Non-tariff measures

trade policy brief

Non-tariff measures

February 2019

educing trade costs associated with non-tariff measures (NTMs) can improve the efficiency of R domestic production, increase wages, and lower prices across the whole economy.

In fact, lowering costs associated with NTMs could increase trade by 5.5% among G20 members and 4% worldwide. irms seeking to access global markets can be disadvantaged when domestic market F regulations are developed in isolation. Cutting these types of NTMs has been shown to increase a country’s exports.

What’s the issue?

The term “Non-tariff measures” (NTMs) is used to broadly describe all measures affecting trade flows that are not tariffs. While this characterisation can evoke a simple parallel with tariffs, NTMs are in fact much more complex.

NTMs generally stem from domestic regulations and aim to overcome or reduce the impact of market imperfections, such as those related to negative externalities (e.g. pollution), information asymmetries (e.g. the condition of a used car), and risks for human, animal or plant health.

However, as markets evolve and ways of doing business change, measures that were once thought to only affect the domestic market can ultimately have a significant impact on global trade. While many NTMs correct market failures, they can also increase production and trade costs, and can influence – positively or negatively – the development of new technologies or production methods. NTMs can prove particularly problematic for firms engaged in global value chain (GVC) trade, which requires timeliness and strict quality control in value chain operations. Given the broad and often significant impact that NTMs can have on international commerce, it is important to better understand, measure, and minimise their potential costs to trade.

An important first step in this process is to disentangle the different forms and objectives of NTMs. Broadly speaking there are two main types of NTMs: “non-technical” and “technical”. Non-technical measures can include quantitative restrictions, price measures, forced logistics, or distribution channels, and so on. By contrast technical measures primarily include sanitary and phytosanitary

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(SPS) and technical barriers to trade (TBT), two areas that are covered by Agreements under the World Trade Organization (WTO).

To help governments better grasp the magnitude of the impact of NTMs on trade, the OECD has developed a new method to estimate trade effects of NTMs that distinguishes these two types of measures and isolates the distinct effect of each on trade volumes and prices.

This approach separates the trade-cost effects associated with NTMs from possible quality effects that come from reducing uncertainty and strengthening consumer confidence in imported products. Building on this work, new analysis has shown that when G20 economies reduce costs associated with NTMs, imports and exports increase by almost 6% on average; and by 4% at the global level. The analysis also shows that reducing NTMs would increase the average income of workers at almost twice as the rate of tariff liberalisation alone.

What should policy makers do?

The nature of NTMs generally reflects domestic conditions and preferences, but may also reflect domestic rule-making processes that pay less, if any, attention to international market considerations. This can have significant unintended consequences as the available evidence shows. OECD analysis suggests that countries that systemically include consideration of international market conditions when developing new regulations have better market outcomes. This benefits market access and competitiveness of exporting firms. In practical terms,

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Non-tariff measures

The cost of NTMs versus differences in regulation between trading partners, 2018 25%

Ad-Valorem Equivalent of NTM (%)

20%

15%

10%

5%

0% 0.00

0.10

0.20

0.30

0.40

0.50

0.60

Similarity index of regulatory measures

Note : Similarity Index is measured on a scale of 0 to 1, where 1 indicates perfect alignment

the likely impacts on international markets can be part of existing regulatory impact analysis systems, and can be explored for using cross-border mutual recognition frameworks and trade agreements.

There are also important potential benefits in examining the existing stock of NTMs to clarify their impact on the participation of domestic firms in international markets. Are existing regulations clear, transparent, and predictable? Are NTMs consistently applied both to domestic and foreign firms? Are existing NTMs based on the best available science or other technical information, proportionate to the goals being pursued, and consistent with internationally agreed standards?

Finally, a growing body of evidence suggests that reducing regulatory heterogeneity between countries would be an important first step to reducing trade costs.

Even if regulations in different countries address the same issue – say a plant health problem – diverging regulatory approaches can lead to costs for international trade. Indeed, recent OECD work shows that regulatory difference between countries is arguably amongst the key factors explaining trade costs related to regulations (Figure).

The OECD is working to help countries identify regulatory divergence and help guide policy makers in thinking through the opportunities for co-operative actions to promote regulatory objectives while reducing unnecessary trade costs. The work is intended to provide a step-by-step approach to help governments identify and analyse types and magnitudes of trade costs associated with regulatory divergence, and the potential gains for trade and inclusive growth from greater cooperation to remove unnecessary trade costs while promoting regulatory objectives.

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Further reading • OECD, 2019. “Trade Policy and the Global Economy: Reducing Unnecessary Costs of Non-Tariff Measures.” Issuu, Organisation for Economic Co-Operation and Development (OECD), issuu.com/oecd.publishing/docs/oecdtrade-scenario-3-costs-ntms.

• Cadot, O., J. Gourdon and F. van Tongeren (2018), “Estimating Ad Valorem Equivalents of NonTariff Measures: Combining Price-Based and Quantity-Based Approaches”, OECD Trade Policy Papers, No. 215, OECD Publishing, Paris, https:// doi.org/10.1787/f3cd5bdc-en.

• Nordås, H. (2016), “Services Trade Restrictiveness Index (STRI): The Trade Effect of Regulatory Differences”, OECD Trade Policy Papers, No. 189, OECD Publishing, Paris, https://doi. org/10.1787/5jlz9z022plp-en.

• OECD, “Regulatory Policy.” Organisation for Economic Co-Operation and Development (OECD), www.oecd.org/gov/regulatory-policy/ international-regulatory-co-operation-andtrade-9789264275942-en.htm.

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