trade health wto policy, Agricultural and Food Policy, Food Consumption/Nutrition/Food Safety, International Relations/Trade, Political Economy,

Kerr, William A.

Zhang, Sidi

English

Research Papers in Economics

 
 
 
Revisiting Barriers to Trade: 
Do Foregone Health Benefits Matter? 
 
 
 
CATPRN Trade Policy Brief 2009-1 
October 2009 
 
 
 
Sidi Zhang 
Research Associate 
Department of Bioresource Policy, Business and Economics 
University of Saskatchewan, Canada 
 
 
William A. Kerr 
Van Vliet Professor 
Department of Bioresource Policy, Business and Economics 
University of Saskatchewan, Canada 
 
 
 
 
http://www.catrade.org 
 
 
 
 
Trade Policy Briefs are short summaries of studies funded by the CATPRN.  As such, the briefs omit many of the 
details and all of the references contained in the longer reports.  This brief is based on CATPRN Working Paper 
2009-3.   Funding for this project was provided by the Canadian Agricultural Trade Policy and Competitiveness 
Research Network which is funded by Agriculture and Agri-Food Canada.  The views in this brief are those of the 
authors and should not be attributed to the funding agencies. 
  
1 
 
1.   Background 
 
It is often forgotten in the midst of the strategic games that comprise negotiations 
pertaining to market access − at either multilateral forums such as the World Trade 
Organization (WTO) or those that take place surrounding the establishment of regional 
trade agreements − that a market access increasing alternative to formal negotiations 
exists. Countries always have the option of unilaterally deciding to reduce their trade 
barriers. Of course, from the perspective of the country seeking improved market 
access, the key is finding a way to convince a trading partner that it is in its own interest 
to unilaterally reduce existing trade barriers. This avenue of increasing market access 
has not received much attention from either trade researchers or governments in recent 
years. 
 
Given that success at the multilateral Doha negotiations is far from assured and 
that, at least for Canada, preferential trade agreements appear unlikely to yield 
significant increases in market access for agricultural products, the unilateral option 
should be explored. As suggested above, the key to inducing unilateral trade 
liberalization by a trading partner is convincing them that it is in their own interest. In 
essence, what is required is to demonstrate that circumstances in a product’s market 
have changed sufficiently that the decision to impose trade barriers warrants revisiting. 
 
 
2.    The Decision to Provide Protection 
 
It is well known that, in most cases, imposing barriers to market access is 
welfare decreasing. Leaving aside any benefits that might accrue to the government 
coffers, this means that the losses in surplus for consumers will be larger than the 
gains reaped by the producers receiving protection from imports. As with many 
decisions examined by economists, the actual process used to arrive at a decision to 
extend protection is not known, but an implicit logic can be applied
1. In the process of 
deciding whether to extend protection the loss of consumer welfare must be traded off 
against the gains to producers. In other words, political decision makers must give a 
lower weighting to consumer’s welfare than to that of producers. For example, a 
decision maker may weigh the welfare of producers at three times that of consumers. 
Economists can estimate this weighting using standard consumer and producer surplus 
calculations. The result of these calculations are often reported in the following fashion: 
for every $1.00 transferred to producers consumers loose $3.00. Thus, if the decision 
to provide protection was made, decision makers must, at a minimum, believe it is 
                                                 
1 For example, the decision taken by a firm to determine its level of output is conceptualized by 
economists as being determined where marginal cost equals marginal revenue – the profit maximizing 
output. Marginal costs and marginal revenues are not calculated by firms and they are not available to 
decision makers. Instead, economists assume that business decision makers use rules of thumb that 
approximate profit maximization – and that the errors are sufficiently small to ignore. Of course, where 
competitive pressure exists, consistently bad decisions will lead to bankruptcy or the inept management 
being replaced.    
2 
 
appropriate to value producer gains at three times consumer losses – but it could be 
higher (i.e. the decision to extend protection would also be made if they believe it is 
appropriate to value producer gains at four times consumer losses). 
 
At some point, however, the ratio of consumer losses to producer gains should 
become high enough that the decision would be not to provide producers with 
protection. Further, if the situation in the market evolved in a way that the losses 
increased relative the benefits, then a previous decision to provide protection might be 
reversed. In other words, the country would unilaterally remove/reduce its trade 
barriers. As suggested above, this potential area of trade policy analysis has received 
little (maybe no) attention in the recent (and maybe distant) past. Hence, a most basic 
policy question arises: Is this an avenue of trade policy research that warrants 
increased research attention? Central to that question is whether markets have evolved 
in ways that would alter the ratio of losses to benefits to a sufficient degree to lead to a 
removal of protection. While it may not be possible to fully answer that question, if 
markets have evolved in ways that suggest the change in the ratio is likely to be trivial, 
then it may suggest that this is not a productive avenue for further research. 
 
Most of the trade barriers in agriculture are not new. They have been, in many 
cases, in existence for decades. As a result, the rationale for granting the protection 
and the kinds of tradeoffs that were made when the trade barriers were put in place are 
lost in the mists of time. Hence, simply providing information to decision makers on the 
costs versus benefits of existing levels of protection may be sufficient to open a debate 
regarding the desirability of continuing protection. 
 
 
3.   Functional Foods 
 
One segment of agricultural markets that has been evolving rapidly is functional 
foods. While no consensus has been reached on an exact definition of functional foods, 
in general, functional foods are those that impart benefits that exceed the benefits that 
arise solely from the nutrition the food provides – in most cases the extra-to-nutrition 
benefit are expected to arise from improved health
2.  The market for functional foods is 
expanding rapidly and many countries, including Canada, believe that this will be a 
major future growth area for the agricultural sector.  International market access for 
functional foods is often limited by trade barriers. In most cases these trade barriers pre-
date the functional attribute of the food product being developed or recognized. Thus, 
functional foods appear to be a good candidate to explore the changing impact of trade 
barriers on the trade off between those who benefit and those who loose. 
 
The costs associated with trade barriers can be expected to rise with the 
development of functional foods because consumer’s willingness to pay for a food 
product should rise due to the additional health benefits they receive. In addition, there 
                                                 
2 Functional foods differ from nutraceuticals – which also are expected to enhance health – in that they 
are consumed as food while nutraceuticals are consumed in the form of tablets, liquids, powders, etc.   
3 
 
may be considerable benefits to society in lower health care costs and because 
healthier individuals use the heath case system less – an indirect benefit. For example, 
if a functional food reduces the probability of an individual having a heart attack then 
they are likely to value that food more highly – a direct benefit – and if less heart attacks 
occur then there will be savings on heath care costs – an indirect benefit. Trade barriers 
raise the cost of functional foods leading to less consumption – and thus direct benefits 
foregone – and more sick people using the heath care system. This research had two 
objectives: (1) to provide a preliminary investigation into how the additional benefits 
expected from functional foods can be incorporated into trade models and; (2) to 
provide case studies to examine whether the increased benefits forgone are of sufficient 
magnitude to cause policy makers to revisit the decision to impose trade barriers. 
 
A range of functional foods exist. Canola oil was chosen for the case studies 
because it is a major Canadian agricultural product produced on an export basis. 
According to the United States Food and Drug Administration (FDA) (2006): 
 
Limited and not conclusive scientific evidence suggests that eating about 1½ 
tablespoons (19 grams) of canola oil daily may reduce the risk of coronary heart 
disease due to the unsaturated fat content in canola oil. (n.p.) 
 
Thus, Canola oil is seen as a healthier alternative to a number of important vegetable 
oils due to its trans fat-free and very low, or even zero, saturated fat but high—almost 
60%—monounsaturated oil content and a beneficial omega-3 fatty acids profile. 
Saturated fat has been linked to rising levels of bad low-density lipoprotein (LDL) 
cholesterol in the blood and increased risk of coronary heart disease (CHD). 
Monounsaturated fat is helpful in reducing the risk of coronary heart disease and 
controlling blood glucose by lowering bad LDL cholesterol in the blood. Omega-3 fats 
are essential for a healthy daily diet and it helps protect against heart attacks and 
strokes. Thus, canola oil might be a better choice for avoiding trans fat in deep fried and 
baked foods and is becoming a popular oil of choice in restaurants and commercial food 
products. 
 
 
4.   Method 
 
The standard partial equilibrium trade model was modified to reflect the changes 
that would arise from a normal food consumed solely because of its nutritional value 
becoming a functional food. Trade barriers were then imposed. This exercise produced 
four distinct cases which had considerably different outcomes. The four case were: (1) 
supply available from domestic production or imports and a cost increasing trade barrier 
(such as a tariff); (2) supply available from domestic production or imports and an import 
prohibition; (3) supply only available from imports and a cost increasing trade barrier, 
and; (4) supply available only from imports and an import prohibition. The results for 
each of these cases were derived for a normal food and a functional food and then 
compared.  
4 
 
 
To determine the degree to which the ratio of the cost of trade barriers to the 
benefits of trade barriers would be affected, two case studies of canola oil import 
markets were undertaken. The first case examined the Chinese import market – 
characterized by supply being available from both domestic sources and imports and a 
cost increasing import barrier. The second case examined the import market in the 
United Kingdom which is characterized by supply being available from both domestic 
sources and imports and an import prohibition.  
 
In both case studies estimates of consumer and producer surplus were made 
using standard methodologies and published data on trade volumes, domestic 
consumption and production, elasticities of supply and demand, and in the case of 
China, tariffs. In the instances when the forgone benefits of functional foods were being 
calculated, estimates of the foregone saving in healthcare costs were calculated and 
added to the forgone direct benefits. The calculation of the foregone saving in health 
care costs involved the adaptation of the cost-of-illness (COI) model used in health 
economics. Sensitivity analysis was conducted for both the trade models and the COI 
calculations. As a result, low, medium and high cost estimates were obtained for both 
the Chinese case study and the case study for the United Kingdom. The results are 
summarized in Table 1. 
 
For example, in the medium Chinese case the cost to society of transferring 
$1.00 of protectionist benefit to producers rose from $1.11 when Canola oil was 
assumed to have no functional food attributes to $1.56 when functional food health 
benefits are included. This represents a 40 percent increase. The results for the United 
Kingdom are higher than those for China, as one would expect, given that an import ban 
is a much more trade restricting policy than a tariff. 
  
Table 1 – Societal Cost of Transferring $1.00 of Protection to Producers 
China     
  No Functional 
Food Benefit 
With Functional 
Food Benefit 
Percent Change 
Low 1.11 1.22  9 
Medium 1.11  1.56  40 
High 1.11 1.67  50 
United Kingdom     
Low 1.26 1.72  36 
Medium 1.11  2.63  236 
High 1.05 3.49 332 
  
5 
 
5.   Conclusion 
 
The results suggest that the inclusion of the expected benefits of functional foods 
in the estimation of the social cost of protection yields more than trivial changes – 
changes that might cause decision makers to revisit their decision to extend protection 
to domestic industries. Of course, the results cannot be generalized but they do suggest 
that this is a valid avenue for further research in trade policy. Further, it cannot be 
implied from the results that politicians in countries which engage in protectionism will 
revisit the decision to provide protection. For that, far more information is required on 
how decisions regarding protection are made. 
 
Given the slow pace of multilateral negotiations pertaining to market access, it 
may be wise to explore alternative methods of achieving the goal of better access for 
Canadian agri-food products. Given that Canada’s trading partners do have the right to 
unilaterally lower trade barriers, providing their decision makers with better information 
on the cost to their societies of existing protectionist measures can do little harm. In the 
case of functional foods, the information may also be picked up by health care 
advocates that are willing to lobby their governments to improve market access. The 
results have been reported as ratios to illustrate the degree of change that can arise 
from the inclusion of foregone health benefits. Political decision makers and lobbyists in 
importing countries may find alternative ways of reporting the results; for example 
millions of dollars, more useful. Again, more research into the appropriate form of 
information dissemination may be appropriate.           
 
 
References 
 
Food and Drug Administration (FDA). 2006.  Qualified Health Claims: Letter of 
Enforcement Discretion - Unsaturated Fatty Acids from Canola Oil and Reduced 
Risk of Coronary Heart Disease.  (Docket No. 2006Q-0091) CFSAN/Office of 
Nutritional Products, Labeling, and Dietary Supplements, October 6.  
 
    
 
 

Qualified Health Claims: Letter of Enforcement Discretion - Unsaturated Fatty Acids from Canola Oil and Reduced Risk of Coronary Heart Disease. (Docket No.

Revisiting Barriers to Trade: Do Foregone Health Benefits Matter?

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