Global value chains (GVCs) have become a dominant aspect of international trade, comprising developed, emerging, and developing economies. Although this has brought economic and societal benefits across the globe, the complexity and expansion of GVCs sometimes lead to failure in addressing the adverse social and environmental and even economic impacts.

Thus, stakeholders along the value chain start calling for more sustainable trade. Nowadays, sustainability has become a key concern for all business operations, and Voluntary Sustainability Standards (VSS) are in the centre of the sustainability approaches.

The expansion of VSS, however, has brought new complexity in trade policy dialogues.  The mystery of the possible impact of VSS on trade remains to a certain extent unsolved and needs further discusses from both theoretical as empirical perspective.

 

Trade and VSS: Theoretical Perspective

Economic literature refers that VSS can be catalysts to trade through increased exports, as they provide a competitive advantage to complying producers and result in product differentiation, harmonization,[1] reduce information asymmetries and transaction costs.[2]

However, it is also argued that the expansion of VSS has become an increasing concern for suppliers, in particular those in low-income countries. If VSS are de facto mandatory, small-scale producers mainly risk being excluded from export value chains due to high compliance costs and increasing monitoring costs.[3] Some researchers conclude that standards could reduce trade when the compliance costs outweigh transaction costs and foster trade vice versa.[4]

Which side does the empirical evidence support? The answer is not univocal. The limited number of studies that look at this question (we only found nine studies, five at country level and the rest at firm level) give contradictory results, but also, are few in number and case-specific that focus on very few standards and products.

 

Trade and VSS: Empirical Evidence

Table 1 summarizes the reviewed papers. While country-level studies (which mainly employed gravity models) conclude that certifications have a favourable impact on trade[5], firm-level studies find no significant trade enhancing effect,[6] or a mixed effect.[7] These mixed results represent a huge challenge when trying to derive policy recommendations for developing countries and VSS.

Table 1: Summary of reviewed papers

What can be concluded?

– The small number and recency of studies in this field highlights that this area is indeed underexplored and signifies the need to dig more into it.

– The available evidence of the trade impact of VSS is relatively weak and case-specific for many reasons including: studies are extremely few, and focus on very few standards (GlobalGAP, IFS, BRC, LEAF, GMP). In addition, the studies focus only on the agricultural sector. Also, most of the available studies focus on the same trading partner that is the European Union countries.

Challenges to overcome

The main challenge that has held back the empirical scholarship on this field is the absence of publicly available data on standards[8]. Furthermore, there are many challenges regarding the possibility of building and utilizing a large panel dataset from limited available data, including missing values and double certification.

Another challenge includes developing quantitative measures of VSS coverage. The literature uses the inventory approach and employs mainly two variables that are: the number of certified firms or producers and the number of hectares harvested. This approach doesn’t differentiate between all existing standards as it gives equal weight to all of them. It also doesn’t distinguish between small and large firms (when using firm-level data). Other measures that can also be utilized if available include certified area and certified production volume.

 

What is next?

There is a need for more research in this area. Also, more considerable recognition needs to be devoted to the channels through which VSS potentially impact trade. Furthermore, there is a need for higher transparency in terms of data availability. One way to overcome the data issue is to establish a research collaboration/competition, where interested researchers from all over the world follow a similar methodology in data gathering and analysis. In a way that enables merging these data into one model/analysis technique to arrive at conclusive derivations.

Many questions have not been adequately addressed yet. Among these questions: (1) Are developing countries more affected by VSS? (2) Are small-medium sized firms more adversely affected by VSS? (3) How are particular sectors/products affected by VSS? And (4) Do Harmonization and Mutual Recognition (for example, in the case of organic certification) necessarily impact trade positively?

From a policy point of view, additional questions need to be addressed, for example, whether policies that support VSS adoption (directly or indirectly) ultimately have an effect on VSS adoption and therefore trade? What policies generated an observed impact on trade? What VSS related policies work the best for developing countries in their attempt to compete in the global market?

 

ENDNOTES:

[1] Masood A and Brümmer B (2014). Impact of GlobalGAP Certification on EU Banana Imports: GlobalFood Discussion Papers.

[2] Henson S, & Jaffee S (2008). Understanding developing country strategic responses to the enhancement of food safety standards. World Economy. https://doi.org/10.1111/j.1467-9701.2007.01034.x

[3] Unnevehr L J (2000). Food safety issues and fresh food product exports from LDCs. Agricultural Economics. https://doi.org/10.1016/S0169-5150(00)00095-5

[4] Mangelsdorf A (2011). The role of technical standards for trade between China and the European Union. Technology Analysis and Strategic Management. https://doi.org/10.1080/09537325.2011.592267

[5] Anderson, J. E. and E. van Wincoop (2004), ‘Trade Costs’, Journal of Economic Literature, 42, 3,691–751.

[5] Fiankor D D D, Martínez-Zarzoso I, & Brümmer B (2019). Exports and governance: the role of private voluntary agrifood standards. Agricultural Economics (United Kingdom).

https://doi.org/10.1111/agec.12488

[5] Masood A and Brümmer B (2014). Impact of GlobalGAP Certification on EU Banana Imports: GlobalFood Discussion Papers.

[5] Ehrich M, & Mangelsdorf A (2018). The Role of Private Standards for Manufactured Food Exports from Developing Countries. World Development. https://doi.org/10.1016/j.worlddev.2017.08.004.

[6] Schuster M, & Maertens M (2015). The impact of private food standards on developing countries’ export performance: An analysis of asparagus firms in Peru. World Development. https://doi.org/10.1016/j.worlddev.2014.08.019

[7] Colen L, Maertens M, & Swinnen J (2012). Private Standards, Trade and Poverty: GlobalGAP and Horticultural Employment in Senegal. World Economy. https://doi.org/10.1111/j.1467-9701.2012.01463.x.

[7] Latouche K, & Chevassus-Lozza E (2015). Retailer Supply Chain and Market Access: Evidence From French Agri-food Firms Certified with Private Standards. World Economy. https://doi.org/10.1111/twec.12191.

[8] To our knowledge, few sources provide publicly available data that include: FiBL statistics, ITC Standards Map, The State of Sustainable Markets: Statistics and Emerging Trends report.