Welfare Assessment of SPS Standards: An Empirical Study of Indo-US Mango Trade Dispute

As trade quotas have been eliminated under GATT and tariffs have been rationalized under WTO; the focal point of disputes and negotiations in international trade has shifted to non-tariff barriers (NTBs), particularly Sanitary and Phytosanitary (SPS) standards. However, in the absence of any past experience and concrete scientific or empirical evidence, standards are usually kept at prohibitively high levels, thereby inducing sub-optimal outcomes. One such case is the mango trade dispute between India and USA. India ranks first in mango production worldwide, supplying about 40 per cent of world mangoes; whereas, USA is world’s biggest mango importer accounting for 32.7% of the total imports worldwide during 2003-05. However, USA imposed a ban on import of Indian mangoes between 1989 and 2006 due to high pesticide levels and incidence of pests. The US permitted import of mangoes from India in 2006 under high standards and strict inspection norms. This study examines the impact of various standard regimes on the two trading partners and explores if the benefit from a higher standard regime is worth the marginal effort. As the importing nation, US has four policy options – 1) a complete ban on mango trade, which was in application between 1989 and 2006; 2) Hot Water Treatment (HWT), the policy advocated by India; 3) nuclear irradiation, the policy favored by US and presently in force, and; 4) free trade, policy regime with no SPS standards in place. Welfare impact of mango trade on both, India and US, under all four different policy regimes is estimated using partial equilibrium framework with stylized microeconomic models for different components. The results suggest that policy choices of both the nations are consistent with their respective payoff estimates. However, if India undertakes to compensate the US for any losses from a policy change in favor of India, both the nations may reach a Kaldor-Hicks efficient outcome. A brief sensitivity analysis is performed, indicating that the developed north can afford to be more flexible in adopting SPS standards. This study also underscores that the impact of risks arising out of invasive species cannot be studied in terms of science alone but it has to be wedded to the economic implications.