Risk Aversion in Action

From October 1998 to May 2004, the EU Commission imposed a moratorium on new approvals of genetically engineered products. This halted approximately $300 million in U.S. corn shipments per year. When the moratorium was eventually lifted, it was made conditional upon Brussels' enactment of costly and burdensome (farm-to-table) traceability and consumer-right-to-know labeling regulations. Many countries, including the United States and Canada, believe these will impair international trade in genetically modified products well into the future. Similar regulations have since been drafted in Korea, Japan and China--not coincidentally three large U.S. agricultural export markets. But these traceability rules have been enacted in anticipation of food safety problems that have not yet occurred and that may never occur. The labeling measures also require product information that is in no way health related. Considering that less trade-restrictive alternatives could have been chosen, these measures were plainly selected because the EU prefers precaution and is not averse to a little trade protectionism on the side.

The mindset behind Brussels's cultural aversion to technology risks (such as those presented by biotechnology) was revealed in a workshop organized by the German Marshall Fund's U.S.-European Biotechnology Initiative. The summary of this workshop is revealing:

"One NGO representative was quoted as saying . . . 'Why can't the Americans understand that this is not specifically about health and safety and labels and traceability; it's a rebellion against industrial agriculture. We need to be talking about the emergence of new ways of farming which take social and environmental concerns into account, not just GMOs.'"

Another effect of this mindset is the region-wide reach (Registration, Evaluation and Authorization of Chemicals). In 2001 the EU Commission proposed reach as a vehicle to hold companies accountable for the thousands of high-volume chemicals that are produced, formulated and incorporated into manufactured products traded within the EU. reach is a complex, three-level system for regulation. It requires companies to register virtually all chemicals based on the volume produced or imported; to evaluate those "substances which give rise to particular concern"; and to seek positive authorization for those deemed "substances of high concern." Only in this third case does the proposed reach system take the potential for exposure into consideration. And that, as a leading chemical industry trade group reasonably complains, "does not occur until after registration and up-front toxicity and environmental testing." Until then, reach simply presumes that such chemicals are potentially harmful to human health and the environment--though the commission has not performed a science-based risk assessment on any specific substance or product and thus lacks empirical evidence to substantiate its presumption. A risk-based approach would take into account exposure data as early as possible and would use that information primarily to determine the extent of risk and how best to manage it. It would not make industry jump through needless hoops.

Recalling Andrew Marvell, had we but world enough and time, this extensive, overlapping and complex set of regulations (unrelated to actual everyday risks) might cause no harm. In the real world, it will delay for long periods--perhaps indefinitely--the myriad benefits that new chemical products can bring to consumers.

The EU aspires to an unachievable aim: eliminating all risks, based on vague possibilities, to human health and the environment posed by chemical-using industries. Helped by non-governmental pressure groups, it achieves this end by exploiting consumer fears--often irrational--about chemicals without supporting its position with scientific evidence. According to two European environmental law experts:

The scope and intrusiveness of the draft reach regime suggest a move to exploit the public's unfounded fears. But in the name of health and environmental protection, reach proponents may be after something bigger. Although the proposed system would differ from past examples of centralized state planning economies, it may produce some of the same results, given the broad discretion granted to government agencies, who will have the power to decide for all of us which chemicals (and thus which products) we should want and which chemicals we should avoid.

Cultural Preferences as Protectionism

If such a regulatory regime is to avoid rendering EU producers uncompetitive internationally, however, it needs to be both defensible and exportable. That in turn requires that such regulations be defended as "cultural values" and distinguished from garden-variety trade protectionism. In a speech to a Greens/European Free Alliance conference at the European Parliament on March 5, EU Commissioner Pascal Lamy sought to do just that.

"[O]ur dispute with the United States over its extra tariffs on steel . . . [which] were clearly designed to protect an uncompetitive industry . . . [should be contrasted with] . . . [o]ur refusal to import genetically-modified maize or soya that we have not authorised. . . . [The latter] . . . is not protecting a European industry (we do import soya and maize that are not genetically modified) but reflects our society's highly precautionary preference in this area."

In support of this distinction, the EU has requested that WTO members consider a new market-access model premised not on free trade, but rather on balanced concessions. Such a framework would ensure that in the end, the "cultural values", which is to say social choices, of all member countries would be appropriately taken into account. Lamy reasoned that since a country's social choices are expressed in public policy decisions (for example, risk evaluation) and embedded via industry standards in the goods and services that are commercially traded among a country's inhabitants, they are a reflection of the country's unique identity. Consequently, governments and industries of exporting countries should respect an importing country's cultural uniqueness by either tolerating it as a matter of diplomacy or adopting a similar market-access framework particular to their own identity. Unless WTO member governments focus on the ideological rather than on the economic dimensions of trade, Lamy argues, then public confidence in regulators and in the WTO system is likely to falter, and international trade to suffer.

Stripped of its high-minded rhetoric and convoluted reasoning, however, the Lamy proposal amounts to nothing more than another creative non-scientific justification for national product distinctions that are susceptible to manipulation as disguised trade barriers. As an exporter, the EU has nothing to lose by agreeing to respect an importing country's values-ridden risk evaluation framework--especially where those regulatory standards are equal to or less rigorous than its own. Products processed or manufactured in accordance with EU precaution-based standards will almost always satisfy the standards of a risk-based regulatory system. As an importer (perhaps the largest import market in the world), the EU has everything to gain by requiring the industries of an exporting country to satisfy Europe's more costly precaution-based system.

This not only furthers the EU's open public policy goals by minimizing perceived health and environmental risks and allegedly restoring public confidence in EU regulators, but it also advances its less overt protectionist agenda. In particular, it raises the bar on foreign exports sufficiently to provide regional EU industries with the "level playing field" needed to compete against more efficient industries in the global marketplace.

Take Lamy's distinction between good and bad protectionism in relation to GM foods. Even the European Competitiveness Council has acknowledged how far behind the United States the European biotech industry has fallen. As Agrifood News noted in a report on November 26, 2002:

"Spending twice as much on research and development, and employing twice the number of people, the U.S. is creating more biotechnology products and services than Europe. . . . [In 2001], market capitalization of U.S. [biotech] firms was five times that of EU companies."

That alone would provide the commission with ample incentive to protect the relatively undeveloped European biotech industry from competition. By saddling American GMO exporters with market-access hurdles more onerous and costly than those imposed within the United States, the EU "levels" the economic playing field--that is, tilts the playing field to the advantage of European companies.

The EU Commission goes to some effort to deny this obvious fact. It contends that the higher environmental standards imposed on EU businesses pursuant to the precautionary principle actually enhance their competitiveness in world markets because of the more sophisticated technologies they are forced to employ. Other things being equal, that might be true. But the EU's rationalization ignores the reality that the more expensive technologies needed to satisfy those standards raise industry costs and make EU companies less competitive. Rather than being absorbed by such companies, the higher technology costs are almost always reflected in higher product prices. The negative competitive advantage they impose is roughly equivalent to the added cost of going beyond average international production costs to satisfy the higher EU market standards.

Hence the commission seeks to level the playing field again by exporting its costly precaution-based regimes abroad to other countries along the global product supply chains, such as China. Examples include the regulation on GMO traceability and labeling, the proposed reach regulation on management of high-volume chemicals, and the combination of the directives preventing waste from electrical and electronic products and restricting the use of hazardous substances in consumer electrical and electronic products. Precaution advocates, drawing on recent internal developments within the EU, have explained the rationale underlying the export of mandatory EU environmental policy initiatives as follows: