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

0%10%20%30%40%50%60%70%80%90%

100%

autres variétés

bintje

chairs fermes

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