Various multilateral trade negotiations had been implemented over the years whose main aim was the gradually reduction of tariff rates. Eight rounds of multilateral trade negotiation under the auspices of the GATT and WTO had finally helped in the reduction of the global tariff barriers. But this decline in tariff had given rise to another form of barriers. These new barriers were responsive measures made by government to safeguard domestic concerns; the measures both serves as a protectionist and regulatory trade instruments in controlling and hampering the free trade flow. It was only during the early 70's that special attention was given to Non Tariff Measures (NTM) when the discussion of the NTMs was explicitly scheduled in the framework of Tokyo Round of the GATT negotiations. According to the United Nations Conference on Trade and Development (UNCTAD) classification, there are approximately one hundred different policy representing tariff measures (OECD, 1997).
With the recent global financial and economical crisis of 2007, the concept of NTMs is getting further attention due to this potential economic and currency war stemming from the crisis. New researches demonstrate that both developing and developed countries are finding recourse in the use of NTMs to shield their economy and their domestic producers from the repercussion of the crisis. The recent crisis had shaded light on the abusive use of NTMs under false pretext (such as protection of health and environment). Economists often argue that these measures affect trade much more ambiguously than tariffs, which are price-based and transparent policy measures.
There is no agreed definition of NTMs not even from the WTO. In general, NTMs include all means other than tariffs used to protect a domestic industry, normally referred to as government imposed or sponsored. A definition had been provided by Multi-Agency Support Team (MAST) which is established under the UNCTAD defined NTMs as "policy measures, other than ordinary customs tariffs, that can potentially have an economic effect on international trade of goods, changing qualities traded, or prices, or both" (MAST, 2009). Therefore, NTMs are measures that generate a distortion between the domestic and the world prices goods and services traded. NTMs can also include restraints on export and production, export subsidies, and not just import restraints.
For a more theoretically clearer definition made by Baldwin (1970a) who states that: "any measure (public or private) that causes internationally traded goods and services, or resources devoted to the production of these goods and services, to be allocated in such a way as to reduce potential real world income".
There exist different types of NTBs and they can be classified under 6 categories:
Specific Limitations on Trade:
These measures aim at the prohibition and quantitative restrictions traded, example of such measure are: include quotas, import licensing requirements, protection restrictions of foreign to domestic goods, minimum import price limits and embargoes.
Customs and Administrative Entry Procedures:
These include the use of valuation systems, anti-dumping practices, documentation requirements and fees. Tariff classifications such as seasonal tariffs are usually intended to increase import prices under given circumstances.
Standards:
Under this classification, the government will impose a standard way in which imported must be carried out. This means also is an underlying technique to block sales of products of foreign manufacture. Such measures are: standard disparities, intergovernmental acceptances of testing methods and standards, and packaging, labelling and marketing.
Government participation in Trade:
They consist of government procurement policies, export subsidies, countervailing duties and domestic assistance programs.
Charges on imports:
Prior import deposit subsidies, administrative fees, special supplementary duties, import credit discrimination, variable levies and border taxes.
Other:
Measures such as voluntary export restraints (VERs) imposed a trade restriction on the quantity of good that an exporting country is allowed to export to another country, and orderly marketing agreements.
One important point that needs to be noted is that GATT does not ban the use of all NTMs. Most of these NTMs are imposed for a legitimate purpose/goal and these measures can be introduced in a WTO consistent manner. Examples of such exception are: measures to protect the environment, sanitary and phytosanitary measures (SPS), technical barriers to trade (TBT), and national security, among others. But, member needs to follow specific provisions to ensure WTO compatibility. There are some measures which are not compatible with multilateral trading rules and are not based on a legitimate goal; this may take forms of protectionism whereby the government tries to protect its local firms.
The Need for NTMs.
In the present trading world, the importance of non-tariff measures has relatively grown vis-à-vis tariffs of developing countries' exports. To be able to acquire reliable market access, developing countries must have the ability to improve its number of regulatory measures that surpasses the realm of traditional trade policies. NTMs include various considerably diversified group of policies of which each has its own purpose. The determination of market access condition by NTMs is due to two main factors:
Modern societies require an increasing number of product standards and regulations to respond to growing societal demands for health, safety and environmental protection
Traditional forms of trade policy have lower significance
Tariffs on goods are usually low under the protection of GATT and the WTO for which they have been liberalized. In developing countries, tariffs liberalization has failed to prove its capability in providing genuine market access for exports. The need of NTMs in the global market has been studied by various researchers through the United Nations Conference on Trade and Development (UNCTAD) and along with the participation of other organizations. These studies showed that the involvement of NTMs' policies has a larger restrictive effect than traditional tariffs and it has a greater impact on the cost of cross-border transactions. Based on this, it showed that there are cases where NTMs are of a greater importance compare to tariffs in restricting access to markets. NTMs are usually divided into 3 categories: Imports, Exports; the domestic economy, which will later be discussed in the study.
The existing literature observed that there's a trend pertaining that affects developing countries in the use of non tariffs barriers which has led to a decline in the quantitative restriction in Post-Uruguay.
How to measure NTMs?
The emergence of NTMs has attracted the attention of trade researchers, policy makers, and economists. With negotiations ongoing, it is important to quantify the impact of NTMs. This process has been tedious. Variations across countries in product prices make the case as to why there are constraints in its measurement. Moreover, the various of NTMs that exist causes variation in establishing a uniform method to convert these administrative controls into numerical equivalent terms.
CGE simulation models are widely used to assess trade policy changes. Adriamanjara et al. (2004) posited at aiming to estimate price gaps both at regional and sector level. Firstly, uniform methodology is applied across sectors to measure the approximate price gap assuming systematic international derivation from purchasing power parity. The variations are of non tradability nature. A positive price gap is attributed where NTMs are notified. CGE simulation methods is applied to find out the significance level of approximated price gaps to welfare of a region or sector.
Bradford (2001) used data from OECD countries particular product prices across countries to draw out percentage mark-ups due to protection. By making use of the retail and export margins from input and output tables to represent the transportation cost. Bradford, then calculated the minimum producer price with transport cost included. If the ratio is larger than the margin due to an imposition of a country's tariff on the product, then the larger ratio is equal to the sum of the price effect of both tariffs and NTMs.
The gravity model is the force behind total exports and total imports between two trading partners.
The gravity model highlights that geographic-spatial distance and economic size are the two basic factors determining the bilateral trade flows between the nations. The basic theoretical gravity model of trade between two countries (X and Y) is stated below:
Where,
Txy = Trade flow between countries X and Y
k = Constant
S = Size of the country
D = Distance
Generally, the economic size of a national territory is measured in terms of the gross national product (GDP). Population number is also used sometimes as another variable. Distance is measured in terms of the geographical distance in kilometers.
The simplest theoretical proposition of the gravity model is that: Bilateral trade flows between two nations tends to be directly proportional to the product of their respective GDPs; and inversely proportional to their distance measure. That is to say, higher the GDP ratio higher the trade volume and vice versa.
In certain empirical studies, using gravity model, it has been observed that nations with similar income levels have shown to have more trade and distance does matter in many cases.
The basic hypothesis of the Gravity Theory is, thus:
i. Size of the nations and trade flows has positive relationship.
ii. Distance between nations and trade flows have negative relationship.
Gravity Distance Attributes
For measuring the impact of gravity distance on empirical counts, the size of the country is measured in terms of the following attributes:
i. Physical Size (Variable):
1. Geographical Area in Kilometer
2. Population Number
ii. Economic Size (Variable):
1. GDP
2. GDP Per Capita
iii. Distance Attributes (Dummy Variables): 1.Common Border
2. Common Language
3. Common Regional Trading Bloc
4. Common Currency
5. Colony-Colonise Relationship
6. Common Coloniser
7. Common Policy
The Gravity Theory normally suggests that distance adversely affect the trade flows as distance tends to create barriers leading to higher costs and risks. Distance implies distinctions in business environment in terms of cultural, legal, political and administrative, and economic dimensions increasing the effects on a country's trade flows. Incidentally, the distance effect on trade flows is empirically measured in a study conducted by Franked and Rose (2000). It follows that higher the degree of distance, trade gravity force will be less, thus, lesser trade flows between the countries.
In a UNESCAP report, researchers view that agricultural exports from third world countries are negatively impacted by NTMs. During the study, a Gravity model was used. The study was emphasised on 40 countries; 8 countries from the southern Asian region and their export partners. The countries were classified in two main categories as developed and developing ones. Four types of bilateral trade occurred; from developing countries, both from developed countries, from developing exporter country to developed importer country and vice-versa.
The results showed that variables accounted for trade restrictions have significant and negative impact on agricultural exports.
How do countries alleviate the problems of NTMs?
The WTO agreements that have been negotiated and signed by the bulk of the world's trading nations and ratified in their parliaments entails to help producers of goods and services, exporters, and importers conduct their business by using Non-Tariff Measures (NTMs).
NTMs create wedges between domestic and world prices. In the case of Quantitative Restrictions (QRs), these wedges generate rents for distributors or holders of licences. In the case of technical regulations, the wedges will typically reflect compliance costs, making NTMs 'dissipative barriers'. Conceptually, NTMs can have two main direct effects on the home economy. In the first place, when imposed on consumer goods, they affect poverty and the distribution of income, with sometimes non-trivial effects, in particular when domestic producers of substitute products have market power, which is likely to be the case in small markets. Second, when imposed on intermediate products, NTMs affect the competitiveness of domestic firms. Recent work (Augier et al, 2011) shows that firms benefit from imported intermediates through higher productivity when they have the in-house skills to make good use of them. This suggests that NTMs making foreign sourcing costlier can reduce productivity growth.
So, it is critical for governments to deal effectively with NTMs for various reasons. NTMs encompass a broad array of regulations including traditional ones, like prohibitions or quantitative restrictions, but also new-type measures like technical regulations (TBTs) and sanitary and phyto sanitary measures (SPS). While the WTO recognises the right of governments to regulate trade, governments need to be aware that these measures can raise the prices faced by households for key consumer products, in particular foodstuffs, reducing real incomes and aggravating poverty. For instance, a pilot application of the World Bank's toolkit in Nigeria suggested that eliminating import prohibitions would reduce the cost of living by enough to lift three million people out of poverty.
However, these NTMs can also penalise domestic employers being too much on critical inputs from abroad, causing harm to competitiveness and employment. Another application of the toolkit in Indonesia highlighted a case where an ill-conceived technical regulation on imported steel penalised domestic producers of cars and household goods, among Indonesia's largest providers of jobs and export earnings.
Moreover, NTMs can also be easily hijacked for protectionist purposes, in which case they are called non-tariff barriers (NTBs). First, they can discriminate de facto (e.g: through technical requirements designed to harm the interest foreign producers more than domestic ones). Second, by their complexity and the lack of transparency that often surrounds them; they can conveniently obfuscate protectionist intent and effect. Thus, they represent a largely, as yet, untapped arsenal of protectionist measures with limited and imperfect WTO disciplines.
Yet, seeking to eliminate NTMs altogether or to cut their number through mechanical formulae would likely be an ill-conceived quest. Most NTMs respond to a genuine public demand for traceability and protection against hazards to health and the environment - a demand that can be expected to grow over time and with wealth. Thus, except in the case of NTBs, policy toward NTMs should strive for their improvement through better design, smarter enforcement and, ultimately, through a robust governance framework.
As a matter of fact, NTM improvement should be viewed primarily as a domestic issue, part of a regulatory-improvement agenda driven by a concern for enhanced competitiveness, rather than as a concession to trading partners. This is the perspective taken by countries which have successfully adopted ambitious regulatory-reform agendas, like Korea or Mexico. In practice, however, regulatory improvement is difficult. For new measures, the standard approach is 'Regulatory Impact Assessment' (RIA). For existing measures, there has been so far no tool to guide their review. Trade economists and lawyers have tried to get around conceptual problems by drawing a distinction between non-tariff measures (NTMs) and non tariff barriers (NTBs). The latter are the evil form of the former, when trade restrictiveness is, deliberately or not, in excess of what is needed for the measure's non-trade objectives. One could, conceptually, try to put the various types of NTMs in boxes corresponding to either NTMs or NTBs, and to give them colour codes (green, amber or red), like in agricultural negotiations. However, such an approach is unlikely to take us very far, as what matters on the ground has typically more to do with how measures are applied than with what measures are applied. For instance, a technical standard may create unnecessary problems essentially because it requires certification of foreign production facilities.
Or, an SPS measure may be highly trade-inhibiting because every shipment is inspected, but would be much less so if customs used risk profiling. In other words, the devil is in the detail when it comes to streamlining NTMs. Indeed, governments need to recognise the complexity and diversity of NTMs. Problems should be identified at the country level through consultations with the private sector and technical solutions should be sought through careful analysis and private-public dialogue. The underlying philosophy is similar to what is known as 'regulatory improvement' or 'Regulatory Impact Assessment' (RIA).
However, whereas RIA is for the ex-ante analysis of measures, before they are adopted, the approach being discussed here aims at the review of existing measures, in response to specific demands from countries struggling with legacies of complicated and penalising regulations. Dealing with existing measures has the advantage of responding to an immediate need and focusing on measures whose effects are known. However, it should be thought of as only the first stage of a process of regulatory improvement covering not just the stock of existing measures, but also the flow of new ones, lest streamlining efforts would have to start all over again as poorly designed new measures keep on appearing.
So, this approach relies on a more sustainable institutional set-up that would ensure continuity in the process of improving the trade competitiveness of firms as the business environment evolves over time and the stock of regulations keeps growing. It should be based on the following three pillars:
• A body dedicated to public-private dialogue (e.g: an 'NTM committee') serving as an entry point for the private sector to flag problems and contribute to the solution.
• A technical team dedicated to carry out substantial analysis (eg:a permanent secretariat for the NTM committee) with analytical capabilities akin to those of a productivity or competition commission, to lead the dialogue into policy action.
• A broad participation drawing into the review process outside expertise and collaboration from line ministries involved in the issuance and enforcement of NTMs, to ensure ownership.
In fact, regulatory reforms are intensive in political capital, and the political economy of reform is usually complex. Depending on the strength of the political commitment, reform process is more or less successful in streamlining NTMs. Hence, a necessary condition to undertake the process is to ensure political support and commitment of the government and all relevant authorities that are involved in the process. This means that when designing an institutional arrangement to conduct the review of existing regulations, the process has better chances to succeed when:
(i) driven by a high level of the administration, which would have the appropriate mandate (supported by the law, decree or any other decision);
(ii) it involves all the concerned agencies;
(iii) it ensures the participation of the highest officials responsible for the issuing and administration of the measures, including the agency's staff; and
(iv) last but not least, it has the necessary technical and financial resources to conduct its mandate. This means that the officials involved in the regulatory process must benefit from training, improvement of their skills as well as tools to perform their tasks.
First, strong political support is essential to achieve results and effectiveness, more than any formal basis such as law, decree, directive or resolutions - to set up any institutional set-up to lead the review process (OECD, 2009). Depending on each country's legal environment, the level of the regulations(eg: laws, decrees, administrative decisions), the level of the authority involved(national, subnational, or municipal), or the entity responsible for issuing the regulation, the reform process may be more or less complex and the institutional arrangements proposed may be more or less appropriate. The proposal outlined could be implemented at different levels of government, but flexibility should be considered when assessing the final approach in a specific country context.
The second condition of success is the choice of the agency/ministry responsible for the conduct of the review process. International experience with stream lining of business regulations to improve domestic competitiveness indicates that there viewing agency should be provided with adequate independence and authority to conduct the review from the agencies responsible for issuing the regulations (Akinci and Ladergaard, 2009; Jacobs and Ladegaard, 2010). Therefore, effective results are more limited when the review is conducted internally by a ministry/agency. Regulators tend to keep most of their regulations. However, if such an institutional design is not politically feasible, the reviewing unit should be located in a politically and technically strong ministry that could provide the necessary support to conduct the process and is technically capable of conducting it. Thus, a key element of success is that the agency/ministry responsible for the review must report and be accountable for the work undertaken.
Another option is to create an inter-ministerial committee responsible for conducting the review as in the case of Japan where the Regulatory Reform Ministerial Council (Chair by the Prime Minister and a Coordination Agency lead the process or in the case of Mexico where the COFEMER, a public agency, oversees the regulatory making process.
Third, the agency responsible for conducting the review process must be endowed with the necessary resources to undertake thorough review of regulations (Jacobs and Ladegaard, 2010). Furthermore, experience shows that lack of resources can jeopardise the process because the entity is not capable of undertaking or outsourcing complex regulatory issues. This means, among other things, that the agency responsible for conducting the review must have the staff and skills to conduct the review. For instance, if the review agency is endowed with one or two staff, it probably will not be able to conduct a thorough review process.
Due to political factors, the institutional set-up is not feasible or possible in the short term, the review process could be developed exclusively within the existing institutional framework. This would require inserting a review process within the agencies responsible for issuing the regulations. For example, Australian authorities mandate review process within each regulatory agency, such as the Department of Agriculture, Fisheries, and Forestry; Department of Health and Ageing; the Treasury; and the Reserve Bank of Australia, among others. In order to achieve the broader goal of regulatory reform, the resources should focus on the strengthening of the regulatory agencies. More specifically this will require introducing the regulatory review process as part of the regulatory process, establishing a transparent and participatory process which will ensure accountability, and improving staff skills and knowledge on regulatory matters. Likewise, the Indonesian government has just adopted a decree to institutionalise the review process for the introduction of new NTMs.
Finally, the single most important initiative that countries could pursue to improve their regulatory environment is to enhance transparency. Strict transparency requirements will provide important information regarding the nature of existing regulations, the objectives they aim to achieve, and whether they are based on international standards and recommendations, among other aspects. In fact, transparency is usually an international requirement embedded in agreements such as the WTO as well as regional and bilateral trade agreements which countries must comply with. Usually, the establishment of enquiry point which must provide information regarding regulations, including proposed regulations, is mandatory, but countries can adopt additional transparency rules beyond what is required by international requirements. For instance, they could ensure that proposed new regulations or changes to existing regulations are publicised and ample opportunity for comments and suggestions for domestic and international interested parties are provided. Additionally, enhancement of transparency has been facilitated in recent years by information and communication technologies which lower the costs of improving access to relevant information as well as the costs of providing and managing information. Moreover, transparency is both an important driver as well as a supporter of regulatory reform, increased transparency reduces policy risks for market actors and of the potential capture of regulators by interested parties (Akinci and Ladergaard, 2009; Jacobs and Ladegaard, 2010).
Cost and Benefits of NTMs
It is clear that the establishment of NTM involves a lot of costs such like; "additional costs of monitoring by national authorities; control and cleanliness costs faced by private health care systems and companies "-Indeed safety measures increase the cost of production and new law has been establish to reinforced the safety of consumers, for example, in Quebec, each cheese maker is required to know their suppliers personally and know their way of operating. In addition, "milk suppliers for this specialty segment of the market will be subjected to much higher standards of cleanliness than those imposed even on France".
Another cost of NTM is that it can bring prejudice to some entices as it does take all factors into consideration, for example, the case of a "young raw milk camembert and brie in the Canadian province of Quebec", where young raw milk cheese can reveal to be costly to both consumers and other entities like the public health care systems and companies when consumed, as there is a risk of Listeria disease. Eventually a ban has been put on these product but this could result to the reduction of both the choice and supplies in the market. Thus, this can also be seen as unfair to consumers who has less chance to be affected by diseases. However, a research has revealed that a lot factors has not been take into consideration, such like; "the potential health risk for consumers not belonging to highly concerned groups, the potential presence of other microbiological hazards in raw milk cheese, and the costs to government and industries to enforce product quality or in the event of an outbreak of listeriosis even if these results ignore a number of potential benefits of banning imports and domestic production (or additional costs in the case of additional domestic raw milk cheese supplies)", and hence we must not rush to a conclusion quickly for the overall welfare.
Another case is the shrimp imports from South-East Asia to OECD countries, where it is said that the improvement production methods could "benefit both producers in the exporting countries" by making higher profit, and "the importing OECD countries given the lower risk of antibiotical residues in the product". Based on a number of assumptions, variables and parameters, the results strongly depend on the estimated change in production costs which themselves are dependent (they will take into account cost advantages). We must not forget that this case also not take into consideration the small producers who may face difficulty to adapt to new production methods.
Another example, cut flower imports from Kenya, Israel and Ecuador to the EU, implies that the costs of "tighter border inspection and costs due to changes in the production methods tend to be large relative to the gains of avoiding contamination for EU flower producers. Profit losses for foreign producers and, even more significantly, inspection costs at the border are found to be the consequences of the avoided contamination costs". The inspection costs that are paid by producers in the exporting countries can become prohibitive whether it is the direct import method or indirect import method. "The degree of quality deterioration due to extended inspection times, and of price discounts resulting from that deterioration, has major impacts on the size of the profit loss for foreign producers, as does the level of cost increases related to improved production methods lowering the infection risk".
However, NTM can bring a lot of benefit to domestic consumers as larger choice and higher supplies are provided and hence might "outweigh greater health risk which is evaluated with existing willingness to pay information". In addition, some people will benefit more than the others, thanks to NTM, as the level profit will differ from domestic production to foreign production due to the point that the composition of the products qualities varies. Plus, retailers also gain a lot from the ban- for example, the" losses on the young raw milk cheese market are outweighed by gains on the PORM cheese market". Moreover, the benefits of authorization is that it bring greater product variety even if its costs involves a "measure of consumers' willingness to pay for avoidance of risk".
Companies also benefit a lot from ' trade standards' as its role has a great impact on domestic and international exchange as they are mean to "transfer knowledge to market participants about the key parameters of the product they are exchanging". The variability inherent in everyday products must have a certain level of standardization so that market participants can select the everyday products that they believe fit their production standards. UHT milk, for instance, required the procurement of raw milk with a certain level bacterial counts because the milk will be store for a long period of time during which even "small bacteria amounts will grow exponentially". Market growth is also being promoted by standards as it give consumers and traders a level of security about the nature of the product exchanged. Likewise, standards can also be used to "exploit the benefits of trade like economies of scale" so that to improve and increase "product variety".
In addition, market participants argue that veterinary licenses have to be establish for each individual consignment and hence, it will make more sense to establish the licenses of those "established firms" annually (for a reasonable period of time). Consequently, both trade and free up resources from monitoring traders with a good reputation will have a lot to gain.
To summarise, NTMs have helped and also harmed countries. It is a peculiar mixture of virtues and vices, boons and banes. However, almost no country can afford to avoid NTMs only because it has dangers associated with them. It may be concluded that NTMs constitute a mixed blessing to countries. They are helping as well as harming them. So, NTMs are bound to exist and countries have to learn to live with them.
