Essays on the political economy of trade and regulation: biotechnology and conservation

Economics and politics interact. Political and economic forces influence the choices of policy instruments, the distribution of economic rent, and the distribution of political power. Politicians balance the interaction of economic rents and political interests in the policy-making process. Some policies aim to correct market failures, others aim to pursue politicians’ own interests, some are a combination. I discuss two policies in this thesis, the regulation of genetically modified (GM) food crops, and forest conservation policy. The relationship between GM food technology and food supply is a dilemma for policymakers in many countries. Theoretical and empirical studies show that GM food technology helps increase crop yields, reduces pesticide and fertilizer use, and generates economic, environmental, and health benefits. However, many consumers are concerned about the potential risks from using the technology and treat GM and non-GM food products as different products. The differences in public attitude towards GM food technology influence GM food policy-making. Many scientists believe that the public attitude is not purely based on scientific evidence, but is influenced by different interest groups. The two major interest groups involved in the GM food policy debate can be clustered into the GM food-supporting and non-GM food-supporting groups, depending on their attitude towards the GM food technology. The GM food group points to the high yields, environmental benefits, and potential for sustainable agricultural production. The non-GM food group, however, emphasizes the unconfirmed potential risks of genetic modification to human health and the environment. There are two major GM food policy regimes: the EU Member States have very strict GM food regulations, whereas the US has relatively lenient GM food policy regulations with respect to cultivation and imports. A stricter GM food policy would generate high welfare costs to countries that face food security issues, and possibly reduce a country's food self-sufficiency. Also, different GM food policy regulations give rise to different national standards, differentiate agricultural trade markets, and result in trade disputes. Environmental policy regulates economic activity. To balance economic interests and environmental benefits, conservation policy is often needed for the protection of natural resources. Forests as a renewable resource provide both economic and environmental benefits. Forest conservation policy often requires governments to settle the trade-off between interests of the timber industry and the environmental benefit of maintaining parts of the forests. Political conflicts may exist between a profit-maximizing timber industry lobby and an environmental lobby. An industry-biased conservation policy could cause faster exploitation of this domestic resource, while a stricter protection of the resource could result in profit reduction for the timber industry, but increase environmental benefits. I discuss the relationships between food security and GM food policy regulations in Chapter 2. I develop a standard political economy model of GM food policy regulations and model GM food policy as the outcome of a GM-versus-non-GM food lobbying game. I find that stricter GM food policy has negative effects on three aspects of food security: availability, access, and utilization. Politically determined GM food policy has a negative effect on the food security situation if lobbying is costly. I also discuss the situation in which the policymaker weighs the GM food and non-GM food lobbies’ contributions differently, depending on whether the food security target has been reached or not. The GM food lobby becomes more efficient in the political game than the non-GM food group when the country commits itself to improving its food security. If the non-GM food lobby is large and strong, it will make high lobbying contributions for stricter GM food policy, even when the country is food-insecure. Chapter 3 studies the relationship between politically determined GM food policy and domestic food self-sufficiency. I first develop a theoretical model of a small-open economy and investigate the GM food policy. The government maximizes its own payoff, which is the weighted sum of social welfare and lobbying contributions. I take maize production in South Africa as an example for illustrating the politically influenced self-sufficiency rate. I find that the food self-sufficiency rate will decrease with an increase in GM food policy regulation cost. I also specify the mechanism of policy change in this small open economy case. I include changes in the lobby groups' sizes in the model, and assess the effect on food self-sufficiency. In the case of a large non-GM food group, the government payoff does not monotonically decrease when the government weighs social welfare at a low level in the political process. The GM food policy can be strict in this case. In addition, the food self-sufficiency rate can be high when a large non-GM food group is present and the government places a low weight on social welfare. Most importantly, this case demonstrates that the food self-sufficiency rate is not always a good indicator of food availability. In some cases, the food self-sufficiency rate can increase, while food availability may decrease. In Chapter 4, given the two different GM food policy regimes and in light of the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership negotiations, I discuss a bilateral negotiation regarding GM food trade policies. Two countries pursue an increase in trade volume for both GM and non-GM food products. With a high GM food non-tariff barrier (NTB) on the foreign GM food imports and a relatively high non-GM food NTB in the foreign country, I find that the Nash bargaining solution lies between the two countries’ optimal unilateral stances for a successful negotiation. Simulation results show that the foreign country would not like to reduce much of its non-GM food NTB in the negotiation. The level of the non-GM food NTB only influences the absolute payoffs of the domestic and foreign governments, but not the negotiation results. The outcome of the negotiation only depends on the level of GM food NTB reduction in the domestic country. In Chapter 5, I discuss the effects of international trade on forest conservation and welfare in a two-country model with an industry-biased policymaker and Cournot-competing firms. I find that opening to trade increases the harvest taxes compared to the taxes under autarky. The tax increase is large enough to decrease the production levels, which increases the conservation level. In addition, the numerical simulation illustrates that the industry bias parameter monotonically decreases the output and increases the welfare gains from trade. As a result, industry-biased policymaking does not necessarily have to increase the environmental costs when opening to trade. Three main conclusions can be drawn from this thesis. First, strict biotechnology regulations decrease the level of global food security, especially in developing countries. Second, in the GM food trade negotiations, the country that has high trade barriers has to make concessions for a successful trade agreement. Third, second-best conservation policies can still protect the environment in an open economy. This thesis does not provide solutions to either the GM-versus-non-GM or the environmental-versus-trade debates. It does, however, offer some insights into the politically determined GM food and conservation policy-making and the impact of lobbying.