Trade Barriers and Functional Foods What are the Forgone Benefits?

Transcription

1 Trde Brriers nd Functionl Foods Wht re the Forgone Benefits? A Thesis Submitted to the College of Grdute Studies nd Reserch in Prtil Fulfillment of the Requirements for the Degree of Mster of Science in the Deprtment of Bioresource Policy, Business nd Economics University of Ssktchewn Ssktoon By Sidi Zhng Copyright Sidi Zhng, Mrch All rights reserved.

2 PERMISSION TO USE The uthor hs greed tht the University of Ssktchewn nd its librry my mke this thesis freely vilble for inspection. The uthor further hs greed tht permission for extensive copying of this thesis for scholrly purposes my be grnted by the professor or professors who supervised the thesis work or, in their bsence, by the Hed of the Deprtment or the Den of the College in which this thesis ws done. It is understood tht due recognition will be given to me nd the University of Ssktchewn in ny scholrly use tht my be mde of ny mteril in this thesis. Requests for permission to mke use of or to copy the mteril in this thesis in whole or in prt should be ddressed to: Hed of the Deprtment of Bioresource Policy, Business nd Economics University of Ssktchewn 51 Cmpus Drive Ssktoon, Ssktchewn 57N 5A8 i

3 ABSTRACT Functionl foods provide positive externlity benefits to society through the promotion of helth benefits tht lower the potentil of illness for individul consumer nd reduce the helth cre costs tht re borne by governments. With strong mrket growth nd considerble potentil socil benefits, functionl foods pper to be n importnt re for future expnsion in the globl food mrket. However, pre-existing trde brriers to interntionl commence reduce, or sometimes eliminte, trde in functionl foods. Given tht there re benefits ssocited with helth-giving ttributes from functionl foods, retining trde restrictions on functionl foods my led to dditionl forgone benefits. To exmine the effects of the positive helth benefits rising from functionl foods when pre-existing trde restrictions re in plce, comprtive-sttic prtil equilibrium trde model is modified. Four cses pertining to import restrictions on functionl foods re exmined in the trde model bsed on two ctegories: trde policies nd bility to produce. The theoreticl frmework provides n illustrtion of the potentil welfre benefits forgone from the existence of trde brriers when trditionl food becomes functionl food. Empiricl cse studies exmined cnol oil s functionl food. The vlue of the benefits foregone from mintining trde brriers to cnol oil in two countries: Chin nd United Kingdom were estimted. In ddition, cost of illness model ws used to estimte helth cre svings. The finl rtio suggests tht existing trde policies directly result in non-trivil costs to society.. As result, current trde regultions might be re-evluted by policy mkers to better reflect the evolving mrkets for functionl foods. ii

4 ACKNOWLEGEMENTS This thesis represents my two nd hlf yers of study nd reserch in Cnd. I would like to thnk Dr. Willim A. Kerr who not only for his instruction, supporting nd guidnce during this reserch project s my supervisor but lso for his inspirtion, encourgement nd ptience throughout my whole study in Cnd s kind nd helpful friend. Thnks for his insistence nd strong fith in my cpbilities in study nd reserch. I would lso like to extend my pprecition to my committee members, Jill E. Hobbs nd Peter W.B. Phillips for their prticiption nd suggestions. I m lso grteful to Brin T. Oleson for serving s externl exminer nd for his vluble suggestions provided during the defence. I would lso like to thnk Cndin Agriculturl Trde Policy Reserch Network for their funding supports during my thesis composition. I would lso ddress my thnks to the entire fculty, stff nd grdute students in the deprtment of bioresource policy, business nd economics for their generous help nd supports. I m gretly thnkful to my prents who rised me up in wrm nd peceful tmosphere tht full of trusts nd encourgements. I deeply thnk my fther, Heng Zhng who sets up n excellent model during my eduction nd lwys supports my study with infinite ptience nd help. I eternlly thnk my mother, Weike Zhng who gve me chnce to see the whole world nd provide ny support whenever I need. I m lso thnkful to my boyfriend, Li Lin for his encourgement nd understnding throughout my mster progrm. Thnks for their forever love long with me. iii

5 TABLE OF CONTENTS PERMISSION TO USE... i ABSTRACT... ii ACKNOWLEGEMENTS...iii CHAPTER 1: INTRODUCTION TO FUNCTIONAL FOODS INTRODUCTION OVERVIEW OF FUNCTIONAL FOOD PROBLEM STATEMENT OBJECTIVE THESIS OUTLINE... 3 CHAPTER 2: LITERATURE REVIEW FUNCTIONAL FOOD Definitions nd distinctions interntionlly Helth benefits The functionl food industry VALUING HEALTH BENEFITS Cost-of -illness model Cost-of-illness n exmple Assessments of the Cost-of -illness model CHAPTER 3: MODELLING TRADE AND FUNCTIONAL FOODS BASIC MODEL FOUR CASES FOR TRADE BARRIERS APPLIED TO FUNCTIONAL FOODS CASE CASE CASE CASE HEALTH CARE COSTS SUMMARY CHAPTER 4: CHINESE CASE STUDY INTRODUCTION TRANS FAT AND HEALTH SELECTED PRODUCT Helthy choice-cnol oil Cnol/Rpeseed oil mrket iv

6 4.4 CHINESE CASE STUDY The Chinese vegetble oil mrket Cse study clcultions CHAPTER 5: UNITED KINGDOM (UK) CASE STUDY THE EU VEGETABLE OILS MARKET GMO BAN MODELLING THE UK RAPESEED OIL MARKET CASE CALCULATION Trde effects clcultion Estimting the potentil helth cre cost svings for the UK cse Ssudy Finl rtio clcultion CHAPTER 6: SUMMARY AND CONCLUSIONS SUMMARY LIMITATION OF THE RESEARCH SUGGESTIONS FOR FURTHER RESEARCH CONCLUSION LIST OF REFERENCE APPENDIX 1:EXAMPLES OF FUNCTIONAL COMPONENTS APPENDIX 2: CANOLA/RAPESEED OIL SHIFTS IN DEMAND APPENDIX 3: ESTIMATION AND CALCULATIONS FOR THE SAVINGS IN HEALTH COSTS APPENDIX 4: ADJUSTMENT ON UK CASE STUDY v

7 LIST OF FIGURES FIGURE 3.1 BASIC TRADE MODEL FIGURE 3.2 NON-TARIFF BARRIERS EFFECTS FIGURE 3.3 CASE 1 DOMESTIC AND IMPORT SUPPLY, COST INCREASING REGULATION FIGURE 3.4 CASE 2 DOMESTIC AND IMPORT SUPPLY, TRADE PROHIBITING REGULATION FIGURE 3.5 CASE 3 IMPORT SUPPLY ONLY, COST INCREASING REGULATION FIGURE 3.6 CASE 4 IMPORT SUPPLY ONLY, TRADE PROHIBITING REGULATION FIGURE 4.1 CASE 1 DOMESTIC AND IMPORT SUPPLY WITH TARIFF IN CHINA FIGURE 4.2 STEPS OF COI MODEL ANALYSIS FIGURE 5.1 CASE 2 DOMESTIC AND IMPORT SUPPLY, TRADE PROHIBITING REGULATION IN THE U.K vi

8 LIST OF TABLES TABLE 3.1 FOUR CASES FOR TRADE POLICY AND THE SUPPLY OF FUNCTIONAL FOODS. 22 TABLE 4.1 MARKET DATA OF CANOLA/RAPESEED OIL IN CHINA TABLE 4.2 SENSITIVITY ANALYSIS FOR ELASTICITY IN CHINESE CASE STUDY TABLE 4.3 TRADE EFFECTS CALCULATION IN CHINESE CASE STUDY TABLE 4.4 TRANS FATTY INTAKE REDUCTION IN CHINA DUE TO TRANS-FAT-FREE CANOLA OIL TABLE 4.5 POTENTIAL HEALTH CARE SAVINGS ESTIMATED IN CHINA TABLE 4.6 FINAL RATIO CALCULATION TABLE 5.1 EU RAPESEED PRODUCTS IMPORTS FROM AUSTRALIA TABLE 5.2 EU - SUPPLY AND DISPOSAL OF RAPESEED OIL TABLE 5.3 MARKET DATA OF CANOLA/RAPESEED OIL IN THE UK (2006) TABLE 5.4 SENSITIVITY ANALYSIS FOR ELASTICITY IN THE UK CASE STUDY TABLE 5.5 TRADE EFFECTS CALCULATION IN THE UK CASE STUDY TABLE 5.6 TRANS FATTY INTAKE REDUCTION IN THE UK DUE TO TRANS-FAT-FREE CANOLA OIL TABLE 5.7 POTENTIAL HEALTH-CARE SAVINGS ESTIMATED IN THE U.K TABLE 5.8 FINAL RATIO CALCULATION IN THE U.K CASE STUDY vii

9 TABLE 6.1 FINAL RATIO RESULTS FROM CASE STUDIES TABLE A1. EXAMPLES OF FUNCTIONAL FOODS AND ASSOCIATED HEALTH BENEFITS. 103 TABLE A2. UNITED KINGDOM CONSUMPTION OF VEGETABLE OILS AND FATS TABLE A 3.1 ESTIMATED TRANS FAT CONSUMPTION IN CHINA TABLE A 3.2 HCS RATE CALCULATION IN CHINESE CASE STUDY TABLE A4.1 POTENTIAL HEALTH-CARE SAVINGS ESTIMATED IN THE U.K TABLE A4.2 FINAL RATIO CALCULATION IN THE U.K CASE STUDY viii

10 Chpter 1: Introduction to functionl foods 1.1 Introduction Let food be your medicine nd medicine be your food. Hippocrtes, 400 BC 1 The presence in the mrket of foods enriched to improve humn helth nd/or tht nturlly promoted good helth is not new phenomenon. In recent yers, however, food consumption for nturl purposes is incresingly comingled with desire to improve helth nd well-being (Niv nd Mäkelä, 2007). Consumers hve expnded their interest in food beyond it being solely source of nutrition to it being source of dditionl helth benefits (El Hfid, 2004). Incresing incomes hve mde it possible for consumers to think more bout their broder well-being nd they hve become interested s to whether food cn contribute to tht well-being. Further, s the popultion in high income developed countries ges, there is rising demnd for food products to mintin nd improve one s helth - s n lterntive to phrmceuticls. As result, it is importnt to tke ccount of these dditionl benefits in economic nlysis. This thesis is first step in incorporting the benefits ssocited with functionl foods into the economic nlysis of interntionl trde. 1.2 Overview of functionl food New types of foods designed to promote helth or to reduce the risk of diseses hve been recognized s functionl foods since the 1990s (Niv nd Mäkelä, 2007). These new products re designed to meet specific helth concerns by ssisting disese prevention nd helping to promote helth. In ddition to new products which re designed to be helth-enhncing, number of trditionl nd fmilir foods re lso now considered functionl foods s new helth benefits been recently discovered 1 As cited in Siegfried Gursche, Let Food Be Your Medicine nd Medicine Be Your Food. 1

11 (Hsler, 2000). For exmple, t the nnul Frontiers in Cncer Prevention Reserch conference in Settle 2004 it ws pointed out tht, n pple dy my be n effective pproch to cncer prevention (Dvis, 2004). Eggs hve proved to be n excellent dietry source of mny essentil (e.g., protein/choline) nd non-essentil (e.g., lutein/zexnthin) elements tht promote optiml helth (Hsler, 2000). Consumers re incresingly interesting in combining their diet decision with the promotion of helth benefits. Reserch conducted by the Interntionl Food Informtion Council (IFIC) strting in 1996 suggests tht consumer demnd for functionl foods hs stedily incresed nd will continue to do so (Schmidt, 2000). In 2007, the IFIC commissioned its fifth survey on Americns wreness nd ttitudes towrd functionl foods. This survey reveled tht most Americns believe in the ide of functionl foods nd the helth benefits they cn provide. Consumers retin strong interest in foods nd food s links with specific benefits tht cn help promote helth nd reduce the risk of disese (IFIC, 2007). 1.3 Problem sttement Due to consumers incresing interest in functionl foods, there ppers to be strong mrket growth nd considerble potentil for the functionl food industry to expnd into the globl mrketplce. However, the gri-food sector is one of the most hevily protected sectors in the globl economy (Gisford nd Kerr, 2001). Trde brriers in griculture re lrgely historic in origin they predte the rise of informtion pertining to the potentil benefits of functionl foods. The decisions to put trde brriers in plce were, hence, mde on the bsis of n cceptble rise in the price of food considering only its nutritionl ttributes. In other words, those imposing trde brriers did not t the time consider the forgone benefits ssocited with helth-giving ttributes. 2

12 1.4 Objective Given tht there my be dditionl benefits forgone from the existence of trde brriers, with better informtion those responsible for trde policy my wish to lter their decisions to impose trde brriers on individul food products. This thesis hs two objectives: (1) to develop theoreticl frmework to illustrte the potentil welfre benefits foregone from the existence of trde brriers when trditionl food becomes functionl food nd; (2) to provide illustrtive cse studies of the vlue of the benefits foregone from mintining trde brriers. 1.5 Thesis outline This thesis is orgnized s follows. Chpter 2 consists of literture review pertining to functionl foods. First, the terminology pertining to functionl foods nd their definitions re introduced. Second, the current stte of functionl food mrkets round the world is described. This gives mcro-view of the industry globlly. Next, the helth benefits of functionl foods re discussed. With informtion on the vrious helth benefits ssocited with functionl food ttributes, better understnding of the mening of functionl cn be ttined. Lst, helth benefit models re reviewed to ssist in selecting the nlyticl tools used in the cse studies selected for this thesis. Following the literture review, Chpter 3 fully develops trde model tht explicitly incorportes functionl foods. Strting with the stndrd prtil equilibrium trde model, four cses pertining to trde restrictions on functionl foods re developed nd nlyzed. Illustrtive empiricl cse studies re provided in Chpters 4 nd 5. Cnol/rpeseed oil with functionl ttributes is exmined s functionl food. By exmining mrkets with different trde restrictions for cnol/rpeseed oil, estimtes of the vlue of dditionl foregone benefits from the retention of existing trde brriers re provided. Sensitivity nlysis is conducted for key ssumptions mde during the benefits 3

13 clcultions. Generlly, the estimtes of the foregone benefits nd helth cre svings re bsed on published sources. Lstly, summry, conclusions nd suggestions for further reserch re provided in Chpter 6. 4

14 Chpter 2: Literture Review 2.1 Functionl food Definitions nd distinctions interntionlly Functionl food is concept tht is gining ever wider cceptnce round the world. There is, however, no greement on n exct definition (Helth Cnd, 1998). The Bureu of Nutritionl Sciences, of the Food Directorte of Helth Cnd, hs proposed the following definition: A functionl food is similr in ppernce to, or my be, conventionl food, is consumed s prt of usul diet, nd is demonstrted to hve physiologicl benefits nd/or reduce the risk of chronic disese beyond bsic nutritionl functions (Helth Cnd, 1998, Pge 3). In Cnd, functionl foods rnge from trditionl food products with helth-enhncing ttributes to new griculturl technologies including GM food products (Mll et l., 2007). Both nutrceuticls2 nd functionl foods re sometimes clssified s nturl helth products in Cnd. One of the mjor distinctions is tht functionl foods remin food products during consumption, unlike nutrceuticls which re tken in processed form such s cpsule or oil in medicl sized doses. A lrge number of trditionl medicines bsed on herbl nd homeopthic preprtions fll within the scope of nturl helth products. Normlly, such products re typiclly vilble for purchse in the vitmins, herbs nd supplements sections of most Cndin grocery stores. (House of Commons, 1998; Helth Cnd, 1999). Another similr term is novel foods. Food tht hs been geneticlly modified so tht the chrcteristics of 2 A nutrceuticl is product isolted or purified from foods tht is generlly sold in medicinl forms not usully ssocited with foods. A nutrceuticl is demonstrted to hve physiologicl benefit or provide protection ginst chronic disese (Helth Cnd, 1998, Pge 3). 5

15 the plnt, niml or microorgnism hve been ltered or chnged from those which it is derived is lso clled novel food (Helth Cnd, 1999). The term would include some functionl foods. Currently, the Food nd Drug Administrtion (FDA) in the United Sttes hs no specific definition or specil regultory regime for foods being mrketed s functionl foods. FDA regultes foods lbeled s functionl foods under the sme regultory frmework s other conventionl foods (FDA, 2006). Although there is no forml definition for functionl food, report by the Institute of Food Technologists (IFT) in the US defined functionl foods s foods nd food components tht provide helth benefit beyond bsic nutrition (for the intended popultion) (IFT, 2005). In the US, the term Dietry Supplements (usully viewed s nutrceuticls) is often used to refer to helth-enhnced products. The FDA regultes dietry supplements under specil set of regultions tht cover both conventionl foods nd drug products (prescription nd over-the-counter) (FDA, 1997). Following the definition in the US Dietry Supplement Helth nd Eduction Act (DSHEA) of 1994, dietry supplement is product tken by mouth tht contins dietry ingredient intended to supplement the diet (FDA, 1995). The "dietry ingredients" my include: vitmins, minerls, herbs or other botnicls, mino cids, nd substnces such s enzymes, orgn tissues, glndulrs, nd metbolites (FDA, 1995). Dietry supplements cn be found in mny forms such s tblets, cpsules, softgels, gelcps, liquids, or powders (FDA, 2001). Under DSHEA, dietry supplements is specil ctegory clssified s foods insted of drugs. In Jpn, policy development in the re of functionl foods is directed t foods for specil helth uses (FOSHU). Regulted by the Ministry of Helth, Lbor nd Welfre (MHLW) in Jpn, FOSHU refers to foods contining ingredients with functions for helth nd consumed for the mintennce/promotion of helth or specil 6

16 helth uses by people who wish to control helth conditions, including blood pressure or blood cholesterol (MHLW, n.d.). FOSHU must be ssessed for the sfety of the food nd effectiveness of the functions for helth nd the clim must be pproved by the MHLW. With incresing ttention being pid to the concept of functionl foods nd their mrkets, the Europen Union set up the Europen Commission Concerted Action on Functionl Food Science in Europe (FUFOSE). In Europen Union countries, foods recognized s functionl foods must be norml products tht cn esily be consumed in the diet. A functionl food cn be nturl food pproved s functionl or food with modified components to improve helth by technologicl or biotechnologicl mens (EUFIC, 2006). Although there is no universl definition for the concept of functionl foods, the centrl theme is the sme regrdless of the exct definition - functionl foods re introduced into the mrket s norml food form in order to promote humn helth Helth benefits If we re going to live so intimtely with these chemicls eting nd drinking them, tking them into the very mrrow of our bones we hd better know something bout their nture nd their power Rchel Crson, SilentSpring, It seems tht ll foods re functionl in tht they provide nutrients. However, conventionl foods become mrketble s functionl foods when they re endowed or supplemented with ingredients tht contin helth benefits beyond bsic nutrition (NIEHS, 1999). Functionl foods re prticulrly focused on helth-enhncing ingredients or common components tht hve potentil benefit to humn beings. 7

17 Mny foods we et everydy contin nturl components tht provide benefits beyond bsic nutrition. Exmples3 of functionl foods provided by the Interntionl Food Informtion Council (IFIC) cn be divided into four ctegories. Bsic foods with functionl properties (e.g., nti-oxidnt bet-crotene in crrots; lycopene in tomtoes; omeg-3 ftty cids in slmon) re the most common functionl food in the dily diet of individuls. Some processed foods (e.g., ot brn cerel) re viewed s second type of functionl foods which provide functionl ttributes from their originl components. Processed foods with dded functionl ingredients (e.g., clcium-enriched fruit drinks) re lso recognized s functionl foods. Finlly, foods enhnced to express higher levels of functionl components (s through livestock feeding or plnt nd livestock breeding) re lso considered s functionl foods. (IFIC, 2000). Understnding the complex interctions between nutritionl components nd the humn body is still in its scientific infncy. However, there is lredy strong scientific evidence tht suggests eting foods with functionl benefits4 s prt of the dily diet is positive wy to reduce the risk of, or relieve number of, helth problems such s cncer, hert nd crdiovsculr disese, gstrointestinl disese, menopusl symptoms, osteoporosis, eye problems, etc. (NYSOFA, n.d.). For exmple, lycopene in tomtoes nd tomto products is well known s potent ntioxidnt in protecting cells ginst hrmful dmge from oxidtion. Soy contins hormone-like ctors tht help protect ginst hormone-dependent cncers such s endometril nd ovrin cncers (IFIC, 2001). New helth giving ttributes re being identified through ongoing scientific reserch. For exmple, new process ws recently developed by reserchers t the University of Mrylnd which trnsforms ordinry flour into flour with enhnced levels of ntioxidnts compounds tht hve been found to fight ginst cncer nd hert 3 For functionl foods nd their components, see Appendix 1. 4 For functionl foods nd their potentil benefits for humn helth, see Appendix 1. 8

18 disese. Likewise, scientists t Nihon University in Jpn found n esy wy to remove phytte chemicl tht is known to hinder bsorption of clcium in the humn body (ScienceDily, 2006). With helth ttributes beyond bsic nutrition, functionl foods re viewed s convenient food type in promoting helth benefits to humn bodies. It improves the helth condition of citizens nd reduces helth cre costs. Functionl foods lso offer gret opportunity to the griculture nd food industry s the potentil mrket for functionl foods is expnding (AAFC, n.d.) The functionl food industry The growth of the functionl foods industry provides n opportunity for enhncing consumer understnding of the link between diet nd disese, nlyzing helth cre costs nd exmining the process of technologicl improvement in food production (El Hfid, 2004). Functionl foods pper to be significnt in improving the helth of citizens, reducing helth cre costs nd supporting development in the gri-food sector. As result, food products ssocited with benefits which enhnce humn helth cn be identified s potentil growth re for the food industry. Functionl food products represent vlue-dded growth opportunity for the gri-food industry round the world. According to Euromonitor Interntionl (2006), the world mrket for functionl foods hs grown by more thn 50 percent in the lst 5 yers. The United Sttes, Jpn nd Europe re mjor globl mrkets, contributing over 90 percent of totl sles (Kotilinen et l., 2006). Helthy foods (nturl nd orgnic foods, functionl foods nd lesser evil foods5) sles in the United Sttes reched US $102 billion in Among them, functionl foods ccounted for 20 percent of totl US helthy food sles (excluding food service). 5 Lesser-evil foods re mnufctured by removing unwnted substnces including ft, clories, preservtives, cffeine, lcohol, slt, etc. from their originlly stte (NBJ,2008). 9

19 In ddition, with incresing concerns regrding humn helth, the functionl foods mrket grew 6.8 percent in 2004 compred to 1.6 percent growth rte in totl food sles (NBJ, 2006). Functionl ttributes re becoming n importnt fctor in food mrket success. The sles of functionl nd fortified foods were expected to rech US $35.86 billion in 2006, up to 22% over 2005, nd $59.87 billion in 2009 (Slon, 2006). Jpn is the second-lrgest mrket in the world for functionl products fter the US (JETRO, 2006). Strting from the erly 1980s, functionl foods developed rpidly in Jpn. The government hs hd strong involvement in this industry s result Jpn s ging popultion with its incresing helth problems nd the expected future increses in helth cre costs (Kotilinen, 2006). With n ongoing increse in demnd expected for functionl foods, Jpn represents one of the most sophisticted mrkets for these products. The Jpnese mrket is vlued between US $4 billion nd US $15 billion nnully (SWMI, 2002). The functionl food mrket in Europe is expected to grow quickly by s much s 16 percent nnully with pproximte vlue US $15 billion (SWMI, 2002). Within Europe, Germny, Frnce, the United Kingdom nd the Netherlnds represent the most importnt mrkets for functionl foods (Menrd, 2003). In the United Kingdom, sles of functionl foods nd drink were vlued t 835 million (US $1.65 billion6) in The mrket is forecst to double in the next few yers, reching 1.72 billion (pproximte US $3.4 billion) in 2007 (IGD, 2007). As whole, the functionl foods sector ppers to provide lrge potentil for rpid growth in globl mrkets. The mrket is expected to grow much fster thn the overll food industry. 6 GBP: USD = 1:1.98, bsed on the current mrket foreign exchnge rte (verge, July 7, 2008). 10

20 2.2 Vluing helth benefits Correct vlution of risks to humn helth is essentil to helth, sfety, nd the environment (Berger et l., 1987). A number of economics studies of helth benefits hve been developed to mesure the benefits from helth svings. Economic evlution methods considered to tke comprehensive pproch include cost-illness nlysis, cost-effectiveness nlysis, cost-utility nlysis nd cost-benefit nlysis; while prtil economic evlutions depend on cost nlysis, cost-comprison studies nd cost-outcome descriptions (Higgins nd Green, 2008) Cost-of -illness model Trditionlly, mesuring the benefits of improved helth hs been bsed on voidnce of the dmge tht occurs s result of contrcting disese (Berger et l., 1987). One of the most simple nd strightforwrd pproches to estimte the medicl costs voided bsed on helth improvements is the cost-of-illness (COI) model (EPA, 1991). Cost of illness studies were first used in the lte 1950s nd erly 1960s nd hve been used extensively since tht time (Cooper nd Rice, 1976). They re most common in the medicl literture. The bsic ide in COI studies is to estimte the mximum economic costs tht could potentilly be sved or gined if disese were to be lessened or erdicted (Segel, 2006). The cost of illness is mesured by the sum of the direct costs for prevention, detection nd tretment from helth cre nd the indirect costs or loss due to disbility (morbidity) nd premture deth (mortlity) (Cooper nd Rice, 1976). A COI study, however, my be conducted in severl different wys. Ech pproch in clculting costs my vry due to different perspectives from society, the helth cre system, businesses, the government, nd citizens (Segel, 2006). 11

21 COI studies re vluble becuse they provide informtive evidence for policy mkers (Segel, 2006). COI nlysis helps policy mkers nd government mke their decisions on public progrms by showing the finncil impct of certin diseses (Brtlett et l., 1994). For exmple, COI model ws used by Miller et l. (1998) to estimte medicl costs borne by US sttes relted to smoking, this strengthened the fight ginst the tobcco industry in stte lwsuits ttempting to recover losses ssocited with cigrette smoking. Cost of injury studies bsed on version of the COI pproch cn lso provide informtion on disese control nd prevention strtegies which my be useful to sfety nd helth professionls (Rice et l., 1989; Biddle et l., 2005). Thus, the COI model is powerful method in ddressing importnt reltionships between medicl incidents nd socil policy Cost-of-illness n exmple Mll et l. (2007) vlued the potentil helth benefits of trns ft-free cnol oil by using the COI model. In their pper, COI model is dpted to estimte the impct of chnge in dietry ft intke on coronry hert disese (CHD) costs in Cnd (Mll et l., 2007). Their model is bsed on n ssumption tht 1% drop in the incidence of the disese in the long run will result in 1% decrese in the COI. By including direct nd indirect CHD costs (i.e., the totl cost of illness, disbility, nd premture deth) in the clcultion, two lterntive methods of clculting reductions in the cost of illness re embedded in the study. Both pproches followed bsic ssumptions of the COI model, however, Method 1 is focused on totl cholesterol level chnges bsed on reviews of the scientific literture; while Method 2 concentrted on the percentge of energy intke chnge from study by the US Food nd Drug Administrtion (Mll et l., 2007). Using the two different clcultion methods, Mll et l. (2007) hve shown tht the potentil helth-cre or cost of illness svings in Cnd from helthier trns ft-free 12

22 cnol oils re importnt. The uthors suggest vluing helth improvements through food industry innovtions is subject worthy of further study (Mll et l., 2007) Assessments of the Cost-of -illness model Weknesses of COI model There re, however, weknesses ssocited with the use of cost-of-illness studies. The COI model is developed under the ssumption tht the impct of disese is to be mitigted or erdicted. However, from the chrcteristics of diseses, most chronic illnesses tht generte lrge medicl expenses cnnot be gretly reduced or completely erdicted. Thus, the cost svings estimted by COI studies will likely be overestimted under the optiml ssumption (Roux nd Donldson, 2004). In ddition, s bsic nd strightforwrd method, COI model my overlook dditionl informtion tht could be used to better vlue the impct. Opportunity costs, for exmple, should be considered in helth evlution to obtin the optiml solution for the lloction of resources (Donldson nd Nryn, 1998). Another exmple is the difficulty ssocited with mesuring the utility foregone by consumers in COI model compred to contingent vlution (CV) model. Bsed on survey of willingness-to-py or willingness-to ccept mong responders, CV model is superior in vluting non-mrket ttributed which give people utility. Without tking into ccount the loss in utility to individuls, the COI model my underestimte the true cost of illness. Furthermore, insted of estblishing reltionship between costs nd benefits, the sttic COI model simply tbultes the two concepts nd dds them together to estblish the net totl cost (Roux nd Donldson, 2004). Without the pproprite informtion nd comprehensive tretment, COI studies re likely to be sub-optiml in determining how resources re to be llocted (Drummond, 1992.). Further, the COI clcultions must be done crefully to void double-counting problems (Roux nd Donldson, 2004). Mny diseses re connected with ech other 13

23 stemming from common origin. Simply clculting the totl costs resulting from certin diseses might led to underestimtion or incomplete nlysis (Donldson nd Nryn, 1998). Hence, sensitivity nlysis is n pproprite cutionry pproch when there is uncertinty. By setting severl different levels or discount rtes s well s rnges for other importnt vribles, rnge of possible costs would provide more credibility for policy nlysis (Segel, 2006) Conclusions regrding the COI model Although the COI model hs severl disdvntges, COI study cn be superior method under some conditions. First, by plcing emphsis on the whole society rther thn the individul s perspective, the COI model is ppropritely designed for public helth gency to mke their decision (Rice, 1962). Secondly, the choice of models is usully limited by the vilbility of dt. The COI model is simple pproch tht requires little restriction on the type of dt tht cn be used. Thus, COI model is n esy nd relistic solution if obtining the dt is reltively esy tsk compred to other helth vlution models (Rice et l., 1989). Moreover, s simple nd strightforwrd model, the COI pproch is reltively strightforwrd to clculte nd esy to understnd (Biddle et l., 2005). If the economic nlysis is formulted to generl questions bout helth cost impcts, the COI model is likely suitble choice. In this thesis, the objective is to clculte foregone benefits from interntionl trde brriers plced on functionl foods in order to provide suggestions for both trde nd public helth policy. Following the trde model developed in the next chpter, the helth benefit evlution in the cse studies is trgeted t generl problem. From this perspective, COI model is viewed s n cceptble nlytic tool for fulfilling the objective of this study. 14

24 Chpter 3: Modelling Trde nd Functionl Foods 3.1 Bsic model There re number of theoreticl nd empiricl pproches used in economic modeling of interntionl trde. A generl equilibrium pproch is often preferred becuse it cptures shifts in resource use nd consumption between sectors of the economy (Gisford nd Kerr, 2001). A disggregted, generl equilibrium pproch would be desirble when the trde effects for n entire economy with its multiple mrkets re desired - especilly if the cross mrket effects re expected to be importnt. Unfortuntely, generl equilibrium models quickly become intrctble when ll but the simplest disggregtion is ttempted. Computer-bsed computtionl generl equilibrium (CGE) models cn be used to overcome the limittions of generl equilibriums models. CGE models, however, hve two mjor prcticl problems. They cn only be undertken using high degree of ggregtion, mening CGE model is still limited in vluing the interreltionships mong sectors. Further, even the simplest CGE models hve very high, nd costly, dt requirements (Gisford nd Kerr, 2001). While the generl equilibrium pproch hs useful role in evluting multiple mrkets with different commodities, n lterntive but complementry pproch should be considered if nlysis is focused on individul disggregted commodities nd where cross-mrket effects re expected to be smll (Gisford nd Kerr, 2001). In such cses, comprtive-sttic prtil equilibrium pproch to modeling interntionl trde reltions my be preferble. 15

25 In this thesis, the objective is to exmine the forgone benefits from interntionl trde brriers plced on functionl foods. The economic nlysis is focused on the impct of policy chnges on specific functionl food mrket viewed in isoltion. The cross-mrket effects re expected to be sufficiently smll to be sfety ignored. Therefore, comprtive-sttic prtil equilibrium trde modeling pproch for the domestic functionl food mrket of n importing country is selected nd pplied in this thesis.. The comprtive-sttic prtil equilibrium trde model cn be illustrted in Figure 3.1. P S 1 E P E P W +T P w D Q S Q S Q E Q D Q D Q Figure 3.1 Bsic trde model D is the domestic demnd curve for prticulr product. As the price of the product, P, rises, consumers will not be willing to purchse the sme quntity s t the lower price. Consequently, the quntity demnded, Q, declines nd the demnd curve is negtively sloped. For supply, s the price, P, rises, production becomes more profitble nd the output supplied by producers increses. Thus, the quntity supplied, Q, increses, leding to positively sloped supply curve, S (Gisford nd Kerr, 2001). 16

26 Without the opportunity to engge in interntionl trde, the equilibrium price is determined where the totl domestic supply of the commodity is equl to the totl domestic demnd. At this point, E, the mrket clers t PE becuse the quntity being supplied by firms, QE is exctly equl to the quntity of the commodity being demnded by consumers. In Figure 3.1 in the utrky cse, consumer surplus is represented by re 1 which is tringle bove the domestic price nd below the demnd curve. Producer surplus is re , tringle below the domestic price nd bove the supply curve. Combined, the consumer surplus nd the producer surplus, mke up the totl surplus or the welfre rising in this mrket. Now ssume the opportunity to engge in interntionl trde in this product rises. The price consumers nd producers fce in the interntionl mrkets is P w the world price. In this cse, P w is the price t which imports cn be obtined in the interntionl mrket, P w < P E. Assuming trnsport nd trnsction costs ssocited with interntionl shipments re sufficiently smll to ignore, the domestic price will decline to equl the world price. At P w, domestic consumers re willing to purchse Q D while domestic producers re only willing to supply Q S. The difference between demnd nd supply t P w is filled by imports. The import quntity is shown s (Q D -Q S ). Consumer surplus is tringle bove the world price nd below the demnd curve. Producer surplus is re 10. Totl welfre is nd greter thn under utrky (i.e ). Thus, trde is welfre enhncing. If P w is too low for some producers to mke norml profit, they my lobby for protection from imports. Politicl decision mkers my wish to supply protection. Protection could be provided through the imposition of triff (tx) on imports. After the triff, T, is imposed, the domestic price rises from P w to (P w + T). At price (P w + T), domestic firms re willing to produce dditionl quntity becuse they must now 17

27 compete with imports priced t (P w + T) insted of with imports priced t P w. The supply expnds from Q S to Q S. However, the higher price leds to reduction in consumption from Q D to Q D. Thus, imports decrese to (Q D - Q S ). After imposing the triff, totl welfre lso chnges. The higher domestic price leds to n increse in producer surplus but loss in consumer surplus. At price (P w + T), the consumer surplus shrinks from re to re nd producer surplus increse from re 10 to re The triff cuses loss of consumer surplus equl to for gin in producer surplus of 5. If the objective of the protection policy ws to increse producer surplus by 5, decision mkers must weigh the benefits of producers more hevily thn benefits of consumers. In this cse, we ssume tht the revenue received by government is not motivtion in the decision to provide protection. This is resonble ssumption for most modern mrket economies where triffs receipts re reltively trivil source of revenue 7. In the cse of functionl foods, the trde restricting policies my not be triffs 8. Thus, the protection would hve been grnted on the bsis of weighting of consumer nd producer benefits only. Let us denote s the rtio giving decision mkers weighting of the chnges in consumer surplus nd producer surplus rising from the imposition of protectionist policy 9. consumer surplus producer surplus Compred to the sitution before the triff, consumers suffer loss of re nd producer gin re 5. Thus, 7 This my not be the cse for some developing countries nd the nlysis would hve to incorporte tx revenues for those countries. We ignore these cses. 8 It is ssumed tht the rents vilble from the imposition of non-triff brriers do not influence policy mkers decisions. 9 The rtio will be underestimted without the triff revenue. The triff revenue could be used for socil welfre improvement n ddition to the numertor of the rtio formul. However, the triff revenue need not be spent in the mrket we re exmining nd thus would represent loss to the mrket. In this thesis, however, triff collected s government revenue will not be considered s prt of the policy mkers decision to extend protection to producers. As suggested bove, it might, however, be fctor in the decision process in some developing countries nd the model used in our nlysis would hve to be modified in those cses. 18

28 consumer surplus , Which is lrger thn 1. producer surplus 5 In order to clrify the effects before nd fter the grnting of protection, let s simply ssume = 3 for this specific sitution. When =3, the loss for consumers rising from the higher price is three times lrger thn the gin by producers. Politicl decision mkers must ssign t lest three times the weight to producer benefits thn they ssign to consumer benefits. Given tht the triff ws imposed, weight of three is the minimum weight they could hve used in their decision, lthough higher weighting my hve been possible. While politicl decision mkers my not explicitly mke these weighed trde offs, they must do it implicitly with some rule of thumb. The chnge in trde policy turns out to be welfre reducing for the domestic economy (Gisford nd Kerr, 2001). If the sitution in the mrket chnges such tht rises, cse might be mde for decision mkers to re-evlute their decisions. 3.2 Four cses for trde brriers pplied to functionl foods This thesis focuses on the trde policy effects when new products with helth improving ttributes functionl foods become vilble in mrkets with pre-existing restrictions on trde in plce. Functionl foods hve significnt potentil to improve the helth of citizens, reduce helth cre costs, nd support economic development (AAFC, n.d.). Functionl foods represent vlue-dded growth opportunity for the Cndin gri-food industry, both domesticlly nd interntionlly. As suggested in the previous chpter, the mrket is lrge, globl nd growing (Tebbens, 2002). While the trde brrier in plce could be triff, non-triff brriers re lso common in griculture (Hobbs, 2007). Food products normlly fce two brod types of non-triff brriers. One set of non-triff brriers cts like n import bn prevents ny imports. Other non-triff brriers rise the cost of exporting so tht imports still tke plce, but t lower levels the effect is similr to triff (Kerr, 2007). 19

29 P S E P E P W +C P w D Q S Q S Q E Q D Q D Q Figure 3.2 Non-triff brriers effects Figure 3.2 illustrtes the differentil effects of bn compred to n increse in costs s result of n import regultion. Before ny import regultion is put into plce, domestic consumers nd producers fce P w, world price in the interntionl mrket. At P w, domestic demnd from consumers is Q D while domestic supply is Q S. The difference between demnd nd supply t Pw leds to imports. The import quntity is shown s (Q D - Q S ). However, when there re non-triff brriers pertining to imports, the mrket will be constrined. If the non-triff brrier cts like n import bn, it prevents ny imports. There is only domestic production sold in the mrket nd imports t P w cnnot tke plce. The mrket will cler t P E. The equilibrium quntity is Q E. Thus, equilibrium will be reched t P E, higher price thn P w. Non-triff brriers cn lso rise the cost of exporting. In such cse, the domestic price will increse from P w to (P w + C) - where C is the dditionl cost increse fced by the exporter in stisfying the importing country s requirements. At (P w +C), import quntity shrinks to (Q D - Q S ). 20

30 In order to gin mrket ccess, exporters my hve to stisfy cost incresing regultions of importing countries. An exmple might be testing to ensure tht imports re free of drug residue. These regultions mybe unduly odorous nd thus provide economic protection they re disguised protectionist mesure. Thus, there re dditionl costs incurred in the process of production when firms in the exporting country wish to export their products. If there re different requirements for testing nd proof of scientific evidence, the importing country my refuse to ccept foreign credentils or scientific procedures nd the importer s regultions re equivlent to n import bn. The welfre effects of trde restriction lso vry depending on whether or not the new functionl food cn be provided domesticlly in the importing mrket. Therefore, four different cses pertining to import restrictions on functionl foods cn be exmined. These four cses fll into two ctegories: trde policy nd bility to produce. Within trde policy, the focus is on the trde brrier fced by exporters. The brrier is either equivlent to n import bn or cost incresing regultion 10. Under bility to produce, functionl foods re divided by the bility to cquire the new products from domestic producers s well s imports (domestic production or imports) or solely from imports (imports only). 10 Triffs re treted s prt of the ltter ctegory. 21

31 Tble3.1 Four cses for trde policy nd the supply of functionl foods Ability to produce Trde Policy Cost incresing regultion Import prohibition Domestic production or imports Cse 1 Cse 2 Imports only Cse 3 Cse 4 Tble 3.1 outlines the four cses under different trde policy nd production constrints. Cse 1 nd Cse 3 re bsed on the sme trde policy but different ssumptions regrding the bility to produce. Products in Cse 1 cn be supplied by domestic producers nd obtined from the interntionl mrket. On the other hnd, for Cse 3 the functionl food version of the product cn only be cquired from the interntionl mrket. In Cse 2 nd Cse 4 the supply choices re the sme s bove but the mrket is constrined by the more restrictive policy such tht imports re effectively bnned CASE 1 For Cse 1, there re both domestic sellers nd n interntionl source of supply for new functionl food n innovtive product. 22

32 P S M 11 1 E P E P W +C D N P w 10 D M Q SM Q SM Q EM Q DM Q DM Q DN Q DN Q Figure 3.3 Cse 1 domestic nd import supply, cost incresing regultion Figure 3.3 shows the domestic mrket of the conventionl product s well s functionl food. D M is the demnd curve for pre-existing product M tht does not hve helth enhncing ttributes. There is supply curve S M for product M. At P w, the world price for M, consumers re willing to purchse the product M t Q DM nd producers will only supply Q SM. Imports would be (Q DM - Q SM ). If cost incresing import restriction hs been put in plce tht rises costs so tht the lnded price equls (P w + C) cost incresing regultion (or equivlent triff) imports will fll to (Q DM - Q SM ). The cost incresing policy will lter welfre in the mrket. Without the regultion, the consumer surplus is re Producer surplus is shown s re 10. After trde policy is implemented, consumer surplus decresed to re Consumers suffer loss of re in consumer 23

33 surplus becuse of the higher price. On the other hnd, producer surplus increses to n re chnge equl to 5. The reltive weighing rtio is M consumer producer surplus surplus Now ssume new helth enhncing functionl food version of product M, denoted product N, comes onto the mrket. In order to simplify the exposition, we mke three ssumptions. First, we ssume the new product, N, cn be produced t the sme cost s product M by both domestic nd foreign suppliers. Second, product N cn be represented by the sme demnd curve s product M nd tht the new helth ttribute does not chnge the slope of the demnd curve in meningful wy. 11 Thirdly, from the perspective of consumers, more people re willing to buy the new helth enhncing product N t the sme price. Therefore, demnd increses shifting out the demnd curve from D M to D N. As the dditionl demnd cn be ccommodted by cquiring dditionl imports t (P w + C), there is no chnge in price. Thus there is no chnge in domestic producer surplus. The new product, N, fces the originl world price P w nd distorted lnded price (P w + C), the sme s with product M. With the new demnd curve, consumers receive more surplus thn tht from product M. With no trde restriction, consumer surplus chnges from re to re n incresed benefit of re After the cost incresing trde policy is pplied, new world price (P w + C) leds to decline in consumer surplus to re Therefore, the cost incresing policy genertes loss in consumer welfre of re In ddition to the direct consumer benefits from functionl foods which rise in this mrket, there my be svings in helth cre costs 12 for the government s result of 11 It is possible tht the slope of demnd curve for product N will be chnged due to technology innovtion in production of N or chnge in consumer s perception of the product. As no informtion is vilble on how the slope my hve chnged, prllel shift in demnd is ssumed in this thesis. 12 Helth cre costs include direct helth cre cost such s inptient cre cost nd out ptient cre cost s well s indirect helth cre cost such s loss in productivity nd informl cre. 24

34 the consumption of the functionl food. We ssume for the moment tht these cost svings re positive constnt denoted HCS 13. The reltive weighting rtio is now t lest N consumer surplus HCS producer surplus HCS Therefore, M N ; HCS As result, policy mkers my wish to revisit their decision to impose trde brrier CASE 2 For Cse 2, there still exist both domestic producers nd interntionl sources of supply for new functionl food n innovtion product. However, the new functionl food, N, fces regultory trde brrier tht is equivlent to n import bn. 13 This ssumption will be relxed t lter stge. 25

35 P S M 1 10 E N P E N N 2 3 P E M 5 E M D N P w 9 D M Q SM Q EM Q EN Q DM Q DN Figure 3.4 Cse 2 domestic nd import supply, trde prohibiting regultion Q Figure 3.4 illustrtes the domestic mrket when new functionl food enters the mrketplce. As in Cse 1, D M is the demnd curve for pre-existing product tht does not hve helth enhncing ttributes, product M. S M is the domestic supply curve for product M. At P w, the world price for M, consumers re willing to purchse Q DM nd producers will only supply Q SM. Imports would be (Q DM - Q SM ). The consumer surplus is re nd the producer surplus is re 9. If there is n import bn imposed on product M, the price will rise to P E M nd the quntity consumed will be Q EM. Therefore, the consumer surplus will decrese to re reduction of Producer surplus increses to re with n increse equl to re 5. The reltive weighting rtio is M consumer producer surplus surplus

36 Now product N new helth enhncing version of functionl food rrives in the mrket. Our two ssumptions still hold: (1) The new version product, N, cn be produced t the sme cost s product M by both domestic nd foreign suppliers nd; (2) product N cn be represented by the sme demnd curve s well s sme slope s product M nd; (3) more consumers re willing to buy the new helth enhncing product N t the sme price. Therefore, the new helth enhncing functionl food, N, shifts demnd curve out to D N. Product N fces the sme world price s product M. At P w, the consumer surplus increses to re As the world price is unchnged nd supply curve is not ltered, domestic producer surplus remin equl to re 9. With the import bn in plce, the domestic price rises to P E N nd the quntity consumed equls to Q EN. At P E N, consumer surplus decreses to re Consumers suffer loss of re in consumer surplus becuse of the higher price. On the other hnd, new producer surplus increses to re chnge equl to Agin, there my lso be helth cost svings HCS. The reltive weighting rtio is N Thus, consumer surplus HCS producer surplus HCS N HCS M consumer producer surplus surplus It is n empiricl question whether N > M or N < M or N = M due to the different producer surplus chnge in the denomintor of our weighting rtio formul. It is possible tht N > M. So, policy mkers my wish to reconsider the imposing import bn fter the introduction of the helth-enhncing functionl food. 27