Reducing the Transaction cost of goods traded by dealing adequately with sanitary and phytosanitary requirements by Hesdie Grauwde, Policy officer, FAO Sub-Regional Office, Barbados Agricultural Trade Facilitation Workshop – July 27-31st, 2008 – Barbados, Organized by Ectad and Caribbeanfarmers.org
Define a special category of transaction costs-The costs elements of the SPS Agreement and impact on transaction cost
To inform you of
SPS derived private Emerging Codes of Practices and private standards
Discuss trade facilitation services and its importance
Offer recommendations for action to reduce transaction costs
Understanding transaction costs Transaction costs: Costs of market intelligence ( buyers, suppliers, prices, product specifications, trade requirements) Costs of negotiation Costs of transport, delivery and inspection The Competitive Structure of the Firm
Transaction Costs to Agribusiness Food Supply Control Chain Market intelligence Costs : information search to reduce risks of reliability of potential suppliers or buyers and the product quality, to obtain information on costs and prices, volumes, product assortment and other product attributes, and other customer/market requirements. Administrative and Operational costs associated with managing and coordinating integrated production, processing, and marketing . Opportunity cost of time and alternate investment forgone used to communicate with farmers and coordinate them Legal Fees, Administrative and Operational Costs of establishing and monitoring long-term contracts Logistical and transfer costs associated with the legal or physical constraints on the movement and transfer of goods
The SPS Agreement : Removing Non Tarrif Barriers to Trade
The SPS Agreement has brought attention to a category of costs related to food safety, quality and bio-security systems.
The SPS Agreement contains procedural rules for the formulation and application of sanitary and phytosanitary measures in international trade
The Agreement covers measures to protect human, animal and plant health from health risks arising principally from pests, diseases, disease carrying and disease-causing organisms, additives, contaminants, toxins or disease-causing organisms in foods, beverages or foodstuffs
A measure shall not discriminate against or between trading partners more than is necessary to reach its goal of sanitary and phytosanitary protection
This SPS principle equivalent to the GATT basic principle of most favoured nation status.
The principle of scientific justification (Art 2.2)
Non discrimination Scientific Justification
Risk Assessment Equivalence
Rules on setting protection levels Regionalisation
Exception in the case of insufficient
Harmonisation Dispute Settlement
Complexity of agricultural trade -risk assessment
An SPS measure has to be backed by a risk assessment that provides a scientific justification for the relationship between the measure and the level of protection targeted (Art 5.1-5.3). The requirement is generally seen as high and countries (even developed countries) face a substantial task when they have to provide a risk assessment robust enough to be judged in conformity with the Agreement’s provisions.
Measures complying with the standards, guidelines and recommendations developed by Codex Alimentarius Commission, IOE and the IPPC are compatible with the SPS Agreement.
Competitive pressure to meet customers expectations of quality. Firms differentiate their products through labeling and branding and demand suppliers meet quality and product standards
Regulatory pressures on Importers and exporters by EU, USDA, National Authorities, to ensure that products sold in the market place are completely safe and constitute low risk to human health as can be technically measured .
This has led to a range of sector oriented Codes of Practice (COP) incorporating standards relating to all the elements of the food chain.
COPs are not mandatory and have no force in law, but importers will only purchase from exporters who comply with the particular sector requirements set out in these COPs.
Complexity of agricultural trade - principal issuers of COPs
EUREPGAP - set of standards on behalf of EU retailers of fruit and vegetables (Good Agricultural Practice and Good Packhouse Practice)
BRC – British Retail Consortium, has three standards:
BRC Global Standard on Food Safety and Quality (incorporates HACCP);
BRC/IOP Technical Standard and Protocol for companies manufacturing and supplying food packaging materials;
BRC/FDF Technical Standard for the supply of non-genetically modified food ingredients and products;
MPS – The Milieu Programme Sierteelt – Dutch initiative covering flowers. Concerned about use of pesticides and residues;
ESA – European Spice Association, covers minimum quality for imported herbs and spices. Concerned legal requirements for pesticides, residues, alflatoxins, trace metals and microbiological contaminants
Trade facilitation: Its Importance aims at : services to reduce transaction costs in trade.
“ trade facilitation”: generally refers to:
The simplification of trade procedures and administration
Standard procedures and associated information flows required to move goods internationally from seller to buyer and to pass payments in the other direction
Trade facilitation has multi-dimensional features:
at the border: tariffs and non-tariff measures, custom procedures, etc
behind the border : domestic infrastructure, sectoral regulations and regulatory environment, governance, etc
Transaction cost can be addressed through trade facilitation efforts
Trade facilitation is especially important because it encourages economic growth!
Good trade facilitation reduces transaction costs
- direct transaction costs
.costs directly related to formalities;
. charges for trade-related services.
- indirect transaction costs
. costs related to procedural delays;
. costs due to lost business opportunities;
. Costs related to lack of predictability.
Trade facilitation reduces the costs for both the producer and consumer
Economic impact of sanitary requirements Standard-setting Dispute settlement Prepare compliance, certificates Negotiations Inspections -- Cost for government, industry organization Second-best business solutions Scan foreign regulations Compliance costs: products, labels, tests, certification Negotiation Detained shipment Markets restricted Volumes, prices drop Loss of market position Co st for firm “ Solution” “ Response” Transaction cost Trade loss