# **Box 1: Proliferation of standards increases trade costs and can lead to proliferation of standards in other sectors: the case of pallets.**

The case of pallets illustrates the impact of non-harmonization of standards on trade. It is a particularly interesting case because of the many different pallet standards and the prevalent use of pallets – 80 percent of freight containers leaving the US contain products that are stored in pallets.

The pallet is a portable, horizontal, rigid platform used as a base for storing, staking, handling, and transporting goods as a unit load (National Wooden Pallet & Container Association 2004). The development of the pallet was one of the two key innovations for storage and distribution of the twentieth century (Le Blanc 2002). It was developed in the 1930s in the US to protect the product, improve storage and make distribution more efficient. Its use spread rapidly to the rest of the world. However, as transport companies in other countries adopted the pallet, many employed pallets with different standards. At present, there are thousands of different pallet standards active in the world: pallets vary in size, composition, and potential health and environment hazard.

This multiplicity of standards diminishes the efficiency of distribution that the pallets were initially designed for. If the destination country refuses entry of pallets that do not satisfy a particular standard or the local machinery cannot work with pallets that do not satisfy a particular standard, the goods have to be manually transferred to a pallet that satisfies that standard. This increases the cost of handling, extends transport time, leads to greater losses due to damaged goods, and causes the additional cost of having to rent different pallets depending on the market of destination. Even when the destination country accepts entry of pallets of different standards, the use of different pallet sizes leads to poor container space use and increases trade costs. A European study conducted by AT Kearney concluded that “current pallet heights make poor use of vehicle inner heights... as a result, 15% additional grocery trucks are required” (Penman 1997:6). The space that would be saved loading standardized pallets into containers can represent 1.2 percent of the retail sales price. The multiplicity of standards increases trade costs for all countries and is particularly challenging for developing countries. Developing countries’ lower access to pallet rental markets grants them less flexibility to satisfy trading partners’ pallet requirements.

While there are legitimate environmental and phytosanitary reasons why some countries apply stricter standards, there appears to be no legitimate justification for having many different pallet sizes. The ideal solution would be the harmonization of pallet sizes. This has proven to be a daunting challenge because regions employ different pallet sizes and are reticent to abandon them. To make matters worse, the nonharmonization in the pallet sector appears to be leading to diversity in previously harmonized sectors. Though the European Commission is complaining about the diversity of standards, it is trying to create diversity of standards in the field where standardization is the most widespread worldwide: containers. Since the Europallet fits very badly in the standard ISO container, the EU is developing a new container, the EILU, with a larger size. Such move will break away from the harmonized container standard and increase transport costs for the rest of the world.

Note: See Raballand and Aldaz-Carroll (2005) for more details.

To reduce transaction costs associated with differences in standards a number of international standards bodies (like ISO and IEC) have elaborated international voluntary standards and are encouraging countries to harmonize their standards with these international standards. The harmonization of standards in the electronic industry for instance has allowed for greater interoperability between products reducing production costs and allowing for greater fragmentation of production between countries. The harmonization of terminology and product definitions in other sectors has also diminished transaction and information costs.

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