Empirical insights on the dynamics of SPS trade costs: The role of regulatory convergence and experience in EU dairy trade

Abstract

With its influence on the world stage, the EU’s Farm to Fork initiative seeks to extend sustainable and fair food production practises globally, in part, by encouraging convergence with EU food standards (i.e., sanitary and phytosanitary measures-SPS). Harmonisation clauses have been found empirically to encourage trade, but no quantifiable estimates exist on the trade effects of SPS regulatory convergence. This paper examines this issue for the dairy industry, a highly regulated sector with significant sustainability concerns attached. Furthermore, the cost-saving effects arising from closer regulations and ‘experience’ (i.e., accumulated years of foreign trade track-record), are compared. Employing a 3-year interval panel starting in 2010, a structural gravity equation that includes domestic trade is estimated with a flexible empirical approach that evinces asymmetric trade impacts for specific bilateral trade routes. Results indicate a trade depressing effect for SPS measures, estimated as a global average 10.4% Ad-valorem Equivalent (AVE). Moreover, at the global level, converging regulatory frameworks generate larger trade gains than experience, where a 1% rise in regulatory convergence is equivalent to 5 years of positive trade and a 14% reduction of the AVE. The reduction of trade frictions prompted by harmonisation and experience does not, however, outweigh SPS trade costs. Exporters to the EU face a higher SPS AVE than that faced by the EU (10.1% vs 9.3%). On average, exporters to the EU also benefit from a 9% saving due to experience, although cost savings from regulatory convergence are only reported for larger exporters to the EU, whose consolidated position in EU markets also grants them even greater than average benefits from years of accumulated experience.