Technical measures: the not so visible barriers to trade

When you buy a new TV, you don’t expect to get an electric shock while plugging the cord into the outlet or burn your hand while handling the remote control. The truth is that no one expects to suffer a misfortune when they get ready to watch their favorite show or streaming series. That is why most countries in the world impose regulations on the marketing of many goods – not just TVs – to protect aspects such as the health and safety of consumers. But these regulations -called technical measures– if poorly conceived can create barriers to trade, especially when they are unnecessarily stringent and cumbersome to comply with. Needless to say, when it comes to deceit.

In this blogpost we examine the prevalence of technical measures in Latin American and Caribbean countries (LAC) and discuss their potential impacts on international trade.

Technical measures encompass a wide variety of measures including broad categories like sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT). Technical measures have been proliferating in LAC. For example, on average, 52% of imported products in 2020 were subject to a technical measure, up from 20% in 2000 (see Figure 1).

Figure 1

                              

Technical measures are not intrinsically bad; on the contrary, they can provide valuable information regarding the inherent characteristics of a product and its quality, thus increasing trust, facilitating comparison, reducing uncertainty, and signaling that a product is safe to consume.

But technical regulations can sometimes be stricter than necessary, or involve very cumbersome procedures, or simply respond to protectionist demands. There is an additional layer of complexity when countries impose technical measures that are very different from each other. Going back to the TV example, imagine that two countries in Latin America impose very different safety requirements for the commercialization of a part that is needed to produce the new TV. In this situation, a supplier of this part located in one of the countries must comply with two safety requirements if it want to sell the part in both markets. This may involve hiring additional labor for testing and certification, or creating two designs for the part, or opening two separate product lines, or worse yet, setting up two different plants. A result of this is that the existence of different safety requirements across countries unnecessarily increases the cost of the product that is traded.

As the TV example shows, technical measures are often imposed not only on final products but also on intermediate inputs. For example, a typical country in the region imposes technical measures on 47% of its imports of intermediate inputs. This has the potential to limit the emergence of regional supply chains by increasing the costs of the intermediate inputs that are traded across borders.

Countries that seek to reduce this type of costs normally follow a regulatory convergence agenda where the objective is not to eliminate the technical measures but to reduce the heterogeneity in the regulations that exists between the countries. There are alternative mechanisms to pursue regulatory convergence, including i) harmonization of technical measures, ii) mutual recognition of technical measures, iii) harmonization of conformity assessments, and iv) mutual recognition of conformity assessments.

The convergence process could take place between members of a free trade agreement. The most salient example is the European Union (EU). While, on average, EU members apply more technical measures than the average LAC country,, the EU integration process includes provisions for all the four regulatory convergence mechanisms mentioned above. Therefore, technical measures applied by the EU countries do not impede trade within the EU. The USMCA is another example of a trade agreement that includes provisions in the four regulatory convergence mechanisms described above.

In contrast with the EU and the USMCA, only a minority of trade agreements signed by LAC countries include provisions that pursue regulatory convergence of technical measures (see Figure 2).

Figure 2

While the convergence of technical measures can also take place outside of trade agreements, such efforts in the region are few and far between. Consequently, LAC countries lag behind other regions in incorporating regulatory convergence into their trade and integration agendas.

Such a scheme can bear fruit. For instance, our estimations indicate that the negative impact of the technical regulations on trade flows in the region can be reduced by more than half with provisions that seek regulatory convergence.

It is true that much remains to be done in LAC to reduce the so-called traditional trade barriers, such as tariff rates or transportation costs. But this should not preclude the countries of the region to look at technical measures as potential trade barriers because, although they are not as visible and well understood as tariff rates, they could potentially impact trade flows and limit regional integration.

It is not about eliminating technical measures by sweeping them aside, as they often serve legitimate national policy objectives. The right course of action must be to promote regulatory convergence. This could alleviate the effects on trade without abandoning the national objectives pursued by the original regulation.