Animal Disease Outbreaks and Trade Bans

Animal Disease Outbreaks and Trade Bans WTO Impacts on U.S. Farm Policy Southern Regional Trade Research Committee (S1016) World Trade Center New Orleans June 1-3, 2005

Dr. Thomas Marsh • Associate Professor, School of Economic Sciences • Fellow, IMPACT Center • Washington State University • Dr. Thomas Wahl • Professor and Director, IMPACT Center • Washington State University • Tamizheniyan Suyambulingam • PhD Student • School of Economic Sciences • Washington State University School of Economic Sciences

Overview • Provide background information/motivation • Objectives • Examine selected historical outbreak data • Highlight selected WTO SPS policies • Discuss a game theory model focusing on • Disease outbreaks • Trade bans • Perceived risk • Draw some implications School of Economic Sciences

Background Information • Animal diseases are public goods that impose externalities on trade throughout the world. • Typically, trade bans are imposed on exports from counties infected with a disease by importing countries. School of Economic Sciences

Background Information • Even though the WTO agreements call for scientific basis of trade barriers, imposing trade bans are controversial, and costly • Moreover, re-establishing trade is relatively difficult to achieve School of Economic Sciences

Background Information • Key concerns • Importing countries impose trade sanctions based on perceived risks rather than real risks. • WTO regulations are not disease specific, but rather generically defined to accommodate a myriad of animal and plant diseases. • WTO regulations are centrally planned schemes that are rule-based and not market-based. School of Economic Sciences

Objectives • Review selected livestock outbreak data and policies governing major animal disease outbreaks across the world. • Conceptually assess the effectiveness of trade bans as a mechanism to control these outbreaks. School of Economic Sciences

Outbreak Information • Focus on selected diseases • Avian Influenza (AI) • Bovine Spongiform Encephalopathy (BSE) • Classical Swine Fever (CSF) • Foot and Mouth Disease (FMD) • World Organization for Animal Health (OIE) • Outbreak Data School of Economic Sciences

Outbreak Information School of Economic Sciences

School of Economic Sciences

Summary: Outbreaks • The data exhibit that temporal trends and skewness are important characteristics of disease outbreaks. • Disease outbreaks can be spatially concentrated and clustered regionally around the world. • Economic impacts • Outbreak costs are estimated to exceed billions of $US • Export losses alone due to the single BSE case in 2003 for the US range from $US 3-4 billion (Coffey et al. 2005) School of Economic Sciences

WTO SPS Standards • The apparent role of the WTO is to maximize security against the international spread of disease with a minimum interference to world trade. • WTO regulations are rule-based schemes covering risks to humans from diseases carried by animals, plants and their products; the entry or spread of pests; and additives, contaminants, toxins, and disease-causing organisms in food and beverages. School of Economic Sciences

Trade Ban Game • Should a country impose a trade ban on imports from another country in the event of an animal disease outbreak? School of Economic Sciences

Trade Ban Game • Game theory model focusing on trade bans in the event of disease outbreaks with perceived risk (Bauch and Earn 2004) • Game theory is relevant in modeling interdependent behavior in the presence of risks, where risks faced by any one agent depend not only on its choices but also on those of all other. School of Economic Sciences

Trade Ban Game • Let P denote an individual country’s strategy to ban trade and p be the proportion of other countries instituting a trade ban (i.e., the ban coverage level) • Pure strategies are • P=1 impose a ban with probability 1 • P=0 not impose a trade ban. • A mixed strategy arises if 0<P<1. School of Economic Sciences

Trade Ban Game • Expected payoff to country k facing perceived morbidity risksrb (with a trade ban in place) and ri (from infection with no trade ban) is where is the probability that an unprotected country’s livestock will be infected. School of Economic Sciences

Trade Ban Game • Intuitive outcomes are driven by thresholds • Thresholds depend on • Perceived risks (both subjective and objective) • Disease specific attributes in • Likely also perceived School of Economic Sciences

Trade Ban Game • Some implications • Diseases have differing characteristics that influence individual country strategies • FMD and CSF predominately have morbidity risk for animals • AI and BSE have morbidity risk for animals and humans • FMD, CSF, and AI are highly contagious School of Economic Sciences

Trade Ban Game • Some implications • Temporal issues and patterns are important. • AI has immediate risks for animals and humans • BSE exhibits temporal patterns that are latent in nature, having longer-term effects for animal and human risks School of Economic Sciences

Trade Ban Game • Some implications • Spatial issues and patterns of diseases are important. • Assuming uninfected countries can be isolated from infected regions of other countries, then countries should implement a trade ban with some nonzero probability. • Trade bans are likely to be ineffective and remain sufficiently risky if there is unfettered black market trade or livestock smuggling across borders. • Effective border monitoring of adjacent countries, border buffer zones, or regionalizing the outbreak are essential for a trade ban to be successful. School of Economic Sciences

Summary • Specific model outcomes are that • Perceived information is critical to the likelihood of a trade ban • Generic trade bans are not necessarily effective nor efficient tools in the event of a trade ban School of Economic Sciences

Summary • General recommendations are that • Because risks are often based on public perception it is vital to have effective risk communication strategies • Public policies should be mixed with innovative market-based mechanisms and private incentives to effectively control disease outbreaks. School of Economic Sciences

Questions/Comments? School of Economic Sciences

Animal Disease Outbreaks and Trade Bans