Quarantine overboard

Given the theme of last Wednesday’s post, questioning the validity of economic arguments supporting free trade, and previous discussions on food security, I though it wise to spend a moment considering the use of quarantine as a barrier to trade.

Queensland’s banana crop was destroyed by cyclone Yasi last summer and prices at the supermarket shelf hit $14/kilo and more. This wouldn’t have been the case if bananas could be freely imported.

It seems that leading economist Saul Eslake, and economist turned politician Andrew Leigh, have done the job of deciphering genuine concerns over importing disease, and rent-seeking by protected producers.

Let us start with what Andrew had to say –

In fact, just about every trade barrier can be rewritten as a quarantine rule or a consumer protection law. Suppose Californian wine producers are complaining about competition from French Bordeaux. Left unchecked, US authorities could simply raise health concerns about Phylloxera, and ban French wines on quarantine grounds. Or imagine that British carmakers are struggling to compete with Malaysian hatchbacks. Without any international guidelines, there would be nothing to stop the UK from banning Malaysian small cars for reasons of safety.

To prevent competition laws and environmental rules from being used as backdoor protectionism, the WTO has two new treaties that require health, consumer and environmental regulations to be scientifically based. National regulations cannot discriminate against particular countries, and must not impede trade any more than necessary.

If a WTO member thinks that another country is breaking the global trade rules, it can take a case to the dispute panel. Australia has complained to the WTO on seven occasions (against the European Union, Hungary, India, Korea, and the United States). We’ve won five of these cases, including decisions in favour of our beef exporters to Korea and our lamb exporters to the US.

On the flipside, we’ve had ten cases brought against us (by Canada, the EU, New Zealand, the Philippines, Switzerland, and the US). We’ve lost three of these cases, including the New Zealand apples decision (the other two losses related to imports of salmon and automotive leather).

Andrew makes the solid points that quarantine and consumer protection is ‘back-door’ protectionism, and gives a good overview of the international legal framework around trade.   I would add, however, that the global framework is a political construct, and concessions are based on relative power of each country in these negotiations.  I don’t think there are any countries without some form of ‘back-door’ trade protection (especially indirect subsidies).

Saul Eslake takes different approach by discussing the price impacts on domestic consumers from this type of protection. He also highlighted that in the wake of cyclone Yasi, high banana prices were only helping banana growers whose crops weren’t destroyed, not those who actually lost their crops from the cyclone.

On the matter of importing diseases, he makes a point I have argued to many people in the past. How would diseases go from boxed-up fruit and vegetables arriving in city ports out to farms? How high is that risk? In Eslake’s words:

If bananas and other fruit or vegetables are imported into southern ports, such as Melbourne, Adelaide or Sydney, and are subject upon arrival to appropriate inspections, they are no more likely to spread diseases damaging to Australia’s banana industry than the importation of cooked and packaged Canadian salmon has done to Tasmania’s salmon industry (another example of protectionism masquerading as ”biosecurity” where, unusually, commonsense and the interests of consumers ultimately prevailed).

To me the irony of the situation is that many of the crops now requiring protection from foreign pests are themselves introduced species, and could arguably be classified by an environmentalist as a foreign pest. (Also, countries that do have these diseases can produce the crop cheaper than us.)

Aside from political considerations, the logical person would ask whether the potential costs from the pest or disease are greater than the benefits derived by consumers from cheaper food? If yes, then we should keep the quarantine restrictions. If no, we should drop them.

Clearly not all quarantine rules will necessarily have greater benefits than costs. We have lost 3 out of ten cases brought against us by other WTO member, so if 30% of the quarantine rules can be dropped because their costs outweigh the benefits, this may be beneficial in the long run.  We need to remember that when we open up export markets for our domestic goods (which we can produce for a cost below the global market price), we can end up paying a higher price that if export markets were shut off (as long as there is sufficiently competitive domestic production). The reverse is true for imported goods that we cannot produce for the global market price – protection means an increase in price.

In economic terms, the choice to protect some farmers is a political gift to a select industry at the expense of a diverse consumer base – the product of their historical rent seeking activities, and political decisions (which, to be honest, could have global political ramifications I have not considered).

In reality however, these cost may be very minor.  I admit that my reduced utility from the 2011 banana shortage was approximately zero, due to the wide variety of substitutes for bananas, which I indulged in during the year.  But to properly analyse trade, quarantine’s back-door protection needs to be considered.

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Comments

  1. My kids love banannas. The import restrictions adversely affected my family. Even with QLD’s bananna production at full throttle, our bananna prices are higher than most other countries without a bananna growing industry (e.g. the EU nations). It’s time to end this protection racket.

    Great article by the way.

    • The EU nations get their bananas from North Africa, if I recall correctly – the issue isn’t going to be a protectionist racket but simple input-and-output costs. I disagree that it’ll be as simple as sourcing from elsewhere to drive prices down.

      • The EU produces almost one sixth of its total banana consumption in the Canary Islands (Spain), the French overseas departments of Martinique and Guadeloupe, Madeira (Portugal), Cyprus and very small quantities in Crete (Greece). The rest it imports from former Caribbean and African colonies (‘ACP’ bananas) and from Latin America (‘Dollar’ bananas).

        Historically, special ties developed between certain consuming countries within the EU and producing countries, often within the context of a common colonial history of repression and dependence. Until the Single European Market countries like France and Britain, which have had a long history of colonialism, mostly imported the fruit from their colonies. Other EU members imported the cheapest bananas available, which are from the large-scale plantations of Latin America.

    • In a situation such as what happened recently to banana prices and how expensive they had become, it would have been just as easy to import them into Tasmania or Melbourne and just distributed into states that are unable to grow bananas, yes the whole of Australia would have been able to benefit, but at least not all of Australia would have been penalised either. On another note there were roadside vendors here in Melbourne selling bananas for $4.99 a kilo while Coles et al were ripping off the public for $13.00 a kilo, now if a roadside vendor could sell them for this price then why couldnt have Coles et al?

    • During Australias tour of the west indies in 99 I visited the small island of Dominica. The island had been hit by trade argy bargy with the USA. The upshot was that the locals no longer had a market for their bananas there due to lobbying by septic farmers.

      The US were however investing anamount in the region in terms of DEA and coast guard activities. Reason: after losing the banana market the locals resorted to an alternative cash crop.

      swings and roundabouts.

  2. It also doesn’t help when “great Australians” like Dick Smith run xenaphobic campaigns against imported food.

    In the end it should be the consumers choice if they want home grown or imported food, not the government.

      • Interesting that this view dominates. It is the concept ‘let value be the deciding factor’ that has driven the success of the globalised economy and growth of emerging nations, particularly China. ie There will always be a cheaper producer.

        Just ask manufacturers…

  3. How would diseases go from boxed-up fruit and vegetables arriving in city ports out to farms? How high is that risk?

    Asking that as an open ended question makes me wonder if the author has the basic tools to reason through the issue.

    Risk = severity x detection x occurance

    Occurance being very low doesn’t alter the fact that severity and detection factors are high. It’s the product of all three that provides a useful indicator or risk.

      • Unintended consequences.

        http://en.wikipedia.org/wiki/Fire_ant
        http://en.wikipedia.org/wiki/Diseases_of_the_honey_bee#Acute_bee_paralysis_virus_.28ABPV.29_or_.28APV.29

        Read any mature FMEA and it becomes apparent that only some of the current controls were anticipated. All the rest are countermeasures introduced after something unexpected goes wrong. In a business like production, that risk and expense is real and is shared between the producer and purchaser.

        In agriculture, who pays?

        Our own history shows that once done, some things are next to impossible to undo.

        • Except that bananas aren’t indigenous to Australia (as Rumplestatskin points out). Anyway, the bananas that Australia’s protectionism keeps out are from Papua New Guinea – the home of the banana fruit for some 10,000 years!

          Eagerly awaiting the response that “Australian bananas are just BETTER than the foreign ones, so I don’t mind them being so expensive and neither should you”.

          • European honey bees aren’t native either.

            Yet our poulation of bees is recently infected with a virus that puts wholesale pollination of many fruit species at risk.

            You can have a non-indigeous crop and still wish to have isolation from it’s pests.

    • Hi SteveB
      You did solve the problem! Love it “Risk = severity x detection x occurance”
      It makes it look like you know everything…
      BTW Is occurrence not occurance

  4. So we unlock our market for the sake of saving a few bucks on bananas, in exchange for… possibly destroying a market crop? Far easier to dig up dirt hey, there’s no such thing as an iron weevil.

    At times I’m almost inclined to join Bob Katter’s Australia Party.

    • And another thing: isn’t the price determined by what the market will bear? If bananas at $15/kg had been left to rot in Coles and Woolies shelves, wouldn’t we have seen some feedback loops being established?

      • Yes. Which adds to my point that the cost are relatively minor, since many people easily found substitutes. Those who continued to pay the price were a very small group of bananaholics who clearly still gained benefits from their purchase.

        • It doesn’t change the fact that these laws are moronic and provide windfall gains to the relatively few growers whose crops were undamaged. Meanwhile consumers get screwed… again.

          Sure, my family (reluctantly) went without banannas for a year. But it is simply wrong to argue that the ban of imports was effectively costless because other fruit is available.

          • Of course I agree that many of them are moronic.

            However, to measure the cost to society, you need to estimate only the different in consumer surplus between bananas and the next best consumption item. Usually, these differences are very small (hence, very few people were willing to pay a higher price for bananas), although for some it will be larger (hence, some people actually paid the high price).

            On balance I would say economists typically overestimate the costs, and underestimate the risks, and vice-versa for the industry. Yet I would say Australia is very much tipped in favour of a select few producers even on some middle ground assessment.

      • rob barrattMEMBER

        Coles & Woolies.. I often wonder how much we’re paying for the freight and how much to compensate them for the vast amount of fruit they have to throw away. I cannot believe one has to pay $3+ for one KP mango..
        I’m a mango addict, I believe I know where every tree on public property is located within a 3K radius of where I live!

      • Yes. You have a great understanding of supply and demand.
        Next time there is a banana shortage would you please arrange for 1/2 the country to join you and boycott Coles and Woolies?
        I (and the other half of the country) will happily buy the scarce bananas at the lower price.

      • “isn’t the price determined by what the market will bear?”

        Ever heard of the principle of supply and demand? And why are bananna growers such a special species? Why shouldn’t they be subject to the same competition as other industries?

  5. I understand RS’s points on quarantine as protectionism, but I really do think that bananas are a special case. The Gros Michel variety (which my grandfather told me was much tastier than the Cavendish’s we eat now) was wiped out globally about 50 years ago, and it could easily happen again. And there are only a handful of alternative varieties to turn too, most of which don’t taste very good. GM might come to the rescue, or it might not (GM works best when researchers can combine genes from a wide range of closely related varieties), and there would probably be quite a bit of consumer resistance to GM bananas anyway.

    This article from 2003 gives some of the background: http://www.guardian.co.uk/science/2003/jan/16/gm.science

    • If there is a special reason to choke supply of an item (in this case imported bananas) then we should look at the rationing scheme employed.
      I suggest that during a severe shortage market price should NOT be used to ration bananas. Perhaps ration cards or a lottery or some form of queue could be employed.

      • The argument about the introduction of foreign diseases, begs the question of how Caribbean islands or Philippine have a banana industry if these diseases are so terrible. How comes their bananas can be competitively priced if the industry is continually fighting against these diseases?

  6. Beyond the threat of disease (which almost always spread beyond human control), there is another reason why allowing the import of bananas is a bad idea : if the local market is lost, the devastated banana farmers will have no chance of recovery.

  7. Almost anything we manufacture and by that I also mean ‘manufacture’ of agricultural products can be obtained cheaper from Asia.
    ‘So let the customer decide on price’.

    A point not covered is the resultant largescale closure of much of Australian agriculture and further job losses, apart from our own food security. (In the event of any war breaking out in which Australia is linked, directly or otherwise, think how vuneralble we are to a naval action stopping imports of fuel, food and necessary manufactured goods we have become reliant on. Heavens, our intelligensia would not be able to get their fair trade coffee).

    (Taking the argument of cheaper costs is always to the consumers benefit, to its logical conclusion, then lets outsource our expensive Federal parliament to some Asian parliament…I am sure they could mess up the country just as effectively as our governments do but at a lesser cost to the taxpayer).

    While Theoretically the argument of lowest costs are best for consumers might hold water, in fact in certain cases other factors are in play which are more important to society in total. Some sectors of society are unfortunately more important than others.

    • Why not let consumers choose whether they want to ‘support’ Aussie banannas? Why should this choice be taken away via protectionist policies dressed-up as quarantine? After all, these quarantine restrictions have benefited only a small portion of bananna growers – i.e. those whose crops were not affected by the cyclones. These farmers made huge windfall profits at the Australian public’s expense (via higher prices and reduced choice).

      • UE, this ‘banana’ talk is reminiscent of recent inflation figures going through the roof due to ‘bananas’. Funny but not really of much consequence. (I wonder if this thread would be so long if it were not because of ‘Banana talk’?)

        The principle is good and may be correct, but what are the effects? I think I have indicated what they might be. Just as correct is an economic theory that says labour rates should be decided by supply and demand and minimum wage rates shd not be set by politicaly well connected power brokers.

        Or that Greece, Spain, Portugal and Italy should be allowed to just go bankrupt with the resultant world recession/depression. In the latter case what is being done now by the EU politicians and others might not be theoretically correct but they are trying to stave off a societal disaster through much of the world.

        Economic theory might look great in a book but in life it won’t necessarily work,’all other things being equal’ of course.

        • Anton – this is essentially a continuation of the Ricardian “gains from trade” topics elsewhere on MB.

          Just because some people are inefficiently employed in an industry without a comparative advantage does not mean the status quo is best. Protectionism is keeping those people employed inefficiently – rather spend money on reeducation and redeploying them in another industry. The long term benefit to all (consumers and workers) will outweigh the short term cost.

          • Econ 101,you are right, but yes i am recalcitrant when it comes to the free trade policy.

            I have seen too much sorrow caused by free trade policies/imports amongst workers, managers and small business owners to belive that this economic policy is always right. I am referring to impacts seen in Australia, parts of Africa and a poor South American country.
            In fact I believe this theory is flawed as it does not include and take into consideration the social aspects of the disruption (and costs) caused by free trade.

            I have much admiration for UE but I belive society has the right and obligation to ignore or only partly accept any economic theory and adjust it to their own needs as they see fit.

            If we are to accept this theory in its purity, then why do we have minimum wages, unemployment benefits when there are jobs available locally or somewhere else in a country and I can mention many other political programmes in existance that are not in accordance with economic theory. The current one the Labor government is toying with is capping private rents. All of these push up costs and are not efficient.

  8. Been quiet in the blogosphere of late – mainly because we bought a home – yes, that’s correct, homes4aussies has bought (and I’ve been busy in my yard!) – but this thread is too close to home to let go without saying a few words.

    I’ve got a fairly unique perspective here. On the one hand my family are banana farmers – I almost certainly would be, too, if I returned after university. And on the other hand I worked in quarantine (biosecurity) policy development. I worked in the aquatic unit in the period after we lost the Salmon WTO case and I was the only one of 8 policy development officers in our unit that was not pulled into conducting the import risk analyses in response to our loss in the WTO and which ultimately recommended the importing of certain salmon products.

    I worked there for two and half years developing policy papers on the import of aquatic invertebrates.

    My view from this period is that it is undeniable that biosecurity policy is being used as a barrier to trade. And there was significant political interference in the process.

    On one occasion I took part in a telephone hookup with the minister’s chief advisor who bluntly said to us (the head of our unit and the head of animal biosecurity policy development, who very sadly is no longer with us)”why can we not ban the import of xxxx” (this was an unusual case because we have a long standing history of the import of these invertebrates, and the local industry wanted the imports curbed – with Xmas coming up, I’m sure lots of Aussies would appreciate lower prices of these products…..).

    You see the question should have been “why is the disease risk associated with their import acceptable” (thus within our appropriate level of protection).

    When we said that we believed that we would be contravening WTO rules to ban their import because our analysis suggested that it did not pose an unacceptable risk, he got off the phone letting it be known that he was none too pleased and said that he had been called by 7 farmers in the last hour!

    Soon after this conversation I received a fellowship to work in France and left. But my bosses were clearly under significant pressure, as were the additional scientists assisting with the policy review. In the last meeting that I attended it was clear that they were beginning to have doubts about their views, and it was clear from what they had said prior to the meeting it had a lot to do with the pressure the farmers were placing on them.

    You see, governments have encouraged co-operative funding with industry, and there is precious little funding available in these areas that industry does not have a say in who gets funded.

    And during that meeting the minister’s office faxed over a research paper – which the farmers’ lobby group had forwarded to them – for us to urgently consider in that meeting. More pressure….

    Admittedly, it was largely because of my persuasive arguments that earlier decisions were not reversed in that meeting there and then, but within 2 weeks of me leaving my position the policy was reversed and import conditions were strengthened significantly.

    (Perhaps my position on this issue was a factor in my not managing to obtain funding to continue my career in Australia after returning from 2 prestigious overseas research fellowships – remember that hot topic from last decade – “the brain drain”)

    So the other side of the fence is this. Since the early WTO cases, especially salmon, farmers are well aware that they need to be seen to be concerned about disease. And of course they do have those concerns – who would not.

    But, in my experience, if you speak to them for just a few minutes the competiton factor comes very much to the fore.

    Having travelled a lot in developing countries, I’m pretty much a globalist. All people deserve the opportunity to seek a better life for themselves and especially for their children.

    These rules are created to make a structure to argue against inequity. But the truth is that it takes a lot of funds to be able to fight a case in the WTO. And countries need considerable scientific expertise to support the case. Clearly most developing countries still are at a very great disadvantage.

    Funnily enough some of Australia’s foreign aid is used to improve skills in import risk analysis etc with those developing countries that are disadvantaged by our import policies. But, having also been involved on that side in a later position, what those exercises show is the enormous gap between us and them.

    The big caveat on what I say is that the impact on farming families in the developed countries is ONLY worth it IF the benefits of freer trade flow through to the people who really need the help. There in lies my main concern – the risk that the real beneficiaries are wealthy (by global standards – remember still half of the world’s population live on less than $2.50 a day – $1,000 a year) shareholders of multinationals.

    So I get to my own family. Clearly my position on this damaged my relationship with my own family, even though if they listened a bit more they could have been in a position to manage their own business risks.

    My advice to them was to play the political game – why not, it works! – but to keep in mind that while Australia is the master at dragging it’s heels, it will eventually need to move things along. And nearly always the risks are not as serious as you (or you would like to) believe. So you should use the time that you give yourself playing the political game to prepare for the likelihood that at some stage the product will be allowed in and you will need to face that competition. Look for opportunities to value add and continue to produce the very high quality product that you do, and perhaps go out and try to market on your own to niche markets – perhaps upmarket hotel chains, etc.

    That advice was not respected or appreciated. Instead it became clear that in these circumstances many people choose to stay on the ship and go down together rather than try to go out on a limb and create a new future.

    Change can be very frightening, especially in conservative communities. But I’ve seen poverty first hand. On one occasion I felt the confused feelings of being handed a bottle of tequila – a gift for a family member – directly from a child worker, a boy no older than 8 (the confronting feeling of such sadness, the initial desire to walk out in disgust followed by the more complex feelings of on the one hand asking how is that arrogant “stand” going to help this little boy, and then remembering myself working after school on our farm from even a younger age).

    On a doco I’ve seen primary school age children working in banana fields in the Philippines for 10c a day rather than going to school. And while many farmers will jump on that and say that is the reason they will not be able to compete with imports, I say that is the situation right now and it will never get any better unless we in the west are genuinely prepared to work towards a fairer world.

    • +1 on each statement, particularly:

      “So you should use the time that you give yourself playing the political game to prepare for the likelihood that at some stage the product will be allowed in and you will need to face that competition.”

      and

      “I say that is the situation right now and it will never get any better unless we in the west are genuinely prepared to work towards a fairer world.”

  9. Brett
    I have likewise seen the effects of free trade on people in poor countries in Africa and S America. In many of these countries free trade is not supported but their governments are pressured by the west, Australia included, to sign up them.

    In one country I was in, the PM of a government had stated they would not sign a particular deal only to hear the US ambassador say they would. When I mentioned this to an MP he said ‘We have to do what the US tells us to’.

    As I have said earlier, I don’t belive the economic theory of free trade has properly dealt with the costs of human dislocation and sorrow. Free trade between unequal economies is not equitable. Countries might be unequal because of wage rates or government policies or just because of the economic strength of one country or their businesses against the other.

    If Biosecurity is the last bastion avaialble to us and others under WTO rules then we should use it if at all possible to protect our industries.

    Where is the fairness of us putting our people out of work, closing companies and in the case of agriculture, closing down rural commmunities?

    It seems to me that so many of our economists (including those in Federal treasury) believe in pure theories at all costs and don’t take into account what happens in the real world.

    • It’s pretty simple. We should not be looking to protect “our” people over anybody else. By “our” do you mean Queenslanders as apposed to people from other states, or perhaps people from Brisbane, or maybe even people from one specific suburb???

      When somebody wants to protect Australian jobs what they are really asking people to do is care more about somebody because they happen to live within a certain geographical area. It makes no more sense to ask people to care more about other people from the same country as it does to care more about people from the same suburb, city or state… where do we draw the line… (and of course we know human history is littered by atrocities caused by drawing such a line)…

      I understand that it is human nature to not want the region, even country, in which one lives to go into decline as it raises the probability of life getting more difficult…

      But I see no reason to care more about one person because they reside in Feluga, or Lennox Heads, or Hobart than a young african girl who still must drink unsantised water…

      We should all strive to care equally for all human beings…

      And we will all be the poorer for a move back to protectionism… We must continue to move forward and make sure that the pain of adjustment is spread and that the rewards reach the most needy… For me that is the long and the short of it…

      • Hi Brett,

        I’m glad people like you are still around us. More like you and this planet would be a much nicer place….

      • Brett
        You have a political or social view and I have a different view about the benefit of this economic theory having worked and lived in a number of poor and developing countries and obviously we will not change our views based on our own experiences.

        Anyway differences of opinion make the world interesting.

        • Anton,

          While I personally agree with Brett’s sentiments, I recognise that they are not exactly common. So I will try using more common economic responses to answer your question “Where is the fairness of us putting our people out of work, closing companies and in the case of agriculture, closing down rural commmunities?”

          The answer follows from Brett’s, but on a more local scale. Your question implies that those being put out of work and having their rural communities closed down are less efficient than their foreign competitors. It also implies that other Australians (maybe city workers and those with better education) are more efficient than their overseas competitors. The cost of keeping the inefficient people in their current employment falls on the rest of the country’s workers as the products they would like to consume are more expensive (due to inefficiencies) or not available (due to “biosecurity” furphies). So the question becomes, where in the fairness in forcing efficient workers to subsidise inefficient workers just because those inefficient workers like to live in the countryside and grow particular types of fruit and vegetables? Should I (a boring accountant) also be supported if I have the crazy notion that I really want to move to central Queensland and farm bananas? Would that be fair?

          The ideal solution is instead for those who can change jobs and work in the “efficient” industries to do so as quickly as possible, and for those who can’t (due to education or ability or poverty) to be assisted by the rest of society through our usual system of government taxes and income support.

          This cash-based system is far cleaner and more efficient at supporting the poor than is a trade-distorting system of import restrictions and trade barriers. In particular, it would ensure that the money goes to those who really need it rather than, for example, some super-rich banana-farming millionaire who benefits from the trade rules to the detriment of the country’s consumers.

          As a last point, you might ask what happens if the “inefficient” Australian population is actually more efficient than those foreign workers, but being put out of jobs because of foreign subsidies, foreign disregard for workers’ safety or environmental destruction of the foreign country. The answer is still to buy those cheap goods from the foreigners and to use the money “saved” to improve society – the unemployed locals and (a la Brett) the unhappy foreigners too.