Certification Programs in International
Agricultural Trade
Consumers these days are faced with a multitude of products that compete vigorously in
the market place. The nature of these products is changing at a very rapid pace. A
growing body of literature in economics states that products are comprised of many
characteristics and it is these characteristics that are important in the consumption
decision. For instance, one chooses an apple based on its size, color, texture, and other
characteristics. Yet not all characteristics of products are readily observable. Nelson
(1970) and Darbi and Karni (1973) classified characteristics as search, experience, or
credence attributes.
Types of Goods and Product Characteristics
Search attributes are ones where the characteristics can be readily observed and product
quality can be assessed before the good is purchased. The size, shape, and color of an
apple can be observed and judged as the consumer is shopping and the consumer can
make a choice from knowing those characteristics. Some characteristics can be measured
reliably and are also search characteristics (such as Choice beef which is graded on
intramuscular fat content). One knows those characteristics before the good is purchased
and consumed.
There are a number of product characteristics that are not observable until after
consumption has taken place. One does not know how an apple will taste until
consumption takes place. Simply looking at the apple provides little information on this
characteristic. However, as one purchases apples over time, notes their variety, observes
their firmness, and experiences the taste, there is more information about the product’s
characteristics. Yet one is never sure about experience goods (e.g., how the apple will
taste) until consumption has taken place. An important characteristic for many goods is
useful life. One doesn’t know how long the product will last with certainty, but with
information about brands, past performance, guarantees, and other observable
characteristics, the consumer can make a better decision on the product’s life expectancy
(which is a very important characteristic).
Finally, there are sometimes characteristics that are impossible to observe, even after the
product has been consumed. These are called credence characteristics and they usually
involve the production process employed. When purchasing shoes, one does not know
the wages and working conditions for the workers or if child labor was involved. Goods
can be produced under a host of conditions and these conditions are increasingly
important to consumers throughout the world. As technological processes have changed
and information has increased concerning production activities around the world,
credence characteristics have become much more important to many consumers and the
retailers that sell goods.
This course is about credence characteristics of agricultural products and how the
marketplace is building institutions that allow consumers to have information about these
credence characteristics, while building infrastructure that assures that those valued
characteristics are supplied. Wealthy consumers throughout the world (but especially in
more developed countries) are increasingly willing to pay a premium for food products
that are produced in a safe and ethical manner, and save the environment. This requires
that systems be designed that assure that consumers can link products with these credence
characteristics.
Grades and standards allow consumers to know some characteristics of products in an
easily identifiable manner. Governments often establish grades and standards for specific
products so that everyone along the marketing system can be assured that certain
characteristics are present. No. 2 yellow corn weighs at least 54 lbs per bushel, has no
more than 0.2% of its kernels heat damaged, no more than 5% damaged for any reason,
and contains no more than 3% foreign matter. Corn can be transacted easily because a
shipment of corn can be identified based on that grade; all buyers and sellers know what
they are getting in terms of those four characteristics. These are the characteristics that
the U.S. government has deemed as important for the grain trade. Note that there are
many characteristics that might be important in the corn that are not part of the grading
system (its starch content, whether it is organically grown, whether is it geneticallymodified, etc.). Some of these characteristics are important for some corn consumers.
This is why non-government standards play a role in the marketing system today.
Government grades and standards normally exist to provide information on the end-use
characteristics of the product. These characteristics might not be readily identifiable by
the purchaser, but they are important for the product’s use. The government determines
what characteristics are most important to buyers and sellers, discovers ways of
measuring those characteristics, and assigns grades to products based on reasonable
categories (e.g., No. 1 apples and Choice Beef). Government grades and standards
sometimes identify the production process that is used to signal the safety of the product
(that a well respected food safety system is employed) or the production process
(certifying that the product is produced using organic standards). The U.S. Department
of Agriculture (USDA) requires that all seafood companies selling product in the U.S. be
certified Hazard Analysis Critical Control Point (HACCP) suppliers; HACCP is a food
safety system. There are USDA standards for organic certification for many products.
Yet government standards are not enough for consumers and agribusinesses these days.
Consumers in Europe and the U.S. are concerned with more details about the production
process and this normally involves credence characteristics. These consumers want to
make sure that they are purchasing products that are grown and processed in ways that
they prefer. They feel they are using their consuming power to not only obtain goods that
satisfy their needs and wants, but also reward people who produce in ways that are
economically, socially, and environmentally “sound.” These are almost always credence
characteristics and definitions become important because what is “sound” for one person
might not be so for another.
Signaling of quality is quite important with credence goods. If production methods are
an important determinant for a consumer, how are “good” production methods signaled
to the consumer? The answer oftentimes involves a certification program. Such a
certification program must define what process is “good,” communicate that to actors
within the production and marketing system, assure that steps are followed to preserve
those valued characteristics throughout the marketing system, and label the product at the
retail level so that consumers know that the production has those credence characteristics.
This is a huge undertaking when markets are increasingly global and food suppliers are
scattered throughout the world (from Argentina to Zimbabwe).
Credence Goods and the New Consumer
In the current world trade context, where food firms strive to meet the ever changing
demands of consumers, there will be demands for certification programs that identify
credence characteristics whenever money can be made from differentiating products on
that basis. There are a large number of affluent consumers throughout the world that
want to know more about where their food originates, who produces it, how it is
produced, how it is processed, etc. If a large number of consumers decide that they want
their milk supplied from farmers that have fewer than 50 cows that are fed organic feed
(and they are willing to pay for this), it is likely that a certification program will be
developed to supply milk that meets those credence characteristics. That certification
program will establish a marketing channel where such milk can be separated from all
other milk to assure that its characteristics are preserved. That will allow consumers to
purchase milk that meets those characteristics if they are willing to pay the price that is
needed to compensate for the costs of meeting those characteristics.
Without a labeling and certification program, though, economists argue that companies
will not provide goods that adhere to these credence characteristics. If providing those
characteristics is costly and consumers are willing to pay for those characteristics, there is
still no guarantee that a market will develop. Firms will fear that they cannot recapture
their increased costs from providing the credence characteristics (since all products look
the same and none are certified), so they will provide goods that don’t have the
characteristics because they are less costly to produce. Consumers won’t know which
goods have the characteristics (because there are no labels or assurances), so they will
purchase the lower priced goods even though they would be willing to pay more if they
were assured of the product’s quality.
Consider a banana that comes from a plantation that uses child labor and has a history of
other labor abuses. Some consumers might be willing to pay more for a banana that
comes from a plantation that doesn’t employ such labor practices. However, one cannot
distinguish the bananas among plantations because they have identical search and
experience characteristics. Therefore, consumers won’t be able to reward the plantation
that has preferred labor practices because those bananas are not identified. Furthermore,
without a tracking system that consumers understand and trust, there is little likelihood
that they will pay more for the “fair labor” plantation bananas. Yet if a certification
program is developed that monitors the labor practices of banana plantations and those
bananas are separately identified throughout the marketing chain, a label can be placed on
those bananas that make them distinct from others. This will allow consumers to be
assured that those credence characteristics are present.
One of the first certification programs involved the assurance that tuna was caught using
techniques that did not harm dolphins. Almost all of the canned tuna sold in the US has a
dolphin safe label on it guaranteeing that the tuna was caught using nets that would allow
dolphins to escape during the process. Before this fishing technology was developed,
there was a substantial by-catch of dolphins with tuna fishing.
Types of Credence Attributes
There are some certification programs that improve food safety and hygiene, which are
important product characteristics. Some of these are government standards that are
established for all firms operating in the country (whether producing or importing the
product). Governments dictate compulsory hygiene and safety standards that must be
met to assure that foods are safe for consumers. These standards differ by country and
they are minimum standards. For instance, a firm supplying seafood into the US must
have an approved HACCP program. HACCP programs are not mandatory, though, for
all food production systems (though they would likely improve food safety). These
government standards are changing all the time as food health concerns get more
publicity, as the food marketing and production system changes, and as consumers
choose to spend more money on food products that improve food safety.
Every country in the world produces food and their governments have food production
and safety standards that must be met by food producers and suppliers. The regulations
for their domestic producers can deal with hygiene and safety standards, environmental
protection, worker rights and welfare, and other issues that they deem important.
However, regulations on imported food generally relate to the product’s end use (or
search) characteristics; a country which is a member of the World Trade Organization
cannot dictate production methods (see Discussion Box 1 on the World Trade
Organization and Setting of Standards). Thus, production standards for imported food
products can be different than domestic products because their credence characteristics
are different. Governments cannot mandate credence characteristics, but private
companies can. So if consumers in France want their chicken to be treated in an ethical
manner, they can mandate chicken production techniques in France, but not in Brazil.
However, a private company could require that its chicken suppliers from Brazil meet a
certification program that assures ethical treatment of chickens.
Government standards, though, are minimum standards that must be met by all product
suppliers. Yet there are many food processors and retailers that are establishing their
own standards that must be met by their suppliers that go beyond government standards.
These private standards allow the company to produce a competitive advantage with the
consumers because their products are deemed as higher quality or safer. European
retailers have led the way in this push for improved food safety and hygiene by
establishing EurepGAP standards that must be met by food suppliers. Discussion Box 2
gives the purpose, history, and effects of EurepGAP standards on food producers all over
the world. These standards are important, but they are not the focus of this course
because they are experience characteristics. One will know whether a product is safe
after consumption (because one doesn’t get sick). Instead we will focus on establishing
standards for credence characteristics involving production methods that cannot be
determined even through experience.
If certain credence characteristics are desired by consumers or retailers, then there must
be a system to warrant that the characteristics exist. This certification system must be
trusted by all parties involved. Generally, this is performed by either the purchasing firm
(in this case the food retailer) or a third-party (that is independent). For instance,
Starbucks has its own Coffee and Farmer Equity (CAFÉ) standards that involve human
rights and environmental concerns that must be met by all suppliers. This is not
specifically labeled on all Starbuck’s coffee, but it is applied to all their suppliers and
Starbucks tries to purchase most of their coffee through suppliers that meet these CAFÉ
standards. A third-party certification will be recognized by numerous retailers and will
usually involve a label so that the credence attributes are visible on the product (through
an organic label, a Rainforest Alliance label, etc.).
Here are some of the most important attributes that deal with credence attributes of
production processes and some of the organizations that set standards in these areas for
food producers:
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Environmental, where certain practices are followed to reduce environmental
degradation from production. Examples include practices that improve
biodiversity, reduce rainforest destruction, and lower carbon emissions.
Rainforest Alliance, Green Seal, Forestry Stewardship Council, Marine
Stewardship Council
Geographical, where a good is produced from a certain region using a traditional
process. There are many such products in Europe, including cheeses, wines, etc.
Each geographic origin has its own organization that controls the production
process. The certification is usually handled by the country government.
Ethical, where production takes place through processes that are deemed more
ethical. Examples would include stipulations concerning worker and animal
welfare. FairTrade, Max Havelaar, Animal Welfare Approved, Union for Ethical
BioTrade
Economic/Social, where a good is produced by disadvantaged workers or
companies. Examples would include production by small scale farmers or
companies that provide “living” wages. FairTrade, Social Accountability
International, Social Accountability Accreditation Service
Religious/Cultural, where production must take place under certain conditions.
Examples are Halal and Kosher foods.
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Organic where production takes place with little or no chemical inputs.
International Organic Accreditation Service
Benefits and Costs of Standards
Consumers clearly benefit from certification programs; otherwise they would purchase
unlabeled food products that are readily available. Furthermore, retailers likely benefit
too; otherwise they would not stock the product. However, the benefits to others in the
food marketing chain are not clear.
Producers usually must change their production process in order to comply with the
certification programs. This is costly and if they must bear all the costs associated with
the program, they could lose, depending on the price premium. For instance, if the
EurepGAP standards mandate that farmers make many changes in their production
methods in order to sell the same quantity of food as before the standards with no price
premium, the farmers clearly lose. They are required to incur costs in order to maintain
the market that they previously captured without the costly changes. In contrast, if the
new standards allow the farmer to sell to more retailers because of adopting the
EurepGAP standards, there could be benefits that exceed costs even if prices remain the
same because the farmer can expand output.
Some worry that the EurepGAP standards have allowed retailers to band together to
exploit their market power. In that way, they have an anti-competitive alliance that
forces farmers to increase their costs to supply products that the retailers can sell at
higher prices. The standards are then a barrier to entry for farmers where the companies
are exploiting their size. Yet many standards involving credence characteristics are
controlled by third-party non-government organizations (NGOs) that have an interest in
preserving the environment, improving working conditions and wages, and producing
food in an ethical manner. Producers voluntarily choose to enter these certifications
because they make more money (despite being required to change their production
methods).
The EU, which is leading in many of these areas of food product certifications, is trying
to help small producers by providing technical assistance in some of its developmental
aid programs. Furthermore, it is trying to make sure that these private certification
schemes are not unnecessarily burdensome and a large hindrance to small scale farmers
in less developed countries.
International standards for credence characteristics are playing an important role in
changing the way agricultural goods are produced throughout the world. Each
certification program has unique goals, objectives, and standards that fit their situation.
The case study on Coffee Certification Programs highlights the various ways that these
programs have influenced the coffee market. The case study on the Fair Trade
Movement shows how that movement began, its standards and certification procedures,
and indicators of its benefits and importance. Finally, a case study on Indonesian
Agriculture shows why credence characteristics are important for some less developed
countries where agricultural wages are low, the environment has been degraded, and
agricultural production is being changed to meet the standards of more developed
countries.
Discussion Box 1. World Trade Organization and Setting of
Standards
The World Trade Organization (WTO) was established in 1995 as the successor to the
General Agreements on Tariffs and Trade (GATT), which was established after World
War II, along with the United Nations, International Monetary Fund, and the World
Bank. Observers often use WTO and GATT synonymously. The WTO has 153 member
countries that have pledged to follow a set of principles aimed at promoting international
trade that is mutually beneficial for countries by reducing barriers. It is a negotiating club
that has specific rules for conduct and dispute settlement in international trade.
The basic rules and principles of WTO are that:
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Countries are to negotiate reductions in trade barriers (tariffs and other border
restrictions) with the expectation that other countries will also lower their trade
barriers (Reciprocity).
Countries are to give all WTO members the same preferences
(Nondiscrimination).
Countries are to have policies that are transparent and market-driven
(Transparency).
Imported goods should receive the same treatment as domestic goods inside the
country (National Treatment).
Countries harmed by changes in another country’s policies are entitled to
compensation (Compensation).
The WTO does not dictate standards for countries, but it has rules about how countries
should establish standards. The overriding idea is that trade should be mutually
beneficial (the exporting and importing country should gain) and that standards should
not be specific to any country (remember national treatment where imported goods are
treated the same as domestic goods).
Countries are sovereign and they are allowed to establish any standards that they see fit
for their domestic producers and consumers; but they are not free to establish any
standards (trade barriers) on imported goods. For imported goods, the WTO allows
countries to have trade barriers “which are necessary to protect their humans, plants, and
animals.” So the US is free to have domestic regulations that prohibit use of a particular
pesticide on strawberries, but it cannot dictate such a regulation on foreign companies
that export to the US unless certain conditions apply. The burden of proof whether a
trade barriers is necessary resides with the country that establishes the policy. So if the
US bans imports of strawberries from a country because they use a particular pesticide,
the US must prove that such the policy is necessary to protect their humans, plants, and
animal1. Furthermore, this proof must be based on sound science. If there is not
sufficient scientific evidence that bringing such strawberries into the country is harmful,
the trade barrier must be dropped (or the offending country will be penalized).
Thus, with respect to food product characteristics, the WTO allows a country to
discriminate against a product that has characteristics deemed as dangerous to its humans,
plants, or animals. However, it does not allow border policies that discriminate against
products based on their credence characteristics, because they cannot harm the importing
country’s humans, plants, or animals. They might harm the humans, plants, or animals in
the producing country, but that is not relevant to the importing country’s trade policy.
Countries cannot dictate the manner in which foreign suppliers produce food as long as it
is not harmful to the importer’s humans, plants, or animals. A country cannot require that
imported food be produced using sustainable techniques that do not harm the
environment. They cannot dictate that products be produced organically or without
certain pesticides (as long as those pesticides leave no residual on the food product).
One of the interesting early cases for the GATT was whether the US could ban imports of
tuna from Ecuador and other countries because the fishing methods were unsafe for
dolphins. The GATT panel ruled that banning imports from these countries was not legal
because dolphins were not endangered; instead a labeling program could be used to
inform consumers whether the tuna was caught using dolphin-safe methods (this label
continues today).
The WTO does encourage countries to adopt domestic and import standards that are
consistent with practices established by recognized international bodies, such as the
Codex Alimentarias Commission, International Plant Protection Convention, and the
International Office of Epizootics. These scientifically-based organizations have
technical committees that establish standards for countries in the areas of food safety,
plant protection, and animal health. The WTO hopes that these bodies will move the
world toward a more harmonized system of standards and regulations in food and
agricultural trade so that producers are not required to face multiple regulatory standards
for their exports. Yet countries are free to establish their own standards as long as they
can be justified scientifically.
The growth of private standards is a challenge for the WTO because companies are not
WTO members and are not bound by WTO rules and regulations. Private companies are
free to establish standards that give them advantages as long as they meet the country
standards (which are normally minimum standards). The fact that GlobalGAP standards
are much more stringent than EU food standards isn’t something that the WTO can
address. So farmers throughout the world are increasingly facing private standards that
1
Countries are allowed to restrict imports of products that might bring pests or diseases that would harm its
plants and animals.
incorporate credence characteristics; forcing them to change their production process and
increasing their costs.
Discussion Box 2. EurepGAP
Europe is a major food importer and their consumers are very worried with food quality,
safety, and production processes. Food retailers were concerned that they were receiving
food products from all over the world under differing regulations. Food suppliers from
many countries were frustrated by the individual product standards that were being
dictated by European retailers. The solution to these issues was the establishment of the
EurepGAP program in 1997. This program began when twenty food retailers who were
members of the Euro-Retailer Produce Working Group (Eurep) met to decide upon Good
Agricultural Practices (GAP) for their suppliers. These GAPs involved product safety,
environmental, and labor standards that were increasingly demanded by European
consumers. This initiative was good for food suppliers because they were guaranteed that
if they met EurepGAP standards, they would be able to sell to all of those major retailers,
rather than to go through a different standard (and audit) from each retailer. However,
there were costs to comply with these standards.
The main goal of EurepGAP was to increase consumer confidence in food quality and
safety through establishment of standards that are designed jointly by retailers and
suppliers (though some argue that it was only European-based suppliers that have much
voice in setting standards). Some argue that these standards have evolved to differentiate
products because strong public food safety and quality standards already exist in many
more developed countries. Yet, others argue that these standards exist in order to educate
food suppliers, improve the wholesomeness of food, and allow products to be easily
traced through the marketing system.
The EurepGAP requires that food suppliers be certified against the standards set by an
authorized certification body (which is independent of EurepGAP). There were over 100
certification bodies in more than 70 countries in 2006. All approved certification bodies
have received accreditation to perform audits to assure that EurepGAP standards and
regulations are upheld. EurepGAP certification not only allows food suppliers to sell to
the member retailers, but it also is a recognized symbol of higher quality that can be used
in marketing to other food wholesalers and retailers. Yet this comes at a cost to growers
because they must keep their EurepGAP certified produce separate and it must be fully
traceable back to all suppliers. Adherence to EurepGAP standards is also costly.
It is important to note that EurepGAP is a business to business quality certification
program. If you are a food retailer that is a member of EurepGAP, you are assured that
products supplied through that system meet standards. However, the products themselves
are not labeled as such and are therefore not visible to consumers. Retailers might use
the fact that they are EurepGAP members and their products meet these standards in their
promotions, but this typically is not done because consumers don’t know about
EurepGAP. This means that food suppliers are probably not given much of a price
premium through the program. Instead, they have access to many retailers through their
adherence to EurepGAP standards.
The EurepGAP protocol has over 200 standards that must be met, including
recordkeeping, food safety, pesticide use and control, integrated crop management,
workers' health and environmental requirements. They are included in published
documents that contain EurepGAP General Regulations, the EurepGAP Control Points
and Compliance Criteria and the EurepGAP Checklist. These standards are often costly
to implement, particularly for small farmers in less developed countries (there is no
financial help from the retailers). Once these protocols are in place with the farm, there
must be certification and auditing that takes place to assure that the standards are upheld.
Again, this is particularly costly to small-scale producers; so EurepGAP is not sizeneutral because it is easier for large firms to incur and recapture these costs. There is a
“farm group” option for small farmers that can help if farmers are willing to join together
in the certification process.
Because EurepGAP has been so successful and often used as a benchmark for food
transactions throughout the world, the organization changed its name to GlobalGAP in
September 2007. Members include retailers in Japan, Norway, and Switzerland; and
suppliers from Albania, Argentina, Brazil, Chile, Colombia, Egypt, Israel, Kenya,
Mauritius, Mexico, Morocco, New Zealand, South Africa, Thailand, Turkey, United
States and Uruguay. Furthermore, schemes such as ChileGAP, ChinaGAP, KenyaGAP,
MexicoGAP, JGAP (Japan) and ThaiGAP are modeled on the EurepGAP criteria.
Additional countries have associate members to GlobalGAP: Australia, Canada, Costa
Rica, Croatia, Ghana, Malaysia, and Ukraine.
EurepGAP/GlobalGAP is governed by an eight member board; half of the members from
the retail side and the other half from the supplier side. This board helped to develop
standards based on input from all actors in the food supply chain involving countries
throughout the world. They also heard from governments, and consumer and
environmental organizations that had an interest in their standards. It was a
comprehensive process that involved input from many spheres of the food industry.
EurepGAP/GlobalGAP is financed through membership, farmer registration and
certification body license fees. All of these certified food producers must be a member
and pay membership fees that are based on their sales.
Darby, M.R. and E. Karni. “Free Competition and the Optimal Amount of Fraud.”
Journal of Law and Economics. 16 (1973): 67-88.
Nelson, P. “Information and Consumer Behavior.” Journal of Political Economy. 78
(1970): 311-29.