The biggest drag on global trade isn’t tariffs, but standards

NOTHING HAS done more to juice global trade than a simple receptacle—spanning about 40 feet on the long side and eight on the other two. It could be stuffed with cargo and hoisted onto lorries, trains, ships or planes with equal ease. That humble steel box—the standard shipping container—did “more than all trade agreements in the past 50 years put together” to boost globalisation, this newspaper has noted.

Today, globalisation is being pushed in the opposite direction. Ask for the reason, and many fingers will point at increases in tariffs. It is, however, standards, not tariffs, that are doing most of the pushing—and are the bigger threat to globalisation.

Standards—mainly involving product-safety and environmental requirements—shape which products can get to markets, and which cannot. A tariff can be passed on to consumers in the form of higher prices. Or it can cut into profits. A new standard used as a trade barrier can, at least for a while, cut off trade entirely.

Technical non-tariff measures have overtaken tariffs as the dominant drag on trade. Between the establishment of the World Trade Organisation in 1995 and 2021, the standard tariff rates that WTO members apply to one another fell by nearly half. Governments, however, simply switched to a different instrument of restraint: non-tariff measures went on the upswing, offsetting much of the decline in tariff rates.

Non-tariff measures now affect 90% of global trade by volume, six times the share three decades ago. More than half of the more than 20,000 standards established over the past seven decades did not exist before the turn of this century. The result has been overlapping and often contradictory national and international rules that cause confusion and increase compliance costs.

High-income economies remain the biggest implementers. Unfortunately but understandably, many developing countries have also jumped on the bandwagon. No wonder that in 2024 the WTO received nearly 6,500 notifications of technical barriers and new health and safety rules covering trade in food, animals and plants—a ten-fold increase from 1995.

Non-tariff measures are not inherently protectionist: they can be legitimate tools to protect health, safety and the environment. Yet their effect on developing countries’ exports is often restrictive. That’s because developing countries export a larger share of products subject to these measures—food and agricultural commodities, in particular. Exporting countries must now comply with four times as many technical regulations on average as was the case three decades ago. Countries often tighten technical regulations shortly after surges in imports, suggesting the real purpose of many such measures may be to shield domestic producers.

The consequences can be harsh. It can cost an exporter $425,000 to obtain certification of compliance—a prohibitive sum for most firms. Developing countries lack the vast system of auditors and testing facilities necessary to make certification affordable. Ethiopia, for example, has fewer than 100 auditors for standards related to the International Organisation for Standardisation (ISO); Germany has 12,000. Not surprisingly, German firms face lower certification costs, ranging from $3,000 to $11,500.

A standard can be a good thing: improving safety and the environment while acting as a quiet catalyst of economic progress, cutting costs, simplifying processes, boosting efficiency and aiding innovation. But this depends on precise co-ordination and co-operation. That is not what has happened over the past 25 years.

Establishing order depends on the full participation of all countries. Today, developing countries are seldom at the table when standards are written, usually because of a lack of resources and expertise. They should step up their participation—by gradually building capacity. As their capacity grows, they should align national standards to international norms. Eventually, they should strive to help write global standards.

When standards are done right, the pay-off can be enormous. In the 1920s America’s Division of Simplified Practice, established by Herbert Hoover when he was commerce secretary, served as a neutral broker for voluntary industry standards. Working through trade associations, it had implemented 173 Simplified Practice Recommendations by 1939. By increasing compatibility, standards cut waste and freed up capital for innovation. South Korea, for its part, built its entire economic strategy on a foundation of quality standards. To compete abroad in the 1960s, the government built high-quality national infrastructure, encouraged the private sector to develop voluntary standards and then ramped up participation in international organisations like the ISO and the International Electrotechnical Commission.

These experiences show that what looks like a technical exercise is in fact a powerful economic policy. Our research shows how developing countries can best use standards. It advocates two fundamental principles. First, governments should set mandatory standards only when needed for public interests such as health, safety and environmental protection. Second, the private sector should be left free to set voluntary standards, as it was in South Korea, with the government stepping in only when collective action fails—and then only as a convenor.

Standards work best when they’re matched with capacity. No standard will stick if it cannot be easily used by the largest possible number of people. This was the insight that transformed the inventor of the standard shipping container, Malcolm McLean, into an unlikely architect of globalisation: after coming up with the idea, he turbocharged its global adoption by authorising the ISO to distribute the patent free. The rest is history.■