Abstract
This chapter presents a theoretical model of how private standards diffuse from one country to another country and examines the policy options available for domestic governments. The motivation behind the eagerness by foreign governments to incorporate foreign private standards in their public policies appears to stem from the desire to increase exports. The underlying assumption is that if standards and regulations are harmonized with major importing countries, then their exports will increase. This chapter explores the impact of different modes of incorporating of private standards into the domestic economy through public policy. Using the Krugman's monopolistic competition model, it shows how these different modes of incorporation impact on firms of different types.
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Notes
- 1.
This includes international standards, such as ISO, and other standards created by private companies, regardless of whether they are made public and those created by non-governmental organizations.
- 2.
Although typically, non-compliance with public regulations leads to a punishment, there is no such mechanism for non-compliance with private standards, except for losing sales, which is a sufficient incentive for a private company.
- 3.
Most empirical research focuses on this case. For agricultural products, see Henson et al. (2011), Jaffee and Masakure (2005), Subervie and Vagneron (2013) on the effect of GLOBALG.A.P. certification on exports from developing countries, and Kleemann et al. (2014) on organic certification. For manufactured products, see Chen et al. (2014), Honda (2012), Michida et al. (2014), Michida et al. (2014a, 2014b), Otsuki et al. (2014), Ramungul et al. (2013).
- 4.
For example, Indonesia is including certification for some good agricultural practices (a specific private standard, GLOBALG.A.P.) to obtain licenses to import certain agricultural products (Nabeshima et al. 2015). In addition, California in the United States of America is including the European Union’s Restrictions on Hazardous Substance (RoHS) directive as a part of their environmental policy (See Chapter 3).
- 5.
Standards a and b may be different. However, they can be benchmarked with each other to establish equivalency, so that both standards lead to equivalent outcomes. This is similar to the mutual recognition agreement between governments, although it is different from harmonization where the content of the standards is the same.
- 6.
Benchmarking can be done by the standard owner or by another entity. For instance, GLOBALG.A.P. (a private standard created by major European retailers aimed at primary product production) benchmarks other private standards. Global Food Safety Initiatives (GFSI) by the Global Consumer Forum also benchmarks different standards related to food safety. Under GFSI, GLOBALG.A.P. and other standards are recognized as approved standard schemes. GFSI does not own any standards, but focuses on benchmarking activities.
- 7.
There are many types of private standards with different assessment methods. For instance, many companies create a supplier code of conduct, which is also a private standard. The assessment is typically done by the buyer company to see whether the supplier meets the code of conduct. Thus, the audit cost is borne by the buyer, not by the supplier. There is also a private standard with certification. In this kind of scheme, the audit cost of compliance to a standard is borne by the suppliers.
- 8.
It is also conceivable that a company may need to incur a fixed cost associated with changes in production process (e.g., additional investment necessary to ensure safety) to comply with a private standard. However, that would be a one-off cost to obtain the certificate. What we are interested in is the cost of maintaining the certificate, so we do not consider this one-time adjustment cost in this model.
- 9.
For instance, Thai farms consider that the initial cost and recurring costs of GLOBALG.A.P. certification is a significant hurdle (Kersting and Wollni 2012).
- 10.
Because we are only looking at the industry sector level, we assume that companies do not face resource constraints.
- 11.
This can be regarded as two different companies, or a company with two different production lines, one for the domestic market and the other for the foreign market.
- 12.
Another interesting question is whether foreign companies will enter the domestic market. If the foreign company’s fixed cost is \({\ F_1}\), they cannot penetrate the domestic market, although if we assume that the domestic market is also segregated, then foreign companies may be able to enter. However, if the fixed cost in the domestic market is increased to \({\ F_1}\), then the foreign companies would be better positioned to enter because the playing field is leveled.
- 13.
In this model, we treat the foreign demand as exogenous to make the analysis simpler. In this kind of model with identical companies, the composition of domestic and foreign companies is unknown, and only the trade volume is known (Krugman 1979).
- 14.
Most countries have adequate IPR laws, especially WTO members, because they need to sign the Agreement on Trade-Related Intellectual Property Rights, which specifies the minimum level of IPR protection. However, enforcement varies widely among countries (Park 2008).
- 15.
A regulated market here refers to markets governed by stricter public mandatory regulation and markets governed by a private standards. As argued earlier, for a private company, a requirement is a requirement regardless of the origin.
- 16.
Although monopolistic competition is a long-run model, we may need to incorporate longer time horizons where the fixed cost can change.
- 17.
For instance, in a sample of companies studied by Schuster and Maertens (2015), GLOBALG.A.P. certification was the main private standard adopted by the Peruvian asparagus industry, accounting for 34% of certification, and Hazard Analysis and Critical Control Point (HACCP) and British Retail Consortium (BRC). Global Standards are the next two most popular processing standards.
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Acknowledgment
Part of this work was supported by JSP KAKENHI Grant Number 15K00675 and 15H03350.
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Nabeshima, K. (2017). Preliminary Theoretical Model for Standard Promotion from the Perspective of Governments. In: Michida, E., Humphrey, J., Nabeshima, K. (eds) Regulations and International Trade. IDE-JETRO Series. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-55041-1_6
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