The Regulation of Product Standards in World Trade Law

Ming Du

• Publisher: Hart Publishing
• Year: 2020
• ISBN:
  9781509931156
• Edition: 1
• Topic: Diritto
• Subtopic: Diritto commerciale internazionale

This monograph has two central purposes. The first is to provide a critical analysis of how governmental, private and hybrid product standards are regulated in the GATT/WTO legal framework. The second purpose is to explore – both positively and normatively – the impact that WTO disciplines may have on the composition, function and decision-making process of various standard-setting bodies through the lens of a series of selected case studies, including: the EU eco-labelling scheme; ISO standards; and private standards such as the FSC. The book analyses what role, if any, the WTO may play in making product standards applied in international trade embody not only technological superiority but also substantive and procedural fairness such as deliberation, representativeness, openness, transparency, due process and accountability. Whilst it has been long recognised that voluntary product standards drawn up by both governmental and non-governmental bodies can in practice create trade barriers as serious as mandatory governmental regulations, a rigorous and systematic inquiry into the boundary, relevance and impact of WTO disciplines on product standards is still lacking. Providing a lucid interpretation of the relevant WTO rules and cases on product standards, this book fills this significant gap in WTO law literature. Definitive and comprehensive, this is an essential reference work for scholars and practitioners alike.

1

Introduction

The World Trade Organisation (WTO) and its predecessor, the General Agreement on Tariffs and Trade (GATT), have been extraordinarily successful in liberalising trade between WTO Member States. The process of liberalisation has entailed a series of negotiations resulting in reciprocal commitments to reduce or eliminate tariffs, quotas and other traditional instruments of protectionism.¹ However, if reciprocal trade liberalisation commitments at the border can be neutralised by creating the same protective effects through domestic measures, such as heterogeneous product standards purportedly for legitimate regulatory objectives, confidence in the world trade system will likely be weak. Indeed, negotiated tariff liberalisation may even create an incentive for states to pursue ‘policy substitution’, when deviation from tariff bindings becomes more difficult.² Accordingly, the predominant concern of international trading community has shifted from border measures to standards and technical regulations that exist behind the national borders, which Pascal Lamy, the former WTO Director General, called ‘the real 21st Century trade issues’.³

Product standards specify or pin down the characteristics of a product. These characteristics can include design, size, weight, safety, energy and environmental performance, interoperability, material, and even the process of production, and they may be embodied in marking, labelling, packaging, testing, inspection and quarantine, and information requirements.⁴ Food standards, for instance, may specify maximum pesticide residue levels on fruits and vegetables that are considered safe for human consumption or prescribe methods for laboratory testing of milk for fat content so that labels provide reliable and comparable information to consumers. Product standards are ubiquitous in modern life. Over the past few decades, a great number and wide range of product standards have been applied to international trade. The annual number of notifications of new technical measure made to the WTO Secretariat under the Agreement on Technical Barriers to Trade (TBT Agreement) has increased markedly from 364 in 1995 to 2,074 in 2019.⁵ During the same period, the annual number of new notifications under the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement) has increased from 189 in 1995 to 1,118 in 2019.⁶ Increased standardisation activity reflects, among other factors, demand by consumers for safer and higher quality products, rising living standard, technological innovations, the expansion of global economic integration and the increased concern paid by many governments and non-governmental organisations (NGOs) to social issues and the environment.⁷

As will be analysed in detail in the next section, the term ‘standards’ differ from ‘technical regulations’ in the GATT/WTO legal terminology in that the use of, and compliance with, a standard is not mandatory.⁸ Nevertheless, for business purposes, what is legally voluntary may be financially and practically necessary. Standards often elicit compliance from business enterprises in practice for various reasons, ranging from the wish to be responsive to consumer concerns to practical considerations of compatibility of products and insurance/liability incentives.⁹ Often companies have little choice but to comply with these voluntary standards as non-adherence would in practice make it much more difficult, if not impossible, to sell their products.¹⁰ Colombia’s experience of its flower-growing industry with regard to private environmental labels is a telling example. To address concerns about the environmental aspects of flower production in Colombia, several voluntary labelling programs were proposed to Colombia by the German NGOs such as the ‘Colombia Flower Declaration’ and ‘Flower Label Program’. Consequently, while global flower exports showed an upward trend, exports from Colombia to Germany declined markedly.¹¹ During the Uruguay Round, the European Community argued in the TBT Committee that standards drawn up by non-governmental bodies can, when used on a nation-wide basis, in practice created barriers to trade as serious as if they were mandatory technical regulations drawn up by central government bodies.¹² Given their similar economic effects, the term ‘standard’ is widely used in a broader sense to cover both mandatory and voluntary technical standards outside the WTO context.¹³

Product standards are an integral part of a national regulatory framework in modern society just as crucial as hierarchies and markets.¹⁴ They play an important role in ensuring the functioning of the market, increasing economic efficiency, correcting market failures and fostering innovation.¹⁵ To begin with, standards may provide a superior solution to a technical problem. The cost savings of a superior technology can bring about convergence on a single standard by atomistic economic actors without any need of government intervention. Second, standards help overcome the problem of asymmetric information about product quality, enhance compatibility between complementary goods, and mitigate negative production and consumption externalities where the market, left to itself, would fail to provide the optimal level of a good or service.¹⁶ Empirical evidence has demonstrated that companies benefit about 0.5 per cent to 4 per cent of their annual sales revenues from using standards.¹⁷ Third, first mover advantages in standardisation are substantial incentives for firms to innovation. Absent some form of standard setting, technological progress would miss an important instrument for benchmarking and capitalising on technology advances.¹⁸ Next, social pressure or political-legal incentive from third parties may induce a company to comply with standards that are seen as embodying ‘best practices’. For example, direct pressure from activist NGOs has led many businesses to commit at least rhetorically to various ‘fair trade’ standards.¹⁹ Finally, one of the hallmarks of the modern regulation era has been the shift from state-centered, command-control approaches to market forms of voluntary standards.²⁰ States concede part of their powers to other non-state actors that can act more effectively and swiftly due to their expertise, focus and smaller size. A particular standard developed by a private body may also be referenced or incorporated in laws or regulations. For example, as part of the US federal law, Public Law 104-113, the National Technology Transfer and Advancement Act, and the accompanying Administrative Circular requires federal agencies to consult with, participate and use technical standards developed by voluntary consensus standards bodies for both regulation and procurement.²¹

Product standards vary sometimes tremendously among countries, and very often for good reasons such as different levels of development, technology, environmental requirements and preferences. For example, absent any regulatory measures, the level of risk posed by the same product may differ when in different countries. This may be simply because of differences in local conditions, eg, climatic or geographical conditions, so that some countries will be more exposed to risk than others.²² On other occasions, average income and the income distribution will have considerable influence on citizen preferences. Consumers in developed countries with higher per capita income are more willing to bear additional costs to ensure a higher level of product safety and quality.²³ The difference may also come from the cultures and experiences of citizens in different societies. A nation that has experienced a serious health issue may exhibit a stronger demand for stringent standard of a particular sort. National constituencies that are less comfortable with markets and more sanguine about government intervention may prefer more intrusive regulation. Likewise, some societies have a greater awareness of, and sensitivity to, ecological concerns than other societies. Due to these differences, the desired standards that states choose to afford their citizens will also differ. In the same vein, we may also expect that risk-reducing measures necessary to achieve a given level of desired risk will differ among countries for the same reasons. For example, some governments may consider the ‘controlled use’ of a hazardous substance sufficient to protect human health, while others may believe that an outright ban should be in place.²⁴

Despite many benefits that product standards bring to our society, they are not always applied to secure these benefits. Economic literature has told the story of how product standards may be captured by well-organised interest groups or narrow constituencies at the expense of the general interests of the whole society at large.²⁵ Such capture can readily produce regulatory heterogeneity and associated impediments to international trade. Indeed, the tendency to misuse standards for trade protectionism purposes is inevitable in a world where the commercial interests of foreigners have little or no representation in the political life of the state enacting the standards.²⁶ Consequently, product standards may be designed to the effect of discriminating the imported products vis-à-vis domestic like products.²⁷ For example, in US – Gasoline, under the banner of environment protection, the US required that all imported gasoline comply with a specific emission standard, while put either no restriction or a less stringent standard on domestic gasoline.²⁸

Even though a product standard may be applied in a prima facie non-discriminatory way to both domestic and imported goods, the immediate cost impact of the standard may be non-uniform, with higher costs falling on imported goods.²⁹ This may be accomplished, for instance, by requiring the use (or non-use) of technologies, processes or ingredients in which domestic firms have a proprieta...