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Executive Summary

The Internationalisation Monitor describes trends in globalisation and the consequences thereof for the Dutch economy and society. It is published quarterly as part of the Globalisation research agenda at Statistics Netherlands (CBS), commissioned by the Dutch Ministry of Foreign Affairs.

Globalisation is largely driven by declining international trade costs. The World Trade Organization (WTO) plays an important role in these decreasing costs. In the treaties of this organisation, countries have agreed to keep their import tariffs as low as possible and not to discriminate between foreign and domestic producers. There is, however, an important exception to this non-discrimination principle. Countries are allowed to introduce a certain potentially discriminatory regulation, if they can proof that it is necessary based on certain considerations (for example health or safety) to introduce regulation. Many so-called non-tariff measures (NTMs) have been established under such a regulation.

UNCTAD defines non-tariff measures as any policy measures other than regular customs tariffs that may potentially have an economic effect on the international trade in goods. Examples of NTMs are quotas or price controls, regulatory and technical measures related to health and environmental protection. NTMs could therefore be trade policy measures, but might also be implemented to ensure the quality and safety of imported products. Thus, they may influence the price of imported products as they impose certain requirements on suppliers with regard to the quality of the export product or production process. Although such requirements entail additional costs for the producer, the improved quality could increase demand nevertheless. In short, the effect of NTMs on trade is twofold.

Since the establishment of the World Trade Organization (WTO) in 1995, import tariffs worldwide have fallen steadily, while non-tariff measures (NTMs) have been on the rise. Based on the coverage ratio, about 90% of Dutch goods exports in 2020 were subject to at least one NTM regulation. This high share is consistent with an apparent increase in global protectionism, which traders and producers have to deal with. Global concerns about the possible economic effects of NTMs are therefore growing. Since NTMs are becoming increasingly common and their effect on international trade ambiguous, this Internationalisation Monitor offers a deeper insight into a wide range of aspects of non-tariff measures.

In this edition, we would like to offer more insight into what non-tariff measures (NTMs) mean in general and to Dutch trade in particular; the effects of NTMs on product quality and cost; and the extent to which (domestic) production in global value chains is affected by such measures?

Listed below are some of the main findings presented in this edition:

Chapter 1: Non-tariff measures: an introduction

  • Non-tariff measures (NTMs) are those policy measures, other than customs tariffs, that potentially have an economic impact on international goods trade, changing quantities in trade or prices or both.
  • Countries apply NTMs in order to regulate the conditions for market access: either from a trade protectionist point of view by shielding the internal market from foreign competition, from a precautionary perspective by increasing the safety and quality standards of imported products, or politically by putting other countries under economic pressure.
  • We can distinguish two types of NTMs: the technical measures that require certain standards with regard to health, safety and the environment, and the non-technical measures that serve commercial policy interests by regulating incoming and outgoing goods. With respect to the technical measures, we will focus on Sanitary and Phytosanitary Measures (SPS) and Technical Barriers to Trade (TBT).
  • The non-technical measures can be further categorised into instruments of trade policy (e.g. quotas, price controls and export restrictions), trade defence instruments (e.g. anti-dumping and safeguard measures) and behind-the-border measures (e.g. trade-related investment measures, subsidies and intellectual property measures).
  • The rules of non-discrimination of the domestic industry against foreign producers are established in the General Agreement on Tariffs and Trade (GATT) of the World Trade Organization (WTO), by which all members (most countries worldwide) must abide. However, there is a provision that allows for ‘general exceptions’ if necessary to protect public health, safety or the environment, on the basis of which most NTMs have been implemented.
  • NTMs may affect the costs of a product in different ways: 1. requirements for the production process (e.g. labour standards) increase the production costs, 2. requirements for the characteristics of the product (certain quality standards) increase the production costs as well, 3. customs regulations (e.g. minimum import prices) increase product prices at the border, and 4. consumer regulations (e.g. taxes) affect the final price consumers pay.
  • Aside from prices, NTMs (mainly TBT and SPS measures) can influence the quality of traded products.
  • Finally, NTMs can affect trade volumes, because of the influence they can have on product quality and on prices. Since quality improvements can increase the demand for products while higher costs can lower the demand, the final effect on trade volumes is unclear.

Chapter 2: NTMs and Dutch exports

  • Non-tariff measures (NTMs) can be measured using a variety of indicators, for example by employing the coverage ratio, frequency index, prevalence ratio, regulatory distance and ad valorem equivalents (AVE).
  • Based on the coverage ratio, about 90% of Dutch goods exports in 2020 were subject to NTM regulations.
  • Products are often subject to multiple NTMs. South Korea, China and Brazil impose on average the most NTMs on Dutch exports: 7.8, 7.3 and 7.1 respectively. This implies that in general, a Dutch exporter must comply with more than 7 different regulations per product in order to export to those countries. EU countries impose an average of 6.8 NTMs per exported product.
  • Slightly over one-quarter (26%) of the total value of Dutch exports was subject to SPS measures. There is a high concentration of SPS measures related to agricultural goods, natural products and food.
  • Among all NTM chapters, Dutch exports were by far the most subject to TBT measures; this type of NTM applies to 87% of the total Dutch export value.
  • More than half (53%) of the Dutch exports to countries outside of the EU have to comply with export-related measures. This involves a broad spectrum of export requirements.
  • Almost all exports to China (87%) are subject to export-related measures. This is mostly related to the export of food and beverages, and of machinery and transport equipment.
  • NTMs can also be measured by their ad valorem equivalent (AVE): the costs of the NTM as a percentage of the price, similar to import tariffs. From the literature we know that SPS measures push up prices of traded goods worldwide by 2.9%, while TBT measures increase prices by 4.1%.

Chapter 3: Import tariffs, NTMs and export quality

  • The average price of an exported product, the unit value, is often used as an indication for the quality of the exported product. However, a better indicator is based on the unexplained variation in demand. If one product still exhibits higher demand than another product after controlling for observed and unobserved differences between the two, this must be due to differences in quality (Khandelwal, Schott and Wei,  2013).
  • Export quality correlates positively with the distance to and level of income in destination countries, the scope of product differentiation and some firm characteristics such as productivity and size.
  • Trade policy instruments such as tariffs and non-tariff measures may impact the quality of products. We find that import tariffs in extra-EU destinations typically harm the quality of exported products from the Netherlands. This effect is dependent, however, on product and firm characteristics.
  • While products closer to the quality frontier or produced by more productive firms do indeed undergo significant quality upgrading in the presence of lower tariffs, products of inferior quality or produced by less productive firms do not display the same thing. This can be explained by Amiti and Khandelwal’s (2013) notion of the ‘distance to the world quality frontier’. Here, firms with lower productivity levels compete in terms of price, while firms with higher productivity compete in terms of product quality.
  • Technical Barriers to Trade (TBTs) aim to ensure product quality and safety. As such, contrary to import tariffs, they can be expected to improve product quality. We indeed observe that: for each additional TBT in the destination market, the exported product quality is 0.2% higher. This upgrading effect is particularly present for B2 (Tolerance limits for residues and restricted use of substances), B4 (Production or post-production requirements) and B7 (Product-quality or performance requirements) measures.
  • Here, too, we find heterogeneous effects. Firstly, the upgrading effect is largest in North, Central and South America, as well as Asia. We do not observe any upgrading effect for products exported to European (but non-EU) countries, which may have to do with the fact that such countries may align their rules with the EU and since we already control for the effect of European NTMs in our specifications.
  • Secondly, there is a divergence between different sets of firms or products in terms of the effect of NTMs on quality. SMEs and products of lower quality in particular are the ones undergoing a quality upgrading effect from TBTs.
  • Concluding on the comparative effects of both tariffs and non-tariff measures, it is evident that while they both affect quality, their underlying mechanisms are very different. Whereas import tariffs have a negative impact on the quality of especially the highest quality goods, NTMs tend to have a positive effect, in particular on the lowest quality products.

Chapter 4: NTMs: An investment in quality?

  • The costs of non-tariff measures can be expressed as a percentage of the sales price. This is called the ad valorem equivalent (AVE). This chapter firstly measures the AVEs of both Sanitary and Phytosanitary (SPS) as well as Technical Barriers to Trade (TBTs) according to standard academic practice.
  • The measured AVEs of TBTs indicate there are significant compliance costs involved as the sales price is 0.05% higher for every additional TBT that is levied by the country of destination. Especially subchapter B2 ‘Tolerance limits for residues and restricted use of substances’ as well as B8 ‘Conformity assessments’ are associated with significantly higher costs. For example: each additional B2 measure increases the export price by 2.0%.
  • Overall, SPS measures do not significantly increase the price of agricultural products. However, specific subchapters such as A1 ‘Prohibitions/restrictions of imports for SPS reasons’ and A5 ‘Treatment for elimination of plant and animal pests and disease-causing organisms in the final product’ may lead to significant extra costs. For each additional A1 measure, the costs are 1.9% higher while for each additional A5 measure the costs are 5.0% higher.
  • At the same time, however, the imposition of an NTM may increase the average quality of a product. Since higher quality products are also more expensive, it makes sense to assess the quality upgrading effect in the AVE. We therefore break down the AVE into its quality component and the so-called quality adjusted price.
  • Doing so shows that the quality upgrading effect of TBTs widely outweighs their compliance costs. While each additional TBT leads to 0.05% higher costs, the quality improvement is 0.15% for each TBT. The quality adjusted price change is therefore negative. This effect is visible for most TBT subchapters. Only B8 ‘Conformity assessments related to TBTs’ are associated with higher costs without the quality benefits, leading to a significantly higher quality adjusted price as well.
  • For SPS measures, the aggregate results are less outspoken. However, the significant AVEs for A5 are completely offset by the quality improvement while for A1, they are only partly offset.
  • We also observe differences in these costs between various export destinations. Compliance costs are particularly high in Central and South America and to some extent in Asia. In North America and (non-EU) Europe, we do not observe any significant compliance costs, which may have to do with the rules being similar between those destinations and the Netherlands. We also observe negative costs for NTM compliance on exports to Africa, which might have to do with the rules being less stringent or less enforced there.
  • Finally, we observe significant differences in the costs and (quality) benefits between firms of different sizes and ownership structures. Especially smaller firms or firms that are not part of a multinational conglomerate experience higher compliance costs. These costs are, however, again offset by quality improvements which are only present for these types of firms, such that the differences in quality-adjusted prices between both types are insignificant.

Chapter 5: Technical barriers to trade and international production chains

  • Dutch importers and exporters both have to deal with technical barriers to trade (TBTs). TBT-related costs for importing companies are on average 17.1% of the import value; for intermediate imports this is 11.6% of the import value. The total costs incurred due to TBTs on domestically produced exports are estimated at €9.4bn and for the import of raw materials and semi-finished goods at €7.4bn.
  • In exports, the costs of TBTs are relatively high for the electrical appliances industry, the electrical engineering industry and the metal products industry. Exports to Japan, Oman and New Zealand in particular are facing relatively high costs due to the presence of technical barriers to trade. In absolute terms, costs due to TBTs are highest for exports to the US and China.
  • In the case of imports, it is mainly the electrical engineering industry, the machinery industry and the other transport equipment industry that have to deal with relatively high costs due to non-tariff measures. In absolute terms, the costs resulting from TBTs are highest on intermediate imports from China and the United States. Relatively speaking, the costs due to TBTs are remarkably high on imported raw materials and semi-finished products from Taiwan and Hong Kong.
  • Exports require imported inputs. Within Dutch production chains, we see that for Dutch exporters, at €3.5bn, the direct costs of TBTs on intermediate imports significantly exceed their indirect costs, which amount to almost €1.1bn. Indirect costs refer to the costs of imported raw materials and semi-finished products purchased by the exporters from Dutch companies that previously imported these products. Exporting industries that face relatively high indirect costs are the food, beverages and tobacco industry and the chemical industry.
  • Countries and sectors that are highly integrated in global value chains are characterised by a high import content of exports. The extra-EU import content of Dutch extra-EU exports is 18.3%. The costs due to TBTs on Dutch exports are 17.1% of the export value, with an additional 1.7 euro cents for every euro of exports incurred by TBTs for the required imports. The magnification effect, or the relative increase of the export costs due to TBTs, therefore amounts to 10%. The magnification effect is particularly striking in the other transport equipment industry (42%), the electrical engineering industry (20%) and the textile, clothing and leather industry (19%).

Chapter 6: Desperate times call for desperate measures: NTMs in times of COVID-19

  • During the initial outbreak of the novel coronavirus and the ensuing COVID-19 crisis, countries experienced acute shortages of certain critical goods, such as medical goods or personal protective equipment.
  • Throughout 2020 and the first month of 2021, the European Union, the Eurasion Economic Union and 128 individual countries implemented a total of 304 – temporary or ongoing – NTMs on the imports and exports of certain goods in order to manage the COVID-19 crisis.
  • Over a third of these NTMs are trade facilitating, such as national VAT exemptions on certain goods. Developing countries implemented facilitating NTMs just as often as developing countries, namely in 35% of the cases.
  • Over 70% of the COVID-19 NTMs refer to medical goods such as syringes, medication and drugs (for example an export ban on (hydroxy)chloroquine), vaccines, COVID-19 test kits, and protective equipment such as face masks, medical aprons, protective glasses and disinfection materials. NTMs on foodstuffs comprise 16% of all NTMs, e.g. (temporary) export bans on rice, wheat, beans, onions or garlic.
  • Securing national supplies of medical goods, personal protective equipment and foodstuffs was the main motive for implementing NTMs. More than 80% of the NTMs had this objective.
  • Nearly half of COVID-19 related NTMs were implemented in March (150 NTMs) and April (88 NTMs) of 2020. As a result, 85% of the COVID-19‑related NTMs were activated in the first four months of 2020, at a time when the number of people dying from COVID-19 (worldwide) also peaked. By the end of 2020, 185 of the COVID-19‑related NTMs were still active. Even though the pandemic was far from over at that time, the initial panic had subsided and, despite significantly rising numbers of daily COVID-19 deaths, very few new NTMs were implemented.
  • The import of COVID-19 related goods grew in 2020. For example, the Netherlands imported twice as many COVID-19 test kits by the end of 2020 as it did at the beginning of that year. Perhaps surprisingly, is that this increase is observed in the second half of 2020, despite the fact that the first wave of COVID-19 related deaths was already in March and April. This apparent delay might be due to global shortages, trade policies or firms needing to restructure their value chains.

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Medewerkers

Auteurs

Marcel van den Berg

Timon Bohn

Sarah Creemers

Dennis Dahlmans

Loe Franssen

Marjolijn Jaarsma

Angie Mounir

Tom Notten

Janneke Rooyakkers

Khee Fung Wong

Redactie

Sarah Creemers

Marjolijn Jaarsma

Janneke Rooyakkers

Eindredactie

Sarah Creemers

Marjolijn Jaarsma

Janneke Rooyakkers

Dankwoord

We danken de volgende personen voor hun constructieve bijdrage aan deze editie van de Internationaliseringsmonitor:

Deirdre Bosch

Frans Dinnissen

Gerard den Drijver

Mahdi Ghodsi

Janneke Hendriks

Irene van Kuik

Sandra Vasconcellos

Rik Verhulst

Gabriëlle de Vet

Karolien van Wijk

Hendrik Zuidhoek