REVISITING BARRIERS TO TRADE: DO FOREGONE HEALTH BENEFITS MATTER?

Transcription

1 REVISITING BARRIERS TO TRADE: DO FOREGONE HEALTH BENEFITS MATTER? CATPRN Working Pper April 2009 Sidi Zhng M.Sc. Cndidte Deprtment of Bioresource Policy, Business nd Economics University of Ssktchewn Willim A. Kerr Vn Vliet Professor Deprtment of Bioresource Policy, Business nd Economics University of Ssktchewn Funding for this project ws provided by the Cndin Agriculturl Trde Policy Reserch Network (CATPRN). The CATPRN is funded by Agriculture nd Agri-Food Cnd but the views expressed in this pper re those of the uthors nd should not be ttributed to the funding gency.

2 Introduction After over more thn six decdes of brod-bsed multilterl trde liberliztion under the Generl Agreement on Triffs nd Trde (GATT), nd subsequently the World Trde Orgniztion (WTO), trde in griculturl products is still constrined by high brriers to mrket ccess for imports. These brriers consist of both trditionl triffs nd plethor of non-triff brriers. Until the Uruguy Round ( ) of GATT negotitions, trde in griculturl products ws lrgely exempt from multilterl disciplines pertining to mrket ccess due to wivers grnted in the erly yers of the GATT. While the conclusion of the Uruguy Round brought the rules of trde for griculturl products within the generl WTO frmework, triff concessions were few, nd in the end significnt improvements in mrket ccess were lrgely thwrted by dirty trifficction nd the continued widespred use of non-triff brriers. Mny members of the WTO continue to show little enthusism for the liberliztion of mrket ccess for griculturl products. As result of the continued reticence of some countries to liberlize their griculturl mrkets, no greement hs been reched in the Doh Round negotitions tht begn in 2001 mrket ccess for griculturl products remins mjor stumbling block to completion of the round (Gifford et l., 2008). Even if the Doh Round were to succeed, wht hs risen thus fr in the negotitions shows only limited mbition. It seems tht the trditionl pproch to liberlizing mrket ccess 1

3 my not be ble to deliver much progress, nd those interested in securing better ccess should explore lterntive mens to ccomplish their gols. While the stte of interntionl mrket ccess my be reltively sttic, the gri-food sector is exhibiting considerble innovtiveness nd dynmism the move to genetic modifiction of some plnts, the expnsion in biofuel production, ongoing improvements in cold chin cpcity in food supply chins nd the rrivl of growing rnge of functionl foods those tht provide helth benefits beyond those rising from those ssocited with nutrition, to nme only few. Rising consumer incomes hve led to more vlue dded nd processing being incorported in the food people buy nd decline in the proportion of mels eten t home. As result, there is greter opportunity to engge in product differentition in the food sector. The trde brriers in the griculturl sector lrgely reflect the period when interntionl movements were lrgely commodity-bsed mening tht product differentition ws difficult nd frmers in one country were competing directly with frmers in nother country. While significnt progress on liberlizing mrket ccess in griculture hs proved llusive over the lst hlf century, the imposition of new brriers hs been more difficult. As with other triffs, griculturl triffs hve long been bound nd the cretion of new triffs lrgely prohibited. Certinly, some new non-triff brriers hve been put in plce nd the process of triffiction nd the estblishment of triff rte 2

4 quots tht rose from the Uruguy Round led to increses in brriers to ccess, but, for the most prt, the brriers to griculturl trde hve been long stnding. Given the chnging nture of gri-food products nd trde nd the pprent inbility to grner significnt liberliztion in multilterl negotitions the question rises s to whether trde brriers put in plce decdes go re still pproprite. Are there situtions where the decision to impose brriers to trde need to be revisited? This implies piecemel pproch to trde liberliztion. Of course, countries lwys hve the right to unilterlly lower their trde brriers. One suspects tht there is gret del of inerti in trde policy mking once trde brriers re imposed. Thus, the question becomes, when should policy mkers revisit the decision to impose trde brriers? Except under prticulr mrket configurtions (e.g. optimum triff strtegies for lrge countries), trde restrictions re welfre reducing (Gisford nd Hester, 2007). As policy mkers re willing to impose trde brriers, this suggests tht they must give implicit, if not explicit, weightings to the benefits (received or forgone) by vrious mrket prticipnts. In simple exmple, if the benefits forgone by consumers from the imposition of trde brrier re three times the vlue of the benefits received by producers, when policy mkers chose to impose the brrier then they must, t minimum, give weighting to producers welfre tht is three times tht which they give to consumers welfre. Of course, it my be tht the ctul weighting given to producer s welfre is four or five times tht which they give to consumers. The 3

5 tipping point where the mrginl weighted utility of consumers is equl to the mrginl weighted utility of producers, s evluted by policy mkers, is not trnsprent. It is, however, cler tht there must be some implicit tipping point where policy decision would be reversed. If the benefits forgone from the existence of trde brrier were to increse significntly, or the benefits reped decresed significntly (or some combintion of the two) then the tipping point might be reched nd policy mkers might wish to revisit their decision. It is cler tht policy mkers require dditionl informtion upon which to bse their decisions. One of the res where gri-food products re evolving, nd where there my hve been n increse in the benefits forgone when trde brriers re in plce, is functionl foods. Functionl foods provide consumers with helth benefits in excess of the vlue provided by the food s nutrition. In some cses, foods hve been improved or enhnced to provide the new helth benefits; in other cses reserch hs found new helth benefits in previously existing products. As the brriers to trde in food products were put in plce when only the nutritionl vlue of the food ws known, there will be dditionl benefits forgone. As yet, there re no seprte triff lines for functionl food vrints of trditionl products nd creting new triff lines is long nd complicted process (Kerr nd Loppcher, 2005). This pper hs two objectives: (1) to provide preliminry investigtion into how the dditionl benefits expected from functionl foods cn be incorported into 4

6 trde models nd; (2) to provide cse studies to exmine whether the incresed benefits forgone re of sufficient mgnitude to cuse policy mkers to revisit the decision to impose trde brriers. While the ltter is subjective, if the results of the empiricl nlysis produce wht pper to be trivil chnges in the benefits forgone, then it might be concluded tht this is not n pproprite venue for further reserch. Given tht we do not know of ny other ttempts to incorporte helth benefits into trde models, this is n importnt first step. Functionl Foods New types of foods designed to promote helth or to reduce the risk of diseses hve been recognized s functionl foods since the 1990s (Niv nd Mäkelä, 2007). These new products re designed to meet specific helth concerns by ssisting disese prevention nd helping to promote helth. In ddition to new products which re designed to be helth-enhncing, number of trditionl nd fmilir foods re lso now considered functionl foods s new helth benefits hve been recently discovered (Hsler, 2000). For exmple, t the nnul Frontiers in Cncer Prevention Reserch conference in Settle 2004, it ws pointed out tht n pple dy my be n effective pproch to cncer prevention (Dvis, 2004). Eggs hve proved to be n excellent dietry source of mny essentil (e.g., protein/choline) nd non-essentil (e.g., lutein/zexnthin) elements tht promote optiml helth (Hsler, 2000). Consumers re incresingly interested in combining their diet decision with the promotion of helth benefits. As result, functionl food products represent 5

7 vlue-dded growth opportunity for the gri-food industry round the world. According to Euromonitor Interntionl (2006), the world mrket for functionl foods hs grown by more thn 50 percent in the lst 5 yers. The United Sttes, Jpn nd Europe re mjor globl mrkets, contributing over 90 percent of totl sles (Kotilinen et l., 2006). Helthy food (nturl nd orgnic foods, functionl foods nd lesser evil foods 1 ) sles in the United Sttes reched US $102 billion in Among them, functionl foods ccounted for 20 per cent of totl US helthy food sles (excluding food service). The sles of functionl nd fortified foods were expected to rech US $59.87 billion in 2009 (Slon, 2006). Jpn is the second-lrgest mrket in the world for functionl products fter the US (JETRO, 2006). The Jpnese mrket is vlued between US $4 billion nd US $15 billion nnully (SWMI, 2002). The functionl food mrket in Europe is expected to grow quickly by s much s 16 percent nnully reching n pproximte vlue US $15 billion (SWMI, 2002). Cnd cn be n interntionlly competitive producer of rnge of functionl foods. The smll size of the Cndin mrket, however, suggests tht the success of the functionl foods industry will depend, to considerble degree, on ccess to foreign mrkets (Yeung et l., 2007). Vluing Helth Benefits Correct vlution of risks to humn helth is essentil to helth, sfety, nd the environment (Berger et l., 1987). A number of brod-bsed economic pproches to 1 Lesser-evil foods re mnufctured by removing unwnted substnces including ft, clories, preservtives, cffeine, lcohol, slt, etc. from their originlly stte (NBJ,2008). 6

8 estimting helth benefits hve been developed including; cost-illness nlysis, cost-effectiveness nlyses, cost-utility nlyses nd cost-benefit nlyses; while prtil economic evlutions depend on cost nlyses, cost-comprison studies nd cost-outcome descriptions (Higgins nd Green, 2008). Trditionlly, mesuring the benefits of improved helth hs been bsed on voidnce of the dmge tht occurs s result of contrcting disese (Berger et l., 1987). One of the simplest nd most strightforwrd pproches to estimte the medicl costs voided bsed on helth improvements is the cost-of-illness (COI) model (EPA, 1991). Cost of illness studies were first used in the lte 1950s nd erly 1960s nd hve been used extensively since tht time (Cooper nd Rice, 1976). They re most common in the medicl literture. The bsic ide in COI studies is to estimte the mximum economic costs tht could potentilly be sved or gined if disese were to be lessened or erdicted (Segel, 2006). The cost of illness is mesured by the sum of the direct costs for prevention, detection nd tretment from helth cre nd the indirect costs or loss due to disbility (morbidity) nd premture deth (mortlity) (Cooper nd Rice, 1976). COI studies re vluble becuse they provide informtive evidence for policy mkers (Segel, 2006). The COI pproch hs been used to evlute the benefits of functionl foods. For exmple, Mll et l. (2007) vlued the potentil helth benefits of trns ft-free cnol oil by using the COI model. In their pper, COI model is dpted to estimte the impct of chnge in dietry ft intke on coronry hert disese (CHD) costs in Cnd. Their results hve shown tht the potentil helth-cre or cost of illness 7

9 svings in Cnd from helthier trns ft-free oils re importnt. The uthors suggest vluing helth improvements through food industry innovtions is subject worthy of further study (Mll et l., 2007). In this pper we dpt this pproch to ssist in the estimtion of the foregone benefits of retining trde brriers. 2 Trde Policy Trde Offs A comprtive-sttic prtil equilibrium trde model (Gisford nd Kerr, 2001) is illustrted in Figure 1. D is the domestic demnd curve for prticulr product. As the price of the product, P, rises, consumers will not be willing to purchse the sme quntity s t the lower price. Consequently, the quntity demnded, Q, declines nd the demnd curve is negtively sloped. For supply, s the price, P, rises, production becomes more profitble nd the output supplied by producers increses. Thus, the quntity supplied, Q, increses, leding to positively sloped supply curve, S (Gisford nd Kerr, 2001). Without the opportunity to engge in interntionl trde, the equilibrium price is determined where the totl domestic supply of the commodity 2 There re, however, weknesses ssocited with the use of cost-of-illness studies. As bsic nd strightforwrd method, COI model my overlook dditionl informtion tht could be used to better vlue the impct. Opportunity costs, for exmple, should be considered in helth evlution to obtin the optiml solution for the lloction of resources (Donldson nd Nryn, 1998). Another exmple is the difficulty ssocited with mesuring the utility foregone by consumers in COI model compred to contingent vlution (CV) model. Bsed on survey of willingness-to-py or willingness-to ccept mong responders, CV model is superior in vluting non-mrket ttributed which give people utility. Without tking into ccount the loss in utility to individuls, the COI model my underestimte the true cost of illness. Furthermore, insted of estblishing reltionship between costs nd benefits, the sttic COI model simply tbultes the two concepts nd dds them together to estblish the net totl cost (Roux nd Donldson, 2004). Without the pproprite informtion nd comprehensive tretment, COI studies re likely to be sub-optiml in determining how resources re to be llocted (Drummond, 1992.). 8

10 is equl to the totl domestic demnd. At this point, E, the mrket clers t P E becuse the quntity being supplied by firms, Q E is exctly equl to the quntity of the commodity being demnded by consumers. 9

11 S 1 E P E P W +T P w D 10 Q S Q S Q E Q D Q D Q Figure 1: The Bsic Trde Model 10

12 In Figure 1 in the utrky cse, consumer surplus is represented by re 1 which is tringle bove the domestic price nd below the demnd curve. Producer surplus is re , tringle below the domestic price nd bove the supply curve. Combined, the consumer surplus nd the producer surplus, mke up the totl surplus or the welfre rising in this mrket. Now ssume the opportunity to engge in interntionl trde in this product rises. The price consumers nd producers fce in the interntionl mrkets is P w the world price. In this cse, P w is the price t which imports cn be obtined in the interntionl mrket, P w < P E. Assuming trnsport nd trnsction costs ssocited with interntionl shipments re sufficiently smll to ignore, the domestic price will decline until it is equl to the world price. At Pw, domestic consumers re willing to purchse Q D while domestic producers re only willing to supply Q S. The difference between demnd nd supply t Pw is filled by imports. The import quntity is shown s (Q D -Q S ). Consumer surplus is which is tringle bove the world price nd below the demnd curve. Producer surplus is re 10. Totl welfre is nd greter thn under utrky (i.e ). Thus, trde is welfre enhncing. If Pw is too low for some producers to mke norml profit, they my lobby for protection from imports. Politicl decision mkers my wish to supply protection. Protection could be provided through the imposition of triff (tx) on imports. After the triff, T, is imposed, the domestic price rises from P w to (P w + T). At price (P w + 11

13 T), domestic firms re willing to produce dditionl quntity becuse they must now compete with imports priced t (P w + T) insted of with imports priced t P w. The supply expnds from Q S to Q S. However, the higher price leds to reduction in consumption from Q D to Q D. Thus, imports decrese to (Q D - Q S ). After imposing the triff, totl welfre lso chnges. The higher domestic price leds to n increse in producer surplus but loss in consumer surplus. At price (P w + T), the consumer surplus shrinks from re to re nd producer surplus increse from re 10 to re The triff cuses loss of consumer surplus equl to for gin in producers surplus of 5. If the objective of the protection policy ws to increse producer surplus by 5, decision mkers must weigh the benefits received by producers more hevily thn benefits forgone by consumers. In this cse, we ssume tht the revenue received by government is not motivtion in the decision to provide protection. This is resonble ssumption for most modern mrket economies where triffs receipts re reltively trivil source of revenue 3. In the cse of functionl foods, the trde restricting policies my not be triffs 4. Thus, the protection is ssumed to hve been grnted on the bsis of weighting of consumer nd producer benefits only. Let us denote η s the rtio giving decision mkers weighting of the chnges in consumer surplus nd producer surplus rising from the imposition of protectionist policy. 3 This my not be the cse for some developing countries nd the nlysis would hve to incorporte tx revenues for those countries. We ignore these cses. 4 It is ssumed tht the rents vilble from the imposition of non-triff brriers do not influence policy mkers decisions. 12

14 η = Δ consumer surplus Δproducer surplus Compred to the sitution before the triff, consumers suffer loss of re nd producer gin re 5. Thus, Δ consumer surplus η = =, Which is lrger thn 1. Δproducer surplus 5 In order to clrify the effects before nd fter the grnting of protection, let us simply ssume η = 3 for this specific sitution. When η =3, the loss for consumers rising from the higher price is three times lrger thn the gin by producers. Politicl decision mkers must ssign t lest three times the weight to producer benefits thn they ssign to consumer benefits. Given tht the triff ws imposed, weight of three is the minimum weight they could hve used in their decision, lthough higher weighting my hve been possible. While politicl decision mkers my not explicitly mke these weighed trdeoffs, they must do it implicitly with some rule of thumb. The chnge in trde policy turns out to be welfre reducing for the domestic economy (Gisford nd Kerr, 2001). If the sitution in the mrket chnges such tht η rises, cse might be mde for decision mkers to re-evlute their decisions. Trde Brriers nd Functionl Foods Four Cses This pper focuses on the trde policy effects when new products with helth improving ttributes functionl foods become vilble in mrkets with 13

15 pre-existing restrictions on trde in plce. While the trde brrier in plce could be triff, non-triff brriers re lso common in griculture (Hobbs, 2007). Food products normlly fce two brod types of non-triff brriers. One set of non-triff brriers cts like n import bn prevents ny imports. Other non-triff brriers rise the cost of exporting so tht imports still tke plce, but t lower levels the effect is similr to triff (Kerr, 2007). Figure 2 illustrtes the differentil effects of bn compred to n increse in costs s result of n import regultion. Before ny import regultion is put into plce, domestic consumers nd producers fce P w, world price in the interntionl mrket. At P w, domestic demnd from consumers is Q D while domestic supply is Q S. The difference between demnd nd supply t Pw leds to imports. The import quntity is shown s (Q D - Q S ). However, when there re non-triff brriers pertining to imports, the mrket will be constrined. If the non-triff brrier cts like n import bn, it prevents ny imports. There is only domestic production sold in the mrket nd imports t P w cnnot tke plce. The mrket will cler t P E. The equilibrium quntity is Q E. Thus, equilibrium will be reched t P E, higher price thn P w. 14

16 S E P E P W +C P w D Q S Q S Q E Q D Q D Q Figure 2: Non-triff brriers effects 15

17 Non-triff brriers cn lso rise the cost of exporting. In such cse, the domestic price will increse from P w to (P w + C) - where C is the dditionl cost increse fced by the exporter in stisfying the importing country s requirements. At (P w +C), import quntity shrinks to (Q D - Q S ). In order to gin mrket ccess, exporters my hve to stisfy cost incresing regultions of importing countries. An exmple might be testing to ensure tht imports re free of drug residue. These regultions my be unduly odorous nd thus provide economic protection they re disguised protectionist mesure. Thus, there re dditionl costs incurred in the process of production when firms in the exporting country wish to export their products. If there re different requirements for testing nd proof of scientific evidence, the importing country my refuse to ccept foreign credentils or scientific procedures nd the importer s regultions re equivlent to n import bn. The welfre effects of trde restriction lso vry depending on whether or not the new functionl food cn be provided domesticlly in the importing mrket. Therefore, four different cses pertining to import restrictions on functionl foods cn be exmined. These four cses fll into two ctegories: trde policy nd bility to produce. Within trde policy, the focus is on the trde brrier fced by exporters. The brrier is either equivlent to n import bn or cost incresing regultion 5. Under bility to produce, functionl foods re divided by the bility to cquire the new 5 Triffs re treted s prt of the ltter ctegory. 16

18 products from domestic producers s well s imports (domestic production or imports) or solely from imports (imports only). Tble 1 outlines the four cses under different trde policy nd production constrints. Cse 1 nd Cse 3 re bsed on the sme trde policy but different ssumptions regrding the bility to produce. Products in Cse 1 cn be supplied by domestic producers nd obtined from the interntionl mrket. On the other hnd, for Cse 3, the functionl food version of the product cn only be cquired from the interntionl mrket. In Cse 2 nd Cse 4 the supply choices re the sme s bove but the mrket is constrined by the more restrictive policy such tht imports re effectively bnned. 17

19 Tble 1: Four Cses for trde policy nd the supply of functionl foods Trde Policy Supply of Functionl foods Cost incresing regultion Import prohibition Domestic production or imports Cse 1 Cse 2 Imports only Cse 3 Cse 4 18

20 Cse 1 For Cse 1, there re both domestic sellers nd n interntionl source of supply for new functionl food. Figure 3 shows the domestic mrket of the new functionl food. D M is the demnd curve for pre-existing product tht does not hve helth enhncing ttributes, product M. There is domestic supply curve S M for product M. At P w, the world price for M, consumers re willing to purchse Q DM nd producers will only supply Q SM. Imports would be (Q DM - Q SM ). If cost incresing import restriction hs been put in plce tht rises costs so tht the lnded price equls (P w + C) cost incresing regultion (or equivlent triff) imports will fll to (Q DM - Q SM ). 19

21 P S M 11 1 E P E P W +C P w D M D N Q SM Q SM Q EM Q DM Q DM Q DN Q DN Q Figure 3: Cse 1 domestic nd import supply, cost incresing regultion 20

22 The cost incresing policy will lter welfre in the mrket. Without the regultion, the consumer surplus is re Producer surplus is shown s re 10. After trde policy is implemented, consumer surplus decresed to re Consumers suffer loss of re in consumer surplus becuse of the higher price. On the other hnd, producer surplus increses to n re chnge equl to 5. The reltive weighing rtio is M η Δ consumer surplus = Δproducer surplus = 5 9 Now ssume new helth enhncing functionl food version of product M, denoted product N, comes onto the mrket. In order to simplify the exposition, we mke three ssumptions. First, we ssume the new product, N, cn be produced t the sme cost s product M by both domestic nd foreign suppliers. Second, product N cn be represented by the sme demnd curve s product M nd tht the new helth ttribute does not chnge the slope of the demnd curve in meningful wy. 6 Thirdly, from the perspective of consumers, more people re willing to buy the new helth enhncing product N t the sme price. Therefore, demnd increses shifting out the demnd curve from D M to D N. As the dditionl demnd cn be ccommodted by 6 It is possible tht the slope of demnd curve for product N will be chnged due to chnge in consumers perception of the product. As no informtion is vilble on how the slope my hve chnged, prllel shift in demnd is ssumed. 21

23 cquiring dditionl imports t (P w + C), there is no chnge in price. Thus there is no chnge in domestic producer surplus. The new product, N, fces the originl world price P w nd distorted lnded price (P w + C), the sme s with product M. With the new demnd curve, consumers receive more surplus thn tht from product M. With no trde restriction, consumer surplus chnges from re to re n incresed benefit of re After the cost incresing trde policy is pplied, new world price (P w + C) leds to decline in consumer surplus to re Therefore, the cost incresing policy genertes loss in consumer welfre of re In ddition to the direct consumer benefits from functionl foods which rise in this mrket, there my be svings in helth cre costs 7 for the government s result of the consumption of the functionl food. We ssume for the moment tht these cost svings re positive constnt denoted HCS 8. The reltive weighting rtio is now t lest N η Δ consumer surplus + HCS HCS = = Δproducer surplus 5 Therefore, η M η N > ; HCS > Helth cre costs include direct helth cre cost such s inptient cre cost nd out ptient cre cost s well s indirect helth cre costs such s loss in productivity nd the provision of informl cre. 8 This ssumption will be relxed t lter stge. 22

24 As result, policy mkers my wish to revisit their decision to impose trde brrier. Cse 2 For Cse 2, there still exist both domestic producers nd interntionl sources of supply for new functionl food. However, the new functionl food, N, fces regultory trde brrier tht is equivlent to n import bn. Figure 4 illustrtes the domestic mrket when new functionl food enters the mrketplce. As in Cse 1, D M is the demnd curve for pre-existing product tht does not hve helth enhncing ttributes, product M. S M is the domestic supply curve for product M. At P w, the world price for M, consumers re willing to purchse Q DM nd producers will only supply Q SM. Imports would be (Q DM - Q SM ). The consumer surplus is re nd the producer surplus is re 9. If there is n import bn imposed on product M, the price will rise to P E M nd the quntity consumed will be Q EM. Therefore, the consumer surplus will decrese to re reduction of Producer surplus increses to re with n increse equl to re 5. The reltive weighting rtio is M η Δ consumer surplus = Δproducer surplus =

25 24

26 P S M P E N N 1 10 E N 2 3 P E M P w 5 6 E M D N 9 D M Q SM Q EM Q EN Q DM Q DN Q Figure 4: Cse 2 domestic nd import supply, trde prohibiting regultion 25

27 Now product N new helth enhncing version of trditionl food rrives in the mrket. Our two ssumptions still hold: (1) The new version product, N, cn be produced t the sme cost s product M by both domestic nd foreign suppliers nd; (2) more consumers re willing to buy the new helth enhncing product N t the sme price. Therefore, the new helth enhncing functionl food, N, shifts demnd curve out to D N. Product N fces the sme world price s product M. At P w, the consumer surplus increses to re As the world price is unchnged nd the supply curve is not ltered, domestic producer surplus remin equl to re 9. With the import bn in plce, the domestic price rises to P E N nd the quntity consumed equls to Q EN. At P E N, consumer surplus decreses to re Consumers suffer loss of re in consumer surplus becuse of the higher price. On the other hnd, new producer surplus increses to re chnge equl to Agin, there my lso be helth cost svings HCS. The reltive weighting rtio is N η Δ consumer surplus + HCS = = Δ producer surplus HCS Thus, N η = HCS M η Δ consumer surplus = Δproducer surplus =

28 It is n empiricl question whether η N > η M or η N < η M or η N = η M due to the different producer surplus chnge in the denomintor of our weighting rtion formul. It is possible tht η N > η M. So, policy mkers my wish to reconsider the imposing import bn fter the introduction of the helth-enhncing functionl food. Cse 3 For Cse 3, there is only n interntionl supply for new functionl food. Figure 5 shows the domestic mrket of both conventionl product nd the new functionl food version of the products. Before the new innovtive product enters into the mrket, the sitution for the originl product M is the sme s in Cse 1. D M is the demnd curve for pre-existing product M nd the supply curve S M for product M. At P w, the world price for M, imports would be the difference between wht consumers re willing to purchse, Q DM, nd wht producers will supply, Q SM, tht is (Q DM - Q SM ). If cost incresing import restriction hs been put in plce tht rises costs so tht the lnded price equls (P w + C), imports will fll to (Q DM - Q SM ). 27

29 P Mrket for product M P Mrket for product N S M 1 13 Pw+C P E M P W D A B G Pw+C P W b 1 b 2 b 3 b 4 b 5 b 6 b 7 D N 2 F D M 4 D M 3 D M 2 D M 1 D M D N D N 1 Q EM Q SM Q SM Q DM Q DM Q Q N Q N Q Figure 5: Cse 3 import supply only, cost incresing regultion 28

30 The cost incresing policy will chnge the welfre in the mrket. Without the regultion in plce, the consumer surplus is re nd producer surplus is re 6. However, fter trde policy is implemented, consumer surplus decresed to re with loss of re In contrst, producer surplus increses to re gin equl to The reltive weighting rtio is M η Δ consumer surplus = Δproducer surplus = Now ssume the new version of product M helth enhncing functionl food N comes onto the mrket but cn only be sourced from imports. Our ssumptions: (1) new product, N, cn be produced t the sme cost s M by foreign suppliers nd, (2) product N cn be represented by demnd curve tht hs the sme slope s product M. (3) more people re willing to buy the new helth enhncing product N t the sme price, still pply here. To begin with, product M nd N re fcing the sme world price t P w with no trde brrier. At ny price bove P w, no consumers re willing to purchse product M. Bsed on the ssumptions, consumers switch to the mrket for N, which 1 shifts the demnd curve from D M to D M in the mrket for M. This unmbiguous switch to product N will continue until curve D M reches D 3 M. The difference between demnd curve D M nd D M 3 leds to seprte mrket for N. In the mrket 29

31 for N in Figure 5, we tke D 1 N for the demnd curve of product N when the demnd for product M is D 3 3 M. Once the demnd curve for M shifts further to the left of D M, product M s price will be less thn Pw nd some consumers will choose to continue to consume it. This mens tht the rte t which consumers re switching to product N slows. The further to the left the demnd curve for M moves, the lrger the price dvntge for product M nd the more ttrctive product M will be to consumers. An equilibrium my well be reched somewhere between point D nd F in Figure 5. 4 If the demnd curve for M reches D M, no firms re willing to supply product M. At point F, the mrket for M no longer exists nd ll consumers hve moved to the mrket for N. When there is cost incresing restriction in plce, the demnd will gin shift inwrd s consumers switch to the more desirble product, N. When demnd for M reches D 1 M, point A in Figure 5, product M nd N both fce price(pw + C). The difference between demnd curve D M nd D 1 M leds to demnd curve D N for product N in the seprte mrket for N. As the demnd curve moves beyond point A, the demnd curve of M still shifts inwrd becuse consumers might be more interested in the new version of the product with functionl ttributes. However, it is possible tht domestic producers cn supply product M t lower price thn (Pw + C). Therefore, some consumers my sty in the mrket for M becuse it is lower priced thn N. Let s suppose the price of M declined to P E M, where D M 2 equls S M. Point B, my be n equilibrium if 30

32 no more consumers re willing to switch to product N. As more consumers switch from M to N, the demnd curve for N shifts out from D N in Figure 5. Finlly, the demnd curve in mrket for M could rech D 4 M nd the demnd curve in mrket for 2 N will move to D N in Figure 5. At point F, there is no supply for product M nd consumers will ll hve switched to the mrket for N. As the demnd chnges re dynmic, we clculte the welfre of both consumers nd producers bsed on minimum chnges t point A nd for the mximum chnge, point F. In both mrkets together, consumers receive more surplus thn tht rising from only product M being in the mrket N gives more utility per unit thn M. At point G, without trde brrier, consumer surplus equl re b 1 + b 2 + b 4. However, fter the cost incresing trde policy is pplied, t point A, new world price (Pw + C) leds to consumer surplus chnge equl to re b 1 with loss in consumer welfre of re b 2. The chnge in producer surplus remins The reltive weighting rtio is now t lest η NA Δ consumer surplus+ HCS = Δproducer surplus = b 2 + HCS Since M η Δ consumer surplus = Δproducer surplus = , where only product M is vilble in the domestic mrket. 31

33 Noticing tht ( ) is term common to both η NA nd η M. Therefore, η NA > η M if b 2 + HCS > ; b2 + HCS 4 > As result, politicl decision mkers my wish to reconsider their decision to impose trde brrier which dds to the cost of imports. At point F in Figure 5, without trde brrier, the demnd in mrket for product N hs shifted to D 2 N nd consumer surplus equls re b 1 +b 2 + b 3 + b 4 + b 5 + b 6 + b 7 However fter the cost incresing trde policy is pplied, new world price (Pw + C) moves consumer surplus to re b 1 + b 3 + b 6 with loss in consumer welfre of re b 2 + b 4 + b 5 + b 7. One the producer side, t point G, the producer surplus is 6 before ny policy pplied. After the cost incresing regultion is implemented, t point A, the producer surplus is equl to with gin of Nevertheless, the producer surplus is decresing with the movement of the demnd curve for M. When the demnd curve for M moves from D M to D 2 M, tht is from point A to point B, the producer surplus chnges to with reduction of Compred to the producer surplus before product N entered into the mrket, clculted s 6, however, producers still gin if there is no trde restriction existing in the mrket. Once the demnd curve shifts to point D, the producer surplus returns to 6 which is exctly the sme s when only product M ws vilble in the mrket without ny trde restriction. 32

34 Thus, producers do not receive ny benefits from the trde restriction policy t point D. From Point D to Point F, the producers lose surplus from the rrivl of the new good in the mrket. The price incresing policy provides no benefit to producers fter point D is reched, nd consumers suffer loss in surplus becuse of the cost incresing regultion. Thus, the policy hs no merit nd should be bndoned. Cse 4 In Cse 4, while there is domestic cpcity to supply the conventionl version of product, no domestic cpcity to supply the new functionl food exists. The new products cn only be cquired from the interntionl mrket. However, the new functionl food cn t be cquired from bord becuse of n import policy tht is equivlent to bn. Figure 6 give us n insight into the domestic mrket before nd fter the introduction of new functionl food product. As in the previous cses, D M represents the demnd curve for pre-existing product tht does not hve helth enhncing ttributes, product M. S M is the supply curve for product M. At P w, the world price for M, consumers will purchse Q DM nd producers re only willing to supply Q SM. The difference between demnd nd supply would be (Q DM - Q SM ) for imports. Thus, the consumer surplus is re nd the producer surplus is re 5. As in Cse 2, if there is import bn imposed on the product M, both consumers nd producers will rech the new equilibrium E M with P E M, higher price 33

35 thn P w, nd quntity Q EM. Therefore, the consumer surplus will decrese to re 1 with reduction of Producer surplus chnges to re with n increse of re 2. 34

36 P S M 1 6 E M P E M D N P w 5 D M Q SM Q EM Q DM Q DN Figure 6: Cse 4 import supply only, trde prohibiting regultion 35

37 The reltive weighting rtio is M η Δ consumer surplus = Δproducer surplus = 2 4 If the new helth-enhncing product N cn be introduced into the domestic mrket successful through imports, there will be demnd shift from the originl demnd curve D M to D N. From our previous ssumption, product N cn be produced t the sme world price s product M. So, t P w, there is lrger demnd, Q DN, for the new product. However, in this cse, there is no domestic production of product N tht cn be supplied to the consumers. Thus, totl imports re equl to totl demnd Q DN. The consumer surplus expnds to re However, in Cse 4, we ssume there exists n import regultion tht still cts like bn, thus llowing none of product N into the mrket. The demnd for product N cnnot be supplied by the interntionl producers. Thus, the new demnd curve, D N, does not pply under n import bn. The domestic mrket hs to move bck to the previous sitution with the product in n utrky mrket. We ssume there is no supply of the old product M from foreign mrket the exporter no longer produces product M. Thus, consumers nd producers return to the domestic price P E M. At the utrky equilibrium point, consumer surplus decreses to re 1, reduction of re nd the producer surplus is re There would lso be helth cre svings equl to HCS. Therefore, the reltive weighting is 36

38 N η Δ consumer surplus + HCS = Δproducer surplus HCS = 2 Since M η Δ consumer surplus = = Δproducer surplus 2 4 Thus, η N > η M HCS > 2 Therefore, politicl decision mkers my wish to chnge their trde inhibiting policy. Incorporting Helth Cre Costs 2 In ech cse, we ssumed tht the HCS is constnt. However, svings in helth cre costs for the government is not likely to be constnt. In most cses, it is likely to be some function of the consumption of the prticulr functionl food. For our nlysis, in ech cse the HCS tht would rise from the remove of the trde brrier is function of the incresed consumption of product N. Tht is, 4 HCS = ƒ( ΔQ N ), where ΔQ N is the difference between the consumption of N with trde brrier nd tht which rises without the trde brrier. HCS will be different depending on ech cse given the different trde situtions illustrted bove. In Cse 1, there re both domestic sellers nd n interntionl source of supply for functionl food N. The cost incresing regultion increses the import price from P w to (P w + C) which leds to reduction in the demnd of product N. Thus, the difference between the consumption of N with 37

39 trde brrier nd tht of without trde brrier is mesured by the quntity chnge long the demnd curve D N from (P w + C) to P w. HCS 1 = ƒ( ΔQ N ) = ƒ(q DN - Q DN ) In Cse 2, product N fces both domestic nd interntionl supply but with regultory trde brrier tht is equivlent to n import bn. The import bn llows no supply for product N from the interntionl mrket. Thus, the difference between the consumption of N with trde brrier nd tht without the trde brrier is mesured by the quntity chnge on the demnd curve D N from Pw to P E M. HCS 2 = ƒ( ΔQ N ) = ƒ(q DN Q EN ) In Cse 3, there is only n interntionl supply for functionl food N. Like Cse 1, the cost incresing regultion mkes the import price P w increse to (P w + C) which leds to reduction in the demnd of product N. Thus, the difference between the consumption of N with trde brrier nd tht without the trde brrier is mesured by the quntity chnge long the demnd curve D N from (P w + C) to Pw. As the figure in Cse 3 is dynmic, the chnge in consumption of the product N, which bsed on the shift of demnd curve D N, cn tke on rnge of vlues. HCS 3 = ƒ( ΔQ N ) = ƒ( ΔQ N ) ƒ(q N - Q N ) In Cse 4, there is no domestic cpcity to supply the functionl food N. However, product N cnnot be cquired from brod becuse of n import policy tht is equivlent to bn. Before the import bn, the consumption of N is bsed on imports only nd the import quntity is equivlent to domestic demnd which is Q DN. 38

40 With the import bn in plce, the imports of product N do not tke plce. Therefore, there is no consumption of product N. The chnge in the consumption of product N is just equl to Q DN. HCS 4 = ƒ( ΔQ N ) = ƒ(q DN - 0) This section hs developed prtil equilibrium model to exmine the effects of the introduction of functionl foods tht provided consumers with positive helth benefits when pre-existing trde restrictions re in plce. While undertking empiricl investigtions for exmples of ech of the four cses would hve been desirble given the different results they predict, limits on time nd resources llowed for investigtions of only two of the cses. As the objective of this investigtion is only to determine whether incorporting helth benefits into interntionl trde models is worthy of further study, limiting the investigtion to only two cses is not mjor constrint. In wht follows, two cses re developed using trde restrictions on cnol oil. The first study involves the Chinese triff on cnol oil nd is n exmple of Cse 1. The second study exmines the mrket for cnol oil in the United Kingdom where mrket ccess is blocked by the Europen Union s import bn on geneticlly modified products n exmple bsed on Cse 2 developed bove. Brriers to Cnol Oil in Chin Over time, consumers hve responded to new scientific informtion relted to food consumption by switching their purchses to products with helthier or less 39

41 hrmful components (Mll et l., 2007). Recently, the reltionship between consumption of trns ftty cids (TFA) nd ssocited hert disese hs become hot topic with the public. Coronry hert disese (CHD) refers to the filure of the coronry circultion system to supply dequte blood to the hert muscle nd surrounding tissue. Over 451,000 Americns die of coronry hert disese every yer (AHA, 2008). In the United Kingdom, over 100,000 deths nnully re ttributed to coronry hert disese (BHF, 2007). Scientific studies suggest tht consumption of trns ft will increse the risk of CHD. The Food nd Drug Administrtion (FDA) in the United Sttes ruled tht the reporting of trns ft levels hd to be dded to the Nutrition Fcts Pnel on food lbels strting from Jnury 1, Identifying sturted ft, trns ft, nd cholesterol on the food lbel provides consumers with informtion so tht food choices tht help reduce the risk of CHD cn be mde. The revised lbel ws expected to be helpful to people who re concerned bout high blood cholesterol nd hert disese (FDA, 2003). This section provides Chinese cse study to exmine the potentil welfre benefits forgone from the existence of trde brriers when selected product becomes functionl food. First, the chpter gives detiled overview of the connection between trns ft nd helth. Further, the selected product cnol oil is introduced from two spects its functionl ttributes to reduce the risk of CHD nd its interntionl trde sttus. Following this introduction, the empiricl cse study of Chinese cnol oil is exmined ccording to Cse 1 in the frmework 40

42 developed bove. The forgone benefits of functionl cnol oil in Chin rising from the trde brriers triff re clculted. Trns ft nd Helth Trns ft (lso known s trns ftty cids) is specific type of ft formed when liquid oils re processed into solid fts like shortening nd hrd mrgrine. However, smll mount of trns ft is nturlly occurring, primrily in selected niml-bsed foods. The mjority of trns ft comes from dding hydrogen to vegetble oil through process clled hydrogention. Trns fts re more solid thn oil but less likely to spoil. In processed foods, trns ft helps food keep fresh, extends the self life nd gives products less gresy feel (MFMER, 2006). Animl-bsed fts were once the only trns fts consumed, but by fr the lrgest mount of trns ft re formed during the prtil hydrogention of vegetble oils, process tht converts vegetble oils into semisolid fts for use in the food industry (Mozffrin et l., 2006). The consumption of trns ftty cids rises the levels of low-density lipoprotein (LDL) cholesterol 9, so clled bd cholesterol nd reduces levels of high-density lipoprotein (HDL) cholesterol 10, so clled good cholesterol. Trns fts lter the rtio between LDL nd HDL by incresing the rtio HDL in totl 9 LDL (bd) cholesterol could led to hert ttck or stroke by forming clots in the inner wlls of the rteries nd blocking the wy to feeding the hert nd brin (AHA, 2008b). 10 High levels of HDL (more thn 40 mg/dl) protect ginst hert ttck by crrying cholesterol wy from the rteries to the liver, where it is pssed from the body (AHA, 2008b). 41

43 cholesterol 11. The ltter is powerful predictor of the risk of CHD (Stmpfer et l, 1991). A study published in the New Englnd Journl of Medicine reported tht trns ft is linked to 93 percent rise in the risk of crdiovsculr disese. The reserch lso reveled tht replcing of 2% of trns ft consumed with monounsturted ft (MUFA) tht re derived from plnt sources such s cnol, penuts nd olives could reduce hert disese risk by 53 percent (Lm, 2002). Conventionl cnol oil nd soyben oil require hydrogention to mke them stble. Hydrogention is the process tht turns fts into trns ft. New technology, however, gives cnol oil very high degree of stbility, eliminting the need for hydrogention (Mll et l., 2007). At present, there re two types of cnol oil: commodity nd high-oleic. The former is sold directly to consumers; the ltter is chrcterized by high stbility which is newer nd sold lmost exclusively to food processing compnies nd food service opertions. Both oils hve the sme low level of sturted ft nd positive helth ttributes (Cnol Council of Cnd, 2008). The FDA (2006b) sttes tht: Limited nd not conclusive scientific evidence suggests tht eting bout 1½ tblespoons (19 grms) of cnol oil dily my reduce the risk of coronry hert disese due to the unsturted ft content in cnol oil. (n.p.) Thus, Cnol oil is seen s helthier lterntive to number of importnt vegetble oils due to its trns ft-free nd very low, or even zero, sturted ft but 11 The totl cholesterol to HDL cholesterol rtio is obtined by dividing the totl cholesterol vlue by the vlue of the HDL cholesterol. High rtios (High totl cholesterol nd low HDL cholesterol) indicte higher risks of hert ttcks (Kinosin et l., 1994). 42

44 high lmost 60% monounsturted oil content nd beneficil omeg-3 ftty cids profile. Sturted ft hs been linked to rising levels of bd LDL cholesterol in the blood nd incresed risk of CHD. Monounsturted ft is helpful in reducing the risk of coronry hert disese nd controlling blood glucose by lowering bd LDL cholesterol in the blood. Omeg-3 fts re essentil for helthy dily diet nd it helps protect ginst hert ttcks nd strokes. Thus, cnol oil might be better choice for voiding trns ft in deep fried nd bked foods nd is becoming populr oil of choice in resturnts nd commercil food products (Cnol Council of Cnd, 2008b). The Chinese Vegetble Oil Mrket The mrket for vegetble oils is growing cross Asi s result of expnding popultions nd rising incomes. Chin s popultion growth rte is pproximtely 8.6 million people per yer. Further, gross domestic product (GDP) in Chin hs been growing t n nnul rte in excess of 10 percent. Per-cpit GDP in Chin is pproximtely US$7,600 on purchsing power prity bsis (AAFC, 2007). According to the Chin Stte Administrtion of Grin 12, totl vegetble oil imports reched 8.5Mt in , ccounting for 18 percent of globl imports of vegetble oils. However, the nnul consumption of vegetble oils incresed to 23.4Mt, mening only 15.14Mt re being supplied domesticlly. The consumption of cnol oil is 4.34 Mt nd domestic production only supplies 4.01 Mt t the 12 Stte Administrtion of Grin cn be ccessed t: 43

45 existing price level (USDA, 2008). As result, pproximtely 0.33 Mt of cnol oil re imported. This is pproximtely to 15% of the world cnol oil imports. Prior to joining the WTO, Chin hd n import mngement control system for vegetble oils. A triff rte quot (TRQ) restricted the mount of vegetble oils tht could be imported. All imports up to the quntity limit known s the TRQ-quot were subject to low within-quot triff of 9 percent, while ny dditionl imports were subject to higher bove-quot triff rnging between 19.9 percent nd 52.4 percent (Xu nd Wng, 2006). From 2006, however, Chin removed ll of the import mngement restrictions on vegetble oils s prt of its WTO ccession commitments. However, there still flt triff of 9 percent on imports of vegetble oils. In Cse 1 developed bove, there re both domestic producers nd n interntionl source of supply for new functionl food. Chin s current import regime is consistent with the ssumptions of Cse 1. In the Chin cse study, cnol oil is new functionl food. Given the constrints on Chinese production nd processing cpcity, imports of cnol oil re required. However, the existing triff level cts s trde brrier on imports. The protection benefits producers t the expense of consumers. This triff ws put in plce prior to the helth benefits of cnol becoming pprent. Given tht the socil costs cn be expected to rise s the helth benefits become known, the Chinese government my wish to revisit hving triff on cnol oil. 44