trade, potato, Agricultural and Food Policy, International Development,

Clark, J. Stephen

Prochazka, Petr

Thibodeau, David R.

Yang, Jinbin

English

Research Papers in Economics

 
 
 
DOES INTERNATIONAL TRUMP 
DOMESTIC TRADE? THE SEED 
POTATO MARKET IN CANADA 
 
 
CATPRN Trade Policy Brief 2008-04 
March 2008 
 
David R. Thibodeau 
Research Assistant 
 
J. Stephen Clark 
Associate Professor 
 
Jinbin Yang 
Research Assistant 
 
Petr Prochazka 
Research Assistant 
 
 
Department of Business and Social Sciences 
Nova Scotia Agricultural College 
 
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 2008-01.  The CATPRN is funded by Agriculture and Agri-
Food Canada but the views expressed in this paper are those of the authors and should not be 
attributed to the funding agency.     1
 
1.   Background 
 
Agricultural commodities and products are an important part of Canadian trade, 
and this trade is always threatened by protectionist interests. Given the potential 
failure of the Doha Development Agenda of multilateral trade negotiations, 
Canada will likely turn increasingly to bilateral trade agreements.  However, the 
US is and will remain Canada’s largest trading partner.  The recent BSE disease 
outbreak in Canada and the 9/11 terrorist attack in the US highlight the increased 
focus paid to food health and safety issues, terrorism  and their relationship to 
agricultural trade.  This has led to increased demand by the US for country of 
origin labelling and increased health and safety testing on food and other raw 
materials entering the US.  There seems to be an assumption that the 
preservation of an international market is always in the interests of Canada. This 
may not be true, especially if the requirements of the international market will 
raise the cost of domestic trade.  The purpose of this study is to address this 
issue with reference to the Canadian seed potato market. 
  
The Canadian seed potato market has come under increasing scrutiny by the US 
and is an example of an industry that is facing greater attention in the US market. 
This increased focus results from three disease outbreaks in the last twenty 
years: 1) the Potato Virus Y  Necrosis  (PVYn) outbreak in Prince Edward Island 
(PEI) between 1989-92); the potato wart outbreak in PEI in 2000; and 3) the 
golden nematode outbreak in Quebec in 2006.  All of these disease outbreaks 
resulted in a temporary ban on seed product entering the US and a strengthening 
of import requirements for seed potatoes after the bans were lifted.  These import 
requirements were relaxed when the disease outbreaks were contained, but the 
US seems to be leaning towards making them permanent. These increased 
requirements include: 1) province of origin labelling (POOL) that will require more 
costly tracing systems than those currently in place; and 2) a ban on bulk 
shipments with a maximum package weight of fifty pounds. 
     
The increased costs of compliance with the US requirements will impose 
additional tracing and packaging (T&P) costs on seed potato producers in 
Canada.  This will not only affect bilateral trade with the US but also domestic 
trade within Canada.  Because effective traceability systems must be in place for 
the sale of seed potatoes to all buyers, additional requirements will result in more 
T&P costs for all seed producers in Canada.  Therefore, it is not clear if the 
preservation of the US market for seed potatoes justifies the increased cost of 
trading within Canada.  This brief presents the results of analysis designed 
measure the costs and benefits associated with compliance to the additional US 
restrictions and compares these with the non-compliance case which would 
result in the loss of the US market.   
 
 
   2
 
2.   Model 
 
The market impacts of increased T&P costs on the Canadian seed potato 
industry are estimated using a single commodity, partial equilibrium trade model 
for the North American seed potato market. The model consists of three 
Canadian regions; Atlantic (New Brunswick and PEI), Central (Quebec and 
Ontario), and Western (Manitoba, Saskatchewan, Alberta and British Columbia). 
Seed potatoes in any region can be sold on the local market, to other domestic 
markets, to the US, or to the rest of the world (ROW). Import demand functions 
for the US and ROW markets are estimated. Supply and demand relationships 
are calculated from elasticity estimates. The data and sources used are 
described in our Commissioned Paper. 
   
3.   Methods 
  
Increased T&P costs are included in the model through a shift in Canadian 
supply curves.  To be effective, traceability systems must be in place for the sale 
of seed potatoes to local, domestic and international buyers and sellers.   
Therefore, additional traceability requirements will result in more costly T&P 
systems for all producers in Canada, not just those producing seed potatoes in 
any particular Province. Shifting the domestic supply curves reflects the added 
costs of traceability systems which will be incurred on all transactions of seed 
potatoes.  Two increased T&P costs are used: 1) a low cost estimate of 
$0.04/cwt; and 2) a high cost estimate of $0.76/cwt. From 2000 to 2006 the 
average price received for seed potatoes in Canada was approximately 
$12.00/cwt. The two traceability systems therefore account for about 0.7% and 
6.3% of the average market price, respectively.     
 
The low cost estimate refers to an increased tracing cost of $0.04/cwt to account 
for a rubber stamp that would need to be added to the package that identifies the 
Province of origin.  Under this estimate, the one-step forward, one-step back 
paper tracing system currently in place would be maintained.  
 
The high cost estimate of $0.76/cwt includes the increased packaging cost plus 
the implementation of a bar code tracing system. This system requires producers 
to implement an electronically based tracing system with additional scanning 
equipment and software.  Excluded from this estimate is the radio frequency 
identification  RFID  tracing technology, which would add an additional $4.00/cwt 
to the T&P costs. 
 
Of the two estimates, the high cost estimate seems most plausible.  The one step 
forward one step back paper based system has been questioned as a system 
that does not respond quickly to disease outbreaks.  The bar code method is 
becoming the new standard for tracing systems.            
   3
 
4.   Results  
 
Table 1 presents the results from the trade model. Three T&P cost estimates are 
examined; 1) the low cost estimate of $0.04/cwt (column 1); 2) the high cost 
estimate of $0.76/cwt (column 3), and 3) an estimate of the traceability cost that 
would result in the same loss to the domestic market as the US seed potato 
market is worth to Canadian seed potato producers and consumers (column 2). 
Consequently, column 2 is an estimate of maximum Canadian seed potato 
producers and consumers would be willing to pay to preserve the US seed potato 
market, assuming the distribution of benefits and costs among Canadian seed 
potato producers and consumers does not matter in such considerations. These 
results are compared against the case where there is a ban on US trade in seed 
potatoes (column 4).  Welfare measures include changes in consumer surplus, 
producer surplus, and total welfare resulting from the three T&P cost estimates, 
and from a ban on US trade. The welfare changes are relative to the baseline 
situation of no additional traceability requirements for Canadian producers.  
 
Table 1.  Estimated Impacts of Increased Tracing and Packaging Costs in 
the Canadian and US Seed Potato Markets (Millions of Canadian Dollars) 
   Estimated Compliance Cost    
Welfare Changes   $0.04/cwt  $0.37/cwt  $0.76/cwt Ban of US Trade 
Canada       
Consumer Surplus  -0.22  -2.07  -4.27  13.10 
Producer Surplus  -0.15  -1.33  -2.73  -16.50 
Net Social Welfare  -0.37  -3.40  -6.99  -3.40 
US        
Net Social Welfare  -0.07  -0.66  -1.34  -9.61 
Notes: cwt = hundredweight (100 lbs, = 45.45 kgs) . Baseline model prices and quantities are an 
average of crop years 1997 to 2001.  All figures are expressed in millions of $CDN.  
  
 
The analysis of this summary presents results of welfare changes associated 
with the US and Canada only, since the focus is on bilateral trade issues 
between the US and Canada.  A more comprehensive analysis that includes 
welfare changes in the ROW and an interregional comparison within Canada is 
provided in our commissioned paper.     
 
The last column of Table 1 estimates the change in welfare resulting from a ban 
on imports into the US if Canada does not comply with the US requirements.   
This would result in the loss of $3.40 million to Canada and $9.61 million to the 
US. This welfare change provides the benchmark case to compare against 
various estimates of increased tracing costs.  
 
The third column estimates the change in welfare resulting from the high 
compliance cost of $0.76/cwt.  This would result in a loss of $6.99 million to 
Canada and $1.34 million to the US.  Therefore, the findings indicate that the   4
high compliance cost scenario results in approximately twice the loss in 
Canadian welfare over the non-compliance case. Therefore, the costs to the 
domestic market do not justify the compliance costs. 
 
The first column of Table 1 estimates the impacts of low T&P costs on seed 
potato market welfare.  In this case, preservation of the seed potato market into 
the US is justified, since the loss is only $0.37 million.  T h i s  f i g u r e  i s  
approximately one-tenth of the $3.4 million Canada would lose if imports of seed 
potatoes into the US were banned due to non-compliance. 
 
The second column estimates the maximum compliance cost that Canada would 
be willing to pay to preserve the US seed potato market.  This is estimated to be 
$0.37/cwt.  From a distribution perspective, this scenario may be preferable to 
the case of a ban, since the losses are spread more equally across consumers 
($2.07 million) and producers ($1.33 million) rather than comparatively large 
consumer gains of $13.10 million and producer losses of $16.50 million resulting 
from a US ban or non-compliance.  
 
Finally, a ban on seed potatoes entering the US results in a net loss to the US of 
$9.61 million.  This loss is incurred by US non-seed potato producers who will no 
longer be able to buy high quality Canadian seed potatoes. It may not be in the 
US potato producers’ interest to force compliance on Canadian seed potato 
producers; and hence the US position may not be a credible. However, the 
interests of US potato producers may be outweighed by those of US seed potato 
producers, who would gain as a result of an import ban.    
 
5.   Conclusions  
 
The results indicate that it may not be in Canada’s interest to comply with 
potential increased import requirements by the US because these requirements 
will affect both domestic and international sales. This conclusion is dependent 
upon the cost scenario faced by producers. Under low cost import requirements 
of $0.04/cwt, the results support preserving the access to the U.S. market. On 
the other hand, the loss of domestic production and trade resulting from 
increased tracing and packaging costs of $0.76/cwt is almost twice the loss that 
would result if the US market was lost due to non-compliance.  Hence, with high 
additional costs for tracing and packaging it may be in Canada’s interest to 
abandon the US market in order to preserve domestic trade.   
 
Furthermore, the results indicate that the US would also suffer to greater extent 
from a ban on imports than Canada, so that the US position may not be a 
credible threat.  Canada produces a high quality seed potato that is not easily 
produced elsewhere.  US producers will suffer losses if they are no longer able to 
buy these high quality Canadian seed potatoes. 
 
 

Does International Trump Domestic Trade? The Seed Potato Market in Canada

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