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The Effects of Standards on Value Chains and Trade in Europe

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The Effects of Standards on Value Chains and Trade in
Europe
Florian Ramela,*
Axel Mangelsdorfa,d
Knut Blinda,b,c
a Technische Universität Berlin, Chair of Innovation Economics, Marchstraße 23, 10587
Berlin, Germany
b Fraunhofer Institute of Open Communication Systems, Kaiserin-Augusta-Allee 31,
10589 Berlin, Germany
c Chair of Standardisation, Rotterdam School of Management, Erasmus University,
Burgemeester Oudlaan 50, 3062 Rotterdam, Netherlands
d BAM Federal Institute for Materials Research and Testing, Unter den Eichen 87,
12205 Berlin, Germany
* Corresponding author: Florian.Ramel@tu-berlin.de. Phone: +49 30 314 76624.
Abstract
We examine the impact of technical standards on trade in global value chains (GVCs). Using
a gravity model approach for panel data, we estimate the influence of national, European, and
international standards on GVCs and gross trade flows within Europe. We find that national
standards hamper trade in European value chains while European and international standards
foster trade. European standards have greater influence on trade in value-added whereas
international standards have strong effects on gross trade flows. European standards therefore
connect market actors in European value chains. Because gross trade figures contain value
from outside of Europe, international standards facilitate trade with market actors from non-
European countries. In addition, we find a positive trade effect of the interaction term between
national and European standards. These standards generate gains from trade when their
specifications are combined in the production process.
1
1. Introduction
Research on global value chains (GVCs) is evolving in international trade and innovation
economics literature (Kaplinsky 2010; Baldwin 2013; WTO 2014). GVCs describe cross-
border production patterns. Producing in multiple countries requires a sufficient amount of
coordination and communication. Market actors need to ensure compatibility and the meeting
of quality requirements of goods and services. Technical standards are means to do so and are
therefore necessary for production in today’s GVCs (Nadvi 2008).
We focus our research in this study on the role of standards within GVC trade. Producing in
GVCs means that one good or service is produced or developed by performing several stages
in multiple countries. For example, the value chain of Apple’s iPod family stretches across
several continents. Principal components are produced in the United States and Japan using
intermediates from up to ten different domestic and foreign suppliers. The assembly of the
final product then takes place in China. The final product is eventually exported to sales
markets all over the world (Dedrick, Kraemer, and Linden 2010).
Previous research shows that standards are trade enhancing since they facilitate the exchange
of information (Blind 2004). When the costs to adapt a standard are too high, however, they
can act as barriers to trade (Mangelsdorf 2011; Swann 2010; Mönius 2004). Empirical
examination of GVCs on macroeconomic level has to deal with the problem of “double
counting” in export and import figures. The value of the good or service that is accumulated
enters into the importing country’s trade statistics when goods and services are crossing
national borders to be further processed in a different country. Fortunately, a new database
that comprises trade in value-added data by the OECD and WTO enables us to examine
global production patterns (OECD, WTO, and UNCTAD 2013). The value-added that is
traded from one country to another resembles the contribution of the exporting country to the
value of the good or service without counting any prior activities. Baldwin and Lopez-
Gonzalez (2014) develop an overview of these patterns. According to the study GVCs
constitute geographical clusters which the authors call “Factory North America”, “Factory
Asia” and “Factory Europe”. Value-added trade mainly takes place within the regional
clusters but there is little trade between the clusters and third countries (Baldwin and Lopez-
Gonzalez 2014). In other words, GVCs are much less global than the name suggests.
As existing studies on the standards and trade nexus have dealt with gross trade flows (see
Swann (2010) for a literature overview), we extend the literature and examine the effects of
standards for GVC trade.
In our contribution, we focus on the European cluster, “Factory Europe”. We apply a panel
gravity model for the years 1995-2008 covering 17 European countries and 18 industry
sectors. To compare our results for GVC trade, we perform the same exercise using traditional
gross export data. Focusing on Europe allows us to differentiate between national, European
and international standards. The separation of the different types of standards makes it
possible to differentiate the effects of standards-related GVC governance in Europe in
addition to that of national and international GVC governance. Our results show a positive
correlation between trade in value-added and European standards for “Factory Europe. We
interpret these findings as an indication that standards reduce information asymmetries
between different market actors in Europe, which increases GVC trade. This shows that
European economic integration through common European standards is an important factor
for close production ties in Europe.
Using gross trade instead of GVC trade as the dependent variable, international standards
have a much greater trade enhancing effect than European standards. This is in line with our
assumptions of the importance of international standards for the trade of European countries
2
with the rest of the world. Gross export statistics count the value of both goods and services
that were produced in Europe and outside of Europe. Goods and services from outside of
Europe can more efficiently be traded globally and eventually imported into Europe -
because they comply with international standards. International standards therefore influence
gross trade positively because they facilitate global trade.
Furthermore, using an interaction term we show that different market actors have different
roles within Europe. National specialization codified in national standards is combined with
European interoperability through European standards in the production of goods and
services. The combination of these national and European factors in value chains produces
gains from trade.
We organize the remainder of the paper as follows. In Section 2, we review the literature on
GVCs and on the standards and trade nexus. Consequently, we develop a number of
hypotheses regarding the impact of standards on value-added trade. In Section 3, we describe
our empirical model and data. We present the results of our regression analysis in Section 4
and conclude our research in Section 5.
2. Literature on GVCs and Standards
2.1. The theory and measurement of global value chains
Production increasingly takes place in GVCs (WTO 2014), which are defined as follows
1
:
“The value chain describes the full range of activities which are required to bring a product or
service from conception, through the different phases of production (involving a combination
of physical transformation and the input of various producer services), delivery to final
consumers, and final disposal after use” (Kaplinsky and Morris 2001, 4). A value chain
becomes global when firms move some of the phases of production to foreign countries.
Global fragmentation is mainly enabled by a large reduction of tariffs in developed and
developing countries as well as reduced cost of information and communication technology
and services (Baldwin 2006). In this subsection we present theoretical and empirical findings
from literature concerning the characteristics and implications of these developments.
Firm-level research on GVCs has created a strand of literature focusing on microeconomic
implications and governance (Gereffi, Humphrey, and Sturgeon 2005; Gereffi and Sturgeon
2013; Kaplinsky 2010). Other authors focus on the macroeconomic implications. Backer and
Miroudot (2013) show that the number of steps undertaken in a GVC has increased between
1995 and 2008. They find that fragmentation has not increased in the domestic portions of a
GVC, but in the part that is produced internationally. This provides evidence for a shift
towards global production patterns. More fragmented patterns create more interfaces and
possible sources of information asymmetries and therefore have greater need for standards
(Blind, Gauch, and Hawkins 2010).
Baldwin and Robert-Nicoud (2014) present a first comprehensive theoretical framework that
integrates goods trade and task trade. It combines the trade of final goods with the trade of
intermediates and services along GVCs for production purposes. The authors explicitly
mention coordination costs as “task-specific parameters” (Baldwin and Robert-Nicoud 2014,
54). Task trade can hence be facilitated by a reduction of coordination costs. Standards fulfill
1
We use the term „global value chain“ to express all the steps and phases noted in the definition. We distinguish
GVCs from the also often used term “global supply chain”. Although they are sometimes used interchangeably,
according to our definition, a supply chain is only concerned with the physical flow of goods ((Dedrick,
Kraemer, and Linden 2010), footnote 2).
3
this purpose by providing information on the quality and specifications of goods and services
(Blind 2004).
To measure the contribution that a single country attributes to the global production process,
we regard the value-added that is defined as the “value that is added […] by a country in the
production of any good or service” (Ahmad (2013).
Source: authors
Figure 1 illustrates the connection between import value, the value-added that a country
contributes through further processing, and the eventual export value. Using value-added as
our main variable of concern, we avoid the “double counting” bias that would come up by
using the whole the whole export value.
Figure 2 displays the exports of value-added in comparison to the gross exports of the
countries included in our panel over time. Both figures have risen steadily between 1995 and
2008. Trade in value added in European countries represents more than half of gross exports.
This shows the deep integration of these countries in GVCs.
The gap between trade in value-added and gross exports has grown during the regarded
period. The difference is caused by value that was added to the good or service previous to
entering Europe. This shows that European countries are becoming more and more
0
500
1000
1500
2000
2500
3000
3500
4000
1995 2000 2005 2008
Billion USD
Year
Exports of value-added Gross exports
Import value
Value-added
Export value
Figure 1 Value-added vs. export value
Source: OECD-WTO Trade in Value-Added Database
4
“headquarter economies” that conduct tasks located in later stages in the value chains
(Timmer et al. 2014).
2.2. Standards and their influence on trade
We focus our research on formal standards, i.e. standards that are published by official
standardization bodies. The scope of a standard is an important criterion for their influence on
GVCs. In general, standards can have national, regional (e.g. European), or international
scope. We use this geographical differentiation to be able to draw policy recommendations
with regard to the standardization regimes and their role for GVC governance.
National standards are developed by the national standardization body located in one country.
They can be used by everyone, but are more prominent for market actors in the country in
which the standard has been developed, especially when they are only published in the local
official language. Moreover, even though a national standard is publicly available, foreign
market actors have more difficulties to apply the standard than domestic market actors (Blind
2004): In some cases, the adaptation costs for foreign market actors are prohibitive (Blind and
Jungmittag 2005). Furthermore, heterogeneity of national standards developed by different
countries leads to additional costs. Market actors have to react by duplicating processes to be
able to comply with different standards requirements (OECD and WTO 2012).
By specifying a domestic standard requirement that is different from best practice or an
international standard in the same GVC, domestic market actors will possibly be put in a
favorable position. They already adhere to this standard and have adapted their facilities and
processes. In contrast, for a foreign market actor it is costly to switch to a foreign national
standard (Fischer and Serra 2000). This is a possible protectionist strategy which bears the
risk of damaging both the foreign and the domestic market actor. Domestic market actors
might be excluded from GVCs because they will not find enough suppliers that can deliver
intermediates that are in accordance with the domestic standard (OECD and WTO 2012).
These difficulties can be circumvented through harmonization of national standards into
international or regional ones (OECD, WTO, and UNCTAD 2013).
Regional standards are published in multiple countries of one geographical or political region.
European standards, for example, are developed in technical committees of the official
European standardization organizations (European Committee for Standardization CEN,
European Committee for Electrotechnical Standardization CENELEC, European
Telecommunications Standards Institute ETSI). National members of the standardization
organization have agreed on the content of standards, they have to be published in all Member
States of the European Union and in the associated countries Iceland, Liechtenstein, Norway
and Switzerland with equal status to a national standard (CEN 2015). Therefore, all
information that is codified in standards is immediately available for purchase at the national
standardization bodies to all interested parties. This mechanism of creation of European
standards is one part of the European Single Market. The creation of the Single Market aims
at EU-wide economic integration through the reduction of barriers and the simplification of
rules.
2
Gandal and Shy (2001) examine the incentives to form standardization unions. According to
the authors, national economies have such incentives when adaption costs to national
members’ standards are high. Standardization unions are welfare increasing for members but
exclude trade from non-members.
2
Although they are not EU members, Iceland, Liechtenstein, and Norway participate in the Single Market
through the EEA (European Economic Area) Agreement. Switzerland participates in the Single Market through
bilateral agreements.
5
Compared to national and regional standards, international standards have the broadest scope
and are developed by all member states of an international standards setting body
(International Organization for Standardization - ISO, International Electrotechnical
Commission - IEC, International Telecommunication Union ITU).
International standards reduce information asymmetries between global actors. For exporting
firms confirming to multiple standards, i.e. national or international, creates adaption costs.
(WTO 2005).
In order to increase transparency of standardization processes, avoid duplicate structures and
increase the speed of the standardization processes, a number of agreements regulate
information procedures between the standardization bodies. National standard setting
organizations that are members of the European standardization bodies must inform the EU
about domestic standardization projects (European Parliament and Council of the European
Union 1998). The Vienna Agreement (ISO and CEN 2001) and Dresden Agreement (IEC and
CENELEC 1996) regulate standardization work between European and international
standards setting bodies. Regional standards bodies inform international organizations about
their new standardization projects and the latter decide if standardization work should be
continued at the international level or remain at the regional level. The Vienna and Dresden
Agreements are voluntary agreements between independent international organizations. In
contrast, the European information procedure is mandatory for member states. All three
documents aim to reduce barriers to trade resulting from multiple standards.
For the remainder of the paper we use the following classification of standards. A standard is
regarded as national if it has not been published by a European or international
standardization body. It is counted as European as soon as a European standardization body
but no international body has published it. A soon as it has been published by an international
standardization body, it counts as international standard.
0
5000
10000
15000
20000
25000
30000
35000
40000
45000
1995 2000 2005 2008
Standards
stocks
Year
National standards European standards International standards
Source: Perinorm
Figure 3 Stocks of standards over time in Germany
6
Using Germany as an example, Figure 3 shows the evolution of different types of standards.
National standards represent the largest stock. The number of European standard surpassed
the stock of international standards in 2005. This indicates the growing significance of
European standards and the development of the Single Market.
Empirical research on standards and trade started with Swann, Temple, and Shurmer (1996).
The authors show that national standards have a significant impact on trade flows. British
national standards exert positive effects on British exports and imports. German national
standards used as benchmark, on the other hand, influence British exports and imports
negatively. National standards can therefore both facilitate trade but also serve as barriers to
trade.
Mönius (2004) examines the influence of standards on trade using a sample of 12 European
countries. The study deals with the effects of both purely national standards and standards that
are shared between the trading partners. The results show that the shared standards have a
positive influence on trade. In contrast to the expectations, national standards too have an
overall positive influence. The author explains this result by differences between sectors.
Trade is positively influenced by national standards only in manufacturing sectors, but
negatively influenced in non-manufacturing sectors. The author assumes that non-
manufactured products are unaltered and more homogenous than products that are already
further processed. Therefore, standards requirements put an unnecessary burden on producers
in a sector in which the characteristics of products are already defined because of their
simplicity (Mönius 2004).
Blind and Jungmittag (2005) compare the trade effects of standards regarding trade between
Germany, the UK, and the rest of the world. Trade is measured as export and import values.
The results show that the effects of national and international standards on imports, exports or
trade balances vary. Standards can reduce adaptation costs. On the other hand, they can
increase domestic competitiveness and hence block trade. The authors come to the conclusion
that one should examine standards only if a country’s characteristics like innovativeness are
taken into account (Blind and Jungmittag 2005).
Mangelsdorf, Portugal-Perez, and Wilson (2012) focus on food exports from China to
examine the effects of standards on trade. The results show that standards have a positive
influence on Chinese exports. The trade enhancing effect of internationally harmonized
standards proves to be stronger than the effect of national standards.
The influence of regional standards agreements on trade is examined by Chen and Mattoo
(2008). The authors find that standards that are harmonized in a regional agreement increase
trade flows between the partners. The regional standards influence trade flows from countries
that are not part of the agreement negatively. The external countries’ production costs
increase because of the regional standards and make it less profitable to trade with the
partners of the regional agreement.
A comprehensive overview of the research on standards and trade is given by (Swann 2010).
The majority of reported studies find a significantly positive influence of both national and
international standards on exports. The effects on imports do not point into one direction as
clearly. National standards can have negative as well as positive influence on imports whereas
international standards rarely have negative, but predominantly negligible or positive effects
(Swann 2010).
2.3. The effects of standards in GVCs
Policy decisions can influence companies’ participation in GVCs. More so than general
global trade policies, GVC policies can target niches. These policies aim to include
7
specialized domestic capabilities, e.g. in the high-tech sector, into already existing value
chains to increase the market size for domestic market actors. In doing so, countries can select
between all available GVCs and “pick” those that fit a country’s endowment and relative
advantage best. In this case, a country only specializes in certain fields (Gereffi and Sturgeon
2013).
Standards facilitate the process of integration, because of the information they provide about
the properties of goods and services. The implementation of certain standards hence enables
companies to become part in the desired GVC and assures long-term involvement.
Consequently, standards facilitate the division of labour within GVCs and influence the
regional composition of actors in the GVC (Kaplinsky and Morris 2001). In other words they
are the “glue” that keeps GVCs together. Standards ensure collaboration between firms and
allow for the diffusion of innovation. New technologies are often codified in standards and
are thus made publicly available (OECD, WTO, and World Bank 2014). By supplying the
proper flow of information, standards make it possible for GVCs to exist (WTO 2005).
Consequently, we develop hypotheses towards the effects of standards in GVCs.
National standards are developed by the national stakeholders of a country and published by
the responsible national standardization organization. They are tailor-made for the local
companies with regard to their knowledge and technological capabilities, but also take into
account preferences of actors on the demand side. Production in compliance with a national
standard can serve as a quality signal (Blind 2004). Consequently, national standards can
foster the restriction of competition, when only domestic firms are able to produce a certain
product (Swann, Temple, and Shurmer 1996). National standards then decrease the openness
of the national markets and hamper trade (Blind 2004). In the case that market actors in a
GVC adopt these standards as best practice, domestic companies that used them before are
put in a favorable position. They do not face switching or adaptation costs. Moreover, foreign
market actors might consider complying with the national standard. This will happen when
the adaptation costs are lower than the expected benefits. If the gap between foreign and
domestic knowledge and technological endowment is too wide, no adaptation will take place
due to high costs. The information contained in a national standard can help to overcome this
gap by providing information (Mönius 2004). For the stated reasons, empirical studies find
both positive and negative trade effects of national standards, depending on the specification
of the study (Swann 2010). In Europe, national standards contain specific national
specializations that are only used in the respective countries. Standards that are of interest for
other countries are turned into European or international standards as a consequence of the
different information agreements between the countries and the higher-level standardization
bodies. Moreover, European countries have a high level of technological development that
foreign market actors have to adapt to. Therefore we assume that national standards hamper
trade in Europe because they express purely national specializations and hence impose high
adaptation costs. This equally concerns trade in value-added and gross trade.
Hypothesis 1a. National standards have a negative effect on trade in value-added.
Hypothesis 1b. National standards have a negative effect on gross trade.
In the European Union, the so-called “New Approach” has contributed to the creation of the
European Single Market since 1985. Within the Single Market, goods and services can move
freely. One means to reduce barriers and to decrease the coordination costs for actors in value
8
chains in different European states is European standards (DIN 2015). European standards are
thus tailor-made to European needs and possibilities. They are drafted by representatives of
European companies or companies that have offices in the EU and other interested
stakeholders (Frenkel 1990). For this reason, we assume that European standards facilitate
production within “Factory Europe”. As countries in the rest of the world are different from
European countries as to their economic characteristics, European standards may impose high
adaptation costs unto them (WTO 2005). European standards remove technical barriers within
Europe. As the EU is also a customs union and the Single Market was established, there are
externalities in any case. These arise because goods and services admitted in one national
market will likely also be traded in the other countries. In this case, common standards are
desirable to further exploit these externalities. Moreover, there is a learning curve when the
countries’ representatives meet to draft standards. These national experts can bring their
technical expertise into the European standardization committees and learn from the ideas of
other countries’ representatives at the same time (Pelkmans 2003). This is also true for
international standards. However, since European countries are endowed similarly, no trade-
offs have to be made to be able to include less well-endowed committee members. For these
reasons, European standards foster trade within Europe. The trade enhancing effect of
European standards is shown by (Hagemejer and Michalek 2006). Because European
production patterns concentrate in the cluster “Factory Europe”, these GVCs are governed and
managed by European standards.
Trade in value-added, on the other hand, by definition only contains the value that was added
by the previous market actors in another European country. In contrast, gross trade figures
contain additional value-added in the traded goods and services that may have been produced
outside of Europe. Global trade relies on international standards (Swann 2010).
We therefore expect a positive influence of European standards on trade in value-added. For
the portion of European value-added that is contained in the gross trade figures, European
standards also have positive influence. Because of the non-European value contained in gross
trade, the influence of European standards will be smaller in the latter case.
Hypothesis 2a. European standards have a positive effect on trade in value-added. The
influence is greater than the influence on gross trade.
Hypothesis 2b. European standards have a positive effect on gross trade. The influence
is smaller than the influence on trade in value-added.
Even though all national standardization projects in European countries have to be reported to
EU level, not all projects are taken over by CEN, CENELEC or ETSI. When no stakeholders
from other European member states are interested in drafting the standard on the European
level, the project is continued as a national standardization project. When there is no
European interest, this means that other member states and their market actors expect no
benefits from the standard. The standard therefore only fits one nation’s properties and
expresses the technological specialization of this one country. Therefore, there exist national
standards in Europe that benefit single national economies. We presume that these national
standards can play out their strength only when they are combined with more general
European standards in the final good or service. In practice, a specific country contributes to a
good or service using its national specialization. The national specialization is a key
competency that is only available in the concerned country and that is codified in a national
standard. The good or service is then further processed and marketed throughout the European
value chains in compliance with European standards. In the end, the good or service has been
9
created by combining national and European standards. The finalization and marketing take
place in the Single Market with the help of European standards. Through the combination of
national and European standards, gains from trade arise.
Hypothesis 3. The interaction between specific national standards and European
standards has a positive effect on trade in value-added.
International standards are specifications with global consensus. International standards
increase the openness of economies. Supply and demand of the concerned goods and services
are therefore as large as possible and economies of scale can be exploited (Blind 2004).
International standards negotiations take place on a higher level and at a later stage than
national standards development. They have been well prepared beforehand and will face
strong political opposition if they fail to fulfill all international stakeholders’ requirements
(Mattli and Büthe 2003; Lee, Chan, and Oh 2009; Frenkel 1990).
If there is, however, a national or regional standard that satisfies preferences of local market
actors better, the international standard will be overruled and the national or regional standard
is used (Blind 2004). International standards present the lowest common denominator that all
negotiating parties could agree to. Hence, highly developed economies will not necessarily
find their best technological possibilities by implementing international standards and opt to
produce differently. E.g. the European standardization bodies aim to bring all their standards
to international level as agreed upon in the Dresden Agreement and Vienna Agreement.
However, when the proposed standard has to be redrafted in a way that European interests are
infringed, the European bodies are obliged to withdraw their standard proposal (CEN 2006).
This is why we expect international standards to play a less important role in European value
chains. The market actors in “Factory Europe” rely on European standards that are tailor-
made for them and that make intra-European exchange easy. Still, international standards
have positive influence on trade in value-added because European market actors use them
when they fit their needs or when there is no European alternative.
When goods and services are imported from outside of Europe, international standards play a
more important role. Consequently, we assume international standards to have greater
positive influence on gross trade figures, which contain value-added from third countries, than
on trade in value-added.
Hypothesis 4a. International standards have a positive effect on trade in value-added.
The influence is smaller than the influence on gross trade.
Hypothesis 4b. International standards have positive effect on gross trade. The
influence is greater than the influence on trade in value-added.
In the following sections we develop a gravity model in order to test our hypotheses.
3. Empirical model and data
In order to estimate the influence of standards on trade in value-added as well as on exports
we use a gravity model as introduced by Tinbergen (1962). The basic model has since been
refined, e.g. by Anderson (1979), Deardorff (1998), Anderson and van Wincoop (2003), and
Baier and Bergstrand (2007).
10
As a result of these refinements we include multilateral resistance terms into our estimation
following Anderson and van Wincoop (2003). A computationally easy way to do so is to use
country-specific fixed effects. Baier and Bergstrand (2007) argue that many gravity models
suffer from endogeneity due to an omitted variable bias. We follow their argumentation and
use panel data in combination with importer-exporter pair fixed-effects as well as time-
varying country-specific fixed-effects (see also Baldwin and Taglioni 2006) in order to
minimize this issue.
Our baseline estimation model is defined as follows. The dependent variable X takes on the
values of trade in value-added (TiVA) or gross exports (EXGR). We estimate the trade flows
from country i to country j in sector k at time t.
            
    
          
The dependent as well as most of the independent variables are entered as logarithms. As
independent variables, the nominal gross domestic product GDP, the geographical distance
between the trading partners dis and dummies for contiguity and common language, contig
and comlang, are entered. Standards are split into three groups: national standards nStd,
European standards eStd, and international standards iStd. Standards are entered into the
estimation with a lag of one period. The vector fe contains several fixed effects. We include
country, year, and sector fixed effects in the equations as well as dummies for the interaction
between importer and exporter country. The last term is the standard error term .
Table 1 Overview of variables
Variable
Description
Source
TiVA
Domestic value added embodied in
foreign final demand
OECD-WTO Trade in Value Added
Database
EXGR
Gross exports
OECD-WTO Trade in Value Added
Database
GDP
Nominal gross domestic product
The World Bank World
Development Indicators
dis
Distance
CEPII GeoDist database
contig
Contiguity
CEPII GeoDist database
comlang
Common language
CEPII GeoDist database
nStd
Stock of national standards
PERINORM
eStd
Stock of European standards
PERINORM
iStd
Stock of international standards
PERINORM
We retrieve our TiVA and EXGR trade data from the trade in value-added database that was
released by OECD and WTO in 2013. In contrast to previously available value-added
measures, the data is calculated from input-output tables for each country. This means that the
actual production inputs and outputs are considered. TiVA measures the domestic valued-
added embodied in foreign final domestic demand, i.e. it can be regarded as “exports of value-
added”. EXGR is the actual gross exports. All trade data is available as country aggregates
and also for 18 selected industries. The list of industries is provided in the appendix. The
11
database covers the years 1995, 2000, 2005 and 2008. Due to the restricted availability of
standards data, we are able to regard 17 countries in our final model.
3
The variable dis and the dummies contig and comlang are taken from the GeoDist database by
Centre d'Etudes Prospectives et d'Informations Internationales (Mayer and Zignago 2011).
The distance variable is a weighted measure. It describes the geographic distance between two
countries using the locations of urban agglomerations and their share of the total population as
weights.
Table 2 Descriptive statistics
Variable
Observations
Mean
Std. Dev.
Min.
Max.
TiVA
13696
411.95
1046.94
0
24426.8
EXGR
13696
649.40
1638.72
0
41512.4
GDP
13696
825551.3
886058.2
25962.25
3623688
dis
13696
1119.09
540.09
160.93
3027.23
contig
13696
0.20
0.40
0
1
comlang
13696
0.09
0.29
0
1
nStd
13696
584.89
1030.26
1
11103
eStd
13696
475.10
721.86
1
5844
iStd
13696
408.15
727.50
1
7128
Standards stocks are retrieved from the PERINORM database. The database allows us to
differentiate between national, European, and international standards. The standard stock in
year t is defined as all standards published until the end of year t minus all withdrawn
standards in this period. PERINORM provides information if a given standard is purely
national or if it has been harmonized on European or international level. A standard is
categorized as European only if it was published by CEN, CENELEC or ETSI. If there is an
international reference for a standard, i.e. if it was published by ISO, IEC or ITU, it is
classified as an international standard. If there is no European or international reference, a
standard is national. Moreover, we classify the standards stocks in concordance to the 18
industries. Standards are classified by the International Classification for Standards (ICS).
There exist no official concordance tables between industry classifications and the ICS.
Consequently, we constructed a concordance table which can be found in the appendix.
Table 1 provides an overview of all used variables and Table 2 shows the descriptive
statistics.
4. Estimation and results
4.1. Main results
The relevant estimation results for the baseline model specifications of Equations (1) and (2)
can be found in the first two columns of Table 3. The economic mass variables GDPi and
GDPj yield the expected results in both model specifications and show a strong and positive
effect on both trade in value-added and on export volume, which is well comparable to other
studies on trade flows that use gravity models (e.g. Baier and Bergstrand 2007; Baldwin and
Taglioni 2006; Disdier and Marette 2010). As expected, dis shows a negative effect.
3
List of countries: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Italy, Lithuania,
Netherlands, Norway, Poland, Slovakia, Spain, Sweden, Switzerland, United Kingdom
12
Contiguity and a common language have a significantly positive effect on trade in value-
added and gross trade because they reduce the cost of trade. Geographical proximity therefore
fosters trade and contiguity is especially trade promoting when gross exports are concerned.
Table 3 Gravity model estimation results
(1)
(2)
(3)
Trade in Value-Added
Gross Exports
Trade in Value-Added
GDPi
1.010
***
0.615
**
1.202
***
(0.24)
(0.30)
(0.24)
GDPj
0.828
***
0.916
***
0.829
***
(0.17)
(0.27)
(0.15)
dis
-0.641
***
-0.172
***
-0.625
***
(0.01)
(0.02)
(0.01)
contig
0.496
***
1.194
***
0.508
***
(0.01)
(0.01)
(0.01)
comlang
0.223
***
0.181
***
0.247
***
(0.02)
(0.03)
(0.02)
nStdi
-0.074
***
-0.080
**
-0.193
***
(0.02)
(0.03)
(0.03)
nStdj
0.022
0.020
0.030
(0.02)
(0.03)
(0.02)
eStdi
0.077
***
0.059
**
-0.131
***
(0.02)
(0.03)
(0.03)
eStdj
-0.014
-0.075
***
0.014
(0.02)
(0.02)
(0.02)
iStdi
0.130
***
0.214
***
0.129
***
(0.03)
(0.04)
(0.02)
iStdj
-0.006
-0.001
-0.011
(0.02)
(0.03)
(0.02)
nStdi*eStdi
0.039
***
(0.00)
nStdj*eStdj
-0.003
(0.00)
Constant
-15.904
***
-16.869
***
-17.955
***
(3.06)
(4.90)
(2.82)
Fixed effects (country, year,
sector, importer*exporter)
Yes
Yes
Yes
Observations
9,343
9,102
9,343
R-squared
0.838
0.740
0.844
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
As our panel is built of bilateral trade relationships, it is possible to report the effects of
standards for both the exporting and the importing countries. National standards show a
significant negative effect on trade flows for the exporting country, no matter if they are
measured in value-added or in gross exports. This shows that inside Europe national standards
act as barriers to trade as assumed in Hypothesis 1a and 1b for the exporter. Goods and
13
services that were produced according to national standards are therefore too specific to be
easily exported. The effect for the importing countries is not significant. Certain specific
requirements for imports do hence not influence trade in either case.
Following our assumptions, European standards have a significant and positive impact on
exports of value-added and gross exports. Countries that comply with European standards
therefore find countries to export to more easily because of the Single Market. European
standards foster trade along value chains in Europe. The results confirm Hypotheses 2a and
2b. The size of the coefficients is slightly larger for trade in value-added than for gross
exports. This shows that European standards foster the portion of gross trade that contains the
same value-added that is measured by the trade in value-added figures. The coefficient for
gross exports is smaller because the gross trade numbers are larger and European standards
only influence a part of this gross trade. For imports the effect of European standards is
insignificant for trade in value-added. They have no signaling function in “Factory Europe”.
Unlike national standards they do not express a specialization that could be signaled. The
coefficient is negative for gross imports. The negative coefficient shows that the use of
European standards hampers import flows when the imports contain value from outside of the
Europe (cf. Chen and Mattoo 2008). European standards therefore pose requirements that
these imports cannot meet.
International standards have a significant and positive effect for exporters in both cases. The
effect is larger when gross exports are measured, which means that the use of international
standards especially fosters trade when value from third countries is included in the good or
service. These findings confirm the Hypotheses 4a and 4b. For importers there is no
significant effect of international standards in both model specifications. The use of
international standards does therefore not attract imports in Europe. This result is in line with
the ambiguous results regarding the effects of international standards on imports reported by
Swann (2010).
Lastly, we turn to the test of Hypothesis 3 in column (3).
4
To examine the interaction effects
between national and European standards in European value chains, we included a
multiplicative interaction term between the nStd and eStd variables in the gravity equation.
The coefficient of the interaction term is positive and significant for the exporter and
insignificant for the importer. This confirms our assumption of Hypothesis 3 that the
combination of national and European standards in “Factory Europe” has a positive influence
on the European value chains. When we regard the base variables, the picture becomes even
clearer. Because the interaction effect is controlled for, the base variables show their isolated
effect. The coefficients for the national standards become strongly negative for the exporter
and lose their significance for the importer. This is a strong signal that national standards have
to be combined with other standards to generate gains and are at the same time an essential
part of the European division of labor. Isolated national standards hamper exports and lose
their positive effect on imports. The coefficient for European standards of the exporting
country turns from positive to negative. European standards are therefore an equally
important part in the division of labor. The inclusion of the interaction term reveals that like
national standards, European standards only work in combination. They always have to be
combined with national specializations. Otherwise, their effect on trade is negative. The size
and signs of the coefficients for the effects of international standards stay about the same in
this model specification.
4
The results of this model specification with dependent variable EXGR are similar. They were omitted in the
discussion because of their limited relevance for the research question.
14
4.2. Robustness check
We perform a robustness check of our estimation by replacing the stocks of standards in the
baseline model with standards ratios.
         
    
     
      
with   
, equally for eRatio and iRatio.
The ratio reports the effect of one kind of standards when it is set in relation to all available
standards. In other words, the ratio reports the influence of the intensity of a certain kind of
standard (Shepherd 2007). A change in the ratio can be caused by both changes in the
numerator and in the denominator. To interpret the results it is important to recall the
development of the stocks of standards over time as exemplarily reported in Figure 3. The
dynamic of the ratios allows us to test for the interplay between the different kinds of
standards in an additional way that takes into account the reciprocal effects of the types of
standards onto each other in a development over time.
Again using the example of Germany Figure 4 shows the development of the ratios of the
standards stocks over time. The intensity of national standards has clearly decreased between
1995 and 2008. As we know from Figure 3, this is caused by the rising numbers of European
and international standards in the denominator. The numerator, the stock of national
standards, has stagnated. In 2005 and 2008, European standards have the highest intensity.
0
0,1
0,2
0,3
0,4
0,5
0,6
0,7
0,8
1995 2000 2005 2008
Ratio
Year
nRatio eRatio iRatio
Figure 4 Standards ratios for Germany
Source: Authors’ calculations
15
Table 4 Results of the robustness check
(1)
Trade in Value-Added
(2)
Gross Exports
GDPi
1.118
***
0.784
***
(0.17)
(0.29)
GDPj
0.820
***
0.879
***
(0.17)
(0.26)
dis
-0.545
**
-0.613
***
(0.22)
(0.01)
contig
0.423
*
0.703
***
(0.25)
(0.02)
comlang
0.731
**
0.941
***
(0.37)
(0.03)
nRatioi
0.094
***
0.182
***
(0.01)
(0.03)
nRatioj
-0.001
-0.038
(0.01)
(0.03)
eRatioi
0.100
***
0.103
***
(0.01)
(0.03)
eRatioj
-0.022
**
-0.079
***
(0.01)
(0.02)
iRatioi
0.211
***
0.342
***
(0.01)
(0.05)
iRatioj
-0.017
-0.028
(0.01)
(0.03)
Constant
-17.255
***
-14.211
***
(3.49)
(4.26)
Fixed effects
(country, year,
sector,
importer*exporter)
Yes
Yes
Observations
9,343
9,102
R-squared
0.842
0.746
Standard errors in parentheses
*** p<0.01, ** p<0.05, * p<0.1
Accordingly, the ratios correspond to the total stocks of standards with dominating European
standards, a declining number of national standards and international standards representing
the lowest numbers.
We perform the gravity estimation again for both dependent variables TiVA and EXGR. The
results are displayed in Table 4 and confirm our results from the previous section. The
coefficients of the basic gravity variables are stable.
The coefficients for the ratios of national standards are positive and significant for the
exporting country. The positive effect of the ratio confirms the negative effect of the stocks of
standards in our main regression. National standards measured in total numbers decrease trade
flows. The ratio, which expresses a decreasing intensity of national standards, therefore has a
positive effect on trade. For the importing countries, the effect is not significant. The
16
declining intensity of national standards has thus no effect on importing countries and
national standards continue to serve as signals for product specifications.
Regarding European standards, the coefficients of the ratios have the same sizes and
directions like in the main regression. The rising intensity of European standards therefore
confirms the trade effects of stocks of European standards and shows that this development
has positive trade effects.
The coefficients for the ratios of international standards also show the same direction and
level of significance like the coefficients in the main regression. Consequently, the robustness
check confirms our findings for the effects of international standards. The large coefficient
size of the ratio shows that the development of the intensity of international standards has
strong positive trade effects.
In conclusion, our main findings prove to be robust. Moreover, the robustness analysis
provides us with information as to how the development of the three standards stocks over
time has effects on trade. As we can see, the stagnating numbers of national standards, the
increasing numbers of international standards, and the even stronger increasing numbers of
European standards have largely positive effects on trade.
5. Conclusion
In this paper we examine the effects of standards on trade in value-added and gross trade
flows in “Factory Europe”. We find differing trade effects of standards with regard to their
different scopes. Whereas international standards facilitate global trade, regional standards
impact European GVC trade. In closely connected economic clusters such as Europe, regional
standards such as European standards are tailor-made for the local market actors. European
standards therefore play an important role as a means of communication in European value
chains. They have negative influence, however, when the trade figures contain value from
outside of Europe. National standards prove to be hampering exports within Europe because
they express national specializations that other European market actors cannot use. For
imports in “Factory Europe”, national standards serve as signals and enhance trade slightly.
We find evidence that combining national and European standards in production lead to a
fruitful division of labor in Europe that generates gains from trade.
Our findings therefore present an incentive for policy makers to foster regional harmonization
of standards to steer production patterns. The results also show the success of economic
integration in Europe through the Single Market and they prove the necessity of European
standards. Nevertheless, even in a standardization union national and international standards
are still necessary and serve their specific purposes. National standards codify the technical
specialization of a single country. International standards facilitate trade with third countries
and are also useful within “Factory Europe” when there is no European standard that is more
specific.
Several limitations apply to this study. Although we use sectoral data, there exist no official
tables for the concordance of the ICS classification to an industry classification. Therefore,
we can only roughly align standards and sectors. The sectoral data is only available as
aggregates of multiple sectors. An in-depth analysis on sector level is hence not yet feasible.
Moreover, the trade in value-added data has only been recently assembled. At this point, we
can only use four points in time to construct our panel. In future research the results from
panels covering a longer time span will be interesting to see. A further interesting question for
17
future research might be to differentiate standards differently, e.g. into product and process
standards.
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Appendix
Table A1 List of industries
Industry (based on ISIC Revision 3)
Label
01 - 05
Agriculture, hunting, forestry and fishing
10 - 14
Mining and quarrying
15 - 16
Food products, beverages and tobacco
17 - 19
Textiles, textile products, leather and footwear
20 - 22
Wood, paper, paper products, printing and publishing
23 - 26
Chemicals and non-metallic mineral products
27 - 28
Basic metals and fabricated metal products
29
Machinery and equipment, nec.
30 - 33
Electrical and optical equipment
34 - 35
Transport equipment
36 - 37
Manufacturing nec.; recycling
40 - 41
Electricity, gas and water supply
45
Construction
50 - 55
Wholesale and retail trade; Hotels and restaurants
60 - 64
Transport and storage, post and telecommunication
65 - 67
Financial intermediation
70 - 74
Real estate, renting and business activities
75 - 95
Community, social and personal services
21
Table A2 Concordance between ISIC Revision 3 industry classification and ICS standard classification
ISIC
Rev. 3
Label
ICS
Label
01 - 05
Agriculture, hunting, forestry
and fishing
65
Agriculture
10 - 14
Mining and quarrying
73
Mining and minerals
15-16
Food products, beverages and
tobacco
67
Food technology
17-19
Textiles, textile products,
leather and footwear
59; 61
Textile and leather technology; clothing
industry
20 - 22
Wood, paper, paper products,
printing and publishing
79; 85
Wood technology; paper technology
23-26
Chemicals and non-metallic
mineral products
71; 75
Chemical technology; petroleum and related
technologies
27-28
Basic metals and fabricated
metal products
77
Metallurgy
29
Machinery and equipment, nec.
21; 23;
39
Mechanical systems and components for
general use; fluid systems and components
for general use; precision mechanics, jewelry
30-33
Electrical and optical
equipment
29; 31;
35; 37
Electrical engineering; electronics;
information technology, office machines;
image technology
34-35
Transport equipment
43; 45;
47; 49;
53
Road vehicles engineering; railway
engineering; shipbuilding and marine
structures; aircraft and space vehicle
engineering; materials handling equipment
36-37
Manufacturing nec.; recycling
11; 13;
25; 81;
83; 87;
95
Health care technology; environment, health
protection, safety; manufacturing
engineering; glass and ceramics industries;
rubber and plastic industries; paint and color
industries; military engineering
40-41
Electricity, gas and water
supply
27
Energy and heat transfer engineering
45
Construction
91; 93
Construction materials and building; civil
engineering
50-55
Wholesale and retail trade;
Hotels and restaurants
97
Domestic and commercial equipment,
entertainment, sports
60-64
Transport and storage, post and
telecommunication
33; 55
Telecommunications, audio and video
engineering; packaging and distribution of
goods
65-67;
70-74;
75-95
Financial intermediation; real
estate, renting and business
activities; community, social
and personal services
01; 03
Generalities, terminology, standardization,
documentation; services. Company
organization, management and quality.
Administration, transport, sociology.
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