Mind your side of the shelf, will EU? How Moldova introduced a ‘shelving quota’
This is a translated and slightly adapted version of an article originally published in Romanian on December 16, 2020.
Sometimes small economies impose trade protectionist measures to shield their producers from foreign competition. Moldova recently did something of the sort by introducing a ‘shelving quota,’ one that requires retailers to reserve a certain share of their shelves – 50% in our case – for domestic goods. In various iterations, the measure was first proposed by the Democratic government, then picked up by the opposition party PDA, and now adopted by the informal alliance between the Socialists and the Șor Party. On the face of it, each version had good intentions: the Democrats wanted a stronger regional economy, PDA aimed to combat unfair trade practices, and now the Socialists seek to “address the challenges related to the implementation of the Moldova-EU association agreement.”
Trouble is, the European Union, which has been our most important trade partner in the last four years, is not very happy about the measure. The Deep and Comprehensive Free Trade Agreement (DCFTA), which is part of our association deal with the EU, requires Moldova to liberalize its market and phase out any tariff quotas. Specifically, Art. 152 states that “each Party shall accord national treatment to the goods of the other Party,” meaning Moldova must apply the same regulations to domestic and EU goods alike.
To be fair, the new Law contains some provisions that are laudable and free of controversies. For example, it establishes a deadline for paying invoices and lists exceptions as to when a retailer can return the goods to the supplier.
The obvious question then is whether the amendments are worth the risk of spoiling our relationship with the EU. So, will the overall effect be positive enough, or will Moldova lose more than what it hopes to gain?
The relay of protectionism
The first attempt to introduce a shelving quota was in 2017, when the Democratic government, probably inspired by a Romanian law existing at that moment, decided to support Moldovan farmers through a soft protectionist measure. The bill never reached the second reading though, and after the Democrats were ousted in 2019, the Sandu Cabinet formally scrapped it.
Half a year later, PDA lawmaker Alexandru Slusari, previously president of a farmers’ association, introduced an almost identical bill. Before long, President Igor Dodon decided to steal the spotlight for being the one to bring the shelving quota proposal back on the legislative agenda, using this occasion to once again attack his rival Maia Sandu, whom he accused of serving “the interest of foreign corporations.”
The initiative was welcomed by the employers’ organizations, but not so much by the EU. Its representatives were “surprised” to see the proposal gain ground and warned that the measure, if adopted, would run afoul of the general WTO principles and the more specific provisions of the DCFTA. And let’s not forget – the representatives added – that 80 percent of the foreign direct investment into Moldova was of EU origin.
Copy thy neighbor
For the EU, the introduction of the Moldovan shelving quota was a “not again” moment. In early 2020, neighboring Romania repealed a similar law that required retailers to locally source 51% of certain products. This was following infringement proceedings started back in 2017 by the European Commission, which argued that the law was violating the right of consumers to choose the desired goods as well as the freedom of movement of goods in the European Union.
For better or worse, the European Commission generally doesn’t tolerate any form of economic nationalism, so Romania was compelled to remove the labels “Romanian meat” or “product of Romania” as well. In 2015, Slovakia had to withdraw the requirement for retailers to post at the entrance of each store the share of local products as a percentage of their total sales. The Commission’s argument was that such practices lead to “prejudice” against foreign products and have an effect equivalent to quantitative restrictions on free movement of goods (Article 34 of TFEU).
Romania surrendered eventually, but in the couple of years that the law was in effect, it managed to produce some positive effects in the medium term and maybe in the long run too. Preference for local products increased, as the largest supermarket chains – including Kaufland, Carrefour, and Lidl – developed their own versions of ‘buy Romanian’ labels. The success of these labels means that they will be kept even if the stores are no longer required by law to promote Romanian goods.
This illustrates how those rules were able to stimulate cooperation between Romanian producers and foreign retailers, thus strengthening the so-called short supply chains – the straightest producer-to-consumer paths with as few intermediaries as possible. Or put simply, chain stores sourcing food directly from farmers.
Under EU pressure, Romania ditched the shelving quota and even struck out the definition of direct short supply chain from its legislation.
Moldova is not a member of the European Union and of its single market, and even under the current free trade deal with the EU, we still have several years left to make the transition to a fully liberalized trade. So the extent to which such a protectionist measure can affect the implementation of DCFTA and our relationship with the EU probably also depends on Moldova’s diplomatic adeptness.
However, Mariana Rufa, executive director of the European Business Association NGO, suggests that the shelving quota measure could affect not only EU imports into Moldova, but also Moldovan exports to the EU.
The procrustean cap
The shelving quota is not the only contentious issue of the recently adopted legislation. There is also a 10% upper limit on discounts that retailers can ask from suppliers. Again, the clause is found both in Alexandr Slusari’s earlier version and in the law ultimately adopted by the PSRM-Șor majority.
The PDA lawmaker argued for the cap by stating that “there is a limited number of quite influential actors in the food supply chain that seem to possess considerable negotiating power.”
In the draft law borrowed by the Socialists from the Democrats, there is a similar argument from ex-minister of economy Chiril Gaburici: “In negotiating delivery contracts, merchants use to request various discounts from suppliers, going as high as 30% in some cases. This often forces suppliers, especially small ones, to sell at a loss and expose themselves to the risk of bankruptcy.”
The problem of “entrance fees” into retail chains has been discussed back since the drafting of the Domestic Trade Strategy in 2014. Three years later, the practice was prohibited by law. But there’s a loophole: retail chains figured out they can negotiate the supplier cost instead. Obviously, small suppliers are at a disadvantage, as their costs tend to be higher. Plus their larger counterparts can afford better shelf placement.
Adrian Lazarenco, CEO of the retail chain Fourchette, explained for Agora – cynically but honestly – why supermarkets do this: “How can a new producer enter our network? By offering a discount, of course. Because, say, I have a range of ten brands, and in order to add the eleventh, I’ll have to figure how to make it stand out. [...] If a supplier can’t offer a discount bigger than 10%, how do you think, will I take a new product, which is usually offered by small producers? No. Because I’m not certain I’ll be able to sell it. We don’t do charity. Everyone wants to do business.
“If I’m required to reserve no less than 50% of the shelving for domestic suppliers and they can give me no more than a 10% discount, I will obviously go for foreign goods where I can negotiate better prices, or will import goods myself, and for the 50% quota I will go for monopolies, because they are a safe bet sales-wise.”
In other words, small producers have brands that are less known, and stores are afraid they won’t be able to sell them, so they make up for the risk by seeking larger discounts. If this sales device is restricted, retailers will look for other ways to reduce risks. And the easiest one, says Lazarenco, is to market only best-selling goods from leading brands.
This is not the best solution, however, not even for supermarkets. After all, they compete not only in prices, but also in diversity. It’s unlikely that chains will go as far as to throw small brands overboard entirely, as one might read Lazarenco’s words, but many local producers will obviously struggle. This is against the stated goal of the law, and the legislators failed to include safeguards to mitigate this risk.
At the same time, large suppliers will be advantaged, as they can expect increasingly larger orders. Unsurprisingly, it was mainly the big business community that welcomed the new amendments.
There is no clear list yet of the goods that fall under the scope of the new amendments – it is to be established by secondary legislation. But if it’s adopted with as little transparency as the amendments themselves, there’s little guarantee that it’s the local, small producers who will benefit in the end.
Aliona Țurcanu, who runs a small dairy in the provincial town of Drochia, is among the those who are supposed to benefit from the freshly adopted measures. Aliona invested considerable amounts in her business, she tells AgroBiznes, but she has trouble reaching the stores, as retailers demand large quantities at low prices. She cannot export to the EU neither, as Moldovan meat and dairy products are not yet eligible. So her only option is to find a market at home. With deficient legislation, and retailers like Lazarenco seeking a continuous, fast-selling supply to meet the quota, Aliona’s products are not getting on the shelves any time soon.
It’s just one of the local cases that serve to show that Moldova is not keeping up with its own development strategies. In 2016, the government was planning to secure access for Moldovan dairy products on the EU market by 2018. But a 2017 visit of inspectors from the EU Commission’s health and food safety body DG SANTE found both the Moldovan authorities and producers unprepared. A new inspection was planned for 2020, but it was postponed until 2021 due to the coronavirus pandemic.
To understand the ridiculousness of the situation: Moldovan producers of foods with dairy ingredients (such as pastry or confections) have to import milk from the EU to be able to export to the EU.
The protectionist measures adopted recently hardly fix any of these problems. Conversely, a proper implementation of EU sanitary and certification standards would benefit both Moldovan consumers and producers, enabling the latter to export to the EU. The wine industry is a case in point. In response to Russia embargoing Moldovan wine, the industry had to adapt to European standards and gain a foothold on the EU market, which it successfully did. The better the quality, the richer the trophy case, and the larger the exports.
Not least, the introduction of stricter standards could limit the import of cheap and poor-quality goods that are giving our local producers a hard time today.
An own goal?
With many questions left unanswered, the law doesn’t clearly explain how exactly it will “facilitate the access of small local producers” and how retailers would be prevented from using the shelving quota and the discount cap as excuses to legally marginalize small producers to the big business’s advantage.
When a half of the shelving is reserved for Moldovan producers, it means the presence of foreign goods is limited to the other half, which is an indirect restriction. To what extent are Moldovan producers ready to fill the space vacated by imported goods? For a retailer, quantity is as important as quality, and as explained above, going for larger suppliers is a safer bet, especially in troubled times such as a pandemic.
For example, Ana Pancrat, president of the Dairy Farmers-Producers Association, warns that the output of Moldovan milk could drop by 50%, as dairy farms started sending their cows to the slaughterhouse in an effort to cut operating costs.
Gross agricultural output isn’t any better: it dropped by a quarter in the first nine months of 2020. As for last year’s grape harvest, it was scarcer by a third.
Meanwhile, farmer subsidies – the main instrument for supporting local food producers – have been so slim that farmers took to the street over and over last year. Ion Perju, the now former minister of agriculture, was bragging in 2019 that the 2020 Subsidies Fund would be nearly 1 billion lei (about €50M). But what Ion Perju forgot to say was that the amount has remained about the same for several years now, and that half of the 2020 amount was for overdue subsidies. As producers demand larger subsidies, the government offers them a half of the shelf. But can they fill it? Ensuring access to supermarkets is important, but this is putting the cart before the horses if you don’t make sure that domestic production is up and running.
Alone on the shelf
There is broad consensus among economists that protectionist rules can be beneficial only as transitory measures.. They can give domestic producers a break to build up their capacities – develop brands, win customer loyalty, and create jobs – before being able to compete with foreign producers on equal footing.
However, protectionism does only this: it offers a respite. This precious period has to be used by both the authorities and producers to improve the quality and quantity of domestic output. Providing subsidies, encouraging producers to associate, introducing higher sanitary and quality standards, strengthening food safety certification and inspection capacities, promoting modern technologies and eco-friendly agriculture – these are just some of the policies that the government should pursue to help Moldovan producers grow. This should have been the government’s priority immediately after the signing of the DCFTA six years ago.
Alone, the 50% shelving quota cannot put domestic producers on a par with the foreign ones, just like the discount cap rule cannot balance forces between small and large producers. These measures will not adjust national standards to EU ones and surely won’t change consumer preferences overnight. They could be useful as part of a broader plan that makes use of that transition period afforded by the free trade deal with the EU, to prepare domestic producers for a genuinely free market.
In the absence of such a complex plan, protectionism carries more risks than advantages, at least in the long term. Competition doesn’t improve when it’s delayed indefinitely. Without a stable government, a temporary measure can become permanent, turning against those who it was originally meant to protect.
The concern shown for local producers, especially the small ones, is praiseworthy. But in the current version, the shelving quota and the discount cap amendments could end up benefiting the big fish, who are already capable of negotiating dangerous waters like the coronavirus crisis on their own.
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