Transcript Lecture38 SPS cases

Operation of the SPS
Agreement
Lecture 38
Economics of Food Markets
Alan Matthews
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?
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
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.
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)
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?
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.
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
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
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
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).
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 lowquality 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
Price
Initial
equilibrium
before the
introduction of
the GMF
variety
Snon-GMF
Initial non-GMF
world price
Dnon-GMF
Quantity
Price
Snon-GMF
New
equilibrium
following
introduction
of GMF
product
Initial non-GMF
world price
Pw
Final GMF
world price
Pf
Dpooled
Domestic output

Domestic
consumption 
Dnon-GMF
Quantity
Price
Snon-GMF
Welfare
changes
following
introduction
of GMF
product
T
Pe
V
U
Pw
Y
W
Initial non-GMF
world price
X
Z
Final GMF
world price
Pf
Dpooled
Qe
Dnon-GMF
Quantity
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 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
Is mandatory labelling a superior
option?
Price
SnonGMF
Pe
Ps
Pf
A
E
B C
F G
Initial nonGMF world
price
Dsepa
rate
non-
Qs
Qe
GMF
H
Dnon
-GMF
Quantity
There are now two separate markets for
conventional and GMF products
Ddemand
separate GMF
Final GMF
world price
inc.
labelling
cost
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 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)
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?