Food Quality and Safety - III

Food Safety Standards, Regulations and Their Impact on International Trade

Processed food exports to developed country markets from many developing countries have emerged as a potentially major new source of dynamic export growth in recent years, where this potential has been exploited by many countries which has created many challenges. In particular, the capacity of developing country exporters to penetrate these markets depends critically on their ability to meet increasingly more stringent food safety standards imposed in developed countries. Not only are these standards typically much higher than those prevailing in developing countries, and often difficult and costly to meet, but they are also subject to frequent changes. Such changes are to be expected, given advances in scientific knowledge about health hazards, improvements in food processing technology, and the highly income-elastic consumer preferences for higher safety standards. However, some of the changes have provoked strong suspicions that food safety standards are being used as a non-transparent, trade impeding protectionist tool, rather than as a legitimate instrument for the protection of human, plant and animal health. 

Sanitary and Phytosanitary Standards

Primarily, food safety is a ‘luxury’ good whose demand rises as income levels rise, and greater prosperity tends to be accompanied by increased demand for more stringent Sanitary and Phytosanitary Standards(SPS)in developed countries. Many in developed countries see the much laxer SPS standards that often prevail in developing countries as a threat precipitating ‘a race to bottom’.  Secondly, and perhaps more importantly, as traditional trade barriers such as tariff and quantitative restrictions continue to decline, protectionist interests are likely to make increasing use of food safety regulations and other technical barriers to block trade. Thus, Food-safety standards are measures of compliance regulations enacted by governments to protect the health and safety of their citizens and the environment in which they live.   Following the promulgation of the Sanitary and Phytosanitary Agreement in 1994 as part of the outcome of the Uruguay Round of world trade negotiations, these standards are now popularly known as ‘SPS measures/ standards’.

In principle, the Sanitary and Phytosanitary Agreement and the associated WTO dispute settlement mechanism can ensure that food safety standards are not abused or misused for such protectionist aims. But in practice, developing countries are usually placed at a disadvantage when it comes to making use of these procedures, being hampered by their limited capacity to access and absorb best practice, technology, information and constrained by inadequate resources from challenging perceived inequities. As a result, SPS related issues have become a source of tension and friction in international trade negotiations.

SPS Trade Regulations

According to the Agreement, SPS measures include, all relevant laws, decrees, regulations, requirements and procedures including, inter alia, end product criteria; processes and product methods; testing, inspection, certification and approval procedures; quarantine treatments including relevant requirements associated with the transportation of animals and plants, or with the materials necessary for their survival during transport; provisions on relevant statistical methods, sampling procedures and methods of risk assessment; packaging and labelling requirements directly related to food safety. There are notable differences between classical trade barriers (tariffs and quantitative restrictions), product standards and regulations in terms the economic implications of their implementation/abolition. The latter are discriminatory border taxes, which generally result in inefficiency in resource allocation and reduce consumer welfare. There is a general consensus among economists now that, except under very special circumstances, countries generally benefit from their removal or reduction, unilaterally or through collective effort.   By contrast, at least in principle, SPS standards are introduced by government in the interest of the society, to achieve the important social objective of protecting public, animal and plant health and to protect the environment.  In other words, food-safety is a ‘public good’ that would go largely unserved in a private market.  Social losses arising from their elimination could well exceed the associated economic efficiency gains.

In theory, establishment of SPS standards (or other technical standards) could facilitate trade through reducing transaction cost, by assuring consumers that the food they consume is of an acceptable standard and reducing the cost of uncertainty that they face in assessing product quality. Universally accepted standards should also guide exporters as to the expectations of importers concerning food quality and safety, leading to reduction in trade frictions. Standards can serve to signal quality in foreign markets and thus contribute to increasing elasticity of substitution between similar goods produced in different countries, thereby permitting relatively more efficient producers to thrive through export expansion. Efficacy of production would be increased through standardization as it reduces information asymmetries between buyers and sellers, and promotes product commutability, thereby allowing for increased economies of scale and scope.In practice, SPS standards can, however, become an impediment to trade for two reasons.  First, importing countries may deliberately craft SPS measures that impose a cost or other disadvantage on foreign competitors to provide protection for domestic producers.  Second even when comparable SPS measures are applied in developed countries to both domestic and imported products, they can act to impede imports from developing countries because of asymmetry in compliance cost. 

As tariff barriers and other forms of border protection (e.g. quantitative import restrictions (QRs) and voluntary export restraints (VERs)) are progressively dismantled as part of the multilateral and unilateral trade liberalization initiatives, the temptation to use SPS standards (and other non-border measures) as protectionist barriers become greater. Given that SPS standards are less transparent than tariff or quotas, there is ample room for tweaking them to make them stronger than necessary for achieving optimal levels of social protection and to twist the related testing and certification (conformity assessment) procedures to make competing imports less competitive.

SPS standards can impede trade even when they are imposed on genuine health and safety considerations because of additional compliance costs imposed on the foreign competitor. The existing food-safety standards have been designed by industrial countries to reflect their technology mix and consumer preferences, which may or may not be appropriate for developing countries. Upgrading existing standards or developing new ones and performing risk assessments is a costly and difficult procedure, which is neither technically feasible nor economically affordable for most developing countries. Resource, manpower and institutional constraints are naturally more binding for developing-country exporters compared to their developed-country counterparts. In addition, SPS standards sometimes diverge considerably across importing countries, making meeting standards costly and cumbersome for exporters. i.e. 1998 EC regulation that raised the maximum permissible level of a certain type of aflatoxin in foodstuffs and animal feed to a higher level than international standards specified by the Codex Alimentarius. The results suggest that the EU standards, which would reduce health risk by approximately 1.4 death per billion a year would reduce exports by more than 60% or USD 670 billion from the 9 countries, as compared with regulation based on the international (Codex) standard.  There are numerous costs associated with attempting to deal with the variability of standards across export markets and over time. Nonetheless, one of the Australian quarantine regulation requires that chicken meat imported from Thailand must be heated at 70º Celsius for 143 minutes to avoid the possibility of carrying a certain disease, which has effectively closed the Australian market for Thai chicken exporters.

The WTO Mechanism

The SPS Agreement, which forms a part of the WTO Agreement signed in 1994, aims to lay a firm foundation for strengthening multilateral discipline in the implementation of food safety standards (SPS standards) in agricultural trade, with a view to achieving the objective of protecting consumers while regulating the use of these standards as a means of non-border trade protection.  It superseded the original Article XX of the GATT, which remained virtually inactive in achieving this objective owing to unclear/restrictive provisions and the lack of an effective institutional framework for implementations. The text of the SPS Agreement (unlike the original GATT Article XX) is part of the mandatory portion of the WTO Agreement and therefore all WTO members are bound by it.

Legal and Institutional Provisions

The promulgation of the Agreement was prompted by legitimate concerns that removing conventional trade restrictions on imports of agricultural products may tempt countries to use SPS standards as a form of protection. The agreement was aiming to keep government actions to a minimum on trade effects which are aimed at protecting human, animal and plant health by requiring importing countries to demonstrate that their SPS measures are based on scientific grounds and are applied equally to domestic and foreign producers. In order to harmonize sanitary and phytosanitary measures on a wider basis as much as possible, the agreement encourages members to base their measures on international standards, guidelines and recommendations where they exist, such as the Codex Alimentarius, the International Office of Epizootics (OIE) and the International Plant Protection Convention (IPPC).

However, the Agreement affirms the rights of members to adopt their own SPS measures (Article 2). But members are responsible for ensuring that a measure is applied ‘only to the extent necessary’ to protect human, animal or plant life or health and is based on scientific principles and evidence.  Nonetheless, members are allowed to adopt SPS measures ‘on the basis of available pertinent information’ when ‘relevant scientific evidence is insufficient’, pending a more objective evaluation based on fuller evidence within a reasonable time (Article 5.7).  Moreover, it is expected that members would accept the sanitary and phytosanitary measures of others as equivalent if the exporting country demonstrates to the importing country that its measures achieve the importing country’s desired level of health protection. The agreement recognizes that SPS risks do not correspond to national boundaries, and that there may be areas within a particular country that has lower risks than others, determined by factors such as geography, ecosystems, epidemiological surveillance, and the effectiveness of SPS controls, including pest or disease-free areas and areas of low pest or disease prevalence. In order to achieve transparency in SPS standards adopted by different countries, members are required to publish and notify the SPS Secretariat of all proposed and implemented SPS measures. This information is relayed via the ‘Notification Authority’ within each member government. Moreover, members are required to establish an ‘Enquiry Point’, which is the direct point of contact for any other member regarding any questions about SPS measures or relevant documents.