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 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
 Price

Initial Snon-GMF
equilibrium
before the
introduction of
the GMF
variety

Initial non-GMF
world price

Dnon-GMF

Quantity
 Price
Snon-GMF
New
equilibrium
following
introduction
of GMF
product

Initial non-GMF
Pw world price
Final GMF
Pf
world price

Dnon-GMF
Dpooled

Domestic output Domestic Quantity

 consumption 
 Price
Snon-GMF
Welfare
changes
following
introduction
of GMF T
product
Pe
V
U X Initial non-GMF
W world price
Pw
Y Z
Final GMF
Pf
world price

Dnon-GMF
Dpooled

Qe 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
Snon-
GMF

Pe A B C
Ps E F G Initial non- Final GMF
H
Pf GMF world world price
price inc.
labelling
Dsepar Ddemand cost
Dnon- separate GMF
ate non-
GMF
Qs Qe GMF Quantity

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 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?