Operation of the SPS Agreement

1. Operation of the SPS Agreement Lecture 38 Economics of Food Markets Alan Matthews

2. Key questions • What does the resolution of SPS disputes tell about the interpretation of the SPS Agreement? • How are developing countries affected by rising food safety standards in developed countries • Are rising food safety standards a competitive burden on EU food producers and farmers?

3. 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

4. Primer on WTO dispute settlement • Issues first raised in relevant Committee for the agreement (Committee on Agriculture, SPS Committee) • Country can call for consultations • Country can lodge complaint • Heard by Panel • Appellate Body • Country can request arbitration in the event of partial compliance.

5. EU hormones dispute • One of the first to be taken under the new SPS Agreement • Roberts (1998) provides a comprehensive summary • National treatment was not an issue • EU did not claim defence under Art 5.7 (precautionary principle)

6. EU hormones dispute • Panel found that EU ban was inconsistent with • Art 5.1 (not based on risk assessment) • Art 3.1 (not based on international standards) or Art 3.3 (no scientific justification for claim that ban led to higher protection) • Unjustified and arbitrary protection which varied from protection provided by other EU measures • Burden of proof issue?

7. 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 90/220 18 authorisation were approved for commercial release, but none since October 1998. Five MS said they would refuse approval until new regulations on labelling and traceability were introduced. • Some member states invoked the ‘safeguard clause’ in the Directive to temporarily ban the marketing of GM maize and rapeseed.

8. 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

9. 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

10. 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

11. 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

12. Developing country issues • Significance of SPS standards as barriers to trade • Cost of meeting SPS standards • Limited input into the design of standards • The cost of the standards themselves • Certification • Transparency and technical assistance

13. 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

14. 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 (Gaisford and Chui-Ha, 2000).

15. 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)

16. 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

17. Price Snon-GMF Initial equilibrium before the introduction of the GMF variety Initial non-GMF world price Dnon-GMF Quantity

18. Price Snon-GMF New equilibrium following introduction of GMF product Initial non-GMF world price Pw Final GMF world price Pf Dnon-GMF Dpooled Domestic output  Quantity Domestic consumption 

19. Price Snon-GMF Welfare changes following introduction of GMF product T Pe V U Initial non-GMF world price X W Pw Y Z Final GMF world price Pf Dnon-GMF Dpooled Quantity Qe

20. 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.

21. 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 Pi to Pe • 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

22. Is mandatory labelling a superior option? Price Snon-GMF Pe A B C Ps G E F Initial non-GMF world price H Final GMF world price inc. labelling cost Pf Dseparate non-GMF Ddemand separate GMF Dnon-GMF Quantity Qs Qe There are now two separate markets for conventional and GMF products

23. 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

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

25. 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

26. 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?