Supranational agreements and regulation Stéphan Marette INRA, Paris

Barriers to Trade TARIFF BARRIERS NON-TARIFF BARRIERS What kind of quality regulation in a context of trade liberalization?

Tariff Barriers and Trade Liberalization Does trade liberalization (namely less taxes, subsidies or quotas…) increase the average quality and the consumer surplus? More competition or more concentration? More risks (less supply security or new risk such as invasive species) and more price volatility?

Benefits of Trade liberalization The possibility of consuming a higher quality of products (vertical differentiation). Countries can take advantage of growing economies of scale when markets are opened up; this in turn reduces production costs at constant quality. The increased competition resulting from trade liberalisation encourages firms to offer a better quality/price mix. It increases product variety and freedom to choose for consumers.

Quality and risk of insolvency If no problem of insolvency, a decrease of price support leads farmers to choose more high-quality products. When the cost of investment for high-quality is large, there is a risk of insolvency for producers in a context of uncertainty for quality (Marette Zago (2004)). A decrease of price support may lead to farmers’ bankruptcy with low-quality products and it has an ambiguous effect for the choice of quality by farmers The reply: develop quality insurance

Second pillar of the CAP Second pillar of the new Common Agricultural Policy will subsidize sustainable development or high-quality products How to measure the product quality or the « environmental » quality? Will a subsidy really finance the quality improvement?

Industry and famers Concentration in the agribusiness (industry, supermarkets…) – “Low” sensitivity to trade liberalization Farmers are scattered with no market power – “Large” variability in quantity and quality – Risk of insolvency – New organization under trade liberalization

Farmers’ reaction in a context of trade liberalization French Potatoes producers organized the development of new varieties in a context of intense competition with Spain, UK… Bintje: low quality Higher price for new varieties – Autres varietes : other varieties – Chairs fermes: Firm-fleshed potatoes The market share of the new varieties increased between 1990 and 2000

Market shares in volume of potato varieties in France

Models to measure quality and trade Applied General Equilibrium models (GTAP): – Homogeneous goods – Diversity according the origin (with Armington) – More diversity linked to the trade liberalization Drogué, Marette, Ramos (2004) Comparison between the welfare under an “aggregated” model when product differentiation is overlooked and the welfare when product differentiation is considered is ambiguous – Mussa Rosen specification (vertical differentation)

Non tariff barriers Sanitary and Phytosanitary (SPS) Agreement Technical Barriers to Trade (TBT) Agreement Standard, labeling and liability are necessary to protect consumers and insure safety Heterogeneous policies that may limit trade

How to measure non tariff barriers? Price gap method Gravity – Are data reliable? Cost benefit – One example: Analysis for avocadoes in California (Orden and Romano, 1996)

Standards as Non tariff barriers Otsuki, Wilson and Sewadeh (2001 ERAE and FP) show that “the European Union regulation on aflatoxin will result in a trade flow that is 63% lower than when the Codex Alimentarius standards are followed” Maskus, Otsuki and Wilson (2004) show that “standards increase short-run production costs by requiring additional labor and capital”.

Standards as Non tariff barriers The limit of the previous approaches is the unpredictable reaction of consumers in Western countries if the regulation is dropped or “reduced” – Market context, media The supermarkets’ “private” standards are more important than public regulation – Berdegué, Balsevich, Flores and Reardon (Food Policy, 2004). More capital in developing countries for developing HACCP procedures and famous brands is necessary for entering a market….

Labeling Brand and/or labeling Great diversity – Quality (Red label) – Eco-labels, organic, «sustainable agriculture» – GMO – Labels of origins Too many labels in a context of trade liberalization? Regulation is necessary for avoiding consumers’ confusion!

Voluntary or mandatory labelling? The revelation/certification is depending on – cost structure (marginal or fixed) – competition among producers – competition among certification agencies Only mandatory labeling can be studied as potential barrier to entry

Mandatory Labeling GMO Labeling: SPS or TBT? Crespi and Marette (2003) show that consumers with different perceptions and preferences may lead to different policies/choices of label among countries Trade liberalization may lead to changes in the label policy (Bureau, Marette, Schiavina, 1998) Difficulty to inform consumers regarding the origin…

Voluntary Labels Collective labels suffer from competition with registered brand name (appellation of origins) Wine sector Are brands more efficient on the international markets? Labels of origins matter for consumers in France! – It is a preference and not only a regulation – Trust in national regulation

Most important conditions of production for French consumers (Credoc, 2001) 1. No child labor 2. Products from France (ORIGIN) 3. Good conditions for workers in factories 4. Absence of pollution during the production process … 9. Animal welfare

Conclusion Complexity of the mechanisms – Trade liberalization should lead to new policies – Standard, labeling and liability are necessary Better measures/quantification of the effects between trade and quality are essential to improve regulation