Implications of trade policy are related to consumer preferences and market structure, according to an analysis by an economist at the Vienna Institute for International Economic Studies.
Mahdi Ghodsi used a cost-benefit analysis to investigate the welfare consequences of a regulatory non-tariff measure because of sanitary and phytosanitary (SPS) reasons on a foreign product.
Welfare gains from introducing non-tariff measures depend on public awareness and information given by the government of the importing country.
The example used is the Salmonella poultry trade dispute between Brazil and the European Union.
EU Brazil poultry dispute
Specific Trade Concerns (STCs) raised by Brazil about European controls of Salmonella in poultry meat were discussed several times in 2017 and 2018 in the SPS committee of the World Trade Organization (WTO) but were not resolved.
In 2017, EU authorities inspected prepared turkey from Brazil and found Salmonella in several batches. This occurred despite exporting Brazilian sites being authorized by the EU and officials confirming the safety of poultry preparations in pre-export testing.
In November 2021, Brazil raised a dispute settlement case at the WTO with respect to regulatory measures by the EU on the import of salted poultry and turkey meat with pepper. However, disputes are not currently being settled at the WTO because of political reasons.
In the EU, fresh poultry meat cannot be placed on the market if Salmonella Enteritidis or Salmonella Typhimurium are detected. Rules on poultry meat preparations require the absence of all serotypes of Salmonella in a 25-gram sample.
The paper provides a theoretical framework for measuring the welfare implications of SPS measures imposed by the EU on imports of prepared turkey from Brazil, which dropped from more than 78,000 tons in 2006 to less than 1,000 tons in 2019.
Two groups of consumers are discussed: one that is indifferent to the foreign product’s negative attributes, and another that is concerned about them. It also covers the impact of people being aware of the restrictions.
Impact of halting imports
A government should provide reasons showing the negative effects related to consumption of a foreign product are such that the non-tariff measure prohibiting it will not decrease the consumer welfare of society, even after the structure of the market is changed, said Ghodsi.
Welfare losses from halting the import of Brazilian prepared turkey are mostly related to changes in the market, into a less competitive environment so consumers face higher prices.
In the case of concerned consumers, there are social welfare gains from the introduction of a non-tariff measure as the increase in domestic producers’ profit is higher than consumers’ welfare losses when there is a larger share of worried people in society.
However, when everybody is indifferent to the potential harm from the foreign product, the non-tariff measure will cause losses to the whole of society, as the increase in profit for local industry does not compensate for the losses suffered by consumers.
When people are not informed about the elimination of a bad product, consumer surplus can never become positive because of the change in the market structure with the wrong perception that bad product still exists.
Overall, the use of a non-tariff measure that eliminates bad product from the market should increase the consumer surplus and total welfare of society, regardless of the awareness of consumers.
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