Benefit-cost analysis of the Australian Quarantine regulations in preventing the entry of White Spot Syndrome Virus

Student: Cynthia Hu

Introduction

Quarantine regulations are designed to protect citizens, animals, plants and the environment from exotic pests and diseases via regulating imports.  It can provide an essential and beneficial screening service in preventing the importation of pests and diseases. However, quarantine restrictions also create trade tensions like many other technical barriers. Therefore, economic welfare gains from importing risky products should be weighed against any expected economic losses associated with those additional potential health consequences.

Background

·        SPS agreement-

As a member of WTO, Australia is bind by the Sanitary and Phytosanitary Agreement (one of the Uraguay Round agreements) signed in 1995. SPS agreement allows members to impose quarantine restriction on imports to the extent necessary to ensure the health of citizens, plants and animals based on scientific evidence.

·        WSSV-History

·        Prawn industry in Australia

·        Inspection and testing-

All imported whole or headless unpeeled prawns are to be inspected and test negative for WSSV to be released on to the Australian market.

Problem identification

The SPS agreement seems to ignore the economic aspects of quarantine policy, especially the costs of these policies to consumers. Quarantine policies are largely science based with little economic consultation.

Objective

To determine whether the Australian Quarantine regulations are economically beneficially in preventing the entry of WSSV.

Research Question

What are the benefits and costs associated with Quarantine regulations in restricting prawn imports?

Does the benefits exceed the costs? (In other words, does the quarantine policy result in a net welfare gain?)

Theoretical framework (see slides for diagrams)

standard comparative-static partial equilibrium model

To keep the analysis simple, it is helpful to begin with several assumptions:

1. One homogeneous product and Pw<Po;
2. Import price, exchange rate and domestic markets for other products are unchanged for all changes in this product’s domestic market;
3. Society is risk-neutral
4. Most cost-effective quarantine regulation method is adopted;
5. Domestic market is perfectly competitive.

3 cases are considered:

Case 1: Moving from no trade to free trade with no disease imported, there is net welfare gain of area ACD (the standard gains-from-trade triangle)

Case 2 considers movement from free trade with no disease import to trade with quarantine regulation. As we can see, this move results in a net welfare loss of area CDEF, which is the cost of regulation.

Case 3 considers a movement from quarantine regulated trade to free trade with the risk of disease entry. If trade is liberalized, and WSSV is imported, the domestic supply curve shifts left due to higher domestic production cost (e.g. increased cost on disease-prevention or control) and loss of production from white spot disease prawn death. The price facing domestic producers and consumers will still be the same. Therefore, the net welfare from liberalizing trade is

EFCD-p (KMCB)

·        ‘p’ is the probability of disease incursion from liberalizing trade

·        EFCD is the costs of quarantine regulation

·        p(KMCB) is the benefits of quarantine regulation (cost avoided)

Area KMCB is the most difficult part of my thesis. It is determined by the extent of disease outbreak if WSSV is imported. (i.e. how much does the domestic supply curve shifts back) The data is not yet available, and Bio-security Australia is still in the risk assessment process. Perhaps the best thing to do in this case is to perform a few sensitivity analyses. In other words, to simulate the costs of disease outbreak using scenarios with different extent of disease outbreak. For instance, what is the cost (how big is area KMCB) if WSSV importation causes 10% (or 20% or 50%) domestic production loss.

Data

Costs:

·        costs of inspection and testing (known)

·        physical storage and interests borne for the period the products are held for inspection and testing (from sample importers)

Benefits (as costs avoided):

·        probability of disease incursion without quarantine regulation (known)

·        size of domestic industry (known)

·        possible extent of disease outbreak (sensitivity analyses)

Expected Results

Since,

• Prawn producers are scattered along the coast, to the worst extent, a WSSV in Australia is only likely to cause regional short term economic loss; and
• Australia’s domestic prawn farming industry is small relative to prawn imports;

It is expected to be a net welfare gain through liberalizing trade.

Implications

• If consumer gains from free trade would outweigh the maximum possible loss to producers, it may be better to allow trade without expensive quarantine regulations
• Similar studies may be performed to test whether our major trading partners have imposed excessive quarantine restrictions on our exporters.
• Potential economic benefits from reform might follow such reviews.