Globalization and Sustainability: De Jure and De Facto Approach

Abstract

This chapter covers sustainability issues from the industrial development and international trade perspectives. Issues covered can be broadly regarded as Goal 12: “Ensure sustainable consumption and production patterns” but touches upon various goals. In pursuing the goal of sustainability in economic activities, the society can take two different approaches. One is based on laws (including international agreements), de jure approach. The other is based more on the market force, such as based on Voluntary Sustainability Standards (VSS), de facto approach. Within the de jure approach, the chapter will cover efforts at global level (international agreements) and efforts at domestic levels. At the international levels, the chapter introduces some of the key areas and the motivations behind these agreements. For the discussions on the domestic levels, the chapter introduces the differences between the production-based environmental regulations and the product-related environmental regulations, and how this has influenced the industrial activities and international trade. In the part for VSS, the chapter will focus mainly on private standards with third-party certification schemes and how these diffuse across countries through trade linkages and implications to producers especially in developing countries. Finally, the chapter touches upon the governance issues related to regulations and private standards.

This work was supported by a Japan Society for the Promotion of Science (JSPS) Grant-in-Aid for Scientific Research (c) 18K01591.

1 Introduction

Sustainable Development Goals (SDGs) cover sustainability issues in many economic activities. One focus of the SDGs is to promote sustainable consumption and production in Goal 12 such as on chemical management (target 12.4). Achieving this goal will have impacts on the industrial activities and international trade, and Goal 12 is related to many other goals specified in SDGs. For instance, Goal 2 (target 2.4) focuses on development of sustainable agriculture; Goal 3 (target 3.9) on reducing deaths from pollution; Goal 5 (target 5.1) on gender discrimination; Goal 6 (target 6.3) on reducing water pollution; Goal 7 (target 7.2) on renewable energy; Goal 8 (target 8.4) on decoupling economic growth and environmental degradation (which is also covered in Goal 12), elimination of forced labor, and other labor issues (target 8.7 and 8.8); Goal 11 (target 11.6) on city environment; Goal 14 (target 14.4) on regulating harvesting and overfishing; Goal 15 on forest management, to name a few.

To achieve these targets specified in Goal 12 and other related goals, introductions of new regulations (including international agreements) or revisions to the existing regulations may be needed to change the behavior of producers and/or consumers. In recent years, in addition to regulations, some firms are actively utilizing Voluntary Sustainability Standards (VSS) to make their products and/or processes to be more sustainable. This chapter will introduce some of these efforts and offer economic analysis on how these will affect the industrial development and international trade, especially for developing countries. This chapter is organized as follows. Section 6.2 presents a simple economic model based on the Melitz model (Melitz 2003). The key concept is the existence of fixed costs associated with exports which affect the entry decision of firms to export market. Then Sect. 6.3 covers regulatory approaches done at the international level (international agreements) and at the domestic level. Furthermore, in Sect. 6.3, the impact of differences in regulations among exporter and importer countries is discussed. Section 6.4 examines the efforts stemming from the private sector, focusing on the VSS and highlights the motivations behind the increasing use of VSS and issues faced by producers in developing countries. And Sect. 6.5 concludes.

2 Theoretical Discussion

To achieve sustainability goals and to encourage responsible production and consumption, we need to change how goods are produced and consumed. When it is left to the market force, we tend to underestimate (or ignore completely) the burden we impose on environment (and society) since in many instances these costs are not borne by the economic agents. Therefore, to correct this tendency and change our behaviors, a set of rules are required. Sometimes, that rules are agreed upon a group of countries and become international agreements especially true for the global public good (Rodrik 2019). In other occasions, these are introduced as domestic regulations. Private entities (firms or consumers) may establish new rules, called private standards. In any circumstances, introductions of new rules will have impacts on economic activities.

2.1 Entry and Exit Decision of Firms

The impacts of the introduction of new “rules” on international trade can be analyzed by the Melitz model (Melitz 2003). In the Melitz model, there is a large number of firms, each with different productivity levels. Firms decide to stay in the “market” or exit the market depending on whether they can make profits given their productivity level. To operate in the market, a firm must make an initial investment, a fixed cost.¹ Figure 6.1 graphically represents this simple case. In Fig. 6.1, profit a firm earns is represented in the vertical axis. The horizontal axis represents the productivity of firms. To operate in the market, a firm needs to incur fixed cost, $F$. The curve that represents firms profit starts out with $- F$ (i.e., for a firm that does not produce any quantity). The point $A$ in the graph is where a firm with a particular productivity makes zero profit. For any firm that has lower productivity than firm $A$, they will exit the market and do not produce. The market will be left with firms with productivity that is higher than firm $A$.

Fig. 6.1

Source Created by the author

Melitz model only entry/exit decision.

Now, suppose that a country introduces a new regulation, say a clean water regulation which requires firms to install a wastewater facility to prevent untreated discharge of contaminated wastewater to the nature. To comply with this regulation, firms need to make an additional investment to install wastewater facility. Further assume that the cost that is required to install wastewater facility is fixed regardless of the production level of the firm. Figure 6.2 shows the impact of increase in the fixed cost in graphical manner. With the increase in the fixed cost by the new regulation, the profit that a firm can make goes down (a curve representing firms’ profits shift down from the dashed-line curve to the solid-line curve). As a result, the firm that makes zero profit changes from firm $A$ to firm $B$. With the introduction of a new regulations, firms that have lower productivity than firm $B$ will exit from the market. Since more firms exit from the market compared to the previous case illustrated in Fig. 6.1, there is a smaller number of firms operating in the market, with the result that only more productive firms survive. Thus, the market is left with fewer number of firms, yet with higher productivity.

Fig. 6.2

Source Created by the author

Effect of increase in a fixed cost.

2.2 Firm’s Decision to Export

Now consider the case with some firms exporting. Let us assume that there is a fixed cost that is associated with exporting, represented by F_x.² Firms will first serve the domestic market and then decide to export if and only if that can generate higher profits. In Fig. 6.3, there are two curves representing the profits of firms. The dotted-line curve represents the profit of firms that serve only the domestic market. The dashed-line curve represents the profit of firms that serve both the domestic and foreign markets. The assumption here is that at any given level of productivity, the revenues of firms are higher for exporting firms. The profit will be lower for some of the firms because of the additional fixed cost associated with exports, F_x. Similar to the case shown in Fig. 6.1, firms with productivity lower than Firm A will exit the market. Firms with productivity higher than Firm C will export since the profits from exporting (dashed line) are higher than only serving the domestic market (dotted line). Those firms that are located between Firm A and Firm C will serve only the domestic market.

Fig. 6.3

Source Created by the author

Case of exports.

Let us consider the last case, where the importing country introduces a new regulation which leads to increase in a fixed cost for exporting firms (from $F_{x}$ to $F^{\prime}_{x}$). This situation is illustrated in Fig. 6.4. Profits earned by exporting firms are now represented in a solid-line curve. Similar to the case in Fig. 6.3, firms with productivity lower than Firm $A$ will exit the market. Firms with productivity between Firm A and Firm C will serve only the domestic market. However, because of the increase in the fixed cost, only firms with productivity that are higher than Firm D will export. That means firms with productivity between Firm C and Firm D will exit from the export market and serve only the domestic market. Overall, the number of exporting firms decreases. Those that stay in exporting markets have higher productivity than the situation in Fig. 6.3.

Fig. 6.4

Source Created by the author

Effect of increase in fixed costs for exporting.

2.3 Implications from the Theoretical Model

In this section, the Melitz model was used to illustrate the relationship between fixed costs and entry/exit decisions of firms for domestic and foreign markets. When there are fixed costs associated with production, some firms will decide to exit from the market altogether, because the revenue that they can generate cannot even cover the fixed costs. When fixed costs increase, then additional firms will exit from the market.

This mechanism holds true for the exporting market also when there are fixed costs associated with exporting. When fixed costs of exporting increase, then some firms may decide to exit from the export market and concentrate on serving the domestic market. To the extent that development of export industry is an important element for sustaining growth in developing countries, reductions in the number of firms are of great concern.

There are many factors that can lead to increase in fixed costs of exporting, one of which is the introductions of new “rules”. Such “rules” can include international agreements, regulations in the importing countries, and/or the use of private standards. In the next sections, we will cover official rules (international agreements and government regulations) and unofficial rules (private standards).

3 De Jure Approach

When left to the market force alone, economic agents may overdo certain activities when the costs of such activities are not borne by the economic agents. For instance, if the economic agents do not bear the costs of extinction of certain species, and such species (or some parts of) have economic values, they tend to overhunt or overfish, leading to possible extinction of the species. In another case, it may be chemical substances that are harmful to human health and/or environment. If such chemical substances are economically useful, firms will use them, especially when the firm does not bear the costs of ill human health and/or environmental damages resulting from such use.

To correct these problems, often “regulations” are created to control the behavior of economic agents. In this chapter, we will make a distinction between “regulations” and “standards”. Regulations are created and enforced by public agents, are mandatory, and legally bounding. Often, the violations of regulations carry some penalties. In contrast, standards are created by either public or private entities, and standards are voluntary in nature. They are not legally binding and do not carry any (official) penalties when one does not follow standards. We will discuss the nature of standards in more detail in the next section.

Here, we focus on the regulations (mandatory rules). When one thinks of regulations, there are regulations that are supranational in nature (including international agreements) and domestic regulations. In the following subsections, we will cover international agreements and then domestic regulations and assess their impacts on international trade.

3.1 International Agreements

There are many international agreements in force focusing on sustainability issue. Each of them focuses on a certain issue. Let us look at some of the agreements below.

One of the well-known agreements is “Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES)”. The main purpose of this international agreement is to make sure that international trade in wild animals and plants does not cause harm to their survival, and it covers a wide range of wild animals and plants. Wild animals and plants listed in Appendix I mean that they are threatened with extinction, and, in general, commercial international trade³ of these is prohibited. Those listed in Appendix II are not facing immediate extinction risk, if and only if international trade is controlled sufficiently. Appendix III includes wild animals and plants that are already subject to regulations by a country and require cooperation from other countries (importing countries) to ensure that these are not traded illegally (Table 6.1).

Table 6.1 Number of species and subspecies covered by CITES

The main mode of regulation takes the form of quotas, the restrictions on quantity.⁴ Those listed in Appendix I, the commercial international trade is prohibited; hence, the quota is zero. For those in Appendix II, if they are captured in accordance with domestic regulations, catch or extraction of these do not threaten the survival of the species (which is verified in scientific manner), and have requisite certificates and permits that can be traced through the trade, then international trade is allowed in limited quantity. The quota can be set by the domestic country or through collective agreement.

The previous example was wild animals and plants and trading of species or their artifacts. In addition to this, there are many international agreements related to chemicals that may be harmful to human health and/or environment. For instance, “Montreal Protocol on Substances that Deplete the Ozone Layer” aims to phase out the consumption and production of nearly one hundred ozone depleting substances (ODSs) such as chlorofluorocarbons (CFCs), halon, carbon tetrachloride, and others.⁵ Use of CFCs was widespread in our lives such as in air conditioners and refrigerators as refrigerants and aerosol cans as propellants. CFCs were also used in some medical device such as inhaler for asthma patients. ODSs are also widely used in the manufacturing processes. The adoption of the Montreal Protocol has led to the changing in production process as well as changes in products mainly by the use of alternative substances. The Kigali Amendment aims to phase down the projected consumption and production of hydrofluorocarbons (HFCs), which was developed as substitute for CFCs yet known to be greenhouse gases. The goal is to reduce the consumption and production of HFCs by 80% in the next 30 years. Developed countries are already starting the phase-out process, while developing countries will start from consumption freeze in 2024 (or 2028 for come countries) (Ozone Secretariat 2019).

The Stockholm Convention on Persistent Organic Pollutants regulates chemicals (persistent organic pollutants: POPs) that can linger in the nature for a prolonged period of time and cause harm to human health and environment. These cover some of the chemicals used in pesticide⁶ and for industrial use. Those POPs listed in the Annex A are subject to ban on use, manufacture, and trade. Those in Annex B faces restrictions on the use, manufacture, and trade (Secretariat of the Stockholm Convention 2020).

Recent addition to management of chemical substances at the global level is the Minamata Convention on Mercury⁷ This convention regulates the mining and trading of mercury, phasing out the use of mercury in certain products, and reduces the emission and release of mercury. It requires countries to phase out the mining activities of mercury and control the export and import of mercury between countries. In addition, the year 2020 marks the year to completely phase out the manufacture, export, and import of mercury-added products listed in Part I of Annex A. Mercury is (was) used widely in our daily lives. They are used in batteries, lamps (such as compact fluorescent lamps),⁸ and non-electronic measuring devices such as thermometers, cosmetics, pesticides, and switch and relays.⁹ Mercury is also used in manufacturing processes. Part I of Annex B requires countries to phase out the use of mercury in acetaldehyde production (by 2018)¹⁰ and chlor-alkali production (by 2025). Other manufacturing processes¹¹ listed in Part II of Annex B do not have specific phase-out dates, but countries are required to reduce and restrict the use of mercury and mercury compounds in the manufacturing processes (UNEP 2019).

Another international agreement on chemicals, the “Rotterdam Convention on the Prior Informed Consent Procedure for Certain Hazardous Chemicals and Pesticides in International Trade”, focuses on the information exchange of hazardous chemical substances between exporters and importers, and these chemical substances need to be clearly labeled (Secretariat of the Rotterdam Convention 2020). “Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal” controls the international movement of hazardous wastes which was adopted focusing on the notification of transboundary movements of hazardous wastes, but starting in 2019, there is now a ban on exports of hazardous wastes covered in Basel Convention that are intended for final disposal, reuse, recycling, and recovery from countries listed in Annex VII (such as OECD) (Secretariat of the Basel Convention 2020).¹²

Some of these international agreements rely on quota (including ban) to achieve the sustainability goal, which naturally have impact on international trade and consumption. Others rely on notification and information exchange to make importing countries (especially developing countries) aware of the trading activities, to raise the awareness of the sustainability issue. The latter type of agreements can be considered as part of fixed costs described in Sect. 6.2.

3.2 Domestic Regulations

For the international agreements to have any legal weights, applicable laws corresponding to the international agreements need to be introduced in each country. When doing so, a country (or a region) may introduce additional requirements. For instance, the implementation of “Montreal Protocol on Substances that Deplete the Ozone Layer” in EU is backed by the Regulation (EC) No 1005/2009,¹³ which includes five additional ODSs that are not covered in the Montreal Protocol.¹⁴ Thus, even in the case of international agreements, domestic implementations may differ from countries to countries.

In addition to these international agreements, countries introduce numerous laws to safeguard human health and to protect environment. In almost every country, there are food safety regulations to ensure that the agricultural goods and processed foods are safe for human consumption. Regulations may restrict maximum residue levels (MRLs)¹⁵ and require affixation of labels showing information on the manufacturer, source of inputs, ingredients, nutrition, and potential allergic substances used. Exporting firms need to comply with these regulations if they wish to export agricultural and food products to the destination. Even though they are exported, these products are subject to inspections at the point of entry to make sure that these products comply with domestic regulations. Sometime, imported products fail to meet these requirements, and they are rejected. For instance, the statistics from the UNIDO reveal that in 2013, an estimated US$9328 million worth of agriculture and food products (all food and feeds) were rejected at the borders of four markets (Australia, EU, Japan, and USA) (UNIDO 2015). Often cited reasons for the rejections are the violations regarding residue agricultural chemicals¹⁶ and residue veterinarian drugs (IDE-JETRO and UNIDO 2013; UNIDO 2010, 2015).

These regulations are well known, yet many countries still fail to meet these requirements sufficiently, but the awareness among farmers is not keeping up with the regulation information and the domestic regulatory systems (Schreinemachers et al. 2015). The problem is compounded especially for the processed food industry. They need to make sure that all inputs used in each step of manufacturing process comply with the regulations. For instance, when a firm manufactures frozen shrimp, it needs to ensure that the shrimp they use do not contain excessive amount of residue chemicals (for instance, antibiotics or in some cases, antioxidants). If the shrimp they use as inputs already contained these substances above the allowed amount, then there is nothing that the manufacturers can do to correct this problem.

How can the final good manufacturers ensure that their products will comply with the requisite regulations? First, the manufacturers need to know the regulation of the destination countries. Such information is considered as a part of the fixed cost of exporting as described in the theoretical section. Second, the manufacturers need to ensure that suppliers also know these regulations and these inputs need to be checked along the supply chain, to make sure that after each stage of the supply chain, the products (or inputs) meet the requirements. This checking can be done by the buyer firms (firms located in the downstream), the seller firms (firms located in the upstream), or rely on third party (in many instances, public research institute). In the case of residue chemicals, these tests need to be done scientifically. Thus, either at firm or at the country level, there must be a sufficient scientific capabilities and facilities. In addition to this, to trace back the origin of the problems, traceability system along the supply chain is needed to make sure that only “qualified” (or checked) inputs are used in the supply chain and to quickly identify the source of the problem if arises.¹⁷

This poses a large concern on producers, especially in developing countries. Often small-scale farmers in developing countries are not aware of regulations (domestic and/or foreign ones). Because they are unaware, they do not take the necessary steps to ensure that their products meet the regulatory requirements of importing countries such as correct applications of agricultural chemicals. From government’s point of view, there are two policy levers that they can utilize. One is the establishment of quality assurance system (including public research institutes assisting firms in scientific measurements), and the other is the information dissemination and training of farmers (IDE-JETRO and UNIDO 2013).

Manufacturing industries also face many regulations, especially on the environmental issues.¹⁸ Many countries have introduced pollution abatement regulations. Typically, these traditional types of environmental regulations have focused on the production processes of domestic entities. If a country is keen on environmental protections, their regulations on manufacturing processes tend to be stricter compared to the other countries where they are not too concerned with environmental damages. This can result in the movement of production processes from developed to developing countries through foreign direct investment.¹⁹

Gradually, there seem to be a shift in the orientation of environmental policies in many countries, notably in developed countries. Even though there have been regulations concerning product characteristics such as energy efficiency requirements or emission restrictions for automobiles, there is now an increasing tendency to do so, especially focusing on chemicals. Environmental policies now are focusing more on product-related environmental regulations (focusing on product characteristics) (PRERs) rather than traditional pollution abatement regulations. Pollution abatement regulations regulate domestic production activities by domestic law. The cost of regulatory compliances is borne by domestic producers. PRERs regulate the products regardless of where they are produced, resulting in a mismatch of location of production and consumption. The cost of complying of regulations is borne by domestic and foreign producers.

One such example of PRERs is the Restriction of Hazardous Substances in Electrical and Electronic Equipment (RoHS) (Directive 2011/65/EU), a regulation by the European Union. The regulation essentially limits the use of ten chemical substances in electronics that are known to cause harm to both human health and environment.²⁰ This directive, coupled with the regulation on waste electrical and electronic equipment (WEEE) (WEEE Directive, Directive 2012/19/EU), is used to minimize the risk to human health and environment stemming from the use, recycling, and disposal of electronic equipment. Since RoHS directive applies to electronic products sold in EU, this applies to both domestic and foreign producers. When RoHS was introduced, there were much discussion on the impacts of this on the production and exports of these products from East Asia to EU (Michida 2017). Similarly, the introduction of Registration, Evaluation, Authorisation and Restriction of Chemicals (REACH) (Regulation (EC) No 1907/2006) has caused concerns among producers in East Asia. REACH requires that chemicals to be used in the product must be first registered at the European Chemical Agency. And for the registration, it requires scientific evidence (risk and hazard analysis) that chemical is safe (Humphrey 2017). A study by Honda and Otsuki (2017a) finds that firms in Malaysia and Vietnam that are able to meet these requirements actually increased their exports to the EU markets. At the same time, these firms also seem to concentrate on the EU market once they comply with these regulations. This may be because they have invested substantially to meet the requirements, and to recoup their investments, they are now focusing more on the EU market. Other studies such as Fontagné and Orefice (2018) find that when firms are faced with technical barriers to trade (TBT), some exporter firms, especially if they export to multiple destinations, tend to focus on the market with more relaxed TBT.

Overall, if a firm belongs to global production networks, they invest in compliance requirements even if that entails additional investments (often in terms of increase in the fixed costs, but sometimes of variable costs) (Honda and Otsuki 2017b; Michida et al 2017; Ueki et al 2017). To assist firms in maintaining export activities to the regulated yet lucrative markets, governments typically provide assistance through establishments of quality assurance facilities if that were lacking as well as introducing similar regulations domestically (Michida 2017; Ramungul 2017). In fact, many countries in East Asia have introduced similar regulations concerning chemicals to reduce the information costs. This is done to reduce the export-specific fixed cost. These studies tend to focus on certain issues, and there have been relatively few studies that look at the impact of domestic regulations on international trade.²¹ We turn to this issue in the next subsection.

3.3 Economic Assessment of the Impact of Regulatory Differences Between Exporters and Importers

There are only limited number of studies systematically looking at the impact of domestic regulations on international trade relative to the overall international trade literature.²² This is because there was no comprehensive data on the domestic regulations. The past literature has relied on the estimation of ad valorem equivalents (AVE) to measure the trade impacts (such as Kee et al (2009)). Some are based on the notifications to WTO (Bao and Chen 2013; Bao and Qiu 2012), but the number of notifications is much fewer in number compared to the overall domestic regulations that may have impacts on international trade. In the case of Japan, the total number of non-tariff measures (NTMs) reported to WTO is 383, while the total number of NTMs coded from domestic regulations is 1278 (Nabeshima and Obashi 2020). The effort by the United Nations Conference on Trade and Development (UNCTAD) has created a data set that can be utilized by the researchers.²³

In most studies, they take the existence of regulations in importing countries as the main indicator of interest. However, as we have seen, many countries ratify international agreements, and therefore, corresponding domestic regulations exist, which are similar across countries. In addition, governments introduce regulations to safeguard human health and environment, but they tend to introduce similar regulations. Since domestic regulations apply to domestic entities, even exporting firms need to meet domestic regulations (fixed cost, $F$, in subsection 6.2). In addition to this, exporting firms need to meet the requirements imposed by importing countries ($F_{x}$, in the theoretical subsection 6.2); however, there may be significant overlap between the two since countries implement similar kind of regulations. To account for this overlap, some research utilizes differences in regulations between exporting and importing countries to better identify the true fixed costs, $F_{x} .$ Among many methodologies,²⁴ one methodology is the use of cosine similarity,²⁵ which is based on comparing two vectors (each vector representing a set of regulations) and measures the difference in angle. Figure 6.5 illustrates this. In case 1, two vectors are facing similar directions, compared to case 2 (smaller angle in the case 1). One can utilize this information to construct the cosine similarity index.²⁶

Fig. 6.5

Source Created by the author

Illustration of cosine similarity.

Nabeshima and Obashi (2021) construct the additional compliance indicator (ACRI) based on cosine similarity. They find that the differences in regulations between exporting and importing countries negatively impact international trade. If the regulation changes from “completely the same” (ACRI = 0) to “completely different” (ACRI = 1), bilateral trade between two countries is reduced by 22.9% (or 14.4% when zero trade is taken into account). They also find that exports from developing countries decrease both to developed and developing countries when there are differences in regulations, while developed countries do not seem to be affected by the differences in regulations (Nabeshima and Obashi 2021). This supports the general observation that developing countries often find it difficult to comply with the regulations in developed countries. Furthermore, the so-called South–South trade (trade between developing countries) is also affected by differences in regulations. This finding points the general weakness of firms in developing countries to comply with regulations in destination countries, especially if they are different from the domestic regulations that they are familiar with.

Another study by Nabeshima et al. (2021) find that decomposes the negative impacts of differences in regulations by looking at the intensive and extensive margins of international trade.²⁷ Like other studies, they find that additional regulatory burden negatively affects intensive margin (less trade). When decomposing this to the price and quantity effect, they find that additional regulatory burden negatively affects quantities²⁸ and increases prices. Since the reductions in quantity outweigh the increase in price, overall, the trade decreases.

These and other studies suggest that firms in developing countries are finding it difficult to comply with regulations in destinations.

4 De Facto Regulation (Private Standard) Approach

The previous section has examined the impact of regulations on international trade. In general, the regulations tend to reduce international trade (sometime by design like the case in many international agreements focusing on conservation efforts). Research also points out that differences in regulations tend to discourage exports especially from developing countries. Recently, there is a widespread usage of private standards to respond to consumers’ demand for sustainable products. The final product makers are keen on meeting such demand and offer products labeled as sustainable. To do so, the final product makers need to make sure that suppliers also follow certain production processes or other requirements for the final product to be called sustainable. This leads to the creation of private standards, and the final product makers require meeting this private standard as a condition for the procurement. Because of this, for the supplier firms, private standards (even though voluntary in nature) are a mandatory requirement and perceive it the same as regulations. Even though standards are voluntary in nature, but for certain firms, they become de facto regulation.

There are many different private standards globally, but in this section, we focus on the private standard with third-party certification scheme.

4.1 Types of Private Standards

The main difference between regulations and standards is that regulations are mandatory, and standards are voluntary.²⁹ Standards can be created by any entity, and depending on the nature of the entity, it is called international (such as by the International Organization for Standardization: ISO), industrial (created by a group of firms in an industry), national/public, and private standards.³⁰ Standards exist to ensure consistent quality of products or process or assuring the compatibility of products. For instance, there are well-known standards for management such as ISO9001 for quality management or ISO140001 for the environment management. These specify the processes. Then, there are standards that assist in interoperability of goods. Paper size is defined in ISO216, and because of that, it is easier for the consumers to know whether certain products that use paper as inputs (such as printers) can accept the paper consumers want to use, regardless of the manufacturers of papers or printers. In this chapter, we focus on process standards.

Among the private standards, we can broadly divide them into three different categories as shown in Table 6.2. In the first case of “self-check”, checking of whether one follows the standard is done by oneself. It is a self-claim, and the credibility to the others (especially to strangers) is low. However, this is still useful in, say, dissemination of “best practices”. The second type is often utilized in the business relationships. The buyer firms require the supplier firms to follow certain rules (such as procurement rules created by the buyer firm, which may include external standards). The check (auditing) is done by the buyer firm to make sure that suppliers follow the rule. Continuation of business relationship depends on whether the supply follows the rules set by the buyer. The credibility is medium to high, typically resting on the reputation of the buyer firm. Then the final category is the third-party certification scheme. In this category, the buyer firm requires supplier firms to be certified in specified external standards. Since the buyer is not involved in the certification process, the credibility of this is high (to the extent of credibility of the certification firm).

Table 6.2 Differences among three types of standards

According to UNFSS (2020), there are now more than 250 voluntary sustainability standards (VSS) globally. Fairtrade and Rainforest Alliances are examples of such VSS. In examination of VSS contributions to SDGs, many VSS contribute to Goals 12 (especially on target 12.4 on chemicals, 12.5 on recycling, and 12.6 on encouraging multinational firms to integrate sustainability information) of the SDGs since many VSS focus on the sustainability issues (UNFSS 2018). While these VSS are utilized in the business relationships between buyers and suppliers, VSS can be integrated in other aspects such as the Olympics. Since the London Olympic, the sustainability issue has been integrated in hosting of the Olympic games. This tradition is carried on by the Rio and also the Tokyo Olympics. Table 6.3 lists the private standards with third-party certification schemes to achieve sustainable procurements for the commodities utilized in the Tokyo Olympic.³¹

Table 6.3 Private standards identified in the procurement guidelines for Tokyo Olympic

4.2 Impacts on Developing Countries

Prevalence of private standards is challenging for the producers, especially in developing countries. For instance, agricultural food suppliers need to meet traditional regulations on the use of agricultural and veterinary chemicals, but also humane treatment of livestock and agricultural laborers (some by regulations and some by private standards), while improving the productivity of agricultural productions to achieve lower prices and more quantity produced (Saitone and Sexton 2017). To the extent that the private standards are used as the conditions for the exports, if a firm obtains necessary certificates, then a firm is well positioned to expand on their export activities. In fact, research shows that obtaining international certificates seems to have good effects in the development of coffee industry in Ethiopia (Minten et al. 2019) that obtaining organic and GlobalGAP certificate led to increase in pineapple exports from Ghana (Kleemann Abdulai and Buss 2014), and that Fairtrade certification contributed to increase in job satisfaction among pineapple workers in Ghana (Krumbiegel et al. 2018). A product carrying some indication of “desirability” (such as “organic” or “natural” labeling) seems to be able to sell at higher prices compared to more generic products (Bonanno et al. 2018).³² Because of these advantages, some governments are using the adoption of VSS as a policy tool for export promotion (UNFSS 2020).

However, adoption of VSS is not without concerns. There are at least three different concerns that come from the proliferation of VSS to producers in developing countries (UNFSS 2018). First is that these VSS are now becoming de facto regulations for producers in developing countries, since obtaining some certificate is required as a part of business transactions. Some suspect that buyer firms are using the certificate as a way of minimizing costs associated with production network. In the past, the auditing of the suppliers was done by the buyers themselves, with the cost of auditing incurred by the buyer firms (often from developed countries). However, increasingly buyer firms are requiring suppliers to obtain third-party certification in lieu of auditing by themselves. Thus, the auditing cost has been pushed to the suppliers as fees associated with obtaining certificates (see Table 6.4).

Table 6.4 Cost implications for private standards

Developing countries complain that these private standards are promoted with consumers in developed countries in mind, yet the costs of ensuring health and environmental sustainability of consumption (and disposals) in developed countries are borne by producers.

Second, there are many different, yet overlapping private standards that exist, and suppliers may need to obtain several certificates if they deal with multiple buyers (often from developed countries). This can lead to several different outcomes. Firms may choose to obtain several certificates if they are sufficiently large enough. This means that they need to incur multiple costs for obtaining certifications (which are fixed costs). Or it could result in some choosing one particular standard and others choosing different standards. This could create a lock-in effect and reducing the bargaining power of the suppliers to buyers.

Third, in some areas, the governance is moving from the public to the private sector, and the reach of such rule-setting is defined not by the national boundaries but the international trade linkages (see for instance, Michida and Nabeshima (2017)). Private standards are also mainly created by firms in developed countries, and this rule-setting is outside the jurisdictions of both national governments (as well as they are not illegal) and international organizations such as the World Trade Organization, thus lacking workable dispute settlement mechanisms. In addition, unlike the case in international agreements (or domestic regulations in certain cases) where differential treatment is available for developing countries, developed and developing countries are treated equally.

Even though these concerns exist, the sustainability concerns are gaining momentum, and the use of these private standards can be an effective way to encourage responsibility consumption and production. However, one needs to be aware that these are putting significant burdens on producers in developing countries.

5 Conclusion

To promote sustainable consumption and production (Goal 12), there were large numbers of initiatives implemented through international agreements, domestic regulations, and through private standards. Efforts for Goal 12 have close relationships to the other goals, such as Goal 2 (target 2.4) focuses on development of sustainable agriculture; Goal 3 (target 3.9) on reducing deaths from pollution; Goal 5 (target 5.1) on gender discrimination; Goal 6 (target 6.3) on reducing water pollution; Goal 7 (target 7.2) on renewable energy; Goal 8 (target 8.4) on decoupling economic growth and environmental degradation (which is also covered in Goal 12), elimination of forced labor, and other labor issues (target 8.7 and 8.8); Goal 11 (target 11.6) on city environment; Goal 14 (target 14.4) on regulating harvesting and overfishing; Goal 15 on forest management, to name a few.

In this chapter, we have examined the impacts of regulations and standards on international trade. A simple theoretical model was presented to show that increase in fixed costs associated with exporting negatively influences the entry decision of firms into the export market. Compliance costs associated with either regulations or obtaining third-party certification schemes can be considered as fixed costs of exporting. Hence, if a firm is facing a large number of regulations or significant different regulations from domestic ones, of if a firm needs to obtain multiple certificates, the implication from the theoretical model is that there would be less number of exporting firms. One possible solution to this is to harmonize regulations and streamline certificate requirements³³ to reduce the duplicate efforts by the producers. This can be encouraged through regional trade agreements for instance.

Research also shows that for those firms that can maintain exporting activities, they seem to obtain the benefits from meeting these requirements. However, this seems to be limited to only “capable” existing exporting firms. This is a large concern for developing countries since development of export-oriented industry is a key policy concern for developing countries. Increasingly, the entry barrier to export market is becoming much higher due to these requirements. Looking into the future, additional issues can be woven into the web of agreements, regulations, and private standards such as those on human rights and issues surrounding micro-plastics. Dissemination of the regulatory information is one way of achieving this to reduce the information cost (which are fixed costs in nature) and to assist firms considering exports.

If consumers are willing to consume in more responsible way, and if producers are to respond to such demands for sustainability, producers will need to acquire new sets of skills and supporting infrastructures are needed. Both regulations and private standards require much higher management skills for producers and require easy and affordable accessibility to various testing facilities (to certify that products/processes meet the requirements). Thus, it is critical for governments, especially in developed countries, to “support developing countries to strengthen their scientific and technological capacity to move towards more sustainable patterns of consumption and production” (target 12.a). This kind of assistance is needed in order for producers in developing countries to participate fully in sustainable globalized world.