Supranational agreements and regulation

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

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

Supranational agreements and regulation