Paper Presented at the International Trade Policy Conference, 5 and 6 December 1996

Product Standards and their Impact on International Trade

Drew Andison

Director, Standards and Conformance Policy Section

Department of Industry Science and Tourism

Presentation to the Australian APEC Study Centre's

First Annual Conference on International Trade, Education and Research

5 & 6 December 1996

Introduction

I have been asked to talk this morning on Product Standards and International Trade, a subject that has in recent times been receiving a good deal of attention from policy makers and in international trade forums.

The development of product standards and their widespread adoption can play a vital role in facilitating transactions and enhancing trade, both domestically and internationally. But product standards and related conformity assessment requirements, especially where they are mandated by government authorities, can also be a critical factor impeding trade.

There are two broad types of concerns. Firstly, standards especially regulatory standards are sometimes more prescriptive or restrictive than they need to be to achieve the health and safety outcomes desired by the community. This limits the type and design of products that can be marketed and reduces incentives for innovation. Secondly, differing requirements between countries can result in substantial additional costs for producers and mean that foreign firms are in effect shut out of the market.

Studies indicate that around 15 per cent of all national notifications of non-tariff barriers to the GATT address standards and conformance questions. The issue is also firmly on the agenda in APEC and Australia has been devoting some energy to pursuing ways in which these barriers to trade can be reduced - both through promoting greater adoption of international standards and through reducing testing and certification costs by achieving recognition of our competence to undertake conformity assessment to other countries' requirements.

The major trading countries are only too well aware of the importance of standards and conformance issues and their impact on their competitiveness.

To quote from the US National Export Strategy:

"Standards and conformity assessment requirements imposed by other national and regional authorities have become a critical factor in determining the competitiveness of US firms and workers."

The Strategy document puts as key priorities:

• in the near term efforts designed to increase foreign recognition of US standards; and

• in the longer term programs aimed at harmonisation of standards internationally.

The overall objective is to achieve "a single test of a given product against a given standard, accepted worldwide..."

The strategy will be to:

• emphasise technical assistance programs as a basis for long term internationalization of standards and harmonisation;

• strengthen competitive commercial policy with multilateral and bilateral standards initiatives;

• increase the role and effectiveness of the US private sector, including better use of existing advisory committees, to achieve market access in standards related matters;

• strengthen the US technical infrastructure.

The members of the European Community are progressively harmonising their regulatory requirements and their product standards - an important element in the formation of the Single Market. The Community has also been active for some time in pursing an external strategy that is designed both:

• to maximise European influence in the development of international standards; and

• to develop a network of government to government Mutual Recognition Agreements on Conformity Assessment which will significantly reduce the costs to industry of having to meet different regulatory requirements in export markets.

In recent weeks, the Commission has recommended to the Council that the EC pursue:

• a far-reaching review of the TBT Agreement (recommending that the matter be raised at the Singapore WTO Ministerial);

• high priority being given to standards issues in the WTO accession negotiations of Russia, China, Ukraine, Saudi Arabia and others and through the WTO Trade Policy Review Mechanism;

• priority being given to standards and TBT questions in bilateral trade relations as a major component of the EC's Market Access Strategy;

• a review of whether the EU's relations with international standards and rule-making organisation needs to be strengthened;

• developing synergies between mutual recognition, technical cooperation programs and international harmonisation of rules and standards;

• looking at the potential for concluding MRAs on a regional rather than a country-by-country basis; and

• encouraging the harmonisation of regulatory requirements.

This morning I propose to expand a little on the role standards play and the way they can impact adversely on trade, and then to outline the policy approach and the actions being taken by the Australian Government to tackle the barriers to trade caused by differing standards and conformance requirements.

The Role of Standards

Standards perform a number of functions. They facilitate transactions by providing information about goods in the marketplace. They also facilitate the interoperability of products and systems; they extend and enlarge the market and make possible mass production of products and components. In this way they help determine the efficiency and effectiveness of the economy. They are also an important vehicle for the development and diffusion of best practice technologies. They therefore can make a major contribution to lifting productivity and promoting economic growth.

Standards also serve to give consumers greater health and safety protection.

Standards are very often developed not by governments but by private sector organisations. Such standards are usually known as voluntary standards. But while they are described as voluntary, they can nevertheless have a considerable impact on trade. Very often sales cannot be achieved unless the product meets the recognised standard in the marketplace. Product standards are of course also developed by or for government authorities for regulatory purposes and it is not uncommon for part or all of a voluntary standard to be subsequently picked up or referenced in legislation.

Standards have traditionally been developed initially on a national basis. Where significant differences emerge between national standards, these can constitute major impediments to trade. Producers wishing to export are forced to manufacture to different requirements and must split production runs so reducing the scope for scale economies. And it is not only the standards themselves that are at issue. Differences in the testing and certification procedures required to demonstrate conformity to those standards can raise barriers to trade in themselves and produce significant economic costs. Part of the cost is caused by the uncertainty as to whether or not the product will be judged to conform and the often lengthy additional time involved in gaining approvals from authorities in distant markets.

A simple example illustrates the situation. A manufacturer of pressure equipment in Australia must comply with Australian Standard AS 1200. However this product cannot be exported to the US because the relevant American ASME standard requires a grade of steel that is specific to the US. In addition the US standard requires the vessel to be inspected by an inspector from the US (the clear implication being that the Australian inspector is not considered competent).

Statistics

Much of the evidence of the impact of standards and conformance requirements on trade is essentially anecdotal but nevertheless gives some idea of the magnitude of the problem. For example, a recent OECD report cited the case of a European firm which estimated that the lost sales due to the multiplicity of standards and certification problems in the export destination country was equal to around 15% of total sales.

While quantitative work to date has been limited, there are several studies that have been undertaken which give some indication of the impact that product standards can have on international trade.

A study commissioned in 1993 by the Australian Minister for Trade on the extent to which standards could represent a non-tariff barrier to trade in the APEC region concluded that a modest liberalisation of trade restricting standards could increase regional trade by possibly 20 per cent, which represents an increase of about 3 per cent to regional GDP.

The recent US National Export Strategy noted that in 1994, foreign requirements for testing, inspection and certification affected more than $150 billion of global US exports.

Government

What is the Australian Government doing to address the impact of standards and conformance issues on international trade?

WTO

Australia is a signatory of the WTO Agreement on the Technical Barriers to Trade (formerly known as the GATT Standards Code) which commits signatories to ensure that technical regulations, standards or testing and certification schemes adopted by central government bodies do not create disguised or unnecessary barriers to trade. Signatories must also take reasonable measures to ensure that State and local government, non-government and regional government bodies do the same. The code applies to all products (including industrial and agricultural) except for goods purchased by government bodies.

Among other requirements the Code requires signatories to take all reasonable steps to ensure that State, Territory, local governments and private standards writing bodies accept and comply with the Code of Good Practice for the Preparation, Adoption and Application of Standards (which forms an annex to the Standards Code). The Code of Good Practice also requires standards bodies to adopt relevant international standards and ensure that national standards are not used as non-tariff barriers to trade.

As such it is the Australian Government's firm policy to adopt international standards wherever possible. It is important for Australia, particularly given the relatively small size of our domestic market, to ensure that our standards are harmonised to the greatest possible extent with international standards.

The Government has encouraged the peak standards writing body in Australia, Standards Australia, to become a signatory to the Code of Good Practice and the Memorandum of Understanding that the Government has with Standards Australia requires them to adopt international standards wherever possible. As of 1996 nearly 33% of Australian Standards were fully aligned with international standards.

Standards Australia plays an active role in the main voluntary international standards writing bodies - the ISO and IEC - and participates in a significant number of their technical and policy committees. While in most areas we are essentially a taker of international standards, rather than a producer, an important objective is to try and ensure that the development of international standards takes sufficiently into account our particular needs and conditions.

Australia also participates in intergovernmental organisations dealing with regulatory standards, eg, the International Telecommunications Union for standards for public telecommunications and radiocommunications and the Codex Alimentarius Commission for food standards. Increasingly, the approach of our regulatory authorities is to adopt international standards with as little amendment as possible for domestic requirements.

The TBT Agreement also recognises the rights of countries to adopt measures to the extent they consider appropriate - for example, for human, animal or plant life or health, for the protection of the environment, or to meet other consumer interests such as the prevention of deceptive practices. Members are not prevented from taking measures necessary to ensure their standards of protection are met.

The WTO, as with the GATT before it, does not get involved in establishing standards for any product - not for health, safety, or environmental reasons. The TBT Agreement encourages countries to use international standards developed elsewhere where these are appropriate, but does not require members to change their levels of protection as a result of standardisation.

The Agreement provides a means for dealing with barriers to exports resulting from other WTO members using unreasonable or discriminatory measures. It provides an avenue to access information on standards and regulations applied in other countries and the right to comment on changes being implemented by other WTO members. It provides a right for exporters to have their products accepted for testing by other countries under conditions no less favourable than those accorded to like products of domestic or third country origin. It also provides, through a WTO Committee and disputes settlement procedures, arrangements which can be used to resolve problems involving standards, technical regulations and testing.

To ensure that exporters worldwide can get access to all necessary information about technical regulations and standards as well as conformity assessment procedures, all WTO member governments are required to establish Enquiry Points. The Australian Enquiry Point is located in the Department of Foreign Affairs and Trade and has established links with standards-setting agencies in Australia, State Governments, Standards Australia and the National Association of Testing Authorities.

APEC

The Australian Government is an active promoter of the importance of alignment/harmonisation of standards. Within APEC for example we have been very active in promoting the alignment of members' standards with international standards. This is a key element of the Osaka Action Agenda in relation to standards and conformance issues. Members have agreed to a target of aligning all their standards with international standards by 2010/2020 and of aligning standards in identified priority areas by 2000/2005.

Member economies have already agreed upon a number of areas where they should endeavour to align their standards with the relevant international standards by 2000/2005. These include radios and their parts, televisions, video apparatus, air-conditioners, refrigerators, food labelling, rubber gloves and condoms and selected machinery.

Member economies have also agreed to a proposal put forward by Australia and New Zealand, with the support of Singapore and the Philippines, for a two-step process involving the development of international standards and subsequent alignment of member economies' standards to them, in the following areas:

• Standards for general design and structural design loading (including earthquake and wind loading);
• Structural design of timber;
• Timber preservation;
• Grading of sawn timber;
• Reconstituted and plywood board products; and
• Hazardous Area Equipment (HAE).

MUTUAL RECOGNITION AGREEMENTS

I mentioned earlier that Australian efforts were not only directed towards promoting the greater use of international standards but also towards the negotiation of mutual recognition agreements.

I should note here that the term mutual recognition is used in two different contexts. Mutual recognition can mean mutual recognition of safety standards and regulatory requirements; it can also mean mutual recognition of conformity assessment where each of the parties in effect recognises that conformity assessment bodies nominated by the other(s) are competent to test and certify to their requirements and that they have the same sort of confidence in these bodies as they would have in their own. The standards and regulatory practices which apply in each of the signatories remain unchanged and must be met by all products sold in that market, whether domestically produced or imported.

An example of the former is the Trans-Tasman Mutual Recognition Agreement between Australia and New Zealand which will allow goods legally able to sold in New Zealand to be sold in Australia and vice versa. This agreement builds on, and is a natural extension of, the Mutual Recognition Agreement between the Commonwealth, States and Territories which has been operating since 1 March 1993. Such agreements remove (or largely remove) the effect of standards and conformance requirements as technical barriers to trade. They are however difficult to achieve except where there are close economic links, similar technical capabilities and a substantially similar view of what is required in terms of regulation and the outcomes that are desired to be achieved.

The negotiation of bilateral mutual recognition agreements on conformity assessment is receiving increasing attention and is actively being fostered by a number of governments around the world.

Such agreements reduce or remove the need for multiple evaluation and assessment. In the case of a government to government agreement, products can be assessed and certified in the country of production in accordance with the standards and legal requirements of the importing country and there is no further need for testing, inspection or certification at the point of sale to demonstrate compliance.

The development of mutual recognition agreements on conformity assessment represents a more limited objective but nevertheless has the potential to yield very significant economic benefits. Under such MRAs all testing and certification to the other party's regulatory requirements can be undertaken in the country of export. In July this year Australia (together with New

Zealand) concluded its negotiations with the European Union on a Mutual Recognition Agreement on Conformity Assessment - the first such agreement of its type in the world. The agreement encompasses products in eight regulated sectors and will enable all third party conformity assessment requirements set by the EU to be completed in Australia (and New Zealand). The agreement will therefore provide manufacturers with significant savings in both costs and time associated with demonstrating compliance with EU regulatory requirements.

The EU agreement, while restricted to mutual recognition of conformity assessment does include an additional element. While delivering significant trade benefits to Australia in its own right, the MRA acknowledges that mutual recognition of conformity assessment is not necessarily the optimal outcome. The agreement includes as an annex a commitment by both parties to consider

"... increasing the degree of harmonisation or equivalence of ... respective technical regulations and conformity assessment procedures, where appropriate and where consistent with good regulatory practice. ... the objective could be the establishment where feasible of a single submission and evaluation procedure, applicable in both Parties, for the products covered by the Agreement."

Within APEC we have been pursuing work in two broad areas: the development of multilateral, single-sector mutual recognition arrangements; and the development of a network of bilateral, comprehensive, multi-sector mutual recognition agreements.

The development of multilateral agreements on conformity assessment is obviously an ambitious objective, given the diverse nature of the economies represented in APEC and the very significant differences in technical capabilities. It will necessarily be a slow process. At this stage work has been initiated in the areas of food, automotive products, telecommunications equipment and energy efficiency standards.

In October this year agreement was reached on the text of an APEC Mutual Recognition Arrangement on Conformity Assessment of Foods and Food Products. This arrangement was endorsed by APEC leaders at their recent meeting in Subic Bay.

This arrangement is essentially a framework agreement which sets out the principles which are to be followed in the development of separate arrangements, called "Sectoral Arrangements", dealing with specific food or food product categories.

While the multilateral approach to mutual recognition is an important element in APEC's work program, our view is that we are more likely to achieve early results by pursuing comprehensive bilateral agreements with selected APEC trading partners, similar to the agreement that we have already negotiated with the European Union.

To this end we have held preliminary exploratory discussions with the US, Canada and Japan. These three countries suggest themselves on several grounds. They are important in trade terms. Their technical infrastructures are such that we should be able to have the necessary degree of confidence in their competence to carry out testing and certification to our requirements - an essential precondition for an MRA. And all three are in the process of negotiating agreements with the EU, similar to the one that we have negotiated. We hope that substantive negotiations will commence in 1997.

ASEAN FREE TRADE AREA (AFTA)

A final area in which Australia (together with New Zealand) has taken a lead role is in developing closer cooperative relationship with the ASEAN Free Trade Area (AFTA). This relationship was formalised in September 1996 with the signing of an AFTA-CER MOU on closer cooperation on standards and conformance matters. The meat of the relationship however will be contained in a series of subsidiary MOUs between Australian/New Zealand infrastructure bodies and their ASEAN counterparts. It is hoped that these subsidiary MOUs will be signed at the next round of AFTA-CER talks in Hanoi in February 1997.

Conclusion

Australia is an active participant in all the main world standards and conformance bodies to ensure that its interests are adequately addressed. We are also actively involved in pursuing both bilateral and multilateral mutual recognition agreements. Apart from the agreement with the European Union, this work is very much focused on our major APEC trading partners.

There is an emerging issue I would like to mention that was addressed within the US National Export Strategy, although not in so many words. I am referring to "Standards Diplomacy" whereby efforts are made to encourage adoption by other countries of ones domestic standards and conformance systems as a lever to extract increased trading opportunities for domestic manufacturers.

While such initiatives may well be advantageous in the short term in terms of trade facilitation there is a real risk for Australia that our own well developed domestic systems will be placed at a competitive disadvantage. Such initiatives also have the potential to undermine activities occurring in the international arena and can also lead to the proliferation of regional and sub-regional standards and conformance systems. The European CEN/CENELEC standards writing systems are a good example of this .

While the US and all other WTO signatories have clearly committed to the adoption of international standards this could perhaps be viewed as a longer term objective. The short term focus that is evident in the US National Export Strategy focuses more on standards diplomacy as a mechanism for boosting export opportunities for US producers. Of particular importance for the US (and indeed for countries such as Japan and the leading EU member states) is South East Asia, China and South Korea as these countries represent the major new markets of the future.

Australia is already well placed to participate in the development of standards and conformance infrastructures in these countries. Our geographical proximity together with the world class standard of our own domestic infrastructure provides us with the opportunity to impact on the course of development of these countries. We are, for example, in the process of encouraging other countries in the Asia Pacific region to adopt the Australian Building Code as the basis for their own codes.

This said, increasing competition to direct the course of this development could well have serious consequences for Australia as well as for the region.

This is a relatively new issue to emerge and one that we have not yet had time to consider in any detail. I raise it in this venue simply as an area that is worthy of further consideration and debate.

In closing I would like to draw two conclusions:

• standards (and associated conformance requirements) have the potential to benefit or hinder international trade, and therefore growth; and

• there is an increasing awareness of the benefits of international harmonisation and the Government has the task ahead of it to ensure that Australia is well placed to participate in and benefit from such developments.

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