A framework to analyse standard-like non-tariff measures

The economics of technical measures in a market can be graphically ex-plained by the shis of supply and demand for the product of interest (e.g.

Josling et al., 2004; Fugazza, 2013; van Tongeren et al., 2009; chapter 4, this volume) under the standard partial equilibrium assumptions of a homoge-neous good subject to a standard-like NTM that is applied both to the do-mestically supplied good and to the imported good. This case is depicted in figure 3, where the domestically produced good and the imported good are assumed to be perfect substitutes (this allows lumping production and imports in figure 3(a). The home country imposing the NTM is competing with imports and is small in the world market (i.e. faces an infinitely elas-tic supply of the good from the rest-of-the-world ES* where the asterisk refers to a foreign variable at the world price P_W = P*). First, let us look at the effects of the NTM on supply. A technical measure may increase the

1 See Beghin et al. (2015b) for a general review of the economics of standard-like NTMs.

ply chain. In a supply-and-demand diagram, the effects can be captured by upward shis of supply curves for the final good. In figure 3(a), the NTM is shown to shi the domestic and foreign supply curves. In the absence of externalities in production, the domestic supply curve is the private marginal cost curve, that is, S(P) = MC_P . Under these conditions of perfect competition and no externalities, domestic welfare is the sum of produc-er and consumproduc-er surplus, that is, area ABC in figure 3(a).

With the cost-raising standard, domestic supply is shied from S(P) to S(P;NTM) and the foreign supply export supply curve ES* is also shied upwards from S (P *) to S (P *;NTM). In general, the two shis will not be equal, since the ability to meet the standard will not be the same for do-mestic supplier and for foreign suppliers. In figure 3(a), we show the case where the cost to meet the standard is higher for the foreign supplier.

Hence, the conclusion that the technical measure could have a protective (anti-protective) effect on domestic producers if they meet the new stand-ard more easily (with more difficulty) than foreign producers do. Figure 3(a) shows the case where the NTM is slightly protective as production ex-pands with the NTM, and imports M_NTM are less than under free trade M_F. In summary, the magnitudes of the supply shis reflect individual suppli-ers’ ability to comply with the measure.

As in chapter 4, the gains from trade are shown in figure 3(b), which brings together the excess demand for imports (or import demand) ED curve, which represents the difference between demand and supply at each price and the foreign supply curve of exports ES *. Imports are obtained at the in-tersection of ED = ES *. Under free trade, prior to the application of the NTM imports are M_F and M_NTM when the standard is applied. In the absence of the measure and under the (important) assumption that supply and demand curves represent both private and social marginal benefits and marginal costs, the gains from trade (relative to autarky) are given by the triangle area 1+2+4. With the cost-raising NTM, the gains from trade are given by triangle area 3+4. In this case there are no rent transfers (as there would be with a tariff or a safeguard measure examined in chapter 4). The standard here results in dissipative costs shared between domestic and foreign sup-pliers. For the case shown here, the standard does not raise sufficiently the costs of imports to eliminate completely the gains from trade. And if the NTM was applied only on imports (e.g. recertification from a standard lev-el that is equivalent to the domestic standard), imports would fall further, and the gains would be reduced to area 4 in figure 3(b). Although it does not create rents, this case corresponds to a purely protectionist policy since the NTM does not affect the demand curve as in figures 4 and 5.

Figure 3: Supply shi s induced by a cost-raising technical measure

Less frequently, but occasionally, an NTM measure could reduce a detri-mental external effect brought about by foreign suppliers (e.g. a measure related to an exotic pest brought in with imports). This case is shown in figure 4. Now, domestic supply depends on imports (if there were no trade, domestic supply would be given by S(A) in figure 4(a). With the pest, the supply curve S(MP) is the kinked line ABCD. As drawn, the damage on sup-ply is assumed to be proportional to imports.² Under free trade, the maxi-mum damage in CB and the segment CD shows how welfare is reduced as imports increase. If imports did not carry pests, as before, welfare under autarky would be area AED and trade would increase welfare from autarky by area BDF in figure 4(a) (equal to area 1+2+3 in figure 4(b)).

An NTM to reduce imports will have two effects: (i) it will reduce the dam-age caused by the invasive pest: and (ii) it will reduce the gains from trade.

The marginal costs caused by the pest and given by the vertical distance between CD and AD in figure 4(a) increases with imports while the mar-ginal benefits from trade fall as the volume of trade increases. While the best solution would be to reduce pests at origin, exporters may not have the incentive to do so. In that case, the optimal policy would be to choose the NTM at the rate NTM which equates the marginal gains from trade (which are falling as trade volumes increase) with the marginal gains from reduced pests. Under the assumption that the loss in domestic supply can-not be replaced by imports from a welfare point of view (i.e. the ED curve in

2 This is a very simplistic representation of costs that are likely to be convex rather than linear.

3 In the case of a tariff, area 2 in figure 4(b) would be a tariff revenue. Here this area is a rise in costs due to the NTM and is “dissipative” rather than a rent transfer.

figure 4(b) is not affected by the damage caused by the pest), the gains from trade are now reduced to area (1) in figure 4(b)³ and by area 4 in figure 4(a).

Because marginal gains are decreasing and marginal costs are increasing, area (1)>area (4) and there is a gain from trade. A higher NTM would even-tually lead to autarky with total surplus equal to area AED in figure 4(a).⁴ This example illustrates two characteristics of NTMs that usually hold in a trade context. First, the externality should not be entirely corrected.

Second, it illustrates again the difficulty of targeting the policy so as to realize some gains from trade. The case study on pest control of Mexican avocados to the United States of America summarized in section 4.2 below illustrates the ambiguity of the effects identified in figure 4.

Now let’s turn to an NTM that affects demand. When there is a consum-er-based market imperfection such as a lack of information on the quali-ty of the product, a standard-like NTM can be used to either signal higher quality (corresponding to an outward shi of demand from safer or more nutritious food) or disclose potential risks (corresponding to an inward shi of demand, say from a health warning label). Here, we illustrate in figure 5 the case of the application of an NTM that will raise demand by signalling quality. We leave aside the symmetric case of an NTM that de-creases demand. The NTM will impose costs on producers to meet the standard.

linked to imports

Source: Authors A

C

4 1

2 3

B E

D

ED S(MP)

F

4(a) S(A) 4(b)

M_NT˜M M_NT˜M M_F Imports

ES(P*; NTM)˜ ES(P*; NTM)˜

ES(P*) ES(P*)

P*

4 If the measure is a (non-prohibitive) tariff, then area 2 in figure 4(b) would be a rent accruing to the government and hence would represent an increase in welfare.

This time, we assume that domestic and foreign producers bear the same costs to meet the standard so the NTM has no effect on domestic supply.

If the NTM is not applied, in autarky equilibrium would be at A. Applying the NTM, equilibrium would be at B with higher price and increased con-sumption. Here the shi in demand is drawn for the optimal NTM indicat-ed by (NTM). So, as in the case shown in figure 4, with the optimal NTM, opening the country to trade will give some gains from trade and it will never be optimal to completely shut down trade.

If there were no informational externality, imports would be M_F and the gains from trade would be given by the triangular area 1+2 in figure 5(b).

With the NTM correcting the information failure, there is a welfare gain on the demand side because the gains from the outward shi of the de-mand curve D(NTM) are greater than the inward shi of the supply curve S(NTM) to meet the standard (e.g. the costs from a switch to high-grade intermediates). By providing information, this correction of information failure raises domestic welfare. With trade and the optimal NTM applied on imports and domestic producers, the costs of imports are raised to ES* (NTM) and the new import demand curve is ED(NTM) in figure 5(b).

The welfare analysis in figure 5(b) shows that the welfare gains from trade are still positive with the NTM but less than if there were no externality.

One implication is that opening a country to trade from a situation where the externality has already been corrected will lead to welfare gains. The new area showing the gains from trade is the sum of area 1+3+4 in figure

Figure 5: The impact of non-tariff measures on demand (enhancing case with safer product)

ternality is not corrected by area 4. This is an application of the principle that the gains from trade in the presence of an externality are less (and can even be negative if trade aggravates the externality, as in the case of a country that exerts its comparative advantage in a polluting product with-out having corrected the damage from pollution). So, once again, an NTM that corrects an externality brings benefits, but trade from a situation with an uncorrected externality may not raise welfare.

To sum up, these single-market examples show that, when put together, NTMs shi supply, demand and unit import costs. The conclusion is that NTMs will typically lead to ambiguous trade and welfare effects that re-quire quantification. In addition, in some cases, the externality addressed by the NTM may not be directly affecting demand in that particular mar-ket, although social welfare is at stake because of environmental impact elsewhere. In this case the cost of the externality has to be quantified and the impact of the NTM on the external cost has to be assessed and ac-counted for in the welfare analysis. See van Tongeren et al. (2009) for ex-amples of such cases.

Formally, the intuition shown in figures 3–5 can be implemented in a par-tial equilibrium framework that provides a foundation for quantitative analysis if the economic and policy parameters are appropriately estimat-ed and/or calibratestimat-ed to provide estimates basestimat-ed on the Marshallian trian-gles shown in figures 3–5 (e.g. Disdier and Marette, 2010; van Tongeren et al., 2009; and the application summarized in section 4.2 below). For NTMs affecting products beyond the targeted good, the potential spillover effects into related markets can be captured in a general equilibrium framework (Beghin et al., 2015b). The associated welfare and trade effects can then be inferred using the trade restrictive indices (TRIs) and mercantile trade restrictive indices (MTRIs).⁵ The annex develops the algebra of the mod-el presented here, first in partial equilibrium (section A1) then in general equilibrium (section A2).⁶

5 A multimarket partial equilibrium approach can also be used and the TRI is then applied to a subset of sectors rather than the full economy (Anderson et al., 1995; Beghin et al., 2003).

6 There are also dynamic issues recently analyzed by Swinnen et al. (2015) where hysteresis can occur following shocks in markets. Paths of effects can diverge between two countries because of specific shocks which interact with the political economy of the standards in these countries. This is the frontier of knowledge regarding the analysis of technical measures and is beyond this review.

To sum up, the common message to be drawn from these examples is that trade and welfare effects of standard-like NTMs are ambiguous. Unlike tariffs and border taxes that are shown to constrain trade and lower wel-fare, the implications of NTMs on trade and welfare cannot be determined a priori. Effects on consumption, production and trade are ambiguous. As shown above, by reducing an externality linked to trade, a reduction in trade can be welfare improving, as shown by Disdier and Marette (2010) in the case of crustacean imports, external health effects and antibiotic res-idue regulation. Effects on prices are less ambiguous. The preponderance of positive price effects from introducing technical measures is obvious because they typically raise costs for domestic and foreign suppliers and the price at the border goes up, as shown by Cadot and Gourdon (2016) for a large sample of countries and NTM measures.