How important are tariffs and nontariff measures for developing countries’ agricultural

processed products exports?

Sushil Mohan

Abstract

The paper analyses the trade barriers (tariffs and non-tariffs) that thwart diversification efforts of

developing countries into exports of value-added agricultural processed products. It particularly

examines the extent to which non-tariff measures act as market access barriers that constrain

agricultural processed products exports from developing countries. The analysis shows that it is

not the tariffs or tariffs escalation but the prevalence of non-tariff measures (including domestic

non-tariff measures) that limit the ability of developing countries to increase their agricultural

processed exports. This has important policy implications in terms of the emphasis that trade

negotiators and policy planners should place on addressing non-tariff measures both in the

domestic and foreign markets.

JEL codes : F01, F10, F13, Q17, Q18

Keywords: agricultural processed products – developing countries – non-tariff measures – tariff

escalation – value addition

Dr. Sushil Mohan, Head of Economics, Business School, University of Brighton, UK. E-mail:

s.mohan@brighton.ac.uk

The author thanks Massimo Iafrate from the FAO Trade and Markets Division for assistance with data collection.

1

1. Introduction

The agricultural sector is relatively more important for the economy of many developing

countries (hereafter DCs). It remains the largest source of employment, GDP, exports and

foreign exchange earnings in most DCs. It usually accounts for 50-70 percent of the national

GDP in DCs, though much lower for some oil-rich countries that are an exception (USAID

2011). Also, DCs are the major producers of agricultural products – in general, they account for

more than two-third of total world agricultural production and the remaining coming from

developed countries (FAOSTAT, Jan. 2016). Despite the above, developed countries account for

a much higher share of the total world agricultural exports, with about two-thirds of total exports

coming from developed countries and the remaining from DCs (Table 1). The top five exporters

of agricultural products in 2013 are all developed countries with the exception of Brazil;

performance of the agricultural sector in this country has been outstanding for a number of

special factors (Box 1)1.

Table 1 : World market shares of agricultural products in total exports

Period Total world agricultural

exports, annual averages (US$

billion)

Composition of total world agricultural

exports, annual averages (US$ billion)

Share in total world agricultural exports

(%)

Developing countries

Developed countries

Developing countries

Developed countries

1981–85 217 61 156 28 72

1986-90 279 70 209 25 75 1991-95 371 85 286 23 77

1996-00 438 110 328 25 75 2001–05 529 138 391 26 74

2006–10 940 286 654 30 70

2011-13 1,352 467 884 35 65 Source: Computations based on data from FAOSTAT – Jan. 2016. Developed calculated by difference (World - Developing). Developing and developed countries classification as per World Bank definition based on per capita income (see http://data.worldbank.org/about/country-classifications). In 2015 developing countries include 138 countries as per WB definition and developed countries include 80 countries of which 32 are OECD members. 1 For Brazil’s outstanding performance in agricultural exports see the OECD-FAO agricultural outlook report 2015

which has a special chapter on Brazil.

2

Box 1 : Top 5 exporters of agricultural products, 2013, Value ( Billion US $)

Country 2013

USA 147.7

Netherlands 90.9

Germany 84.0

Brazil 83.9

France 74.8

Source : FAOSTAT (Jan. 2016)

A reason for DCs’ low share in total world agricultural exports is their low share in world

exports of agricultural processed (final) products which normally have a higher value-added than

primary agricultural products.2 Table 2 shows that in 2010-2014 agricultural processed products

exports averaged 46 percent of total world agricultural exports and the share of DCs in total

agricultural processed products exports was only 39 percent compared to 61 percent for

developed countries.

Table 2: Exports of processed (final) agricultural products, 2010–14

Total world exports of

agricultural final

products

Composition of world

exports of agricultural final

products (USD billion)

Share in the world exports

of agricultural final

products (%)

Year Value

(US$

billion)

Share in total

agricultural

exports (%)

Developing

countries

Developed

countries

Developing

countries

Developed

countries

2010 605 46 228 377 38 62

2011 731 46 284 446 39 61

2012 732 46 292 440 40 60

2013 776 47 309 467 40 60

2014 784 47 309 475 39 61

Source: WITS (Nov. 2015); see Appendix 1 for classification for separating agricultural

processed products); the country classification is as in Table 1.

Table 2 highlights that DCs’ are lagging behind in exports of agricultural processed

products. Although DCs have increased their share of processed agricultural exports, yet their

overall participation is still relatively low compared to developed countries. However, the

aggregate nature of analysis does not provide convincing policy guidance for developing country

2 The term ‘agricultural primary products’ refers to agricultural products in the raw or semi-processed form in which

they are first traded internationally, and generally to inputs into agricultural processed products and other

manufactured products. See Appendix 1 for a description of agricultural processed products.

3

policy makers. Therefore, this paper examines the developed and DCs’ share in world exports by

the level of processing at the disaggregated product level. The products chosen are

predominantly produced in DCs and are of particular export interest to them. These products are

vital foreign exchange earners for many DCs, at times, constituting more than 30 percent of their

total export earnings (Mohan 2007). This means that the benefits from increase in their exports

would largely accrue to DCs.

Table 3 reports developed and DCs’ exports of the selected agricultural products by the

level of processing for the year 2013. The share of developed countries in world exports of

roasted coffee was 95 percent in 2013 even though an almost negligible amount of coffee is

produced in developed countries.3 For tea, DCs are the main producers and exporters of bulk tea.

This is an area where DCs have increased their share of processed exports over the years – they

export 71 percent of packaged tea in contrast to 29 percent from developed countries. In the case

of cocoa, the share of DCs in world exports of cocoa beans is 88 percent, while the share in

world exports of cocoa paste and cocoa powder is only 46 and 33 percent respectively. When it

comes to chocolates and other cocoa products, DCs share is only 17 percent, though strictly

speaking these products cannot be treated as the next higher processing level for cocoa as they

contain other products such as milk and sugar. Similarly, developed countries have a higher

share in world exports of manufactured tobacco (67 percent) and processed rubber (62 percent).

In the case of sugar, developed countries produce relatively small amount of sugar, mostly beet

sugar, but have a 33 percent share in export of refined sugar and 60 percent share in export of

sugar confectionery. This suggests that although DCs continue to be the main producers of

products such as coffee, tea, cocoa, tobacco, rubber and sugar, in primary form, while the bulk of

the processing for manufacture of roasted or instant coffee, cocoa powder/paste, tobacco and

rubber products, and refined sugar remains concentrated in more developed countries.

3 The 11 percent share in exports of coffee (raw or non-roasted) by developed countries is because of re-export of

coffee from the EU, US and Japan.

Table 3: Composition of share in world exports of selected agricultural products, 2013

Broad Product

Group Processing Level Export (USD billion) % share in total exports

Developed

countries

Developing

countries Total Developed

countries

Developing

countries

Coffee Not roasted 1.92 15.64 17.56 11 89

Roasted 8.31 0.40 8.71 95 5

Black tea Bulk (in packages > 3kgs) 0.18 3.62 3.80 5 95

Packaged (in packages < 3 kgs) 0.46 1.10 1.56 29 71

Cocoa

Beans 0.89 6.36 7.25 12 88

Paste 1.29 1.11 2.40 54 46

Powder 1.99 0.96 2.95 67 33

Chocolate & cocoa productions 19.07 4.04 23.11 83 17

Tobacco Unmanufactured 3.56 8.81 12.37 29 71

Manufactured 16.01 7.89 23.90 67 33

Rubber Natural (including latex) 1.37 23.66 25.03 5 95

Rubber pastes 14.19 8.62 22.81 62 38

Sugar (cane and

beet)

Raw (in solid form) 0.31 14.39 14.70 2 98

Refined 4.51 8.99 13.50 33 67

Confectionery 5.95 4.01 9.96 60 40

Source: Computation based on UN COMTRADE trade data obtained from WITS (http://wits.worldbank.org/), accessed 28 Dec. 2015.

In this database, developing countries include 142 low and medium income countries and 51 developed high income countries.

5

The importance of encouraging DCs’ diversification into higher value-added production

has been long discussed in the literature and in international fora. The point that is made is that if

DCs specialise in exports of agricultural primary products, they are deprived of the income

advantages that global value chains enjoy, as well as of additional employment opportunities and

growth in value-added industries (Diaz-Bonilla and Reca 2000; Daviron and Ponte 2005). A

question relevant from a policy perspective is: why have DCs failed to capture a larger share of

world exports of agricultural processed products? The reasons for this can be many. The

underlying factors that exercise significant negative effects include the business climate, lagging

technology, limited production capacities and intrinsic supply-side constraints, all of which

contribute to curtailing the ability of DCs to diversify into processed product exports.4

However, tariffs and tariff escalation (TE) have been highlighted as market access

barriers that constitute additional constraints to diversification.5 Over the past half-century tariffs

on manufactured goods have dropped from averages of 40 percent to below four percent, while

agriculture tariffs remain high, with TE being systematically practiced in many countries and for

many agricultural products (Hoekman and Nicita 2011).6 In 2014 the MFN weighted average

(percent) tariff on food products was 14 percent while that of manufactures was 7 percent (WITS

Jan. 2016). This is of particular relevance to DCs that are the main producers and exporters of

agricultural products, as it produces a trade bias against all exporters of processed agricultural

products which can impact more severely on DCs. The increase in nominal and effective duties

from lower to higher stages of transformation discriminates against processed exports and creates

another obstacle to the expansion of value-addition in the DCs. Furthermore, studies show that

import demand elasticities normally increase with processing, so lowering agricultural tariffs

would have relatively larger trade effects on processed than on unprocessed products (Elamin

and Khaira 2004).

However, there are some that do not perceive TE as a major market access barrier as

various rounds of trade agreements have continued to lower tariffs including TE throughout the

world. It is felt that given the prevalence of other trade-distorting measures, commonly referred

as non-tariff measures (NTMs), TE does not appear to be a general problem across a wide range

of agricultural products and markets – therefore lately, the discussion on NTMs and assessing

their impact has gained prominence (Orden et al. 2012).7

The objective of this paper is to identify the extent to which tariffs, TE and NTMs

constitute market access barriers that thwart diversification efforts of DCs into value-added

agricultural processed exports. The analysis highlights that it is not tariffs or TE but the NTMs in

developed countries as well as in DCs’ themselves that limit DCs’ ability to diversify into

4 The supply-side constraints in DCs include the poor quality of infrastructure (roads, electricity, communications)

and institutions (legal, financial, regulatory), information bottlenecks, inadequate access to finance and governance

issues (see Moise et al. 2013). Some of these constraints are more severe for processed products compared to

agricultural primary products. 5 In agricultural trade, TE refers to zero or low tariff rates on primary products that increase with the degree of

processing of the products. 6 See also Balassa (1968), Golub and Finger (1979), Laird and Yeats (1987), Cobban (1988), Safadi and Yeats

(1993), OECD (1997), Burman et al. (2001), USDA (2001), Verkat (2001), Beghin and Aksoy (2003), Rae and

Josling (2003), Panagariya (2005), Sharma (2006), Doanh and Kee (2007), Wainio and Vanzetti (2008), Antimiani

et al. (2009), UNCTAD (2009), Laborde and Martin (2010). 7 The terms ‘non-tariff measure’ (NTM) and ‘non-tariff barrier’ (NTB) are often used interchangeably. The term

NTM simply identifies the measure whereas the term NTB indicates that the measure is trade-restricting. It is here

more appropriate to use the term NTM as the impact of the measure should not be presumed or anticipated prior to

the analysis.

6

processed agricultural exports. The paper is organised as follows: Section 2 presents tariffs and

TE applied on key agricultural exports of DCs and the implications for their exports of processed

agricultural products. Section 3 discusses NTMs including domestic NTMs and how these can

potentially inhibit processed exports from DCs. Section 4 concludes with policy implications.

2. Tariffs and tariff escalation

Applied MFN tariff averages in selected developed countries and DCs for various products at

different processing levels are shown in Table 4 (figures in parentheses in the table report bound

tariffs). Tariffs applied on the selected products are generally zero to low in all developed

countries, except for tobacco and chocolates/cocoa products and for tea and coffee for Japan.

Tariffs applied by DCs are generally high across all products and levels of processing. Average

applied rates range mostly between 10 and 30 percent, although in some cases substantially

lower or higher levels are observed. A possible explanation for the very high tariffs on tea and

coffee in India is the underlying rationale of protecting the domestic industry in east and south

India from competitive exporters like Indonesia, Sri Lanka, Brazil and Vietnam.

7

Table 4: Tariffs in selected developed and developing countries on some agricultural products originating from developing countries, percent (Figures

in parenthesis represent bound tariff rates)

Broad

product

group

Coffee Black Tea Cocoa Tobacco Rubber Sugar (cane and

beet)

Processin

g level

Not

Roasted Roasted Bulk

Packet

(to 3 kg) Beans Paste

Chocolat

e/cocoa

producti

ons

Unmanuf

actured

Manufact

ured Natural

Compo

unded

(vulcan

ised)

Raw

(in

solid

form)

Refined

Developed countries

Australia 0(1) 0(0) 0(0) 0(0) 0(0) 0(0) 5(17) 0(15) 0(15) 0(0) 5(15) 0(0) 0(5)

Canada 0(0) 0(0) 0(0) 0(0) 0(0) 0(0) 6(6) 8(6) 9(9) 0(0) 2(6) 0(0) 0(0)

EU 0(0) 0(8) 0(0) 0(0) 0(0) 8(8) 8(8) NA 27(33) 0(0) 3(3) 0(0) 8(8)

Japan 0(0) 12(12) 7(17) 15(17) 0(0) 5(5) 19(20) 0(0) 0(16) 0(0) 0(0) 0(0) NA

US 0(0) 0(0) 0(0) 0(0) 0(0) 0(0) 5(6) 71(75) 350(350) 0(0) 0(0) 0(0) 6(5)

Developing countries

Argentina 10(35) 10(35) 10(35) 10(35) 10(35) 12(35) 20(35) 14(35) 18(35) 0(35) 14(35) 16(35) 16(35)

Brazil 10(35) 10(35) 10(35) 10(35) 10(35) 12(35) 8(20) 14(35) 20(35) 0(20) 0(20) 16(35) 16(35)

China 8(8) 15(15) 15(15) 15(15) 2(8) 10(10) 8(10) 10(10) 26(49) 20(20) 14(15) 50(50) 50(50)

Colombia 10(70) 15(70) 10(70) 15(70) 3(10) 10(70) 15(70) 10(70) 15(70) 0(35) 6(35) 15(117) 15(117)

Egypt 0(10) 10(40) 2(30) 2(40) 0(20) 0(20) 19(60) NA 20(20) 2(7) 0(30) 2(20) 8(30)

Ghana 20(99) 20(99) 20(50) 20(50) 20(99) 20(99) 20(99) NA 20(99) 10(NA) 10(NA) 10(99) 10(99)

India 100(100) 100(150) 100(150) 100(150) 30(100) 30(150) 30(150) 30(100) 30(150) 21(29) 10(40) 60(150) 60(150)

Indonesia 5(40) 5(40) 5(40) 5(50) 5(40) 10(40) 10(40) 5(40) 22(40) 5(40) 5(40) NA(68) 5(68)

Kenya 25(25) 25(25) 25(25) 25(25) 10(100) 10(100) 25(100) 25(100) 33(100) NA NA 35(100) 10(100)

Pakistan 10(100) 10(100) 10(150) 10(150) 5(100) 5(100) 29(100) 5(100) 35(100) 0(55) 20(50) 25(150) 18(150)

Sri Lanka 30(30) 30(30) 30(30) 30(30) 30(50) 30(50) 30(50) 75(75) 75(75) 15(15) NA 0(50) 0(50)

Sources: Based on TRAINS data from WITS (http://wits.worldbank.org/) and Market Access Map (www.macmap.org) of the ITC, accessed 1 July 2014. Tariffs

reported are ad valorem equivalents (AVE), expressed in percentages (rounded off to the nearest whole number). They are the weighted average of the applied

MFN tariff of tariff lines reported in the product category. Bound tariff rates are simple averages of tariff lines reported in the product category. In some instance

the bound tariff may be lower than the MFN tariff because the tariff lines reported may not match (may be fewer or more) the MFN tariff lines and also because

of different averages. Figures for Egypt, Ghana, India and Pakistan are for the year 2009; Australia, China and Indonesia are for the year 2011; and rest of the

countries are for the year 2012. NA indicates that data are not available.

8

A simple method for estimating the nominal TE is to calculate the tariff wedge (TW),

which is the difference in nominal tariff between the output (processed) commodity and the input

(primary) commodity, that is, TW = tp – tin where tp and tin denote tariff (in ad valorem terms)

imposed on processed commodity and raw commodity respectively. A TW > 0 denotes the

existence of nominal tariff escalation.8

A limitation of the nominal TW is that it underestimates the actual level of protection

accorded to the final output. A better measure is the effective rate of protection (ERP), which is

aimed at measuring the degree of protection afforded to the actual addition to the value of the

product that is undertaken in the country. Though a better indicator to evaluate the extent of

protection, it suffers from shortcomings due both to methodological constraints and to theoretical

limitations. The computation of ERP requires detailed data on prices and production of the many

vertically linked production processes which are not easily available, assumes fixed

transformation coefficients or absence of substitutability between primary factors and

intermediates, and does not consider the presence of non-traded input.9

On the contrary, an important advantage of TW estimation is that it is straightforward.

Moreover, it reflects the minimum level of protection without overestimation. Therefore, in this

paper the TW is calculated for selected pairs of products in order to identify nominal TE between

the processed and primary stages of production. Past studies have mostly used bound tariffs for

determining TE. Although this has the advantage of providing an upper limit measure of TE that

WTO members have committed, it overestimates the actual level of TE impacting on trade flows.

Calculations based on applied MFN tariffs that are often considerably lower, better reflect the

actual level of TE.

The TW between commodity pairs across a range of countries is shown in Table 5. TW

values below five percentage points do not imply a significant level of TE (based on the WTO

rule that if the gap between the processed and unprocessed product is less than five percentage

points then it is not treated as TE and the special tariff-cutting rules are not applicable).

Excluding chocolate, most of the selected products face a zero to very low tariff and TE in most

developed economies except in Japan for most products, sugar and cocoa in the EU, and tobacco

in the US.10 In contrast, DCs impose substantial tariffs on these products.11 However in DCs the

incidence of TE is low because, with some exceptions, they tend to apply the same tariffs

irrespective of the level of processing.

8 TW < 0 denotes the existence of nominal tariff de-escalation and TW = 0 means tariff parity. 9 See Chevassus-Lozza and Gallezot ( 2003) and Greenaway and Milner (2003) for a review of the limitations of the

ERP measure. 10 These tariffs relate to recent years and do not imply that there was no incidence of TE in past years. Past studies

do find evidence of TE in several agricultural products, though most past studies analyse bound tariffs while this

study uses MFN applied tariffs. 11 The motive for this is not only to protect domestic producers and the domestic processing industry, but also to

earn revenue for the government and restrict imports to save valuable foreign exchange (Mohan 2007).

9

Table 5: Tariff wedges (TW) in applied MFN tariffs, percent

Countries Coffee Black Tea Cocoa Tobacco Rubber Sugar

Roasted &

non-roasted

Packet &

bulk

Paste &

beans

Chocolate &

beans

Manufactur

ed &

unmanufact

ured

Compounde

d & natural

Refined &

raw

Developed countries

Australia 0 0 0 5 0 5 0

Canada 0 0 0 6 1 2 0

EU 0 0 8 8 NA 3 8

Japan 12 8 5 19 0 0 NA

US 0 0 0 5 279 0 6

Developing countries

Argentina 0 0 2 10 4 14 0

Brazil 0 0 2 -2 6 0 0

China 0 0 8 6 16 -6 0

Colombia 5 5 7 12 5 6 0

Egypt 10 0 0 19 NA -2 6

Ghana 0 0 0 0 NA 0 0

India 0 0 0 0 0 -11 0

Indonesia 0 0 5 5 17 0 NA

Kenya 0 0 0 15 8 NA -25

Pakistan 0 0 0 14 30 20 -7

Sri Lanka 0 0 0 0 0 NA 0

Source: Computations based on data in Table 4. NA refers to data not available.

10

If developed and DCs reduce tariffs and TE on these products, one effect might be that

those enjoying high levels of protection may in the short run be hit by increased competition

from imports or by reduced margins. This would lead to lower consumer prices along the

processing chain, which can be expected to result in increased consumption, its extent depending

on how sensitive the market is to price changes. As a result, this may eventually lead either to an

increase in imports or to protected producers being forced to lower their margins and eventually

become more efficient, or both. The benefit of increased consumption and competition will go to

the relatively more competitive producers. Therefore, a reduction in tariffs may result in

increased exports of the selected primary products from DCs as they are their main producers;

but the same cannot be said for their processed-form exports. The benefit of increased processed-

form exports will go to the more competitive processed-product exporters wherever they may be

located.

Nevertheless, the above analysis suggests that TE in developed countries is not the main

reason for low levels of processing of the key (selected) agricultural products by DCs. This

highlights the importance of examining the extent to which NTMs can potentially limit DCs’

ability to export agricultural products in processed or semi-processed form.

3. NTMs in agriculture

While tariffs, quotas and subsidies on agricultural products have declined since the early 1990s

as a result of successive rounds of global trade liberalisation and signing of preferential trade

agreements, NTMs have increased in numbers and complexity reflecting not only trade-related

measures but also changing commercial practices, consumer and health concerns, improved

scientific knowledge, and advances in technology and communications. Both public and private

standards are increasingly influencing the production and trade of agricultural goods, and

attention is therefore being given to addressing unjustified measures that may offset the advances

brought about by lower tariffs.

NTMs in agri-food markets are policy measures, other than ordinary customs tariffs, that can

potentially have an economic effect on international trade in agricultural goods, changing

quantities traded or prices or both (MAST 2008).12 Within this broad definition, three categories

(OECD 2013) form the core of interventions commonly felt to be on the rise worldwide:

Sanitary and phytosanitary measures (SPS): Regulations that protect human and animal

health (sanitary measures) and plant health (phytosanitary measures) in order to ensure food

safety for consumers and to avoid the introduction of diseases and pests through trade.

Technical barriers to trade (TBT): Regulations and mandatory standards that target technical

characteristics of products, such as process and product standards (include norms for size,

quality and physical attributes of product), labelling and marketing standards, traceability and

origin of material, and the related conformity assessment and certification.

Other technical measures: Policies and requirements which somehow did not fit into the

previous two categories but look quite similar to them for analytical purposes.

12 It should be noted that the term NTMs refers to measures and does not refer to the conditions prevailing in

countries, such as infrastructure, qualification and governance.

11

Typically, standards are used to address information problems, market failure externalities, or

may be motivated by political considerations (for example, to satisfy demands of risk-averse and

quality-conscious consumer behaviour in developed countries) or to promote economic,

industrial and regional development as well as protect specified sectors from imports generally

or from the dumping of cheaper imports. In the context of agri-food trade, they aim to ensure

food safety, animal and plant health, but also extend to other quality and technical aspects of

food products.

To the extent that NTMs address market failures, simply removing them may not always

be optimal, even if trade volumes would increase, since their intended benefits would be

sacrificed, for example those related to human health (SPS measures). Many technical measures

may restrict trade but improve welfare through a reduction in negative externalities (e.g. through

reduced risk of importing pests or diseases) or information asymmetries (e.g. through a label

providing consumers with details on the product). It has been argued that standards and

regulations can be perceived to act as a catalyst to upgrade DCs’ processing industries

production structures to make them compatible with international standards (Henson 2006). In

some instances NTMs can expand trade as they enhance demand for a good through better

information about the good or by enhancing the good’s characteristics and attractiveness for the

consumer (Van Tongeren et al. 2009). Efficiency costs of NTMs are therefore much less evident

than the welfare losses associated with tariffs and quantity measures that restrict trade. Analysis

and policy must therefore respect these benefits, assess alternative ways to address the market

failures, and assess NTMs on a case-by-case basis (Van Tongeren et al. 2010; Winchester et al.

2012).

3.1 Analysis of NTMs: Data availability and methodology

It is a challenging task to identify incidences of NTMs and to measure the degrees of trade

restrictiveness they cause as well as the consequential economic and welfare impacts. The main

challenges are related to issues concerning lack of data, data collection and measurement. The

lack of transparency concerning the scope and effects of NTMs makes it very difficult to

quantify the coverage and extent of these measures. Moreover, the analysis of NTMs often

requires some kind of matching up of data of different classification and sources which makes it

problematic.13 Nevertheless, a host of studies employ different analytical approaches to detect

NTMs and quantify their impact on trade and economic welfare in general. Some studies are

based on overviews and assessments or deductions of NTMs, while others use economic models

such as gravity-type models, price-wedge models, simulation and primary data analysis to

measure the extent of trade restrictiveness of NTMs.14

Keeping in mind the data and methodological limitations, this paper draws on a number of

sources in an attempt to obtain relevant and useful insights on the extent to which NTMs

constitute trade barriers that thwart diversification efforts of DCs into processed agricultural

exports. The analysis rests on the following analytical framework:

13 See Korinek et al. (2008) for a discussion on methods for quantifying the trade effects of NTMs in the agri-food

sector. 14 For example see Bora et al. (2002), Andriamananjara et al. (2003), Kox and Lejour (2005), Mayer and Zignago

(2005), Maskus et al. (2005), Kee et al. (2006), Silva and Tenreyro (2006), De Frahan and Vancauteren (2006),

Graffham et al. (2007), Helpman et al. (2008), Yue and Beghin (2009), Disdier and Marette (2010).

12

a review of NTM data and relevant studies (section 3.2);

a review of theoretical considerations on the existence of NTMs (section 3.3);

a review of domestic NTMs in DCs (section 3.4).

3.2 Review of NTM data and relevant studies

This section presents the findings of some studies on NTMs and review of relevant NTM data.

Although these findings suffer from the data limitations mentioned above and do not explore

potential impacts for processed agricultural products, they are presented because they do call

attention to key points. Overall, the studies suggest that NTMs adversely affect agricultural

exports from DCs, including those of processed products.

In general, the incidence of NTMs is higher on agriculture tariff lines than on

manufactured products. An UNCTAD (2013) study reports the overall trade restrictiveness index

(OTRI) faced by exports for high, middle and low income countries.15 Large differences in the

restrictiveness of NTMs are observed between agricultural and manufacturing products, with

NTMs substantially adding to the level of restrictiveness faced by agricultural exports (more than

20 percentage points).16

Figure 1: Overall level of trade restrictiveness faced by exports

Source: UNCTAD (2013)

15 The OTRI estimates the overall level of restrictiveness of the trade policies faced by a country and is based on the

estimation of ad valorem equivalents of NTMs. 16 See also Zarrilli and Musselli (2004), Donnelly and Manifold (2005), Dean et al. (2006), Jayasuriya et al. (2006),

OECD (2013).

9

37

25

3

20

5

21

4

22

6

0

5

10

15

20

25

30

35

Ag. Mfg. Ag. Mfg. Ag. Mfg.

High income Middle income Low income

OTR

I

Tariff Non-tariff

13

An OECD (2011) study examines the economic consequences for trade and investment of

more liberal tariff and NTM regimes. It utilises results from business surveys that were

conducted as part of the European Commission ECORYS (2009) project to analyse NTMs in

trade and investment between the EU and US. It maps the survey results (of about 5500 firms)

and other indicators adopting the Anderson et al. (2009) methodology to compile a set of NTM

indexes ranking G20 markets for six broad sectors: processed foods, chemicals, metals, motor

vehicles, machinery, and other manufactured goods. The NTM indexes are then converted to ad

valorem equivalents (tariff or trade cost equivalents) using extrapolation modelling.

The rationale behind the modelling is that trade costs arise from differences in regulations

and their implementation between trading countries. The internal market of the EU is by far the

best example of reducing trade costs by harmonization and mutual recognition of regulations

across EU member states. This implies that the EU can be treated as a benchmark of what is

achievable in terms of reduction in NTM-related trade costs. Therefore, by comparing the gap

between the NTM rankings (indexes) for firms operating within the EU (intra-EU transactions)

and the firms serving the EU from third countries (extra-EU transactions) as well as the firms

serving third countries from the EU, the study extrapolates the ad valorem trade cost equivalents.

Estimates of NTMs trade costs for processed food for selected countries are shown in

Table 6 along with the prevailing MFN tariff rates.17 For comparison purposes the values for

motor vehicles are also reported. The NTM values reflect the addition to the cost of delivery

because of NTMs for cross-border consumers. For example, processed foods exported to the EU

face an estimated 21.3 percent MFN tariff. In addition, NTMs add an estimated 30.1 percent to

the cost of delivery. While there are commitments in place for reduction in MFN tariffs under the

WTOs Doha Round and they have gone down substantially over the years for OECD members,

the same cannot be said for NTMs as many of them relate to changing commercial practices,

health and safety concerns, and technological advances and are most likely to stay. This explains

the need for greater attention to NTMs by countries and trade negotiators.

As shown in Table 6 NTMs for processed products are mostly higher and thus more

important than the prevailing tariff rates in obstructing trade. Furthermore, the consequences of

NTMs are different from that from tariffs because the latter are collected as government revenue

and do not result in substantial increases in the actual cost of production and delivery unlike

NTMs which do result in significant increases in these costs. Table 6 also shows that for all

countries NTMs for processed foods are higher than those for motor vehicles. The study further

uses Computable General Equilibrium (CGE) modelling to simulate the potential impact if G20

member countries implement a 50 percent reduction of NTMs as well as tariff reduction by 50

percent on an MFN basis. As far as the trade impact for processed foods sector is concerned, the

simulation results show that for non-OECD G20 countries exports are estimated to increase by

more than 40 percent.

17 For MFN tariffs, the study employs detailed product and partner level trade and tariff data that has been

aggregated to broad industry aggregates by CEPII and the GTAP consortium. The data is based on tariff data as

reported to the WTO which has been supplemented by CEPII data on preferential tariffs.

14

Table 6: NTM costs and tariffs (percent of import value)

Processed foods NTM related trade costs Tariffs (MFN)

Brazil 39.5 14.1

Canada 23.3 18.5

China 44.8 13.7

European Union 30.1 21.3

India 36.5 48.1

Korea 37.9 33.5

Russia 69.1 15.7

United States 49.5 6.4

Motor vehicles

Brazil 27.2 15.5

Canada 2.6 30.8

China 33.9 20.4

European Union 17.1 8.1

India 27.0 17.2

Korea 20.5 8.1

Russia 34.3 15.3

United States 14.9 2.3

Source: GTAP database for tariffs (based on MacMAPS and WTO) and OECD

calculations for NTM trade costs. Available at OECD (2011).

The International Trade Centre (ITC) initiated a series of surveys to document NTMs that

exporters in developing countries perceive as problematic; surveys have been conducted in more

than 11,500 companies in 23 developing countries, covering all major exports (ITC, 2015). The

survey findings show that the agro-food sector is particularly impacted by NTMs, particularly the

highly perishable fresh food sector with the overall exporters’ affectedness by NTM-related trade

obstacles above 60 percent. The second most impacted sector is processed food, with 55 percent

of exporters declaring being affected. For agricultural products in general, developed countries

are perceived as comparatively more NTM-restrictive than other markets. Among the NTMs

reported by companies in the agro-food sector, 48 percent relate to control and administrative

procedures such as testing, inspection, certification, rules of origin and traceability (categorised

as conformity assessment); and 22 percent result from product-related requirements set by the

importing country such as labelling, packaging, technical, sanitary and phytosanitary

requirements.

An OECD (2013) study analyses NTMs notified by selected DCs for prepared foodstuffs

and beverages (Table 7). The highest notifications are for customs and administrative procedures

(31 percent, mostly relating to rules of origin), followed by marking, labelling and packaging

requirements (21 percent) and testing and certification arrangements (11 percent). The notifying

DCs commented that technical regulations and standards applied by certain developed countries

are more stringent than those specified by relevant international bodies, and the justification for

this is not explained. Moreover, the differing technical requirements among members due to the

non-adoption of common international standards, raises compliance costs and discourages DCs

15

from diversifying their export markets. The report also states that post-Uruguay Round, the

frequency of NTMs for processed goods far exceeds those applied to primary commodities.

Countries indicate that equivalence agreements of standards across WTO members would benefit

DC exporters by reducing financial burdens as well as the risk of uncertainty.

Table 7: NTMs notified by selected DCs for prepared foodstuffs and

beverages

NTM type % share

Customs & administrative procedures (mostly rules of

origin) 31

Marking, labelling & packaging requirements 21

Testing & certification arrangements 11

Quantitative restrictions & similar specific limitations 11

Technical regulations & standards 8

General technical measures 5

Sanitary & Phytosanitary measures 5

Government participation in trade 5

Charges on imports 3

Source: OECD (2013) Total number of notifications: 38 from 9 DCs

The UNCTAD TRAINS database records incidences of NTMs that are notified to the

WTO as well as changes and new regulations with regards to the measures that apply to

imports18. The respective WTO notifications are documented by the type of measure (TRAINS

category of technical measure) according to product (HS product codes) and notifying country

from the year 1992. The TRAINS database relies on self-reporting by WTO member countries.

The TRAINS database shows that the governments of OECD countries impose requirements on

almost all agro-food products except for some unprocessed products. Amongst the NTMs

notified the marking, labelling and packaging requirements are most frequently reported (share

around 35 percent), followed by testing, certification and conformity requirements (share 23

percent), followed by requirement for product characteristics (share 20 percent). It can be

deduced that these requirements would affect agricultural processed products more as they

require greater degree of formal manufacturing compared to primary products and therefore

higher requirement for labelling, packaging, testing etc.

Francois et al. (2011) use a global CGE model of the world economy to examine the

impact of EU preferential trade agreements (PTAs) with its OECD and G20 trading partners. The

PTAs are modelled as involving elimination of tariff barriers and a 50 percent reduction in

estimated NTMs for industrial goods (excluding energy goods): processed foods, chemicals,

metals and metal products, motor vehicles, machinery, other manufactures.19 Table 8 presents the

estimated impact on GDP of these changes. Consistently, the impact of NTM reductions is

greater (2 to 3 times) than tariff elimination. The finding highlights the increasing importance of 18 The TRAINS database is publically accessible through the World Integrated Trade Solution (WITS) software

developed by the World Bank: http://wits.worldbank.org. 19 The NTM protection levels are estimated based on ECORYS (2009) and OECD (2011) studies benchmarking

levels of NTMs across the G20.

16

NTMs and points towards a shift in emphasis in PTAs from tariffs to deeper modes of

integration, as these are more likely to address the impact of NTMs on exporters.

Table 8: Change in GDP, percent

All PTAs together Impact of tariffs Impact of NTMs

Japan 0.80 0.21 0.59

Korea 2.29 0.79 1.50

Canada 0.34 0.02 0.32

USA 0.46 0.08 0.38

Argentina 0.99 0.19 0.80

Brazil 1.57 0.61 0.96

India 1.18 0.38 0.80

Indonesia 1.09 0.37 0.72

Thailand 1.39 0.33 1.06

France 0.73 0.18 0.55

Germany 1.01 0.27 0.75

UK 1.00 0.26 0.74

Source: Compiled from Francois et al. (2011)

Disdier and Marette (2010) analyse the impact of NTMs notified by importing countries

to the WTO under the SPS and TBT agreements on bilateral/multilateral trade flows. They focus

on OECD imports of agricultural and food industry products (690 products at HS 6-digit level)

from 114 exporting countries (OECD and others) for the year 2004, excluding intra EU trade.

Their results suggest that SPS and TBT measures have on the whole a negative impact on trade

in agricultural products. Within the agricultural sub-sectors they find the trade-impeding impact

of SPS and TBTs is the most severe for cut flowers and for processed food like beverages. They

also show that OECD exporters are not significantly affected by these measures in their exports

to other OECD members. On the other hand, exports of developing and least developed countries

to OECD countries are significantly reduced by these regulations. Their results also show that

EU countries in general notify less SPS and TBTs compared to other OECD countries, but their

measures are more trade-impeding (offering better protection) than the ones adopted by other

OECD countries. Their results are robust to different econometric specifications.

Fontagne et al. (2005) collect data on 61 product groups, including agri-food products to

analyse the stringency of the NTMs that countries may adopt. They focus on the measures

covered under the WTOs Agreements on SPS and TBT. They find that the measures have a

negative impact on agri-food trade but not on trade in other products. The measures significantly

reduce DCs’ exports to OECD countries, but do not affect trade between OECD members.

Rather, OECD agri-food exporters tend to benefit from NTMs at the expense of exporters from

DCs and LDCs. They also find that the negative trade effects are more prominent for pork meat,

vegetables, wheat pastry as well as for a variety of processed agri-food products (e.g. chocolate,

beverages).

In summary, the findings above call attention to the following key points:

17

The incidence of NTMs is higher on agriculture tariff lines than on manufactured products.

Within agriculture, highly perishable fresh food products appear as most impacted by NTMs

followed by processed food.

NTMs add an estimated 30 percent to the cost of delivery of processed foods exported to the

EU.

For agricultural products in general, developed countries are perceived as comparatively

more NTM-restrictive than other markets.

Most of NTMs in agriculture (more than 40 percent) relate to control and administrative

procedures (categorised as conformity assessment).

NTMs significantly reduce DCs’ agricultural exports to OECD countries, but do not affect

trade between OECD members (rather, OECD agri-food exporters tend to benefit from

NTMs at the expense of exporters from DCs).

3.3 NTMs: theoretical considerations

3.3.1 Heterogeneity in standards

The most common types of NTMs in agricultural products are attributed to differences in

technical and SPS standards between the exporting and importing country as well as diverging

standards and specifications across different importing countries. In particular, these include

specific measures to regulate product characteristics, marking, labelling, packaging, testing and

SPS measures. Such measures constitute a trade barrier particularly if standards are designed and

implemented, intentionally or otherwise, in a way that favours the production methods of a

particular country or those of advanced countries. The literature shows a growing concern about

certain regulations associated with environmental, national security and labour standards in

developed-country markets. While these seem to be legitimate areas for regulation, bioterrorism

rules, child labour clauses, and environment standards are mostly perceived in DCs as being

more trade restrictive than necessary to achieve intended goals.20

Several studies measure some sort of dissimilarity or heterogeneity indexes for estimating

the additional costs for exports due to divergent NTM regulations between countries.21 Although

the studies are mostly for developed countries and extend beyond agricultural products, they do

offer interesting insights on the trade impact of diverging standards. Berden et al. (2009)

examine the main NTMs involved in the EU-US trade using a global business survey.22 Their

results show that diverging regulations between the US and EU increased trade costs by 73

percent for trade flows from the EU to the US and 57 percent for those from the US to the EU

countries.

Using a similar approach, Sunesen et al. (2009) analysed the impacts of NTMs on trade

between Japan and the EU countries. They focus on regulatory differences that EU companies

face when exporting to Japan. The heterogeneity index constructed showed a divergence level of

60.0 for EU exporters of beverages and food. The European Commission funded project (2009 -

20 As discussion of these measures is controversial, few objective studies examine the impact of these measures on

DCs’ exports. 21 See Burnquist et al. (2011); Achterbosch et al. (2009). 22 The study analyses regulatory divergence faced by companies in their exporting activities using a bilateral NTM

index which assumes values between 0 (no regulatory divergence) and 100 (absolute divergence).

18

2011) ‘Assessment of the impacts of non-tariff measures on the competitiveness of the EU and

selected trade partners’ (referred to as the NTM-Impact project) analyses data on NTMs for key

agri-food products that are most commonly traded by the EU with selected nine countries. A key

finding of the project is that trade is significantly reduced when importing countries have stricter

and/or differing standards (SPS or TBT) than the exporting countries. The findings suggest that,

at least for some import standards, the harmonization of regulations will be trade-increasing

(Orden et al. 2012).

Vigani et al. (2010) test for a sample of about sixty countries how similarities or

dissimilarities in GMO regulation affect bilateral trade flows. The results show that strong

differences in these regulations, particularly in relation to labelling systems, approval processes

and traceability requirements, result in lower trade. The Mohanty (2007) study highlights that

important differences among standards applied in different industrialised countries in areas such

as aflatoxin content or pesticide residues can increase the compliance cost particularly for

developing exporting countries. The Atici (2013) study analyses the impact of EU food safety

regulations on Turkey’s fig and hazelnut exports to the EU. Compliance with the regulations

requires processing expenses which increase the unit prices of the products.

An NTM often reported on agricultural products by DC manufacturers in exporting

countries is compliance with the EU regulation on traceability, which entered into force in

January 2005 and requires all exporters to identify the origin of products.23 This imposes an

additional cost burden on DC exporters as the domestic regulations do not require traceability in

the supply chain. Small and medium sized enterprises, which form the bulk of producers and

processors in DCs, face particular challenges. Those companies often lack the internal capacity

and the economies of scale to establish effective quality assurance and traceability systems

(Giovannucci and Purcell 2008). Thus, unless these sectors can make standard compliance cost

effective and guarantee traceability for the buyers, many producers and processors will be

increasingly marginalised and excluded from competitive markets both regionally and

internationally with consequences for trade and economic growth.

Under the World Trade Organisation (WTO) rules, generally technical regulations (also

referred to as ‘mandatory standards’) with which producers/exporters are obliged to comply are

dealt with under the TBT Agreement of the WTO or if they are imposed to protect human,

animal or plant health they are dealt under the SPS Agreement of the WTO. The agreements

attempt to ensure that standards are not misused as disguised protectionist measures in favour of

domestic producers. While maintaining the sovereign right and obligation of countries to set their

own regulations and standards, countries are encouraged to base their import requirements on

internationally agreed benchmarks, in the case of food safety for example the Codex

Alimentarius standards and guidelines.24

From the above it emerges that not only are agricultural standards different and generally

more stringent in developed countries compared to DCs, and at times more restrictive than those

specified by the Codex Alimentarius (FAO, 2004a), but also that they differ across developed

23 Regulation EC/178/2002 (European Parliament 2002) defines traceability as the ability to trace and follow food,

feed and ingredients through all stages of production, processing and distribution. The main objective is that when a

risk is identified its source can be traced in order to swiftly act on the risk. Detailed information on traceability can

be found at: http://ec.europa.eu/food/food/foodlaw/traceability/index_en.htm 24 The Codex Alimentarius refers to food standards, guidelines and codes of practice recommended under the Joint

FAO/WHO Food Standards Programme. The International Plant Protection Convention (IPPC) and the World

Organization for Animal Health (OIE) respectively promote international standards and guidelines for animal and

plant health issues.

19

countries. This adversely affects DCs’ agricultural exports to developed countries, more so in the

case of processed agricultural exports that require a greater degree of formal manufacturing and

therefore higher effort and capabilities to fulfil standards. Therefore, the simplification and

harmonisation of standards through international collaboration can be expected to promote DCs’

agricultural processed exports.

3.3.2 Private voluntary standards and social labelling

In addition to agricultural standards set and implemented by government authorities (mainly SPS

and TBT regulations), an increasing number of agricultural trade standards is set by private

groups or firms (retailers and agri-food companies). These standards, at times called private

voluntary standards (PVS), usually apply to such areas as quality, process management,

packaging requirements, or social concerns. They mainly reflect specific commercial needs such

as value chain management, or the need to reduce the importing firm’s exposure to risk. They

are often implemented faster and usually have a larger scope or require higher levels of

performance than the mandatory public standards and, as they evolve more rapidly than

government regulations, they can be more difficult to follow and implement. Although

voluntary, they are becoming the basic de facto entry requirement for trade with many of the

large-scale operators and leading production and distribution chains (OECD 2013). For example,

Mellado et al. (2010) report that for African agro-food exports both public and private

requirements are important.

The increase in complaints about PVS signals their apparent importance for a growing

number of exporting DCs and raises a number of issues on the evolution of global sourcing, in

particular by lead firms within a global value chain (GVC) framework. Products must now meet

not only the importing country’s public regulations, but also those set by major importers and

retailers. Since PVS are expected to continue to evolve, increasing in stringency and extending

over wider sets of attributes, it is important to understand the implications for access by

developing country producers to global value chains (OECD 2013). The requirements of PVS are

usually greater when it comes to value-added activities, so they pose greater challenges for DCs

exports of agricultural processed products.

Furthermore, in recent years the agricultural (food) sector has witnessed a proliferation of

private social labelling initiatives to promote overtly ‘socially responsible’ production that

extends beyond organic production. Private sector bodies in the developed world such as the

EurepGAP, the International Social and Environmental Accreditation and Labelling Alliance

(ISEAL) and the Fairtrade Labelling Organisation (FLO) are engaged in developing best-practice

codes for the design and implementation of social and environmental standards for the

certification of agricultural final and other products around the globe. While these voluntary

standards have proven to be effective in promoting positive social and environmental change, the

strategies, codes and auditing methods of private labelling standards setters are often regarded by

businesses in DCs as a subtle form of developed countries’ protectionism.25

Although standards going beyond basic entry requirements can represent important

opportunities for increased market share or price for many agricultural products, they can also

entail significant challenges for developing country producers and exporters faced with capacity

and resource constraints. The heterogeneity of these standards entails collecting and evaluating

25 See Mohan (2010).

20

relevant information and data on the applicable requirements, a complex operation, for which

DC producers and exporters may be poorly prepared. In contrast, developed country producers

and exporters who are better equipped to meet the standards will be in a better position to exploit

market opportunities.

A related problem is the requirement for internationally accredited agencies to certify

many standards. This requirement particularly increases total costs for DC exporters as many of

these agencies are based in developed countries, and certificates usually have to be renewed

every year. For example, in Uganda Robusta coffee is produced organically by default, but it is

difficult for producers to get it certified as organic due to the absence of accredited local

certification firms. As a result, producers miss out on premium prices (Bigirwa 2004). From the

above it is apparent that agricultural exports have witnessed a proliferation of private and social

standards. These have opened up market and trade opportunities for countries and exporters able

to meet the standards and become fully integrated into dynamic global value chains. However,

they have also widened the gap that needs to be overcome by other DCs in order to compete

successfully on international markets. DC agricultural exports need to sustain greater

compliance costs which for processed produce are generally found to be higher than for primary

products.

To overcome the confusion over the proliferation of voluntary standards applied in

international markets and to strengthen the capacity of agricultural producers, manufacturers,

exporters, retailers and policymakers from DCs to participate in more sustainable production and

trade, the International Trade Centre’s (ITC’s) partnership-based programme has developed an

online platform ‘Standards Map’. The platform allows users to explore and compare over 130

sustainability standards, and build their personalized business' roadmap towards sustainable trade

through the following steps:

identify standards or codes of conduct which apply to their own business;

review the main features of the selected standards and codes;

generate comparisons of standards’ content requirements;

self-assess their business against standard requirements, generate their personalized

sustainability diagnostic report which traces out a roadmap towards sustainable trade;

save and share their sustainability diagnostic report with actors along the value chain via

the Sustainability Marketplace.26

It is expected that the platform will be particularly helpful in including small and medium scale

actors (farmers, processors and traders) in sustainable food systems.

3.3.3 Rules of origin

The manner in which preferential tariff treatment is granted to the exports of DCs gives rise to

certain forms of NTMs. In the multilateral framework, the Generalised System of Preferences

(GSP) scheme provides for unilateral and non-reciprocal preferences which allow selected

agricultural and industrial products originating in DCs to enter markets of developed countries at

zero or reduced MFN tariffs.27 These schemes are autonomous and granted at the discretion of

26 See more at: http://www.intracen.org/itc/market-info-tools/voluntary-standards/standardsmap 27 The GSP scheme adopted through UNCTAD Resolution 21 (ii) states ‘... the objectives of the generalized, non-

reciprocal, non-discriminatory system of preferences in favour of the developing countries, including special

measures in favour of the least advanced among developing countries, should be: to increase export earnings; to

promote their industrialization; and to accelerate their rates of economic growth.’

21

the preference-allowing country. Studies show that most processed agricultural products that

could benefit from preferential access do not do so in practice.28 This is mainly because the strict

rules of origin constrain exports of processed agricultural products from DCs to markets like the

EU, the US and Switzerland.

Rules of origin cover laws, regulations and administrative determinations of general

application that are implemented by governments of importing countries to determine the

country of origin of goods. Rules of origin are generally easy to establish for primary agricultural

products, but this is more difficult for processed agricultural products. For the latter, DCs often

find it difficult to source intermediate goods locally and therefore have problems meeting local

content requirements. Although the rules of origin allow for cumulation, complying with the

cumulation requirements can also pose difficulties.29 For instance, the EU and the US allow

cumulation only within specific regional groupings, so GSP beneficiary countries that are not

part of a specified regional group may not meet the requirements to benefit from preferences.

The existing rules in Switzerland require a minimum content of 50 percent domestic input, and

do not allow cumulation among products from DCs.

As shown in Table 7, the NTMs reported with the highest frequency by selected DCs are

customs and administrative procedures. Within this broad category, the two most prominent

barriers are rules of origin and import licensing (both automatic and non-automatic), each

responsible for more than one-third of notifications. Countries complain that rules of origin are

discriminatory, unreasonable, or inconsistent, with the result that their products are not covered

by the preferences. More generally, the requirement to comply with stringent rules of origin and

completion of customs documentation to prove exporters’ eligibility for preferences adds to the

total cost, which often wipes out part or even the full preference margin and does not provide an

incentive for DCs to participate in preferential schemes (Brenton and Ikezuki 2005; Khanal

2011).

The OECD (2013) study reports that the difficulties in complying with customs

formalities and regulations on the import market may be amongst the reasons why DCs are not

fully utilising market access (tariff) preferences in OECD countries. For instance, DCs have a

total share of 27 percent in cocoa butter imported by developed countries, but only 2.30 percent

of this comes under the GSP preferences (Mohan et al. 2013). An estimate for the EU shows that

the total costs of border formalities to determine the origin of a product amount to at least three

percent of the total value of the product (Inama 2003; Mattoo et al. 2003). For the US estimates

show that the average compliance costs for DCs to qualify for preferences was 6.2 percent in

2001 (Carrere and de Melo 2004).

3.4 Domestic NTMs in DCs

In addition to NTMs in foreign markets, there are domestic NTMs to trade in DCs that are not

very often highlighted in the literature but nonetheless impede exporting activity.30 The common

perception is that NTMs are faced in the destination market. The ITC NTM surveys of exporters

28 See Michalopoulos (1999), Panagariya (2002), Candau et al. 2004, and Hoekman and Nicita (2011). 29 Cumulation refers to the degree to which inputs (processes and/or materials) wholly or partly originating in one

preferential trading partner are allowed to count towards satisfying a rules-of-origin governing process carried out in

another preferential partner. 30For discussion on domestic NTMs see Anderson and Wincoop (2004), Kneller et al. (2008), Hoekman and Nicita

(2011), Cadot and Gourdan (2012).

22

in DCs reveal that more than 25 percent of reported problems correspond to measures applied by

the home country of the exporting company (ITC, 2015). An important category of problems

faced at home by exporters is procedural obstacles. The second most important problem concerns

red tape and corrupt practices. The WTO categorises them as trade facilitation issues such as

excessive customs documentation, import and export requirements, lack of cooperation among

customs and other government agencies, inadequate use of information technology, information

asymmetry and lack of transparency. These domestic NTMs increase transaction costs of

exports, which adversely affects export competitiveness.

The World Bank (2015) as part of its ‘Doing Business: Trading Across Borders’ project,

records the time and cost (excluding tariff) associated with the logistical process of exporting and

importing a standardised cargo of goods. We look at two sets of procedures — documentary

compliance and border compliance – within the overall process of exporting or importing a

shipment of goods. Table 9 reports for selected regions and developed and DCs the most recent

round of data collection for the project which was completed in June 2015.

23

Name

Time to

export:

Documenta

ry

compliance

(hours)

Cost to

export:

Documenta

ry

compliance

(USD)

Time to

export:

Border

compliance

(hours)

Cost to

export:

Border

compliance

(USD)

Time to

import:

Documenta

ry

compliance

(hours)

Cost to

import:

Documenta

ry

compliance

(USD)

Time to

import:

Border

compliance

(hours)

Cost to

import:

Border

compliance

(USD)

Regions

OECD high income 5 36 15 160 4 25 9 123

South Asia 80 184 61 376 108 349 114 653

Latin America &

Caribbean 68 134 86 493 93 128 107 665

Sub-Saharan Africa 97 246 108 542 123 351 160 643

Developed countries

Australia 7 264 36 749 3 100 37 525

Germany 1 45 36 345 1 0 0 0

Japan 3 15 48 306 3 23 48 337

United Kingdom 4 25 24 280 2 0 8 205

United States 2 60 2 175 8 100 2 175

Developing countries

Brazil 42 226 49 959 146 107 63 970

China 21 85 26 522 66 171 92 777

Colombia 60 90 112 545 64 50 112 545

Egypt, Arab Rep. 88 100 48 203 192 650 120 1383

Ghana 89 155 108 490 282 302 282 725

India 41 102 109 413 63 145 287 574

Indonesia 72 170 39 254 144 160 99 383

Sri Lanka 76 58 43 366 58 283 72 300

Zambia 130 200 136 370 134 175 139 380

Source: World Bank (2015)

24

The longer time and higher cost needed to arrange exports from DCs (particularly for

documentary compliance) reflects a relatively higher level of domestic NTMs for DCs’

manufacturers (exporters) compared to developed countries’ exporters. Furthermore, most export

products have a component of imports, so ease of importing facilitates exports. Therefore, the

requirement of longer time and higher cost to arrange imports also amounts to domestic NTMs

for DCs’ exporters.

A Government of India (2011) study on transaction costs in exports highlights the

intensity and pervasiveness of domestic NTMs in DCs. A business in India needs to follow a

lengthy process (Figure 2) and interact with a large number of agencies (Figure 3) before being

able to export. This in effect can add significantly to the real resource cost of exporting.

Figure 2: Illustrative view of the export process in India.

Source: Government of India (2011, p. 7);

http://dgft.gov.in/exim/2000/tcostrep2011/tcostenglish.pdf. CST, Central Sales Tax; CONCOR,

Container Corporation of India Limited; DGFT, Director General of Foreign Trade; EPC, Export

Promotion Council; ICD, Inland Container Depot; VAT, Value Added Tax.

25

Figure 3: Various agencies involved in the export process in India.

Source: Government of India (2011, p. 7);

http://dgft.gov.in/exim/2000/tcostrep2011/tcostenglish.pdf. CFS, Container Freight Stations;

ECGC, Export Credit Guarantee Corporation of India Limited; see also notes to Figure 2.

The World Bank (2012) highlights the damaging impact of unpredictable and

discretionary regulatory environments, particularly with export and import regulations. A

number of African countries impose export authorisations by the provincial administrator,

regional governor or local chamber of commerce for certain types of commodities. Many times

regional administrations do not recognise agreements allowing goods in transit to move freely,

obliging road transporters to pay some form of duty at each crossing. A common denominator

among studies and survey findings relating to intra-developing country trade and intra-

developing country regional trade agreements is problems associated with cumbersome and

inefficient customs and administrative bureaucracy. Specifically, the business community in DCs

cites concerns regarding bureaucracy resulting in delays and high costs (Daly et al. 2001;

Bhattacharyya and Mukhopadyaha 2002, Superintendencia Nacional de Aduanas 2001; OECD

2005; Cervantes-Godoy and Dewbre 2010).

Although domestic NTMs impact all exports from DCs, the adverse impact for processed

agricultural exports from DCs can be relatively high as DCs have to compete with developed

countries. This is not the case for many primary products (such as coffee, cocoa, tea, tobacco,

rubber and cane sugar) for which competition is among DCs that face more or less similar levels

of domestic NTMs.

26

4. Conclusions and policy implications

The objective of this paper is to understand why DCs perform poorly in agricultural processed

product exports despite being the main producers of many of these products in their primary

form. The paper uses the case study of selected agricultural products to analyse the extent to

which tariffs and TE in developed countries can be blamed for the poor performance of DCs. It

emerges that even though tariffs and TE are important, they are not the main explanatory factor.

The evidence clearly points to the widespread prevalence of NTMs in developed countries that

impact on trade of processed agricultural products and that have relatively more severe effects in

restricting market access for these products from DCs. These conclusions have important policy

implications in terms of the effort that trade negotiators and policy planners need to make to

manage and reduce these barriers, particularly those that unjustifiably curtail trade. The analysis

also highlights that domestic NTMs are an important trade barrier for DCs’ agricultural

processed product exports. This is an area where DCs must act urgently if they want to compete

with developed countries. The potential benefits from lowering domestic NTMs appear to be

large, as this could add considerably to the export potential of DCs by lowering the transaction

costs of their exports. This again has important policy implications in terms of the effort that

individual DCs policy planners need to make to lower these barriers.

It should be stressed that the analysis nowhere suggests that NTMs are the only or the

main cause of the inability of DCs to capture a larger share of agricultural processed product

world exports. The reasons for this failure can be many, in particular the intrinsic supply-side

constraints in DCs limiting their ability to diversify into processed product exports. Moreover,

there may be some comparative advantage associated with processing in developed markets. If

developed markets are major consumers of the final (processed) products, an advantage of

production being closer to the consumers is of adjusting production and marketing promptly to

changing consumer preferences as well as meeting the requirements of supermarkets and

retailers. Another advantage is of access to primary product from more than one origin. For

example, most of the popular coffee and tea retail brands are blends that use coffee and tea from

different origins in different proportions. Arguably some of the above-mentioned advantages of

processing in developed consuming markets can be countered by DCs’ advantages in areas such

as cheap skilled and unskilled labour. The balance of advantage for individual products can be

ascertained only on the basis of careful review and evaluation.

Notwithstanding, there is no denying the fact that lowering NTMs does offer a dynamic

opportunity for many DCs to increase exports of agricultural processed products both to

developed and developing country markets , in particular for those agricultural products that in

their primary form are mostly produced in DCs. An important dimension of agricultural trade

liberalisation is the need to ensure that the issue of NTMs is high on the agenda of developing

country trade negotiators and that DCs pay more attention to addressing their domestic NTMs,

particularly streamlining the process of exports and imports to reduce time and transaction costs

of exporting and importing. With a high share of agriculture in gross domestic product and in

exports, the costs associated with complying with NTMs in agriculture have a relatively higher

overall economic impact in DCs than in high-income countries.

Undoubtedly there is need for greater policy coherence with regard to NTMs. Although

good regulation can facilitate trade and development, the challenge remains to separate

protectionist and non-protectionist measures and to identify alternative policies that are less

onerous for trade. More attention should be given to identifying NTMs that are of particular

27

concern to DCs agricultural processed exports so as to help determine priority targets for

strengthening special and differential treatment (SDT) as well as international collaboration in

the field of NTMs. DCs too should step up their efforts to implement domestic policies that

assure compatibility with international standards and assist agricultural processors and producers

in meeting the required standards and regulations for exports.

28

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34

Appendix 1: The classification of agricultural products

Of which: Processed (final) products

All Agricultures Product category SITC Product Name SITC Product Name

Tropical Products

Coffee, Cocoa and Tea 071 Coffee 0712, 0713 Coffee roasted, extr/essen/sub

072 Cocoa 0722, 0723, 0724, 0725 Cocoa powder, paste, waste

073 Chocolate/preps 073 Chocolate/preps

074 Tea and mate 0743 Tea extracts/preps

Nuts and Spices 0577 Edible nuts, fresh/dried

075 Spices

Sugar and Confectionery 06 Sugar and honey 062 Sugar confectionery

Textile Fibres 26 Textile fibres, silk, cotton, jute

Temperate Products Meats 01 Meats and products 016, 017 Meat/offal preserved

Dairy Products 02 Milks, cheese & eggs 0222, 0223, 0224, 023, Milk concentr., powder, butter,

024, 0252, 0253 whey, cheese, egg processed

Grains 04 Cereals 0423, 046, 047, 048 Rice milled, flour, meal, bakery

Edible Oils and Seeds 22 Oil seeds 2239 Oilseed flour/meal

Animal Feeds 08+4 Animal feeds, veg oils/fats 08113, 08119, 0812, 0813, Fodder, residues, oil cakes,

0814, 0815, 0819, 4 fish meal, starch, fixed oils/fats

Seafood, Fruits and

Veg Seafood 03 Fish, shell fish etc. 0353, 0354, 0355, 037 Fish, smoked, preps/presv.

Fruits and Vegetables

Flowers & Crude Veg Material

05-0577

292

Fruits & veg, excl. nuts

Cut flowers, roots & lac/gums

0547, 056, 058, 059 Fruit & veg presv/preps, juices

Other Processed

Food

Tobacco 12 Tobacco /manufactures 122 Tobacco, manufactured

Beverages 11 Beverages, alcohol/non-alc 111, 112 Beverages, alcohol/non-alcohol

Other Processed Food 09 Other food preps/sauces 09 Other food preps/sauces

Other Agricultures Other Raw Agric. Products 00 Live animals

21 Hides and skins/fur

23 Crude rubber, synthetic

24, 25 Wood/cork and papers 251 Pulp and waste paper

291 Crude animal & veg materials

Source: Classification based on Aksoy and Ng (2010) Standard International (SITC 3) for separating the agricultural processed products.

35