Tariffs often take centre stage in discussions around market access for exporters – especially SME exporters. But this view is increasingly out of date. “Standards have the ability to facilitate market access even to markets where preferential tariff advantages are not available”, remarked Dr. Susan Stone – UNESCAP’s head of Trade and Investment – during a visit to Colombo for the World Export Development Forum a few years ago. She added that, “Standards should not be seen only as a barrier, but also a way for firms to brand themselves with high compliance”. This was an insightful comment that got many SME exporters in the room thinking, especially when most often they are obsessively focussed on tariff preferences in order to obtain a better margin in an overseas market. At the forum, top Sri Lankan exporters noted that many global brands now want to know about a supplier’s credentials on standards even before they discuss price.
Standards compliance is rising in importance
Standards compliance is fundamental to the functioning of international trade and an important factor determining Small and Medium Enterprises’ (SMEs) competitiveness in export markets. Firm-level productivity alone cannot support competitiveness in international markets – alongside policy considerations, compliance with standards plays a critical role in finding and retaining international buyers. Compliance also benefits suppliers because it gives privileged access to the value chain and to buyers.
For SMEs in countries like Sri Lanka, standards can facilitate access to markets where preferential tariff advantages are not available. Standards compliance helps countries retain their businesses during times of economic downturn or market volatility, and regain, remain or become competitive in international markets dominated by low-cost alternatives. For example, Brazil focused on complying with standards to upgrade the quality of its exports and access new markets after losing global market share to low-cost footwear manufacturers from China in the 1990s. Similarly, a strong standards infrastructure has been a key factor supporting Kenya’s growth into becoming one of the world’s largest exporters of cut flowers.
The importance and nature of standards have evolved with time. Countries are increasingly shifting the focus from tariffs to complying with publicly set standards and regulations (covering quality, environmental, social, labour, etc), which are becoming stricter. In addition, private standards have gained in prominence over the last decade, thus affecting and shaping international trade flows. Private standards are voluntary and are developed and applied by non-public entities (primarily corporates, but also NGOs and CSOs) that are typically required by global brand buyers – producers and retailers – when they source their products from suppliers (both domestic and foreign). They can be roughly categorized as buyer codes of conduct, certificates, and product labels although there are significant differences with regard to their application and governance required, their substantive focus, level of stringency, and auditing processes. Due to their alignment with public standards, private standards are increasingly influential in standard setting at a public level.
These developments have been accompanied by a shift in focus from product to process standards, and widening the scope of standards beyond quality/safety concerns, which have raised concerns in developing countries as standards can become non-tariff measures, as average tariffs fall.
The challenge of compliance for SMEs
Although developing countries are typically hampered by a lack of access to quality infrastructure- independent and credible inspection, testing, certification and accreditation services- standards are no longer an option to opt out of. It is not just developed countries focussing on this anymore. A 2016 study by the International Trade Centre (ITC) revealed that the share of new voluntary sustainability standards by non-OECD countries rose up from 8% pre-1990 to 36% in 2015. While the impact on firms is still challenging to quantify, this shift can have an impact on SMEs given the complicated nature of regulations (due to overlapping standards set by different countries and trading blocs) and private standards, and potential higher costs associated with compliance (associated with upgrading factories, audit/certification fees, consultant fees, training costs, etc.). Research by the European Commission reveals that compliance with different regulations and standards applied to products and services is one of the main obstacles faced by SMEs as they are more burdensome and costly (in relative terms) for SMEs than for large firms.
In Sri Lanka SMEs, find it difficult to get an international quality certificate. According to ITC’s SME Competitiveness Outlook, complying with international standards is among the top five challenges faced by SMEs in Sri Lanka. Thus, they must be supported to overcome these challenges as standards compliance will play an important role in export competitiveness given the country’s focus on value-added exports under the Government’s National Framework Policy (NFP) in particular fresh/processed food and spices. Fresh and processed food products have to comply with stringent regulations and private standards globally, especially in lucrative developed markets.
Anushka Wijesinha, Articles, International Trade, Economic Competitiveness and Growth, Environmental Sustainability