Are SPS Standards Always Barriers to Trade? The Interaction between Demand-enhancing Effect and Cost-increasing Effect

Abstract

Sanitary and phytosanitary (SPS) standards have two opposite effects on international trade: cost-increasing effect and demand-enhancing effect. SPS standards are often regarded as trade barriers in the literature due to their cost-increasing effect. However, SPS standards can beneficially resolve imperfect information problems, and may enhance consumer demand by increasing their confidence in product safety and quality. In our model set-up, we explicitly measures SPS standards’ demand-enhancing effect and cost-increasing effect separately. The model is then applied to investigate how the stricter European Union (EU) aflatoxin standards in the nut industry affect consumer confidence in product safety and quality, product prices, trade flow, and consumer welfare. We find that stricter EU aflatoxin standards significantly increase EU consumer confidence in imported nuts, the consumer welfare of EU countries, and mercantilist gains in exporting countries. Our results indicate that the increased food safety standards and increased trade can be compatible and even mutually reinforcing.