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STRICTER PRODUCT STANDARDS ARE GOOD FOR TRADE: Evidence from pesticides in agricultural products

Stricter standards to make products safer for consumers can encourage international trade, regardless of who imposes them. That is the central finding of research by Liliana Foletti and Anirudh Shingal, to be presented at the Royal Economic Society''s annual conference in Brighton in March 2016. Their study focuses on the maximum residue level from pesticides that is allowed to remain on agricultural and non-processed food products that are traded widely between countries.

The researchers analyse agricultural trade between 69 exporting and 50 importing countries over the period 2006-12, a time when pesticide regulations became considerably more stringent. They find that trade actually rose instead of falling: by roughly 14% when the importing country became stricter, and by 7% when the exporter did so.

This effect was no different if the importing country was much richer than the exporter, which was previously thought to have been a way of blocking trade. Trade costs also fell when the European Union replaced lots of national pesticide limits with a common set of standards, making it easier for exporters to meet just one set of standards.

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Stricter product standards facilitate international trade, irrespective of who imposes them. This is one of the main findings of research by Liliana Foletti and Anirudh Shingal to be presented at the 2016 annual conference of the Royal Economic Society.

Differences in the stringency levels of product standards are expected to affect international trade and most existing work suggests that such differences have an adverse effect both on the likelihood of exporting and the volume of exports. But this work does not account for the fact that stricter standards are not always imposed for legitimate reasons such as mitigating consumption-based health risks. In fact, a country may also impose a stricter standard on a product that it would like to be imported less, to protect domestic industry for instance.

Similarly, it should also matter whether it is the importer or the exporting country that sets the stricter standard. If the exporting country is more efficient than its competitors in meeting stricter standards, than it is more likely to export, especially to countries where consumer demand is in favour of more stringent product standards.

This research takes all these factors into account in estimating the effects of stricter product standards on international trade. The product standard studied is the maximum residue level (MRL) from pesticides that is allowed to remain on agricultural and non-processed food products that are traded widely between countries. The analyses cover agricultural trade between 69 exporting and 50 importing countries over 2006-2012.

The results suggest that stricter product standards facilitate trade, which is a significant departure from existing findings. Moreover, this result is independent of the source of imposition of stringency.

In particular, additional growth in the stringency of standards imposed by the importer is associated with a 13.8% increase in the growth rate of exports; additional growth in the stringency of exporter-imposed standards is associated with a 7.4% rise in the growth rate of exports in the ''best'' results, keeping everything else unchanged.

Another significant finding from this research is the non-impact of more stringent high-income importing country standards on exports coming from non-high income countries, which is again contrary to existing work that suggests that the former adversely affect the latter. This striking result also emanates from accounting for the fact that countries that impose stricter product standards can do so for economic and political, as opposed to, health reasons.

Finally, this research also undertakes an examination of the effects of harmonisation of MRL standards that occurred within the European Union (EU) on 1 September 2008 on the EU''s trade with its partners both within and outside the EU. Thus, national level MRL regulation specific to individual EU members before September 2008 was replaced by a common set of product standards applicable to all the EU members as of that date.

Different MRL standards within the EU before September 2008 led to greater compliance costs for non-EU exporters sending their products to the Common Market. Significantly, findings from this research also suggest that such higher costs may have been wiped out by the harmonisation of MRL standards within the EU post-September 2008.

These results have two significant policy implications. One, they suggest that the imposition of stricter standards may have more of a demand enhancing as opposed to a cost-escalating effect, such that the overall impact leads to greater trade; and this result remains qualitatively similar irrespective of who imposes the stricter standards.

Two, they suggest that replacing diverse product standards with a common set of standards in the destination market may reduce costs for exporting firms of meeting such standards.

Foletti, L. and A. Shingal (2015). ''Re-estimating the effects of stricter standards on trade: endogeneity matters''.