A Quick One on Externalities of Foreign Trade

I won’t pretend this is part of the Vladimir Masch discussion, or one of the traditional thorough-analysis Angry Bear posts. Just a data point on which we may need to work later, and a report that will be of interest to many who read here.

UPDATE: As rdan notes in comments, this “links to testing for mad [cow disease, or BSE] as well.” And since I’m a week or so behind in my blog-reading, I’ll just refer everyone to this U.S. Food Policy post, which used economic reasoning to come to a depressing but clear conclusion.***

One of the ways in which externalities are created is with differing regulations on what should be the same product. The quality of the Grade-A beef you buy that was raised in Texas should be the same as the Grade-A beef that was raised in Mexico and imported. If the inspection processes are not the same, though, the chance of contamination is raised.

I hasten to note that the probability of contamination in both cases is rather low, if you assume that the firm is an ongoing concern that plans to do business with you again.*

But what is the effect of contaminated meat slipping through?

I’m glad you asked, and so is the USDA.

Economic Impacts of Foreign Animal Disease seeks to address the question. Though it deals specifically with foot-and-mouth disease, the report:

presents a quarterly livestock and crop modeling framework in which epidemiological model results are integrated with an economic model of the U.S. agricultural sector to estimate the economic impacts of outbreaks of foreign-source livestock diseases. The framework can be applied to many livestock diseases[.]

To what I trust is no one’s great surprise, the model predicts larger losses than just the animals slaughtered:

Model results show large trade-related losses for beef, beef cattle, hogs, and pork, even though relatively few animals are destroyed.

Even the bromide at the end (“The best control strategies prove to be those that reduce the duration of the outbreak.” Really??) doesn’t change the economic reality: the best way to ensure the highest return is to spend money on inspection.

Anyone who has ever used the financial markets for hedging purposes could tell you that. It’s good to see that the USDA has done the analysis to justify a uniform process of inspection of foreign meats; the only question is whether they realise that is what they have done.**

*It is, for instance, common knowledge in some parts of Eastern Europe that, if you are offered lumber at a lower-than-market price, it probably comes from the Chernobyl area.

**This appears to be noting new: here’s a 1906 NYTimes article (PDF) dealing with jurisdiction over testing meats. (That was, of course, the year after The Jungle was published. Even then, loopholes were the rule, not long-term sustainability.)

***”Instead, the officials’ actions seem to me most consistent with believing there are a handful of real cases of BSE out there in the beef cattle population, and that these cases will naturally die out without infecting new cattle over the next several years. Of course, if this were true, a handful of people would be subjected to risk of the deadly disease years after eating a cow whose infection was never discovered.”