SPS cases Lecture 38 Economics of Food Markets Alan Matthews

Some Cases Cases which went to Dispute Settlement –EU beef hormones –Tasmania (Australia) salmon –Japan apples –EU GMOs Cases ‘settled’ through the SPS Committee –EU aflatoxins

EU & Aflatoxins January 1998 notified the SPS Committee of its plans to introduce new legislation No Codex standard at the time Impact on developing countries potentially severe –e.g. Ghana pointed out that 80% of its exports were of groundnuts, and that the impact on trade could be severe –World Bank suggested it could halve imports of nuts and cereals from Africa for a trivial gain in EU food safety EU made some changes, but many developing countries still profoundly unhappy

EU regulatory framework for GMOs Put in place in the early 1990s to protect citizen’s health and the environment while creating a unified market for biotechnology Authorisation requires a risk assessment Since entry into force of Directive 90/ authorisation were approved for commerical release, but none since October Five MS said they would refuse approval until new regulations on labeling and traceability were introduced. Some member states invoked the ‘safeguard clause’ in the Directive to temporarily ban the marketing of GM maize and rapeseed.

The EU and GMOs If trade restrictive measures are motivated by concerns over ‘super-weeds’ or food safety, then the SPS Agreement applies –have the risks been assessed, does scientific evidence justify the restriction, is the appropriate level of protection consistently applied, is it minimally trade distorting? If mandatory labelling is justified by the consumer’s right to know, then the TBT Agreement applies –the US contests the need for this

The WTO Panel Proceedings began in 2003; Panel report unofficially released in March 2006 US, Argentina and Canada have complained that –A de facto moratorium on GM approvals, since 1998, had no scientific justification –Four Member States (Austria, France, Greece and Italy) banned GM products that had been approved by the EU

The WTO Panel The measures at issue: –The general moratorium, i.e. suspension of approvals –Product-specific moratoria or marketing bans –Member states’ national measures prohibiting the marketing of GMOs

WTO panel findings EU’s moratorium violated WTO rules because it led to ‘undue delay’ in assessing marketing applications for GMOs, contrary to Art. 8 of the SPS Agreement Similarly for the product-specific measures Member State bans violated WTO rules because they were not based on a risk assessment Panel did not question parties’ right to conduct pre-market risk assessment of GMOs Panel did not consider whether GMO products are ‘like’ non-GMO products and can be treated differently

SPS measures and consumer protection Traditional trade measures were taken to protect producers – easy to show under standard assumption that trade measures reduce welfare SPS measures often take in response to consumer concerns – the welfare effects can be very different Consider case of ban on GMFs (genetically modified foods) where consumers have preference for non-GMF product

The model (Gaisford and Chui-Ha) Two country world, Europe and North America Free trade prior to introduction of new GMF New GMF developed in North America Europe prohibits domestic production of the GMF and continues to produce only non-GMF Assume Europe small relative to North America Assume that European welfare only depends on quantities of GMF and non-GMF directly consumed as private goods (i.e. no externalities)

The model GMF is perceived in Europe as a low- quality substitute for the non-GMF In the absence of credible labelling, individual consumer cannot determine whether food is GM or not – we have a pooling equilibrium GM technology reduces cost of production in supplying country, resulting in fall in world price

D non-GMF Initial non-GMF world price S non-GMF Price Quantity Initial equilibrium before the introduction of the GMF variety

D non-GMF Initial non-GMF world price S non-GMF Price Quantity D pooled Final GMF world price Domestic output  PfPf PwPw Domestic consumption  New equilibrium following introduction of GMF product

D non-GMF Initial non-GMF world price S non-GMF Price Quantity D pooled Final GMF world price T V X W U YZ PfPf PwPw PePe QeQe Welfare changes following introduction of GMF product

Welfare impact of introduction of GMF Demand curve shifts downward because of decline in average quality Loss of consumer surplus –(T+V+X) (adverse quality effect) Increase in consumer surplus (Y+Z) – loss of producer surplus Y (net price effect) If adverse quality effect dominates, European welfare falls.

Can EU improve its welfare with an import ban? Only non-GMFs remain available and no adverse quality effect arises However, a harmful price effect arises Non-GMF imports are non-available, price rises from P i to P e Producer surplus rises U+V, consumer surplus falls –(U+V+W+X) Fall in EU welfare –(W+X) But fall may be less than allowing unlabelled GMF imports Z-(T+V+X) Embargo is superior is T+V exceeds W+Z

Is mandatory labelling a superior option? Initial non- GMF world price D non -GMF S non- GMF Price Quantity PfPf PsPs PePe QeQe D sepa rate non- GMF AB E QsQs FG C Final GMF world price inc. labelling cost H D demand separate GMF There are now two separate markets for conventional and GMF products

Is mandatory labelling superior? Start with embargo on GMFs – welfare loss is C+F+G Mandatory labelling gives rise to a separating equilibrium; EU consumers now have a choice Advent of GMFs will create a second market Availability of GMF will shift the demand curve for non-GMFs because of availability of substitute product

Is mandatory labelling superior? Start with non-GMF market 1. Raise price to P s assuming GMF price is infinite (i.e. prohibited). Relevant demand curve is D non-GMF. Welfare change CS –(E+F+G) + PS (E) Gain from new product = H Overall gain is H – (F+G)

Compare with import embargo Adverse price effect is smaller with mandatory labelling -> smaller welfare loss on non-GMF market by C Also gain on GMF market of H Mandatory labelling unambiguously better than embargo on GMF

Conclusions Mandatory labelling may still be challenged under WTO because it imposes large costs on exporters to develop Identity Preservation Systems Could evidence of consumer preferences be used/required as defence of labelling?