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AN ECONOMIC ANALYSIS OF FOOD SAFETY ISSUES FOLLOWING THE SPS AGREEMENT

AN ECONOMIC ANALYSIS OF FOOD SAFETY ISSUES FOLLOWING THE SPS AGREEMENT
AN ECONOMIC ANALYSIS OF FOOD SAFETY ISSUES FOLLOWING THE SPS AGREEMENT

Policy Discussion Paper

No.0005

University of Adelaide ? Adelaide ? SA 5005 ? Australia

AN ECONOMIC ANALYSIS OF FOOD SAFETY ISSUES FOLLOWING THE SPS AGREEMENT: LESSONS FROM THE HORMONES DISPUTE

Sallie James

February 2000

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CIES POLICY DISCUSSION PAPER 0005

AN ECONOMIC ANALYSIS OF FOOD SAFETY ISSUES FOLLOWING THE SPS AGREEMENT:

LESSONS FROM THE HORMONES DISPUTE

Sallie James

Agricultural and Resource Economics Group

University of Western Australia

Nedlands WA 6907

AUSTRALIA

ph: +61 8 9380 2514

fax: + 61 8 9380 1098

email: sjames@https://www.doczj.com/doc/ef6523621.html,.au

February 2000

--------------------------------------------------------------------------------------------Paper presented at the 44th Annual Conference of the Australian Agricultural and Resource Economics Society, University of Sydney, Sydney, NSW, 23-25 January 2000

Without implicating them, the author wishes to thank Kym Anderson, University of Adelaide; Michael Burton, University of Western Australia; Thomas Cottier, University of Berne; Lyall Howard, National Farmers Federation; Joost Pauwelyn, World Trade Organization; Donna Roberts, US Trade Representative’s Mission to the WTO and USDA; and Carolyn Tanner, University of Sydney for their helpful comments.

This paper was partly written while at the School of Economics and Centre for International Economic Studies, University of Adelaide.

ABSTRACT

AN ECONOMIC ANALYSIS OF FOOD SAFETY ISSUES FOLLOWING THE SPS AGREEMENT:

LESSONS FROM THE HORMONES DISPUTE

Sallie James

The long-running feud between the US and the EU over trade in hormone-treated beef was the first case under the Uruguay Round's SPS Agreement to be disputed formally at the WTO. It provides a classic example of how cultural differences with respect to food attributes have the potential to hamper trade and to challenge WTO agreements designed to limit trade disruptions, especially when scientific evidence is limited or spurious. After outlining the legal arguments used by the parties to the Hormones dispute, simple economic models are used to represent the EU beef market and examine the effects of the hormone-treated beef ban and its removal. The implications for the practical implementation of the SPS Agreement are then explored.

Keywords: Agriculture, WTO, multilateral trade negotiations, agricultural policy reform, new trade issues

Contact author:

Sallie James

Agricultural and Resource Economics Group

University of Western Australia

Nedlands WA 6907

AUSTRALIA

Tel: +61 8 9380 2514

NON TECHNICAL SUMMARY

AN ECONOMIC ANALYSIS OF FOOD SAFETY ISSUES FOLLOWING THE SPS AGREEMENT:

LESSONS FROM THE HORMONES DISPUTE

Sallie James

The signing of the Uruguay Round Agreements of the World Trade Organization (WTO) and the ever-increasing products and people movements between countries will put governments under increasing pressure to maintain effective and scientifically justified quarantine and food safety policies to protect their citizens, animals, plants and natural environments from the importation of pests and disease. But those policies can be abused, with governments at times adopting excessive restrictions so as also to offer domestic industries economic protection from import competition.

The WTO Agreement on the Application of Sanitary and Phytosanitary Measures (the SPS Agreement) was designed to prevent human, animal and plant health policies from becoming disguised restrictions on international agricultural trade. The Agreement provides clear guidelines as to acceptable bases for SPS restrictions. In general, it is admissible under the terms of the SPS Agreement for a Member to restrict imports to protect human, animal and/or plant life or health, so long as those restrictions are transparent, consistent and based on international standards (where they exist) or a scientific assessment of risks. Through legal and economic analysis of specific cases we can, to some extent, measure the Agreement’s success.

The long-running feud between the US and the EU about the use of hormonal growth-promotants in beef (the Hormones dispute) was the first to be disputed formally at the WTO. It provides a classic example of how cultural differences with respect to food attributes have the potential to hamper trade and to challenge WTO agreements designed to limit the disruptions, especially when scientific evidence is limited or spurious.

The paper begins by outlining the legal arguments used by the parties to the Hormones dispute, and a simple analysis of the outcome. The Panel and the Appellate Body, which heard the dispute, found that the EC violated its obligations under the SPS

Agreement. Beneath the surface of broad agreement, however, lie some differences in interpretation of WTO rules that could potentially weaken the ability of the SPS Agreement to achieve the objectives for which it was designed.

A simple economic model is used in section 3 to represent the EU beef market and effects of the hormone-treated beef ban and its removal under certain conditions. The model demonstrates that lifting the current prohibition of hormone-treated beef cannot reduce the net economic welfare of the EU. Qualifications, such as how the analysis would change if the market for beef were to segment after the ban was lifted, are discussed in section 4. The implications for the practical implementation of the SPS Agreement, with particular reference to how it might be improved in light of the outcome of the Hormones case and the analysis of its economic effects, are then explored in sections 6 and 7.

The paper concludes by suggesting that, legal issues notwithstanding, using economic analysis can shed light on the efficiency of SPS policies, and promote the balance between achieving gains from trade reform and protecting human, animal and plant health and the environment.

AN ECONOMIC ANALYSIS OF FOOD SAFETY ISSUES

FOLLOWING THE SPS AGREEMENT:

LESSONS FROM THE HORMONES DISPUTE

Sallie James

1. Introduction

The beef hormones dispute is a classic example of how cultural differences with respect to the value of food attributes have the potential to hamper trade and challenge World Trade Organization (WTO) agreements designed to limit the disruptions, especially when scientific evidence is limited or spurious. The dispute between the United States (and Canada) and the EC over the use of growth-promoting hormones in beef provides researchers with a clear case study of how the SPS Agreement works in practice. As the first SPS measure to be formally disputed at the WTO, the legal and economic arguments used by the disputing parties and the dispute settlement bodies in the Hormones case provide regulatory agencies in Member countries with an idea of how their own SPS policies would fare under WTO scrutiny. The WTO Agreement on the Application of Sanitary and Phytosanitary Measures (the SPS Agreement)1 was originally designed to provide clear and specific guidelines about human, animal and plant health protection measures relative to what had been the case under the TBT Agreement. Legal and economic analysis of specific cases is one way of measuring its success.

Before the SPS and TBT2 Agreements, the role of science in settling trade disputes was limited. The effects of a tariff or a quota have no scientific aspect and hence trade disputes were relatively transparent and easy to resolve under the applicable articles of the GATT. But environmental and food safety issues – such as the case study presented here – deal inherently with scientific risk and uncertainty. These scientific aspects of measures affecting trade, and how they should be balanced against economic aspects

1 GATT (1994a). For an extended discussion on the SPS Agreement and its relation to other WTO Agreements, the interested reader is directed to Bureau et al. (1998), Roberts (1998) and the appendix of this paper.

more familiar to the WTO, are bound to present challenges to the WTO framework and Members wishing to ensure their trading partners abide by its rules. The emergence of genetically modified organisms (GMOs) in food production will present further challenges to national governments and the WTO to find a compromise between promoting and securing free and fair trade while honouring legitimate consumer demands for safe food and an undisturbed environment.

This paper first outlines the beef hormones dispute and the legal arguments employed by the parties involved. An economic model is used to analyse the international trade effects of the EC3 ban on hormone-treated meat and meat products and its removal on WTO instruction. Qualifications, such as how the analysis would change if the market for beef were to segment after the ban was lifted, are discussed in section 4. The implications for the practical implementation of the SPS Agreement, with particular reference to how it might be improved in light of the outcomes of the Hormones case and the analysis of its economic effects, are then explored in sections 6 and 7.

2. The Hormones Dispute

The European Commission, after a series of beef-related health scares in the 1970’s and 1980’s (see Roberts (1998)) enacted a series of directives banning the use of synthetic and natural hormones for growth promoting purposes in the production of beef. The prohibition (last adopted in Directive 96/22/EC) applies to both imported and domestically produced beef and so is prima facie GATT-legal since it abides by the national treatment and MFN principles. The EC allows the use of hormonal substances only for therapeutic and zootechnical purposes under veterinary supervision (Hurst, 1998; Roberts, 1998).

2 GATT (1994b), the Agreement on Technical Barriers to Trade, hereinafter the TBT Agreement.

3 In the following legal analysis, the European Communities (EC) is the official party to the dispute, since the ban on hormone-treated beef predates the formation of the European Union (EU). Similarly, the EC is the contracting party to the GATT (and a member of the WTO). The EU is used in the economic analysis of section 3.4, however, to denote the aggregation of economic interests in the common market in Europe (ie.

Following the adoption of the WTO Agreement including the Understanding on Rules and Procedures Governing the Settlement of Disputes (the Dispute Settlement Understanding), the United States, later joined by Canada, requested a dispute settlement panel to review the ban under the new rules (Roberts, 1998). The US questioned the scientific basis to the ban on the use of hormones in beef production, and the timing of the ban given the large surplus of beef in the European Union. According to Roberts (1998), the US opinion was that “...the ban represented a crisis management decision which subsequently evolved into an expedient non-tariff barrier that lacked scientific foundation” (p 386). The main points of contention between the US/Canada and the EC, as outlined by Roberts (1998) were: the legitimacy and limitations of scientific evidence on the safety of hormone-treated beef, the level of protection afforded to EU producers by the measures, and the motives for the ban.

Outlined in the US and Canada Panel reports4, and cited in Hurst (1998) and Roberts (1998), the complainants’ main objections to the EC measure relating to the use of hormones in the production of meat and meat products were as follows:

Firstly, that the ban was implemented and maintained without sufficient scientific evidence to suggest such a measure was necessary to protect humans from consumption-related health risks, in direct violation of Article 2.2 of the SPS Agreement. According to the complainants, the Joint FAO/WHO Expert Committee on Food Additives (JEFCA) and some EC experts, there is no scientific evidence to suggest that the six hormones at issue pose risks to human health when used according to good animal husbandry practices. A JEFCA report published in 1988 found that residue levels in hormone treated meat were low relative to hormone levels occurring naturally in humans, and in other –non-banned – foods, and that residue levels in hormone-treated beef fell within the normal range of hormone residue levels occurring in non-treated beef (Hurst 1998). In

“EU producers” “EU consumers”, “EU market” etc). Thanks to a reviewer for alerting the author to the potential for confusion.

4 WTO (1997a) hereinafter U.S. Panel Report and WTO (1997b), hereinafter Canada Panel Report.

any case, hormones administered exogenously (for growth promotion purposes or otherwise) are largely indistinguishable from those occurring endogenously.5

Secondly, the measure was not based on international standards as required by Article 3.1 of the SPS Agreement. For all of the considered hormones except one, relevant standards do exist. None of those standards or the evidence they imply, in the view of the co-complainants, justified the ban.

Thirdly, the US and Canada noted that the EC measure was not based on a scientific assessment of the risks of importing hormone-treated beef. Rather, it provided a level of protection that was arbitrary and unjustified, and constituted a disguised restriction on international trade, and thus violated Articles 3.3, 5.1 and 5.5 of the SPS Agreement.6 The ban on hormone-treated beef was further seen by the complaining parties as being “a response to perceived, rather than actual, risks” (Roberts 1998, p 392).

As evidence of the arbitrary nature of the ban, the complainants noted that the EC allows the use of carbadox as a feed additive in pork production, despite its proved carcinogenicity, and attributed the inconsistency to the relative competitiveness of the EU beef and pork sectors. The US and Canada estimate the value of their combined trade loss from the ban to be US$250 million per year (ICTSD 1999a) and cite their loss of export sales since the bans inception as evidence of the EC’s protectionist motive.

The EC rejected these claims, and specifically disputed each one. The scientific evidence on the long-term health effects from ingesting hormone-treated beef is, it was argued, insufficient or non-existent (Hurst, 1998). Given the current state of scientific knowledge, the EC asserted it was well within its rights under the terms of the SPS Agreement to exercise the precautionary principle (Roberts, 1998). With regards to the claims about the

5 This may be an argument to support the EC ban: if it is not possible to detect which hormones are endogenous and which are not, a ban may be the only way of avoiding, with any certainty, additional risks from hormones used for growth-promoting purposes in imported beef.

6 Since none of the disputing parties made claims or counter-claims in relation to its allowances, and the EC considered its ban to be permanent, Article 5.

7 was found to be inapplicable (US Panel Report, para.

8.249).

measure itself, the EC deferred once again to the precautionary principle, arguing that its general level of acceptance in international law justified the conservative approach taken (Hurst, 1998; Sampson, 1999).7

The complainants’ accusation that the level of protection chosen by the EC in relation to hormone-treated beef was arbitrary and unjustified was rejected by the EC on grounds of national sovereignty. It is each country’s sovereign right under Article 2.1 of the SPS Agreement to choose a level of protection which is acceptable to society – an argument not refuted by the complaining parties. There are, however, qualifying restrictions on how this right can be exercised under the terms of the SPS Agreement (specifically outlined in Articles 3.3 and 5.1). The reviewing bodies’ decisions on the validity of the EC’s sovereignty claim is discussed below.

Notwithstanding the EC’s right to choose an appropriate level of protection, the justifications given for the ban related to the practicalities of achieving it using less extreme measures. The EC maintained that a ban was the only economically and practically feasible option given the “substantial economic incentives” (Roberts, 1998, p. 390) for producers to abuse hormonal growth promotants. Furthermore, the practical difficulties of testing and compliance monitoring would render regulated use of hormones expensive, and largely ineffectual (Roberts, 1998).

The EC denied the charge that its measure was a disguised restriction on international trade and that it was unduly trade restrictive in pursuit of its chosen appropriate level of protection. Total import levels of beef, according to the EC, had remained fairly constant before and after the introduction of the de facto ban against US and Canadian beef and therefore it cannot be considered a non-tariff barrier (Roberts, 1998).8

7 The complaining parties claim that the EC measure was not based on existing international standards was not refuted by the EC on appeal (Hurst 1998).

8 The question still arises as to what the level of imports would have been had the ban not been implemented, especially considering that hormone-free imports from the rest of the world are restricted by a tariff quota regime.

After the initial hearing, the US and Canada Panel Reports concluded that the EC had violated the SPS Agreement -- a conclusion that was appealed by the EC in September 1997. The Panel’s opinion9 was broadly shared by the Appellate Body in its report10 which was delivered to WTO Members in January 1998 (Hurst, 1998). The main disagreements between the Panel and the Appellate Body related to the arbitrary and unjustifiable nature of the measure itself and whether or not it constitutes a disguised restriction on international trade.

The Panel’s main conclusion was that the EC ban on hormone-treated beef imports constituted a violation of the SPS Agreement, specifically with respect to Articles 3.1, 5.1 and 5.5. The Panel interpreted the wording of Articles 3.1 and 3.2 to conclude that the requirement that a measure be “based on” international standards implies that it should conform to international standards and that the measure in dispute did not fulfil this obligation (U.S. Panel Report, para. 8.72; Canada Panel Report, para. 8.75).

With regards to Article 5 of the SPS Agreement which covers provisions and obligations relating to risk assessment, the Panel found insufficient evidence to suggest that the measure was based on a risk assessment, in direct violation of the procedural and substantive requirements of Articles 5.1 and 5.2 (U.S. Panel Report, para. 8.134). The EC’s claim that controlling the use of hormones as a growth promotant in beef production would be more difficult than controlling other regulated substances was also found to be insufficiently substantiated by evidence (U.S. Panel Report, para. 8.146).

The Panel further found the EC in violation of Article 5.5 by adopting different levels of protection in comparable situations in the treatment of hormones occurring naturally versus those administered for growth-promoting purposes; hormones administered for therapeutic and zootechnical purposes versus hormones administered for growth promoting purposes; and hormones administered for growth-promoting purposes versus the administration of other growth-promoting substances (eg. carbadox) (U.S. Panel

9 Since the findings in the reports of the Canadian and US Panels were very similar, they will henceforth be referred to as “the Panel”.

10 WTO (1998a) hereinafter Report of the Appellate Body.

Report, paras. 8.193-6; Canada Panel Report, paras. 8.196-9)).11 The measure chosen by the EC to provide its chosen level of protection – a ban on imports of hormone-treated beef from US and Canada – necessarily restricts international trade.

The single provision in the SPS Agreement under which the EC could implement the ban while considering the scientific evidence (according to the precautionary principle) is contained in Article 5.7 which allows “ Members[s to] provisionally adopt sanitary or phytosanitary measures...[while they]...seek to obtain...additional information...and renew the sanitary or phytosanitary measure accordingly within a reasonable period of time”(GATT, 1994a). The EC, however, considered its ban to be permanent and so did not choose to defend its measure under the terms of Article 5.7. The Panel ruled that the EC must therefore comply with the provisions of the other Articles of the SPS Agreement, a view shared by the Appellate Body which found that the clear wording of the rest of Article 5 meant that the other provisions prevail over the precautionary principle embedded in Article 5.7 (Report of the Appellate Body, para. 253(c); Sampson, 1999).

There were few other procedural or substantive aspects of the Panel’s interpretation of the terms of the SPS Agreement with which the Appellate Body concurred. The Appellate Body did, however, find against the EC on the grounds that the measure was not based on an adequate risk assessment, and the Arbitrator ruled12 that the EC implement the findings within 15 months (Report of the Appellate Body, para. 208; Arbitration Award, para. 48)). Some observers maintain that the Appellate Body had taken a far more generous view of the Agreement’s provisions in favour of the EC and may have lost substantial ground claimed by the Panel with particular regards to the discrimination-based test of SPS measures affecting trade (Cottier, 1999; Hurst, 1998). That is, while the Panel found the measure constituted a disguised restriction on international trade (despite its prima facie non-discriminatory nature), the Appellate Body disagreed on the basis that the intent of the EC was to protect its consumers from unidentifiable health risks (Report of the Appellate Body, para. 245).

11 Only the last distinction was found to be arbitrary and unjustifiable by both the Panel and the Appellate Body (Hurst 1998).

12 WTO (1998b) hereinafter Arbitration Award, (granting a period of implementation up to May 13, 1999).

By making the intent of a member a relevant, indeed crucial, consideration, the Appellate Body’s conclusion weakens the ability of the SPS Agreement to discipline measures strictly on scientific bases (as was its designed purpose) and on the extent to which they interfere with international trade:

The SPS Agreement is...not designed to protect measures which have no basis in science, regardless of whether the party imposing such measures intends to restrict international trade. The Appellate Body’s conclusion condones measures which – although imposing arbitrary and unjustifiable distinctions in levels of protection which interfere with international trade – are imposed to address purely political concerns...[In any case], because legislation reflects mixed objectives, it may be fallacious to speak of a Members “intent” at all.

Hurst, 1998, p. 23

The Appellate Body’s interpretation of Article 3.1 and 3.2 of the SPS Agreement was more favourable to the EC. In the opinion of the Appellate Body, the Panel’s requirement that measures “conform to” international standards to meet Article 3.1 obligations was excessively burdensome (Report of the Appellate Body, paras. 167, 253(g)). However, although the Appellate Body confirmed the SPS Agreement specifies no threshold level of risk, the acceptable level of risk chosen by the Member imposing the measure must base its decision on an objective risk assessment (Hurst, 1998). In the opinion of the Panel and the Appellate Body, the latter requirement had not been sufficiently met, and the EC was requested to implement the findings of the reviewing bodies.

3. Economic analysis

The EC ban on hormone-treated beef imports necessarily affects international trade. The purpose of the present section is to analyse those effects using an economic model. The

assumptions of the model are designed to keep the analysis as simple as possible, while maintaining a credible level of reality.

Firstly, negative externalities – in either production or consumption – are initially assumed to be negligible. That is, the presence of hormone-treated beef is assumed to have no effect on the production of other goods or the natural environment or on human health. Secondly, hormone-treated beef is assumed to be in fact safe for human consumption even though it is perceived as unsafe by some consumers in the EU because of lack of scientific evidence, or evidence which lacks credibility in the opinion of those consumers. Thirdly, except for their hormone status, the beef from the EU, the US and Canada, or the rest of the world is assumed to be identical in quality and safety attributes. Initially, the US and Canada are assumed to produce only hormone-treated beef.13 Likewise, EU beef and imports to the EU from the rest of the world are assumed to be hormone-free, consistent with the current EU requirements.

Consumer decisions about the purchase of beef are assumed to be made under conditions of imperfect information. The total demand for beef in the EU depends on the perception of the average quality of beef available on the EU market and the relative amounts of the different types of beef (ie hormone-treated or hormone-free) available on the market. The average demand for beef decreases as the amount of hormone-treated beef on the market increases because some EU consumers, for either health or ethical reasons, see hormone-treated beef as less desirable. The model therefore allows for differences in preferences among EU consumers – some are indifferent between the different types of beef and will purchase the hormone-treated beef if it is cheaper. We assume that EU consumers trust the labelling and certification regimes of the European Commission and private standards groups (such as ISO) but not those of the North American governments or private enterprise. Society is assumed to be risk neutral.

13 In reality, some US producers do produce and export hormone-free beef, but the EC has placed a temporary (until November 15 1999) ban on all US beef imports since supposedly hormone-free US beef was found (in April 1999) to contain (allegedly) exogenously administered hormones (ICTSD, 1999b, c). This situation is therefore consistent with the assumption of no US imports while the ban is maintained.

We assume, in order to keep the model as realistic as possible, that the EU is a large country ie. is a large buyer on the world beef market and therefore the supply curves of the importing countries (such as the US) are upward sloping from the perspective of the EU.14 The US and Canada, although complaining parties in their own right in the Hormones dispute are, for simplicity’s sake, referred to as NA (North America).

The EU beef market is represented in diagrammatic form in Figure 1.15 The demand for (initially hormone-free) beef by EU consumers is shown as D EU . The supply of hormone-free beef by EU producers is shown as S EU and the supply of (initially hormone-free) beef to the EU from the EU and the rest of the world other than the US and Canada (ROW) is shown as S ROW+EU . Since hormone treated beef from North America is currently banned, the market equilibrium is found at A, where the S ROW curve intersects the EU’s demand curve. The equilibrium price is denoted P ROW and the equilibrium quantity, Q ROW is supplied by EU producers (OQ EU) and imports from ROW (Q ROW-Q EU). Producer surplus to EU producers is equal to the area P ROW CD and consumer surplus to EU consumers is represented by area FAP ROW. Producer surplus to importers is shown by the area CAD.

Assume that the EC follows the recommendations of the reviewing bodies in the Hormones dispute, and the ban on hormone treated beef is lifted and replaced with a publicly monitored labelling scheme, which has been suggested as an efficient policy alternative to the ban (Canada Panel Report, para. 8.278; Roberts, 1998). Usually, in the case of credence goods, the qualities of the goods and the claims being made by producers are not detectable or verifiable. Producer-sponsored labelling schemes are ineffectual if the public does not believe them. In such a situation, the labels lose their informational content and producers have no incentive to implement such a scheme (Bureau et al., 1998). Through the assumption here that labels are credible in the view of

14 The EU’s share of world production of beef and veal in 1998 was approximately 14.2% (FAO, 1999a). In 1997, the EU contributed 14.6% of the world’s beef and veal exports, and consumed 13.6% of total world consumption (inferred from FAO, 1999a, b). In this same year, however, the EU consumed only 3.7% of world imports (FAO, 1999b). It is clear that the EU is a net exporter of beef and veal. Hence, the 11417 MT of beef and veal imported in 1997 (FAO, 1999b) may represent specialised types of high quality beef.

consumers if they are government sponsored, the normal problems with credence goods, or indeed with credence attributes such as the biotechnology used to produce goods, can be overcome.

If the labels claim no more than country of origin, then they will convey enough information to those consumers who are concerned with the use of hormones in beef production to be able to avoid NA beef if desired. Those consumers who are adverse to the use of hormone technology will know that NA uses hormones to treat their beef and will purchase beef from elsewhere: they are infra-marginal consumers who are not indifferent and hence will be self selected from the market at the margin. The indifferent consumers – those who do not care if beef has been treated with hormones – are marginal consumers who will be made better off when the ban is removed. In this case, the relevant supply curve becomes S TOTAL which equals S NA plus S ROW+EU . The price facing EU consumers and producers is now the world price, P W.

It is useful to compare how welfare in the EU, NA and the rest of the world changes when the ban on hormone-treated beef is lifted and a (costless) labelling scheme is introduced. At price P W domestic production is equal to OQ EU’ and EU producer surplus is P W ID instead of P ROW CD, a decrease of P ROW CIP W. Imports to the EU from NA at price P W are OQ NA and NA producer surplus is shown by P W ED or BMD. EU imports from the rest of the world are equal to Q ROW’-Q EU’ such that ROW producer surplus is equal to the area IBD instead of CAD, a decrease of CABI. Consumer surplus in the EU is equal to FMP W instead of FAP ROW, an increase of P ROW AMP W which is enjoyed by those who refuse to eat NA beef as much as those who are indifferent. The net gain in EU economic welfare is the difference between the EU producer and consumer surplus changes, or CAMI. According to this analysis, the EU would be better off adopting the recommendations of the WTO reviewing bodies, suggesting that political economy forces within the EU are preventing a net benefit from being realised.

15 A more complete model of the EU beef market, including an analysis of how the market would be affected when the TRQ regime is considered, is outlined in James (1999).

What if, to take the extreme case, no EU consumer wants NA beef? The outcome cannot be worse than what currently occurs under the ban regime in which D NA = 0. If this is indeed the case, then the EC could adopt free trade and achieve two goals: firstly, to have zero imports of hormone-free beef such that the ban result is achieved under conditions of free trade; and secondly, to discourage the use of hormones in beef production in other countries wishing to import to the EU, thus addressing any ethical concerns the EU consumers may have with the use of hormones in world beef production.

Even if only a few EU consumers are indifferent, however, gains will be made by lifting the ban. This model shows it is not possible for the EU as a whole to lose by lifting the ban under these assumptions. Clearly, though, EU beef producers would lose from freer trade if some NA imports occur.16

The change in welfare of non-EU suppliers to the EU market is the sum of the NA producers’ unambiguous gain of area BMD, and ROW beef producers’ loss of CABI. Thus, the ban on hormone-treated beef is preventing an outcome which would be welfare improving for its own citizens (on net) by area CAMI as well as NA producers.

If we further assume that ROW producers are able to adopt hormone technology (but the EC ban on growth promoting hormones remains in place for EU producers) then the S ROW+EU and hence S TOTAL curves would shift down. The equilibrium world price will fall, reducing EU and NA producer surpluses while raising ROW producer surplus and EU, NA and ROW consumer surplus further – assuming EU consumers unwilling to buy hormone-treated beef remain infra-marginal. Furthermore, if EU producers were allowed to use hormones, S EU also would shift down, perhaps enough to offset their welfare loss from the drop in price.

4. Qualifications

16 Presumably, that loss to EU producers could be offset or even reversed if they were allowed to lower their costs of production by using beef hormones, an option discussed below.

The above model shows that, given its assumptions including that a country-of-origin labelling scheme is implemented, EU net economic welfare cannot be reduced by lifting the current prohibition on hormone-treated beef and beef products. A number of qualifying comments should be made, however, regarding possible developments in the EU market which would affect the analysis outlined above, and hence its conclusions.

It would be expected that the EU beef producers would place pressure on the European Commission to allow them to employ hormone technology in order to compete more favourably with hormone-treated imports. If the beef producers were successful in their bid, the cost structure and efficiency of the EU producers would change and presumably the S EU curve would shift down. Clearly, the closer becomes the EU’s efficiency to that of the importers, the lower are the additional gains from trade per se but the larger are the gains to EU producers and to consumers at home and abroad. Assuming no adverse health effects and zero ethical externalities (ie. consumers do not experience disutility from the existence of hormone technology), and assuming consumers unwilling to eat hormone-treated beef remain infra-marginal, the EU cannot be worse off from relaxing that regulation on producers.

In reality, the EC’s beef tariff rate quota is not binding, and is in fact less than one quarter filled. There could be several possible explanations for this. Firstly, the EU producers may be so efficient as to preclude imports apart from specialist high-quality lines of beef. Secondly, the 20% in-quota tariff may be prohibitive for many overseas suppliers, as has been suggested by Australian beef industry sources. It could also be that an administrative decision was made to allocate the quota to countries whom the administrators knew could not compete. In any case, the fact that the quota is not filled may give a non-SPS reason for the EC’s reluctance to lift the ban on hormone-treated beef. Hormone technology may yield efficiency gains enough to undermine the EU producers’ efficiency (or the assistance given to them) such that the tariff on in-quota sales is a less effective import barrier.

The labelling scheme used to provide information to consumers is assumed to be costless. If, however, the implementation, enforcement and monitoring costs are positive, they would have to be weighed against the welfare gains from freer trade. Following Bureau et al. (1998), the “quality” difference between the two types of beef must be sufficiently large for the labelling scheme to yield positive welfare results. The EU consumers who benefit from the freer trade and the labelling scheme can be seen in Figure 1 to enjoy consuming an extra amount of beef equal to Q-Q ROW, and their welfare gain is represented by area P ROW AMP W. Only if the EU consumers’ share of the labelling cost is less than their welfare gain will the EU consumers be better off. If there are not many consumers who would be willing to buy NA beef given the choice, then Q NA-Q ROW will not be large, and the condition that AMB be larger than the labelling costs is less likely to be satisfied. The label will be a waste of resources if consumers perceive little difference between hormone-free and hormone-treated beef.17

The above analysis recognises differences in consumer preferences, but assumes those with a higher willingness to pay for hormone-treated beef are infra-marginal consumers. It is helpful to consider how the analysis would change should the market segment such that there are two separate demand curves for the two types of beef.

The hormone-free beef market is shown in the first panel of Figure 2 and shows the supply of EU beef as S EU, the total supply of beef as S ROW+EU and the (initial) demand for hormone-free beef as D f. The equilibrium price for beef is P f at point E. The initial quantity of hormone free beef sold is O f Q f, of which HE is imported and P f H is produced domestically. Following the lifting of the ban and the introduction of hormone-treated beef, the hormone treated beef market is shown in the second panel of Figure 2. The equilibrium for the hormone-treated beef market is found at the intersection of S NA and D EU, yielding a price P t and a quantity traded of O t Q t.

17 Bureau et al. (1998) use a similar model and conclude that the optimal policy for the EU depends on the cost of the labelling scheme and the perceived quality difference between the two types of beef.

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