Animal Disease Outbreaks and Their Impacts on Trade
The major events that shaped the world meat market outcomes in the second half of the last decade can be categorized into three areas. The first is the change in trade policy regimes ushered in by the 1995 Uruguay Round Agreement in Agriculture (URAA). The second is the macroeconomic crises in Asia and the Former Soviet Union (FSU) in 1998. The third is a series of animal disease outbreaks in major livestock producing regions in Asia and the European Union (EU). This article examines the trade impacts of three major disease outbreaks as they were influenced by particular trade regimes governing affected markets.
Bovine Spongiform Encephalopathy in the European Union
Bovine Spongiform Encephalopathy (BSE) cases were first recognized in 1986, and incidences of the disease peaked in 1992 at 37,299 confirmed cases in at least six EU member countries, including the Union’s leading beef exporters. On March 20, 1996, the United Kingdom’s Ministry of Agriculture, Forestry and Fisheries BSE Advisory Committee announced that, “although there is no direct evidence of a link, on current data and in the absence of any credible alternative, the most likely explanation at present is that cases of Creutzfeldt-Jackob Disease (CJD) are linked to exposure to BSE before the introduction of the Specified Bovine Offal (SBO) ban in 1989.” Prompted by the possibility of this link, exports from the United Kingdom (UK) and other affected member states were banned within the EU, and many beef importers also unilaterally imposed a ban of beef imports from affected EU member countries.
The European Union beef exports average for 1995-1996 were 12.86 percent lower than the average level over the previous two years. However, a large part of the reduction in beef exports was a consequence of the limits on subsidized exports negotiated under the URAA. The decline in EU beef exports to nonmember countries from 1.2 million metric tons (mmt) in 1994 to 1.07 mmt in 1996 was primarily an adjustment to the URAA maximum quantity of subsidized exports, which was 1.07 mmt in 1996. In effect, the BSE did not significantly affect the excess supply of beef from the EU because the General Agreement on Tariffs and Trade (GATT) limit was the more binding constraint. Moreover, beef supply from EU countries with fewer cases of BSE was still available.
However, world beef trade was directly affected by the demand response to concerns about the safety of consuming beef. For example, household consumption surveys in Japan during the same period reported a drop in consumption by 14 percent, while hotel and restaurant industry (HRI) sales dropped by 15 to 20 percent. The world price of beef dropped by 9.56 percent in response to the beef demand shock. With the decline in EU beef exports and recovery in beef demand, some countries increased their exports, including Argentina, Canada, New Zealand, and the United States. The BSE risk levels of these gainers are I or II, which means that BSE is highly unlikely, and unlikely but not excluded, respectively.
Classical Swine Fever in the EU
Classical swine fever (CSF) was detected in the Netherlands on February 4, 1997. The disease also impacted Belgium, Germany, Spain, and Italy. Although the CSF outbreak did not affect world trade significantly, because the Netherlands is not a major exporter of pork outside the EU, it did affect trade within the EU. The Netherlands was the leading exporter of live swine to most EU member countries, particularly Germany and Spain for feeder pigs and slaughter ready pigs. It also had significant pork exports to EU member countries. As swine inventories declined in the Netherlands other member states increased their swine stock, virtually eliminating any negative impact of the disease on pork production in the EU as a whole. Consequently, when the Netherlands recovered from the outbreak in 1998, total EU pork production was up by 8.2 percent. EU’s quick recovery from CSF and it’s ability to subsidize pork exports prevented any decline in EU exports as a result of the disease outbreak.
On August 4, 2000, CSF was reported in the UK, the first incidence in 14 years. Although the UK is not a major pork exporter, the successive and widespread outbreaks demonstrate that CSF is endemic in Europe. Denmark, which accounts for close to one-half of the EU’s pork exports to nonmember countries (particularly to Japan), is CSF-free. Its last case of CSF was in 1933. However, Denmark reported the first case of BSE in a native animal in February 2000. The possibility of a CSF outbreak in Denmark is particularly risky because Japan has openly declared its goal of becoming CSF-free by 1999. Any outbreak of CSF in Denmark will be damaging to the EU’s pork exports because Japan accounts for 17 percent of EU exports; moreover, EU exports to Japan are not subsidized.
Foot-and-Mouth Disease in Asia
Before the 1997 outbreak, Japan, Korea, and Taiwan were foot-and-mouth disease (FMD)-free with the last FMD cases reported in 1908 for Japan, 1934 for Korea, and 1930 for Taiwan. However, suspected illegal movement of infected animals and use of infected feed stuffs caused a major FMD outbreak in Taiwan in 1997, and smaller outbreaks in Japan and Korea in 2000. These outbreaks caused major changes in trade.
The trade impact of the Taiwan FMD outbreak is dramatic compared to other recent disease outbreaks. After sustained growth throughout most of the 1990s, Taiwan’s pork production declined by 19 percent in 1997 and by another 13 percent in 1998. Total world pork imports declined by 6.19 percent in 1997, primarily from the lack of available pork supply in the world. However, the bigger impact of the FMD outbreak was the reallocation of market shares among suppliers to the Japanese pork import market, the largest in the world.
The pork import market share in Japan has never been allocated based on competitive advantage because of its protection structure. For example, over the last five years, Taiwan pork prices averaged 1.93 times higher than U.S. pork prices, but in the same period Taiwan dominated the pork import market in Japan in both the fresh-chilled and frozen pork import categories. At its peak in 1992, Taiwan’s share was 68 percent of the fresh-chilled pork market and 40 percent of the frozen pork market in 1995. South Korea, with pork prices two times higher than the United States, gained significant market share in the pork import market in Japan when Taiwan was banned because of its FMD outbreak. Just this year, however, South Korea was also banned from exporting pork to Japan, as it suffered from an FMD outbreak in dairy cattle located in its major swine producing region.
It took nine years to negotiate the URAA, which included provisions for Japan to alter its import regime to improve access of imported pork. But these changes brought about a minimal impact in the allocation of market shares in Japan’s pork import market. Figure 1 shows that Taiwan’s share declined only 2.11 percent following the implementation of the URAA, while the share of North American exporters increased only 6.07 percent. During the same period, Korea increased its share 1.52 percent. In contrast, a single outbreak of FMD literally wiped out Taiwan’s share and increased the share of North American exporters by 15 percent. During the same period, Korea’s share increased 10.38 percent. Despite being a high cost producer, Korea gained significant market share after Taiwan was banned in Japan. However, another reallocation of share occurred when Korea was hit by an FMD outbreak. Korea basically lost all of its earlier gains in market share, while North America continued to increase its share an additional 11.23 percent.
Conclusion and Implications to North American Meat Exporters
The BSE, CSF, and FMD outbreaks showcase the differential trade impacts of diseases, due to particular trade policy regimes in affected countries. In the case of BSE, the supply side impact from the EU was not as binding as the GATT limit on maximum subsidized exports. Most of the trade impacts were on the demand side, as consumers shifted to other meats because of concerns about the safety of beef. The CSF outbreak in the EU did not significantly impact world pork trade because other EU countries more than compensated for the lost production in the Netherlands. However, the FMD outbreaks in Taiwan and South Korea had a major impact on trade. The more efficient reallocation of pork imports into the Japanese market that was only marginally achieved by URAA was swiftly accomplished by FMD outbreaks in Taiwan and Korea.
North America is already competitive in livestock production because of its abundant feed resources, efficient processing facilities, good storage and transport infrastructure, and advanced production technology. On top of this, North America has a low disease load in BSE, CSF, and FMD, and excellent veterinary services. With further growth in market access uncertain because of the slow progress in the current World Trade Organization (WTO) negotiations, North American meat exporters may continue to penetrate new markets if it can successfully address some remaining sanitary barriers, such as Procine Respiratory and Reproductive Syndrome (PPRS).