Mycotoxin Regulations and Trade

This research assesses the effects of mycotoxins regulations on international trade flows. Mycotoxins regulations reflected in the mandatory maximum residue limits impose costs on the producers that could take the form of both variable and fixed costs. Little empirical research exists on the effects of food safety regulations on international trade flows. The same holds true for the assessment of the effects of aflatoxins regulations on trade flows. In case of aflatoxins standards, Otsuki, Wilson and Sewadeh (2001) in an earlier paper explored the trade effect of the proposal of European Commission (EC) to harmonize aflatoxin standards announced in 1998. It was later implemented in 2002. The paper predicted the trade effect of setting aflatoxin standards under three regulatory scenarios: standards set at pre-EU harmonized levels (status quo), the harmonized EU standard adopted across Europe, and a standard set by the Codex. Otsuki, Wilson and Sewadeh (2001) used the Gravity Model, an empirical model that has been used for a long period of time in empirical analysis of trade flows. Since the publication of the paper, two main developments have occurred in the evolution of the gravity model of trade both of which have important implications for assessing the effects of mycotoxins regulations on trade. First, bilateral trade costs as used in Otsuki, Wilson and Sewadeh(2001) – and several other papers of that vintage – was not the measure of trade costs that followed theoretical derivation of the gravity model. Anderson and van Wincoop (2003) showed that trade costs had to be measured as a multilateral resistance term as opposed to a bilateral cost. The second major development was regarding the issue of zero trade in trade models. Following Melitz (2003) and Melitz et al. (2008) gravity models have been derived using a theoretical framework where firms differ in productivity and there are fixed costs to exporting which are partner specific. Hence, only firms that have a level of productivity beyond a certain threshold can export. If no firm/farm has productivity levels high enough to benefit from exporting, zero trade at the product, and even at the aggregate level, is possible between two countries. Our methodological framework is based on Melitz (2003), Melitz, Helpman and Rubinstein (2008), and Djankov, Freund and Pham (2008), all of which consider the fixed costs of exporting. In our case we capture the effect of aflatoxin regulations as being reflected in costs of exporting which could vary across markets.