Context
Economics of Standards: Public and Private
54. A general economic principle is that the market is the best determinant of product characteristics - unless market failure exists.9 There are a number of types of market failure which might justify the need for standards. It is useful to distinguish between "private" and "public" standards in this context.10
55. One major market failure in relation to "private" standards is that "a firm that bears the costs of developing a standard by itself cannot generally capture rewards equal to the overall social and economic benefit that accrues from standardisation. As a result, market incentives alone are not sufficient to encourage firms, acting in isolation, to produce as great a degree of standardisation as would be most economically beneficial to the industry or to society at large."11 Examples of such standards include the dimensions of freight containers or credit cards and protocols that allow computers made by different vendors to "talk" to each other.
56. Reflecting international practice, in New Zealand the response to the lack of an incentive to develop private standards has been to set up public sector bodies which have a mandate to facilitate collective action to develop standards.
57. While the government has set up the legislative framework for the infrastructure, this does not necessarily imply that the government must directly fund its activities in relation to private standards. As with many other Crown entities, the government expects the agency to fund itself by charging fees. For businesses, participation in standards development is voluntary, but purchasing and complying with Standards and regulations are a cost of doing business.
58. "Public" standards take into account the wellbeing of all consumers as well as industry. These are not simply directed at enabling an industry to work together for better overall productivity. Public standards correct market failures including externalities such as health or environmental risks. In these cases, public standards can either be used in support of, or as an alternative to, regulation. Such standards require public funding, as do other regulatory functions.
59. In New Zealand, this public funding is provided by government agencies responsible for regulation. There is no central "standards fund". Rather, Standards which are directly in support of regulatory (public interest) outcomes are expected to be funded out of the Crown Vote of funds which support their various outcomes.
60. In the New Zealand standards and conformance model, regulatory agencies are expected to purchase from the infrastructure the services they require, much like other clients. Thus, for example, the Electrical Safety Service of the Ministry of Consumer Affairs is a significant purchaser or sponsor of Standards developed by SNZ, and that public money comes from the amount identified as being spent on electrical safety in Vote: Consumer Affairs.
61. The reasoning for this is that, in New Zealand's application of principles of public management and public finance, the intention is to create a clear "purchaser" and "provider" of services, even between public bodies. The advantage of this model is that it creates clear expectations for the provider to meet the purchaser's needs.
62. Measurement activities are funded differently. MSL is directly funded as a core part of the science infrastructure. The benefits of scientific expertise and provision of accurate measurement is a public good which has benefits across society and the economy which cannot be quantified and therefore cannot be charged for.
63. There is some discussion of resourcing issues in this paper. This is done without prejudice to future decisions made by government. Should the review recommend increased resourcing, this would require a separate process to be undertaken. Discussion of issues and options regarding resourcing is located under each topic area below (i.e. standards, accreditation, measurement).
International Situation
64. A number of factors drive the growing importance of standards and conformance in the New Zealand and international economy. New Zealand institutions have done well to react to these factors and to play a role internationally where possible. The infrastructure will have to continue to play the best role it can to support the outcomes which New Zealand as a whole seeks.
65. The impact of standards in international trade has grown, in part because of trade liberalisation and lowered tariffs combined with a corresponding growth in the impact of non-tariff barriers to trade. The role of standards has also grown with demand by consumers for safer and higher quality products, the increased pace of technological change and increased social and environmental concerns. The role of third-party accreditation and of traceability in measurement has also grown in importance as the sources of imports become more diverse.
66. Rapidly changing technology and international regulatory practices are creating demands for more flexible safety regimes modelled on performance based outcomes rather than specific and highly prescriptive requirements. This calls for regulatory regimes that are in tune with international best practice and that deliver cost effective safety and performance outcomes.
The Development of a Single Economic Market with Australia
67. In recent years, the Governments of Australia and New Zealand have given high priority to the development of a single economic market between the two countries. This has seen the development of better trans-Tasman regulatory co-ordination and the development of joint institutions (for example, Food Standards Australia and New Zealand and the proposed trans-Tasman Therapeutic Goods Agency) leading to greater efficiencies for business and governments in both countries.
68. The Trans-Tasman Mutual Recognition Arrangement (TTMRA), which came into effect on 1 May 1998, is a non-treaty arrangement between the Commonwealth, State and Territory Governments of Australia and the Government of New Zealand. It is a cornerstone of a single economic market and a powerful driver of regulatory coordination and integration. Further, the TTMRA is a key instrument in developing an integrated trans-Tasman economy and a seamless market place as envisioned by the Australia and New Zealand Closer Economic Relations Trade Agreement (CER) signed in 1981.
69. The TTMRA is given effect by overarching domestic legislation in both countries. It requires a high degree of co-ordination of trans-Tasman technical regulations, Standards and recognition of conformity assessment.
New Zealand's International Obligations
70. Developments in domestic standards and conformance infrastructures tend to be driven by developments in the international environment rather than in isolation. As a member of the World Trade Organisation, New Zealand has international obligations under the TBT Agreement. Whilst recognising that governments employ technical regulations to achieve legitimate objectives, the TBT Agreement provides that those technical regulations must not be prepared, adopted or applied with a view to, or with the effect of, creating unnecessary obstacles to international trade. In other words, technical regulations should not be more trade-restrictive than necessary to fulfil a government's legitimate objective.12
71. In addition to its WTO obligations, New Zealand is a signatory to a number of Mutual Recognition Agreements (MRAs), Free Trade Agreements (FTAs) and Closer Economic Partnerships (CEPs) which form part of our broader international obligations. In some areas there are also regulator-to-regulator agreements or co-operations which achieve similar outcomes to MRAs.
72. New Zealand is a signatory to a range of MRAs including:
- the Agreement on Mutual Recognition in Relation to Conformity Assessment Between New Zealand and the European Community;
- the Asia Pacific Economic Cooperation MRA for Electrical and Electronic Equipment;
- the Arrangement between the New Zealand Commerce and Industry Office and the Chinese Taipei Economic and Cultural Office of New Zealand in relation to Facilitating Trade in Electrical and Electronic Products;
- the Trans Tasman Mutual Recognition Arrangement (see above).
73. New Zealand is a signatory to the following FTAs and Closer Economic Partnerships:
- Australia and New Zealand Closer Economic Relations Agreement (1981);
- The New Zealand and Singapore Closer Economic Partnership Agreement (2001);
- The New Zealand and Thailand Closer Economic Partnership Agreement (2005).
74. In addition, the Trans Pacific Strategic Economic Partnership between Singapore, Brunei, Chile and New Zealand has been signed but not yet ratified.
75. There are a number of FTAs and CEPs under negotiation, including:
- The New Zealand and China Free Trade Agreement;
- The ASEAN / New Zealand / Australia Free Trade Agreement;
- The New Zealand and Malaysia Free Trade Agreement; and
- The New Zealand and Hong Kong Closer Economic Partnership.
76. These agreements provide frameworks for co-operation and the negotiation of arrangements to reduce technical barriers to trade and promote the confidence of overseas trading partners in the New Zealand infrastructure. For this reason, it is important that New Zealand ensures that its standards and conformance infrastructure can effectively support the objectives of its current preferential trade agreements and any future agreements the government may enter.
77. International arrangements and norms in the areas of standards and conformance are developing over time. Internationally, particularly in Europe, there has been a trend away from unconditional reliance on the multilateral arrangements between accreditation bodies with regulators resuming more control over the accreditation agencies that they are prepared to recognise. New Zealand regulators have always had the ability to recognise, or not recognise, accreditation undertaken by signatories of the voluntary sector Multilateral Agreements (MLAs) that IANZ and JAS-ANZ have joined.13 However, ultimately, for trade facilitation, it will be important to strengthen those arrangements and the confidence of regulators in them.
Facilitating Innovation
78. The government has identified a need for economic transformation in New Zealand. Innovation will be a significant contributor to this. Standards and conformance are often seen as a compliance cost for business, but standards can also be a key enabler of innovation and economic growth.
79. A criticism of the standards development process in relation to innovation is the time it takes to reach consensus on a new standard, particularly in areas of rapid technological change. One response to this has been the introduction of an ability for SNZ to produce guidance documents.14
80. Stringent standards for product and process performance can encourage firms to innovate to achieve and exceed these standards. If these standards anticipate standards elsewhere they can provide domestic firms with a competitive advantage internationally. Codifying information standards also facilitates technology transfer which can be a basis for further innovative activity. Involvement in standards development can create competitive advantage, particularly if firms secure influence over international standards. In addition, standardisation is not just about producing norms for given technologies in given markets but helps to establish credibility, focus and critical mass in markets for new technologies.
81. Conversely, standards can be barriers to innovation by being rigid or out-of-date, encouraging "just good enough" behaviour or reducing choice. The increased flexibility offered by performance-based regulation and standards is intended to reduce these negative effects.
82. The issues and options identified in this paper are aimed at enabling the standards and conformance infrastructure, and others, to better support innovation and economic transformation.
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