The emergence of new technologies, increased product differentiation, rising consumer incomes and the heightened focus on food safety and quality have set the stage for the emergence of private quality standards in the food sector that sit alongside regulatory standards, approval processes, and mandatory labeling requirements. Private food quality standards feature two defining dimensions: the source or scope of the standard and the economic function of the standard . The umbrella of ‘private standards’ encompasses proprietary standards established by individual firms, voluntary consensus standards established by industry bodies or coalitions of firms, and third-party standards established by independent standard-setting bodies and other nongovernmental organizations. Private standards also differ with respect to the economic functions or objectives they perform, from reducing exposure to liability, to improved supply chain management, to product differentiation and brand name capital, to the protection of firm or industry reputations.
Private standards may be a component of a product differentiation strategy if the standard is communicated to consumers through product labeling, thereby becoming a quality signal for individuals seeking enhanced individual food security. Private standards can also serve to reduce a firm’s liability as a component of a due diligence defense in the event of a failure of a product to provide the expected quality . In other cases, private standards are primarily aimed at enhancing supply chain management through improving the efficiency of information transfer along the supply chain and reducing transaction costs. By facilitating longer term supply chain relationships private standards can reduce the search costs of finding reliable suppliers and the monitoring costs of ensuring the quality of supplies. Credible verification (often by a third party) that standards have been met is a necessary element of most private standard systems, both proprietary and consensus. While outwardly voluntary, private standards can become a de facto mandatory requirement if a majority of the market adopts the standard as a prerequisite to doing business [15, 16].
Standards that are put in place by individual firms and are unique to the firm are known as proprietary standards, and are typically a core part of the firm’s branding strategy. Examples are private standards established by retailers. The food retailer WholeFoods has a set of quality standards that its suppliers must meet, including a long list of unacceptable ingredients on processed food products—to increase individual food security—as well as the company’s “Responsibly Grown” standards for fresh produce and flowers which emphasize practices such as those that promote soil health, reduce waste, conserve water, promote ecosystem diversity, and address farmworker welfare. In addition, the retailer has a set of animal welfare and meat quality standards and seafood sustainability standards for suppliers of these food products (WholeFoods) .
The retailing giant Walmart has a number of management standards for its supply chains with which its suppliers must comply and which are aimed at enhancing efficiencies within the company’s distribution system. It also implemented a proprietary Ethical Standards Program (ESP), which set out a series of labor and environmental standards for suppliers . The examples from both of these retailers serve to illustrate that proprietary standards can serve multiple functions. Product differentiation is a primary objective in both cases, although enhanced supply chain management plays a central role in Walmart’s standards. The extent to which a proprietary standard reduces liability and/or protects reputation (brand name capital) depends on the effectiveness of the standard in mitigating food safety and quality failures or in ensuring the provision of specific quality attributes . The degree to which the standards are monitored and enforced is also an important determinant of their effectiveness and credibility with those seeking to identify products that will enhance their personal food security.
Sometimes firms come together to establish a shared standard to achieve a common goal. This is known as a voluntary consensus standard and may be an entirely private sector initiative or may involve government in a facilitating role. By their nature, these standards are collaborative rather than competitive, and therefore are focused on a common set of objectives around which the firms within the standard do not compete, such as food safety, albeit the standard may allow firms collectively to compete with other firms that lie outside the club, for example a standard associated with a country of origin. Two prominent examples of voluntary consensus standards are GLOBALGAP and the Assured Food Standards program (the so-called Red Tractor program). The former was established by a coalition of international food retailers, while the latter is driven by a coalition of agricultural producer organizations in the United Kingdom. In some cases governments put in place and enforce property rights systems specifically designed to facilitate the existence of consensus standards. The sui generis legal system that endows geographical indications with legal intellectual property rights in a number of jurisdictions, including the European Union, is one example .
GLOBALGAP,Footnote 7 is a set of good agricultural practice (GAP) standards pertaining to environmental stewardship, worker health/safety and animal welfare. It is a business-to-business standard targeted at improving food quality and food safety within food supply chains, rather than providing quality signals directly to consumers. Foods are not usually labeled as “GLOBALGAP” at the retail level, so consumers may not necessarily know that the food they are purchasing was produced to GLOBALGAP standards. Instead, the system reduces the transaction costs of managing supply chains and of ensuring that food meets minimum standards. While the initial emphasis was food safety for imported produce (clean irrigation water, adequate hand sanitization during harvesting, etc.), the standard is multifaceted encompassing food safety, environmental protection, animal welfare, and worker health and safety across a range of commodities—fresh vegetables and fruit, livestock, aquaculture, flowers, and feed manufacturing. The initial development of these consensus standards occurred through a coalition of European food retailers (The Euro Retailer Produce Working Group—EUREP) that recognized the need for a common set of quality standards for suppliers of fresh produce and other agricultural commodities. Compliance with GLOBALGAP standards is verified through independent third-party audits . Rather than product differentiation, which is a primary driver in firm-level proprietary standards, the core objectives of this consensus standard relate to management of supply chains, including reducing the transaction costs of sourcing reliable supplies and reducing the retailers’ exposure to the negative liability and reputational effects associated with food quality (particularly safety) problems .
The Assured Food Standards program established by a coalition of producer organizations in the United Kingdom is another example of a voluntary consensus standard. It differs from GLOBALGAP in that the program’s distinctive Red Tractor logo features prominently on food labels, such as fresh produce and meat, acting as a quality signal for consumers. The program provides quality assurances with respect to food safety, animal welfare, environmental sustainability, and British origin (country of origin).
A third type of private standard that differs in scope, source and economic objective to proprietary or voluntary consensus standards is a third-party private standard. Well-known examples are the ISO (International Organization for Standardization) quality management and environmental standards, but other examples include food quality standards established by nongovernmental organizations or other third-party interest groups to verify a range of food quality credence attributes, often relating to on-farm production methods. An example is the animal welfare standard established and certified by the SPCA (Society for the Prevention of Cruelty to Animals) in Canada, and similar standards from animal welfare organizations in other countries. Third party standards are diverse in terms of their intent and objectives: while the ISO standards are primarily business-to-business standards that reduce transaction costs and facilitate supply chain efficiencies (albeit some firms do publicly identify their compliance with ISO standards), other third-party standards such as the SPCA standard act primarily as a quality signal for consumers who may be seeking a product that is consistent with a set of specific ethical preferences.
Rising incomes have led to increased demand for choice in consumers’ food baskets, including foods from a wider range of countries—often countries with little experience in integrating into international supply chains. The technology associated with moving food products long distances has allowed both lower cost international shipping and a wider variety of food types that can be transported internationally (e.g., fresh, frozen, freeze-dried). Standards can facilitate the communication of the demands of distant consumer markets to producers and processors.
Private standards have become a somewhat contentious issue in international commerce and development economics. The issue is whether private standards for food quality divert or reduce trade, or can they instead facilitate international commerce? The primary argument for private standards having a negative effect on international commerce revolves around the burden of compliance costs placed on suppliers which can be significant, particularly if much of the market requires adherence to private standards, making them de facto mandatory. These concerns are particularly pertinent in the case of developing countries . The burden of compliance tends to be higher on exporters from countries with lower public standards and who therefore have a bigger gap to bridge in terms of upgrading of production and storage facilities and investments in technical capacity, such as the capacity for verification, certification and testing. Indeed, this may also be the case for developing country exporters in complying with public regulatory standards in importing markets. Nevertheless, if private standards put developing exporters at a competitive disadvantage vis-à-vis exporters in countries with higher public standards, the concern is that these standards may divert international commerce by reducing exporting opportunities for developing countries.
An alternative view, however, is that compliance with the food safety and quality standards of importing countries has a positive effect, acting as a catalyst driving infrastructure improvements and investment in developing countries, in which case the effect could be to increase international commerce .Footnote 8
Beyond the financial burden of investing in new production and verification technologies to meet private standards, proprietary private standards that require asset-specific investments by suppliers in order to meet the production protocols embedded in the standards of an individual firm can have a further trade reducing effect . Increasing concentration in the global food retailing sector exacerbates this problem because access to global supply chains is channeled through a relatively small number of multinational firms. Even a competitive market can reduce to one of bilateral dependency once one party to a transaction has made an asset-specific investment, effectively tying them to the other party . The classic holdup problem results, where a firm’s willingness to invest in new production technologies to meet the quality requirements of a buyer is inhibited by the risk that the buyer could act opportunistically and appropriate rents once the supplier has made an asset-specific investment and is locked into dealing with that buyer. If proprietary private food quality standards require significant asset-specific investments by suppliers without the requisite contractual safeguards to guard against opportunistic behavior by the buyer, either suppliers will require a risk premium sufficient to offset the risk of opportunistic behavior, or in the long run these supply chain relationships will be contractually unstable . Contractual safeguards in this context could include required codes of practice that are unequivocal and communicated clearly to suppliers, as well as retailer investments in brand name capital (reputation) that would be damaged by repeated opportunistic behavior toward suppliers, as well as the use of independent third-party auditors to verify suppliers’ compliance .Footnote 9
An alternative view argues that private standards can have trade facilitating effects. It has been noted that the processes of harmonization and mutual recognition (equivalence) among private standards may be occurring more quickly than is possible for national public standards, particularly those that require multilateral negotiations at the WTO or standards bodies such as the Codex or World Organization for Animal Health (OIE) [15, 36]. Voluntary consensus standards provide suppliers with access to multiple supply chains in multiple countries, as long as retailers do not treat consensus standards as a base upon which they can add additional proprietary standards. Private food quality standards are also a signal of product differentiation and quality differentiated markets, and therefore can be a basis for trade in value-added differentiated food products.
As this discussion indicates, private standards can enhance, divert or reduce international commerce under different circumstances and the outcome can be expected to differ depending on the products or how the supply chain is constituted. The extent to which asset-specific investments are required, the current status of food quality standards in an exporting region (hence the costs of the compliance gap), the competitive structure of the food retailing sector, and the degree to which private standards are firm-level proprietary standards or widely adopted consensus standards will determine the impact of private standards on international trade.