PBTC 03-12

i -ional Agricultural Trade and Policy Center

THE DILEMMA OF SAFER AND FREER TRADE: THE CASE
OF THE U.S. NURSERY INDUSTRY
By

Edward A. Evans & John J. VanSickle
PBTC 03-12 October 2003

POLICY BRIEF SERIES

i~fr

UNIVERSITY OF
FLORIDA

Institute of Food and Agricultural Sciences

"j_
I'

INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER

MISSION AND SCOPE: The International Agricultural Trade and Policy Center
(IATPC) was established in 1990 in the Food and Resource Economics Department
(FRED) of the Institute of Food and Agricultural Sciences (IFAS) at the University of
Florida. Its mission is to provide information, education, and research directed to
immediate and long-term enhancement and sustainability of international trade and
natural resource use. Its scope includes not only trade and related policy issues, but also
agricultural, rural, resource, environmental, food, state, national and international
policies, regulations, and issues that influence trade and development.

OBJECTIVES:

The Center's objectives are to:

Serve as a university-wide focal point and resource base for research on
international agricultural trade and trade policy issues
Facilitate dissemination of agricultural trade related research results and
publications
Encourage interaction between researchers, business and industry groups,
state and federal agencies, and policymakers in the examination and
discussion of agricultural trade policy questions
Provide support to initiatives that enable a better understanding of trade and
policy issues that impact the competitiveness of Florida and southeastern
agriculture specialty crops and livestock in the U.S. and international markets

The Dilemma of Safer and Freer Trade: The Case of the U.S. Nursery Industry

Edward A. Evans and John J. VanSickle

Although the recent collapse of global trade talks in Cancun, Mexico had nothing

to do with sanitary (human and animal safety) and phytosanitary (plant safety) issues, it

serves as a reminder of an ongoing heated debate concerning the implications of

Agreement on the Application of Sanitary and Phytosanitary Measures (SPS), negotiated

during the 1986-1994 Uruguay Round multilateral trade negotiations. Specifically, the

debate focuses on the extent to which implementing the Agreement (aimed at promoting

freer trade by preventing regulatory protectionism1) encroaches on a nation's sovereign

right to determine the level of risk it is willing to accept.

The debate is important to the U.S. nursery industry because, over the years, the

country has managed to maintain a fairly high standard of plant health and safety. This

stems in part from a well-developed safeguarding infrastructure that has evolved over the

last century, which has been fairly successful in restricting the number of foreign pests

and diseases entering the country while aggressively eradicating and controlling those

that escape border protection. Also, local scientists have greatly improved the quality of

germplasm and have made available a variety of disease-free (clean) planting materials.

Based on evaluations carried out by independent testing agencies, the U.S. nursery

industry ranks at the top (Kreith and Golino, 2003).

However, potential changes in the way the industry currently operates could

emerge from U.S. commitments to international trade agreements, particularly the World

Trade Organization's (WTO) Sanitary and Phytosanitary (SPS) Agreement, the North

1 Illegitimate technical barriers to trade aimed at shielding domestic industry from international competition

American Free Trade Agreement (NAFTA), and the proposed Free Trade Area of the

Americas (FTAA). Particularly, there are now pressures to open up the U.S. market and

facilitate freer trade in nursery stocks and planting material that could result in increased

imports of damaging pests and diseases. Such changes could undo some of the gains

made by the industry over the years if necessary steps are not taken.

This paper considers some of the issues facing the U.S. nursery industry in the

context of the aforementioned debate and examines the risks to the industry of trading

more freely in planting materials.

Advantages of Free Trade

There is consensus among economists that a country can increase its level of real

national income by efficiently utilizing its limited resources and engaging in mutual

trade. Consumers can thus enjoy a higher level of satisfaction and producers have the

opportunity to sell their products in an expanded market. However, when such trade

carries with it the possibility of negative externalities or hidden costs (such as the

likelihood of also importing damaging pests and diseases), acceptance of the general

premise becomes somewhat blurred. In such situations the gains from trade are no longer

a certainty. And, the decision of whether to engage in trade boils down to figuring out

whether the chance of "winning" the benefits is great enough relative to the chance of

"losing" them, so as to make the "risky" choice of trading far more attractive than the

"riskless" alternative of not trading. Stated differently, consideration must now be given

to: a) the likelihood that the benefits from trade can still be preserved in the face of the

uncertainties; and b) the magnitude of the net benefits.2

International Agricultural Trading Environment-SPS Agreement

An accepted international principle is that all nations have the right to adopt

necessary measures to protect human, animal, and plant health. In the past,

implementation of such measures was left largely to the discretion of the importing

countries, and they were undertaken based on the criterion of "zero risk" to the importing

country. This meant that if the disease in question was present in the exporting country,

the import was banned.

Although SPS measures can impede trade and were considered important under

previous General Agreement on Tariffs and Trade (GATT) rounds, they were relegated to

being included as parts of other agreements and as exceptions to the main provisions

fostering increased trade.3 The decision to negotiate separate disciplines for SPS

measures (Agreement on the Application of Sanitary and Phytosanitary Measures) during

the 1986-1994 Uruguay Round multilateral trade negotiations marked a turning point in

the development of multilateral trade rules and gave prominence to issues related to

agricultural trade and the risk of importing invasive pests and diseases and food-borne

illnesses.

The impetus for negotiating a separate Agreement stemmed from the deeper

integration of agriculture into the international trading system, particularly, the decision

2 Of course other factors have to be taken into account in the decision making process such as distribution
impacts and political considerations.
3 SPS measures were found in the original GATT Articles, mainly Article XX (General Exceptions) and
later in the 1979 Tokyo Round Agreement on Technical Barriers to Trade (a pluri-lateral agreement known
as the Standards Code).

to discipline the use of quantifiable non-tariff trade barriers (such as quotas, subsidies,

and licenses). Many countries, including the United States, feared that with a reduction

in the use and levels of these support measures, some importing countries would turn to

technical trade barriers (notably SPS measures) as a means of allowing them to continue

providing support to their farming communities. The intent of the Agreement was to

ensure that when SPS measures were applied, they were used only to the extent necessary

to ensure food safety and animal and plant health, not to unduly restrict market access for

other countries (James and Anderson, 1998; Josling, 2002; and Roberts, 1998).

The WTO's SPS Agreement sets out a framework to guide member governments

in devising measures related to border protection and eradication while facilitating the

WTO principle of encouraging freer trade. The Agreement was negotiated around the

following five general principles:

1. Harmonization-encourages the adoption of measures that conform to

international standards, guidelines, and/or recommendations of Codex

Alimentarius, International Office of Epi-zoonosis (OIE), and the

International Plant Protection Convention ( IPPC).

2. Equivalence-mutual recognition of different but equivalent measures to

achieve international standards.

3. Non-discriminatory-means imports are not to be treated any differently than

domestic produce.

4. Transparency-requiring countries to notify trading partners of changes in

their SPS measures, especially in situations where the measures differ from

those of the international standards.

5. Regionalization-allows for continued exports from clean (disease-free)

areas when such approval for the entire exporting nation is not feasible.

The Agreement reaffirms the fact that countries are free to choose their

appropriate level of protection against imported pests and pathogens. However, in cases

where the measures chosen are not in conformity with international standards, the onus is

on the importing country to demonstrate the need for such measures on the basis of

science and to show clearly how the measures are related to the control of the risk.

Unintended Consequence of the Agreement

It is difficult to overlook the success the Agreement has had in facilitating

international trade, but there is concern that it has also served to increase the risks of

bioinvasion-the likelihood of foreign pests and diseases entering and becoming

established in a country. In other words, by making it much more difficult for countries

to use sanitary and phytosanitary issues as a means of erecting unjustified trade barriers,

the Agreement, at the same time, has actually weakened national protections against

bioinvasion and provides a greater opportunity for foreign species to spread accidentally

or deliberately (McNeely, 1999).4 This comes at a time when global concerns for the

environment is shrinking the available means for combating such invasions faster than

new technologies for control can be developed and proven (FAO, 2001). Together these

developments have led to a noticeable increase in the spread of unwanted pests and

diseases and the concomitant increase in the level of resources that countries now have to

put aside to address this growing problem. In the United States, for example, USDA-

4 The situation can be likened to that of taking a particular medicine to cure the common cold-it gets the
job done but, at the same time, weakens the body's immune system to fight off some of the more serious
life-threatening diseases.

APHIS spending on its emergency eradication program has increased twelve-fold since

the implementation of the Agreement, jumping from approximately $10 million dollars

per annum spent in the early 1990s to the current estimated spending at $120 million

dollars per annum (USDA Briefing Room, 2003).

Therefore the challenge confronting members including the United States, is how

to balance the regulatory needs of a country with the general goal of facilitating freer

trade, that is, to what extent should the regulations that are acceptable and desirable to

domestic stakeholders be made compatible with an international regime designed to

facilitate trade? To illustrate the points of the discussion we now focus on the case of the

U.S. Nursery Industry.

Brief overview of the U.S. Nursery Industry5

According to the Census of Horticultural Specialties, the nursery industry

includes nine plant groups: 1) broadleaf evergreens; 2) coniferous evergreens; 3)

deciduous shade trees, 4) deciduous flowering trees; 5) deciduous shrubs and other

ornamentals; 6) fruit and tree nut plants; 7) cut and to-be-cut Christmas trees; 8)

propagation material, or lining out stock; and 9) transplants for commercial truck crop

production. Table 1 shows the value of production, trade, and consumption, and Figure 1

illustrates the trends of selected variables.

Table 1 reveals that the estimated farm value of the industry in 2002 was

approximately US $8.92 billion. Between 1989 and 2001, the value of production

increased steadily from $5.3 billion to $8.93 billion, at an annual rate of approximately

5 Information presented in this section is taken largely from USDA/ERS Floriculture and
Nursery Crops Situation and Outlook Yearbook.

4.4 percent. The slow-down in 2002 was due to a weak U.S. economy caused by the

recession in 2001. Because the bulk of the plants produced are utilized locally,

consumption patterns mirrored production, increasing from $5.4 billion to $9.1 billion in

2001/02.

Of interest are the developments regarding the imports and exports of nursery

crops. Table 1 shows that the value of nursery crop imports doubled between 1989 and

Table 1. US Nursery Crops: Value of Production, Trade and
Consumption,
1989 -2002
Year Production Consumption Imports Exports Import Share
---------------------million dollars---------------------- (%)
1989 5,329 5,393 143 79 2.7
1990 5,963 6,018 157 102 2.6
1991 6,182 6,241 166 107 2.7
1992 6,270 6,332 182 120 2.9
1993 6,325 6,373 192 143 3.0
1994 6,607 6,658 203 152 3.1
1995 7,007 7,109 240 138 3.4
1996 7,422 7,549 255 129 3.4
1997 7,981 8,099 264 146 3.3
1998 8,101 8,217 287 171 3.5
1999 8,524 8,668 301 156 3.5
2000 8,561 8,724 307 144 3.5
2001 8,927 9,095 312 144 3.4
2002 8,917 9,076 298 137 3.4
Source: Floriculture and Nursery Crops Situation and Outlook Yearbook, ERS/USDA,
June 2003

10,000

8,000
S- Consumption
4 ---Production
S6,000
S6,000 --- Imports
S-A- Exports
= 4,000
E
U)
2,000

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Year

Figure 1. Trends in Value of Production, Trade, and Consumption of Nursery
Crops, 1989-2002.

2002, increasing from $0.14 billion to about $0.30 billion. However, the share of

domestic consumption accounted for by imports remained relatively insignificant,

increasing slightly from 2.7 percent in 1989 to 3.4 percent in 2002. The relatively low

share of consumption accounted for by foreign supplies is due primarily to stringent

regulatory policies governing the imports of such products, the majority of which come

from Canada and the Netherlands. The export share of domestic production remained

relatively flat over the period at 1.5 percent, with the value of exports increasing only

slightly from $0.08 billion in 1989 to $0.14 in 2002.

The Dilemma Facing the Nursery Industry

The disease- and pest-free standards for U.S. Nursery products are considered

world class (Kreith and Golino, 2003). The industry's clean stock status has been

attributed largely to a federal system of quarantine regulations, under the Plant

Quarantine Act of 1912,6 and a series of voluntary state certification programs. To gain

entry into the United States, foreign nursery stock must either originate from approved

virus certification programs abroad, similar to the ones in the United States, or be placed

in quarantine, where they are tested for both exotic and domestic pathogens. This has

severely curtailed the volume of nursery stocks entering the country and reduced the

potential for accidental or intentional introduction of damaging pathogens not easily

detected.

Within the confines of the system described above, U.S. growers currently enjoy a

level of protection from diseased nursery stock imported from overseas, which carry

exotic pathogens or those domestic ones that are targeted by state certification programs.

As noted by Kreith and Golino (2003), since there is no cure or treatment for viruses in

perennial crops already planted in the fields, this is an efficient way of managing plant

health issues (from a disease control perspective). Also, by limiting the number of plants

entering the country, there is less need for elaborate government facilities, which

considerably minimizes government expenses and costs to taxpayers.

The problem, however, is that the above framework does not comport with the

general principles of the SPS agreement, particularly the principle advocating non-

discrimination between foreign and domestic goods. The specific issue has to do with the

way the IPPC, the international body mandated by the WTO to oversee the

implementation of the phytosanitary component of the Agreement, sets out its rules

governing the regulation of pests and diseases. In particular, the rules state that a country

can only regulate against damaging pests not known to occur in that country, or those

6 The Plant Quarantine Act of 1912 was repealed by the Plant Protection Act of 2000, which is considered
to better reflect the general provisions of the SPS Agreement.

which occur in the country but are targeted for eradication or control by an official

program (Foster, 2000). The state certification program being voluntary is not regarded

as an official program. Consequently, actions taken by federal quarantine regulators to

restrict entry of any domestic pests targeted by certification programs, but for which no

official control programs are being implemented, are viewed as being discriminatory

against foreign producers. This is irrespective of whether the particular domestic pest is

known to cause serious economic damages. Hence, the IPPC approach effectively

eliminates from the United States' current list of regulated pathogens a host of pests for

which no official eradication or control programs are currently being undertaken. These

include damaging pathogens that once plagued the industry, such as tristeza; stubborn;

exocortis and psorosis of citrus; fanleaf; leafroll; corky bark and stem pitting of grape;

green crinkle; flat limb; rubbery wood and blister bark of apple; stony pit; blister canker;

little cherry; necrotic ringspot; prune dwarf; X-disease of stone fruits; and red stele of

strawberry (Foster, 2000).

Implications for the US Nursery Industry

Foster (2000) points out that an obvious implication is that for every domestic

pest now included on the U.S. list of excluded pests, a decision will have to be made to

either implement an official control program or remove the pest from the list. Either

decision can prove to be costly. Moreover, many of these domestic pests are either on the

verge of being eradicated or are significantly controlled-thanks to the work of scientists.

In these cases, implementing official eradication programs at this time would not be

warranted. However, removing such pests from the restricted lists and allowing for the

possible infected planting material to enter the country could result in a resurgence of

some of these pathogens and severely undermine years of scientific work and investment.

Second, in the past, countries wishing to export nursery stock to the United States

had to have in place a certification program that was similar to the U.S.'s states

certification programs. Now, certification would only be required for those foreign pests

not yet present in the United States and declared to be of concern here, and the domestic

ones for which official control programs are being implemented. As pests are removed

from the excluded list and entry conditions made easier, it is conceivable that the

floodgates could be opened for entry of newer, more virulent strains of pests than were

once regulated.

Third, because of the limited amount of planting material that is currently being

imported into the country, there was no need to maintain an elaborate regulatory

infrastructure for imported nursery crops. However, with the expected deluge of imports

of nursery stock coming from all over the world, additional regulatory infrastructure

would be needed on the domestic front. Establishing and maintaining such systems could

have considerable budgetary implications.

Fourth, the WTO's SPS Agreement, by requiring scientific evidence as proof

before imports can be restricted, assumes that "there is no risk in the unknown".

However, as entry conditions are made easier and the United States begins trading in

nursery stocks and propagating materials from non-traditional sources, there is an

increased likelihood of introducing new pests and diseases. Invasive species are not

necessarily pests where they are native because natural predators and parasites keep them

in balance, but they can cause significant damage to agricultural systems and native

plants and animals in a new environment. Moreover, because many of these diseases are

not detected immediately, this could greatly offset the short-term gains from freeing up

the trade.

One possible solution that has been suggested is a move towards federal or state

mandatory certification for nursery crops. Such a move would satisfy the WTO's SPS

principle of non-discrimination against foreign products and preserve the United States

current list of regulated pests. However, how such a system would work is not clear

because a federal mandatory certification program model does not currently exist in the

United States (Kreith and Golino, 2003). As these authors contend, it is conceivable that

many nurserymen and growers might consider such an idea to be intrusive. Also,

enforcing mandatory programs would require substantial additional funds far in excess of

what is spent on the current system.

Concluding Remarks

Undoubtedly, freer trade can lead to unrealized benefits for a country. However,

when trading live organisms, particularly where such organisms are not destined for food

or feed, the underlying assumption of perfect knowledge does not hold, and the potential

gains from trade are questionable. Live organisms can reproduce, escape and become

invasive, causing damage to the surrounding environment. In addition, they can harbor

damaging pathogens that are not easily detected, compounded by the fact that it often

takes time before the full impact of the damage is realized. Hence, the extent of the

uncertainties surrounding the spatial and temporal outcome of such trades makes

computing the potential gains, at best, an educated guess.

The SPS Agreement recognizes the importance of a country protecting its

resources. However, the Agreement in its zeal to stamp out unfair trading practices

associated with the use of SPS measures, and by insisting on scientific proof of a disease

threat has also taken away the freedom of countries to exercise their prerogative to

determine the level of risk they are willing to take-science was never meant to provide

definitive proof. Thus, the Agreement might inadvertently be contributing to the spread

of damaging pests and diseases by weakening national safeguarding mechanisms in an

era of increased global trade of agricultural commodities and the movement of people.

As always, a country's first line of defense for and the most cost effective approach to

combating invasive species is to keep them from becoming established in the first place.

If the benefits of free trade are to be preserved, then necessary steps must be taken to

limit the detrimental impact-even if this means restricting freer trade to only certified

planting materials.

References

Food and Agricultural Organization (FAO). 2001. The state offood and agriculture
2001. Rome, Italy. http://www.fao.org/docrep/003/x9800e/x9800e 14.htm.

Foster, J.A. 2000. Free Trade and the American Fruit Industry.
http://fpms.ucdavis.edu/FreeTradeArticleJAFoster.pdf

James, S., and K. Anderson. 1998. "On the need for more economics assessment of
quarantine policies." Australian Journal ofAgricultural and Resource Economics
42(4):425-444.

Josling, T. (2002). Can one make the SPS Agreement work for small economies? Paper
presented at the 24th West Indies Agricultural Economics Conference, Grenada
West Indies (July 9-12).

Kreith, M., and D. Golino. 2003. Regulatory Framework and Institutional Players. In
Exotic Pests and Diseases Biology and Economics for Biosecurity, edited by D.
Sumner. Ames, IA: Iowa State University Press.

McNeely, J.A. 1999. An Introduction to Human Dimensions of Invasive Alien Species.
In The Great Reshuffling: Human Dimensions of Alien Invasive Species, edited
by J. A. McNeely, pp 5-22. Gland, Switzerland: IUCN Publishers.

Roberts, D. 1998. Implementation of the WTO Agreement on the Application of
Sanitary and Phytosanitary Measures. Economic Research Service/ USDA.
Agriculture in the WTO/WRS-98-44. Washington, D.C.

USDA Briefing Room. 2003.
http://www.ers.usda.gov/briefing/invasivespecies/indemnities.htm

USDA. 2003. Floriculture and Nursery Crops Situation and Outlook Yearbook. Market
and Trade Economics Division, Economic Research Service, U.S. Department of
Agriculture, FLO-2003. Washington, D.C. (June).

World Trade Organization (WTO). 1995. Agreement on the Application of Sanitary and
Phytosanitary Measures. In Results of the Uruguay Round of Multilateral Trade
Negotiations: The Legal Texts. Geneva, Switzerland: World Trade Organization.