Catching Up with the Competition: Trade Opportunities and Challenges for Arab Countries

8. Regulatory Regimes and Trade Costs

CHAPTER 8 Regulatory Regimes and Trade Costs Jamel Zarrouk The interface between regulatory policy and trade has received increased attention in recent years. As countries reduce traditional trade barriers such as tariffs and QRs, business and consumers become more aware of the impact of domestic regulatory regimes on trade. These often take the form of mandatory requirements that legislators or officials in the executive branch impose on imports of goods and services. Domestic regulatory regimes are generally intended to protect public interests . However, enforcement of health, safety, and environmental protection norms requires testing and certification systems to assure that products satisfy technical requirements. Not only may the technical regulations and standards imposed by governments in exporting and importing countries differ, but testing and compliance procedures are often duplicative and discriminatory, giving rise to additional costs for traders. Such costs may be needless, in that the procedures that are applied do not necessarily benefit consumers or ensure better public health or environmental protection. In the case of international service transactions, countries frequently restrict the mode of supply through which markets can be contested by foreign providers, or simply prohibit access altogether. This is often the case for activities such as insurance and banking, domestic transportation, basic telecommunications ,. or even distribution services. There is substantial evidence that such policies inhibit competition in service industries, impose costs on producers and consumers, and reduce export performance. Since the conclusion of the Uruguay Round, trade-related regulations have risen in importance and have caused concern in both developed and developing countries. For instance, developing countries argue that industrial countries have expanded technical regulations that are beyond developing 228 CatchingUpwiththe Competition countries' competence to implement or do not take into account their special development needs, fundamental climatic or geographic factors, or techno-logical problems (UNCTAD 1999). Conversely, the business sector in industrial countries has complained about excessive control and inefficiencies in customs procedures for inspection and clearance in developing countries, arguing that customs-related barriers to trade have deterred numerous international firms from penetrating developing markets. This chapter discusses the trade impact of certain regulatory regimes that are prevalent in the MENA region and options that can be considered to remove regulatory barriers to trade. Emphasis is put on the link between national efforts to facilitate trade and regional and multilateral cooperative approaches in designing and applying domestic regulations that reduce trade costs. A major obstacle in quantifying the impact of regulatory regimes on trade costs is the absence of information on domestic policies and their impact in the MENA region. This chapter relies in part on the limited literature that is available and on data collected through surveys of and interviews with traders and officials from selected countries in the region. Conceptual Issues Government intervention generally aims at overcoming domestic market failures . Examples are regulations that control the behavior of monopolies and state-owned or controlled industries/firms, offset information asymmetries, or ensure that missing markets do not lead to overexploitation of environmental resources. Regulatory regimes that aim to overcome either negative externalities or market failures may generate additional costs to cross-border trade in a way similar to NTBs to trade, although the intent of such regulatory regimes may not be to discriminate against foreign firms. The effect may be to raise the price of imports in a way equivalent to tariffs. Estimates of the impact of certain types of policies suggest they may exceed the level of import duties that apply on the imported products concerned. However, the difference between tariffs and regulatory policy effects is that customs duties are part of government revenues, while the enforcement cost of regulatory regimes at the border may constitute deadweight losses from which no one benefits. Attempts to quantify the impact of duplicative testing requirements and customs controls in the European Community before the EC-1992 program indicated that these could be equivalent to a tax of up to 2 percent of the average value of a shipment (Hoekman 1998a). Other estimates have placed transaction costs of inefficient customs clearance procedures at between 7 and IO percent of the value of world trade in 1994(Staples 1998). Regulations for service industries may be motivated by market failure. However, exclusive rights for domestic suppliers of transportation and tele- RegulatoryRegimesand TradeCosts 229 communication services can significantly raise the costs of exporting activities and reduce the international competitiveness of domestic firms. Technical standards, prudential regulations, and qualification...