PRRS and the North American Swine Trade: A Trade …ageconsearch.umn.edu/bitstream/15154/1/31030425.pdf · Petry, Paarlberg, and Lee: PRRS and North American Swine Trade 427 icy is

Journal of Agricultural and Applied Economics, 3 1,3(December 1999):425–436

0 1999 Southern Agricultural Economics Association

PRRS and the North American SwineTrade: A Trade Barrier Analysis

Mark Petry, Philip L. Paarlberg, and John G. Lee

ABSTRACT

The partial equilibrium model links the infection risk from imported products to a pre-

mium, which compensates the importing country for the risk incurred by allowing importsfrom infected countries. The model is applied to the Porcine Reproductive and Respiratory

Syndrome (PRRS) and Mexican live swine imports. The premium is sensitive to the ex-pected loss from a PRRS outbreak and to the magnitude of the risk. As the risk or severityof PRRS rises, so does the level of the barrier. If swine imports are categorized and

appropriate restrictions applied, an acceptable level of disease protection can be achieved

while improving national welfare.

Key Words: livestock health risk, PRRS, trade barriers.

All countries maintain health and sanitary reg-ulations on imported products to protect thehealth of consumers and interests of produc-ers. Article XX of the World Trade Organi-zation (WTO) agreement confirms the funda-mental right of nations to set sanitary andphytosanitary (SPS) import barriers on agri-cultural goods to protect “human, animal, orplant life or health,” as long as the measuresare not disguised trade barriers. The UruguayRound Agreement strengthened SPS rules byrequiring that SPS barriers be based on scienceand that nations use an acceptable risk crite-rion (Roberts and DeRemer). Nevertheless, itis difficult to determine whether a regulationis being properly applied or is a disguisedtrade barrier.

This study focuses on the setting of tradebarriers that reflect the disease risk associated

Mark Petry is a former graduate student and Philip L.Paarlberg and John G. Lee are associate professors,Department of Agricultural Economics, Purdue Uni-versity, West Lafayette, Indiana.

This research was supported by a research grantfrom the Purdue Research Foundation.

with imports. A barrier based on risk may notbe a prohibitive barrier. If the actual barrier isprohibitive a nation can capture additionalgains from liberalizing trade while still pro-tecting the health of domestic plants and ani-mals. In 1994, Mexico created a barrier to mit-igate the risk of the Porcine Reproductive andRespiratory Syndrome (PRRS) virus enteringthrough imports of live swine, which, alongwith the Mexican economic problems, severe-ly reduced trade. From 1991–1993, prior tothe barrier, U.S, exports of live swine to Mex-ico averaged 127,000 head. In 1995, U.S. ex-ports of live swine to Mexico fell to 4,900head and recovered to 40,600 head in 1996.Swine trade after 1996 has grown, but the lev-els of Mexican swine imports observed beforethe barrier have not been repeated. This anal-ysis investigates whether the Mexican tradebarrier accurately reflects the PRRS healthrisk, using a framework that links trade bar-riers to the disease risk and potential produc-tion losses that an importer faces when allow-ing imports from infected countries.

The first section introduces the nature of

426 Journal of Agricultural and Applied Economics, December 1999

the PRRS disease and explains the Mexicanimport policy that is designed to eliminate thepossibility of PRRS introduction through im-ports. FoIlowing the description of the diseaseand policy environment is a brief descriptionof the partial equilibrium model that is usedto examine this issue. The model shows howthe level of the premium is linked to the mag-nitude of the risk and the scope of the ex-pected welfare losses. The welfare maximizinglevel of the premium is determined given theexpected PRRS-related production losses, therisk of contracting PRRS from importedswine, and trade elasticities. The results fromthe model show that the premium is sensitiveto the expected loss in Mexico due to a PRRSoutbreak and to the magnitude of the risk. Theresults show that an alternative policy choicecould give Mexico higher levels of welfare,while maintaining an acceptable level of dis-ease risk.

Porcine Reproductive and RespiratorySyndrome and Mexican Import Policy

The PRRS virus is highly contagious and af-fects swine in all stages of development. Thedisease is characterized by late-term abortions,stillbirths, piglets born weak, and respiratorydifficulties in pigs of all ages. Classic PRRSfeatures are disguised symptoms and enhance-ment of pre-existing diseases in the pig. Al-though PRRS is sometimes fatal to youngpigs, the main economic losses are from alower reproductive rate in sows and increasedfinishing times in slaughter hogs. PRRS ismostly transmitted by direct bodily contact,but to a lesser degree by semen and waste. Tothis point, the PRRS virus has not been shownto be transmittable through meat, as it is sen-sitive to heat and is short-lived. Thus, live an-imals are the primary source of transmission.

In 1994, Mexico enacted a SPS barrier de-signed to stop the introduction of PRRS fromimported swine. The barrier was a response tooutbreaks of new strains in several major ex-porters of swine, but mainly in its largest sup-plier, the United States. Live swine importedinto Mexico must comply with several regu-lations before entering the country. Initially,

exporting U.S. herds must have a health cer-tificate issued by an Animal and Plant Healthand Inspection Service (APHIS) veterinarian.To be classified negative for PRRS the entireherd from which the animals are being ex-ported must be free of PRRS during marketingand at the time the export-bound animals aregrouped for shipment (Export RequirementsSummary). Additionally, no swine can be in-troduced into the exporting herd from herdswhere PRRS has been identified within 30days prior to the issuance of the health certif-icate. Therefore, the exporting herd plus anyherd that supplies pigs to that herd must testPRRS-negative 30 days before shipment. Be-fore crossing the border the animals are un-loaded and re-inspected for clinical signs ofPRRS. Slaughter hogs must be transported toa federally inspected and certified TIF slaugh-ter plant, where a Mexican federal veterinarianmonitors unloading. Breeding and feeder pigsare transported in sealed trucks to their desti-nation, where they are subject to a 30-dayquarantine.

Literature Review

Literature that relates to the PRRS issue comesfrom a wide body of research that ranges fromexamining the physical and production effectsof a disease to trade policy. This researchcombines the modeling of animal health issuesand analysis of Sanitary and Phtyosanitary(SPS) barriers to trade. At one end of the spec-trum are the disease modeling studies thatdominate the veterinary science literature(Rodriques and Gardner; Gardner and Carpen-ter). Such studies examine farm-level decisionmaking and financial evaluation of disease-mitigation methods, but do not incorporate do-mestic or foreign policy situations. A numberof studies in the agricultural trade literature(Hillman, 1978 and 1991, Ndayisenga andKinsey, and Orden and Roberts) describe tradebarriers and the motivations behind their cre-ation, but do not quantify the impact of thebarriers nor examine the specific disease fac-tors involved in the origins of the regulations.

Integrating the economic consequences ofthe disease, the impacts of risk, and trade pol-

Petry, Paarlberg, and Lee: PRRS and North American Swine Trade 427

icy is the focus of studies by Dijkhuizen andRenkema; Rendleman and Spinelli; Berentsenand Dijkhuizen; Krissoff, Calvin, and Gray;Orden and Romano; and Paarlberg and Lee.These studies commonly use some form ofcost-benefit analysis to examine different pol-icy environments and outbreaks of the disease.Another key feature of the models is the de-velopment of epidemiological and economicsub-models. The epidemiological model iden-tifies the transmission of the disease through-out a population and production consequences,while the economic model captures the lossesand benefits of control strategies and importpolicies. Dijkhuizen and Renkema and Ber-entsen and Dijkhuizen use this method to ex-amine Foot-and-Mouth Disease in the Neth-erlands. Rendleman and Spinelli use apartial-equilibrium model of the U.S. hog andpork sector to examine methods of AfricanSwine Fever prevention. Krissoff, Calvin, andGray estimate the extra protection Japan im-poses on apple trade and the economic effectsof liberalization. Orden and Romano balancethe trade gains from opening the U.S. avocadomarket with the potential losses due to disease.Paarlberg and Lee take a different approach tothe issue by creating an optimal tariff that rec-ognizes the gains from trade for an importingcountry as well as the potential cost of out-breaks, control costs, and risk of an outbreak.

A Partial-Equilibrium FrameworkIncorporating Animal Disease and ImportPolicy

One limitation of the previous literature is theabsence of research into the effects of thePRRS on a national scale or on trade, specif-ically the North American swine trade. Cur-rent economic analysis of the PRRS virus doesnot investigate issues beyond farm-level de-cision making. This study attempts to fill thatgap by examining the welfare impacts of cur-rent and potential Mexican swine trade poli-cies. It allows for not only the welfare lossesdue to the disease, but also the welfare lossdue to restrictive policies designed to protectagainst the initial infection using a partialequilibrium model, modified to reflect the

trade and regulatory conditions of the Mexi-can swine market.

The model description begins with the for-mulation of the market relationships in Mex-ico. In this partial equilibrium model, the pric-es of other goods and income are exogenousand these factors are not shown in the modelto keep the presentation clean. Trade in porkor other products is not incorporated into themodel. This assumption does not affect thedisease transmission in the model becausePRRS directly affects only live swine andtransmission via pork has not been demon-strated. Confining the analysis to live swinegreatly simplifies the barrier setting and re-gional structure of the model, but does so byignoring potential large price effects on pork,beef, and feed inputs. 1

Live swine trade is largely regional ratherthan global because of the difficulties in ship-ping live animals. The exporting countries arelimited to the United States and Canada whereCanada exports to the United States which ex-ports swine to Mexico.z Due to relatively lowU.S. import barriers for swine trade and sim-ilar PRRS status, the United States and Can-ada are taken as a single net exporting region(US/CAN) described by an excess supplyfunction:

(1) x,, = Xu(p,,); dx,lldp,l k 0.

The Xu denotes exports of swine by the US/CAN region, and p,, denotes the price of liveswine in US/CAN.

The second country, Mexico, is a net im-porter. Demand from Mexico for live swine is

i In this model, the impacts of alternative policiesfor live swine appear as swine price changes, mostlyin Mexico. The assumption is that surplus measured asthe area under the demand function for swine is a mea-sure of the benefit to consumers of pork. This is similarto evaluating the impacts of a wheat policy changeusing the derived demand for wheat instead of the finaldemand for wheat products. Impacts on feedstuff pric-es are ignored. The consequences of this assumptiondepend on the linkage of Mexico to world feedstuffprices and the extent to which Mexican behavior af-fects world feedstuff markets.

2 If pork or feedstuffs were included, a full globalporldfeedstuff model would be required to accuratelyincorporate the price determination.


a straightforward non-positive function ofprice shown by:

(2) Dn, = D~(P,n); i)Dn,/dP,n s O,

where D. is the Mexican demand for liveswine and Pm is the Mexican price for liveswine. The supply of swine for Mexico (S.)is a non-negative function of the price ofswine in Mexico. An additional variable is in-cluded to capture the severity of a PRRS out-break on production (a):

(3) sm = sm(Pn,, 0!); ds,nlaPm 2 o;

The severity of the outbreak (a) is treated asa random variable with mean (p,) and a vari-ance (u*) and is independent of the level ofimports from the United States and Canada.Live swine imports for Mexico (M.) is thedifference between the supply and demand oflive swine:

(4) M,m = D,n – S,n.

Swine are assumed to be a homogeneousproduct, except for the PRRS risk. It is as-sumed that all of the animals are tagged andthese markings specify their place of originand allow authorities to track the animals totheir correct destination. Though the customsofficials are able to identify the country of or-igin of the swine and its respective PRRS risk,the producers of swine in Mexico are unsureof the risk that imported swine bring. There-fore, live swine in Mexico have a commonprice, regardless of the country of origin.

The total barrier that the US/CAN faces isthe sum of two parts. The first part of the bar-rier is a traditional specific tariff, tu, set byMexico within the specified limits of NAFTA.The second part of the barrier is a premium(R,,) that is based on the risk that PRRS fromUS/CAN poses to Mexico’s swine herd, Thispremium compensates Mexico for the PRRSrisk that it incurs by permitting imports fromthe United States and Canada, which is theinfected region. The price linkage for the bar-rier is:

(5) pu=Pm–tu– Ru

As the quantity of live swine crossing theMexican border rises, the probability of anoutbreak occurring in the Mexican herd rises.The risk of an outbreak (n) is a known prob-ability of a single contaminated animal cross-ing the border and transmitting the disease:

(6) ‘i? = ‘m(x,,); adax. >0.

A welfare function is used in order to de-termine the Mexican barrier to be levied. Themodel assumes the goal of Mexican officialpolicy is to maximize national welfare plus thetariff and premium revenues (Paarlberg andLee). The welfare of private agents (G) in thepartial equilibrium model is defined by con-sumer and producer surplus:

Jk

JP

(7) G(Pm, II)= Dm(P,n) dP,. + S~(P~, a) dP,..D “

The total revenue (TR) is the sum of the spe-cific tariff and the premium levied against US/CAN multiplied by the quantity exported toMexico from US/CAN:

(8) TR = (tu + RL,) Xu.

This is assumed to be redistributed by theMexican government to Mexican producersand consumers. Thus, the expected welfarefunction (W) is:

(9) W = [1 – m(xu)][Gm(Pn,) + (t. + R,,)x(,]

+ ~ (xu)[Gm(Pm, ~) + (t,, + R.)x. ].

Maximizing the expected Mexican welfareand solving for the risk premium gives:

(lo) R,l = – {Gm(P,m, a) – Gn,(pm)}(a~/axu).

The premium consists of the expected wel-fare decrease due to a PRRS outbreak multi-plied by the probability of an outbreakoccurring because of an individual imported


animal transmitting PRRS. An outbreak ofPRRS in Mexico results in a decline in thenumber of marketed hogs each year by do-mestic producers, but this causes a rise inprice, which benefits producers. It is an em-pirical issue whether the gain to producersfrom higher prices exceeds or is less than thevalue of lost production. Orden and Romanoshow a net gain to producers is possible. Con-sumers experience a welfare loss due to therise in prices. While Ru is strictly ambiguous,the most plausible result is a national loss inwelfare, where G. (P., a) < G,.(P.). Fromequation (10), as the welfare loss under aPRRS outbreak increases the premium rises.Furthermore, if the probability of an outbreakincreases, so does the premium.

Empirical Trade Model of the SwineMarket With PRRS

The model presented in the previous sectionincorporates the risk of contracting PRRSfrom imported swine in a situation where theimporter maximizes total expected nationalwelfare with a premium compensating for therisk they incur by allowing imports from in-fected countries. This section builds the nu-merical groundwork for the execution of theconceptual model. The key parameters that areneeded for the model are the estimated lossesdue to introduction of the PRRS virus intoMexico, import policy options open to Mexi-co, and basic data to create the supply anddemand equations in the model.

For each policy option, three disease losspossibilities are developed to model a PRRSepidemic in the Mexican swine herd resultingfrom the introduction of the PRRS virus froman outside source. The length of an outbreakis estimated from past patterns exhibited byPRRS in the United States. Since the discov-ery of the disease in the late 1980s, there havebeen two nationwide outbreaks of PRRS in theUnited States. Before each national outbreakthere was a period of one to two years wherethe disease spread throughout the country. Theprimary, most severe part of the outbreak last-ed an average of three years. Following thisthree-year period, immunity develops to that

strain and there is a two-year period of de-cline. After that, though PRRS is no longer aserious threat, it remains, causing very minorlosses in conjunction with other diseases. Toincorporate two complete outbreaks (cycles)of the disease, the average yearly loss wasbased on a 15-year period.

The production loss possibilities are basedon the most recent published results about theprevalence of PRRS in the United States(Hurd; Rothenberger). PRRS raises the ratesof abortions, farrowing death, pre-weaningdeath, and finishing time by 10 percent, 13.5percent, 10.6 percent, and 21 days respectively(Rothenberger; National Animal Health Mon-itoring Service (NAHMS)). To determine theloss in output at a national level, two separate“national” herds are formed. One herd is as-sumed PRRS free, thus experiencing a normalproduction efficiency. The other herd experi-ences a PRRS outbreak using the data byRothenberger and by NAHMS. Final produc-tion results show that PRRS causes a 7.2-per-cent reduction in the number of pigs reachingthe finishing stage and a 5.8-percent drop inthe number of slaughter swine marketed in aparticular year due to increased finishingtimes. A total decline of 13 percent in thenumber of marketed swine characterizesPRRS effects during the height of an outbreak,which would be the maximum yearly loss ifMexico were to become infected. Therefore,incorporating the peak 13-percent productiondecrease into the disease cycle, the averageyearly production loss for Mexico would be6.3 percent (780,000 head) called the Medium

Loss possibility. Furthermore, High Loss (13%production decline or 1.6 million head) andLow Loss (2.4Y0 production decline or300,000 head) possibilities are developed toencompass the spectrum of possible epidemicsituations.

In addition to the range of disease possi-bilities, the Mexican government could takemany different policy responses toward thePRRS threat. For this analysis, several policyoptions are considered with each having a dif-ferent risk of PRRS transmission. One policyoption is the current policy described earlier.Other options involve whether a PRRS test is


required before export and whether animalsare categorized by end use with different usessubject to different PRRS barriers. The PRRStest is effective at screening infected animalsand so alters the likelihood of disease trans-mission. Categorizing animals by end use alsoalters the risk of transmission to the Mexicanherd. Animals for breeding and feeding rep-resent a higher risk of transmission than ani-mals for immediate slaughter. For each policyoption, two levels of transmission risk (sce-narios) are considered—a high-risk situationand a low-risk scenario.

A short description illustrates how thetransmission risks are calculated. Two separaterisks are included. One risk is that the animalis infected. This risk is set at 54.8 percent forslaughter hogs and 31.3 percent for feeder andbreeder pigs (Rothenberger). The other risk isthat an infected animal transmits the diseaseonce inside Mexico, a commodity risk. It isassumed that once one native animal or herdis infected, the virus is transmitted throughoutthe entire Mexican swine herd and it is toolate for an effective Mexican control policy.The assumed commodity risk for slaughterhogs for the low-transmission-risk situation isone in one million or one in one hundred thou-sand in the high-transmission case. Breedingand feeder pigs have a commodity risk of 1because these animals come into contact withthe Mexican herd and the nature of the diseaseallows for the possibility that PRRS can bedormant for the holding period, spread amongthe quarantined animals, or spread from aholding pen.

The Restrictive Policy represents the cur-rent policy of the Mexican Government andthe probability of an outbreak of PRRS inMexico under this policy is zero. It is used asa point of comparison because the RestrictivePolicy plus the existing 20-percent tariff is theoriginal market condition. Since many in theUnited States suspect that Mexico is alreadyinfected with PRRS, a Pre-existing Infectionscenario considers policy where Mexico likethe United States and Canada is infected withthe PRRS virus. Thus, there is no barrier inthe market due to PRRS.

The first proposed PRRS mitigation policy,

Slaughter Pig Testing, allows slaughter swineinto Mexico with one test for PRRS, only inthose animals being exported. This is a depar-ture from the Restrictive Policy, where the en-tire exporting herd and sourcing herds are test-ed. Exporters are responsible for the cost ofthe testing.3 The testing cost is the per-hogcost of the IDEXX Laboratories PRRS anti-body test. The IDEXX Laboratories Herd-Check PRRS test is an industry standard witha 99.7-percent accuracy rating and a cost of$1.22 per animal. There is not any mandatedMexican federal licensing of slaughteringplants and the trucks transporting the hogscould unload at any slaughtering facility aslong as the hogs remain isolated from theMexican herd. Breeder and feeder pigs wouldremain under the same restrictions as the Re-strictive Policy. To calculate the final trans-mission risk the infection rate of the slaughteranimals (0.548) is multiplied by the failurerate of the test, 0.005. Their product is thechance that an individual slaughter hog is in-fected with PRRS, the test fails, and the hogcan transmit the disease. This number is thenmultiplied by the commodity risk correspond-ing to the low- and high-transmission scertar-ios. The result is the probability that an indi-vidual slaughter hog, infected with PRRS,where the test failed, will come into contactwith a Mexican herd and transmit the virus.Under Slaughter Pigs Testing—Low Trans-mission and Slaughter Pigs Testing—HighTransmission, the probability that any one pigwill be infected and transmit the PRRS virusto Mexico is 1 in 364 million and 1 in 36million, respectively.

Another policy option, Slaughter Pig NoTesting, allows slaughter swine into Mexicowithout any testing for PRRS. The remainingregulations would be the same as the SlaughterPig Testing policy and there are the same two

~The premia found and reported reflect the effectof the PRRS test on the probability, but do not includethe cost of the PRRS test. Consequently, the total bar-rier faced by exporters is the tariff, the premium, andthe PRRS test, if required. The tariff revenue and thepremium revenue accrue to Mexico while the cost ofthe PRRS test is paid by swine producers in the ex-porter.


alternative commodity risks. Under theSlaughter Pig No Testing option, the proba-bility that any one hog will spread the PRRSvirus to Mexico is 1 in two million in the low-transmission-risk scenario and 1 in 200,000 inthe high-risk scenario. The higher probabilitiesof transmission reflect the absence of thePRRS test.

The next set of policy options, All PigsTesting and All Pigs No Testing, treat breed-ing, feeder, and slaughter pigs as a single cat-egory. All Pigs Testing allows the importationof any animal which tested negative for PRRSone time without any additional regulatory re-quirements. In this case, the low commodityrisk is used for slaughter hogs, while breedingand feeder pigs are assumed to have a com-modity risk of 1. Under the All Pigs Testingpolicy option, the probability that any one an-imal will spread the PRRS virus to Mexico is1 in 27,000. The last possible step that Mex-

ican authorities could take is to allow the im-portation of any animals regardless of itsPRRS status and without testing. Under theAll Pigs No Testing policy, the probability thatany one imported animal will spread the PRRSvirus to Mexico is 1 in 80. The much higherrisk in the last two scenarios reflects the highrisk of breeding and feeder pigs.

The numerical specification of the model’ssupply and demand relationships use a three-year average, 1992–1994, to account for thevariability in the Mexican market and importsfrom the United States. The Food and Agri-culture Organization (FAO) FAOSTAT agri-culture database supplied the informationabout the Mexican and Canadian markets,while the Economic Research Service’s Live-

stock, Dairy, and Poultry Outlook supplied thedata for the United States, Since the UnitedStates and Canada are treated as a single ex-porting region, they have one common elas-ticity of demand and supply, –0.86 and 1.2(Sullivan, Wainio, and Roningen). The elastic-ities of demand and supply used for Mexicoare – 3.0 and 0.55 (Sullivan, Wainio, and Ron-ingen; Gardiner, Roningen, and Liu). Becausethese elasticities apply to pork, sensitivityanalysis on their values is performed to deter-

mine whether different values alter the con-clusions.

The Mexican PRRS barrier, as described inthe Restrictive Policy, is associated with anadded cost to the exporter because of the test-ing requirements. The compliance cost of thePRRS testing is a significant part of the non-tariff barrier that exists in this market. To cal-culate the real cost of U.S. swine enteringMexico, a tariff equivalent is calculated thatrestricts trade to the same extent as the regu-latory protection (Josling; Krissoff, Calvin,and Gray), The slaughter hog price in Omahais used as the base U.S. price. The transpor-tation cost from Omaha to Mexico is then add-ed to the hog price, plus a constant 20-percentad valorem tariff.4 The transportation cost (permile) for shipping hogs in the United States isfrom an independent transportation companyin Jefferson City, Missouri. This total is sub-tracted from the Mexican producer price forslaughter hogs to get the estimated cost of thePRRS compliance. The cost of complyingwith the PRRS health requirements is esti-mated to be $12.95 per hog, or about 13 per-cent of the value. The real total trade barrierseen by exporters is estimated at 33 percent.

Results

The results allow Mexico to set a two-part im-port barrier against swine from the UnitedStates and Canada consisting of a fixed 20-percent ad valorem tariff, plus a premium thatbalances social welfare against the expectedrisk of a PRRS outbreak. The situation simu-lates an environment where Mexico adds arisk-based premium, rather than a disguisednontariff barrier, to the existing 20-percent tar-iff barrier to manage the threat of PRRS. Ini-tially, the original market conditions (209Z0tar-iff plus Restrictive Polic y—a 33% real-tradebarrier) are compared to only a 20-percent tar-iff. Thereafter, the alternative policies to man-

4 The need to include the transportation cost arosebecause Mexico has a barrier due to PRRS regulationsin effect. The presence of the PRRS regulations pre-cluded using the Mexican price less the ad valorem todetermine the border price.


Table 1. Mexican Premia for Imported Swine by Policy Option and Disease Scenario

Disease Scenario

Low Loss Medium Loss High LossPolicy Option Dollars Per Animal

Pre-Existing Infection o 0 0

Slaughter Pig Testing

Low Transmission 1.32 1.40 1.50

High Transmission 2.02 3.30 3.80

SlaughterPig No Testing

Low Transmission 15* 40* 50*

High Transmission 150* 400* 500*All Pigs Testing 3,000* 3,000* 3,500*All Pigs No Testing 300,000” 1,000,000* 1,000,000*

* Note: These policy option/disease scenarios are trade prohibitive.

age the PRRS risk are introduced. When the33-percent total tariff barrier falls to a flat 20-percent barrier, Mexican welfare increases by$138 million as a result of increased trade. Ona base swine herd of 11 million head, importsby Mexico jump from 132,000 to 3.9 millionhead as the total import barrier decreases. It isin this more liberal trade environment that thepolicy options and disease scenarios are in-corporated.

For each PRRS disease and policy scenar-io, two results are shown: the tariff and thepremia. The rows of Table 1 describe the pol-icy options, while the columns are the pre-mium under each disease scenario. A fixed 20-percent tariff, $20.80 per hog, does not changein any of the disease scenarios or policy op-tions. The sum of the tariff, the premium, andthe PRRS test, if required, is the total barrierfaced by exporters. Moving from one policydown to the next, the PRRS restrictions be-

Table 2. Changes in Mexican Welfarel

come less stringent and the likelihood one im-ported animal will cause an outbreak increas-es.

The first row of Table 1 describes a situa-tion where there is a pre-existing PRRS infec-tion, which carries no additional PRRS riskfrom imports. Mexico is infected with PRRSand maintains only its 20-percent tariff. Theprobability of transmission via imports is setat zero; therefore the premia under this policyare zero for all disease scenarios. This situa-tion allows the analysis to focus on the con-sequences of including only the productionloss in the model. The increase in Mexicanimports in each disease outbreak possibility ofthe pre-existing infection situation roughlycorresponds to the production loss Mexico ex-periences due to the PRRS outbreak. The wel-fare gains shown in Table 2 are a comparisonof the Pre-existing Infection policy, a 20-per-cent tariff, versus the 33-percent tariff of the

No PRRS Low LoSS Medium Loss High LossScenario Million Dollars

20% Tariff 138 NA2 NA2 NA2Pre-existing Infection NA2 111 61 43

SlaughterPig Testing

Low Transmission NA2 105 53 33High Transmission pJ,42 98 42 7

1Change Relative to Current Restrictive Policy of 33V0 Tariff Equivalent

2 Not Applicable


Restrictive Policy. When the expected outputloss due to PRRS is low, the welfare gain is

$111 million. As the production losses in-crease, the welfare gains versus the RestrictivePolicy are smaller, Mexico gains welfare if itis already infected, recognizes that fact, andeliminates all PRRS barriers rather than hold-ing onto the Restrictive Policy. If the Restric-tive Policy is retained after Mexico becomesinfected, there is an unambiguous welfare de-crease.

Of the situations where Mexico is treatedas uninfected, the only policy option that al-lows trade is the Slaughter Pig Testing policy.When the probability of transmission and theexpected loss are low, the premium is $1.32per animal and imports to Mexico are 3.7 mil-lion head. Mexico gains welfare under thispolicy, $105 million, compared to the original20-percent tariff plus Restrictive PRRS Policy.The medium-loss disease possibility has a pre-mium of $1.40 and a welfare gain of $53 mill-ion. When the loss is expected to be high, thepremium rises to $1.50 and Mexican importsrise to 4.7 million head as they experience aPRRS associated production loss of 1.6 mil-lion head. Of the Slaughter Pig Testing—LowTransmission scenarios, the High-Loss out-come exhibits the lowest social gain to Mexicobecause of the catastrophic PRRS loss and thehigher trade barrier.

The commodity risk changes from 1 in onemillion to 1 in 100,000 in the next scenario,Slaughter Pig Testing—High Transmission.Altering the commodity risk raises the trans-mission probabilityy; thus the premia are higherthan under the Slaughter Pig Testing—LowTransmission case. The result is premia thatrange from $2.02 to $3.80. The level of Mex-ican imports range from 3.4 to 3,5 millionhead. There is a decreased level of trade ineach of the Slaughter Pig Testing—HighTransmission results versus Slaughter PigTesting—Low Transmission, because the totalbarrier is higher. Accordingly, compared to theoriginal restrictive policy, Mexican welfaregains are much lower in the Slaughter PigTesting—High Transmission cases than in theSlaughter Pig Testing—Low Transmission sit-uations. When the expected output loss is high

and the transmission risk is high, there is littlewelfare gain over the existing policy.

Eliminating the one-time PRRS test con-siderably increases the transmission rate be-tween the Slaughter Pig Testing policy and theSlaughter Pig No Testing policy. The proba-bility of an outbreak increases from one in 36million in Slaughter Pig Testing—High Trans-mission to one in 2 million in Slaughter PigNo Testing—Low Transmission. Increasingthe likelihood of a PRRS outbreak by such adegree yields a jump in the premia. The pre-mia that result in the Slaughter Pig No Testingpolicy are all trade prohibitive and lower wel-fare below that for the current policy. All ofthe other policies have even higher premia(Table 1). Therefore, neither Slaughter Pig NoTesting, All Pigs Testing, nor All Pigs NoTesting are feasible policy choices to replacethe current import regulations, the RestrictivePolicy.

The analysis suggests that of the policy op-tions analyzed only the policy that separatesswine into slaughter animals and which re-quires a PRRS test raises Mexican nationalwelfare. Within the increased welfare, thechange in policy alters the distribution of wel-fare. Compared to the current policy, consum-ers clearly benefit from the changed policy asthe price in Mexico is reduced. The increasein consumer surplus ranges from $284 millionin the low-transmission scenario to $214 mil-lion in the high-transmission scenario. Ordenand Romano show that producers might gainfrom a disease outbreak as the price rise morethan offsets the output quantity lost. The re-sults in this analysis do not show such a pat-tern. Mexican swine producers lose welfare asthe producer surplus loss ranges from $260million in the low-transmission scenario to$301 million in the high-transmission scenar-io. A likely outcome is that the Mexican Gov-ernment would compensate producers for theirlosses with Mexican taxpayers paying the cost.

Sensitivity Analysis

The premia are sensitive to the elasticitiesused in the model. The base elasticities usedin the model give a very elastic excess demand


since swine trade is small relative to the sizeof the herd. When the elasticities are loweredby 50 percent, the conclusions gained from theresults change for the high-transmission-riskscenario. With the reduced elasticities onlytwo of the three loss possibilities in the high-transrnission scenario yield a welfare gain forMexico. The high loss outcome gives a pre-mium that results in reduced Mexican welfareand would not be a situation where the policyalternative is viable. More extreme results areobtained with a reduction in the assumed elas-ticities by 75 percent. All three possible lossesunder the high-transmission scenario yieldwelfare losses for Mexico. However, in thelow-transmission case replacing the currentpolicy with a liberalized policy using a pre-mium yields a welfare gain, with the low losspossibility generating a $4.3 million gain.These sensitivity results show that with ex-treme reductions in the elasticities, the policychange under conditions of a high-transmiss-ion-risk can provide Mexico with either wel-fare gains or losses depending on the loss lev-el.

Policy Implications

The results of the model show several require-ments are needed to create an import barrierbased on risk. If the proper care is given inspecifying this policy, it can link the PRRSrisk to imports and provide welfare gains com-pared to the current Mexican policy, while stillprotecting the Mexican herd from PRRS. Theanalysis of the policies focuses on the waysthat a policy must manage the PRRS risk as-sociated with imports. The key features dealwith “category discrimination” and the typeof PRRS testing that is required.

Category discrimination describes the pro-cess of separating swine into two import cat-egories and specifying regulations that dealwith each group differently. Though eachgroup has roughly the same infection rate,each group has very different transmissionrisks. The first group, breeding and feederpigs, is assumed to have a transmission risk of1,0. The second group, slaughter hogs, is as-

sumed to have much lower risk, either one in100,000 (0.00001) or one million (0.000001).

Carefully choosing the type of import re-quirement for each category of pig is very in-fluential. Table 1 shows that no policy optionthat involves relaxing regulations for breedingor feeder pigs (All Pigs Testing or All Pigs NoTesting) has a total barrier that allows trade.Category discrimination is used to developtougher rules for breeding and feeder pigs inall of the feasible policy situations. Without ahigh protective barrier, breeder and feeder pigimports will cause production losses that arecatastrophic. The opposite argument can beused for a slaughter hog category. Slaughterhogs represent a small risk to Mexico becauseonce in the marketing chain there is a low lev-el of contact between these animals and thedomestic herd. Therefore, the reduced amountof risk that they pose should be reflected inimport policy formulation.

The second crucial factor for diminishingthe PRRS risk is the addition of mandatorytesting within the category discriminationframework. Mandatory testing for feeder andbreeder pigs is necessary before export be-cause of the unacceptably high risk they poseto importers. As in the Slaughter Pig Testingpolicies, slaughter hogs need to test PRRSnegative one time before being exported as thepremia under the No Testing scenarios are pro-hibitive. Including the testing requirement al-lows Mexican officials to formulate a risk-based policy because it allows for a widermargin of safety.

In addition to difficulties in developing im-port regulations, the changing nature of thePRRS virus presents many problems. There-fore, it is crucial to know how PRRS diseasecharacteristics affect the model. With thisknowledge, policy makers can determine howprecisely they need to predict the possible ef-fects of the PRRS virus in Mexico. The twoassumptions of key importance are the esti-mated loss associated with PRRS introductionand the commodity risk.

The PRRS loss variable is impossible toestimate precisely; thus its sensitivity is im-portant to the value of the results. The threeestimated impacts (Low, Medium, and High)


determined the level of Mexican imports, butnot whether a policy was prohibitive or not.The commodity risk was the variable whichwas most uncertain in the model and it heavilyinfluences the probability of transmission, andthus the level of the premia. Though the com-modity risk was crucial in creating the policiesand linking them to a transmission risk, thecommodity risk did not cause a prohibitivebarrier but affected the level of trade, Imple-menting the single testing regimen for slaugh-ter hogs creates a situation where assumptionsabout production loss and commodity risk af-fect the level of the trade but not whether abarrier is prohibitive. The main factor thateliminated trade was the jump in transmissionrisk with the omission of the one-time PRRStest.

Conclusion

This study examines the Mexican nontariffbarrier created to mitigate the livestock healthrisk of the Porcine Reproductive and Respi-ratory Syndrome (PRRS) virus. The frame-work creates a barrier that adheres to inter-national trading agreement rules on theelimination of disguised protection, while stillprotecting the health of the Mexican swineherd. Within a partial equilibrium framework,a premium compensates Mexico for the riskincurred by allowing imports of swine fromPRRS-infected countries. Alternatives to thecurrent Mexican import policy are analyzed.Additionally, three scenarios simulate the loss-es Mexico might incur if infected with PRRS.These various options allow for the determi-nation of whether a risk-based barrier is lesstrade restrictive than the current regulations.

llvo results of the model are crucial to for-mulating an import policy. The first concernsdistinguishing between the slaughter hogs andfeeder and breeding pigs. Feeder and breederpigs transmit PRRS very easily and must bemore strictly monitored before and during theimport process. Slaughter hogs carry a muchlower PRRS transmission risk and the resultssuggest a liberalization of current import rules.The second result supplements the first. Breed-er and feeder pigs need to be strictly tested,

but slaughter hogs need to be tested only onetime to ensure both an acceptable level of riskfor Mexico and a non-prohibitive, nontariffbarrier.

The model results provide insights into thecurrent Mexican import regulations which re-quire strict testing and quarantine of pigs im-ported into Mexico. The model results confirmthat regulations for the importation of breed-ing and feeder pigs do reflect their higherPRRS risk. However, current Mexican importrules do not capture the lower risk of slaughterhogs. The policy option that mitigates thePRRS risks while increasing the gains fromtrade is the Slaughter Pig Testing policy. Thepolicy breaks the swine into categories andthen deals with the risk associated with eachcategory in the appropriate manner. Feederand breeder hogs continue to be tightly testedand monitored, while slaughter hogs are testedonly once.

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