The International Consortium on Agricultural Biotechnology Research (ICABR)


Regulations and Market Segregation of Biotech Crops: Implications for Global Agricultural Trade

Aziz Elbehri,
Economic Research Service,

Thomas Hertel,
Center for Global Analysis Project,
Purdue University

William Lin
Economic Research Service,

This research presents a modeling framework to examine the implications for the emerging global trade patterns resulting from biotechnology-driven market segmentation. The spread of biotechnology has introduced an important new dimension along which consumers can be distinguished – namely their sensitivity to the biotech food products. This has given rise to government biotech regulations including labeling. Depending on how these regulations are implemented, they could potentially become instruments of trade restriction. The private sector has responded to this new environment by initiating demand-driven product segmentation through private labeling and certification. These developments could fundamentally transform the long-standing commodity-based trade system into segmented markets.

The extent to which market segmentation, including identity preservation (IP) will develop depends on the magnitude of segregation costs and the incidence of these costs along the production-processing-consumption chain. The incidence of IP costs depends on the ability of economic agents to substitute away from these products. Consumers with an inelastic demand are likely to get stuck with a significant portion of the costs, as are firms facing very elastic market demand. Should the biotech crops become the majority grown, they become the norm while the non-biotech varieties will become a niche market grown only if purchasers are willing to pay a premium price that covers the additional IP costs.

The prospects of bifurcated, segregated commodity markets imply that traditional trade patterns are likely to be transformed in a way that cannot be determined a priori. The demand-side forces stemming from heterogeneous consumer preferences imply that the sourcing of grain imports might change in order to meet importers’ biotech requirements. On the supply side, biotech-enhanced crops may fundamentally change production structure either by allowing the growth of crops in new areas or by improving yields in existing growing areas. This in turn would significantly affect the net trade position for a particular country, meaning that some net importing countries may turn out to be self-sufficient or even become exporters. Likewise, local opposition to biotech crops may prevent some grain exporting countries (e.g., the European Union) from supplying their traditional markets, which may in turn shift their imports to lower-priced biotech grains.

This paper describes an empirical multi-country, multi-sector model of global trade and production that has been specifically constructed to examine the trade effects of biotech regulation and market segmentation. The model features product differentiation based on country of origin as well as a sector level differentiation between biotech and non-biotech varieties, which substitute imperfectly in consumption. The model is employed to analyze the trade and welfare effects of heterogeneity in biotech acceptance among markets, differential adoption of bio-technology between countries, and potential regional specialization induced by segregation costs. Empirical results are based on a three-region, three-commodity version of this model with particular emphasis on one product, soybeans imported into the Japanese market. Given the uncertainty about key parameters (e.g., elasticity of substitution between biotech and non-biotech soybeans), empirical results are presented in the form of a distribution of outcomes (mean and standard deviation) based on formal systematic sensitivity analysis.

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