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The Price of Trade Protectionism: Yes, We Have No Bananas!

Published: July 27, 2011 in Knowledge@Australian School of Business
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Until recently, the banana was the biggest-selling individual item in Australian supermarkets, but since the banana industry's double whammy of destructive floods followed by Cyclone Yasi in early February, Australians have been forced to review their tropical tastes. Yasi devastated banana plantations in far-north Queensland, which supplies 90% of Australia's production. When retail prices blew out to A$17 per kilogram, bananas lost their appeal and shot beyond the reach of the average Australian family's grocery budget. Many fruit sellers simply gave up stocking them.

Rather than go without, some food industry players and retailers began discussing importing bananas from the Philippines. That way Australian families could have a guaranteed supply of the fruit at a more palatable price of about A$2 a kilogram. Then federal government authorities, including Joe Ludwig, the Minister for Agriculture, Fisheries and Forestry, confirmed that the new banana supply would be a long time coming. It would take a number of years to complete required trials, despite an import risk analysis and a resulting quarantine policy having been done in 2008 by Australia's director of Animal and Plant Quarantine.

Potential threats from Filipino bananas, it was stated, included exotic diseases such as Moko, Black Sigatoka and Freckle. Such diseases could jeopardise the annual multimillion-dollar spend on quarantine and disease control, it was argued. The arrival of Filipino bananas on Australian soil could also present a competitive threat to the local industry. These are all healthy concerns, but weighed up against the financial benefit to families – and therefore to the economy as a whole – of increased competition and reduced protectionist policies, the financial cost of even the worst-case scenario pales into insignificance, according to Kevin Fox, head of Economics at the Australian School of Business and director of the Centre for Applied Economic Research.

"What we're not hearing about in the public debate is the far higher food costs for families that are resulting from these trade protectionist policies," Fox says. "Trade barriers also mean members of the public don't have access to the quality of product that they could have. They are restricted simply because of a powerful lobby group. The industry usually argues that if a disease gets in it will be catastrophic, we'll lose the industry and so many people would be unemployed as a result."

In the case of bananas, if a disease from the Philippines spread into Australia, the industry would not be devastated, although there would be some costs around disease control, Fox points out. "Those costs are very small compared to the saving that would be offered to families. The Filipino banana argument is interesting because the Australian government has effectively said to the Philippines: 'We are not going to buy the goods that you produce, but we'll give you money in foreign aid.' In the meantime Australian families can no longer afford bananas."

Something Fishy?

A recent ruling by the World Trade Organisation (WTO) overturned a 90-year ban on New Zealand (NZ) apples entering the Australian market. The ruling was seen as a victory for the apple industry across the Tasman Sea. NZ apples were first banned from Australia after fire blight was found in apples from Northland, on NZ's north island, in 1919. A series of failed talks over the issue led New Zealand's pipfruit industry to complain about the "unacceptable trade barrier" to the World Trade Organisation in 2007. The ban was lifted in April 2011. However, experts suggest that Australians will not be putting NZ apples in their fruit bowls in the near term.

"The trade barriers tend to go from outright bans to some form of trade restriction that might include unusual packaging or processing requirements," notes researcher Dan Bunting, whose PhD thesis in economics at the Australian School of Business was titled Quarantine as a trade barrier? An examination of the impact of quarantine policies on consumers. "The issue may be that the eventual processing or packaging requirements may erode the price competitiveness of New Zealand apples, so none will be imported," predicts Bunting. "Bananas are a great example – the Australian banana industry has pushed for the individual inspection of every single banana that comes into the country. Obviously this gets to the point where bananas then become prohibitively expensive to import. Meanwhile, bananas are currently prohibitively expensive to buy at retail."

Fox illustrates his concerns about trade restrictions by referring to the Canadian salmon industry's struggle to enter the Australian market. In the 1990s, the Canadians took the Australian salmon industry to the WTO. "The accusation from Australia was that importation of raw salmon would introduce diseases that would devastate the Tasmanian salmon industry," he says. "But the WTO found there was no scientific basis for the 24-year ban and Tasmania eventually had no leg to stand on. So you can now import raw salmon into Australia but it has to be professionally packed by a licensed producer. Again there is no scientific reason for this, the government is putting up another barrier to stop foreign industries from providing consumers with a wider range of choice at reasonable prices."

The argument about the introduction of foreign diseases, Fox says, begs the question of how Canada has a salmon industry if this disease is so terrible. How can Canadian salmon be competitively priced if the industry is continually fighting against this disease?

Weighing Up

Bunting, a senior economist with The Allen Consulting Group, says while primary producers in Australia would face greater competition from cheaper foreign imports, the issue of disease is a real one and must be taken into account. But the many great benefits of importation must also be considered and measured against the perceived threat. This is what the WTO has been encouraging across all trading nations.

"Whilst the impact of quarantine policies on producers through reducing the threat of harmful pathogens (infectious agents) is widely known, their impact on the price and quality of import has not yet been rigorously addressed," Bunting wrote in his thesis.

"Quarantine policies protect domestic industry from the effects of harmful exotic pathogens. However, quarantine policies also generate costs to domestic consumers through their impact on the prices of imported goods … the benefits gained in protecting domestic industries and insuring against the importation of pathogens are clearly not to be understated, (but) the effects of these restrictive policies on consumers are systematically ignored in the formation of policy."

Bunting discovered benefits are being missed at the consumer level. He reports that the financial cost of the occasional outbreak of fruit-borne disease doesn't come close to the value of the benefits that the imports offer to consumers. "We found out the best thing to do is spend a little bit on quarantine, but not to make it prohibitively expensive to get these things into the country," he says. "If you treat a banana before it comes in, you can seriously mitigate the risk. Some of these risks can be overstated. For some very serious issues, like mad cow disease (Bovine Spongiform Encephalopathy), a tiny risk is too much because we're talking about a risk to human life. But when we're talking about an unlikely case of tree damage, it's about protectionism, not lives."

The import of specific products often helps to grow a local industry, Fox points out, noting that apple consumption is very low in Australia compared to New Zealand. The importation of different varieties – possibly a crisper and better-tasting apple – may help to grow the Australian market. Think also about secondary industries such as apple juice businesses and smoothie producers and baby food manufacturers that rely on good quality but inexpensive raw products, Bunting says. These industries would benefit enormously, in the same way as households, from imported goods.

"What does the public think about quarantine? It makes them think about mad cow disease and people in Germany dying after eating a cucumber," Bunting says. European authorities are still investigating a deadly outbreak of E.coli in late May that was initially suspected to have been caused by cucumbers imported from Spain. Such episodes prompt people to leap to conclusions, asserts Bunting. "They think 'we don't want to import these Filipino bananas because they're going to kill people'. It is an easy argument to make, but it is not a logical one. The optimal level of quarantine from our study is not about banning imports but is about reducing the probability of something nasty getting into the country. Quarantine is a spectrum and you need to do a cost-benefit analysis to work out where on the spectrum you need to be."

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