An Economic Theory of the SPS Agreement

Abstract

Sanitary and phytosanitary (SPS) measures are important policy instruments to regulate food safety and to protect the domestic ecosystem from biological invasions. However, these measures may also be used to protect domestic producers from international competition. The World Trade Organization's (WTO) Agreement on the Application of Sanitary and Phytosanitary Measures (the SPS Agreement) was established in 1995 to prevent member countries from using SPS measures discretionarily and arbitrarily. Whereas the SPS Agreement is mainly based on the risk analysis approach, economists have criticized it for its lacking economic considerations in regulating SPS measures. Despite these criticisms, I show that the SPS Agreement would contribute to establishing economically sound discipline for SPS measures by reducing the scope of the use of SPS measures for disguised protectionist purposes. However, it is not entirely free from protectionist use of SPS measures. Potential problems also arise from scientific uncertainty.