesonNTMs,such as harmonized standards or harmonizedconformity assessment procedures (these practiceswere found in more than 40 per cent of a sample of58PTAssurveyed).Inlightoftheprecedingdiscussion,this finding is not surprising. Members of a PTA mayshare more similar policy preferences and/orexperience stronger policy spillovers than the broadmembership of the multilateral trade system. In thissense, harmonization in the regional context couldprovideanappropriateintermediatelevelofintegrationamongcertainnationsandthegloballevel.

However,asdiscussedintheWorld Trade Report 2011(World Trade Organization (WTO), 2011b), PTAs alsohave systemic effects through market segmentationthat could lead to regulatory divergence and haveadverse effects on world welfare. For example, animportant trade-off discussed in the literature is thatregulatory harmonization among countries of varyinglevelsofdevelopmentcanreinforcea“hub-and-spoke”trade structure, with the larger partner representingthehubtowhosestandardsthespokesconform.This


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structure may carry costs. Disdier, Fontagné, andCadot (2012) use a gravity model to show that whendeveloped trading partners take steps to harmonizetheir regulations with a developed partner, trade withthedevelopingcountriesdeclines.

2. Cooperationinspecificpolicyareas:TBT/SPSandservicesmeasures

The previous section provided a theory-baseddiscussion of the economic rationale for cooperationon non-tariff measures in a trade agreement. Thissection illustrates why and how countries cooperateover NTMs in specific policy areas. In particular, thefocus is on SPS/TBT measures and domesticregulationinservices.

(a) CooperationonSPS/TBTmeasures

This section argues that countries cooperate onSPS/TBT measures to address information problemsthat arise when governments try to balance traderestrictiveness and achievement of policy objectives,and when seeking to follow best practice in theregulatoryprocess.Inthisrespect,countriescooperateby developing, disseminating and adopting commonapproaches to regulation. These activities, whichpromote regulatorycooperation, takeplace invariousfora. For instance, this cooperation occurs in theWTO’s TBT and SPS committees, in regulatorycooperation arrangements, and in internationalstandardizingbodies.ThefocushereisoncooperationinimplementingtheexistingTBTandSPSagreements.

(i) Why do countries cooperate on SPS/TBT measures?

Countries use SPS/TBT measures, which includetechnical regulations, standards and conformityassessment procedures, to achieve legitimate policyobjectives,suchasprotectionofhumanhealthandtheenvironment,orpreventingthespreadofdiseasesandpests.Inordertoachievetheirstatedobjectives,thesemeasuresinvariablyhavetradeimpacts;somemaybejustifiable while others could be challenged asdiscriminatory or simply unnecessary to achieve theobjectivesought.Hence,theneedfordiscipline.

The TBT and SPS agreements require that WTOmembers balance achievement of legitimate policyobjectives against trade restrictiveness in the designand implementation of measures. In particular,members should ensure that measures are not moretraderestrictivethannecessaryforthepolicyobjectiveathand,areproportionallyrestrictivetotheriskofnotmeeting the policy objective, are based on scientificprinciples and not maintained without sufficientscientificevidence,anddonotarbitrarilyorunjustifiably

discriminate between members where the sameconditionsprevail.

Membershavesovereignauthorityindecidinghowtoregulate under the SPS/TBT agreements. However,membersdonotalwayshavesufficientinformationorcapacity to regulate effectively or efficiently.Members may face, among other challenges, twoinformation problems in this regard. First, membersmaynotknowwhichmeasurewillbemostefficientinstriking the aforementioned balance between traderestrictiveness and policy fulfilment. Second,members may not know how best to design andimplementSPS/TBTmeasuresacrosstheregulatorylifecycle.ThefactthatSPS/TBTmeasuresareoftenopaque and complex, as discussed in Section E.1,compoundthesechallenges.

Indeed,regulatoryprocessesandtheirimpactsmaybedifficult to grasp, and governments often faceproblemsunderstandingregulatoryneeds,orthecostsand benefits of their interventions (Harrington et al.,2000). Members may therefore use a particularSPS/TBTmeasurewhen it isneitheranefficientnoreffective instrument for their policy objective orgenerates unnecessary hindrances to internationaltrade.IfmembersimposeSPS/TBTmeasuresthatfailto efficiently strike the balance mandated by theagreements, they riskbeingchallenged in theTBTorSPScommittees,orultimately,indisputesettlement.

Setting an internationally agreed benchmark of anefficientregulationforaparticularpolicyobjectivecanhelpaddressthefirstsortof informationproblem.ThisbenchmarkcanbeusedtoassesswhetheraSPS/TBTmeasure adequately reflects policy objectives; thosemeasures that are more trade restrictive than thebenchmark may raise questions. The SPS/TBTagreements do this by strongly encouraging membersto align their SPS/TBT measures with relevantinternational standards, which ideally are developedusingtheworld’sbestavailablescientificandtechnicalknow-howregardingaparticularpolicyproblem.

With respect to the second sort of informationproblem,theuseofanagreedsetofregulatorystepsthatdefineanefficientregulatoryinterventionmaybebeneficial. Sharing a common regulatory languageincreasestransparencyandpredictabilityofSPS/TBTmeasures,andprovidescommoncriteriaagainstwhichto judge measures. Members encourage one anotherto follow common approaches, such as “goodregulatory practice” (GRP), when crafting SPS/TBTmeasures,andCommitteediscussionprovidesfurtherreinforcementofthis.

(ii) How do countries cooperate on SPS/TBT measures?

Members cooperate to address information problemsrelated to SPS/TBT measures in at least three


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ways: at the multilateral level, through discussions inthe TBT and SPS committees; by using internationalstandards as a basis for regulation; and, moregenerally, by using and disseminating GRPs, andengaginginregulatorycooperation.

WhileGRPisnotexplicitintheTBTorSPSagreements,thediscussionsinbothcommitteespromote“regulatoryconvergence”by reducingunnecessarydiversity in thewaygovernmentsregulate.

Good regulatory practice and regulatory cooperation

Even when intended to address the same policyobjective,notallregulationsarecreatedequal–therearesignificantvariationsacrosscountries.Whilesomedifferences are certainly inevitable and may even benecessary, some general lessons that are broadlyapplicablehavebeenidentifiedabouthowtoregulateefficiently and effectively across the regulatorylifecycle. These lessons are, essentially, what isincorporatedingoodregulatorypractice(GRP).

ExperienceandguidanceonGRPhavebeencompiledby bodies such as the World Bank, the OrganisationforEconomicCo-operationandDevelopmentandAsiaPacific Economic Co-operation (APEC).13 GRPemphasizes, inter alia, a deliberative process foridentifying public policy problems, considering thecostsandbenefitsofalternative regulatorymeasures(or of no regulatory intervention), using regulatoryimpact assessments (RIAs), relying on performance-basedregulation,effectiveinternalpolicycoordination

(vis-à-visWTOobligations),andensuringtransparencyandopennesstofacilitatestakeholderparticipationintheregulatoryprocess.Thus,theuseofGRPcanhelpimprove regulatory performance by increasing thetransparencyandopennessof theregulatoryprocessand by subjecting regulatory decision-making toimpactanalysisandperiodicreview.

WiderdisseminationanduseofGRPcantoacertainextent provide a common, predictable frameworkwithin which countries make regulatory interventions;it induces countries to speak the same “regulatorylanguage”. This is why WTO members engage inbilateral and plurilateral regulatory cooperationarrangements.14 Regulatory cooperation is a processbywhichofficialsengagewiththeircounterpartsfromdifferentgovernmentsinformalandinformalsettings,including by exchanging information on rules andprinciples for regulating markets, the objectives ofwhichincludetheformulationofmorecompatibleandtransparent regulations and testing procedures,simplification and the lowering of trade barriers, andmaking it easier and less costly for exporters todemonstrate conformity with different requirements(see Box E.3 for some examples of regulatorycooperationintheTBTarea).

Examples of regulatory cooperation arrangementsamong countries include initiatives such as the Trans-PacificPartnership,theTransatlanticEconomicCouncil,theUS-EUHighLevelRegulatoryCooperationForum,the Trans-Tasman Mutual Recognition Arrangement,and work in organizations such as the South AsianRegional Standards Organization, APEC, the

BoxE.3: Examples of regulatory cooperation in the TBT area15

APEC: green technologies

MembersoftheAsiaPacificEconomicCooperation(APEC)sharepolicyobjectiveswithrespecttotradeand environmental protection, which they seek to forward through regulatory cooperation in emergingenvironmental technologies. The 2011 APEC Meeting of Ministers Responsible for Trade stressed thesignificantroleofopentradeandinvestmentintheAsiaPacificregioninfulfillingthecommonobjectiveofenvironmental protection. The rationale behind such cooperation is that a reduction in unnecessarybarriers to trade and investment in environmental goods and services would reduce their costs, andincrease access to green technology, and therefore further achievement of the shared objective ofenvironmentalprotection.

The APEC Sub-Committee on Standards and Conformance (SCSC) has worked to promote regionalcooperationingreensectorsthroughinformationexchange,enhancedtransparency,andprovidingabaselinefor the use of standards, technical regulations and conformity assessment procedures. These initiativesinclude the “Solar Technologies Standards and Conformance Initiative”, and “Green Buildings and GreenGrowth”. In the context of these initiatives, APEC members have recognized the need to conform withinternational standards, to promote mutual recognition of certification, and to increase stakeholderparticipationinthestandards-settingprocess.

Severalcasestudieshavebeenundertakenongreen technologiesunder theumbrellaof these initiatives,particularlyon“greenbuildings”,andinthisrespectworkisbeingundertakenincooperationwiththeWorldBankandtheWorldGreenBuildingCouncil. Inthiscontext, therewasrecognitionoftheneedtoenhanceconsistencyintheuseofterminologyrelatedtogreenbuildingsinordertoincreasetransparencyandenableproducers to better meet requirements across different regional partners. Standards development


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AssociationofSoutheastAsianNations(ASEAN),andtheUnitedNationsEconomicCommissionforEurope.17

Regulatory cooperationarrangementscanprovideanopportunity to influencehowSPS/TBTmeasuresareimplemented in other countries. Promoting GRP inthese arrangements facilitates discussion andinformation exchange on the trading partner’smeasuresbyprovidingcommoncriteriaand languagefor assessing measures. Formalized, standingregulatorycooperationarrangements(forexample,theTransatlantic Economic Council between the UnitedStates and Europe) may increase certainty about apartner’s regulatory responses to future problems orproducts.Moreover, regulatorycooperation ingeneral

isaboutbuildingtrustamongregulatorswithregardtoregulatory systems and outcomes. This helps toprovide confidence that SPS/TBT measures andconformity assessment procedures will strike anefficientbalancebetweenpolicyobjectivesand traderestriction.

Therearedifferentlevelsoftrust,formalityanddegreeof engagement. The most basic category ofcooperation is simple informationexchangeand trustbuilding, which will lower transaction costs. A moreadvanced category of cooperation is mutualrecognition of accreditation systems and testingprocedures,whichlowerscostforexportsbyenablingconformity assessment to the requirementsofexport

work at APEC on green buildings involves both public and private stakeholders. The APEC SCSC is alsocollaboratingwiththeASEANConsultativeCommitteeonStandardsandQuality inthecontextofworkongreenbuildings.

ThisinitiativeillustrateshowapolicyobjectivethatiscommontotheAPECmembership,namelyaddressingmarket failures with cross-border effects related to environmental pollution, is being tackled throughregulatorycooperation.Inaddition,thisexampleshowshowcountriesaretryingtoengageatanearlystageon regulatorycooperationwith respect togreen technologies toensure that future regulatoryapproachesfurtherenvironmentalprotectionandtrade.

EU-China: Toys

RAPEX16-China isanonline informationexchangemechanismwhichseeks toenhanceandregularize thetransmission of data onproduct safety administration and enforcement between China and the EuropeanUnion. The initiative emerged from the Memorandum of Understanding signed in 2006 between theEuropean Commission Directorate-General for Health and Consumers (DG SANCO) and the GeneralAdministration of Quality Supervision, Inspection and Quarantine of China (AQSIQ). It is one element ofregulatorycooperationbetweentheEuropeanUnionandChina.

The initiative comprises information exchange between DG SANCO and AQSIQ with respect to toys ofChineseorigin thathavebeen identifiedasunsafeand thereforebannedorwithdrawnfromtheEuropeanmarket(asnotifiedtotheEuropeanCommissionviaRAPEX).Foritspart,AQSIQworkstowardspreventingfuturebansonChinesetoysintheEuropeanmarket,andinformstheEuropeanCommissionoftheresultsofinvestigationsconductedinresponsetothesenotifications,includinganymeasuresadopted.

Theinitiativeaimstoensurequalityandsafetyofconsumerproducts,protectconsumerrightsandinterests,andenhanceconsumerconfidenceinthecontextofgrowthoftradebetweenChinaandtheEuropeanUnion.Furthermore, the initiative seeks to enhance coordination in toy standards work at the InternationalOrganization for Standardization (ISO) level, and to improve awareness in China about applicablerequirements for toys in the European Union. It also includes technical cooperation activities to improveproduct quality and safety. RAPEX-China helps to build trust between regulators and consumers, reducetrade frictions, and create a culture of product safety, while maintaining an open market between theEuropeanUnionandChinafortoys.

Thisexampleisofinterestbecauseitusesanovelinformationexchangemechanismforcooperationtowardsthe achievement of toy safety. China and the European Union follow different national regulations orstandards for toy safety, given differing national preferences in this respect. Under this arrangement,cooperationlargelyconcernstheone-wayflowoftradeintoysfromChinatotheEuropeanUnion.Alternativestothisinformationexchangearrangementcouldbeharmonizationtointernationalstandardsorfullalignmentoftechnicalrequirements,butthesemaybeunrealisticobjectivesforvariousreasons. Instead, informationexchangeenablesbothChinaandtheEuropeanUniontoworktogethertomeetsharedpolicyobjectivesbyreducinginformationasymmetries.


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markets to be carried out in domestic laboratoriesprior to export. Other categories of arrangementsinvolving still greater levels of trust and engagementinclude mutual recognition of conformity assessmentresults, mutual recognition of technical regulations,including through recognition of equivalence, and fullharmonization of both technical regulations andassociatedconformityassessmentprocedures.

RecallingthediscussioninSectionE.1(c)onthedepthof integrationindifferingapproachestoaddressnon-tariff measures, the level of ambition for a particularregulatory cooperation activity may differ dependingon the contexts of the countries involved.18 Forexample, regulatory cooperation between two majortradingpartnerswithstrongeconomictiesmayaspiretofullharmonization,therebyleadingtoahighlevelofconvergence. On the other hand, regulatorycooperation between two economies with verydifferentpoliticalsystems,incomelevels,andlevelsofdevelopmentmayhavea lower levelofambition–forinstance, to increase understanding and confidence-buildingtofacilitatetrade.

Sharedregulatorytraditionsandinstitutionalstructurescan make the deep forms of regulatory cooperationeasier to achieve. Differences between countries,however,arenotnecessarilyanobstacletocooperation.In fact, differences between countries engaging inregulatory cooperation may provide impetus forregulatory innovation that increases efficiency andlowerscosts.19

Ofcourse,notallformsofregulatorycooperationcanbecaptured by these broad categories, and manyarrangementsinvolveaspectsofdifferentcategories.Forinstance,regulatorycooperationonasectorbasisoccursbetween partners in regional organizations such asAPEC and ASEAN, including various mechanisms withprogressive levels of ambition under the umbrella of asinglescheme.Thisenablespartnerstocooperatetoanextentappropriatetotheirnationalcircumstances.20

Novel cooperation between member states of theCommon Market for Eastern and Southern Africa(COMESA), the East African Community (EAC) andtheSouthernAfricanDevelopmentCommunity(SADC)is occurring in the form of the Tripartite Non-TariffBarriers (NTB) Mechanism. A web-based platformallowsexporterstosubmitcomplaintsaboutSPS/TBTmeasures in export markets that are creating tradeproblems,andthenforwardscomplaintstoresponsiblenational authorities for resolution through bilateralconsultations among the member states affected, orthroughrelevantregionalstructures(Kalenga,2012).

Both the TBT and SPS agreements encourage WTOmembers to cooperate. The SPS Agreementencourages bilateral equivalence arrangements (seeBox E.4 and Section B), two of which have beennotified to the SPS Committee. Similarly, the TBT

Agreementencouragesmemberstoreachagreementson mutual recognition of results of each other’sconformityassessmentprocedures (seeSectionD.4).Thesearrangementsarebeneficialbecausetheylowercosts to exporters relating to the need to monitorpotential policy changes in export markets (WorldTradeOrganization(WTO),2011b).

International standard-setting

The development of international standards is, bydefinition, a form of multilateral cooperation.Standardization activities are a process wherestakeholders, including governments, cooperate onmatters that may have a direct bearing on SPS/TBTmeasures.Theoutcome–aninternationalstandard–is a tangible result of such cooperation and is,essentially(andwhenatitsbest),ameansofcodifyingand diffusing state-of-the-art scientific and technicalknowledge related to a particular product or policyproblem.21

BoththeTBTandSPSagreementsstronglyencouragethe use of international standards – as well asparticipation in the development of such standards.Theagreementsincludearebuttablepresumptionthatregulations which are in accordance with relevantinternationalstandardswillbe, inthecaseoftheTBTAgreement, “presumed not to create an unnecessaryobstacleto internationaltrade”and inthecaseoftheSPSAgreement, “presumedtobeconsistentwith the…provisionsoftheAgreement”.22

Internationalstandardsaredevelopedbygovernmentalbodies, non-governmental bodies (including “privatestandards”),orsometimesacombinationofboth.Whilethe SPS Agreement specifically names threeinternational bodies that develop internationalstandards which serve as benchmarks, the TBTAgreement does not name any specific body in thisregard.23 However, international standards are not apanacea – and the international standardizationprocessitselfmaynotalwaysfunctionideally;thishasbeenattherootofmanydiscussionsattheWTO,andpresentsaparticularchallengeforWTOmembers(thisisfurtherdiscussedinSectionE.4).

Conformity assessment procedures

Cooperationdoesnotonlytakeplaceatthestandards-development phase; it is also relevant to conformityassessment, and, more specifically, to facilitating therecognition of the results of conformity assessment(e.g. mutual recognition arrangements, equivalenceagreements and the Supplier’s Declaration ofConformity). In other words, actually meeting thestandardmaynotbeenough,itisalsonecessarytobeable todemonstratecompliance tocreateconfidencein the quality and safety of exported products (formany developing countries, there are capacityconstraints in this regard24). Members of the TBT


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Committeehavebeguntoconsiderthedevelopmentofpractical guidelines on how to choose and designefficient and effective mechanisms that can assistcountriesincooperatingalsointheareaofconformityassessment.

Inthisregard,bothregionalandinternationalsystemsfor conformity assessment can contribute to solvingthe problems related to multiple testing andcertification/registrationfortradersandindustries–achallengethatcanbeparticularlydifficulttoovercomefor small and medium-sized enterprises (SMEs).DelegationsintheTBTCommitteehaverecentlybeendiscussing the work of the International LaboratoryAccreditationCooperation(ILAC)andtheInternationalAccreditation Forum (IAF) as useful examples ofinternational cooperation in the area of conformityassessment.26

The ILAC is the global authority for laboratory andinspection body accreditation, and the IAF overseesaccreditation in the fields of the certification ofmanagement systems, personnel and products. Theobjective of both organizations is the same: oneconformity assessment result accepted in everymarket place. The main tool used by the twoorganizations is multilateral mutual recognitionarrangements among accreditation bodies with ashared vision of a single global system of conformityassessment. This reduces risks for business,regulatorsandtheconsumerbyensuringthattheycanrely on accredited services. In the on-going SixthTriennialReviewoftheTBTAgreement,promptedbyaproposalfromtheUnitedStates,27thereisdiscussiononhowmembers’experiencesintheuseofthesetwointernational systems for conformity assessment canserve to strengthen the implementation of the TBTAgreement.

BoxE.4: Equivalence in the SPS Agreement

TheSPSAgreement createsa framework that supports convergenceofpolicies tominimize thenegativeimpactsofSPSmeasuresontrade,whileat thesametimesupportingpolicydiversity.Todothis, theSPSAgreementexplicitly recognizes that althoughmeasuresmaydiffer among tradingpartners, this doesnotimplythattheydonotachievethesamelevelofappropriatelevelofprotection(ALOP).Indeed,intermsofthe SPS Agreement, trading partners are obliged to accept SPS measures as equivalent if the exportingcountryobjectivelydemonstratesthatitsmeasureachievestheimportingcountry’sALOP.Equivalencecanbeacceptedforaspecificmeasureormeasuresrelatedtoacertainproductorcategoriesofproducts,oronasystems-widebasis.TheAgreementalsospecifiesthatexportingcountriesshouldfacilitatethisprocessbyprovidingimportingcountries’accessforinspection,testingandotherprocedures.

ALOPcanbeachieved indifferentways,andcountries’measuresmaydivergeduetopoliticalandhealth-relatedfactors.Theobligationtoexplorewhethermeasuresareequivalentcreatesincentivesforcountriestolearnfromtheexperienceoftheirtradingpartnersandthusmaycontributetocapacitybuilding.Still,giventhe technological requirements inherent inmanySPSmeasures, developingcountriesmayhaveconcernsaboutallocatingresourcestoimprovingSPScapacityiftheydonothaveconfidencethattheirSPSmeasureswillberecognizedasequivalent.

To address the concerns of developing countries regarding the implementation of equivalence, the SPSCommitteedevelopedguidelines(G/SPS/19/Rev.2).Theseguidelinesoffermoredetailsaboutthetypesofinformation thatshouldbeprovidedbyboth importingandexportingmembers.Specifically, theguidelinescall for importingcountries to identify relevant risks, explain itsALOP, andprovide its riskassessmentortechnicaljustificationforitsmeasures.Theguidelinesalsoindicatethatimportingcountriesshouldtakeintoaccountthehistoryoftradewiththeexportingcountrysinceahistoryoftradeimpliesafamiliaritywiththeinfrastructure and measures. The three sisters – Codex Alimentarius, the World Organization for AnimalHealth and the International Plant Protection Convention – have also developed guidance in the area ofequivalencerelatedtotheirspecificareasofexpertise.

Given the importance of dialogue among trading partners in order for the concept of equivalence to beeffectively implemented, transparency should play a key role. The SPS Committee includes the issue ofequivalence as a standing item on the agenda and has developed a notification template that capturesinformation on equivalence agreements. Importing countries that have accepted the equivalence of SPSmeasuresofothercountriesareexpected tonotify therelevantmeasuresandaffectedproducts.Todate,onlytwonotificationshavebeensubmitted.Whilethenotificationsfromcountrieshavenotbeenforthcoming,contributionsduring theSPSCommitteeby the threesisters25on theirworkprogrammesonequivalenceenhancestransparencyofmultilateraleffortsinthisarea.


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TBT and SPS committees

TheTBTandSPScommitteesprovideWTOmemberswith the opportunity to discuss specific SPS/TBTmeasures as well as more general issues, such asgoodregulatorypractices,internationalstandardsandtransparency. With respect to GRP, members shareinformation on the development and application ofthese practices. Members have emphasized thatregulations developed in the spirit of GRP are morelikelytoachievetheirpublicpolicyobjectives,andlesslikelytobedrivenbycompetitivenessconsiderations.28Both committees hold regular discussions oninternational standards, and receive updates fromobserverbodiesthatsetsuchstandards.

WTO members also discuss specific trade concerns(STCs – see Sections B.2 and C.2) in the SPS/TBTcommittees. In some cases, the concern is simply amatterofclarificationaboutthescopeorstatusofthemeasure;inothercases,theconcernrelatestoactualorperceiveddiscriminatoryortrade-restrictiveaspectsof draft or applied measures. These discussionsencouragemembers to follow thebenchmarkssetbyinternational standards, and to use GRP whenformulating measures – thus promoting regulatoryconvergence. For instance, over one-third of the330 specific trade concerns raised in the TBTCommitteesince1995havebeenrelated, inonewayoranother,tointernationalstandards.

Issuesthatarise in theSPS/TBTcommittees includewhetheraninternationalstandardwasusedasabasisfor a particular measure, whether members havedeviated from relevant international standards, andwhether relevant international guidance exists. Inaddition, most specific trade concerns raised in theTBT Committee are indirectly related to the use ornon-useofGRPinthecontextofaparticularmeasure– for example, with respect to the rationale for ameasure, transparency questions (e.g. publicconsultation),orregulatorydesignandanassessmentofitsimpactontrade(e.g.theuseofregulatoryimpactassessments). The discussion of specific tradeconcernsintheSPSCommitteecoversimilarthemes,with the same proportion of such concerns explicitlyreferring to international standards. Out of the327 specific trade concerns raised in the SPSCommittee since 1995, almost one-third referred tointernational standards. The largest proportion ofconcerns (about 40 per cent) have been related toanimal health and zoonoses.29 Food safety and planthealthconcernseachconstituteaboutaquarteroftheremainingconcerns.

The multilateral review of trade concerns in theSPS/TBTcommitteeshelpstoshedlightonpotentiallyproblematic SPS/TBT measures, and encouragesWTOmemberstoavoidunnecessarilytrade-restrictivemeasures that exceed benchmarks or do not followbest practice. In addition, members whose measures

are challenged often provide information or updateswhich increase the transparency of SPS/TBTmeasures and regulatory processes (see G/SPS/GEN/204/series and G/TBT/GEN/74/series).Furthermore, information about the impact that acertain measure has on trade can help membersidentify regulatory inefficiencies and further developGRP.ThisisdiscussedinmoredetailinSectionE.4.

Both committees also give members the opportunityto highlight draft SPS/TBT measures. The TBT andSPS agreements oblige members to notify the WTOSecretariat when they are drafting new SPS/TBTmeasures that are not in accordance with relevantinternational standards, and that may have a‘significanteffectontrade’.Suchnotificationscontaininformation about the products covered by themeasure, its objectives and the rationale for themeasure.Theyalsoallowothermembers tocommentonthedesignofmeasures.

Since1995,theTBTandSPScommitteeshavetakendecisions and developed recommendations30 toextend the notification requirements laid out in therelevant agreements in order to further enhance thetransparencyofmeasuresandtogivemembersbetteraccess to information contained, or referred to, innotifications.Someexamples includegivingguidancetomembersaboutwhichmeasuresshouldbenotified,developingrecommendedtimeframesfornotificationsaswellascommentperiods(minimumof60days)andentry intoforce(minimumofsixmonthsfromtheendof the comment period) and establishing proceduresfor making the full texts of SPS/TBT measuresavailable in multiple languages. Other decisions andrecommendations include encouraging members torespond to comments and to take these commentsintoaccountwhenfinalizingmeasuresanddevelopingweb portals for the WTO Secretariat to disseminateinformationonSPS/TBTmeasures.31

(b) Cooperationonservicesmeasures

As explained in Section B.3, the nature of servicesmakesregulationstheprincipallimittomarketaccess.Firstandforemost,thefeasibilityofapplyingatarifftotheinternationalprovisionofservicesisremote.Tradeprotectioninservices,whereitexists,willbefoundininternallaws,regulations,rules,procedures,decisions,administrative actions, and other such measures.Although services regulations often do not primarilyhaveatrade-relatedfocus,theremaybecaseswhereregulations have unnecessarily trade-distortive andrestrictive effects. Distinguishing between thoseregulations which are legitimate and those which areconsidered protectionist is fraught with difficulties.The sub-sections below review how countriescooperate in services depending on the type ofmeasureinquestion.


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(i) How do countries cooperate on trade in services?

To facilitate cooperation, services trade agreements,most notably the GATS, have distinguished betweenthreetypesofservicesmeasures,namely:

(i) measures restricting market access by settingquantitative restrictions and requirements onlegal form (i.e. restrictions on the entry of, orlimitsontheoutputby,theservicessupplier)

(ii) measures which discriminate against foreignservices and services suppliers by modifyingconditions of competition in favour of nationalservicesandservicesuppliers32

(iii) domesticregulationswhicharenon-discriminatoryandnon-quantitativeinnature.

The extent to which countries have been willing tocooperate on trade in services differs depending onthe measures involved. The GATS framework definesmeasures in categories (i) and (ii) as market accessand national treatment limitations which are to bereduced or eliminated through successive rounds ofnegotiations. Measures in category (iii), on the otherhand, have largely not been subjected to tradedisciplines, apart from certain general obligationsunder GATS. There is, however, a mandate inArticleVI:4of theGATStonegotiatedisciplinesonaspecific set of domestic regulations, namely thosemeasures relating to licensing, qualifications andtechnical standards. The rationale for negotiatingdisciplinesonthisparticularsetofdomesticregulationsis not too different from that of the TBT and SPSagreements, with the focus on ensuring that licensingand qualification procedures and requirements andtechnical standards do not constitute unnecessarybarrierstotradeinservices.

AlthoughtherearestrongparallelsbetweentheTBTandSPS agreements and the type of domestic regulationdisciplines being negotiated under Article VI:4 of theGATS, the GATS framework for regulatory cooperationon services, apart from the negotiations of specificcommitments,remainsatanascentstage.Thediscussionthatfollowsexaminestheextenttowhichcooperationoneachofthesebroadcategoriesofmeasurescanbesaidtobetakingplaceinrespecttotheimplementationandoperation of the agreement. In the case of category(iii)domesticregulation,itshouldbenotedthatthefocusis on those measures for which disciplines are beingnegotiated as the rationale, issues and challenges arevery similar to those encountered in the TBT and SPSagreements.

(ii) Cooperation on progressive liberalization

Section B.3(c) has already provided a discussion ofwhy quantitative restrictions and discriminatory

measuresarethemosttradedistortive,thusprovidinga stronger case for cooperation. In principle, suchcooperation is undertaken through negotiations toremove market access limitations and nationaltreatment discrimination. The results of suchnegotiations are “bound” through a legal instrument,whichcanaddcredibilitytoexistingandfuturereformastheyarecostlytorevoke.

InthecaseoftheGATS,cooperationonthemeasuresincategories(i)and(ii)culminates inaWTOmemberundertaking to guarantee a minimum level of marketaccess and national treatment for each committedsector.Schedulesforspecificcommitmentsinservicesthusperformasimilar function to tariffschedules forgoods, in the sense that they facilitate cooperationthrough reciprocal bargaining. In the case of trade inservices, this occurs through request-offernegotiations between pairs or groups of WTOmembers with common interests or demands, andcouldbethoughtofasaframeworkofcooperation.

Therearegoodpolitical economic reasonswhyWTOmembersmighthavebeenwillingtocooperateontheremoval of market access and national treatmentlimitations. Some of these have been discussed inSection B.3 and Section E.1. What is noteworthy isthattheexperienceoftheGATS,aswellaspreferentialtradeagreements,asshownbyRoyetal.(2007),hasmainly concerned liberalization commitments relatingto market entry and discrimination and not otheraspectsofamember’sregulatoryregimeorconduct.

Indeed,suchanapproachwastheintendeddesignofthe GATS, which was why a separate mandate tonegotiate disciplines on domestic regulation wasnecessary. Thus, when a WTO member removes alimitationon thenumberof foreignservicessuppliersthat can operate in its territory, other types ofregulationsremainunaffected.

The regulator could still require that the servicessupplier obtain a licence before the service can besupplied. Obtaining such authorization could includethe fulfilment of both substantive and proceduralrequirements.Employeesoftheservicessuppliermayneed to satisfy particular qualification requirements.The services supplier may need to ensure that theservices provided conform with certain technicalrequirements. In addition, any business operationwouldbesubject toenvironmental,health,safetyandlabour regulations. All of these non-discriminatorymeasures, which are typically found in licensing andqualificationregimes,oftenhavetobefulfilledbeforeauthorization to supply a service is provided. Thus,theymay haveaprofound impact on services marketaccess but would not be subject to negotiations onprogressiveliberalization.

In particular, domestic regulations in the form ofcumbersomeand/oropaquelicensingandqualification


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procedures, subjective or partial licensing andqualification criteria, excessively burdensomerequirements and administrative “red tape” can servetoobstructtradeinservices,eveniftheydonotappeartobeprimarilydirectedattrade.Thesheerdiversityofregulatory systems and standards in marketsinternationallycanalsosignificantlyraisethecostsofcompliancefortheservicessupplierandactasindirectbarriers to the supply of services, even in situationswhere there are no market access restrictions ordiscriminatorymeasuresinforce.ThisiswhytheGATSframework for cooperation had to go beyond theremoval of market access and national treatmentlimitationsof the typedescribed incategories (i) and(ii) and address particular aspects of domesticregulation.

(iii) Cooperation on domestic regulation

While theeconomic theory forcooperationunder theGATS is in part different from the one for the GATT(see Box E.1), there is an important similarity that isaddressed here. The policy substitution problemdiscussed in Section E.1, with specific reference totradeingoods,couldalsoapplytotradeinservices.

WhenWTOmembersmakecommitmentsonservicesmeasures in categories (i) and (ii), governments mayface incentives to alter domestic regulations or toimplement them in a particularly obstructive manner(i.e. Article VI:4 measures as described above). Inpractice,theproblemmaynotariseinthesamewayinservicestradeasitdoesingoodstradesincethereisa large gap between GATS bindings and actualmeasures. There is less incentive to use domesticregulation as an alternative way of limiting marketaccess or national treatment, since a member canchange its regime up to the level of the binding.Indeed,policysubstitutioninservicesmightalsooccurinreverse.Governmentsthatlackadequateregulationsandenforcementcapacitymightbe reluctant toopenmarkets and might therefore maintain market accessrestrictions.

Unlike the TBT and SPS agreements, the GATS hasyet to fully develop a framework for cooperation ondomesticregulationinservices.ThereisamandateinArticle VI:4 of the GATS to negotiate any necessarydisciplines toensure thatmeasuresrelated tocertaintypes of regulations (qualification and licensingrequirementsandprocedures,andtechnicalstandards)are, among other things, based on transparent andobjective criteria and not more burdensome thannecessary to ensure the quality of the services. TheDecision on Domestic Regulation (S/L/70) specifiesthree separate areas for the development of anynecessary disciplines. This includes: (i) thedevelopment of generally applicable disciplines (i.e.horizontal disciplines to be applied to all sectors);(ii)disciplinesfor individualsectorsorgroupsthereof;and(iii)disciplinesforprofessionalservices.

In1998,theDisciplinesonDomesticRegulationintheAccountancy Sector (S/L/64) were adopted by theWTO’s Council for Trade in Services. The relevantCouncil Decision (S/L/63) provides that the“accountancy disciplines” are applicable only to WTOmembers with specific commitments in accountancy.The disciplines are to be integrated into the GATS,togetherwithanynew results that theWorkingPartyonDomesticRegulationmayachieveintheinterim,attheendofthecurrentroundoftradenegotiations.

Subsequent to the Accountancy Disciplines, WTOmembers embarked on the negotiation of “horizontaldisciplines”but thisdidnotprecludethepossibilityoffutureworkon“sectoraldisciplines”.Issuesconcerningthenegotiationofhorizontaldisciplinesarediscussedlater in this section. It shouldbenoted that therearealready some existing general obligations requiringcooperationamongmembers,particularlywithrespectto transparency and administrative procedures, andthat the disciplines to be negotiated are expected tobuild upon them. The following sub-sections discusshowthesehavebeenusedandthetypeofcooperationthat would be required by domestic regulationdisciplines.

Existing disciplines and mechanisms

Article III of the GATS requires WTO members topublish all measures pertaining to or affecting theGATS.Inaddition,forserviceswhicharecoveredbyamember’sspecificcommitments,thereisanobligationto notify all laws, regulations or administrativeguidelines significantly affecting trade in services.Membersarealsoobliged toestablishenquirypointstoprovidespecificinformationtoothermembersuponrequest.Notifications,iffullyimplemented,couldbeanimportant avenue to improve information sharing andto address issues of regulatory transparency inservices. However, in practice, obtaining compliancewith the notification obligation has been difficult toachieve. Several reasons for this low compliance arediscussedinSectionCandSectionE.4(b).

Other transparency requirements relate to therecognition of the education or experience obtained,requirementsmet,orlicencesorcertificationsgrantedtoaservicessupplierinaparticularcountry.ArticleVIIof the GATS does not set any particular substantiverequirementsonhowrecognitionshouldbeundertakenbut it requires the notification of existing recognitionmeasures, as well as the opening of any newnegotiations. In such a case, adequate opportunityshouldbeprovidedtoanymemberwhichindicatesitsinterest in participating. However, as with thenotification requirement in Article III, compliance hasbeenlimited.

Nevertheless, WTO members adopted a set ofvoluntaryguidelinesformutualrecognitionagreementsor arrangements in the accountancy sector. These


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guidelinescover theconductofnegotiations, relevantobligationsundertheGATS,andtheformandcontentof agreements. The objective is to make it easier forparties to negotiate recognition agreements and forthirdpartiestonegotiationtheiraccessiontothem,ortonegotiatecomparableones.

Apart from transparency,cooperation isalso requiredon the administration of domestic regulation. Theseprovisions, which are contained in Article VI of theGATS, have the goal of ensuring due process andopenness in decision making. For instance, allmeasures of general application affecting trade inservices,forwhichcommitmentshavebeentaken,areto be administered in a reasonable, objective andtransparent manner. Information must be provided onthe status of applications for the authorization tosupply a service. Where specific commitmentsregardingprofessionalserviceshavebeenundertaken,adequate procedures to verify the competence ofprofessionals of another country must be provided.WhilealloftheseGATSprovisionssuggestthatWTOmembers saw a need for cooperation on regulatorymatters affecting trade in services, it is not clear towhat extent these existing provisions have beenutilized.

However, the adoption of Disciplines on DomesticRegulationintheAccountancySector(S/L/64)bytheServicesCouncilinDecember1998wasanoteworthyachievement. These disciplines are to be integratedintotheGATS, togetherwithanynewresults that theWorkingPartyonDomesticRegulationmayachieve,atthe end of the current round of negotiations. A corefeature of the disciplines is their focus on (non-discriminatory) regulations that are not subject toscheduling under Article XVI (market access) andArticle XVII (national treatment). The AccountancyDisciplinesalsoincludedaprovisionthatwouldrequireWTOmemberstoensurethatsuch“measuresarenotmore trade-restrictive than necessary to fulfil alegitimate objective”. Legitimate objectives weredefined as including the protection of consumers(which includes all users of accounting services andthe public generally), the quality of the service,professional competence and the integrity of theprofession.

Developing new disciplines

Apart from requiring adherence to the obligationsdiscussed above and completing the AccountancyDisciplines, the GATS has not ventured much furtherintosubjectingnon-discriminatorydomesticregulationtotradedisciplines.Yet,WTOmembersrecognizedtheneedtocooperateonregulatoryissuesbyestablishinga mandate on domestic regulation disciplines inArticle VI.4 of the GATS. Reaching understanding ontheappropriatescopeandambitionforsuchdisciplineshas been fraught with difficulties. A central problemhasbeenhowtodistinguishbetweenrequirements in

pursuit of legitimate objectives and those which areaimedatrestrictingtrade.Somemembershavearguedin favour of a necessity test, while others are of theviewthatsuchatestwouldbetooonerousandwouldunduly restrict the freedom of regulators. Thediscussion in Section B points to difficulties inansweringthisquestionfortradeinservicesgiventherelativelylimitedtheoreticalandempiricalworkonthisissue.

It also begs the question as to what extent couldgovernments cooperate to minimize the negativeeffects arising from domestic regulation, amidst theconsiderable regulatory diversity across sectors andcountries.Inthisregard,theexperienceoftheTBTandSPS agreements are instructive where cooperation isfocused on encouraging members to work towardseliminating or reducing requirements which are notnecessaryfortheachievementofthepolicyobjectiveathand. Similar mechanisms could be used in services.Thesecouldincludestrongertransparencyprovisions,ageneralpresumptioninfavourofinternationalstandardsand an institutional framework for monitoring andinformation exchange. The TBT and SPS agreementsalso contain a necessity test, a subject of muchcontention in the context of the domestic regulationnegotiations(seeSectionE.4(e)(iii)).33

Despitethesesimilarities,thereisacriticaldifferencein that services are intangible and thus cannot besampled, testedand inspected.Thus,proceduresandmethods used in TBT and SPS measures cannot beeasily applied to services – for instance, thedevelopment of science-based standards throughlaboratorytestingismuchharderorsimplynotfeasiblefor services. This in turn suggests that evaluation,verificationandassuranceofconformitycanoftennotbe undertaken on the service itself but has to be onthe service supplier. Since the “product” cannot beeasily examined, regulatory precaution is likely to behigherinservicesthanitisforgoodsandestablishinga commonly acceptable level of risk tolerance hardertoachieve.

Below isadescriptionof the typeof issuesonwhichcooperation among countries is being sought in thecontext of the domestic regulation negotiations. Itshould be noted that services negotiations dealseparately with the issues related to transparency,objectivityandthesimplificationofprocedures.

Transparency

The negotiations seek to ensure that information onregulatory requirements and procedures areaccessible toallpartiesconcerned.This includes thepublication and availability of information onregulations and procedures, the specification ofreasonabletimeperiodsforrespondingtoapplicationsfor licences, information on why an application wasrejected and notification on what information is


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missinginanapplication.Italsoincludesspecificationof reasonable time periods for responding toapplicationsandinformationonproceduresforreviewofadministrativedecisions.

Thenewdomestic regulationdisciplinesare intendedtotakeaccountof,andbuildon,ArticleIIIprovisionsoftheGATSonpublicationandnotificationofmeasures(see also Section E.4). Should the transparencyprovisions be agreed, it would contribute to reducinginformation asymmetries which are prevalent inservices sectors and would provide greater certaintytoservicessuppliers.

Impartiality and objectivity

Services suppliers typically want to be assured thatassessmentsbyregulatoryandsupervisoryauthoritiesfor authorization to supply a service, if suchauthorization is required, will be conducted in areasonable, impartial and objective manner. It is alsowell recognized that efficient outcomes are bestachieved when decisions are independent from anycommercial interests or political influence. In thisconnection, the formulation of clear criteria andprocedurescanbevitallyimportanttoavoidexcessivediscretion and to help ensure reasonableness,impartialityandobjectivityintheregulatoryprocess.

Simplification of procedures

Long and complex procedures for assessing anapplication for authorization to supply a service maydiscourageservicessupplierstoseekaccesstoahostmember. Such complexity may also serve to hideprotectionist intentions. Simplification of procedureswill facilitate the activities of services suppliers andreducetheopportunitiesforhiddenprotectionism.

Nonetheless, in many services sectors, thecharacteristicsoftheservicessuppliedmaynotalwaysallow for very simple procedures to be adopted. Forinstance, several authorities may need to be involvedin ensuring the quality of the service, in avoidingnegative impact on the environment or in enablingpublic consultations. The complexity of a procedurethusneeds tobeconsidered in its context.Linked tothe issue of simplification is procedural certainty. Itstandstoreasonthatservicessupplierswouldexpectthat assessment criteria are not modified during thecourse of an application. Should this be unavoidable,applicants would need to have a reasonable timeperiodtoadjusttoamendedcriteriaorprocedures.

Recognition of equivalence

To ensure that foreign services suppliers meet thequalificationandotherstandardsimposedonsuppliersof national origin, regulators are often called upon toassess the equivalence of domestic and foreignqualifications. Inmanycases, theymay require foreign

applicants for licencesorotherbadgesofauthority tosubmit a service to tests or to fulfil conditions todemonstrateequivalence.Sincesuchtestsareimposedtoensurethatadomesticstandardismet,theymayberegarded as domestic regulations. Negotiations onArticle VI.4 disciplines have been grappling with thequestion of how to ensure that such requirementsshould be no more burdensome than necessary toensure the quality of the service. Regulators in thesesituations could be obliged to take account ofqualificationsalreadyearnedinthehomecountryoftheforeignservicessupplierandtomodifyaccordinglyanyadditionalrequirementsimposeduponthem.

Theconceptofequivalencehasalreadybeenused inthe qualification requirements section of theAccountancy Disciplines, in Article 2.7 of the TBTAgreementandinArticle4.11oftheSPSAgreement.Complementing this principle, governments areencouraged to negotiate agreements to accept theequivalence of qualifications obtained under otherjurisdictionsorunilaterallyrecognizeequivalence.34

International standards

Acceptance of international standards could facilitatethe evaluation of qualifications obtained abroad andhelp promote services trade. Governments involved instandard-settingattheinternationallevelshouldensurethatthisisdoneinastransparentamanneraspossiblein order to avoid “capture” by specific-interest groups.GATS Article VI:5(b) says that in determining whetherthe requirementsarecompatiblewith theprinciplesofnecessity,transparencyandobjectivity,accountshallbetakenofinternationalstandardsofrelevantinternationalorganizationsappliedbyWTOmembers.

The term “relevant international organizations” refersto international bodieswhosemembership isopen totherelevantbodiesofatleastallmembersoftheWTO.The TBT and SPS agreements already contain astrong presumption in favour of internationalstandards.Inservices,whilstthereisastrongincentivefor a similar presumption in favour of internationalstandards, therearesignificantobstacles.Forastart,international standards are less prevalent in servicesas compared with goods. There are also questionsconcerningtheexactnatureof technicalstandards inservices; are they predominantly product or processstandards, or both, and to what extent could a tradediscipline cover voluntary standards, which may beissuedbynon-governmentalorganizationswithoutanydelegatedauthority.IntheTBTcontext,adistinctionismadebetween“standards”asvoluntarymeasuresand“technical regulations” as mandatory. The GATS,however,makesnosuchdistinction.

Cooperation will not in itself be sufficient to addressall externalities which might arise from regulatorydivergence. The relative scarcity of internationalstandards in services, as compared with goods,


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reflects in part the differences in regulatorypreferences. In such a situation, the regulatorydivergencebetweenjurisdictionscouldwellbeadirectconsequenceofapreferenceforaparticularobjectiveaswellasitslevelofattainment.Itisnotobviouswhycountrieswouldcompromiseonachievingaregulatoryobjective which is considered legitimate andnecessary. At best, cooperation might be sought onfinding less trade-restrictivemeansofachievingsuchan objective or on ways to help services suppliersmeet particular standards or other substantiverequirements.

Cooperationondomesticregulationinserviceswouldrequire a mix of negative integration, in terms ofcommon prohibitions on particular practices and/oradherence to a particular set of principles. It wouldalsoneed tobe complemented bypositive actions toimprove regulators’ understanding of, and confidencein, standards and requirements with which they maynotbefamiliar.

Cooperation on domestic regulation in services maythusrequireactiontobetakenonatleastthreefronts:(i) establishing an appropriate framework of rules toensurethatdomesticregulationdoesnotconstituteanunnecessarybarriertotradeinservices;(ii)promotinggreater use of trade instruments for pro-competitiveregulation; and (iii) supporting regulatory capacitybuilding for trade in services. The first of these isalready being undertaken through the domesticregulation negotiations under the GATS Article VI:4mandate. Theother twoactionpoints call forgreaterregulatory cooperation among agencies andinternationalorganizations,andcouldbelinkedwithatechnical cooperation agenda to address regulatorysupply-side constraints. These challenges arediscussedingreaterdetailinSectionE.4.

(iv) Other forms of cooperation

Cooperationamongregulatorshasbeenmostevidentin the telecommunications sector. Going beyond theelementscontainedintheGATSArticleVI:4mandate,the Reference Paper containing a set of pro-competitiveprincipleswasamajorachievementofthe1997 Agreement on Basic Telecommunications. TheReference Paper has helped shape the regulatoryenvironment for telecommunications by elaborating asetofprinciplescoveringmatterssuchascompetitionsafeguards, interconnection guarantees, transparentlicensing processes and the independence ofregulators.

Unlikeageneralobligation, this instrumententers intoforce when it is attached by a WTO member to itsschedule of specific commitments. Strictly speakingthis instrument deals with a broader set of regulatoryissues than those contained under the Article VI:4mandate. It is mentioned here as it provides a usefulexampleofregulatorycooperationwhichmightperhaps

be emulated in other sectors. The Reference Paperapproach which is undertaken as additionalcommitments(ArticleXVIII)couldalsoserveasamodelfor cooperation on other regulatory issues, includingdomestic regulation disciplines under Article VI:4.TheseissuesarediscussedfurtherinSectionE.4.

ThevariousGATSbodiesdealingwithimplementationandoperationoftheAgreementalsoprovideforaforcooperationonotheraspectsofservicesregulations.Memberscan,andhaveraised,regulatorymattersfordiscussion. For example, the Council for Trade inServices has been examining regulatory issuesrelatingtointernationalmobileroamingcharges.TheCommittee on Trade in Financial Services haspursued discussions on the financial crisis andregulatoryreformissues.TheCommitteeonSpecificCommitments, in addressing regular issues such astheclassificationofservices,requirestheinteractionof regulators with specific expertise and knowledgeoftheindustry.Thatbeingsaid,thesebodies–unlikethe TBT and SPS committees – were not primarilydesignedasforaforregulatorycooperation.ThefactthatthereisnosuchforumisnotsurprisingsincetheGATS has yet to negotiate a set of disciplines thatwould serve a similar purpose as the SPS and TBTagreements.

Outside of the WTO, cooperation on regulationaffecting trade in services occurs in many differentfora.Royetal.(2007)havefoundthatoverallservicesliberalization commitments in preferential tradeagreements (PTAs) have gone beyond current GATScommitments as well as offers tabled in the DohaRound negotiations. There is, however, little evidencetosuggestthatPTAshavegonefurtherthantheGATSindevelopingdisciplinesondomestic regulationor inestablishing new avenues for regulatory cooperation.MostPTAshavereplicatedtheprovisionscontainedinArticleVIof theGATS. ItwouldseemthatPTAshaveencounteredthesamedifficultiesasatthemultilaterallevel in moving this subject forwards. There are,however,someexceptions.

MattooandSauvé(2010)havenotedtheinclusionofanecessity test in the Switzerland-Japan PTA, a fullchapter on domestic regulation in the Australia-NewZealand Closer Economic Relations Agreement, andadditionalservices-specificprovisionsontransparencyin US agreements. There are also necessity testprovisions in the Trans-Pacific Strategic EconomicPartnershipAgreementandinMercosur.

Outside the context of trade negotiations, certainregional organizations have developed principles orcodes of good regulatory practices that wouldcomplementservices liberalization.Someof themostdeveloped of these include the OECD GuidingPrinciplesonRegulatoryQualityandPerformanceandthe APEC-OECD Integrated Checklist on RegulatoryReform. These instruments, which deal with all


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regulations and not just those involving the servicessector, provide non-binding principles on how todesign regulations which support market opennessandcompetition.

There is also a relatively long history of regulatorycooperationatthesectorallevel,suchasinpostalandcommunications services, financial services,transportation, education as well as certainprofessional services. Such cooperation has beennecessary to deal with the effects of internationalinter-dependencies which demand coordinatedregulatory response from different jurisdictions inorder to be effective. Cooperation has also beenrequired to achieve compatibility and inter-operabilitybetweendifferentsystemsandnetworks.

For example, the International Federation ofAccountants (IFAC), the International AccountingStandards Committee (IASC) and the InternationalOrganization of Securities Commissions (IOSCO) setinternational standards for the accountancy sector.The Universal Postal Convention defines generalguidelines on international postal services andregulations on the operations of mail services. Thestandards developed by the InternationalTelecommunication Union (ITU) are fundamental tothe functioning and inter-operability of information,communication and technology (ICT) networksglobally.Ineducation,theRegionalConventionsoftheUnited Nations Educational, Scientific and CulturalOrganization (UNESCO) have been the maininternational instruments addressing the recognitionof academic qualifications for academic andsometimesprofessionalpurposes.

In the financial sector, the Basel Committee onBanking Supervision provides a forum for regularcooperationonbankingsupervisorymatters,withtheobjective of enhancing understanding of keysupervisory issues and improving the quality ofbanking supervision worldwide. A Financial StabilityBoard (FSB), which brings together nationalauthorities responsible for financial stability insignificant international financial centres,international financial institutions, sector-specificinternationalgroupingsofregulatorsandsupervisors,and committees of central bank experts, has alsobeen established. The FSB coordinates the work ofnational financial authorities and internationalstandard-setting bodies, with the aim of developingand promoting effective regulatory, supervisory andotherfinancialsectorpolicies.

Althoughnotundertakenprimarilyforthepurposesoftrade,suchcooperationhasimportantimplications,asit can encourage greater understanding, if notharmonization, among regulators. Thereare, however,risks as international standard setting or regulationmay by chance or by design serve the interests ofthose that have the resources to participate in and

influencetheprocess.Whilesuchconcernshavebeenverymuchattheforefrontingoodstrade(seeSectionE.4),therehasbeenlessdiscussionandawarenessofitinservicestrade.Someofthishastodowiththefactthattheregulationofservicesislessdevelopedattheinternational level and where such instruments doexist,theytendtofocusonparticularsectors.

3. GATT/WTOdisciplinesonNTMsasinterpretedindisputesettlement

Thediscussioninprecedingsectionsofthisreporthasexplained that, while some non-tariff measures aremotivated principally by a desire to protect import-competing sectors, others pursue legitimate publicpolicy objectives, such as safeguarding human andanimal health, consumer protection, or promotingenvironmental sustainability. In this sub-section, welook at GATT/WTO rules, as interpreted in disputesettlement,withaviewtounderstandinghowtheymayormaynotreflectsomeoftheinsightsdrawnfromtheeconomicanalysisinprevioussections.

Morespecifically, thissub-sectionfirstdiscusseshowGATT/WTO rules reflect the economic motivationsfor multilateral cooperation that were analysed inSectionE.1.Secondly,itdiscussestheextenttowhichGATT/WTO rules on non-tariff measures take intoaccount the economic rationales for adopting suchmeasures, which were analysed in Section B.Section E.4 will then take this analysis further bydiscussing some specific issues that arise whenGATT/WTO rules are contrasted against the insightsprovidedbyeconomictheory.

(a) GATT/WTOrulesontradeingoodsandreasonsformultilateralcooperation

Inthecaseofgoods,theGATT/WTOagreementslimitthepolicyinstrumentsthatWTOmembersmayusetoprotect import-competing industries. Tariffs are theonly legitimate form of protection that may be used.Members have negotiated maximum levels of tariffs(knownas “tariff bindings”) andmaynot apply tariffsthat exceed those levels (see GATT Article II). Themaximumlevelsoftariffsthatamembermayapplyareset out in the member’s schedule of concessions.Members are also prohibited from applying “all otherduties or charges of any kind imposed on or inconnection with the importation” unless they havereserved the right to do so in their schedules ofconcessions.

Formanyyears,theprincipaldisciplinesthatappliedtonon-tariff measures were the prohibition onquantitative restrictions in GATT Article XI and thenon-discrimination obligations in Article I (most-favoured nation – MFN) and Article III (national


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treatment) of the GATT. These disciplines weresupplemented by the possibility of bringing a non-violation claim where a contracting party consideredthat a measure, despite being consistent with theprovisions of the GATT, nevertheless “nullified orimpaired” any benefit accruing to it under theAgreement.

TheMFNobligationappliestobothinternalandbordermeasures. It requires WTO members to treat animportedproductfromonemembernolessfavourablythanthe“like”domesticproductimportedfromanothercountry. The national treatment obligation concernsinternal measures, such as internal taxes andregulationsrelatingtothesaleofaproduct.Itrequiresmembers to treat an imported product no lessfavourably than the likedomesticproduct.Oneof thekey issues that has been discussed in GATT/WTOdispute settlement in connection with the nationaltreatment obligation is the extent to which it forbidsmeasuresthathaveadisparateimpactonimports,butcan be objectively shown to have a legitimateregulatory purpose. This issue is further discussed inSectionE.3(b).

Asexplained inSectionE.1, theoverall frameworkofthe GATT is consistent with a policy substitutionapproach.TheGATTalsohadcertain rules thatwentbeyond constraining members from replacing onepolicy(suchastariffs)withanother,suchasnon-tariffmeasures. In particular, the GATT included importanttransparency obligations that respond also to theproblemofincompleteinformation.

Someof theUruguayRoundagreements introducedobligationsthatextendsignificantlybeyondthepolicysubstitutionapproachoftheGATT.Thesehavebeenreferred to as “post-discriminatory” obligations(Hudec,2003).Ofparticular relevancetothisreportare the obligations contained in the SPS and TBTagreements. Both of these agreement contain non-discriminatory obligations. However, they set outadditional requirements that apply to non-tariffmeasures within their scope. Thus, for example, theSPSAgreementalsorequiresthatSPSmeasuresbebased on scientific principles. For its part, the TBTAgreementrequiresthattechnicalregulationsnotbemore trade-restrictive than necessary to fulfil alegitimateobjective.

One result of this “post-discriminatory” approach isthat the link with the market access concessionsprotectedunderapolicysubstitutionapproachismoretenuous. Despite the underlying policy substitutionrationale underlying the GATT/WTO agreements,today there does not appear to be an overarchingrequirementthataWTOmembershowhowitsoverallmarket access has been undermined when itchallenges a non-tariff measure. The only measuresfor which there is a requirement to demonstratenegative effects as part of a claim of violation are

actionable subsidies. By contrast, a memberchallenging, for instance, an advertising ban underGATT Article III:4 need not demonstrate any tradeeffects to succeed in its claim. Nor is there arequirement to show trade effects when challengingSPSmeasuresortechnicalregulationseither.

Insum,thedisciplinesthatapplytonon-tariffmeasuresotherthanactionablesubsidiesarenotdirectlytiedtospecificmarketaccessconcessions.Putdifferently,amembercanchallengeanNTMirrespectiveofwhetherit has demonstrable trade effects. Having said that,one would expect that members normally will notinvest the resources necessary to prosecute acomplaintunlessthemeasurehassometradeimpact.

Asoriginallyframed,ArticleXXIIIoftheGATTrequireda contracting party challenging a measure taken byanothercontractingparty todemonstrate that suchameasure “nullified or impaired” a benefit expected bythatcontractingpartyundertheGATT(J.H.Jackson,1989). In 1962, however, a GATT dispute settlementpanel determined that where there was a “clearinfringement” of a GATT provision, “the action would,prima facie, constitute a case of nullification andimpairment…” (GATT Uruguay – Recourse to Article XXIII, para. 15). This legal presumption was latercodifiedand isnow incorporated inArticle3.8of theDisputeSettlementUnderstanding(DSU).

The claim of nullification or impairment has been thesubject of discussion in economic literature where ithas been identified as an efficient mechanism todisciplinenon-tariffmeasures(seeSectionE.1(c))Itisstill possible for a WTO member to challenge ameasure that is not inconsistent with the GATT, butthat nonetheless “nullifies or impairs” benefits itexpectedtoobtainundertheAgreement.However,asexplained below, non-violation claims are subject tostringent requirementsandareseldompursuedotherthanwhentheyare“thrownin”asanalternativeclaimincasetheclaimsofviolationdonotsucceed.

ThevastmajorityofWTOdisputesconcernallegationsof violation. No WTO member has successfullyrebuttedthepresumptionofnullificationorimpairment,resulting from a finding of violation, by showing thatthe measures had no actual effect on trade (WorldTradeOrganization(WTO),2004).

In EC – Bananas III, the European Communitiesattempted to rebut thepresumptionofnullificationorimpairment with respect to the panel’s findings ofviolations of the GATT 1994 on the basis that theUnitedStateshadneverexporteda singlebanana tothe European Community, and therefore, could notpossiblysufferanytradedamage.TheAppellateBodyrejectedtheEuropeanCommunities’argumentand,indoing so, endorsed the following reasoning by anearlierpanel:


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“Article III:2, first sentence, cannot beinterpreted to protect expectations onexportvolumes;itprotectsexpectationsonthe competitive relationship betweenimportedanddomesticproducts.Achangein the competitive relationship contrary tothat provision must consequently beregarded ipso facto as a nullification orimpairmentofbenefitsaccruingunder theGeneral Agreement. A demonstration thata measure inconsistent with Article III:2,first sentence, has no or insignificanteffects would therefore in the view of thePanel not be a sufficient demonstrationthat the benefits accruing under thatprovisionhadnotbeennullifiedorimpairedeven if such a rebuttal were in principlepermitted”(PanelReport,US – Superfund,para.5.19).

The claim of non-violation has been described as an“exceptional remedy” which “should be approachedwithcaution”(PanelReport,Japan – Film,para.10.37andAppellateBodyReport,EC – Asbestos,para.186).

(b) GATT/WTOrulesontradeingoodsandeconomicrationalesforNTMs

SectionBexplained thatnon-tariffmeasuresmaybejustified where such measures address a genuinesituationofmarketfailure.SectionBfurtherexplainedthat, whereas the welfare effects of an NTM thataddresses a genuine market failure are positive, thetradeeffectsareambiguous.

Since its inception, the GATT/WTO regime hasrecognized that WTO members may need to adoptnon-tariffmeasurestoaddressmarketfailures.Inthisregard,GATT/WTOrulesonNTMscanbeunderstoodas providing “devices” that help distinguish measuresthat genuinely seek to address a market failurefrom those that have opportunistic motivations(see Trachtman, 1998; Marceau and Trachtman,2009). Insomecases,GATT/WTOrulesalsoseektominimize the trade impact of an NTM otherwiseadoptedforalegitimatepolicypurpose.

Despitewhatsomecriticshavesaid,GATT/WTOrulesdo not establish a hierarchy between the tradecommitmentsofWTOmembersand thepublicpolicyobjectives that these members may pursue throughdomestic regulation. Ultimately, GATT/WTO rulesallow for the application of non-tariff measures thatpursue a legitimate non-protectionist purpose, evenwherethemeasureshavetradeeffects.The“devices”set out in the WTO agreements to draw the linebetweenprotectionistandnon-protectionistNTMsaredescribedbelow.

(i) Non-discrimination and the relevance of intent or purpose

As discussed in Section E.1, the non-discriminationobligations in Articles I and III of the GATT are theprimarydevicesused in theGATT toconstrainpolicysubstitution.Additionalflexibilityisprovidedunderthegeneral exceptions in Article XX of the GATT, whichallowscertainmeasures thatpursue thepublicpolicyobjectives recognized in that provision, such as theprotectionofhuman,animal,orplantlifeorhealth,andtheconservationofexhaustiblenaturalresources.

Even with the additional flexibility provided underArticle XX, some fear that the national treatmentobligationinArticleIIIcanbetoobluntaninstrumentifit is applied mechanically. Those who hold this viewadvocate an interpretation of the national treatmentobligation thatdoesnot focusexclusivelyonwhetherthe challenged non-tariff measure has an impact onimports that isdifferent from the impacton the “like”domestic product. Rather, in their view, the analysisshould also take account of the intent or purposebehind the challenged measure, thereby onlyconstraining those measures that do not pursue alegitimatepurpose.

As Lester (2011) explains, three positions have beenadvocatedastotherelevanceofintentorpurposefortheassessmentofadomesticregulationunderArticleIII. Those in the first group consider that intent orpurposehasnoroletoplayintheanalysisofnationaltreatment.Instead,theyconsiderthatintentorpurposemayberelevant,ifatall,wheretherespondentmemberinvokesoneofthegeneralexceptionsinArticleXXoftheGATT.Theothertwogroupsbelievethat intentorpurposemustnecessarilybeconsideredintheanalysisunderArticleIII,yetdifferastowherepreciselyintentor purpose comes into the analysis. One groupadvocates consideration of intent or purpose indetermining whether the imported and domesticproducts are “like”. The other group sees intent orpurposesasbeingpartoftheanalysisofwhethertheimportedproductisbeingtreatedlessfavourablythanthedomesticproduct.

Two GATT panels sought to include consideration ofregulatorypurposeintheassessmentofdiscriminationinwhatbecameknownasthe“aimsandeffectstest”(US – Malt Beverages and Canada – Provincial Liquor Boards (US)).Hudecdescribes the “aimsandeffectstest”asmakingthefollowingtwoimprovementstothetraditional approach. First, the new approach“consigned the metaphysics of ‘likeness’ to a lesserrole intheanalysis,andinsteadmadethequestionofviolation depend primarily on the two most importantissues that separate bona fide regulation from tradeprotection–thetradeeffectsofthemeasure,andthebonafidesoftheallegedregulatorypurposebehindit”.Secondly, “by making it possible for the issue ofregulatory justification to be considered at the same


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time the issue of violation itself is being determined,the ‘aim and effects’ approach avoided both theprematuredismissalofvalidcomplaintsongroundsof‘un-likeness’ alone, and excessively rigoroustreatment”(Hudec,2003:628).

Regan(2003)hasalsoadvocatedincludingconsiderationofregulatorypurposeaspartoftheassessmentofnon-discrimination under GATT Article III. In his view, thecentral inquiry in the assessment of non-discriminationunder Article III should be whether the measure is theresult of aprotectionist legislativepurpose.Heclarifiesthat this is not a question of the subjective motives ofindividual legislators. Rather, it is a question at a moregenerallevelaboutwhatpoliticalforceswereresponsiblefortheultimatepoliticaloutcome.Reganrecognizesthattheremaybemultiplepurposesbehindtheenactmentofa regulation. In such a case, he suggests that theregulation be invalidated only if the contribution ofprotectionist purpose was a “but for” cause of theadoptionoftheregulation.

Itiscommonunderstandingthatthe“aimsandeffects”test was rejected in Japan – Alcoholic Beverages, thefirst non-discrimination dispute about internal taxesdecidedundertheWTOdisputesettlementmechanism(seeRoessler,2003).The issuealsocameup inEC – Bananas III,wheretheAppellateBodyrefusedtoapplythe“aimsandeffect”testinthecontextofanalysingaclaimunderArticlesIIandXVIIoftheGATS.However,some commentators have noted that subsequentAppellate Body reports would appear to recognizesome role for regulatory purpose in the assessmentunder GATT Article III (Regan, 2003; Porges andTrachtman,2003).35This isamatterofcurrentdebateasaresultoftheAppellateBody’srulingsonArticle2.1of the TBT Agreement in US – Clove Cigarettes and US – Tuna II (Mexico)(seebelow).

Both the SPS and the TBT agreements include non-discrimination obligations, although they operatesomewhat differently. The SPS Agreement providesthatSPSmeasuresmustnot“arbitrarilyorunjustifiablydiscriminate between Members where identical orsimilarconditionsprevail, includingbetweentheirownterritoryandthatofotherMembers”.This languageisa recognition of the fact that, due to differences inclimate, existing pests or diseases, or food safetyconditions, it is not always appropriate to impose thesame sanitary and phytosanitary requirements onfood, animal or plant products coming from differentcountries. SPS measures sometimes vary, dependingon the country of origin of the food, animal or plantproduct concerned. Marceau and Trachtman (2009)contrast this provision with Article III of the GATT,notingthattheformerdoesnotseemtocallfora“likeproduct” analysis, but rather is focused on thejustificationforthediscriminationbetweensituations.

The languageofArticle2.1of theTBTAgreement iscloser to that of Article III of the GATT. The TBT

Agreement provides that WTO members shall ensurethat in respect of technical regulations, productsimported from the territory of any member shall beaccorded treatment no less favourable than thataccordedtolikeproductsofnationaloriginandtolikeproductsoriginatinginanyothercountry.

As noted above, the relevance of the rationale orpurpose of the measures has been the subject ofintense debates in the context of Article III of theGATT.TheissuehasnowbeenraisedinthecontextofArticle2.1oftheTBTAgreement.Itisworthrecalling,in this regard, that the TBT Agreement does notincludeageneralexceptionsprovisionsimilartoGATTArticleXX.

Three recent panels took differing approaches withrespect to the relevance of intent or purpose for theassessment of likeness under Article 2.1 of the TBTAgreement.ThepanelinUS – Tuna II (Mexico),referringbacktotheAppellateBody’sinterpretationofArticleIII:4oftheGATTinEC – Asbestos,interpretedtheterm“likeproducts”inArticle2.1oftheTBTAgreementasrelatingto the nature and extent of a competitive relationshipbetweenandamonggroupsofproducts (PanelReport,US – Tuna II (Mexico), para.7.225). Inotherwords, thispanelwasreluctanttotaketheintentorpurposeofthemeasure into account at this stage. The panel in US – COOL (Certain Country of Origin Labelling) took asimilarapproach.

Bycontrast,thepanelinUS – Clove Cigarettes,whichexamined a claim against a tobacco measure thatprohibitscigaretteswithcharacterizingflavours,otherthan tobacco or menthol, refused to undertake theanalysis of likeness “primarily from a competitionperspective”. Instead, the panel was of the view thatthe weighing of the evidence relating to the likenesscriteria should be influenced by the fact that themeasure at issue was “a technical regulation havingtheimmediatepurposeofregulatingcigaretteswithacharacterizing flavour for public health reasons”. Thismeant that it had to “pay special notice to thesignificance of the public health objective of atechnical regulation and how certain features of therelevant products, their end-uses as well as theperception consumers have about them, must beevaluatedinlightofthatobjective”.

The panel therefore concluded that “the declaredlegitimate public health objective” of the measure atissue–thatis,thereductionofyouthsmoking–“mustpermeate and inform our likeness analysis”. Inparticular, the panel considered that the declaredlegitimate public health objective was relevant in theconsideration of the physical characteristics that areimportant for the immediate purpose of regulatingcigaretteswith characterizing flavours, aswell as theconsumer tastes and habits criterion where theperception of consumers, or rather potentialconsumers, can only be assessed with reference to


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the health protection objective of the technicalregulation at issue (Panel Report, US – Clove Cigarettes,para.7.119).

AnotherinterestingaspectofthepanelproceedingsinUS – COOL is that the parties extensively arguedaboutallegedactualtradeeffects–andwhethersucheffectswereattributabletothemeasuresatissue(theCOOL measure) or to other factors. The partiessubmitted economic figures and analyses, includingeconometric studies. For the panel this was animportant factual matter in the dispute: the panelfounditimportanttomakefindingsontheactualtradeeffectsoftheCOOLmeasure,evenif,underthelegalstandard it had identified for Article 2.1 of the TBTAgreement, thesefindingswerenot indispensable forthe analysis of the complainants’ claim. Indeed, thepanelwentfurther,arguingthatithadtheright,“andinfact the duty, to make the factual findings necessarytocarryoutanobjectiveanalysisofthedisputeandallof the evidence before us”, and the basic function ofpanelsdidnotexclude–andcould,infact,necessitate– the review of economic and econometric evidenceandarguments.

Hence,whilethepaneldidnotactuallyundertakeanyeconometric analysis of its own, it assessed therobustness of the contradictory US and Canadianstudies,stressingthattheeconometricstudies,unlikethe descriptive analyses, were able to isolate andquantifythedifferentfactorsatplay.ItconcludedthattheCanadian(Sumner)EconometricStudyhadmadeaprima faciecasethattheCOOLmeasurehadarobustnegative and significant effect on the import sharesandpricebasisofCanadianlivestock.Italsoconcludedthatthis impactdemonstratedbytheCanadianStudy,and not refuted by the USDA Econometric Study,concurred with its finding that the COOL measureaccorded less favourable treatment (for muscle cuts)withinthemeaningofArticle2.1oftheTBTAgreement(PanelReport, US – COOL,paras.7.444-7.566).

Allthreepanelreportswereappealed,butatthetimeof writing only the Appellate Body reports in US – Clove CigarettesandUS – Tuna II (Mexico)hadbeencirculated.

The Appellate Body disagreed with the US – Clove Cigarettespanel’sinterpretationoftheconceptof“likeproducts” inArticle2.1of theTBTAgreement,whichfocusedonthepurposesofthetechnicalregulationatissue, as separate from the competitive relationshipbetween and among the products. In the AppellateBody’s view, “thecontextprovidedbyArticle2.1 itself,by other provisions of the TBT Agreement, bythe TBT Agreement asawhole,andbyArticleIII:4oftheGATT 1994, as well as the object and purpose ofthe TBT Agreement, support an interpretation of theconcept of ‘likeness’ in Article 2.1 that is based onthe competitive relationship between and among theproducts”. Regulatory concerns underlying a technical

regulationmaybetakenintoaccountonlytotheextentthat they are relevant to the examination of certainlikeness criteria and are reflected in the products’competitive relationship.36 Ultimately, however, theAppellate Body found that the “likeness” criteria thatthe panel had examined supported the panel’s overallconclusion that clove and menthol cigarettes are likeproducts within the meaning of Article 2.1 of theTBT Agreement (Appellate Body Report, US – Clove Cigarettes,paras.156and160).

TheAppellateBodyalsoaddressedthelessfavourabletreatmentelementofArticle2.1oftheTBTAgreement,notingthatapanelexaminingaclaimofviolationunderArticle 2.1 should seek to ascertain whether thetechnicalregulationatissuemodifiestheconditionsofcompetitioninthemarketoftheregulatingmembertothedetrimentofthegroupofimportedproductsvis-à-visthegroupoflikedomesticproducts.

TheAppellateBodyfurtherexplainedthat“thecontextandobjectandpurposeoftheTBT Agreementweighinfavourofinterpretingthetreatmentnolessfavourablerequirement of Article 2.1 as not prohibitingdetrimental impact on imports that stems exclusivelyfrom a legitimate regulatory distinction”. This meansthat where a technical regulation does not de jure discriminate against imports, “the existence of adetrimental impact on competitive opportunities forthegroupof importedvis-à-vis thegroupofdomesticlike products is not dispositive of less favourabletreatment under Article 2.1”. Panels must furtheranalyse whether the detrimental impact on importsstems exclusively from a legitimate regulatorydistinctionratherthanreflectingdiscriminationagainstthe group of imported products. In doing so, panelsmust carefully scrutinize theparticular circumstancesofthecase,that is,thedesign,architecture,revealingstructure, operation, and application of the technicalregulation at issue, and, in particular, whether thattechnical regulation is evenhanded, in order todetermine whether it discriminates against the groupof imported products (Appellate Body Report, US – Clove Cigarettes,paras.180-182).

Intheend,theAppellateBodyagreedwiththepanel’sconclusion that,byexemptingmentholcigarettes fromthe ban on flavoured cigarettes, the US measureaccords to clove cigarettes imported from Indonesialess favourable treatment than that accorded todomesticlikeproducts,withinthemeaningofArticle2.1oftheTBTAgreement.TheAppellateBodyconsideredthat the detrimental impact of the US measure oncompetitive opportunities for clove cigarettes did notstem from a legitimate regulatory distinction becausementhol cigarettes have the same productcharacteristics(theflavourthatmaskstheharshnessoftobacco) that, from the perspective of the statedobjectiveoftheUSmeasure,justifiedtheprohibitionofclovecigarettes.


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However, theAppellateBodysoughttoclarifythat itsrulingdidnotmeanthatWTOmembers“cannotadoptmeasures topursue legitimatehealthobjectivessuchas curbing and preventing youth smoking”. Itemphasized that, even though the measure at issuepursued the legitimate objective of reducing youthsmokingbybanningcigarettescontainingflavoursandingredientsthatincreasetheattractivenessoftobaccoto youth, “it does so in a manner that is inconsistentwiththenationaltreatmentobligation inArticle2.1ofthe TBT Agreement as a result of the exemption ofmenthol cigarettes, which similarly contain flavoursand ingredients that increase the attractiveness oftobaccotoyouth,fromthebanonflavouredcigarettes”(AppellateBodyReport,US – Clove Cigarettes,paras.226and236).

The Appellate Body also addressed a claim underArticle 2.1 of the TBT Agreement in US – Tuna II (Mexico). The likeness of tuna products of differentorigins was not appealed. The debate on Article 2.1thuswas limitedtothe“treatmentno lessfavourable”element of Article 2.1. The Appellate Body began byexplaining that technical regulations are measuresthat, by their very nature, establish distinctionsbetweenproductsaccordingtotheircharacteristicsortheir related processes and production methods.Therefore,Article2.1shouldnotbereadtomeanthatany distinctions, in particular ones that are basedexclusivelyonparticularproductcharacteristicsoronparticular processes and production methods, wouldper se constitute “less favourable treatment”(para.211).

TheAppellateBodydescribedtheanalysisofwhetherthereislessfavourabletreatmentunderArticle2.1asinvolvingthefollowingtwosteps:(i)anassessmentofwhetherthetechnicalregulationatissuemodifiestheconditions of competition to the detriment of theimported product as compared to the domestic likeproduct or the like product originating in anothermember; and (ii) a determination of whether thedetrimental impact reflects discrimination against theimportedproductofthecomplainingmember.

Referring back to its earlier ruling in US – Clove Cigarettes, the Appellate Body explained that theexistence of a detrimental effect is not sufficient todemonstrate less favourable treatment underArticle 2.1; instead, a panel must further analysewhether the detrimental impact on imports stemsexclusively from a legitimate regulatory distinctionratherthanreflectingdiscriminationagainstthegroupof imported products (paras. 215 and 231). TheAppellateBody further said that in this case itwouldscrutinize in particular, whether, in the light of thefactual findings made by the panel and undisputedfactsontherecord,theUSmeasureisevenhandedinthemannerinwhichitaddressestheriskstodolphinsarising from different fishing methods in differentareasoftheocean(para.232).

Turning to the US “dolphin-safe” labelling provisions,theAppellateBodyfirstfoundthatthepanel’sfactualfindings “clearly establish that the lack of access tothe ‘dolphin-safe’ label of tuna products containingtuna caught by setting on dolphins has a detrimentalimpact on the competitive opportunities of MexicantunaproductsintheUSmarket”(para.235).Asforthequestion of whether the detrimental impact reflecteddiscrimination, the Appellate Body examined whetherthedifferentconditionsforaccess toa “dolphin-safe”label are “calibrated” to the risks to dolphins arisingfromdifferentfishingmethodsindifferentareasoftheocean, as the United States had claimed. TheAppellate Body noted the panel’s finding that, whilethe US measure fully addresses the adverse effectson dolphins (including observed and unobservedeffects) resulting from setting on dolphins in theEasternTropicalPacific, itdoesnotaddressmortalityarising from fishing methods other than setting ondolphins in other areas of the ocean. In thesecircumstances, the Appellate Body found that themeasureatissueisnoteven-handedinthemannerinwhich it addresses the risks to dolphins arising fromdifferent fishing techniques in different areas of theocean.Onthisbasis,theAppellateBodyreversedthepanel’s finding that the US ”dolphin-safe” labellingprovisions arenot inconsistentwithArticle2.1of theTBT Agreement, and found, instead, that the USmeasureisinconsistentwithArticle2.1.

TheAppellateBody reports inUS – Clove Cigarettes and US – Tuna II (Mexico) focused on Article 2.1 ofthe TBT Agreement; the Appellate Body addressedArticleIII:4oftheGATTonlyasrelevantcontextforitsinterpretation of Article 2.1 of the TBT Agreement.Nevertheless, the reports have given rise to debateabout their implications for theanalysisunderArticleIII:4oftheGATT(seetheInternationalEconomicLawandPolicyBlogat:http://worldtradelaw.typepad.com).

As noted earlier, the TBT Agreement and the GATTarestructureddifferently.TheGATTincludesageneralexceptionsprovision(ArticleXX)thatmaybeinvokedtojustifyameasurethatisotherwiseinconsistentwithArticle III:4 (or another obligation in the GATT).ArticleXXreferstosomeofthepolicyobjectivesthatare also mentioned in the Preamble of the TBTAgreement,suchastheprotectionoftheenvironment.TheAppellateBodyobserved,inthisregard,thatwhilethe GATT and the TBT Agreement seek to strike asimilar balance, “in the GATT 1994 this balance isexpressedbythenationaltreatmentruleinArticleIII:4as qualified by theexceptions inArticleXX,while, inthe TBT Agreement, this balance is to be found inArticle2.1itself,readinthelightofitscontextandofitsobjectandpurpose”(AppellateBodyReport,US – Clove Cigarettes, para. 109). This could be read bysomeassupportingadifferentapproachunderArticleIII:4 than under Article 2.1 of the TBT Agreement,whereupon any legitimate policy basis for thedifferentialtreatmentoftheimportedproductandthe


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like domestic product would be considered in theassessmentoftheArticleXXdefenceandnotaspartof the assessment of whether there is discriminationunderArticleIII:4.

Another point to note is that Article XX of the GATThas a closed list of policy reasons that could beinvoked to justify an otherwise GATT-inconsistentmeasure. By contrast, the TBT Agreement does notexpressly limit the policy objectives that could bepursued through a technical regulation. The range ofobjectives that could justify a measure is potentiallymore “open” under the TBT Agreement than undertheGATT.

Appellate proceedings in US – COOL had notconcludedatthetimeofwriting.

(ii) Appropriate level of protection

Like Article III of the GATT, the SPS and TBTagreements do not establish minimum or maximumlevels of regulatory protection. For example, the SPSAgreement does not require a WTO member toregulate in relation to a particular risk. Thus, a WTOmembermaychoosenottoregulateatall.Atthesametime,theSPSAgreementdoesnotimposeaceilingonthe maximum level of regulation. The Appellate Bodyhasemphasizedinthisregardthatitisthe“prerogative”ofaWTOmembertodeterminethelevelofprotectionthat it deems appropriate (Appellate Body Report,Australia – Salmon,para.199).

Although WTO members have the prerogative todetermine their level of protection, they must complywiththerequirementofconsistencyinArticle5.5oftheSPS Agreement. An SPS measure would fail theconsistencyrequirementofArticle5.5if:(i)thememberimposing the disputed measure has adopted its ownappropriatelevelsofsanitaryprotectionagainstriskstohuman life or health in several different situations;(ii) those levels of protection exhibit arbitrary orunjustifiabledifferences (“distinctions” in the languageofArticle5.5) in their treatmentofdifferentsituations;and (iii) the arbitrary or unjustifiable differences mustresult in discrimination or a disguised restriction ofinternational trade. The analysis under Article 5.5proceeds,however,onlyifthesituationsexhibitdifferentlevelsofprotectionandpresentsomecommonelementor elements sufficient to render them comparable(Appellate Body Report, EC – Hormones, paras. 214-215and217).

(iii) Scientific or technical basis

The SPS Agreement requires that SPS measures bebased on scientific principles and not be maintainedwithoutscientificevidence.UnlesstheSPSmeasureistakeninanemergencyorisbasedonaninternationalstandard,itmustbebasedonariskassessment,whichtheAgreementdefinesas:

“The evaluation of the likelihood of entry,establishmentorspreadofapestordiseasewithintheterritoryofanimportingMemberaccording to the sanitary or phytosanitarymeasures which might be applied, and ofthe associated potential biological andeconomic consequences; or the evaluationof the potential for adverse effects onhuman or animal health arising from thepresenceofadditives,contaminants, toxinsor disease-causing organisms in food,beverages,orfeedstuffs”.

TBTmeasuresmayalsobesupportedbyscientificortechnicalstudies,althoughinsomecasesthescientificortechnicalinformationmaybeoneofseveralfactorstakenintoconsideration.Indeed,Article2.2oftheTBTAgreement includes available scientific and technicalinformation among the elements that may beconsidered in assessing the risks that would becreated if the legitimate objective pursued by thetechnical regulation were not fulfilled. While it isfeasible to consider technical studies providingbackingfor theneedforcertain technical regulationsrelatingtoconsumersafety,theusefulnessoftechnicalstudies for other technical regulations – such ascertain labelling requirements for foods subject toreligiousrestrictions–islessobvious.Thedraftersofthe TBT Agreement would appear to have foreseenthat such measures could involve complex technicalassessments in that they explicitly provided for thepossibility that panels reviewing such measures inWTO dispute settlement could rely on experts“to assist in questions of a technical nature”(seeArticle14andAnnex2oftheTBTAgreement).

The additional requirements of the SPS and TBTagreementshavegivenrisetoconcernsbysomethatthe WTO will interfere with legitimate democraticchoicesofthecitizensoftheWTOmembersadoptingthe SPS or TBT measures. Writing about the SPSAgreement, Howse (2000) has argued that theserequirements “do not have the effect of usurpingdemocraticjudgmentaboutriskanditsregulationandplacingthesemattersundertheauthorityof‘science’”.Rather,inhisview,“theSPSAgreementbringssciencein as one necessary component of the regulatoryprocess, without making it decisive”. Howse findssupport for his views in the approach taken by theAppellate Body in EC – Hormones. He refers, forexample, to the Appellate Body’s acknowledgmentthatWTOmembersmayadoptSPSmeasureseven ifscientificopinionisdividedorthereisuncertainty.

Sykes (2006) is less optimistic. He has argued thataccommodation between the SPS Agreement’sscientific evidence requirement and respect for WTOmembers’ regulatory sovereignty “is exceedinglydifficult if not impossible”. In his view, “(m)eaningfulscientific evidence requirements fundamentallyconflict with regulatory sovereignty in all cases of


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seriousscientificuncertainty”.Heseesthisasforcinga choice on the WTO “between an interpretation ofscientific evidence requirements that essentiallyeviscerates them and defers to national judgmentsabout ‘science’, or an interpretation that gives themreal bite at the expense of the capacity of nationalregulators to choose the level of risk that they willtolerate”.Amiddlegroundisonlypossible“intherarecases where scientific uncertainty is remediablequicklyatlowcost”.

HoekmanandTrachtman(2010)havearguedthatthescientific evidence requirement of the SPSAgreementdoesnotentailadramaticdeparturefromthe general policy of the GATT of preventingdiscriminatory measures (understood narrowly asonly covering measures that have a differentialimpact without an adequate rational justification intermsofachievinga legitimate regulatoryobjective).They assert that the scientific evidence requirementmaybeunderstoodasanobjectiveindicatoror“proxymeasure” of protectionist intent. Hoekman andTrachtman explain that the scientific evidencerequirement (including the requirement that SPSmeasures be based on a risk assessment) wouldseem to evaluate directly “the extent and quality ofthe non-protectionist aim”. Alternatively, therequirement may be understood to establish apresumption of protectionist aim where the SPSmeasure is found not to be based on scientificevidence. Described in this manner, the scientificevidence requirement would be mostly concernedwiththeproblemofpolicysubstitution.

The concern about intruding into the regulatorydomain of national governments on such sensitivemattersashealthandsafetymeasuresfindsreflectioninthe“standardofreview”thatappliestothereviewofsuchmeasuresbytheWTO’sadjudicatorybodies.ThestandardofreviewreferstotheintensityofthescrutinyofdomesticmeasuresbyWTOpanels.Asnotedabove,SPSmeasuresmustbebasedonscientificprinciplesandmaynotbemaintainedwithoutsufficientscientificevidence. This sometimes means that the WTOmember applying the SPS measures must haveconducted a risk assessment in accordance withArticle5.1oftheSPSAgreement.

ApanelassessingtheconsistencyofanSPSmeasurewithArticle5.1ismeanttoreviewtheWTOmember’srisk assessment and not to conduct one itself. TheAppellate Body has cautioned that “[w]here a panelgoes beyond this limited mandate and acts as a riskassessor, it would be substituting its own scientificjudgmentforthatoftheriskassessorandmakingade novo review and, consequently, would exceed itsfunctions under Article11of theDSU”. Itwent on toexplain that “the review power of a panel is not todeterminewhethertheriskassessmentundertakenbya WTO Member is correct, but rather to determinewhetherthatriskassessmentissupportedbycoherent

reasoning and respectable scientific evidence and is,in this sense, objectively justifiable” (Appellate BodyReport, US/Canada – Continued Suspension, para.590).

It could be suggested that a deferential standard ofreview, similar to that applied to the review of SPSmeasures, would be justified in relation to measuresunder the TBT Agreement that are based on somekindof technicalassessmentcarriedoutbydomesticauthorities.Sofar,however,thestandardofreviewhasnotreceivedmuchattentioninthedisputesbroughttotheWTOundertheTBTAgreement.

Arelatedissuethathasbeenraisedinconnectionwithboth the SPS and TBT agreements is whether WTOadjudicators have the required level of expertise toadjudicatedisputesthatmayinvolvecomplexscientificor technical debates. The lack of such scientific andtechnicalexpertiseisoneofthejustificationsgivenfora deferential standard of review. The SPS and TBTagreementsbothprovideforthepossibilitythatpanelsseek advice from experts and several panels havedone so. Panels must consult the parties whenchoosing the experts and must respect the parties’due process rights. Thus, a panel was faulted forconsulting two experts that had participated in theevaluationofsixhormonesforpurposesofdevelopinginternational standards when the adequacy of thatevaluationwasanissueintheWTOdispute(AppellateBody Report, US/Canada – Continued Suspension,para.481).

Moreover, experts cannot do the job of the parties,especially the complainant who bears the burden ofproof (Appellate Body Report, Australia – Salmon,para.222).Theuseofexpertsmustbeconsistentwiththestandardof review. In thecaseofSPSmeasures,theconsultationswiththeexperts“shouldnotseektotest whether the experts would have done a riskassessmentinthesamewayandwouldhavereachedthesameconclusionsastheriskassessor”(AppellateBody Report, US/Canada – Continued Suspension,para. 481). In other words, the assistance of theexperts is constrained by the applicable standard ofreview.

(iv) A less trade-restrictive requirement

As noted earlier, a WTO member taking a domesticmeasurethatisinconsistentwithoneoftheobligationsof the GATT nevertheless may be able to justify it ifthe measure pursues one of the policy objectivesrecognized under Article XX and is otherwiseconsistent with the other requirements of thatprovision. Article XX allows, among other things,measuresthatare“necessary”toprotectpublicmoralsor to protect human, animal or plant life or health.Under the approach followed by some panels duringthe GATT, a measure would be considered to be“necessary”onlyiftherewerenoalternativemeasures


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consistentwith theGATT,or less inconsistentwith it,that the member taking the measure could beexpected to employ to achieve the relevant policyobjective(seeGATTPanelReport,US – Section 337 Tariff Act,para.5.26andGATTPanelReport,Thailand – Cigarettes,para.75).

The Appellate Body has taken a more nuancedapproach to necessity. The determination of“necessity”, as articulated by the Appellate Body,involves a weighing and balancing of the relativeimportanceoftheinterestsorvaluesfurtheredbythechallenged measure and other factors, which wouldusuallyincludethecontributionofthemeasuretotherealization of the ends pursued by it and therestrictive impact of the measure on internationaltrade.Ifthisanalysisyieldsanaffirmativeconclusion,thenecessityofthemeasuremustbethenconfirmedby comparing the measure with possible lessrestrictivealternatives.Theburdenofidentifyinglessrestrictivealternativesisonthecomplainingparty.Toqualifyasanalternative,themeasuremustallowtherespondent member to achieve the same level ofprotection and must be reasonably available – therespondingmembermustbecapableoftakingitandthe measure may not impose an undue burden onthatmember,suchasprohibitivecostsorsubstantialtechnicaldifficulties–takingintoaccountthelevelofdevelopment of the member concerned (AppellateBody Report, Brazil – Retreaded Tyres , paras. 143and156).

InaccordancewithArticle5.6oftheSPSAgreement,a WTO member establishing or maintaining SPSmeasures toachieve theappropriate levelof sanitaryor phytosanitary protection must “ensure that suchmeasuresarenotmoretrade-restrictivethanrequiredto achieve their appropriate level of sanitary orphytosanitaryprotection,takingintoaccounttechnicaland economic feasibility”. Footnote 3 to Article 5.6clarifies that “a measure is not more trade-restrictivethan required unless there is another measure,reasonablyavailabletakingintoaccounttechnicalandeconomic feasibility, that achieves the appropriatelevel of sanitary or phytosanitary protection and issignificantly lessrestrictivetotrade”.Theassessmentdescribedinfootnote3couldbeunderstoodasatypeofcost-benefitanalysis.

InAustralia – Salmon, theAppellateBodystated thatArticle 5.6 provides a three-pronged test. Thecomplaining party must prove that there is anothermeasure that: (i) is reasonably available, takinginto account technical and economic feasibility;(ii)achievesthemember’sappropriatelevelofsanitaryor phytosanitary protection; and (iii) is significantlyless restrictive to trade than the SPS measurecontested.Thesethreeelementsarecumulativeinthesense that, to establish an inconsistency with Article5.6,allofthemhavetobemet:

“If any of the elements is not fulfilled, themeasure in dispute would be consistentwith Article 5.6. Thus, if there is noalternative measure available, taking intoaccounttechnicalandeconomicfeasibility,or if the alternative measure does notachieve the Member’s appropriate level ofsanitaryorphytosanitaryprotection,orifitis not significantly less trade-restrictive,themeasureindisputewouldbeconsistentwith Article 5.6” (Appellate Body Report,Australia—Salmon,para.194).

InAustralia – Apples,theAppellateBodyaddedthat,indeterminingwhether thefirst twoof theseconditionshavebeensatisfied(whetherthereisameasurethatisreasonablyavailable,takingintoaccounttechnicalandeconomic feasibility, and achieves the member’sappropriate level of sanitary or phytosanitaryprotection),apanelmustfocusitsassessmentontheproposed alternative measure. Only in examiningwhetherthethirdconditionisfulfilledwillapanelneedtocomparetheproposedalternativemeasurewiththecontested SPS measure (Appellate Body Report,Australia – Apples,WT/DS367/AB/R,atpara.337).

Marceau and Trachtman (2009) suggest thatArticle 5.6 of the SPS Agreement, as interpreted,wouldseem to involveabalancingexercisesimilar totheoneespousedbytheAppellateBodyinrelationtothe assessment of necessity under Article XX of theGATT. One difference they identify is that, unlike theassessment of necessity under Article XX of theGATT, the evaluation under Article 5.6 of the SPSAgreement would not include consideration of thedegree of the measure’s contribution to the endpursued.

Foritspart,Article2.2oftheTBTAgreementprovidesthat “Members shall ensure that technical regulationsarenotprepared,adoptedorappliedwitha view toorwith the effect of creating unnecessary obstacles tointernational trade. For this purpose, technicalregulations shall not be more trade-restrictive thannecessarytofulfilalegitimateobjective,takingaccountoftherisksnon-fulfilmentwouldcreate.Suchlegitimateobjectivesare,inter alia:nationalsecurityrequirements;the prevention of deceptive practices; protection ofhumanhealthorsafety,animalorplantlifeorhealth,orthe environment. In assessing such risks, relevantelements of consideration are, inter alia: availablescientificand technical information, relatedprocessingtechnologyorintendedend-usesofproducts”.

The panels in US – Clove Cigarettes, US – Tuna II (Mexico) and US – COOL each addressed andinterpretedArticle2.2oftheTBTAgreement.Despitethedifferencesinthepanels’analyses,therearesomecommon elements that can be discerned in theirapproaches.


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Allthreepanels interpretedthisprovisionasrequiringan enquiry regarding the following elements:(i)whether themeasureat issuepursuesa legitimateobjective; (ii) whether the measure at issue fulfils, orcontributes to the achievement of, the legitimateobjectives, at the level the member deemedappropriate; and (iii) whether there is a less trade-restrictive alternative means of achieving the samelevelofprotection.Moreover, inallthreedisputes,theUnitedStates,astherespondent,consistentlyarguedthat the jurisprudence relating to Article XX of theGATT1994wasnotrelevantininterpretingArticle2.2oftheTBTAgreement,andthatinsteadpanelsshouldrely on Article 5.6 of the SPS Agreement and itsjurisprudence (see above). None of the three panelsaccepted the US argument in toto. Rather, they drewupontheAppellateBody’sjurisprudenceonArticleXXoftheGATT1994invaryingdegrees,fortheiranalysisunderArticle2.2.ThepanelsinUS – Tuna II (Mexico) and US – COOL also relied on Article 5.6 of theSPS Agreement and its related jurisprudence ininterpretingArticle2.2.

Thethreepanels,however,adopteddifferentstandardsfortheindividualelementsofthetest.ForthepanelinUS – Clove Cigarettes, thefirststepunderanArticle2.2 analysis requires an examination of whether themeasure itself is necessary to fulfil the legitimateobjectives. Borrowing from the Appellate Body’sinterpretation of “necessary” under Article XX of theGATT1994, thepanelobservedthatameasuremustmakea “materialcontribution” to the fulfilmentof thelegitimateobjectiveforittobeconsidered“necessary”forthepurposesofArticle2.2.

HavingfoundthatIndonesiafailedtodemonstratethatthe US measure at issue makes no “materialcontribution”tothestatedobjective,thepanelturnedtothesecondstageofitsanalysis–theidentificationofaless trade-restrictive alternative – adopting the testdevelopedbytheAppellateBodyunderArticleXX(b)inBrazil – Retreaded Tyres. The panel concluded thatIndonesia, by “mere[ly] listing two dozen possiblealternatives”,hadfailedtoestablishaprima facie case.Moreover,relyingagainontheAppellateBodyReportinBrazil – Retreaded Tyres, thepanel said that even if a prima facie case was established, the United StatesrebutteditbyhighlightingthatseveralofthealternativesproposedwerealreadyinplaceintheUnitedStates.

ThepanelinUS – Tuna II (Mexico) adoptedadifferentapproach. In itsview,Article2.2doesnotrequirethatthe measure itself be necessary for the fulfilment ofthe legitimate objective. Instead, it requires that thetrade restrictiveness of the challenged measure benecessaryforthefulfilmentoftheobjective.ThepanelnotedthatArticle2.2differsfromArticleXX(b)and(d)oftheGATT1994,whichrequirethatthemeasurebenecessary.Despitethisobservation,asafirststep,thepanel embarked on an assessment of the manner inwhich,andtheextenttowhich,themeasuresatissue

fulfiltheirlegitimateobjectives,takingintoaccounttheWTO member’s chosen level of protection. Here,however, the panel’s analysis differs from the oneconductedbythepanelinUS – Clove Cigarettes, asitfocused not on “material contribution”, but on the“manner and extent” to which the US “dolphin-safe”labelling provisions fulfil the objectives identified bytheUnitedStates.

Havingfoundthatthemeasureshavethecapabilitytocontribute to the fulfilment of these objectives, thepanel examined whether there is a less trade-restrictivealternativemeasurethatachievesthesamelevelofprotection.

In US – COOL, the panel focused exclusively onwhether the US measure fulfils its stated objective,eventhoughitsinterpretationofArticle2.2envisagedotherstepstobeassessed,suchasanexaminationofwhether the measure at issue is “more trade-restrictive”thannecessarybasedontheavailabilityofless trade-restrictive alternative measures that couldequally fulfil the identified objective. Here too, thepanel relied upon the Appellate Body’s jurisprudenceonArticleXX,observingthatameasurecanbesaidtocontribute to the achievement of its objectives whenthere is a “genuine relationship of ends and means”between the objective and the measure. However,having found that the measure does not fulfil theobjective it had determined the United States to bepursuingthroughitsmeasure,thepaneldidnotassessthe availability of less trade-restrictive alternativemeansofachievingthatobjective.

As noted above, the appellate proceedings in US – Clove Cigaretteshaveconcluded.However,thepanel’sfindingsonArticle2.2oftheTBTAgreementwerenotappealed and thus were not addressed by theAppellateBodyinthatcase.

TheAppellateBodyinterpretedArticle2.2oftheTBTAgreement in US – Tuna II (Mexico), describing theassessment requiredunder thatprovisionas follows.First,apanelmustassesswhatobjective(s)amemberseekstoachievebymeansofa technical regulation.In doing so, it may take into account the texts ofstatutes, legislative history, and other evidenceregardingthestructureandoperationofthemeasure.Apanel isnotboundbyamember’scharacterizationoftheobjectivesitpursuesthroughthemeasure,butmust independently and objectively assess them.Subsequently, theanalysismust turn to thequestionof whether a particular objective is legitimate (para.314). Moreover, a panel must consider whether thetechnical regulation “fulfils” an objective. This is aquestion concerned with the degree of contributionthat the technical regulation makes towards theachievement of the legitimate objective.Consequently, a panel adjudicating a claim underArticle 2.2 of the TBT Agreement must seek toascertain towhatdegree,or if at all, thechallenged


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technical regulation, as written and applied, actuallycontributestothelegitimateobjectivepursuedbythemember.

The degree of achievement of a particular objectivemay be discerned from the design, structure andoperation of the technical regulation, as well as fromevidence relating to the application of the measure(para. 317). Furthermore, the assessment of“necessity” under Article 2.2 involves a relationalanalysis of the trade-restrictiveness of the technicalregulation,thedegreeofcontributionthat itmakestotheachievementofalegitimateobjective,andtherisksthat non-fulfilment would create. In most cases, thiswouldinvolveacomparisonofthetrade-restrictivenessandthedegreeofachievementoftheobjectivebythemeasure at issue with that of possible alternativemeasures that may be reasonably available and lesstrade restrictive than the challenged measure, takingaccount of the risks that nonfulfilment would create.AsclarifiedbytheAppellateBodyinpreviousappeals,the comparison with reasonably available alternativemeasures is a conceptual tool for the purpose ofascertaining whether a challenged measure is moretraderestrictivethannecessary.

The obligation to consider “the risks nonfulfilmentwouldcreate”furthersuggeststhatthecomparisonofthe challenged measure with a possible alternativemeasureshouldbemade in the lightof thenatureoftherisksatissueandthegravityoftheconsequencesthat would arise from non-fulfilment of the legitimateobjective.Thissuggestsafurtherelementofweighingand balancing in the determination of whether thetrade-restrictiveness of a technical regulation is“necessary” or, alternatively, whether a possiblealternative measure, which is less trade restrictive,wouldmakeanequivalentcontributiontotherelevantlegitimate objective, taking account of the risks thatnon-fulfilmentwouldcreate,andwouldbe reasonablyavailable(paras.318-321).

As regards the measure challenged by Mexico underArticle 2.2, the Appellate Body reversed the panel’sfinding that Mexico had demonstrated that the US“dolphin-safe” labelling provisions are more traderestrictive than necessary to fulfil the United States’legitimateobjectives. Indoingso, theAppellateBodyreasoned, inter alia, that the panel had conducted aflawed analysis and comparison between thechallenged measure and the alternative measureproposedbyMexico(theco-existenceofthelabellingrules in the Agreement on the International DolphinConservationProgramandtheUSlabellingprovisions).The Appellate Body also noted that the alternativemeasure proposed by Mexico would not make anequivalentcontributiontotheUnitedStates’objectivesas the US measure in all ocean areas. On this basis,the Appellate Body reversed the panel’s finding thatthe measure is inconsistent with Article 2.2 of theTBTAgreement(paras.328-331).

AppellateproceedingsinUS – COOL remainpendingatthetimeofwriting.

Sykes (2003) has suggested that the least trade-restrictiverequirementisa“crude”formofcost-benefitanalysis that is “highly attentive to error costs anduncertainty”.Hedescribesitas“crude”becausethereisno actual quantification of the costs and benefits ofalternative regulatory policies in monetary terms orusing another metric. Instead, he portrays the WTOdecision-makerasproceeding“moreimpressionisticallyand qualitatively” when assessing the trade effect ofalternative policies, their administrative difficulties andresource costs, and their regulatory efficacy. SykesreviewsWTOdisputedecisionsup to2003aswellasearlier GATT panels, and finds that they support hisunderstandingofthe lesstrade-restrictiverequirementasa“crude”formofcost-benefitanalysis.

Bown and Trachtman (2009) are critical of theAppellateBody’sarticulationofthenecessitytestanditsapplicationintheBrazil – Retreaded Tyresdispute.TheysubmitthattheAppellateBodyhasshownitselfunwilling toevaluate for itself,or require thepanel tohavedoneso, inanymeaningfulway the factors thatare supposed to be weighed and balanced under itstest.Intheabsenceofsuchevaluation,theadjudicatorybodies effectively defer to the domestic authority.Bown and Trachtman ask whether this degree ofdeference satisfies the mandate of the WTO’sadjudicatorybodies.Astowhichshouldbethepropertest to apply in this context, Bown and Trachtmanobserve that the text of Article XX, in particular theterm “necessary”, most naturally suggests a “least-treaty-inconsistent-alternative-reasonably-available”test,whichinthiscontextwouldcallforacomparativeanalysisofwhetherthereexistsanothermeasurethatwould achieve the same regulatory benefits as thechallenged measure, while imposing lower trade-restriction costs, without excessive costs ofimplementation.Yet,ontheassumptionthatthetreatytextcouldbeamended,BownandTrachtmanproposethatamoreappropriateapproachwouldbeonebasedon a welfare-economics analysis and they illustratehow this approach would proceed using the facts oftheBrazil – Retreaded Tyresdispute.

Regan (2007) also criticizes the balancing test asarticulated by the Appellate Body. Like Bown andTrachtman,Reganarguesthattheterm“necessary”inArticle XX suggests a “less-restrictive alternativetest”.Regangoesontoarguethat,whiletheAppellateBody has described its approach as one involvingweighingandbalancing, it is in realitydecidingcaseson thebasisofa less-restrictivealternative test.Oneof the reasons that he gives for arriving at thisconclusionisthatheconsidersthatthereisaninherentinconsistency between a balancing test and the viewalso espoused by the Appellate Body that WTOmembers are entitled to determine for themselvestheirappropriatelevelofprotection.


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Regan has what he considers is a more importantobjection. He does not believe that the WTOadjudicatory bodies have the authority to judge therelativeimportanceofvarious(non-protectionist)goalsthatWTOmembersmightwishtopursueandconsidersthat, if this were indeed done, it would be a seriousintrusion into members’ regulatory autonomy. Reganexplains that the advantage of a “less restrictivealternative” test – the test he thinks the AppellateBodyhasactuallyapplied–isthat itdoesnotrequiremaking such judgments, but rather is limited tobalancing the trade costs against administrative/enforcementcosts(asopposedtotheachievementoftheunderlyinggoal).

(v) International standards

AsdiscussedinSectionE.1andSectionE.2,regulatorydivergence may result in higher costs for producers,exportersand importers.TheWTO isnotastandard-setting body. The principal means through which theWTO promotes regulatory convergence is byencouraging its members to use internationalstandards. Neither the TBT Agreement nor the SPSAgreement, however, requires aWTOmember touseinternational standards. WTO members may adoptSPS measures or technical regulations that departfrominternationalstandards.

Article 3.1 of the SPS Agreement provides that “toharmonizesanitaryandphytosanitarymeasuresonaswide a basis as possible, Members shall base theirsanitary or phytosanitary measures on internationalstandards,guidelinesorrecommendations,wheretheyexist”. Article 3.3, however, allows WTO members tointroduceSPSmeasureswhichresultinahigherlevelof SPS protection than would be otherwise achievedby measures based on international standards,provided that there is scientific justification or as aconsequence of the level of SPS protection that amemberdeterminestobeappropriate.

The legal incentive for harmonization is that, underArticle3.2oftheSPSAgreement,measuresbasedoninternationalstandardsaredeemedtobenecessarytoprotect human, animal or plant life or health andpresumedtobeconsistentwiththerelevantprovisionsoftheSPSAgreementandtheGATT.Yet,itisimportanttonotethat,evenwhereaWTOmemberchoosesnottobaseitsSPSmeasureonaninternationalstandard,nonegative presumption attaches to that measure. If themeasure is challenged in WTO dispute settlement,the complaining member must demonstrate that themeasure is inconsistentwith theSPSAgreement. It isnotenoughtoshowthattheSPSmeasureisnotbasedon the international standard (Appellate Body Report,EC – Hormones,paras.102and171).

Inthecaseoftechnicalregulations,Article2.4oftheTBT Agreement provides that where “relevantinternational standards exist or their completion is

imminent”, WTO members “shall use them, or therelevant parts of them, as a basis for their technicalregulations”. Nevertheless, Article 2.4 allows WTOmembers to depart from an international standard,even when such a standard already exists, if “suchinternational standards or relevant parts wouldbeanineffectiveorinappropriatemeansforthefulfilmentofthe legitimate objectives pursued, for instancebecause of fundamental climatic or geographicalfactorsorfundamentaltechnologicalproblems”.

Similarly to SPS measures, there is a legal incentivefor using an international standard in preparing atechnicalregulation.Article2.5oftheTBTAgreementstates that, where the technical regulation pursuesoneof the legitimateobjectivesrecognizedunder theAgreement and is in accordance with relevantinternationalstandards,itshallberebuttablypresumednottocreateanunnecessaryobstacletointernationaltrade. As with SPS measures, there is no negativepresumptionwhenaWTOmemberchoosesnottousean international standard as a basis for a technicalregulation.IfthattechnicalregulationischallengedinWTO dispute settlement, the complaining membermust demonstrate that the international standard orrelevantpartswouldbeeffectiveorappropriatemeansfor the fulfilmentof the legitimateobjectivespursued(AppellateBodyReport,EC – Sardines,para.275).

The SPS Agreement expressly recognizes threeinternational standard-setting bodies: the CodexAlimentariusCommission, the InternationalOfficeofEpizootics (now called the World Organization forAnimal Health – OIE) and the Secretariat of theInternationalPlantProtectionConvention(IPPC).Formattersnotcoveredbythesethreeorganizations,theSPS Agreement leaves open scope for “appropriatestandards … promulgated by other relevantinternational organizations open for membership toall Members, as identified” by the WTO’s SPSCommittee.

The TBT Agreement does not specify which bodiesmay issue “relevant international standards”. Thesubject of “naming” or not naming bodies under theTBT Agreement has come up for discussion in thecontext of on-going negotiations in the Doha Roundon non-agricultural market access. Here, the WTOmembershipisdividedintotwocampsbutfornowthebodiesarenotlisted.

One group of WTO members argues that relevantinternationalstandardizingbodiesshouldbeexplicitlynamed.SincethegoaloftheTBTAgreementitselfisoneofpromotingharmonization,thisveryobjective,itisargued,willbeimpededifmultiplestandard-settingorganizations co-exist, creating duplicative andpossibly contradictory requirements. In a contextwhere regulators are strongly encouraged to basetheirmeasureoninternationalstandards,competitionbetween standard-setting bodies will lead to


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fragmentation of markets, unnecessary compliancecostsandevencaptureofregulatorsbyprotectionistinterests. The opposite needs to be achieved: closecooperation, greater inclusiveness and sharing ofgovernance at the international level. Focusing thedevelopment of standards used for regulatorypurposes within a few international bodies willincentivize a broad participation by stakeholders, inparticular industry, thus ensuring market relevanceand reflecting technological developments (JOB/MA/81andJOB/MA/80).

It is further argued that naming the relevantinternational standard-setting bodies would facilitateparticipation by developing countries because thesecountries will be better able to prioritize scarceresources. Following on from this, an increase inparticipation by developing countries will help ensurethat standards reflect the widest interests possible,thusprovidinggreaterlegitimacyandglobalrelevanceto the international standard itself (JOB/MA/81 andJOB/MA/80).

AnothergroupofWTOmembersarguestheopposite:international standardizing bodies should not benamed because whether a standard is relevant,effective and appropriate in fulfilling a member’sparticular regulatory or market need depends on thestandard itself, not on the body that developed thestandard. They argue that Article 2.4 of the TBTAgreement links the relevance of a “standard” to theobjectivepursued; the term “relevant” isnot linked tothe body. Furthermore, they suggest that bydesignating a particular body as a “relevantinternational standardizing body”, WTO memberswouldessentiallybeendorsingallstandardsthatsuchbodies produce without reviewing their content, evenin cases where the standard might not reflect theinterestsofallmembers,or,disproportionatelyreflectsthoseofonlyafew(G/TBT/W/138).

ItisalsoarguedthatalimitednumberofnamedbodiescannotproducethebreadthanddiversityofstandardsneededtofulfilalloftheregulatoryandmarketneedsthatarethepurviewoftheTBTAgreement.37Instead,itisthediversityofbodiesthatwillpromoteinnovationandhelpensurethatstandardsareofhighqualityandrespond to regulatory and market needs. Greaterharmonization will result from increased use of suchstandards(G/TBT/W/138).

Itisfurtherarguedthatmostbodiesproducingmarket-relevantstandards(thatareactuallyused)areprivatesector entities that need to cover their own coststhrough the sale of standards; naming bodies wouldeliminate this source of revenue and concentrateproceedsinafewhands.Finally,namingbodieswouldrender any standard produced by a designated bodyas “relevant”, regardless of whether that standard infact responds to the needs of developing countries,and this would counteract the goal of promoting the

development of standards to meet the diverse needsofdevelopingcountries(G/TBT/W/138).

Despite these different views, neither “camp” disputesthe importance of using international standards as ameans of reducing unnecessary non-tariff measures,and all WTO members agree on the importance ofadhering to the 2000 TBT Committee Decision thatsetsoutsixprinciplesandprocedures(DecisionoftheTBT Committee on Principles for the Development ofInternationalStandards,GuidesandRecommendationswithRelation toArticles2,5 and Annex3,G/TBT/1/Rev.9, p.38).38ThisDecisionwas recently recognizedas having interpretative value as a “subsequentagreement”withinthemeaningofArticle31(3)(a)oftheVienna Convention on the Law of Treaties (AppellateBodyReport,US – Tuna II (Mexico,para.372).

An issue that came up in WTO dispute settlement iswhether an international standard had to be adoptedby consensus in order to be a “relevant internationalstandard”underArticle2.4oftheTBTAgreement.TheExplanatoryNotetothedefinitionof“standard”intheTBTAgreementstatesthat“standardspreparedbytheinternationalstandardizationcommunityarebasedonconsensus”. It then adds that the TBT Agreement“covers also documents that are not based onconsensus”. This language was interpreted in EC – Sardines as applying also to international standards.TheAppellateBodyconfirmedthepanel’sfindingthatthe definition of a “standard” in Annex 1.2 tothe TBT Agreement does not require approval byconsensus for standards adopted by a “recognizedbody”oftheinternationalstandardizationcommunity.

TheAppellateBodywentontoclarifythatitsrulingwasrelevant only for the purposes of the TBT Agreement.Furthermore,itsaidthattherulingwasnotintendedtoaffect, in any way, the internal requirements thatinternationalstandard-settingbodiesmayestablish forthemselves for the adoption of standards within theirrespectiveoperations.AstheAppellateBodyputit,“thefact that we find that the TBT Agreement does notrequireapprovalbyconsensusforstandardsadoptedbythe internationalstandardizationcommunityshouldnotbeinterpretedtomeanthatwebelieveaninternationalstandardization body should not require consensusfor the adoption of its standards. That is not for us todecide” (Appellate Body Report, EC – Sardines,paras.222and227).

The question of what constitutes an “internationalstandard”forthepurposesoftheTBTAgreementwasmore recently discussed in US – Tuna II (Mexico).TheAppellateBodynotedthat,withrespecttothetypeof entity approving an “international” standard, theISO/IEC Guide 2: 1991 refers to an “organization”,whereas Annex 1.2 to the TBT Agreement stipulatesthata“standard”istobeapprovedbya“body”.However,theAppellateBodyobserved that theTBTAgreementestablishes that the definitions in that Agreement


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prevailoverthedefinitionsintheISO/IECGuide2:1991.Consequently, theAppellateBodyheldthat inorder toconstitutean“internationalstandard”,astandardhastobeadoptedbyan“internationalstandardizingbody”forthepurposesoftheTBTAgreement.

The Appellate Body further explained that a requiredelementofthedefinitionofan“international”standardforthepurposesoftheTBTAgreementistheapprovalof the standard by an “international standardizingbody”, that is,abody thathas recognizedactivities instandardizationandwhosemembershipisopentotherelevant bodies of at least all WTO members. TheAppellateBodyadditionallyobservedthattheconceptof “recognition” has both a factual and normativedimension. A body with “recognized activities instandardization”doesnotneedtohavestandardizationasitsprincipalfunction,orevenasoneofitsprincipalfunctions.At thesame time, the factualdimensionofthe concept of “recognition” would appear to require,ataminimum, thatWTOmembersareaware,orhavereason to expect, that the international body inquestion is engaged in standardization activities. Inexamining whether an international body has“recognized activities in standardization”, evidence ofrecognition by WTO members as well as evidence ofrecognitionbynationalstandardizingbodieswouldberelevant.Astandardizingbodywillbeconsideredopenif membership to the body is not restricted. Thestandardizing body must be open to the relevantbodies of at least all WTO members and on a non-discriminatory basis. Furthermore, it must be open ateverystageofstandardsdevelopment.

Having provided its views on the definition of an“international standard” for the purposes of the TBTAgreement, the Appellate Body next consideredwhether the dolphin-safe definition and certificationcontained in the Agreement on the InternationalDolphin Conservation Program (AIDCP) qualified asone. TheAppellateBody reversed thepanel’s findingand held that AIDCP is not an “internationalstandardizing body” for the purposes of the TBTAgreement because acceding to it requires aninvitationbytheparties,adecisionthatmustbetakenby consensus, and the Appellate Body was notpersuaded that being invited to join is a mere“formality”(paras.398-399).

ThepanelandAppellateBodyreportsinUS – Tuna II (Mexico) alsoaddressed the issueofwhether theUSdolphin-safe labelling measures constituted atechnical regulation or a voluntary standard. ThefindingsonthisissuearediscussedinSectionE.3(vi).

(vi) Regulating private conduct

The WTO agreements primarily regulate governmentconduct. Nevertheless, as discussed in Section E.1,privateconductcansometimeshaveeffectsequivalenttothoseofagovernment-imposednon-tariffmeasure.

The intervention of some element of private conductdoes not necessarily mean that a WTO member isrelieved of its responsibility to comply with itsobligations under the WTO agreements. Thus, forexample, in Korea – Various Measures on Beef, therewas a reduction in the number of retail outlets forimported beef that followed from decisions ofindividualretailerswhocouldchoosefreelytosellthedomestic product or the imported product. TheAppellate Body, however, explained that the legalnecessity of making a choice – between sellingdomestic or imported beef – was imposed by thegovernment measures itself. In such circumstances,“the intervention of some element of private choice(did)notrelieveKoreaofresponsibilityundertheGATT1994 for the resulting establishment of competitiveconditions less favourable for the imported productthan for the domestic product” (Appellate BodyReport,Korea – Various Measures on Beef,para.146).

A similar situation arose in the recent US – Tuna II (Mexico) dispute, where the Appellate Bodyconsidered whether the detrimental impact onMexican tuna products resulted from governmentintervention or was merely the effect of the privatechoice of US consumers. The Appellate Body heldthatthemodificationoftheconditionsofcompetitionand, hence, the detrimental impact on Mexican tunaproducts resulted from the challenged USgovernmentmeasure– that is, theUS“dolphin-safe”labelling provisions. It based its finding on the factthat it is the government measure that establishesthe requirements under which a product can belabelled“dolphin-safe”intheUnitedStates.Moreover,while US consumers’ decisions whether to purchasedolphin-safetunaproductsaretheresultoftheirownchoices, it is the government measure that controlsaccesstothelabelandcircumscribeshowconsumersmayexpresstheirpreferencesfor“dolphin-safe”tunaproducts(para.239).

The TBT Agreement makes some inroads intoregulating non-governmental standard-setting bodiesasaresultofthecommitmentsrelatingtotheCodeofGood Practice. The application of the Code to non-governmental standardizing bodies is explained inSectionE.2.

Article 14.4 of the TBT Agreement is an interestingprovision in termsofattribution toaWTOmemberofprivate conduct. It states that the dispute settlementprovisionsoftheWTOcanbeinvokedwhereamemberhas not achieved satisfactory results under certainprovisions and the interests of another member aresignificantly affected. Article 14.4 goes on to statethat“(i)nthisrespect,suchresultsshallbeequivalenttothoseasifthebodyinquestionwereaMember”.

The SPS Agreement also requires WTO members to“take such reasonable measures as may be availableto them to ensure that non-governmental entities


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within their territories … comply with the relevantprovisions of this Agreement”. It similarly states thatmembers must not take measures which have theeffectof,directlyorindirectly,requiringorencouragingsuchnon-governmentalentitiestoactinamannerthatisinconsistentwiththeAgreement.

Given their increasing use, private standards havebecomeasubjectofgrowingattention.The issueofprivate standards was first raised in the SPSCommittee in 2005. Committee discussions onprivate standards initially focused on three themes:market access, development and WTO law. In theareaofmarketaccess,WTOmembersdiffer in theirviews on whether standards are an opportunity orthreat to exporters. Many members are concernedthat the cost of certification, sometimes for multiplesets of standards for different buyers, can be aproblem, especially for small-scale producers andparticularly (but not exclusively) in developingcountries. Members also have differing views as towhether private standards fall under the jurisdictionof the SPS Agreement. The concern that theproliferation of private standards could underminesome of the progress made in regulating SPSmeasures through the adoption and implementationof the SPS Agreement is at the root of thesedivergentviews.

Despite the lack of consensus on whether and howprivatestandardsfit into theoverall frameworkof theSPSAgreement,theissuehasbeenontheagendaofevery meeting of the SPS Committee since June2005. Inaddition, theWTOSecretariathasorganizedtwoinformalinformationsessionsonthetopic,andtheStandards and Trade Development Facility, a globalpartnership that supports developing countries inimplementing international SPS standards, held aworkshop on the issue in 2008. The informationsessions and workshop provided the opportunity fortwo-wayeducationandawareness-raising: increasingthe knowledge and understanding of governmentregulatory officials about the operation of variousprivatestandardschemesandtheirobjectives,whileatthe same time making the operators of the privateschemesawareof theconcernsandeffectsof theseondevelopingcountries.

InMarch2011, theSPSCommitteeagreed topursuefive practical actions recommended by an ad hocworkinggroup39ontheissueofprivatestandards(seeG/SPS/55 and G/SPS/R/62). While WTO membersremainhighlydividedas towhetherprivatestandardslegallyfallwithinthescopeoftheSPSAgreement,theCommittee agreed to develop a working definition ofprivate standards related to SPS measures, and tolimitanydiscussionstoprivatestandards identified inthedefinition. In addition, theCommitteeagreed thatinformation regarding the work of the threeinternational standard-setting organizationsreferenced in the SPS Agreement (Codex, IPPC and

OIE) as well as relevant developments in other WTOcouncilsandcommitteesshouldberegularlysharedinthe Committee. Members agreed to educate relevantprivate sector bodies in their countries so that theyunderstand the issues raised in the SPS Committeeand the importance of the international standards ofCodex, IPPCandOIE.TheCommitteealsoagreed toexplore cooperation with these three bodies indeveloping information material underlining theimportanceofinternationalSPSstandards.

As noted earlier, one of the distinctions drawn in theTBT Agreement between a technical regulation and astandard is that compliance with the former ismandatory,whilecompliancewiththe latter isnot.Therecent panel in US – Tuna II (Mexico) had to decidewhether the US dolphin-safe labelling measures were“technical regulations” within the meaning of the TBTAgreement as argued by Mexico or rather a voluntarystandardasadvocatedbytheUnitedStates.Thepanelheld that “compliance with product characteristics ortheir related production methods or processes is‘mandatory’ within the meaning of Annex 1.1, if thedocumentinwhichtheyarecontainedhastheeffectofregulatinginalegallybindingorcompulsoryfashionthecharacteristics at issue, and if it thus prescribes orimposesinabindingorcompulsory fashionthatcertainproduct must or must not possess certaincharacteristics, terminology, symbols, packaging,markingorlabelsorthatitmustormust notbeproducedbyusingcertainprocessesandproductionmethods”.

The panellists, however, disagreed as to whether theUSmeasuresaremandatory.Themajorityofthepanelfound that theUS labelling requirement ismandatorybecauseit(i) is legallyenforceableandbindingunderUS law (it is issued by the government and includeslegal sanctions); (ii) prescribes certain requirementsthatmustbecompliedwithinordertomakeanyclaimrelating to themanner inwhich the tunacontained inthe tuna product was caught, in relation to dolphins;and(iii)embodiescompliancewithaspecificstandardas the exclusive means of asserting a “dolphin-safe”statusfortunaproducts.

The dissenting panellist noted that “the measures donotimposeageneralrequirementtolabelornottolabeltunaproductsas ‘dolphin-safe’”.Rather, theuseof thelabel“remainsavoluntaryanddiscretionarydecisionofoperators on the market to fulfil or not fulfil theconditionsthatgiveaccesstothelabel,andwhethertomakeanyclaiminrelationtothedolphin-safestatusofthetunacontainedintheproduct”.ThepanellistfurtherdeterminedthatMexicohadfailedtodemonstratethatthemeasureswerede factomandatory,becauseMexicohadnotestablished“theimpossibilityofmarketingtunaproductsintheUnitedStateswithoutthe‘dolphin-safe’label” and that “such impossibility (arose) from factssufficientlyconnectedtotheUSdolphin-safeprovisionsortoanothergovernmentalactionoftheUnitedStates”(PanelReport,US – Tuna II (Mexico),paras.7.111-7.188).


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TheAppellateBodyupheldthepanelmajority’sfindingthat theUSmeasure isa technical regulationsubjectto the disciplines of Article 2 of the TBT Agreement.TheAppellateBodynotedthatthemeasurechallengedby Mexico is composed of legislative, regulatory andjudicialactsoftheUSfederalauthoritiesandincludesadministrative provisions. The measure sets out asingle and legally mandated definition of a “dolphin-safe” tuna product and disallows the use of otherlabels on tuna products that use the terms “dolphin-safe”,dolphins,porpoisesormarinemammals thatdonotsatisfythisdefinition.Indoingso,theUSmeasureprescribes in a broad and exhaustive manner theconditions that apply for making any assertion on atuna product as to its “dolphin-safety”, regardlessof the manner in which that statement is made(para.199).

(vii) Transparency

Transparency is an important element of all WTOagreements.SectionE.2describedsomeof themostimportanttransparencyprovisionsoftheSPSandTBTagreements, andexplained theeconomic rationaleoftheexchangeofinformationamongWTOmembers.

TransparencyobligationsarenotfrequentlythesubjectofWTOdisputesettlement.However,inarecentcase,US – Clove Cigarettes ,aviolationwasfoundofArticle2.12 of the TBT Agreement, which provides that “(e)xceptinthoseurgentcircumstances…,MembersshallallowareasonableintervalbetweenthepublicationoftechnicalregulationsandtheirentryintoforceinordertoallowtimeforproducersinexportingMembers,andparticularly in developing country Members, to adapttheir products or methods of production to therequirementsof the importingMember”. Inparagraph5.2 of the Doha Ministerial Decision, WTO membersagreedthat“thephrase‘reasonableinterval’(inArticle2.12 of the TBT Agreement) shall be understood tomean normally a period of not less than 6 months,except when this would be ineffective in fulfilling thelegitimateobjectivespursued”.

TheUS – Clove CigarettescaseconcernedatechnicalregulationadoptedbytheUnitedStatesthatcameintoforce three months after it had been published. Aninitialquestionthatwasraised inthecaseconcernedthe legal status of paragraph 5.2 of the DohaMinisterialDecision.TheAppellateBody rejected thecontentionthatparagraph5.2constitutedamultilateralinterpretation of the TBT Agreement adopted inaccordance withArticle IX:2 of theWTO Agreement.The reason for this was that paragraph 5.2 had notbeen adopted pursuant to a recommendation of theCouncil on Trade in Goods – the Council thatsupervisestheTBTAgreement,asrequiredbyArticleIX:2oftheWTOAgreement.

Asthepanelhaddone,theAppellateBodyconsideredthat paragraph 5.2 has interpretive value because it

constitutes a subsequent agreement between theparties, within the meaning of Article 31(3)(a) of theVienna Convention on the Law of Treaties, on theinterpretation of the term “reasonable interval” inArticle2.12oftheTBTAgreement. Itthenfoundthat,read in the light of paragraph 5.2, Article 2.12 of theTBT Agreement “establishes a rule that ‘normally’producers in exporting Members require a period of‘not less than 6 months’ to adapt their products orproduction methods to the requirements of animportingMember’stechnicalregulation”.

The Appellate Body further explained that once it isshown that the WTO member adopting a technicalregulation has not allowed a period of at leastsixmonthsbetweenthepublicationandtheentryintoforce of that technical regulation, such a membercarries the burden of demonstrating that a shorterperiod was justified because (i) the “urgentcircumstances” referred to in Article 2.10 of theTBT Agreement surrounded the adoption of thetechnical regulation; (ii) producersof thecomplainingmembercouldhaveadaptedtotherequirementsofthetechnical regulation within the shorter interval that itallowed; or (iii) aperiodof “not less than” sixmonthswouldbe ineffective to fulfil the legitimateobjectivesofitstechnicalregulation.Inthisparticularcase,itwasfound that the United States had failed to establishthat any of the above-mentioned circumstancesjustified a period shorter than six months (AppellateBodyReport,US – Clove Cigarettes ,paras.255,268,and290).

(c) IssuesrelatingtotheGATS

The principal disciplines on measures affecting tradein services are similar to those applying to non-tariffmeasures forgoods trade. These servicesdisciplinesfocusonMFN(Article II),marketaccess(ArticleXVI)andnationaltreatment(ArticleXVII).However,nationaltreatment under the GATS is significantly differentfrom that in goods trade, since it applies only to thesectorsforwhichcommitmentshavebeentaken,andcanbemadesubject to limitations.Thus, thenationaltreatmentobligationinservicescannotbeviewedasameanstocurbpolicysubstitution.Rather,byrequiringthat limitations on market access and nationaltreatment be subject to scheduling, the Agreementseeks to constrain the trade implications of thesemeasuresinthesamewaythattariffsareboundundertheGATT.

TheGATShasaverybroadscope,whichresultsfromthe four modes of supply that constitute trade inservices.Moreover,unliketraditionaltradeagreements,the GATS is primarily concerned with internalmeasures.Whatmattersinservicestradeisoftentheoveralllevelofcontestabilityofthemarkettonewandexistingentrants,andnot just itsopennesstoforeignsuppliers.ThebreadthoftheGATSisalsoreflectedbythe wide range of measures within its scope. In


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accordance with Article I, the GATS “applies tomeasuresbyMembersaffectingtradeinservices”.

The Appellate Body has explained that the “use oftheterm‘affecting’reflectstheintentofthedrafterstogive abroad reach to theGATS” (AppellateBodyReport,EC – Bananas III,para.220).Thecoverageofthe GATS can extend as well to measures that arewithin thescopeof theGATT. In thesamecase, theAppellateBodynotedthat,whilesomemeasureswillfall under one or the other agreement, there maybe measures that could be found to fall within thescope of both the GATT and the GATS. Thesewould be “measures that involve a service relatingto a particular good or a service supplied inconjunction with a particular good”. In such cases,“while thesamemeasurecouldbescrutinizedunderboth agreements, the specific aspects of thatmeasure examined under each agreement couldbedifferent” (AppellateBodyReport,EC – Bananas III,para.221).

The policy substitution problem as discussed inSectionE.2between tariffsandnon-tariffmeasurescould in principle only exist for services if WTOmembers,havingremovedmarketaccessornationaltreatment limitations, were then to use domesticregulations as a substitute instrument. So far,domesticregulationdisciplinesunderthenegotiatingmandateofArticleVI:4(seeSectionE.4)haveyettobedefined.Pending thosedisciplines,membersmaynotunderArticleVI:5maintaindomestic regulationson licensing,qualificationand technicalstandards ina way that would nullify or impair specificcommitments. These domestic regulations shouldalso be based on objective and transparent criteria,not be more burdensome than necessary to ensurethe quality of the service, and not have reasonablybeen expected at the time when the relevantcommitmentsweremade.

So far, WTO dispute settlement cases have notaddressedArticleVI:5,althoughtherehasbeensomeguidanceonotheraspectsofdomesticregulation.ThedistinctiondrawnintheGATSbetweenmarketaccessrestrictions (Article XVI) and domestic regulations(ArticleVI)wasexaminedinUS – Gambling. Theissuethatarosewaswhetherabanonameansofsupplyinga service constituted a market access restrictionunder Article XVI:2(a) and (c), or whether suchprovisionscoveredonlymeasuresthatwereexpressedintheformofanumericvalue.Thepanelfoundthataban is, in effect, a “zero quota”, and is thereforecovered by these provisions. This finding was upheldonappeal(PanelReport,US – Gambling,paras.224-239; Appellate Body Report, US – Gambling, para.265).

TheMexico – Telecoms casedemonstrated thecloserelationship between domestic regulation andcompetition policy. The measures at issue were

Mexico’s domestic laws and regulations that governthesupplyoftelecommunicationsservicesandfederalcompetition laws. The panel found that theinterconnection rates charged by Mexico’s majorsuppliers were not “cost-oriented”, as required by thenon-discriminatorydisciplines in theReferencePapercontained in Mexico’s schedule of commitments.Furthermore, thepanel found that,with respect to itsregulations on interconnection costs, Mexico had nottaken appropriate measures to prevent “anti-competitive”practices,as itwas required todoundertheReferencePaperdisciplines.Thepanelalsofoundthat US suppliers had not been provided access topublic telecommunications transport networks on“reasonable terms”, contrary to Mexico’s obligationsundertheAnnexonTelecommunications.

4. AdaptingtheWTOtoaworldbeyondtariffs

This final section sketches some of the mainchallenges in dealing with non-tariff measures in themultilateral trading system. Sub-section (a) illustrateswhy improvements in the treatment of non-tariffmeasures intheWTOmaybecomemoreimportant inlight of rapid changes in the global economy (cross-border production chains) and the growing use ofNTMs to address broad consumer and generalinterests, such as food safety and environmentalquality.

Sub-section (b) focuses on the scope for policyflexibility in setting non-tariff measures in the theoryandpracticeof non-violationcomplaints andof otherapproaches, such as mutual recognition andharmonization. Sub-section (c) takes up the currenttransparencyprovisionsintheWTOandthechallengeof aligning incentives when transparency has costs.Sub-section (d) focuses on addressing the challengeof distinguishing between legitimate and illegitimateusesofNTMs.

Sub-section (e) discusses policy challenges tointernational cooperation on non-tariff measures. Inparticular, it considers the issue of regulatoryconvergence, the development of rules on privatestandards, disciplines on domestic regulation and“pro-competitive” regulations in services. Sub-section(f)concludeswitha focuson theneed for regulatorycapacitybuildingindevelopingcountries.

(a) NTMsinthe21stcentury

Recent changes and foreseeable changes in thetradingenvironmentalterboth theneed fornon-tariffmeasuresand thestructureofgovernment incentivestousethesemeasuresforprotectionistpurposes.TheReport has discussed in detail the implications ofdiverseareasofeconomicchangeforNTMs,suchasthediffusionofglobalproductionnetworks,difficulties


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associated with the recent financial crisis and theneed to address climate change. Some of thechallengesarediscussedbelow.

The rules of the GATT were designed for a world inwhich international trade predominantly consisted oftradeinfinalgoodsandprimarycommodities.However,the modern economic environment has grown morecomplexasproductionnetworksspanborders.Thesechangesposechallengesforgovernance,asthekindsofproblemsthatariseinaworldofoffshoringrequirerethinkingthecurrentmarketaccessbasedframeworkofthemultilateraltradingsystem.

AsAntràsandStaiger(2011,2012)haveargued,deeprather thanshallow integration isneededtosolve thetype of policy problems associated with theproliferation of global production chains. Specifically,the theory outlined in Section E.1(b) suggests that ifproducers are locked into trade relationships withforeign firms, governments must consider not onlymarketaccessbutalsotheupstreamanddownstreameffects of their measures. One possibility to accountfor theseneeds is thatWTOrulescouldbeamendedor reinterpreted to allow non-violation complaints tocover “intra-firm market access”. This would requireexpandingnon-violationcomplaintstocover“benefits”accruingnotonlyfromtheagreedmarketaccess,butfrom the range of policies that affect the bargainingrelationship between the input supplier and thepurchaser of those inputs. Such a change wouldnecessitate significant departures from currentpractice and open challenging questions oninstitutional design. Part of the challenge lies indistinguishing between those situations in whichindustries set prices through bargaining rather thancompetitively. Trade rules would have to reflect suchsectoraldifferences.

Little work on the theory of trade agreements underoffshoring has attempted to evaluate the substantiveimportance of price formation through bargaining,making it difficult to determine the need for aninstitutional response (Staiger, 2012). As a first steptowards a test of the theory, Section C.2 examinesthose sectors that have a higher share of trade inintermediate goods. While not identical to offshoringandbilateralbargaining, thepresenceof intermediategoodsisindicativeofthekindsofinternationalsupplychainsthatwouldbesubjecttobargainingoverpricesandthereforeprofits.

The statistical analysis finds, however, that the shareof intermediate goods is negatively associated withtheamountoftradecoveredbyspecifictradeconcerns(and by extension the amount of trade affected bynon-tariff measures). This indicates either that theincentivetouseNTMstoshiftfirmprofitsisdominatedbyotherconsiderations(suchasthedesiretomakeanattractive environment for global production), orpossiblythatgovernmentshavealreadyaddressedthis

issue in existing “deep integration” preferential tradeagreements (see World Trade Organization (WTO),2011). Even if PTAs promote deep integration, thechallengefortheWTOistoensurecoherenceamongdivergent regulatory regimes that in practice maysegmentmarketsandraisetradecosts.

Changes in international markets do not only arisefromdifferencesinhowbusinessesorganize.Itisalsolikely that the use of non-tariff measures will beresponsive to a number of foreseeable trends in theglobal economic environment. Section B highlightsthree areas in which economic changes create newchallenges for the regulationofNTMs.Theseare theway food isproducedandconsumed, thecentral roleof international finance in the economy and ineconomic crises, and the fundamental challenges ofclimatechange.Eachofthesefactorsisofconcernforgovernments seeking to promote a regulatoryenvironment that protects broad consumer andsocietal interests,whichmayhoweverhavean impactontrade.

The increasingly globalized agri-food system showshow organizing and regulating global supply chainsinvolvesbusiness,governmentandconsumerinterests.Section B argues that as consumers’ standards rise,thereisagreaterneedforbusinessestomanagetheirsupply chains and for governments to ensure thedesired level of quality and safety. This effort iscomplicatedbytheeverexpandinginternationalizationof food production, and the difficulty in tracingproductsthatchangehandsveryquicklyandtraversemultiplejurisdictions.

International finance services are similarly complexand fast moving, but play a central role in the globaleconomy. In this environment, challenges to financialmarkets threaten the stability of entire economies.When crises arrive, governments use a variety ofmeasures to contain the systemic damage and toboostconsumerdemand.Atthesametime,economiccrises are associated with increased demands forprotectionist policies that stabilize the domesticeconomy at the expense of other countries, fuellingeconomic tension. This challenge is particularlyrelevantinlightoftheapparentinstitutionalfailuresofthe 2008 financial crisis and the subsequent globaleconomicrecession.

While the recession itselfcreatespoliticalchallengesfor international cooperation in general, theconcentration and severity of the crisis in countrieswithsophisticatedregulatoryregimesandopencapitalaccounts may derail efforts to harmonize regulationsin the financial services sector. As financial servicescontinuetomakeupalargeportionoftheeconomyofmanycountries,facilitatingtradeintheseservicesmayrequire additional mechanisms to coordinate crisisresponse.


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Financial crises, while harmful, have happened before,andhavelimitedlifespans.Climatechange,ontheotherhand,causesbothglobaland long-lastingeffects.Thediscussionofclimatechange inSectionBemphasizesthe challenge of balancing legitimate concerns aboutcarbon leakage with an equitable distribution of thecosts of carbon dioxide abatement. As governmentsincreasinglyattempttoregulatecarbonemissions,partof the discussion inevitably revolves around the tradeimplicationsofthesemeasures.

(b) Policyflexibility:tensionsbetweenlawandeconomics

Whengovernmentsbindtariffsandcommittoalevelofmarketaccess,theirpartnersmayworrythatmeasuresto address domestic concerns may in fact circumventtheobligationsintheagreement.OnewaythatcurrentrulesoftheWTOenablegovernmentstoemploypublicpolicy oriented measures is by allowing non-violationcomplaints,asdescribedinSectionE.1(c).Non-violationcomplaints allow WTO members to be “compensated”afteroneof their tradingpartnersestablishesa trade-alteringnon-tariffmeasurebywithdrawingconcessionsto rebalance the level of market access. This remedyconfers a high degree of domestic policy flexibility toWTO members, in line with their internationalcommitments. It might serve to encourage confidencein the value of a trade negotiation and discouragesgovernments from using NTMs to renege oncommitments. In practice, however, WTO membersgenerally do not invoke non-violation complaints intradedisputes.

Several reasons have been advanced to explain whycomplaintsbasedonnon-violationclaimsarerare.Oneis that the Uruguay Round agreements reduced thescope for non-violation cases because GATT/WTOlaw became “more and more comprehensive andcomplete”, shrinking “the legal vacuum around GATT… in particular with respect to subsidization”, whichwas the target of most of the non-violation claimspursued during the GATT years (Kuijper, 1995).Anotherreasonthathasbeenputforwardisthatthereremain a number of ambiguities concerning theelementsthatacomplainantmustsatisfyfor itsclaimofnon-violationtosucceed.

A non-violation complaint is usually understood toprotecttheexpectationsofaWTOmember(“benefitsaccruing to it directly or indirectly under the relevantcovered agreement”) (Roessler and Gappah, 2005).Nevertheless, questions have been raised as topreciselywhichexpectationsareprotectedandwhenthose expectations can be said to have beenfrustrated. Finally, the remedy available when a non-violation complaint is successful is weaker than theremedies available in cases of violation. In the firstcase, the respondingparty isnotunderanobligationto withdraw the measure. Instead, the respondentmember must “make a mutually satisfactory

adjustment”, which may include compensation (seeArticle26(1)oftheDisputeSettlementUnderstanding).

Under the Dispute Settlement Understanding (DSU),WTOmembersarenotgenerallyrequiredtoshowthata non-tariff measure actually harms market access.Instead,membersgenerallychallengetheNTMonthebasisofthespecificruleitallegedlyviolates.Thereis,therefore,atensionbetweentheeconomicframework,whereby rebalancing can be used to confer policyflexibility, and the legal framework which relies on“clearinfringement”ofaGATTprovision.Moreover,theinfringement principle exacerbates the problemregarding the asymmetric application of the non-violationruledescribedinSectionE.1.

Ideally, a government could efficiently correct adomesticmarketfailurebyusinganon-tariffmeasurewithout being accused of violating the agreement solong as this measure is balanced with a tariffadjustment so as not to alter overall concessions totradingpartners.As interpreted,however,GATT rulespreclude this form of readjustment. Addressing thisasymmetrywould,ataminimum,requirereinvigoratingthe non-violation rules to cover market access, butseveral additional problems could arise. Staiger andSykes (2011) indicate that a requirement to maintainbalance in market access, while limiting policysubstitution,woulddiscourageeconomicallydesirableregulationforfearofsanctionsbyforeigngovernments.Whilethisincentivecouldbelimitedbycalibratingtheallowedresponse,achievingbalancewouldbedifficult,particularlyasthewelfareeffectsofregulatorypolicyareoftendifficulttomeasure.

Increasingly, the WTO membership addresses non-tariffmeasuresanddomesticregulationinservicesbyusing one of two tools, harmonization or mutualrecognition (discussed inSectionDandSectionE.1).Harmonization sets both common policy objectivesand the measures needed to achieve them, whilemutualrecognitionreferstothereciprocalacceptanceofthemeasuresappliedinbothcountries.

Inthepolicyareascoveredbyeitherkindofagreement,harmonization and mutual recognition reduce thediscriminatoryeffectsofnon-tariffmeasures,buteachhasadifferenteffectontrade.SectionBarguesthatthe economic theory on the relative trade effects ofharmonization and mutual recognition does notindicateageneraladvantageofoneruleovertheotherintermsoftradeflows.Lookingtoactualpractice,theempiricalanalysisinAppendix5ofSectionDindicatesthatmutual recognitionprovisionsappear tobemoretradeenhancingthanharmonizationprovisions.

Beyond the trade effects, Section E.1 indicates thatgovernmentsmaysetlooserthanoptimalregulationsifa mutual recognition rule ensures access to foreignmarkets. This means that, even if trade is enhanced,there are potential consequences for consumer


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welfare.Finally,SectionE.1alsopointstothepotentialtrade-offs implied by harmonization of non-tariffmeasures whenever policy needs differ acrossdevelopedanddevelopingcountries.

The asymmetry in the application of non-violation inthe GATT/WTO system, the trade-offs implied byharmonization and mutual recognition and theambiguityoftheirtradeeffectspointtothedifficultiesthat still persist in the multilateral trade regime infindingtherightbalancebetweenpolicycommitmentsandflexibility.Beyondtheissuesdiscussedabove,partof the complexities of this problem is tied to theopaque nature of many non-tariff measures andthe difficulty in discerning the protectionist and thelegitimate intent of governments. These challengesarediscussedinmoredetailbelow.

(c) Transparencyisno“freelunch”

Transparency is an important dimension ofinternational cooperation on non-tariff measures andservicesmeasures.Previouspartsof this reporthaveshownthat:(i)bothNTMsandservicesmeasuresraisetransparency issues (see Section B); (ii) opacityimposes costs on certain firms but it may benefitothers (import-competing firms) and, depending oncircumstances,politicallymotivatedgovernmentsmayhaveapreference foropaquepolicy instrumentsovertransparent ones (see Section B); (iii) availableinformation on both NTMs and services measures islimited in coverage and of generally low quality (seeSection C.1); (iv) international cooperation on NTMsandservicesmeasures ismademoredifficultbytheiropacity(seeSectionE.1);(v)anumberoftransparencyprovisionsintheWTOagreementsaddresstheopacityproblems (see Section C.1 and Section E.2). Thissub-section examines whether existing transparencyprovisions address all the problems raised by theopacity of NTMs and services measures. It identifiesa number of remaining challenges and points atpossiblesolutions.

As discussed in Section E.1, the opacity of non-tariffmeasures and services measures raises four mainproblems for international trade cooperation whichtransparency provisions can help address. First,opacity creates rule-making inefficiencies due toregulatory uncertainties. Secondly, cooperation onNTMs or services measures can suffer becauseenforcement of agreements requires that thecompliance of each government can be observed.Thirdly,ifmeasuresareopaque,anagreementmaybeonly of limited use to correct governments’ lack ofcommitment. Finally, transparency may induce or bepartofaregulatoryimprovementprocess.

Fourmaintypesoftransparencyprovisionshavebeendeveloped over the years to address the problemsoutlined above (see Section C.1). Publicationrequirements,inGATTArticleX,ArticleIIIoftheGATS

and inotherWTOagreements,are theoldest typeofprovision.Notificationsareanothercore transparencymechanism, whose importance has substantiallyincreased over the years. The WTO’s Trade PolicyReview Mechanism and its monitoring reportsconstituteathirdmechanism.Finally,thepossibilitytoraise specific trade concerns in the TBT and SPScommittees(seeSectionC.1)andtosomeextent thedispute settlement mechanism represent a fourth.40The question is whether these four mechanismsensure sufficient transparency to make cooperationpossible.

The answer to this question is that transparencyprovisions in the WTO agreements help address theproblemsraisedbytheopacityofnon-tariffmeasuresandservicesmeasuresbuttheyarenotsufficient.Oneproblemisthefailureofnotifications,oneofthepillarsof the WTO transparency system, to provide theinformation they should. WTO members’ compliancewith certain notification requirements is low and thequality of the information notified is not alwayssufficient.Asalreadymentioned,partofthereasonforthis appears to be that notifying can be difficult andcostly.

Over the years, various measures have been taken tofacilitate and enhance the quality of notifications. TheSPSCommittee,forexample,hasdecidedthatitwouldbe useful to be alerted when notified regulations areadoptedorenterintoforce,andhasrecommendedtheuseofaddendaforthispurpose.Ithasalsobeentestingan electronic notifications mechanism to facilitate andimprove the quality of notifications. Furthermore,notificationsaccountforasmuchas10-20percentoftechnicalassistanceactivities.However,muchremainstobedoneandcompliancewillmostlikelybedifficulttoimprove without taking into account the politicaleconomyoftransparencyandnotifications.

Contrary to what is often claimed, not everyonebenefits from transparency. There are winners andlosers from increased transparency. As has beenargued in this report,governmentsmayhave reasonstopreferopaquemeasuresandsomefirmsmaybenefitfrom the higher market entry costs associated withopaqueness.Thismeansthatwhileeverygovernmentis interested in its partners’ measures, it may bereluctanttodiscloseinformationonitsownmeasures.Thetemptationtofreerideonthesystemclearlyexistsand, if they consider past records, governments maynot be too afraid of sanctions for not complying withtheir notification obligations, except for some finger-pointing.

As for the possibility to use “reverse notifications”, itcould help but has not been used very actively sincetheUruguayRound.41Howmuchitcouldhelpdependsonvariousfactors.First,itisnotclearhoweasyitisfora WTO member to identify another member’s non-tariffmeasures.Secondly,membersmaybe reluctant


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to denounce trading partners for fear of retaliation.Thirdly,othermechanismsmayhavetakentheplaceofreversenotifications.42

If notifications fall short in terms of providinginformation, what about the WTO’s Trade PolicyReview Mechanism and its monitoring reportsmentioned earlier? Both these transparencymechanismsrelyoninformationfrommultiplesourcesandarethuslessdependentonthedispositionofthegovernment imposing the measures. Trade policyreviews clearly represent an important transparencymechanismbut frequencyandcomprehensiveness, inparticularontheservicesside,areissues.43

As for the monitoring reports, at the 8th WTOMinisterial Conference in December 2011, Ministersdirected the monitoring mechanism to be continuedand strengthened.44 They have also committed tocomply with existing transparency obligations andreporting requirementsneeded for thepreparationofthese monitoring reports, and to continue to supportand cooperate with the WTO Secretariat in aconstructive fashion.Thequestions that remain tobeanswered pertain to the quantity, quality andaccessibility of the information collected for themonitoring reports. At this stage, it is not clear howcomprehensivetheircoverageis,howmuchitcouldbeexpanded and whether and when it can besystematicallycodedandstoredinadatabase.45

Another mechanism which usefully complementsnotifications and the monitoring reports is thediscussionof“specifictradeconcerns”intheSPSandTBT committees.46 These discussions provide anopportunity for multilateral review that enhances thetransparencyandpredictabilityofregulatorymeasurescovered by the TBT and SPS agreements. Since theissues discussed relate to specific measuresmaintained by other WTO members, there is noincentive problem. Another advantage of thismechanism is that itcoversconcernsrelatednotonlyto the measures themselves but also to theirimplementation.

There are two main limitations to the role that thediscussion of specific trade concerns can play. Firstand foremost, only SPS and TBT measures arecovered. Secondly, it is not clear that, even in thecoveredareas,allmeasuresthatviolatecommitmentswill be raised. For any concern to be raised, it firstneedstobeidentifiedbyanexporter.Itthenneedstobe communicated to the government. Finally, thegovernmentneedstoraise itat theWTO.Thismeansthatevenifaconcernisidentifiedandcommunicatedtothegovernment,itmaynotberaisedif,forexample,thegovernmentisafraidofreprisal.

Thechallenge,at this juncture, is thus to improve thequantity,thequality,andtheaccessibilityofinformationcollected through active and passive transparency

mechanisms, both on measures and on problemsassociated with the measures. As far as theaccessibility is concerned, the situation will improvesignificantlyifandwhenalltheinformationnotifiedto,orcollectedby,theWTOSecretariatismadeavailablethrough the recently launched Integrated TradeIntelligencePortal(I-TIP).47

Improving the quantity and quality of information,however, is more difficult. Further work in thecommittees and through technical assistance will nodoubtcontinuetohelpimprovethecontributionofthenotificationmechanismtotransparency,but,giventheincentiveproblem,thismaynotbeenough.Oneoptionmentionedabove is toempower theWTOSecretariatwiththeresourcesnecessarytoindependentlymonitorgovernments and markets. Without a significantimprovement in the compliance and quality ofnotifications,thiswouldbeaverycostlyoption,whichwould have significant budgetary implications for theWTO. The mobilization of additional resources on asustainablebasiscouldraiseincentiveissues.

Another option, which has helped improve thetransparency of tariffs, is to make it easier for WTOmemberstocomplywiththeirtransparencyobligationsbyallowingtheWTOSecretariattouseotherrelevantofficial sources on a “no objection” basis, if suchsourcesareavailable.48Thisoption,however,willshiftthe incentive problem to other information-collectingagencies.Finally,athirdoptionisformemberstoenterintobilateraland/orplurilateralnegotiationsovermoreenforceabletransparencyobligationsinthesamewaythat negotiations have taken place over the years torevampexistingrulesorintroducenewones.

DependingonwhichoptionisadoptedtoaddresstheincentiveproblemandtoensurethatWTOmechanismsgenerateasufficientleveloftransparency,relianceonexternal sources to fill information gaps may vary. Itseemsclear,however,thatatleastintheshortrun,thesystemwillcontinuetobenefitfromother institutions’collectionefforts.Asdiscussed, theWTOSecretariatand other agencies have revamped the existinginternational classification to facilitate the integrationof all available sources of non-tariff measureinformation. From this perspective, the multi-agencyTransparencyinTrade(TNT)initiative(seeSectionC)would have an important role to play in boosting thecollection and dissemination of data on non-tariffmeasuresandservicesmeasures.

The TNT initiative could be used by partners as anopportunity to put in place a sustainable governancemechanism for transparency in non-tariff measures.Such a governance mechanism would need to takeintoaccountthecentralrolethattheWTOshouldplayin thisarea. Itwould relyprimarilyonmultilateralandregional institutions. Regional secretariats andregionalbanks,suchastheLatinAmericanIntegrationAssociation (ALADI) or the African Development


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Bank, have already made substantial contributions tothe data collection efforts and the Inter-AmericanDevelopmentBankhasexpressedinterestinbothdatacollection and analytical work in the WesternHemisphere. Whatever the model adopted, it willrequiresubstantialcapacitybuildingandassistanceinview of the technicalities. However, if incentives areproperly taken into account, there is no fundamentalreasonwhy, inthelongrun, informationonNTMsandservices measures could not be collected anddisseminated in the same way as equally sensitiveinformationonotherdimensionsoftradepolicy.

(d) Theimportanceofpolicyrationale

AsdescribedinSectionE.3,WTOagreementsseektodisciplinemeasuresthatdistorttradewhilerecognizingWTO members’ right to take measures that pursuelegitimate public policies (on such matters asenvironmental protection, health, and consumersafety).Drawingthelinebetweenthosemeasuresthatshouldbeallowedandthosethatshouldbeforbiddenis often a difficult exercise both with non-tariffmeasuresanddomesticregulationinservices.

Thebasicapproachof theGATT is toallowdomesticregulatory measures provided that they do notdiscriminate against the imported products (nationaltreatment obligation). One of the challenges that hasariseninconnectionwithnationaltreatmentconcernsthe relevanceandweight tobegiven to the rationaleorpurposeofthemeasure.Forseveralcommentators,whether or not the regulatory measure has aprotectionist rationale or purpose should be thedecisive criterion in a determination of discrimination(Regan,2003;Hudec,1993).

Consideration of the rationale for measures is a lessfirmly settled approach in the jurisprudence of theAppellate Body, which has made it clear that the“broad and fundamental purpose of Article III is toavoid protectionism in the application of internal taxand regulatory measures” (Appellate Body Report,Japan – Alcoholic Beverages II,pp.16-17).

The first sentence of Article III:2 concerns taxmeasuresthatdiscriminatebetween“like”products. Itwould appear that there would be little scope forconsiderationof therationalefor themeasuresunderthe Appellate Body’s interpretation of this provision,according to which the provision is violated any timethe imported product is taxed in excess of the likedomestic product (Appellate Body Report, Canada – Periodicals,p.19)ThesecondsentenceofArticleIII:2concerns tax discrimination between directlycompetitive or substitutable products (a broadercategorythan“likeproducts”underthefirstsentence).

As a result of the cross-reference to Article III:1, thesecondsentenceofArticleIII:2hasbeeninterpretedtorequirethecomplainingpartytoshowthattheimported

anddomesticcompetitiveorsubstitutableproductsarenot similarly taxed “so as to afford protection to thedomestic industry”. The Appellate Body clarified thatthe “so as to afford protection” requirement “is not anissue of intent”, but rather “of how the measure inquestion is applied” (Appellate Body Report, Japan – Alcoholic Beverages II,pp.27-28)Atthesametime,theAppellateBodysaidinthesamecasethat“(a)lthoughitis true that the aim of a measure may not be easilyascertained,neverthelessitsprotectiveapplicationcanmost often be discerned from the design, thearchitecture,andtherevealingstructureofthemeasure”(AppellateBodyReport,Japan – Alcoholic Beverages II,pp.29).Thisreferencetothe“design,thearchitecture,and the revealing structure” of the measure has beenunderstood by some as necessarily includingconsiderationsrelatingtotherationaleforthemeasure.

ArticleIII:4concernsdomesticregulatorymeasures.Itdoesnot includeacross-referencetoArticle III:1andtherefore the Appellate Body has said that “adeterminationofwhethertherehasbeenaviolationofArticle III:4doesnot requireaseparateconsiderationofwhetherameasure“afford(s)protectiontodomesticproduction”(AppellateBodyReport,EC – Bananas III,para. 216). Article III:4 requires WTO members toaccord imported products “no less favourable”treatment than that accorded to like products ofnational origin in respect of all domestic regulations.“No less favourable treatment”, in turn, has beeninterpreted to mean that “the measure modifie(s) theconditionsofcompetitionintherelevantmarkettothedetriment of imported products” (Appellate BodyReport,Korea – Various Measures on Beef,para.137).

In a subsequent case, EC – Asbestos, the AppellateBodymadetwostatementsthatcanbereadasgoingindifferentdirectionsastotherelevanceoftherationaleforthemeasureunderArticleIII:4.Ontheonehand,theAppellate Body said that if there is less favourabletreatmentofthegroupoflikeimportedproducts,thereisconversely“protection”ofthegroupoflikeproducts.This suggests that once a complainant hasdemonstrated that the conditions of competition havebeenmodifiedtothedetrimentoftheimportedproducts(thatis,“lessfavourabletreatment”),thereisnoneedtomakeaseparateshowingofprotectionistintent.Ontheotherhand, theAppellateBodyadded that “aMembermay draw distinctions between products which havebeen found to be ‘like’, without, for this reason alone,accordingtothegroupof ‘like’ importedproducts ‘lessfavourable treatment’“ (Appellate Body Report, EC – Asbestos, para. 100). This statement has beenunderstood by some as allowing for distinctionsbetween importedanddomesticproducts thatarenotmotivatedbyprotectionistpurposes.

Another device that has been used in WTO disputesettlementtoassistindistinguishingpermissiblenon-tariffmeasuresfromimpermissibleonesisabalancingtest. This test has been used in the context of


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assessing a respondent member’s assertion that itsmeasure is justified under the general exceptions ofArticle XX of the GATT and particularly that themeasure is “necessary” to protect human, animal orplantlifeorhealthundersub-paragraph(b).

AsdevelopedbytheAppellateBody,thedeterminationof “necessity” involves a weighing and balancingprocessthatbeginswithanassessmentoftherelativeimportanceoftheinterestsorvaluesfurtheredbythechallengedmeasure,andalsoinvolvesanassessmentof other factors, which will usually include thecontribution of the measure to the realization of theends pursued by it and the restrictive impact of themeasureoninternationaltrade.Ifthisanalysisyieldsapreliminary conclusion that a measure is necessary,thismustbethenconfirmedbycomparingthemeasurewith possible less restrictive alternatives. The burdenof identifying less restrictive alternatives is on thecomplainingparty.Furthermore, inorder toqualifyasanalternative,themeasuremustallowtherespondentmember to achieve the same level of protection andmustbereasonablyavailable(AppellateBodyReport,Brazil – Retreaded Tyres,paras.143and156).

The relevance of the purpose of a measure for theassessmentofdiscriminationandofthebalancingtestforassessing“necessity”havecomeupinthreerecentdisputes under the TBT Agreement. As noted inSection E.3, in US – Clove Cigarettes , the AppellateBodyinterpretedArticle2.1oftheTBTAgreementasnot prohibiting detrimental impact on imports thatstems exclusively from a legitimate regulatorydistinction (Appellate Body Report, US – Clove Cigarettes,paras.180-182).

The economic theory reviewed in Section B hasdiscussedanumberofways that canhelp to identifysituationsinwhichgovernmentsmaybemorelikelytoemploy non-tariff measures for competitivenessreasonsratherthanthestatedpublicpolicyrationale.49These include an analysis of the efficiency andincidence of the measure in question, and the widersectoralandpoliticalcontextthatmayalsoinformthechoiceofaparticularmeasure.

InSectionB.1,itwasfoundthatassumingaparticularpublicpolicygoal,differentmeasurescanberankedinterms of their economic efficiency. Governments thatfailtousethemostefficientmeasure50maybesubjectto institutionalandpoliticalpressures thatencouragetheadoptionofmeasuresforcompetitivenessreasons.For example, in order to provide assurance toconsumers as to the presence or absence of certaincharacteristics of a product, a ban or a labellingscheme could be employed. Provided thecharacteristicsarenotparticularlyharmful,thelatterissuperiorfromaneconomicpointofview,asitdoesnotartificially limitconsumerchoice. Inpractice,themostefficient instrument may not always be easy todetermine.Itstronglydependsontheparticularpublic

policy concern and market conditions, and it istherefore difficult to establish a general ranking ofalternative measures. Although quantitativerestrictions rarely constitute a first-best policy, animport ban may be optimal if the costs of acquiringrelevant information or the risks associated withconsumptionoftheproductareextraordinarilyhigh.

The relative incidence of a public policy measure onconsumers and producers at home and abroad canalsobetellinginrespectofapossiblecompetitivenessrationale. For instance, in Section B.2, it has beenmentioned that profit-shifting in a situation ofoffshoring and bilateral bargaining might lead agovernmenttochangeenvironmentaltaxesfromtheirefficient levels in order to maximize national welfare,with the burden being shared between domesticconsumers and foreign producers. In practice, theincidenceofapolicymaybedifficulttomeasure,anditcanbe instructive togatherevidenceon thedemandforpublicpolicy insteadinordertogaugetherelativeinfluence of domestic producers and to put tradeeffectsintoperspective.51

Certain features of the sector in question, while notmechanistically determining the prevalence ofcompetitiveness objectives, can give an indication ofcircumstances under which a competitiveness-oriented policy benefitting the sector in question ismorelikely.The“protectionforsale”literaturereviewedinSectionB.152hasshownthatthedegreeoflobbyingand organization within a sector increases thelikelihood of obtaining protectionist measures. Otherrelevant sector characteristics relate to the level ofcompetitionandconsumerbehaviour,asexpressedforinstance in the degree of import penetration and thelevel of responsiveness of demand to price changes,wherelowerlevelsareassociatedwithhigherlevelsofprotection.53

Thenewtradeliteraturewhichemphasizesdifferencesin firm characteristics (heterogeneous firm theory)providesfurtherinsightsintorelevantindicators.54Forinstance, in Section B.2, it was noted that even insectorswithhighimportpenetration(and,therefore,ahigher productivity of foreign firms on average), anincentive to increase protection can still existdepending on the distribution of productivity levelsacross domestic firms. Firm characteristics may alsohelp to identify whether the implementation of non-tariff measures involving fixed cost increases formarket entry could be related to the dominance oflarge,organizedfirmsinthesectorratherthanagivenpublicpolicygoal.

Finally,inSectionB.2,theobservationwasmadethatacloser examinationof thepolitical context canprovideinsights into why certain non-tariff measures may beused to benefit producer interest groups despite theirstated public policy objective. For example, certainNTMsarebettersuitedtotargetpoliticalsupportersor


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more likely to persist beyond election periods andtherefore lead to higher levels of political support. Insum,while the “indicators”mentioned inSectionBarecertainly neither exhaustive nor able to provide aconclusive answer to the question of the true policyrationaleofanNTMaffectingforeigntradeinterests,itstillappearsthatthistypeofanalysiscouldusefullybeemployed inordertonarrowevidentiarygapsthatmayariseintheexaminationofcertaintraderules.

(e) Challengestoexpandingcooperation

While the challenges discussed above call fornegotiations, international cooperation on non-tariffmeasures is proving to be difficult for a number ofreasons.Herewediscussspecificareasofconcern.

(i) International coherence

AsmentionedinSectionE.2,boththeTBTAgreementandtheSPSAgreementgivesignificantdeferencetogovernments following international standards.Additionally, GATS Article VI:5(b) says that pendingthe completion of disciplines on domestic regulation,in determining whether the requirements arecompatible with the principles of necessity,transparencyandobjectivity,accountshallbetakenofinternational standards of relevant internationalorganizations applied by WTO members. TheseprovisionsconstituteauniquefeatureintheWTO:therecognition of other international organizations.However,internationalstandardsarenotapanacea.

First,countriesdifferwithrespecttoriskpreferences(values) and tastes. To the extent that there is anabsenceofcross-bordereffectsinsuchareasaslocalenvironmental protection, labour standards, orminimum product quality standards, harmonization tointernational standards may not be a realistic oreconomically optimal objective (World TradeOrganization (WTO), 2005; World Trade Organization(WTO), 2011). If a country chooses to follow aninternational standard that does not completelyachieve its policy objectives or reflect its nationalpreferences, that country may endure costs due toinappropriate regulation, or be required to undertakefurther regulatory interventions at additional cost tomeetitsobjectives.

Secondly, the international standardization processmaynotalwaysfunctionideally,withtheresultthatnotallstandardsaresetequally.Indeed,discussionsintheregular work of the WTO have raised concerns withrespect tohowstandardsclaimed(by thebodies thatset them or certain members that use them) to be“relevant” or “international” are actually set. Theseconcernsareabout issuessuchastheopportunity toparticipate in and influence the standard-settingprocess and disagreement on the scientific ortechnicalcontentoftherequirementsstipulatedinthestandard itself. Due to lack of regulatory capacity,

developing and least-developed countries may faceparticular challenges in influencing the standardsdevelopmentprocess.55

In the area of SPS measures, since the internationalstandard-settingbodiesareexplicitlyrecognizedintheAgreement,therearenoquestionsaboutwhethertheyare relevant or international. SPS internationalstandardsareset throughamultilateralprocess,witheachof the three standard-settingbodiesadoptingadifferent approach to standard-setting (for moreinformationonthedifferentapproaches,seeG/SPS/GEN/1115). Nevertheless, similar concerns aboutparticipationandinfluencehavebeenraisedinrelationto standard-setting in Codex, OIE and IPPC. Forexample,giventheinformationanddatarequirementsfor scientific risk analysis, countries that have astrongercapacitytogeneratedatamayhaveagreaterabilitytoinfluenceoutcomesininternationalstandard-settingbodies(JacksonandJansen,2010).

Thus, there isa “lineof tension”between,on theonehand,a legalobligation (albeitaqualifiedone) touseinternationalstandards,and,ontheother,thefactthatactuallyusinga“relevant”internationalstandardisnotalways straightforward. The regular work of the TBTandSPScommitteesandcertainaspectsofon-goingnegotiations in the Doha Round are affected by thistension.

Thereisanotherpotential“tension”between,ontheonehand, the SPS and TBT principles and mechanismsfavouring international cooperation and regulatoryconvergence of standards (including through thepresumption of compatibility offered to domesticmeasures that comply with “relevant” internationalstandards) and, on the other hand, WTO members’fundamentalright,alsorecognizedintheGATT,SPSandTBT agreements, to not use international standards –eitherbecausetheyare ineffectiveor inappropriate(forinstance,becausehigherstandardsaredesired)–andtoadoptandimplementtheirowndomesticstandards.Itislikelythatparticipationinthenegotiationofinternationalstandards will be most effective when participantsbelieve that the resultingstandardswill in factbeusedbyotherparticipants.Ifmembers’sovereigntymayjustifya right tosetasideexisting internationalstandards, thelegitimate non-application of international standards bysomemembersmayreducetheincentiveforinternationalcooperationandnegotiationofsuchstandards.

Inservices,whilethereisastrongincentiveforasimilarpresumption in favourof international standards, thereare significant additional obstacles. For a start,internationalstandardsarelessprevalentinservicesascompared with goods. Observers some ten years agowere of the view that “it is unlikely that meaningfulinternational standards for most services will bedeveloped any time soon” (Mattoo and Sauvé, 2003).Has anything changed since then? One factor is thatoffshoring may have given greater incentive to private


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industry to develop common standards. Another hasbeen the growing understanding of the relationshipbetween goods and services in global value chains.Since services are heavily embedded in goods, couldthe pervasiveness of international product standardscreate an incentive for services suppliers to supportinternationalstandards?Thesearequestionsonwhichfurtherresearchcouldshedlight.

Apart from the challenge of developing internationalstandards for services, there are also questionsconcerning the applicability of technical standards toservices, and the extent to which a trade disciplinecouldcovervoluntarystandards,whichmaybeissuedbynon-governmentalstandardizingbodieswithoutanydelegatedauthority.

The WTO legal deference to international standardspromotes a form of multilateral convergence. Thisconvergence allows parties in the WTO to refer tostandards set by other international organizations,even if the requirements theyarebasedonare traderestrictive. This improves international coherence.However, the challenges outlined above remain,specifically in deciding whether any particularinternational organization sets “relevant” internationalstandards.

(ii) Private standards

The topic of “private standards” arises across theWTO’s regular work in contexts as diverse as greenprotectionism, food safety and social responsibility.While some WTO members see no place for thisdiscussion in the WTO, others are keen to engage.ObligationssetoutinWTOagreementsarebindingongovernments, and only governments can make legalchallenges through the WTO’s dispute settlementsystem. Considering that private standards are non-governmental by definition, this gives rise to at leasttwo questions: what responsibility do governmentshavewith respect toprivatestandards,andwhat roledoes–orshould–theWTOhaveinthisregard?

Before looking at the law and role of the WTO, it isuseful to recall why this has been a matter ofdiscussionintheWTO.Althoughcastas“voluntary”innature(becausetheyare imposedbyprivateentities),private standards may become de facto a necessarycondition for market access even if not imposed bylaw.Themagnitudeofthetradeeffectwilldependonthemarketpoweroftheindividualcompaniesrequiringadherencetothestandardaswellasthenumberthatdo so. Indeed, the effect of a particular privatestandard, ifpervasive,couldbegreater than thatofagovernmentregulationofasmallercountry.

Moreover,a “voluntary”standardthatbecomeswidelyused may be a precursor to government regulation.Differententitiesareinvolved.Theymaybecompanies,non-governmental standardizing bodies, certification

and/or labelling schemes,56 as well as other non-governmentalorganizations.Therequirementssetoutinthestandardsdevelopedbythesebodiesaddressarangeofperceivedoractualconsumer-drivenconcernsthat are associated with products (or process andproduction methods used). These may beenvironmentally,sociallyorfoodsafetymotivated.Theconcerns thathavebeen raisedat theWTO–mainlyby developing countries – are that the requirementsaremorestringentde facto than regulations imposedby governments, that they are proliferating, and thatthereisnorecoursetodisciplinethem.

The texts of both the SPS and TBT agreementscontain disciplines that are relevant to non-governmentalbodies.57Inparticular,bothagreementshave an obligation on governments to take “suchreasonablemeasuresasmaybeavailable to them” toensure that non-governmental bodies/entities withintheir territoriescomplywith the relevantprovisionsoftheagreements.

TheSPSAgreementstatesthatWTOmembersshould“formulate and implement positive measures andmechanisms in support of the observance of theprovisions of [the SPS Agreement] by other thancentralgovernmentbodies”–andthatthey(members)shall take “such reasonable measures as may beavailable to them to ensure that non-governmentalentities within their territories… comply with therelevant provisions of this Agreement”.58 The TBTAgreementhassimilar language.59Yet, inthecaseoftheTBTAgreement, there is adifference. It containsan annex (Annex 3) specifically addressed tostandardizing bodies. This annex (the “Code of GoodPractice”) is open to acceptance also by non-governmentalbodies.Thisissignificant.Asmentionedelsewhereinthisreport,thetextoftheTBTAgreement–unliketheSPSAgreement–doesnotreferexplicitlytoanyparticular internationalstandardizingbody. It isthereforeuptogovernmentstodecide,onacase-by-case basis, which standards may be a relevant basisforregulationindifferentsituations,andthisdoesnotexcludestandardssetbynon-governmentalentities.

Akeyquestion,therefore, isthelevelofresponsibilitythat governments have with respect to what non-governmental (standardizing) bodies do within theirterritories.Itcouldbearguedthatthebest-endeavourlanguage attributes to governments a certain degreeofresponsibility.However,theextentisnotobvious:forsome WTO members, private standards are seen asbeyond the grasp of WTO disciplines – and indeed,WTO members remain divided as to whether privatestandardslegallyfallwithinthescopeoftheTBTand/orSPSagreements.

Legal issues aside, and granted that concern aboutthe impact of private standards is being voiced inrelevantWTOcommittees,whatshouldtheroleoftheWTObe– if, indeed, itshouldhaveone? It isnotable


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that the kinds of issues that arise in discussions onprivate standards are not novel: they revolve aroundsuch matters as inadequate design, the basis of ameasure, transparency, the need for commonbenchmarks (harmonization), and acceptance thatdoing things differently does not necessarily meannon-compliance (equivalence). Few, if any, of theseissues are fundamentally different from those thatarise in thecontextofSPS/TBTmeasures (technicalregulationsorconformityassessmentprocedures).

IntheSPSarea,delegationsarecurrentlyworkingonenhancing information exchange and increasingunderstanding and awareness of how privatestandardscomparewithor relate to standardssetbyrecognizedinternationalstandard-settingbodies(suchasthoseoftheCodex)andgovernmentalregulations.ThesituationintheareaofTBTissomewhatdifferent.The TBT Agreement does not refer explicitly to anyrecognized international standardizingbodies. In fact,governments frequentlybase regulationonstandardsthataredevelopedbynon-governmentalbodies,somewith international reach.60 WTO members havedeveloped a refined toolkit of rules and proceduresthatarehelpingregulatorsandtradeofficialsincreasethetransparencyofSPS/TBTmeasuresandtoensurethat they do not unnecessarily affect trade. Thesesamerules, togetherwiththeexperiencegained,mayalso provide useful guidance for the development ofprivatestandards.

(iii) Disciplines on domestic regulations in services

How best to strengthen trade disciplines in serviceswithoutundulycurtailingnationalregulatoryfreedomshas been a central question unresolved by themultilateral community. The GATS framework hasfocusedprimarilyonthenegotiationofmarket-openingcommitments, leaving other aspects of domesticregulation and practice largely untouched. Yet, sincetheestablishmentoftheWTOin1995,WTOmembershave grappled with the question of what additionaldisciplinesare requiredon licensing,qualificationandtechnical standards to ensure that they are not moreburdensome than necessary to achieve legitimatepolicyobjectives. Thepervasivenessof regulations inserviceshasmadeitvitaltoensurethatmarketaccessandnationaltreatmentcommitmentsarenot impairedbyundulyburdensomeorprotectionistpractices.

Despiteitsobviouscomplementtomarketaccess,whyhas it been so difficult for the multilateral tradecommunity to conclude this set of disciplines? Onereason has been the debate over whether suchdisciplines should be “sectoral”, affecting only onespecified sector, or “horizontal”, in the sense ofapplying to all services sectors. Progress made in1998ontheconclusionoftheAccountancyDisciplineshave led some WTO members to conclude that“sectoral” negotiations could potentially be a more

practical route to pursue as the disciplines could beshaped in accordance with the specificities of thatsector.Othershavearguedthata“horizontal”approachwouldbemoreefficientastherationaleforregulationand the reasons for transparency, objectivity andimpartialityintheregulatoryprocessaresimilaracrossservicessectors.

A deeper consideration of this issue would tend tosuggestthatdiscussionsontheformandscopeofthedisciplineshidesamore fundamental tension,namelythe principal concern that common rules at themultilateral level will result in a loss of regulatoryfreedom to pursue non-trade objectives for services.Thisbegsthequestionwhyifgovernmentshavebeenable to agree to TBT and SPS disciplines to ensurethat technical regulations, standards and procedureson goods do not create unnecessary obstacles tointernationaltrade,hasitprovensomuchmoredifficultinservices?

One reason, thoughnot theonlyone,mayhavebeenthedifficultyindesigninga“necessitytest”thatwouldaccommodate the depth and range of regulatoryprecautionthatWTOmembersappeartowishtoretainfor services. The Accountancy Disciplines, not yet inforce, containa “necessity test”, similar to that in theTBTandSPSagreements,whichrequiresmemberstoensure that “measures are not more trade restrictivethannecessarytoachievealegitimateobjective”,withan illustrative list of objectives provided. Such a testwas designed to leave the choice of objectives tomembers, with the focus of the discipline on thenecessityof themeasureused toachieve itsavowedpurpose.However,itshouldbekeptinmindthatunlikein the case of TBT and SPS measures, there is no“product” in services which can be sampled, testedand inspected based on scientific methods. Thus,reachingagreementonwhatwouldbetheappropriatecriteriafordeterminingandevaluatingnecessitycouldbeinherentlymoredifficult.

Couldsucha“necessitytest”,oravariationofit,suchas one on “disguised trade restrictions”, be used in“horizontal” domestic regulation disciplines? Thenegotiations, so far, have found no common view onthisissue.Yet,arecurringprincipleintradeagreementsistherequirementthatthemeasureusedtoachieveacertain legitimateobjectiveshouldbethe“least traderestrictivereasonablyavailable”. Ifsuchatestweretoexist, governments would need to assess, whenadopting regulations, whether they could use analternative measure that would be equally able toachieve the policy objective chosen, but which wouldbelesstraderestrictive.

Uncertainty remains among certain regulators as towhether their autonomy to regulate would beexcessivelyrestrictedbyanecessitytest.Ontheotherhand, proponents of the principle of necessity haveargued that a test could be designed that does not


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questionthenecessityofthepolicyobjectiveschosen,but solely the necessity of the measure used. Manyquestionshaveariseninthediscussions.Theserelate,for example, to the factors to be considered indetermining what is “necessary” and what is not andwhethertheimplementationofanecessitytestshouldalso require consideration of whether the policyobjectiveislegitimateornot.

The challenge of disciplining any undesired tradeeffects of regulation cannot, of course, be reducedonly to the question of the “necessity” test. Despiteover a decade of negotiations, much remains to bedone to improve cooperation and awareness amongregulators,policy-makersandtradenegotiatorsofthelinks between regulatory issues and trade principles.Therearealsoproblemsofcapacitywhichhavemadeitdifficultfornegotiatorstoengageonissuesthatarenot within the traditional realm of trade policy.Regulatorycapacitybuilding, in termsof theabilityofauthoritiestoformulateandenforcerulesappropriatetoservicestradeopeningmaynotbeanewchallenge,butitiscertainlyonewhichhasyettobeaddressedina systematic and meaningful way by the multilateraltradecommunity.

Beyondnegotiatingnewdisciplines,thereremainsthechallengeofadvancingharmonizationandrecognition.There isanobvious linkbetweenmultilateral rulesondomestic regulation and efforts to harmonize andrecognize standards, qualifications, requirements andprocedures. The need for disciplines to curbunnecessarilyburdensomedomestic regulationwouldclearly be diminished if jurisdictions were to movetowardscommonregulatorypracticesordevelopmorearrangements for recognition. These considerationsraise the question whether international standardscouldbeusedtoagreaterextentinservices.Commoninternationalstandardswouldneedtobesetataleveland in a manner that does not favour those with thegreatest capacity to influence the process andoutcomes.For themostpart, thisworkwouldhavetobeundertakenoutsidetheWTO,whichisnotaforumforsettingstandards.

(iv) Pro-competitive principles for services regulation

A unique feature of the GATS is its promotion ofcompetitionwithinaswellasacrossborders.Inaway,disciplines under Article VI:4 – by curbingunnecessarily burdensome regulatory practices inlicensingandqualification regimes– facilitatemarketaccess and thereby potentially enhance competition.Indeed,given thatdomestic regulationwouldapply toforeign and domestic suppliers alike, any applicableGATS disciplines that result from these negotiationswouldineffectimprovemarketcontestability.

Going beyond the negotiation of domestic regulationdisciplinesunderArticleVI:4,whichonlyaddressesa

very particular set of regulatory issues, there is thequestionofhowmuchfurthercanandshoulda tradeagreement go in requiring adherence to certain pro-competitive principles. This question has been mostprominently answered in the telecommunicationssector,wherea“ReferencePaper”whichincludedpro-competitive principles was negotiated and thencommittedtobyasignificantnumberofWTOmembersintheirschedulesofcommitments.

The Reference Paper specified pro-competitiveregulatoryprinciplesforthetelecomssectorandwasamajor achievement of the 1997 Agreement on BasicTelecommunications.Ithashelpedshapetheregulatoryenvironment in this sector over the past decade byelaboratingasetofprinciplescoveringmatterssuchascompetition safeguards, interconnection guarantees,transparentlicensingprocesses,andtheindependenceof regulators in a commonly negotiated text. Everygovernment that has acceded to the WTO since thebasic telecommunications negotiations has also takenon these disciplines. Furthermore, the fact that theReference Paper obligations are binding helps propelthedomesticreformagendaneededtofullyimplementtheopeningofthissectortocompetition.

TheexperienceoftheReferencePaperprovidessomeinteresting lessons on what might be some of thefundamental ingredients required to facilitateagreement on the adherence to certain pro-competitiveprinciples.First,therewasasharedpolicyvision for the sector concerned and of the role thatmarket-oriented regulation could play in improvingefficiency,aswellasachievingsocialequityobjectives.For example, regulators agreed on the need forgovernments to control the dominant incumbentsupplier so as to prevent it from engaging in anti-competitivebehaviour.

Secondly,theinstrumentestablishedasetofcommonunderstandings which were sufficiently broad as toallow fordiverse rulesandpractices,butat thesametime sufficiently specific to hold governmentsaccountable to transparent, objective and impartialpro-competitive regulation. Thirdly, sector regulatorswere directly involved in negotiating such aninstrument. This was important since in-depthunderstanding was required of how the marketfunctioned, what market failures needed to becorrected, and how such problems might beappropriately addressed. Fourthly, the instrumentallowedforself-selection,asitonlyenteredintoforcethroughincorporationinaWTOmember’sscheduleofspecific commitments.Eighty-twomembers (countingEUmember states individually) have, so far, attachedthe Reference Paper to their schedules ofcommitments.

The success of the Reference Paper raises thequestionwhethersuchaninstrumentcouldbeusedinother sectors? Most obvious would be those which


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shareasimilarmarketstructureastelecommunicationsservices, with a major supplier – usually a formermonopoly–thatcontrolstheinfrastructureornetworknecessary for the supply of services. In such asituation, the major supplier can block new marketentrantsby restrictingaccess to the infrastructureornetwork,bylimitingparticipationintherelevantmarketthroughitscontrolofessentialfacilitiesorbytheuseofadominantpositioninthemarket.Collectiveactionto agree on a set of pro-competitive regulatoryprinciples would thus be necessary to ensure thatthere is a level playing field. Another feature of themarketmightbethatscarceresourcesareneededforthe delivery of services, and the manner by whichthese are allocated would determine whetherparticipationispossibleornot.Sectorssuchasenergy,certain forms of transportation, waste and watermanagement, and postal and courier services, togreaterorlesserdegrees,tendtosharesomeofthesecharacteristics.

For such sectors, an instrument which uses similarregulatoryprinciplesas those found in theReferencePaper could help specify the safeguards needed toprevent a major supplier from engaging in anti-competitive practices. Such principles would need tobe implementedbya regulatorybodywhichwouldbeseparate from, and not accountable to, any servicessupplierinthemarket.Whilesuchinstrumentscouldintheory be negotiated outside the context of a tradeagreement, in practice there are political economicreasonswhycollectiveactionaspartofatradedealisoftenrequired(seeSectionE.1(c)).

AninterestingfeatureoftheReferencePaperwasthefactthatitwasnegotiatedbyagroupofMembersnotasanannextotheGATSbutasasetofprinciplesthatwouldonlybe legallybinding for thoseMemberswhosubscribe to it. This rather unique feature of theReferencePaper alloweda criticalmassofMemberstodevelopasetofdisciplineswithouthaving tohaveconsensus. The document itself did not have anyparticularlegalstatusasitwouldonlyenterintoforcefor those Members who attach it to their schedules.This is possible because members can undertakeadditional commitments under Article XVIII of theGATS in their schedules of specific commitments. Itwould be interesting to consider whether such anapproachcouldbeused for theArticleVI:4domesticregulationdisciplines.

Under Article XVIII, WTO members may negotiatecommitmentswithrespecttomeasuresaffectingtradeinserviceswhicharenotmarketaccessandnationaltreatment limitations, including those regardingqualifications, standards or licensing matters. Thus,domestic regulation disciplines could be undertakenasanadditionalcommitment.

(f) Investingininstitutions

(i) Supporting regulatory capacity building for trade in goods

EvenpriortotheestablishmentoftheWTO,countriesrecognized that capacity constraints relating to thestandards of bodies, technical infrastructure and thedevelopmentofregulationsingeneralwereofconcernfor developing countries, and particularly least-developed countries (LDCs). Both the WTO SPS andTBT committees include “technical assistance” as anagenda item at every committee meeting. Thediscussions in the SPS and TBT committees havefocused on facilitating the implementation of theagreements’provisionsontechnicalassistance.

The TBT Agreement obliges WTO members to giveadvice toothermembers (onTBTmatters),especiallydeveloping country members, and to provide othermemberswith technical assistance (onTBTmatters).The text of the Agreement illustrates how theestablishment of national standardizing or conformityassessment bodies or institutions and a legalframeworkwouldenabledevelopingcountrymemberstofulfiltheobligationsofmembershiporparticipationin international or regional systems for conformityassessment. The Agreement also provides advice onsteps that should be taken by developing countries’producers if theywish to have access to systems forconformity assessment operated by governmental ornon-governmentalbodies.ThereisalsoamoregeneralobligationtogiveprioritytotheneedsofLDCs.

TheSPSAgreementcontainssimilarprovisionsrelatedto technical assistance. According to the Agreement,WTO members agree to facilitate the provision oftechnical assistance to developing country members,either bilaterally or through the appropriateinternationalorganizations.Assistancemaybeadvice,credits,donationsorgrantsandshouldallowcountriesto adjust to and comply with SPS measures in theirexport markets. In addition, when substantialinvestments are needed for developing countries tofulfil SPS requirements in export markets, membersagree to consider providing technical assistance thatwouldpermitdevelopingcountrymemberstomaintainandexpandmarketaccessopportunities.

Technical assistance in the TBT area

The TBT Committee oversees the implementation ofthe Agreement’s provisions on technical assistance(containedinArticle11),anditsroleisessentiallyoneof information exchange. One insight that emergesfrom the work of the TBT Committee is the need forthecreationof lasting infrastructures,bothregulatoryandphysicalinnature,whichmaysetinplacetherightconditionsfor theefficientandeffectivedevelopmentand design of technical regulations, standards and


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conformity assessment procedures. In particular, thelack of technical infrastructure (or inadequacy ofexisting infrastructure) constrains many developingcountry members from accessing markets. Meetingthestandardmaysometimesnotbeenough–itisalsonecessary to be able to demonstrate compliance tocreateconfidenceinthequalityandsafetyofexportedproducts.

Quality infrastructure, including laboratories andaccredited certification bodies, is essential fordeveloping countries’ competitiveness. The TBTCommitteehasencouragedWTOmemberstoprovidetechnical cooperation in the area of conformityassessment specifically aimed at improving technicalinfrastructure(e.g.metrology,testing,certification,andaccreditation).

Technical assistance in the SPS area

In overseeing the technical assistance provisions oftheSPSAgreement (contained inArticle9), theSPSCommittee facilitates the exchange of informationwhere WTO members identify specific technicalassistanceneedswhichtheymayhave,and/or reporton any SPS-related capacity building activities inwhich they are involved. Among the most pressingneeds highlighted through the work of the SPSCommittee,apart from information requirements,wasthe development of laws and regulatory frameworksandinstitutionbuilding.

Theneedforhardinfrastructureincludinglaboratories,although important, did not generally represent themost serious obstacle to an appropriateimplementationoftheSPSAgreement. Inthisregard,the SPS Committee continues to encourage itsmembers to provide targeted technical assistancewhich responds to the identified needs of members.Discussions within the SPS Committee have alsohighlighted the technical and scientific expertise andfunding available in other international organizations,while emphasizing the need to improve inter-agencycoordination(see,forexample,G/SPS/GEN/875).

Standards and Trade Development Facility

If trade is to serve as an engine of growth and aninstrument to tackle poverty reduction, developingcountries must have effective systems in place tocontrol their SPS risks and meet internationalstandards. Controlling SPS risks will have marketaccessbenefits,aswellasdirectbenefitstodomesticproducers and consumers by reducing pest anddisease prevalence, raising production and improvingfood security. Improved compliance with internationalSPS standards may also contribute to improvedbiodiversity and environmental protection. However,given capacity constraints developing countries maynothaveadequateSPSsystems inplace.Toaddressthese impediments, notably in the public sector,

sustained long-term commitment to funding withinnational government budgets and by donors will berequired to ensure minimum levels of capacity withultimatepositiveeffectsonmarketaccessandhumanandenvironmentalhealth.

In2002, recognizing thesignificantbenefits that canarise from investments in SPS capacity, fiveinternationalorganizations–theFoodandAgricultureOrganization of the United Nations (FAO), the WorldOrganisationforAnimalHealth(OIE),theWorldBank,theWorldHealthOrganization(WHO)andtheWTO–jointly established the Standards and TradeDevelopment Facility (STDF).61 The STDF is a globalpartnership that supports developing countries inbuildingtheircapacitytoimplementinternationalSPSstandards, guidelines and recommendations as ameanstoimprovetheirhuman,animalandplanthealthstatus, and ability to gain and maintain access tomarkets. Its mandate is to: (i) increase awarenessabout the importance of SPS capacity building,mobilize resources, strengthen collaboration, andidentifyanddisseminategoodpractice;and(ii)providesupport and funding for the development andimplementation of projects that promote compliancewithinternationalSPSrequirements.

The STDF plays an important role in facilitatingdiscussionofpast,on-goingandplannedSPS-relatedtechnical cooperation programmes and initiatives. Itidentifies cross-cutting topics of thematic interest topartners,donorsandbeneficiariesandorganizesjointconsultations at global and regional level to furtheraddress these issues. Examples of successful STDFworkinthepastrelatetogoodpracticeinSPS-relatedtechnicalcooperation,theuseofeconomicanalysistoinform SPS decision-making, SPS risks and climatechange, indicators to measure the performance ofnational SPS systems, regional and national SPScoordination mechanisms, and public-privatepartnerships in support of SPS capacity. Enhancingthe awareness in developing countries, notably atpolitical and decision-making levels, about theimportance of SPS compliance and the need foradditional investments in this area is another centralthemeintheSTDF’swork.

Given the success of the STDF in the area of SPScapacitybuilding, somesuggestionshavebeenmadethattheSTDFmodelcouldalsobeadoptedtoaddressstandards implementation intheareaofTBT. Inorderfor this approach to work, there would need to beclarity, among other issues, regarding which specificinternationalstandardswouldberelevant.Furthermore,thistypeofinitiativewouldrequireasignificantamountof resources in order to be initiated and sustained.Still, lessons learned from the STDF experienceindicate that capacity building efforts of this naturecan efficiently provide practical economic and healthbenefitstocountries.


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Capacity building and international standards

DuetolackofregulatorycapacityintheareasofTBTand SPS, developing and least-developed countriesmay face particular challenges in respect ofparticipating in international standard-settingactivities. Enhancing developing country participationininternationalstandard-settingprocessesisacrucialstep in improving developing countries’ ability to useand adapt international standards. Today, actualparticipation in standard-setting activities bydevelopingcountriesremainsachallenge.Onlyasmallproportionofdevelopingcountriesareresponsibleforthe management of working groups and technicalcommittees, where the detailed work takes place.Standardizing bodies and international standard-setting organizations should increase their efforts inbuilding understanding of the standard-settingprocess and in strengthening institutional capacity indevelopingcountries,andparticularlyLDCs.

(ii) Supporting regulatory capacity building for trade in services

Given the importance of regulation to the properfunctioningofservicesmarkets,weaknessinregulatorycapacitycouldactuallyhaveanegativeimpactontradeopening. Without the reassurance of a regulatoryapparatuscapableofidentifyingandremedyingmarketfailures,theremightbestrongreluctancetoundertakedomesticreformsandtoopenmarketsto internationaltrade. If there is no regulatory capacity to curb anti-competitiveconductortoimplementeffectiveprudentialregulation, there isadownsiderisk tomarketopening,as profits might only be transferred from domesticagents to foreign ones with no discernible efficiencygains.Greaterregulatorycapacitycouldalsohelpbuildgreater support for market opening by givingreassurancethatthepursuitofsocialequityobjectiveswouldbepartof the regulatory framework.Enhancingcapacitywouldalsofacilitateregulatorycooperation,beit through the negotiation of domestic regulatorydisciplines,thedevelopmentof internationalstandards,orinitiativesonharmonizationandrecognition.

Finding ways to support regulatory capacity buildingandcooperationsoas tocomplementservicespolicyreformanddevelopmentisthusanimportantchallengeforthefuture.TheOECDandAPEChaveestablishedvariousprocessesforbringingtradeofficialstogetherwith regulators. The World Bank has launched aninitiative on Services Knowledge Platforms, with theaimofestablishinga forum for sharingknowledgeofregulatory experiences and impacts. This wouldinclude information on the factors underlyingsuccessfuleffortstoexpandtradeinservicesandthecomplementary policies that can be used to addressmarket failures and distributional concerns. Such abroad forum, although focused on internationalregulatory cooperation in services, could do much tofostertradeanddevelopment.

In sum, addressing regulatory challenges in trade inservices requires doing more than curbing non-transparent or unduly restrictive regulatory practices.The challenge which services regulation poses fortrade opening should not be seen simply in terms ofhaving lessregulation,butmore intermsofachievingbetter regulation – that is, regulation which moreeffectively achieves public policy objectives with theleastdistortionoftrade.Workonhowcountriescouldobtainsuchresultsremainsatanascentstage.

Two priority reforms could be assisted by thedevelopment community under the “Aid for Trade”initiative. The first would be to support regulatorycapacity building so as to strengthen the ability ofregulatory institutions to identify, design andimplement policies that address market failures andundertakeregulatoryimpactassessments.Thesecondwould be to encourage international cooperation toaddress theregulatoryeffectson thirdpartiesandtoshareknowledgeongoodpractices.Suchworkneednot be linked to trade negotiations, yet it could domuch to improve the climate for opening up trade inservices. The WTO has no particular comparativeadvantage in regulatory matters but it could act as afocal point, as it does for many other supply-sideinitiatives,tobuildcapacityfortrade.

5. Conclusions

This section has three substantive parts addressingthe theory, the practice and the challenges ofcooperationonnon-tariffmeasures.SectionE.1offersa theoretical framework for understanding therationaleforcooperationonNTMsintradeagreements.Itshowsthatthisrationalerelatestopolicysubstitutionas well as governing international production,improving transparency, limiting the competitioneffects of NTMs and ensuring the efficient use ofprivate standards. Addressing the first problemprimarily motivates shallow integration but the otherconcernsoftenrequiredeepformsofintegration.

SectionE.2andSectionE.3analysethewaythatthemultilateral trading system deals with non-tariffmeasures.InsightsfrompracticeintheSPS,TBTandservicesareashighlighthowactualcooperationattheWTO seeks to address the problems identified inSectionE.1.Inparticular,thesearchforefficientpolicyis bolstered by regulatory dialogue at the multilaterallevel (for instance, through committee work in goodsandnegotiations inservices)andona regionalbasis,the development and adoption of good regulatorypractices, and through the development and use ofinternational standards. Section E.3 focuses on howcasesinvolvingtheuseofNTMshavebeendealtwithbytheWTOlegalframeworkanditsdisputesettlementsystem. Specifically, it describes the key ways thatWTO disciplines address the challenge ofdistinguishingbetweenlegitimateNTMsandmeasures


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designed for protectionist purposes and how theseprovisionshavebeeninterpretedinactualdisputes.

SectionE.4providesaspeculative(andnotnecessarilyall-encompassing) view of what lies ahead for theWTO in dealing with non-tariff measures. While themultilateral trading system has developed severalmeans to promote deep integration, challenges andopportunities remain. These include: (i) challenges infinding the right mix between internationalcommitmentsanddomesticflexibility insettingNTMsand in improvingtransparency,particularly inthefaceof economic, social and environmental change;

1 Nevertheless,abasicfeatureofthecommitmentapproachtotradeagreementsisworthemphasizinghere:unliketheterms-of-tradetheory,whichoffersarobustreasontoexpectthattradeagreementsoughttobetradeliberalizing,thereisnopresumptiononewayortheotherunderthecommitmenttheoryastowhethertradeagreementsshouldincreaseorreducetrade.

2 Internationalagreementsoftenincludeprovisionsthatcanbeappliedtofuturecaseswithoutreferencetospecificcases.Becausetheseprovisionsaregeneral,theywouldrequireinterpretationtoapplytonewindividualcases.Thisex ante indeterminacyisknownintheeconomicsliteratureasan“incompletecontract”.

3 TheInternationalTradeCentrehasdevelopeda“StandardsMap”,whichcontainsinformationon74privatestandardsschemesoperationalinover160countriesandcoveringover40economicsectorsandproductgroups.Itmainlycoversagricultural(organic),textileandflowerproducts,whichareofsignificantinteresttodevelopingcountries.Examplesinclude:informationoncurrentandpotentialgeographicdistributionofprivatestandardssuchasFairtrade,theForestStewardshipCouncilandtheCarbonTrustFootPrintingLabel.Thisweb-basedportalallowstheusertoselectstandardsbasedoncriteriasuchascoverage,economicand/orqualityrequirements,typeofcertificationprocess.Althoughthisisnotanexhaustivedatabase,itprovidesusefulinformation.Itisavailableat:www.standardsmap.org.

4 Severalothervoluntarystandardsschemeshaveemergedinbothdevelopedanddevelopingcountriessince1992.Whilesomeoftheseschemesareprivateinitiatives,othersaremanagedbygovernments.ExamplesofgovernmentschemesincludetheSustainableForestManagementStandardinCanada,CERFLORinBrazil,LEIinIndonesia,theMalaysianTimberCertificationCouncil,andtheSustainableForestryInitiativeandtheAmericanTreeFarmSystemintheUnitedStates.

5 Moreinformationisavailableat:www.fsc.org.

6 Auldetal.(2008);FSCandPEFConlineinformation.

7 ISOisworkingonaproject(ISO14067)thatseekstodevelopaninternationalstandardonquantificationandcommunicationofgreenhousegasemissionsofgoodsandservices.Inaddition,theWorldResourceInstituteandtheWorldBusinessCouncilforSustainableDevelopmentareworkingontwonewstandardsforproductsandsupplychaingreenhousegasaccountingandreporting.

8 Loi.No.2010-788:TheNationalCommitmentfortheEnvironment.

9 ThediscussionofqualitystandardsandlabelsbuildsonthediscussionintheWorld Trade Report2005(WorldTradeOrganization(WTO),2005b),whichprovidesdetailedandthoroughanalysisofglobalcooperationonstandardsandregulation.

10 Inadditiontothearticleslistedhere,ArticleXVIIoftheGATSiswherememberscommitthroughnegotiations,alongmodallinesintheirschedules,toextendnationaltreatmenttoforeignservicesandservicessuppliers.Inthiscase,nationaltreatmentistreatedlikenegotiatedmarketaccessratherthanageneralprincipleofconductasitisinArticleIIIoftheGATTortheotherlistedarticles.

11 Theuseoftheterm“discrimination”sometimesdiffersacrossdisciplines.Foreconomists,anypolicythatdifferentiallytreatsproductsisdiscriminatory,independentlyofthelegitimacyofthemeasure.Forlawyers,ontheotherhand,thetermdiscriminationoftencarriesanormativeimplicationandislimitedtothosesituationswhereapolicydifferentiallytreatsproductsinawaythatisinconsistentwithWTOrules.Inthisdiscussion,theworddiscriminationisusedinitseconomicmeaning.

12 Aseparatelegalissueiswhetherthesetypesofconcernscanbeaddressedwithinthecontextofexceptions,suchastheonescontainedinGATTArticleXX.

13 APEChasdoneworkspecificallyontheimplementationoftheTBTAgreementandGRP.TheAPECCommitteeonTradeandInvestment’sSubcommitteeonStandardsandConformancehasdevelopedadocumentthatlaysouttheprinciplesandpracticesofGRPastheyrelatetoimprovingtheimplementationofsubstantiveobligationsundertheWTOAgreementonTechnicalBarrierstoTrade.Thisstudy,“SupportingtheTBTAgreementwithGoodRegulatoryPractice:ImplementationOptionsforAPECMembers”,buildsupontherecognitionoftheWTOTBTCommitteethatuseofGRPscanmakeanimportantcontributiontotheeffectiveimplementationoftheTBTAgreement,andtoreducingunnecessarytechnicalbarrierstotrade(G/TBT/W/350,16March2012).TheWTOSecretariathasissueda“CompilationofSourcesonGoodRegulatoryPractice(GRP)”,G/TBT/W/341,13September2011.

14 G/TBT/26

15 TBTRegulatoryCooperationWorkshop,8-9November2011.See:http://www.wto.org/english/tratop_e/tbt_e/tbt_events_e.htm

Endnotes

(ii) opportunities to improve the dispute settlementmechanism of the WTO through better integration ofeconomic and legal analysis in the determination oflegitimateNTMs;(iii)improvementsinthecurrentrule-making to adapt the trade system to a fast evolvingworldinareassuchasprivatestandardsanddomesticregulationinservices;(iv)betterglobalcooperationonNTMs which can hardly be achieved without majorsteps to bolster regulatory capacity in developingcountriesthroughconcreteactions.


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16 RAPEX(RapidAlertSystemforNon-FoodProducts),theEU-widealertsystemforalldangerousconsumerproducts,pharmaceuticalproductsandmedicaldevices,allowsrapidexchangeofinformationbetweenEUmemberstatesaboutmeasuresundertakentopreventthemarketingoruseofproductswhichposeaseriousrisktoconsumerhealthandsafety.

17 G/TBT/W/340

18 G/TBT/W/340

19 ReportofchairpersontoTBTCommitteeonTBTRegulatoryCooperationWorkshop:http://www.wto.org/english/tratop_e/tbt_e/docs_wkshop_nov11_e/chair_report_e.pdf

20 SeeAPECElectricalandElectronicEquipmentMutualRecognitionArrangement(EEMRA),atwww.apec.org/

21 Blind(2004);GermanInstituteforStandardization(DIN)(2000);UKDepartmentofTradeandIndustry(DTI)(2005).

22 Article2.5oftheTBTAgreement,Article3.2oftheSPSAgreement.

23 TheSPSAgreementnamesthefollowingasinternationalstandard-settingorganizations:FAO/WHOCodexAlimentariusCommission(Codex),theFAOInternationalPlantProtectionConvention(IPPC),andtheWorldOrganizationforAnimalHealth(OIE).TheTBTAgreementdefinesbotha“standard”(Annex1,para.2)andan“internationalbodyorsystem”(Annex1,para.4)butdoesnameaparticularinternationalstandardizingbody.

24 Intheareaofconformityassessment,theimportanceof“Qualityinfrastructure”isoftenreferredtoandlinkedtocompetitiveness.Thisincludes,forinstance,adequatelaboratoriesandaccreditedcertificationbodies.TheTBTCommitteehasencouragedmemberstoprovidetechnicalcooperationintheareaofconformityassessmentspecificallyaimedatimprovingtechnicalinfrastructure,e.g.metrology,testing,certification,andaccreditation.(ThisisalsodiscussedinSectionE.4.f.)

25 FAO/WHOCodexAlimentariusCommission(Codex),theFAOInternationalPlantProtectionConvention(IPPC),andtheWorldOrganizationforAnimalHealth(OIE).

26 Accreditationisdefinedas“theindependentevaluationofconformityassessmentbodiesagainstrecognizedstandardstoensuretheirimpartialityandcompetencetocarryoutspecificactivities,suchastests,calibrations,inspectionsandcertifications”(G/TBT/GEN/117,moreinformationcanbeobtainedatwww.ilac.organdwww.iaf.nu.).

27 G/TBT/W/349,dated13March2012.

28 Referencetomembers’submissionstoG/TBT/26.

29 Zoonosesaredefinedasanydiseasesorinfectionsthatarenaturallytransmissiblefromvertebrateanimalstohumans(WorldHealthOrganization(WHO),2012).

30 DecisionsandRecommendationsAdoptedbytheWTOCommitteeonTechnicalBarrierstoTradeSince1995,G/TBT/1/R.10(9June2011);RecommendedProceduresforImplementingtheTransparencyProceduresoftheSPSAgreement,G/SPS/7/Rev.3(20June2008).

31 SPSInformationManagementSystem,http://spsims.wto.org/;TBTInformationManagementSystem,http://tbtims.wto.org/.

32 MFN-inconsistentmeasuresalsofallintothiscategory,andaretheonesmoreseverelysanctionedbytheGATS.Infact,barringanyexemptions,theMFNobligationappliesunconditionallytoalltheservicescoveredbytheAgreement.

33 SeeDelimatsis(2008)andKrajewski(2008)foradiscussiononcreatinganecessitytestofthetypecontainedintheTBTandSPSagreements.

34 GATSArticleVIIallowsforrecognitionmeasuresaslongasthereareadequateprovisionsforothermemberstonegotiateaccessionand/orachieverecognitionoftheirrequirementsandcertificates,andthemeasuresdonotconstituteameansofdiscriminationoradisguisedrestrictionontrade.

35 ThepanelreportinEC- Approval and Marketing of Biotech Productsisalsocitedasanexampleofasituationinwhichdifferentialtreatmentoftheimportedanddomesticproductswasconsideredinsufficientforaviolationofthenon-discriminationobligationinArticleIII.Inthatcase,thepanelsaidthatitwasnotevidentthatthelessfavourabletreatmentwasexplainedbytheforeignoriginratherthanbyperceiveddifferencesintermsofthesafetyoftheproducts(seePanelReport,EC – Approval and Marketing of Biotech Products ,paras.7.2509and7.2516;MarceauandTrachtman(2009)).

36 In EC – Asbestos ,theAppellateBodyfoundthatregulatoryconcernsandconsiderationsmayplayaroleinapplyingcertainofthe“likeness”criteria(thatis,physicalcharacteristicsandconsumerpreferences)and,thus,inthedeterminationoflikenessunderArticleIII:4oftheGATT1994.

37 Article1.3oftheTBTAgreementstates:“Allproducts,includingindustrialandagriculturalproducts,shallbesubjecttotheprovisionsofthisAgreement”.Ontheotherhand,theSPSAgreementhasamuchnarrowerscope,whichmaymeanthatnamingbodiesismoreappropriateinthatcontext.

38 Theseprinciplesare:(1)transparency;(2)openness;(3)impartialityandconsensus;(4)effectivenessandrelevance;(5)coherence;and(6)development.ThesearecontainedinfullinG/TBT/1/Rev.10(AnnexB),9June2011,p.46.

39 TheSPSCommitteehadestablishedtheadhocworkinggroupinOctober2008.MembersoftheadhocworkinggrouponSPS-relatedprivatestandardswere:Argentina,Australia,Belize,Brazil,Canada,Chile,China,Colombia,CostaRica,DominicanRepublic,EuropeanUnion,Ecuador,Egypt,Guatemala,Japan,Mexico,Mozambique,NewZealand,Nicaragua,Norway,Pakistan,Paraguay,Peru,St.VincentandtheGrenadines,SouthAfrica,ChineseTaipei,Thailand,UnitedStates,UruguayandtheBolivarianRepublicofVenezuela.

40 OtheractivitiesthattakeplaceinthecommitteesbetweenthecirculationofthenotificationsandthefilingofanSTCmaycontributetotransparency.

41 TheexampleofthenotificationrequirementsofArticle25oftheAgreementonSubsidiesandCountervailingDuties,whichinvitesmemberstonotifymeasuresofothermembershavingtheeffectofasubsidythathavenotbeennotified,isillustrative.DespitetheobligationformemberswhichconsiderthattherearenomeasuresrequiringnotificationintheirterritoriestosoinformtheSecretariatinwriting,only78countrieshadmadeanotificationin2009.

42 SeeforexampleArticle25.10oftheAgreementonSubsidiesandCountervailingMeasures.Notethatmembersalsohavethepossibilitytoaskquestionsaboutothermembers’notifications–forinstance,iftheyconsiderthattheyareincomplete.

43 Sixyearsormoreforallcountriesbutthe20largesttraders.

44 SeeWTOdocumentWT/L/848.


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45 Partoftheanswertothesequestionsobviouslydependsonhowmuchresourcescanbeallocatedtothemonitoringexercise.

46 Thecommitteeontradeinservicesalsooffersmembersthepossibilitytoshareinformationonnationalexperiencesandregimes.

47 Thenewportalwillforexampleallowuserstoaccessallnotifiedinformationontrade,tariffsandNTMsthatrelatestoagiventarifflineinonesinglequery.Allthisinformationwaspreviouslystoredinseparatesiloswhichhadtobeaccessedseparatelyiftheywereaccessibleonlineatall.

48 ThedecisionoftheMarketAccessCommitteeona“FrameworktoenhanceIDBNotificationsCompliance”[G/MA/239of4September2009]madeiteasierfortheSecretariattoassistmembersinprovidingtheirtradeandtariffnotificationsbyallowingtheuseofotherrelevantofficialsources.

49 Criticsof“deepintegration”questionthecapacityofinternationalorganizationstomakethesedeterminations.Forexample,Rodrik(2011)arguesthatthedeterminationoflegitimateorillegitimatetrademeasuresshouldarisefrominformeddeliberationsatthenationallevel,includingbothimportersandexportersinordertobalancecompetinginterestsinatransparentmanner.

50 Itshouldbekeptinmindthatthemostefficientmeasuremaywellbeadiscriminatorymeasureifthesourceoftheexternalityliesabroad.Italsodependsonwhetheragovernmenttakesintoaccountonlydomesticwelfareorforeigninterestsaswell.Thelatterwouldbeparticularlyimportantwheree.g.transboundaryexternalitiesareconcerned.AsmentionedinSectionE.1,ifseveralcountrieshavecommoninterests,cooperationcanensurethatglobalwelfareismaximized.

51 Forexample,SwinnenandVandemoortele(2009)andMaretteandBeghin(2010)holdthatmanypublicstandards,e.g.relatingtotheregulationofGMOs,areintroducedfollowingdemandsbyconsumers,eventhoughtheirtrade-restrictingeffectsalsobenefitsomelocalproducers.However,evensuchanassessmentmaynotbeaneasytask.FalveyandBerti(2009)provideaconcisetheoreticalframeworkthatillustratesthedifficultiesinvolvedindisentanglingproducerfromconsumerinterestswhenidentifyingtheappropriatelevelofaminimumqualityregulationthatwouldaddressinformationasymmetriessufferedbyconsumers.Carpenter(2004)developsamodelinwhichnewproductrequirementsseemtoconferacommercialadvantagetoestablishedfirmseveniftheregulatorwasmotivatedonlybyreputationconcernsandaninteresttoberesponsivetoconsumers.

52 SeeparticularlyalsoBoxB.4.

53 Althoughitisoftenbelievedthatprotectionshouldincreasewiththeratioofimportpenetration,thelatterresultbroadlyreflectstheideaof“sensitive”sectors.Anumberofpapers,suchasGoldbergandMaggi(1999)andGawandeandBandyopadhyay(2000),havefoundwaystomeasurethesevariablesandempiricallyconfirmthefindings.Thelatterauthorsalsoemphasizethatthesethreefactors(importpenetration,importelasticityandwhetherindustriesarepoliticallyorganized)goalongwayinexplainingthepatternofprotectionandreducetheneedtoanalysealargersetoffactors,includingskillcompositionofemployees,averageearnings,laboursharesandgeographicalconcentration,thathavebeenemployedintheempiricalliterature,withoutbeingderivedfromtightly-knittheories.

54 FischerandSerra(2000)highlighttheimportanceofanalysingthecharacteristicsofforeignfirmsandmarketsaswellinordertounderstandtheincentivesofdomesticfirmstolobbyforprotectionistmeasuresandgetanindicationofwhichindustriesfacehigherpressureforprotectionthanothers.Oneimportantconsiderationis,forexample,theavailabilityandsizeofalternativemarketsforforeigncompetitorsandthefixedcostassociatedwithproducingundermultipleproductregulations.Inanextensiontothisapproach,MaretteandBeghin(2010)furtheremphasizetheimportanceoftakingintoaccountfirmheterogeneityandinternationalmarketconditions.Theyshowthatamorestringentproductrequirementcomparedtoaninternationalstandardmaynotalwaysresultinprotectionism,butcanevenbe“anti-protectionist”ifforeignproducersaremoreefficientataddressingtherelatedexternalitythandomesticproducers.

55 In2000,theTBTCommitteeagreedonsixprinciplesandproceduresthatshouldbeobservedduringthedevelopmentofinternationalstandards,guidesandrecommendationsforthepreparationoftechnicalregulations,conformityassessmentproceduresandstandards.ThisCommitteeDecisionhasrecentlybecomethesubjectofdiscussionbothintheCommitteeandintheNAMAcontext(G/TBT/1/Rev.10(AnnexB),9June2011,p.46).

56 Forexample:FSC,MSC,Carbonfootprintlabelling,sectoraltradeassociations(Florverdeforflowers;BCIforcotton,orinthefoodsector:theGlobalFoodSafetyInitiative(GFSI).SeeexamplesdiscussedinBoxE.2.

57 TheTBTAgreementdefinesanon-governmentalbodyasfollows:“Bodyotherthanacentralgovernmentbodyoralocalgovernmentbody,includinganongovernmentalbodywhichhaslegalpowertoenforceatechnicalregulation”(TBTAgreement,Annex1,para8).TheSPSAgreementusestheterm“non-governmentalentity”butitisnotdefinedintheAgreement.

58 SPSAgreementArticle13(onimplementation).

59 TBTAgreement,inparticularArticle4.1;articles3.1,8.1and9.2arealsorelevant.

60 Forinstance,membersfrequentlyreferredtotheISOandtheIECintheTBTcontext;boththesebodiesarenon-governmentalinnature.

61 MoreinformationonSTDFcanbefoundat:http://www.standardsfacility.org/en/index.htm.


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F. Conclusions

This report has sought to deepen understanding of the role, incidence and effects of non-tariff measures and services measures in the multilateral trading system of the 21st century. Against a background of profound changes in the nature of trade flows and trade patterns, institutions, social and environmental realities, and consumer preferences, the Report has identified the challenges that NTMs and services measures raise for international cooperation and, more specifically, for the World Trade Organization.


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The range of non-tariff measures and servicesmeasuresisvastandwellbeyondthescopeofasinglereport. Inaddition toageneral analysisofNTMsandservices measures, the report has focused thereforeon technical barriers to trade (TBT), sanitary andphytosanitary(SPS)measuresanddomesticregulationinservices.

TBT/SPS measures are of interest to producers,traders and consumers alike. They raise specifictransparency challenges. A core question is how toaddress any adverse trade effects of non-tariffmeasures without impeding the legitimate pursuit bygovernments of public policy objectives, such asprotecting public health. A related question concernsthe role of the WTO and other international tradebodies in promoting regulatory convergence as ameansof reducingunnecessary tradebarriers.Thesechallenges are very similar to those faced by WTOmemberswhentheydiscusswhatadditionaldisciplinesare required on domestic regulation in services toensurethatitisnotmoreburdensomethannecessarytoachievelegitimatepolicyobjectives.

Economic analysis provides some insights into whygovernments use non-tariff measures and servicesmeasures.Bothtypesofmeasurecanservelegitimatepublic policy goals but they may also be used forprotectionist purposes. Identifying a government’sintent is inherentlydifficult,particularly in thecaseofTBT/SPS measures and domestic regulation inservices. Welfare economics and political economyanalysishelptoexplaintheuseofparticularmeasures.The analysis also shows how recent changes in thetrading environment, such as the expansion of globalproduction sharing, climate change and the growingimportanceofconsumerconcerns in richercountries,affect the use of NTMs. Circumstances can arise inthis more complex environment where producer andconsumer interests may diverge over the nature of ameasureidentifiedtodefendapublicpolicygoal.

Assessing the incidence of non-tariff measures andservices measures is difficult because of largeinformationgaps.Dataaresparsebecauseoftheverynatureofthesemeasures,whicharediverseandoftennot easy to quantify. Moreover, the fact thatgovernments lack the incentive to provide suchinformationplagues the collectionof official data.Asfar as services are concerned, while commitments inmarketaccessandnationaltreatmentareknown,verylittle information is available on the regimes that areactuallyapplied.Datalimitationsareparticularlyacuteinthecaseofdomesticregulation,wheretheabsenceof criteria that help to single out the regulatorymeasures with a significant effect on trade is acomplicatingfactor.

On the goods side, information from official sourcesdoesnotallowtheidentificationoftrendsovertimeinthe relative frequency of various non-tariff measures

globallyorby region.What itshows is theprevalenceof TBT/SPS measures in the overall incidence ofNTMs.As revealedby recentbusinesssurveys, thesemeasuresalsorepresentthemainsourceofconcernsfor exporters in most developed and developingcountries. Another insight from business surveys isthatexportersgenerallyhavemoreproblemswith theway in which measures are applied than with themeasuresthemselves.

The incidence of non-tariff measures and servicesmeasures is only half of the picture, the other halfbeing their trade restrictiveness. The evidencereviewed in the Report has confirmed that NTMssignificantly distort trade, possibly even more thantariffs.Thisresult,however,shouldbeinterpretedwithcautionbecauseitfailstocapturetherecentchangesin trade brought about by the development of globalsupplychains.Moreprecisely,ageneralfindingisthatTBT/SPS measures restrict trade in agriculturalproducts,whiletheexistenceofstandardsoftenhasapositive effect on trade in manufacturing products,especially inhigh-technologysectors.Moreover,thereis a reasonable expectation that harmonization andmutualrecognitionofstandardswillincreasetrade.

In order to identify the challenges that non-tariffmeasures and services measures pose for the WTO,the Report has spelled out the reasons behindinternational cooperation on such measures. ThetraditionaltheorysuggeststhatpolicysubstitutionisakeyproblemthatrulesonNTMsinatradeagreementneed to address. Shallow integration in the form ofsimple rules on transparency, national treatment andnon-violation(wherebyamembermayclaimthatithasbeen deprived of an expected benefit because ofanother member’s action even if a WTO agreementhasnotbeenviolated)addressesthisproblem.

The changing nature of international trade, however,creates new policy considerations that may motivatetheneed fordeeper formsof institutional integration.Also, growing concerns about TBT/SPS measureshave brought the issue of regulatory convergence totheWTO,raisinganumberofdifficultchallenges.TheReporthassetouttoexamineGATT/WTOdisciplinesas interpreted in dispute settlement, showing thatGATT rules on NTMs are generally consistent with ashallow integration approach but that the TBT andSPSagreementspromotedeeperintegration.

Inthelightofboththeeconomicandthelegalanalysis,the Report has identified several challenges forinternational cooperation, and the WTO morespecifically. First, the transparency of non-tariffmeasures and services measures must be improvedandtheWTOhasacentralroletoplaywithitsmultipletransparency mechanisms. Secondly, current WTOdisciplines may not always strike the right balancebetween policy commitments and flexibility. Forinstance, economists argue in favour of a more


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prominent role for non-violation complaints. Lawyers,in turn, observe that WTO members generally do nottakethispath,preferringtochallengetheNTMonthebasis of the specific rule it allegedly violates. Thirdly,more effective criteria are needed to identify why ameasure is used. Better integration of economic andlegalanalysismayhelpachievethisgoal.

Fourthly, the rise of global production sharing posesadditional challenges for the multilateral tradingsystem,callingfordeeperintegration.Wheninteractionbetween firms in a supply chain involves bilateralbargaining on input prices, policies affecting theconditionsofsaleatonestagealsoaffect theprofitsof producers at all other stages. This implies thatinternational cooperation should go beyond marketaccessandcoverthebroadersetofpoliciesaffectingtheconditionsofsaleatallstagesofthesupplychain.Moreover,globalproductionsharing intensifiescross-effectsandcomplementaritiesbetweentradeingoodsandtradeinservices.Thisraisesthequestionwhethersucheffectsaresufficientlytakenintoaccount inthecurrentnegotiatingframework.

A number of challenges arise more specifically inrelation to cooperation on TBT/SPS measures anddomestic regulation. Addressing the adverse tradeeffects of such measures requires regulatoryconvergence. As discussed in the 2011 World Trade Report, part of this convergence takes place at theregional level and part of it at the multilateral level,raisingthequestionoftheoptimaldistributionofroles.The path to convergence is not always an easy one,since it is more than a mechanical matter of policydesign, and can involve national differences in socialpreferences and priorities. The approach in the TBTand SPS agreements of encouraging the adoption ofinternational standards can create precisely this kindoftension.

Anotherissuerelatestoprivatestandards.Anxietyhasarisen in relation to the role that market power canplayinprivatestandard-settingandthepossibilitythatprivate standards develop into government-mandatednorms that may be unduly influenced by interestgroups.TheroleofgovernmentsandoftheWTOwithregardtosuchstandardswouldseemtobeinneedofclarification.

Asfornegotiationsondomesticregulationinservicesmandated in the General Agreement on Trade inServices (GATS), these have turned out to be verydifficult to conclude. One way to overcome concernswith regulatory autonomy, which seem to be a mainstumblingblock,wouldbetodefineanecessitytest.

Lastly,capacitybuildingisavitalelementinimprovinginternational cooperation on TBT/SPS measures andon domestic regulation in services. In the SPS area,the Standards and Trade Development Facility hasproven to be successful and the question has arisen

astowhetherthemodelcouldbereplicatedinbuildingcapacity relating to standard-setting, technicalinfrastructure and the development of regulations inthe TBT area. In the area of domestic regulation inservices, there is a need for capacity building tostrengthen theabilityof regulators to identify,designand implement policies that address market failures,undertake regulatory impact assessments and shareknowledgeongoodpractices.

TheReporthascoveredalotofgroundbutithasbynomeansaddressedalltheissuessurroundingnon-tariffmeasures in the context of international cooperation.Some of the important questions touched upon, butnot pursued in much depth in the Report, are listedbelow.

• The Report has made a strong case for improvedtransparency internationally in the field of non-tariff measures. This includes properly designedand observed notification procedures. However,sincetheadministrationofNTMmeasurescanbeas important as their design, is there scope for adifferent approach for dealing with administrativeobstaclesper se?

• The share of trade in intermediate goods in totaltrade has increased over the last few decades.Howdoes the fragmentationofproductionacrossnationalbordersaffectincentivestousenon-tariffmeasures? What are the trade effects of NTMsalongvaluechains?

• There seem to be increasing complementaritiesbetween trade in goods and trade in servicesdriven by global production sharing. How relevantare these complementarities? Do they require anew framework of analysis and new forms ofcooperation?

• It is argued that considerable scope exists forimproving domestic regulatory practices. Whatwouldbe theeffect of such improvementson theneedforinternationalcooperation?

• NTMs are a “moving target” and their mix isconstantlyevolving.Somemeasures,suchasthoserelated to intellectual property protection,government procurement, investment and financemeasures, are not covered in this report. WhatchallengesdothesemeasuresraisefortheWTO?

• Amainthemeofthisreport isregulationaimedatachieving public policy objectives. How much oftheirregulatoryautonomyarenationalgovernmentswillingtodelegatetointernationalinstitutions?

• A lot of the activities of the SPS and TBTcommittees involve information sharing, inparticular on best practices. How effective is thisas a mechanism of international cooperation, for


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instance to increase transparency or buildcapacity?Thespecific tradeconcernsmechanismin the TBT and SPS committees goes beyondinformationsharing.Doesithelpresolveconflicts?Shoulditbeusedasamodelbyothercommittees?


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236

Technical notesComposition of regions and other economic groupings RegionsNorth America

Bermuda Canada* Mexico* UnitedStatesofAmerica*

Otherterritoriesintheregionnotelsewherespecified(n.e.s.)

South and Central America and the Caribbean

AntiguaandBarbuda* Chile* ElSalvador* NetherlandsAntilles SaintVincentandtheGrenadines*

Argentina* Colombia* Grenada* Nicaragua* Suriname*

Bahamas** CostaRica* Guatemala* Panama* TrinidadandTobago*

Barbados* Cuba* Guyana* Paraguay* Uruguay*

Belize* Dominica* Haiti* Peru* BolivarianRep.ofVenezuela*

Bolivia,PlurinationalStateof*

DominicanRepublic* Honduras* SaintKittsandNevis*

Brazil* Ecuador* Jamaica* SaintLucia*

Otherterritoriesintheregionn.e.s.

Europe

Albania* CzechRepublic* Hungary* Malta* SlovakRepublic*

Andorra** Denmark* Iceland* Montenegro* Slovenia*

Austria* Estonia* Ireland* Netherlands* Spain*

Belgium* Finland* Italy* Norway* Sweden*

BosniaandHerzegovina** France* Latvia* Poland* Switzerland*

Bulgaria* FYRMacedonia* Liechtenstein* Portugal* Turkey*

Croatia* Germany* Lithuania* Romania* UnitedKingdom*

Cyprus* Greece* Luxembourg* Serbia**


Commonwealth of Independent States (CIS)a

Armenia* Georgia*a Moldova,Republicof* Turkmenistan

Azerbaijan** Kazakhstan** RussianFederation** Ukraine*

Belarus** KyrgyzRepublic* Tajikistan** Uzbekistan**


Africa

Algeria** Congo* Guinea* Morocco* SouthAfrica*

Angola* Côted’Ivoire* Guinea-Bissau* Mozambique* Sudan**

Benin* Dem.Rep.oftheCongo* Kenya* Namibia* Swaziland*

Botswana* Djibouti* Lesotho* Niger* Tanzania*

BurkinaFaso* Egypt* Liberia,Republicof** Nigeria* Togo*

Burundi* EquatorialGuinea** Libya** Rwanda* Tunisia*

Cameroon* Eritrea Madagascar* SãoToméandPríncipe** Uganda*

CapeVerde* Ethiopia** Malawi* Senegal* Zambia*

CentralAfricanRepublic* Gabon* Mali* Seychelles** Zimbabwe*

Chad* Gambia* Mauritania* SierraLeone*

Comoros** Ghana* Mauritius* Somalia


Middle East

Bahrain,Kingdomof* Israel* LebaneseRepublic** SaudiArabia,Kingdomof* Yemen**

Iran** Jordan* Oman* SyrianArabRepublic**

Iraq** Kuwait,Stateof* Qatar* UnitedArabEmirates*


Asia

Afghanistan** HongKong,China* Malaysia* PapuaNewGuinea* Timor-Leste

Australia* India* Maldives* Philippines* Tonga*

Bangladesh* Indonesia* Mongolia* Samoa* Tuvalu

Bhutan** Japan* Myanmar* Singapore* Vanuatu**

BruneiDarussalam* Kiribati Nepal* SolomonIslands* VietNam*

Cambodia* Korea,Republicof* NewZealand* SriLanka*

China* LaoPeople’sDem.Rep.** Pakistan* Taipei,Chinese*

Fiji* Macao,China* Palau Thailand*


*WTOmembers

**Observergovernments

a.GeorgiaisnotamemberoftheCommonwealthofIndependentStatesbutisincludedinthisgroupforreasonsofgeographyandsimilaritiesineconomicstructure.

237

TECHNICAL NOTES

OtherGroupsACP (African, Caribbean and Pacific countries)

Angola Cuba Haiti Niger SouthAfrica

AntiguaandBarbuda Dem.Rep.oftheCongo Jamaica Nigeria Sudan

Bahamas Djibouti Kenya Niue Suriname

Barbados Dominica Kiribati Palau Swaziland

Belize DominicanRepublic Lesotho PapuaNewGuinea Timor-Leste

Benin EquatorialGuinea Liberia,Republicof Rwanda Togo

Botswana Eritrea Madagascar SaintKittsandNevis Tonga

BurkinaFaso Ethiopia Malawi SaintLucia TrinidadandTobago

Burundi Fiji Mali SaintVincentandtheGrenadines

Tuvalu

Cameroon Gabon MarshallIslands Samoa Uganda

CentralAfricanRepublic Gambia Mauritania SãoToméandPríncipe UnitedRepublicofTanzania

Chad Ghana Mauritius Senegal Vanuatu

Comoros Grenada Micronesia Seychelles Zambia

Congo Guinea Mozambique SierraLeone Zimbabwe

CookIslands Guinea-Bissau Namibia SolomonIslands

Côted’Ivoire Guyana Nauru Somalia

Africa

North Africa

Algeria Egypt Libya Morocco Tunisia

Sub-Saharan Africa

Western Africa

Benin Gambia Guinea-Bissau Mauritania Senegal

BurkinaFaso Ghana Liberia,Republicof Niger SierraLeone

CapeVerde Guinea Mali Nigeria Togo

Côted’Ivoire

Central Africa

Burundi CentralAfricanRepublic Congo EquatorialGuinea Rwanda

Cameroon Chad Dem.Rep.oftheCongo Gabon SãoToméandPríncipe

Eastern Africa

Comoros Ethiopia Mauritius Somalia UnitedRepublicofTanzania

Djibouti Kenya Seychelles Sudan Uganda

Eritrea Madagascar

Southern Africa

Angola Lesotho Mozambique SouthAfrica Zambia

Botswana Malawi Namibia Swaziland Zimbabwe

TerritoriesinAfricanotelsewherespecified

Asia

East Asia (including Oceania)

Australia Indonesia Mongolia Samoa Tuvalu

BruneiDarussalam Japan Myanmar Singapore Vanuatu

Cambodia Kiribati NewZealand SolomonIslands VietNam

China LaoPeople’sDem.Rep. PapuaNewGuinea Taipei,Chinese

Fiji Macao,China Philippines Thailand

HongKong,China Malaysia RepublicofKorea Tonga

West Asia

Afghanistan Bhutan Maldives Pakistan SriLanka

Bangladesh India Nepal

OthercountriesandterritoriesinAsiaandthePacificnotelsewherespecified

LDCs (Least-developed countries)

Afghanistan Bhutan CentralAfricanRepublic Djibouti Gambia

Angola BurkinaFaso Chad EquatorialGuinea Guinea

Bangladesh Burundi Comoros Eritrea Guinea-Bissau

Benin Cambodia Dem.Rep.oftheCongo Ethiopia Haiti


238

Kiribati Maldives Niger SolomonIslands Uganda

LaoPeople’sDem.Rep. Mali Rwanda Somalia UnitedRepublicofTanzania

Lesotho Mauritania Samoa Sudan Vanuatu

Liberia,Republicof Mozambique SãoToméandPríncipe Timor-Leste Yemen

Madagascar Myanmar Senegal Togo Zambia

Malawi Nepal SierraLeone Tuvalu

Six East Asian traders

HongKong,China RepublicofKorea Singapore Taipei,Chinese Thailand

Malaysia

RegionalIntegrationAgreementsAndean Community (CAN)

Bolivia,PlurinationalStateof

Colombia Ecuador Peru

ASEAN (Association of South East Asian Nations) / AFTA (ASEAN Free Trade Area)

BruneiDarussalam Indonesia Malaysia Philippines Thailand

Cambodia LaoPeople’sDem.Rep. Myanmar Singapore VietNam

CACM (Central American Common market)

CostaRica ElSalvador Guatemala Honduras Nicaragua

CARICOM (Caribbean Community and Common Market)

AntiguaandBarbuda Belize Guyana Montserrat SaintVincentandtheGrenadines

Bahamas Dominica Haiti SaintKittsandNevis Suriname

Barbados Grenada Jamaica SaintLucia TrinidadandTobago

CEMAC (Economic and Monetary Community of Central Africa)

Cameroon Chad Congo EquatorialGuinea Gabon

CentralAfricanRepublic

COMESA (Common Market for Eastern and Southern Africa)

Burundi Egypt Libya Rwanda Uganda

Comoros Eritrea Madagascar Seychelles Zambia

Dem.Rep.oftheCongo Ethiopia Malawi Sudan Zimbabwe

Djibouti Kenya Mauritius Swaziland

ECCAS (Economic Community of Central African States)

Angola CentralAfricanRepublic Dem.Rep.oftheCongo Gabon SãoToméandPríncipe

Burundi Chad EquatorialGuinea Rwanda

Cameroon Congo

ECOWAS (Economic Community of West African States)

Benin Côted’Ivoire Guinea Mali Senegal

BurkinaFaso Gambia Guinea-Bissau Niger SierraLeone

CapeVerde Ghana Liberia,Republicof Nigeria Togo

EFTA (European Free Trade Association)

Iceland Liechtenstein Norway Switzerland

European Union (27)

Austria Estonia Ireland Netherlands Spain

Belgium Finland Italy Poland Sweden

Bulgaria France Latvia Portugal UnitedKingdom

Cyprus Germany Lithuania Romania

CzechRepublic Greece Luxembourg SlovakRepublic

Denmark Hungary Malta Slovenia

GCC (Gulf Cooperation Council)

Bahrain,Kingdomof Oman Qatar SaudiArabia,Kingdomof UnitedArabEmirates

Kuwait,Stateof

MERCOSUR (Southern Common Market)

Argentina Brazil Paraguay Uruguay

NAFTA (North American Free Trade Agreement)

Canada Mexico UnitedStates

239

TECHNICAL NOTES

SAPTA (South Asian Preferential Trade Arrangement)

Bangladesh India Nepal Pakistan SriLanka

Bhutan Maldives

SADC (Southern African Development Community)

Angola Lesotho Mauritius SouthAfrica Zambia

Botswana Madagascar Mozambique Swaziland Zimbabwe

Dem.Rep.oftheCongo Malawi Namibia UnitedRepublicofTanzania

WAEMU (West African Economic and Monetary Union)

Benin Côted’Ivoire Mali Senegal Togo

BurkinaFaso Guinea-Bissau Niger

WTO members are frequently referred to as “countries”, althoughsomemembersarenotcountries intheusualsenseofthewordbutareofficially“customsterritories”.Thedefinitionofgeographicalandothergroupingsinthisreportdoesnotimplyanexpressionofopinionby theSecretariat concerning thestatusofanycountryor territory,thedelimitationof itsfrontiers,northerightsandobligationsofanyWTO member in respect of WTO agreements. The colours,boundaries, denominations and classifications in the maps of thepublicationdonot imply,on thepartof theWTO,any judgementonthe legal or other status of any territory, or any endorsement oracceptanceofanyboundary.

Throughoutthisreport,SouthandCentralAmericaandtheCaribbeanisreferredtoasSouthandCentralAmerica.TheBolivarianRepublicof Venezuela; Hong Kong Special Administrative Region of China;theRepublicofKorea;andtheSeparateCustomsTerritoryofTaiwan,Penghu, Kinmen and Matsu are referenced as Bolivarian Rep. ofVenezuela; Hong Kong, China; Korea, Republic of; and Taipei,Chineserespectively.

Theclosingdatefordatausedwithinthisreportis12April2012.


240

Abbreviations and symbolsACP African,CaribbeanandPacificGroupofStatesAD anti-dumpingALOP appropriatelevelsofprotectionAMS AggregateMeasurementofSupportAOA AgreementonAgriculture(WTO)APC AustraliaProductivityCommissionAQSIQ GeneralAdministrationofQualitySupervision,InspectionandQuarantineofChinaAPEC AsiaPacificTradeAgreementASEAN AssociationofSoutheastNationsASP AmericansellingpriceATFS AmericanTreeFarmSystemAVE ad-valoremequivalentBE barrierstoentryBFAI ForeignTradeInformationOfficeofGermanyBSE bovinespongiformencephalopathyBT barrierstotradeandinvestmentc.i.f. cost-insurance-freightCARS ConsumerassistancetorecycleandsaveCEPR CentreforEconomicPolicyResearchCERFLOR ForestCertificationProgrammeCIS CommonwealthofIndependentStatesCOMESA CommonMarketforEasternandSouthernAfricaCoOP countryoforiginprincipleDCs DevelopingcountriesDGSANCO EuropeanCommissionDirectorate-GeneralforHealthandConsumersDP discriminatoryproceduresEAC EastAfricanCommunityECLAC EconomicCommissionforLatinAmericaandtheCaribbeanEEMRA ElectricalandElectronicEquipmentMutualRecognitionArrangementEFTPOS ElectronicfundstransferatpointofsaleEFW EconomicFreedomoftheWorldERM environment-relatedmeasuresESCAP EconomicandSocialCommissionforAsiaandthePacificETCR electricity,gas,transportandcommunicationsETI EnablingTradeIndexEU EuropeanUnionf.o.b. free-on-boardFAO FoodandAgriculturalOrganizationFDI ForeigndirectinvestmentFER foreignequityrestrictionsFSAP FinancialServicesActionPlanFSC ForestStewardshipCouncilGATS GeneralAgreementonTradeinServicesGATT GeneralAgreementonTariffsandTradeGFSI GlobalFoodSafetyInitiativeGRP GoodRegulatoryPracticesGTA GlobalTradeAlertHACCP hazardanalysisandcriticalcontrolpointsHS harmonizedsystemIASC InternationalAccountingStandardsCommitteeIEC InternationalElectrotechnicalCommissionIFAC InternationalFederationofAccountantsIFO GermanInstituteforEconomicResearchIMS InformationManagementSystemsIOSCO InternationalOrganizationofSecuritiesCommissionsIPCC IntergovernmentalPanelonClimateChangeIPPC InternationalPlantProtectionConventionISO InternationalOrganizationforStandardizationITC InternationalTradeCentreI-TIP IntegratedTradeIntelligencePortalITO InternationalTradeOrganizationITU InternationalTelecommunicationsUnion

241

ABBREVIATIONS AND SYMBOLS

KPE keyforeignpersonnelLDCs least-developedcountriesLEI IndonesianEcolabellingInstituteLTA Long-term-arrangementMFN mostfavourednationMRA mutualrecognitionagreementMRLs maximumresiduallevelsMTCS MalaysianTimberCertificationSchemeNAMA Non-AgricultureMarketAccessn.e.s. notelsewherespecifiedNMS non-manufacturingsectorsNMR non-manufacturingregulationNTE NationalTradeEstimateNTMs non-tariffmeasuresOECD OrganizationforEconomicCooperationandDevelopmentOIE WorldOrganizationforAnimalHealthOTR otherrestrictionsOTRI OverallTradeRestrictivenessIndexPCA principalcomponentanalysisPEFC ProgrammefortheEndorsementofForestCertificationPMR productmarketregulationPSI Pre-shipmentinspectionPTA preferentialtradeagreementRAPEX RapidAlertSystemforNon-FoodProductsSADC SouthernAfricanDevelopmentCommunitySARSO SouthAsianRegionalStandardsOrganizationSCR screeningandapprovalSCSC Sub-committeeonStandardsandConformanceSITC StandardInternationalTradeClassificationSPS sanitaryandphytosanitarySTCs SpecificTradeConcernsSTDF StandardsandTradeDevelopmentFacilitySTEs StatetradingenterprisesSTRI ServicesTradeRestrictivenessIndexesTBT technicalbarrierstotradeTPP Trans-PacificPartnershipTPR TradePolicyReviewTPRB TradePolicyReviewBodyTRAINS TradeAnalysisandInformationSystemTRIPS trade-relatedaspectsofintellectualpropertyrightsTTMRA Trans-TasmanMutualRecognitionArrangementTTRI TariffTradeRestrictivenessIndexUK UnitedKingdomUNCTAD UnitedNationsConferenceonTradeandDevelopmentUNECE UnitedNationsEconomicCommissionforEuropeUNEP UnitedNationsEnvironmentalProgrammeUNESCO UnitedNationsEducational,ScientificandCulturalOrganizationUNFCC UnitedNationsFrameworkConventiononClimateChangeUR UruguayRoundUS UnitedStatesUSITC UnitedStatesInternationalTradeCommissionUSO UniversalservicesobligationUSTR UnitedStatesTradeRepresentativeVAT value-addedtaxWHO WorldHealthOrganizationWITS WorldIntegratedTradeSystemWTO WorldTradeOrganization

Thefollowingsymbolsareusedinthispublication:… notavailable0 figureiszeroorbecamezeroduetorounding- notapplicableUS$ UnitedStatesdollars€ euro£ UKpound


242

list of figures, tables and boxesPartIFigures

Figure1.1 GrowthinvolumeofworldmerchandisetradeandGDP,2000-11 18

Figure1.2 Volumeofworldmerchandiseexports,1990-2011 19

Figure1.3 RealGDPgrowthandtradeofeuroareaeconomies,2008-11 21

Figure1.4 Quarterlyworldexportsofmanufacturedgoodsbyproduct,2008Q1-2011Q4 24

Figure1.5 Nominaldollarexchangerates,January2005–February2012 24

Tables

Table1.1 GDPandmerchandisetradebyregion,2009-11 20

Table1.2 Worldpricesofselectedprimaryproducts,2000-11 21

Table1.3 Worldexportsofmerchandiseandcommercialservices,2005-11 22

Appendix figures

AppendixFigure1 Seasonallyadjustedquarterlymerchandisetradevolumeindices,2008Q1–2011Q4 26

AppendixFigure2 Monthlymerchandiseexportsandimportsofselectedeconomies,January2008–February2012 27

Appendix tables

AppendixTable1 Worldmerchandisetradebyregionandselectedeconomies,2011 28

AppendixTable2 Worldtradeincommercialservicesbyregionandselectedcountry,2011 29

AppendixTable3 Merchandisetrade:leadingexportersandimporters,2011 30

AppendixTable4 Merchandisetrade:leadingexportersandimporters(excludingintra-EU(27)trade),2011 31

AppendixTable5 Leadingexportersandimportersinworldtradeincommercialservices,2011 32

AppendixTable6 Leadingexportersandimportersinworldtradeincommercialservice(excludingintra-EU(27)trade),2011 33

PartII

A IntroductionTables

TableA.1 Non-tariffmeasuresnotifiedbyGATT/WTOmembersfornon-agriculturalproducts 44

B Aneconomicperspectiveontheuseofnon-tariffmeasuresFigures

FigureB.1(a) EffectofTBT/SPSmeasuresontradeandwelfare:bothincrease 63

FigureB.1(b) EffectofTBT/SPSmeasuresontradeandwelfare:bothdecrease 63

Tables

TableB.1 CoverageratioandfrequencyindexofSTCsandtariffs 73

TableB.2 Typologyofmeasuresaffectingservicestrade 77

TableB.3 Coordinationgame 81

TableB.4 Prisoner’sdilemmagame 81

243

LIST OF FIGURES, TABLES AND BOXES

Boxes

BoxB.1 Definingtransparencyinnon-tariffmeasures 51

BoxB.2 ChoiceofNTMsandcost-benefitanalysis 53

BoxB.3 Networkeffects/externalitiesandprivatestandards 57

BoxB.4 IsitpossibletoidentifydisguisedprotectionisminNTMs? 59

BoxB.5 EffectofTBT/SPSmeasuresontradeandwelfare 63

BoxB.6 Policysubstitution–evidencefromspecifictradeconcerns 72

BoxB.7 Examplesofservices-specificmeasurestopursuepublicpolicyobjectives 76

C Aninventoryofnon-tariffmeasuresandservicesmeasuresFigures

FigureC.1 GATSArticleIII:3notificationsreceived,2000-2011 98

FigureC.2 SharesofproductlinesandtradevaluecoveredbyNTMs,1996-2008 105

FigureC.3 SPSandTBTnotifications,1994-2010 106

FigureC.4 NewandresolvedSPSspecifictradeconcerns,1995-2010 107

FigureC.5 NewTBTspecifictradeconcerns,1995-2011 107

FigureC.6 Maintainingandraisingcountriesinspecifictradeconcerns,1995-2010 108

FigureC.7 AveragevalueofinitiatedSPSandTBTconcerns,1995-2010 109

FigureC.8 CoverageratioandfrequencyindexofSTCsaggregatedbyyear,1995-2010 109

FigureC.9 BurdensomeNTMsbytypeofmeasure,2010 112

FigureC.10 TBT/SPSimport-relatedmeasuresbysub-type,2010 113

FigureC.11 NTMsappliedbyhomecountryonexportsbysub-type,2010 114

FigureC.12 Non-tariffmeasuresfacingUSandEUexporters,2009 114

FigureC.13 NumberofSTC“maintaining”and“raising”countriesasashareofthetotalnumberofcountriesbylevelofdevelopment,1995-2010 115

FigureC.14 BurdensomeNTMsappliedbypartnercountriesbylevelofdevelopment,2010 116

FigureC.15 IncidenceofNTMsbysector,2010 117

FigureC.16 TypeofNTMbysector,2010 117

FigureC.17 ShareofNTMswithandwithoutproceduralobstacles,2010 119

FigureC.18 Sharesofreportedproceduralobstaclesbytype,2010 119

FigureC.19 SharesofNTMswithandwithoutproceduralobstaclesbytypeofNTM,2010 120

FigureC.20 Compositionofnewrestrictivetrademeasures,2008-2011 121

FigureC.21 TimetrendofNMRindicatorsinselectedservicessectors 122

FigureC.22 FDIrestrictivenessinservices,evolutionovertime 125

Tables

TableC.1 Measurescoveredbytradepolicyreviews 99

TableC.2 Internationalclassificationofnon-tariffmeasures 101

TableC.3 ITClistofproceduralobstacles 102

TableC.4 Agreementscitedindisputesrelatedtotradeingoods,1995-2011 111

TableC.5 ComplaintsaboutNTMsinCOMESA-EAC-SADC,2008-11 116

TableC.6 Agreementscitedindisputesrelatedtotradeinagriculturalandnon-agriculturalproducts 118

TableC.7 Tradeandtrade-relatedmeasures,2008-2011 121

TableC.8 DecompositionofgrowthofFDIrestrictivenessintotalservices,1997-2010 126


244

Boxes

BoxC.1 MethodologyforconstructingindicesfromUNCTADTRAINSandSTCdatabases 110

BoxC.2 Traderestrictivenessindexesforservices 123

BoxC.3 DecompositionofchangesinFDIrestrictiveness 126

Appendix Table

AppendixTableC.1 Coverageratioandfrequencyindex:intermediate-intensivesectors 133

D Thetradeeffectsofnon-tariffmeasuresandservicesmeasuresFigures

FigureD.1 AVEsofNTMsandeconomicdevelopment 139

Boxes

BoxD.1 MethodologyusedforestimatingtheAVEofNTMs 137

BoxD.2 Cumulationoftradecostsinaglobalsupplychain 141

BoxD.3 Complementaritiesbetweentradeinservicesandtradeingoods 142

BoxD.4 Environment-relatedmeasures 145

BoxD.5 Reportingofconformityassessmentproceduresasbarrierstotrade:selectedexamples 148

BoxD.6 Harmonizationversusmutualrecognition 150

Appendix tables

AppendixTableD.1 EffectsofSPSmeasuresonexportperformancesbyfirm 157

AppendixTableD.2 EffectsofTBTmeasuresonexportperformancesbyfirm 158

AppendixTableD.3 ImpactofSPSmeasuresonagriculturalandfoodtrade,1996-2010 159

E Internationalcooperationonnon-tariffmeasuresinaglobalizedworldBoxes

BoxE.1 EconomictheoriesoftheGATS 164

BoxE.2 Examplesofprivatestandards 167

BoxE.3 ExamplesofregulatorycooperationintheTBTarea 177

BoxE.4 EquivalenceintheSPSAgreement 180

245

WTO MEMBERS

WTo members(Asof10May2012)

AlbaniaAngolaAntiguaandBarbudaArgentinaArmeniaAustraliaAustriaBahrain,KingdomofBangladeshBarbadosBelgiumBelizeBeninBolivia,PlurinationalStateofBotswanaBrazilBruneiDarussalamBulgariaBurkinaFasoBurundiCambodiaCameroonCanadaCapeVerdeCentralAfricanRepublicChadChileChinaColombiaCongoCostaRicaCôted’IvoireCroatiaCubaCyprusCzechRepublicDemocraticRepublicoftheCongoDenmarkDjiboutiDominicaDominicanRepublicEcuadorEgyptElSalvadorEstoniaEuropeanUnionFijiFinland

FormerYugoslavRepublicof Macedonia(FYROM)FranceGabon

TheGambiaGeorgiaGermanyGhanaGreeceGrenadaGuatemalaGuineaGuinea-BissauGuyanaHaitiHondurasHongKong,ChinaHungaryIcelandIndiaIndonesiaIrelandIsraelItalyJamaicaJapanJordanKenyaKorea,RepublicofKuwait,theStateofKyrgyzRepublicLatviaLesothoLiechtensteinLithuaniaLuxembourgMacao,ChinaMadagascarMalawiMalaysiaMaldivesMaliMaltaMauritaniaMauritiusMexicoMoldova,RepublicofMongoliaMontenegroMoroccoMozambiqueMyanmarNamibiaNepalNetherlandsNewZealand

NicaraguaNigerNigeriaNorwayOmanPakistanPanamaPapuaNewGuineaParaguayPeruPhilippinesPolandPortugalQatarRomaniaRwandaSaintKittsandNevisSaintLuciaSaintVincent&theGrenadinesSamoaSaudiArabia,KingdomofSenegalSierraLeoneSingaporeSlovakRepublicSloveniaSolomonIslandsSouthAfricaSpainSriLankaSurinameSwazilandSwedenSwitzerlandChineseTaipeiTanzaniaThailandTogoTongaTrinidadandTobagoTunisiaTurkeyUgandaUkraineUnitedArabEmiratesUnitedKingdomUnitedStatesofAmericaUruguayVenezuela,BolivarianRepublicofVietNamZambiaZimbabwe


246

previous World Trade reportsThe WTO and preferential trade agreements: From co-existence to coherence

2011


The WTO and preferential trade agreements: From co-existence to coherence

9 789287 037640

World Trade Report

The ever-growing number of preferential trade agreements (PTAs) is a prominent feature of international trade. The World Trade Report 2011 describes the historical development of PTAs and the current landscape of agreements. It examines why PTAs are established, their economic effects, and the contents of the agreements themselves. Finally it considers the interaction between PTAs and the multilateral trading system.

Accumulated trade opening – at the multilateral, regional and unilateral level – has reduced the scope for offering preferential tariffs under PTAs. As a result, only a small fraction of global merchandise trade receives preferences and preferential tariffs are becoming less important in PTAs.

The report reveals that more and more PTAs are going beyond preferential tariffs, with numerous non-tariff areas of a regulatory nature being included in the agreements.

Global production networks may be prompting the emergence of these “deep” PTAs as good governance on a range of regulatory areas is far more important to these networks than further reductions in already low tariffs. Econometric evidence and case studies support this link between production networks and deep PTAs.

The report ends by examining the challenge that deep PTAs present to the multilateral trading system and proposes a number of options for increasing coherence between these agreements and the trading system regulated by the WTO.

World

Trad

e Rep

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Theever-growingnumberofpreferentialtradeagreements(PTAs)isaprominentfeatureofinternationaltrade.TheReportdescribesthehistoricaldevelopmentofPTAs and the current landscape of agreements. It examines why PTAs areestablished,theireconomiceffects,thecontentsoftheagreementsthemselves,andtheinteractionbetweenPTAsandthemultilateraltradingsystem.

Trade in natural resources

2010

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The World Trade Report 2010 focuses on trade in natural resources, such as fuels, forestry, mining and fisheries. The Report examines the characteristics of trade in natural resources, the policy choices available to governments and the role of international cooperation, particularly of the WTO, in the proper management of trade in this sector.

A key question is to what extent countries gain from open trade in natural resources. Some of the issues examined in the Report include the role of trade in providing access to natural resources, the effects of international trade on the sustainability of natural resources, the environmental impact of resources trade, the so-called natural resources curse, and resource price volatility.

The Report examines a range of key measures employed in natural resource sectors, such as export taxes, tariffs and subsidies, and provides information on their current use. It analyses in detail the effects of these policy tools on an economy and on its trading partners.

Finally, the Report provides an overview of how natural resources fit within the legal framework of the WTO and discusses other international agreements that regulate trade in natural resources. A number of challenges are addressed, including the regulation of export policy, the treatment of subsidies, trade facilitation, and the relationship between WTO rules and other international agreements.

“I believe not only that there is room for mutually beneficial negotiating trade-offs that encompass

natural resources trade, but also that a failure to address these issues could be a recipe for

growing tension in international trade relations. Well designed trade rules are key to ensuring

that trade is advantageous, but they are also necessary for the attainment of objectives such as

environmental protection and the proper management of natural resources in a domestic setting.”

Pascal Lamy, WTO Director-General

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The World Trade Report 2010 focuses on trade in natural resources, such asfuels, forestry,miningandfisheries.TheReportexamines thecharacteristicsoftrade innatural resources, thepolicy choicesavailable togovernmentsand therole of international cooperation, particularly of the WTO, in the propermanagementoftradeinthissector.

Trade policy commitments and contingency measures

2009

WORLD TRADE REPORT 2009

World Trade Report The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system. The theme of this year’s Report is “Trade policy commitments and contingency measures”. The Report examines the range of contingency measures available in trade agreements and the role that these measures play. Also referred to as escape clauses or safety valves, these measures allow governments a certain degree of flexibility within their trade commitments and can be used to address circumstances that could not have been foreseen when a trade commitment was made. Contingency measures seek to strike a balance between commitments and flexibility. Too much flexibility may undermine the value of commitments, but too little may render the rules unsustainable. The tension between credible commitments and flexibility is often close to the surface during trade negotiations. For example, in the July 2008 mini-ministerial meeting, which sought to agree negotiating modalities – or a final blueprint – for agriculture and non-agricultural market access (NAMA), the question of a “special safeguard mechanism” (the extent to which developing countries would be allowed to protect farmers from import surges) was crucial to the discussions. One of the main objectives of this Report is to analyze whether WTO provisions provide a balance between supplying governments with necessary flexibility to face difficult economic situations and adequately defining them in a way that limits their use for protectionist purposes. In analyzing this question, the Report focuses primarily on contingency measures available to WTO members when importing and exporting goods. These measures include the use of safeguards, such as tariffs and quotas, in specified circumstances, anti-dumping duties on goods that are deemed to be “dumped”, and countervailing duties imposed to offset subsidies. The Report also discusses alternative policy options, including the renegotiation of tariff commitments, the use of export taxes, and increases in tariffs up to their legal maximum ceiling or binding. The analysis includes consideration of legal, economic and political economy factors that influence the use of these measures and their associated benefits and costs.

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Trade Policy Commitments and Contingency Measures

Cover photos (from left to right): Image copyright Quayside, 2009; Image copyright Christian Lagerek, 2009; Image copyright Guido Vrola, 2009;

The2009Reportexaminestherangeandroleofcontingencymeasuresavailablein tradeagreements.Oneof theReport’smainobjectives is toanalysewhetherWTO provisions provide a balance between supplying governments with thenecessaryflexibilitytofacedifficulteconomicsituationsandadequatelydefiningtheseinawaythatlimitstheiruseforprotectionistpurposes.

Trade in a globalizing world

2008

Trade in a Globalizing World

WORLD TRADE REPORT 2008

World Trade Report The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system.

International trade is integral to the process of globalization. Over many years, governments in most countries have increasingly opened their economies to inter-national trade, whether through the multilateral trading system, increased regional cooperation or as part of domestic reform programmes. Trade and globalization more generally have brought enormous benefits to many countries and citizens. Trade has allowed nations to benefit from specialization and to produce more efficiently. It has raised productivity, supported the spread of knowledge and new technologies, and enriched the range of choices available to consumers. But deeper integration into the world economy has not always proved to be popular, nor have the benefits of trade and globalization necessarily reached all sections of society. As a result, trade scepticism is on the rise in certain quarters.

The purpose of this year’s Report, whose main theme is “Trade in a Globalizing World”, is to remind ourselves of what we know about the gains from international trade and the challenges arising from higher levels of integration. The Report addresses a range of interlinking questions, starting with a consideration of what constitutes globalization, what drives it, what benefits does it bring, what challenges does it pose and what role does trade play in this world of ever-growing inter-dependency. The Report asks why some countries have managed to take advantage of falling trade costs and greater policy-driven trading opportunities while others have remained largely outside international commercial relations. It also considers who the winners and losers are from trade and what complementary action is needed from policy-makers to secure the benefits of trade for society at large. In examining these complex and multi-faceted questions, the Report reviews both the theoretical gains from trade and empirical evidence that can help to answer these questions.

ISBN 978-92-870-3454-0

WORLD TRADE REPORT 2008 - Trade in a Globalizing W

orld

The 2008 Report provides a reminder of what we know about the gains frominternational trade and highlights the challenges arising from higher levels ofintegration. It addresses the question of what constitutes globalization, whatdrives it, what benefits it brings, what challenges it poses and what role tradeplaysinthisworldofever-growinginter-dependency.

Sixty years of the multilateral trading system: achievements and challenges

2007

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2007WORLD TRADE REPORT On1January2008themultilateraltradingsystemcelebratedits60thanniversary.

TheWorldTradeReport2007celebrates this landmarkanniversarywithan in-depth look at the General Agreement on Tariffs and Trade (GATT) and itssuccessor the World Trade Organization — their origins, achievements, thechallengestheyhavefacedandwhatthefutureholds.

Exploring the links between subsidies, trade and the WTO

2006

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The World Trade Report 2006 focuses on how subsidies are defined, whateconomictheorycantellusaboutsubsidies,whygovernmentsusesubsidies,themostprominentsectors inwhichsubsidiesareappliedandtheroleof theWTOAgreementinregulatingsubsidiesininternationaltrade.TheReportalsoprovidesbriefanalyticalcommentariesoncertaintopicaltradeissues.

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Trade, standards and the WTO

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TheWorldTradeReport2005seeks toshed lighton thevarious functionsandconsequences of standards, focusing on the economics of standards ininternational trade, the institutional setting for standard-setting and conformityassessment,andtheroleofWTOagreementsinreconcilingthelegitimatepolicyusesofstandardswithanopen,non-discriminatorytradingsystem.

Coherence

2004


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TheWorldTradeReport2004focusesonthenotionofcoherenceintheanalysisof interdependent policies: the interaction between trade and macroeconomicpolicy, the role of infrastructure in trade and economic development, domesticmarket structures, governance and institutions, and the role of internationalcooperationinpromotingpolicycoherence.

Trade and development

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TheWorldTradeReport2003focusesondevelopment. Itexplainstheoriginofthis issue and offers a framework within which to address the question of therelationship between trade and development, thereby contributing to moreinformeddiscussion.

Cover top left – ©Shutterstock/withGodCover left centre – ©Thinkstock/iStockphotoCover bottom left – ©Thinkstock/F1onlineCover bottom centre – ©Thinkstock/Image SourceCover bottom right – ©InMagineCover image top right – ©Getty/Bloomberg/Contributor

Image credits (cover)

World Trade Organization154 rue de Lausanne

CH-1211 Geneva 21Switzerland

Tel: +41 (0)22 739 51 11Fax: +41 (0)22 739 42 06

www.wto.org

WTO PublicationsEmail: [email protected]

WTO Online Bookshophttp://onlinebookshop.wto.org

Cover designed by triptikReport designed by Services Concept

Printed by Atar Roto Presse SA

© World Trade Organization 2012ISBN 978-92-870-3815-9

Published by the World Trade Organization.

The World Trade Report is an annual publication that aims to deepen understanding about trends in trade, trade policy issues and the multilateral trading system.

The 2012 World Trade Report is split into two main parts. The first is a brief summary of the trade situation in 2011. The second part focuses on the special theme of non-tariff measures in the 21st century.

Website: www.wto.orgGeneral enquiries: [email protected]: +41 (0)22 739 51 11

What is the World Trade Report?

Using this report

Find out more

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The Report examines why governments use non-tariff measures (NTMs) and services measures and the extent to which these measures may distort international trade. It looks at the availability of information on NTMs and the latest trends concerning usage. The Report also discusses the impact that NTMs and services measures have on trade and examines how regulatory harmonization and/or mutual recognition of standards may help to reduce any trade-hindering effects.

Finally, the Report discusses international cooperation on NTMs and services measures. It reviews the economic rationale for such cooperation and discusses the efficient design of rules on NTMs in a trade agreement. It examines how cooperation has occurred on TBT/SPS measures and services regulation in the multilateral trading system, and within other international forums and institutions. A legal analysis is provided regarding the treatment of NTMs in WTO dispute system and interpretations of the rules that have emerged in recent international trade disputes. The Report concludes with a discussion of outstanding challenges and key policy implications.

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Trade and public policies: A closer look at non-tariff measures in the 21st century