1	RISK MANAGEMENT IN THE INTEGRATED NAFTA MARKET: LESSONS FROM THE CASE OF BSE Julie A. Caswell and David Sparling
2	Organization Integration of NAFTA beef industries BSE as a case study Impact of BSE on the NAFTA beef markets Integrated markets – integrated regulations? Implications and challenges for policy
3	NAFTA & Beef Integration Prior to CUSTA and NAFTA tariffs inhibited extensive integration 1989– CUSTA removed Canada/US barriers 1994 – NAFTA removed barriers to trade with Mexico Extensive integration at every level
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5	Production Shift Source: Canfax and Gracey 2002, The Cattle Cycle, p. 19.
6	Relative Sizes of NAFTA Industries
7	Percentage Flows-Beef Exports
8	Production and Markets are Integrated – Are the systems?
9	The Case of BSE? Bovine Spongiform Encephalopathy Disease of the central nervous system in cattle Origin uncertain but believed to be linked to ingesting feed containing rendered central nervous system material from contaminated animals Thought to be linked to CJD – fatal in humans
10	Why Study BSE? Beef industry is integrated at every level Integration interdependence Smooth operation of NAFTA industry depends on flow of cattle and beef Impact of a case of BSE is immediate and substantial Management of BSE is an interesting mix of science and politics
11	Animal Health/Food Safety Events - Two Broad Categories Private Events Risks and impacts limited to supply chains in which they occur E. coli, Salmonella Government response Censure – fines, closures Additional monitoring Industry wide initiatives to reduce risk
12	"Public Events" Public Events Impacts reach outside supply chain Impact may be Regional – Avian Influenza in British Columbia National – BSE, Foot & Mouth Disease Trade distorting Government Response Assessment of the impact and notification of trading partners and OIE New regulations Mitigation of impacts Industry survival and recovery strategies
13	BSE and International Trade BSE protocols managed by the OIE Based on risk analysis - science based 5 levels of BSE risk status Guidance on import restrictions for cattle and beef for each risk status Country goal - BSE free status Importing countries’ response to BSE case in previously BSE free country, contrary to OIE guidance, is complete closure of borders for cattle and beef
14	BSE Reported 1989-2004
15	First NAFTA BSE Event May 20, 2003 – Canada One animal found with BSE Animal had already been removed from the food system Trading partners notified All borders closed immediately for cattle and beef
16	Impact: Live Cattle Imports to U.S. from Canada and Mexico, 2003
17	Price Impacts Canadian market oversupplied Farm gate prices plummeted 50% Imports dropped 50% Already tight U.S. market undersupplied Prices began to increase By fall the Mexican market became tight and prices began to rise
18	Partial Reopening of the U.S. and Mexican Borders September 2003 U.S. reviewed Canadian response to BSE event and risk of importing BSE from Canada Gave Canada a special low risk status Imports of de-boned beef from cattle under 30 months allowed Mexico took similar action
19	Canadian Beef Exports, 2002-2003
20	Second NAFTA BSE Event Dec. 23, 2003 BSE found in U.S. dairy cow Traced back to Canadian herd Possibility that it was fed ruminant protein prior to total feed ban Traceback could only locate half of animals which may have received the same feed
21	Impact All exports halted Redirected to already tight U.S. market Prices eased back from record highs Mexican market now short and prices increased by as much as 15% in early 2004
22	Prices for U.S. Cattle and Beef
23	Partial Border Reopening In March-April 2004, Mexico and Canada reopened border to U.S. boneless beef cuts from animals under 30 months No reopening yet for live animals
24	BSE in NAFTA Dramatic example Market integration exacerbating trade disruptions when problems occur Importance of risk management systems Drawbacks of market integration without regulatory integration
25	Managing Regulatory Integration Country Risk analysis Choosing appropriate level of protection Designing the regulatory program Country to Country Policy coordination Equivalence agreements Harmonization Internationally SPS Agreement of WTO Disputes International Standards Bodies World Organization for Animal Health (OIE)
26	Origins of the BSE Trade Crisis Inadequate risk management at country level Inadequate regulatory integration within NAFTA Breakdown of international discipline on import restrictions
27	International OIE Standards for BSE Risk Management Criteria for determining BSE status 5 status levels BSE free BSE provisionally free Minimal BSE risk Moderate BSE risk High BSE risk OIE does not evaluate countries and assign them to a status Importing countries judge the status of exporting countries
28	Imports: Recommendations v. Reality OIE recommends: Import restrictions that are appropriate for each risk status KEY POINT: in no case recommends complete prohibition of imports when BSE free status is lost What countries do: Immediately close borders to imports from country with BSE case(s) RESULT: huge trade impacts
29	Impact of BSE on NAFTA Countries Set up by failure of international discipline on BSE management NAFTA countries were full partners Aided by lack of regulatory integration within NAFTA to control internal impacts Further abetted by inadequate risk management at the country level
30	Living with BSE Positive Status Putting new regulations in place Reopening borders Encourage all to follow OIE standards, prove minimal BSE risk Negotiate ad hoc border openings (perhaps based on OIE standards) Accomplished within NAFTA for many beef products from younger animals Not accomplished yet for live animals Little progress with other trading partners Being prepared for more cases
31	Lessons from BSE (1) NAFTA is pursuing high level of market integration E.g., with elimination of tariffs But has a relatively low level of coordination in regard to nontariff barriers, such as regulations Economic integration has outrun regulatory integration, leaving industries more vulnerable to disruption
32	Why Can’t We Agree? Same or very similar: Scientific assessment of risk Choice of appropriate level of protection for human health Different benefit-cost calculus due to: Uncertainties Costs and acceptable level of costs Market risks of problems (e.g., first or subsequent BSE cases) Regulatory culture
33	Lessons from BSE (2) There are legitimate reasons why countries are reluctant to harmonize regulatory policy And market integration within NAFTA poses problems for exports to non-NAFTA countries
34	Rebuilding the NAFTA Market Through ad hoc negotiation of border openings Go further? Integrated Risk Management System
35	What Would Need to be Harmonized?
36	Lessons from BSE (3) NAFTA currently has no mechanism to move toward regulatory integration except on a very ad hoc basis Serviceable mechanisms exist for closer coordination of regulatory policy but they are limited NAFTA countries will have to decide to what extent to take the next step toward policy harmonization
37	NAFTA Has Suffered from Poor Harmonization Partly due to international breakdown in regard to BSE but KEY POINT: Bulk of trade impact was within NAFTA and could have been avoided through concerted effort before the fact (before BSE cases)
38	Lessons from BSE (4) Harmonization itself depends on further development of risk management capabilities in each country Failure to address regulatory integration will be: A continuing drag on market integration Leave markets vulnerable to recurring disruptions
39	The Science and Politics of Managing BSE Risk Integrated markets put a premium on good risk management Integrated markets put a premium on integrated risk management NAFTA trade disruptions as a result of BSE were unnecessarily large due to shortcomings in both these areas