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Is Culture Destroying Trade?

Could risk aversion become the most serious threat to international trade?

October 6, 2003

Could risk aversion become the most serious threat to international trade?

In recent decades, the decline of communism, the passage of NAFTA and the increasing effectiveness of the WTO — have led to a renewed expansion of international trade. Despite some real costs, this new wave of globalization has benefited rich nations — and poor ones.

Then, the 9/11 terrorist attacks disrupted the flow of goods and services across borders, primarily by increasing the costs of security and the uncertainty of transnational supply lines.

But another threat to international trade — and to the well-being it promotes — has come upon the scene. Though it may seem less dramatic than the attacks of September 11, it may in the long run be more destructive to the future of international trade.

Which makes it even more amazing that this issue has yet to receive the attention it deserves from officials either in the United States or abroad.

This new phenomenon has so far mostly surfaced in a series of seemingly separate issues. Consider, for example, the disputes between the United States and the European Union regarding genetically modified crops — or the fight between the United States, Canada and Japan over the export of Canadian beef.

What these cases have in common is that they reflect what might be called "culturally based risk aversion" — a set of distastes and worries that vary in intensity from culture to culture.

Plainly put, the level of risk deemed intolerable in one culture often seems irrational in most others. That seems fair enough. After all, consumers everywhere ought to have a say in the foodstuffs they purchase and eat.

But regardless of where one may stand on each individual issue, all of us need to recognize that, in an era of multilateral trade, the cumulative effects of these aversions ultimately threaten to strangle international commerce itself.

Let me explain. In Europe — or to be more precise, in several countries within the European Union — there is an aversion to genetically modified food. By most standards, even those of European authorities, that aversion is less than rational.

Not only has there been no definitive evidence of harm from GM foods — but reports by scientific commissions such as the globally well-regarded U.S. National Academy of Sciences have attested to their safety.

Faced with mounting evidence of the safety of GM products, GMophobes respond that it is not what we do know about such products that worries them, but what we don't know. Of course, they can always point to the fact that not everything that might be known is known.

Yet, there are few areas of life about which this cannot be said. Almost everything is laden with one or another degree of uncertainty and risk.

Still, we conduct our individual and collective lives by making a series of (often implicit) calculations about the degree of risk that we are willing to tolerate for the benefits of say driving a car. That, too, is a risk-laden process — but one chosen hundreds of millions of times each day.

Without a doubt, the preferences of European GMophobes have a direct impact on U.S. producers and consumers. Some American farmers have given up growing GM crops, and farmers from Latin America to Africa are reluctant to adopt new GM strains for fear of being closed out of European markets. But the phobias are not all European in origin. Consider another case — the ban on Canadian beef.

Even several months after the discovery of a single cow infected with Mad Cow Disease (among millions of cattle in Canada and millions more in the United States), most Canadian beef remains banned from the import into the United States. A resumption of normal trade has been blocked by Japan — which has issued its own ban on Canadian beef.

Japan has had seven cases of Mad Cow Disease since 2001. It now tests every animal killed — regardless of age and despite the fact that because of its long incubation period the disease is only found in older cattle.

The Japanese purport to be so worried by the prospect of Mad Cow Disease spreading to Japan that they have declared they will stop the importation of all U.S. beef — unless the United States adopts country-of-origin labeling in order to distinguish the prohibited Canadian beef.

Loathe to lose its beef market in Japan, the U.S. government has maintained the Canadian beef ban with minor exceptions. The effect of the Japanese demand has been to effectively prohibit most Canadian beef products from both the Japanese and American markets.

The Japanese-U.S.-Canadian beef dispute, on top of the U.S.-European dispute over hormone-treated cattle, and the European-American-African GMO dispute, points to a new — and increasing — danger to international trade.

Another contentious issue is that of stem cells. We may well, for example, be at the dawn of the age of new pharmaceuticals derived from embryonic human stem cells.

There are those in the United States who regard such developments with moral repugnance, and who, like the Chairman of President Bush's Committee on Bioethics, seek to ban such research on the grounds that it risks our humanity.

They have already been achieved considerable success — and some of the most important research has shifted to Britain as a result.

If that research results in new pharmaceutical therapies, then culturally induced risk aversion may well lead to their prohibition in the United States. That, in turn, reduces the incentives of pharmaceutical firms elsewhere to invest in such research.

What can be done? The solution to all these conflicts will probably lie in mutual recognition agreements of the sort adopted by the European Court of Justice in its 1979 Cassis de Dijon decision. Among other things,it regulates free movement of goods, quantitative restrictions — and measures having equivalent effect.

Such agreements commit each nation to accept the regulatory rules of its trading partners. Under such arrangements, for example, beef regarded as fit for consumption by Canada's Department of Agriculture would be accepted as such by the U.S. and Japanese governments.

Activists will argue that this amounts to a prescription for lowest-common-denominator regulation, a race to the regulatory bottom. But the alternative dangers are becoming ever clearer — and those dangers will only grow.

Granting a de facto veto on international trade in an ever-widening range of commodities to the most risk- averse partner thus threatens to bring such trade to a standstill.

That slowdown will have the unintended, but expectable effect of diminishing the universal opulence that publicly-minded thinkers since Adam Smith have associated with increased international trade.

The real danger here stems not just from self-interested merchants — but from the nominally public-minded prophets of risk. It would be a tragedy if the new age of globalization were brought to an end by what Smith might have dubbed "the risk-aversionist system."

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