U.S. versus E.U. Biotechnology Regulations and Comparative Advantage: Implications for Future Conflicts and Trade
Gal Hochman, Gordon Rausser, and David Zilberman
April 2009
“Responsible biotechnology is not the enemy; starvation is. Without adequate food supplies at affordable prices, we cannot expect world health or peace.”
[Jimmy Carter, 11 July 1997]
1. Introduction
In 1953, based on X-ray diffraction images taken by Rosalind Franklin, Francis Crick and James D. Watson discovered the first accurate model of DNA structure. This research led to the birth of molecular biology, where methods to purify DNA from organisms and manipulate it in labratories are used. Modern biology and biochemistry make intensive use of these methods to recombinant DNA technology. The genetically modified organisms (GMOs) produced can then be used to produce proteins, i.e., medical research, or be grown in staple crops, i.e., agricultural biotechnology. These techniques are also used in nonfood agricultural production (e.g., biodegradable plastic and biofuel) and for environmental uses.
Whereas all nations endorsed biotechnology applied to medical processes, different nations regulate differently biotechnology applied to crop production, where the regulatory framework ranges from promotional to preventive. These differences lead to differences among nations in utilization of ag biotech. The analysis presented in the paper suggests that these differences are a product of the institutional and the competitive setup.
The balance of our paper is organized into five remaining sections. An overview of ag biotech is presented in section 2. In providing an overview, we discuss the benefits from biotechnology and its impact on both crop production and the environment. We identify two key facets in the development of a rapidly changing science-based industry: innovation and regulation. To this end, section 3 discusses the development of ag biotech in the United States and Europe, and concludes that an educational-industrial complex, together with a clear and efficient mechanism to facilitate technology transfer from the public to the private sector, are crucial for the industry to flourish. Ag biotech regulation in both the European Union (EU) and the United States are described in section 4. Section 5 offers empirical support for the arguments presented in the paper. The implication for policy, emphasizing the importance of relative regulation, regulation that should account for all relevant factors when evaluating new technologies, and the cost of over-regulation, are discussed in section 6.
2. Ag Biotech: An Overview
2.2. The Benefits
Ag biotech applies modern knowledge in molecular and cell biology to produce new and improved varieties of crops. It has transformed the production system of major field crops such as soybeans, corn, cotton, and canola. Providing herbicide tolerance and insect resistance as well as improved product quality, GM crops have experienced a high rate of adoption. Benefits come from increased yields, lower risk, reduced use of chemical pesticides, gains from reduced tillage and other modified production practices, and savings in management, labor, and capital improvement (Kalaitzandonkes and Bijman 2003; Just, Alston, and Zilberman 2006).
Over the last 10 years, U.S. farmers have planted millions of acres of genetically modified (GM) varieties of corn, cotton, and soybeans. In 2004, about 45% of corn, 85% of soybeans, and 76% of cotton planted in the United States were GM varieties. Since much of the corn and soybeans harvested each year are processed into products like corn oil and lecithin, it is not surprising that an estimated 75% of processed food sold in the United States contains ingredients derived from GM crops.
Biotech crops became commercialized in 1996 and, since then, delivered substantial agronomic, environmental, economic, health, and social benefits to farmers, as well as to society at large. For example, Wu et al. (2008) reported that the use of Bt cotton to control cotton bollworm in six northern provinces in China was associated with up to a tenfold suppression of cotton bollwarm infestations in crops other than cotton, which are also hosts of cotton bollworm; these crops include maize, soybean, wheat, peanuts, vegetables, among other crops. Biotech crops not only contribute to the sustainability of low food prices, but also increased income to small and resource-poor farmers, and thus contribute towards alleviation of poverty; case studies include ones done in India, China, South Africa, and the Philippines (James 2008). Ag biotech contributed to the alleviation of poverty and hunger by introducing crops to regions, which in the past could not grow these crops.
Ag biotech introduces an indirect effect on yield by reducing crop losses, and it improved control of damage and diseases. The increase in productivity due to ag biotech contributes to food security. The magnitude, however, is larger in regions where pest pressure is high and pesticide use is low (e.g., tropical developing countries). Although empirical work shows small gains in yield in the United States (0 to 15%), where adoption of Bt varieties has largely led farmers to substitute away from chemicals (Qaim 2009, Qaim et al. 2006, Sadashivappa and Qaim 2008, Carpenter et al. 2002; Falck-Zepeda et al. 2000a, Fernandez-Cornejo and Li 2005, and Naseem and Pray 2004, among others), significant yield gains are reported in Argentina (33%) and in India (37%). Adoption of transgenic varieties also causes less use of substitute inputs such as chemicals. Numerous studies have shown a reduction in pesticide use after the adoption of biotech crops, where in China and Mexico, pesticide use declined by more than half with the adoption of Bt cotton. The adoption of biotech crops may lead to an increase in the use of complementary inputs that have a direct effect on yield, such as fertilizers.
Ag biotech enables us to introduce minor modification to existing varieties, which given the correct institutional setup can help preserve biodiversity. Low transaction costs, sufficient technical capacity, and functioning seed markets may lead to crop biodiversity preservation. This claim is supported by field data. In contrast, conventional breeding usually involves massive genetic changes, while the adjustments to accommodate biodiversity are costly. Whereas conventional breeding leads to wholesale replacement of land races with elite line monocultures, ag biotech can provide precise improvements to traditional land races; it could lead to the reintroduction of new “technologically competitive” land races, namely, ”Jurasic Gardens.”
Ag biotech contributes to the cost-effective production of biofuel by reducing damage and increasing effective yield. It also reduces vulnerability of crops to environmental stress, as well as the crop dependence on fertilizers, pesticides, and other agrochemicals. Ag biotech contributes to sustainable economic and environmental benefits.
Notably, however, the adoption of biotechnology has varied across location, and was initially concentrated in a small number of countries, partly due to regulatory regimes (Zilberman 2006, James 2007). Agricultural biotechnology has recently begun to expand. In 2007, 12 million farmers in 23 countries planted biotech crops in 114.3 million hectares (282.4 million acres). Still, the United States accounted for 50% of biotech production, planting 57.7 million hectares to GM seed (James 2007).
2.2. Gene Transfer
The transfer of genetic material and species among nations is central to the protection of natural resources and human health. Such transfers can be intentional or accidental and can be responsible for significant environmental and health benefits or for costly damage. For instance, in many parts of the world, nutritional needs are primarily met by the cultivation of crops intentionally introduced from other regions (Hoyt 1992). The United States is the leading producer of corn and soybean, crops with origins in Mexico and China, respectively. On the other hand, 80% of endangered species worldwide are threatened by invasive alien species, which are responsible for nearly half of all invertebrate extinctions with known causes (Stein and Flack 1996, Wilcove et al. 1998).
The two most material benefits of international gene and species transfer are their contributions to food provision and chemical pest control reduction. None of the staple crops in North America are indigenous. The grasses that occupy U.S. pastureland were intentionally introduced to provide better livestock grazing. Many of the fruits consumed today are the product of plant breeding with genes from different regions. Genes from Andean corn, carefully bred in Mexico City, ended a century-long effort to improve the nutritional content of corn and yielded modern maize germ plasm. The assault of rusts on cereal crops has led to famine across human history. An intense international effort to develop rust resistance in wheat has yielded a partial solution and perhaps averted untold human misery, and thus the work of transferring rust resistance in rice to other cereals continues. Gene transfer will be integral to developing the agricultural productivity gains necessary to feed a world of 10 billion people.
In addition to improving agricultural production, international species transfer can also benefit the environment by offering alternatives to chemical pest control. The use of predator species to control pest populations is fundamental to biological control, a relatively environmentally friendly practice that uses natural methods to suppress pests. In many cases, predator species are introduced to ecosystems. In other cases, indigenous predator populations are protected to control pest populations. As environmental awareness has grown, demand for chemical-free alternatives to pest control has increased. Alien species can be substitutes to chemical herbicides, fungicides, and pesticides, which can cause wide-ranging changes in ecosystems by affecting nontarget species and polluting water resources. For instance, several parasitoids were successfully introduced in the United States to control the alfalfa weevil, itself an invasive alien species from Europe. Absent biological control, the alfalfa weevil caused damage throughout the United States and induced farmers to spray crops one or more times per year (Stoner 2006). While species introductions can provide a valuable method of pest control, they can also backfire and cause significant damage to ecosystems and native species. In some cases, biological control has led to the extinction of native species, and in at least one case, the extinction of an entire genus (Strong and Pemberton 2000).
Not all species and gene transfers are beneficial, and many can be quite costly. Nonnative species are spreading at faster and faster rates, imposing costs on the global economy on the order of $1.4 trillion every year (Pimentel 2002). Despite the increasing rate of invasions, only 10% of introduced species will become established, and only 10% of those will become pests (Williamson 1996). Regardless, the spread of invasive alien species has altered ecosystems, reduced biodiversity, endangered human health, fouled water sources, destroyed agricultural land, and significantly altered the evolutionary process. These potential costs, combined with the fact that an established invasive species can seldom be eliminated and that the extinction of species threatened by invasives is irreversible, make the control of invasive species one of the most critical issues facing the global community.
2.3. Environmental policy
Nations may attempt to preserve environmental quality at home and abroad by intervening in international trade via two primary mechanisms: enforcing process and production methods (PPM) standards and blocking the importation of invasive species. Under existing trade agreements, PPM standards can be used to influence environmental activities in foreign countries and to reduce the effects of global environmental externalities so long as they do not discriminate against particular producers. Intervention throughout the trade system can reduce the risk of species invasion, though it may be combined with monitoring and control of the invaders.
Cost-benefit analyses are typically used to determine which projects should be pursued. A project should be undertaken if expected present value of a control or environmental project exceeds or equals the expected present value of the cost of the project. A common response by decision makers to the risk of invasion is to ban imports of any commodity that poses such a risk. Such a response ignores the benefits of imports and invasive species themselves, and also ignores less blunt policy options that may be available, such as control or financial incentives.
The determination of optimal policy response for species invasions is difficult for several reasons, not the least of which is the difficulty of assigning value to nonmarketed environmental services. The challenge of determining the full range of effects of invasions has yet to be overcome in the literature. It is compounded by the diverse effects of invasions on other species and the time-dependent magnitude of effects. Evaluation is further hindered by the endogeneity of control dynamics. Risk of invasion and cost of invasion, for instance, are functions of human impacts on ecosystems and human effort to reduce risk (Dalmazzone 2000). In general, lands altered for agriculture or other uses are more susceptible to invasion and support fast growth of invasive species. Mitigation and adaptation efforts, on the other hand, reduce invasion risk.
Besides the endogeneity of risk, the nature of invasion risk poses additional challenges. The probability of invasion is typically low, but the consequences of invasion are quite high. A single invasion can be calamitous. The power of expected utility is diminished with low-probability catastrophic events (Chichilinsky 1998). People treat very unlikely events by either overestimating their probabilities of realization or setting their probabilities to zero. Invasions are also one-time events often independent of history, making estimation of probability density functions impossible (Horan et al. 2002).
Because invasion is uncertain and a low-probability event, and because prevention efforts do not stop invasions with certainty, it may be preferable to expend limited resources on control of invasions once they occur. In some cases, it may be optimal to undertake considerable control effort as soon as an invasion is detected in the hope of exterminating the invasive species before exponential growth begins. In other cases, it may be optimal to try to maintain the invasive species population at an acceptable level over an indefinite period of time.
While economics can address the market failures posed by species invasions, it is important to realize the role of political institutions in determining responses to the problem. The Doha Round was intended to address issues of food safety and the environment. In part, these objectives are necessitated by the development of new technologies, new outbreaks of disease, and consumer concerns. Increasingly, consumers are demanding greater levels of food safety and environmental protection. The growing number of these regulations may be a response to evolving consumer preferences, but they are also prone to political capture and may be used by protectionists to reduce competitive pressure from imports. The principal food safety regulations related to trade involve attempts by importing countries to reduce the risk of adverse health outcomes to acceptable levels. The most important environmental regulations impacting trade include attempts by importing countries to reduce the risk of alien species invasions and demand higher environmental quality provision in source countries through the use PPM standards.