Non-tariff barriers: What government should do to ensure MSMEs remain competitive globally

Published: December 3, 2019 12:10:23 PM

Logistics for MSMEs: Ensuring compliance with the ever-changing NTBs require SMEs to make costly investments in terms of adapting to requisite production processes, packaging and labelling specifications etc.

It is in India’s interest to support a holistic global effort in this regard to ensure that NTBs do not become a hindrance in its growth.
  • By Ashish Chandra

Logistics for MSMEs: The future of the World Trade Organization (WTO) as the global body for multilateral trade is in limbo following the objection taken by the United States vis-à-vis the role of the WTO Appellate Body. While this impasse has already impacted on-going multilateral trade negotiations as well as the WTO Dispute Settlement mechanism, at stake are the gains accumulated over the last 25 years with respect to the administration of global trade. If the present impasse is not resolved, going forward things may become more difficult.

The current crisis at WTO could not have come at a worse time given that many countries are resorting to policies which are protectionist in nature. As tariff rates on multiple products have been reduced globally pursuant to the conclusion of the Uruguay rounds of trade negotiation in 1993 which led to the establishment of WTO, many countries often resort to Non-Tariff Barriers (NTB) to protect domestic manufacturers and safeguard national interests. This has led to the imposition of NTBs in the form of Sanitary and Phytosanitary (SPS) standards and Technical Barriers to Trade (TBT) standards by many countries.

Impact on Small Businesses

While the imposition of NTBs may or may not have legitimate goals, it often poses a challenge for enterprises in developing countries and least developing countries (LDC) to comply with NTBs in order to export. Specifically, the burden is felt most by small and medium enterprises (SME) in these countries who often are unable to comply with these NTBs and the same impede their integration into the global value chains.

Studies show that TBT measures cover 30 per cent of international trade barriers with about 60 per cent of agricultural produce being subject to SPS measures. Ensuring compliance with the ever-changing NTBs of each export market requires SMEs to make costly investments in terms of adapting to requisite production processes, packaging and labelling specifications or undergoing multiple certifications for a singular product. This can sometimes lead to them becoming non-competitive as they grapple with lack of financial resources, time to adapt, and technical/ scientific knowhow.

For example, agro-based SMEs in India contribute immensely to employment generation, food security, and poverty reduction. With globalization and liberalized international markets, the global agri-food economy is experiencing a transformation like never before. While it offers several new opportunities for these SMEs, it also poses significant challenges, such as being unable to ride the growth wave for being non-compliant with the exacting quality and safety standards prescribed by advanced markets in the west.

Also read: Govt purchases from MSMEs exceed minimum procurement limit again; here’s how many businesses benefitted

In fact, the SME Competitiveness Outlook published by the International Trade Centre (ITC) in 2016, highlighted that, the sectors with the highest number of technical regulations per imported product and the highest share of imports subject to such regulations are fresh and processed food. This is more so because food consumption has a direct effect on human health and life.

NTBs Must Not Hinder SMEs

A case for reference is the issue of Maximum Residue Levels (MRL) of pesticide allowed in food or feed products. In this respect, the European Union (EU) has stringent norms. The EU follows a hazard-based approach, that is, if a chemical used in the cultivation of a crop is hazardous, it is not weighed against potential exposure risks. Thus, even very low levels of residue in the produce can be a cause for rejection. This is a departure from the ‘hazard times exposure’ approach followed by CODEX to determine the risk.

In view of the position taken by EU, various countries including India have raised concerns about EU notified MRLs on various pesticides at the WTO. It has been contended that EU has based their decision on a hazard approach and scientific evidence for conclusions on potential health hazards have not been considered. Instances that have been reported in media include a strikingly low MRL of 0.01 mg/kg prescribed for ‘Imazalil’ for bananas against a CODEX threshold of 2.0 mg/kg. Additionally, shorter time frames for adjustment to new standards are also being contended.

Given the rise in protectionist measures specifically the NTBs, it is important to ensure that the gains from the last 25 years on mutual recognition and convergence of regulatory standards are not done away with. Specifically, for developing countries like India, it is in their interest to support a holistic global effort in this regard to ensure that NTBs do not become a hindrance in their growth and specifically of SMEs. According to the CII, the Indian SME sector created the most jobs in the last four years. Given the opportunities available, it is in India’s interest to support and ensure the convergence of NTBs to ensure that the SME sector in India is not at a disadvantage.

(Ashish Chandra is the Partner at L&L Partners. Views expressed are the author’s own.)

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