Supranational agreements and regulation

1
Supranational agreements and regulation

• Stéphan Marette
• INRA, Paris

2
Barriers to Trade

• TARIFF BARRIERS
• NON-TARIFF BARRIERS
• What kind of quality regulation in a context of
  trade liberalization?

3
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?

4
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.

5
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

6
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?

7
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

8
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

9
Market shares in volume of potato varieties in
France
10
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)

11
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

12
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)

13
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.

14
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.

15
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!

16
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

17
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

18
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

19
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

20
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