Phytosanitary Regulation and Agricultural Flows: Tobacco Inputs and Cigarettes Outputs

This paper examines the effects of the use of increasingly-popular phytosanitary regulations on production costs, and output and factor trade flows. The case addressed is that of the European regulation of maximum chemical residues in cigarettes manufactured with tobacco containing maleic hydrazide. The paper presents simulations of the effects of tightening the EU regulation on the tobacco growing and manufacturing industries. The analysis focusses on input/output market linkages and on the substitution away from the residue-contaminated U.S. input to residue-free non-U.S. inputs. This induced substitution results in higher costs, lower quantity supplied of the final product, and higher prices for U.S. cigarettes in Europe. Cross-price effects lead to higher quantities of EU cigarettes sold and a corresponding increase in the use of all inputs, including U.S. tobacco. When the U.S. tobacco price is allowed to fall, direct price effects stimulate the EU derived demand for U.S. tobacco. Although the regulation is protectionist in the output market, it leads to increased EU imports of the residue-contaminated input. When the price of U.S. tobacco adjusts, the regulation is actually antiprotective for EU growers. The regulation also indirectly influences production practices of U.S. tobacco growers and leads to lower levels of MH residues on U.S. leaf.