Options for managing the infectious animal and plant disease risks of international trade

Abstract

Infectious animal and plant diseases introduced through international trade in goods and services are a classic example of market externality. The potential harm they do is visited on people other than those engaged in their export or import, and is not taken into account in reaching export or import decisions. The use of economic instruments to internalize market externalities has been shown to yield substantial benefits in many areas of economic activity. By confronting decision-makers with the expected damage they cause, instruments of this kind have forced decision-makers to take the wider costs of their actions into account. This paper reviews the arguments for extending the range of instruments currently used to manage trade-related pest and pathogen risks, and assesses the options for deploying new instruments in the existing regulatory environment.

Appendix

To see the trade-offs involved when imports carry an acknowledged disease risk, consider a risk-neutral importer in country k (for k = 1,…,n). The economic problem to be solved is the following:

$$ \underset{M_{ij}^k}{max}{\pi}^k={\displaystyle \sum_i{\displaystyle \sum_j\left[{p}_i^k{M}_{ij}^k\left(1-{\rho}_{ij}^k\left({m}_{ij}^k,{M}_{ij}^k\right)\right)-{z}_{ij}^k{m}_{ij}^k{M}_{ij}^k-{c}_{ij}^k\left({M}_{ij}^k\right)\right]}} $$

That is, the importer chooses how much of commodity i to import from country j, denoted M ^k _ij , to maximize expected profits, π ^k. If there are no disease risks, the importer would expect to sell commodity i at price p ^k _i . If there are disease risks, they would expect reduced revenues, where ρ ^k _ij (⋅) represents the expected rate of loss due to infection. The expected rate of loss might be increasing in import levels and decreasing in inspection levels, m ^k _ij . That is, inspections increase the cost of trade, with z ^k _ij being the unit cost to the importer of inspections of commodity i imported from country j (whether due to inspection fees or the cost of delays). c ^k _ij (M ^k _ij ) is the landed cost of commodity i sourced from country j.

The importers simultaneously select the commodities to import, the suppliers of those commodities, and the volume of imports—given differences in the acknowledged risks associated with different commodities and different suppliers. Each choice M ^k _ij > 0 satisfies the condition

$$ {p}_i^k-{z}_{ij}^k{m}_{ij}^k-\frac{\partial {c}_{ij}^k}{\partial {M}_{ij}^k}={\rho}_{ij}^k\left({m}_{ij}^k,{M}_{ij}^k\right){p}_i^k+\frac{\partial {\rho}_{ij}^k\left({m}_{ij}^k,{M}_{ij}^k\right)}{\partial {M}_{ij}^k}{p}_i^k $$

which balances the marginal net private benefit of imports (the left hand side) with the marginal expected private cost of trade-related disease introduction (the right hand side). The expected marginal private disease cost curve is upward sloping if ∂ρ ^k _ij (m ^k _ij , M ^k _ij )/∂M ^k _ij  > 0 for some M ^k _ij . The privately optimal level of disease risk is then determined by the intersection of the marginal net private benefit and expected marginal disease cost curves.

Given the risk landscape created by private import decisions, the problem confronting local and national animal and plant health inspection authorities in country k is then to design and implement a control strategy that minimizes the expected social cost of disease outbreaks. This includes the external costs of animal and plant disease outbreaks after the pathogen has been imported, the cost of biosecurity measures, and the cost of the inspection and interception strategy applied, as well as the expected losses to importers:

$$ \underset{m_{ij}^k}{ \min }{C}^k={\displaystyle \sum_i{\displaystyle \sum_j\left[{D}_i^k\left({\displaystyle \sum_j{M}_{ij}^k{\tau}_{ij}^k\left({m}_{ij}^k,{M}_{ij}^k\right)}\right)+{p}_i^k{M}_{ij}^k{\rho}_{ij}^k\left({m}_{ij}^k,{M}_{ij}^k\right)+{c}_{ij}^k\left({M}_{ij}^k\right)+{Z}_{ij}^k{m}_{ij}^k{M}_{ij}^k\right]}} $$

where D ^k _i represents the expected external social costs of an outbreak associated with commodity i, τ ^k _ij (m ^k _ij , M ^k _ij ) is the probability that an infection is not detected (with ∂τ ^k _ij /∂m ^k _ij  < 0), and Z ^k _ij is the sum of the private and public cost of inspection.