Purpose Outline the benefits of North American integration in agri- food sector Describe new type of impediments to integration Discuss ways policymakers could cooperate to minimize these new impediments

Over past decades, North American governments have removed barriers to greater integration… Source: USDA, ERS. Reduced border costs through regional trade agreements reduced/eliminated tariffs, reformed support facilitated dispute resolution Policies have contributed to increased regional agri- food trade Trade within North America growing much faster than trade with rest of world

…enabling industry to increase investments, build efficient continental supply chains Industry has restructured to take advantage of North American opportunities Foreign direct investment in North American agri-food tripled over last decade Many agri-food businesses depend on open borders for access to inputs and to markets e.g. meat packing facilities in Northern U.S. depend on supplies of Canadian slaughter cattle Source: Bureau of Economic Analysis, USDA, ERS. Billions US$ Canada Mexico

Integration is broad but asymmetrical Source: USDA, ERS. All three NAFTA countries have changed and benefited from integration But the benefits and changes are deeper in Mexico and Canada, given relative size of industries Risks are also greater in Canada and Mexico

We face new impediments to integration In past, integration has overcome traditional frictions Trade distorting domestic support Tariffs Border administration AD / CVD Exchange rate volatility New frictions emerge from time to time – e.g. COOL But now integration faces a new type of challenge – risk of complete loss of market access BSE Bioterrorism? Another disease?

As integration deepens, the cost associated with new impediments increases Border closures do not simply divert trade, they disrupt supply chains Once industry has re-structured on basis of integrated market, border disruptions become very difficult to manage

BSE has clearly highlighted new challenges to integration Industry disruption policy-induced, not consumer-driven North American beef consumption held steady or increased Policy response inside North American affects how other countries respond Unilateral action cannot solve problems in a heavily integrated market Interaction of domestic policy with international negotiations Harmonized NA approach on SRM, BSE testing Common position on OIE changes Impact of BSE event was felt most acutely in Canada, where cattle producers and feedlot operators lost more than $2 billion dollars in revenue. Impact on the US has been more moderate, though some elements of the sector were heavily dependent on open border and therefore more vulnerable. US packers and processors suffer from underutilization of capacity and reduced margins when they lost access to Canadian slaughter cattle. Impact on US cattle producers more moderate, even positive, as domestic beef prices rose. Mexican ban on US and Canadian beef/cattle imports caused shortages of prime beef cuts and dairy cattle in Mexico.

BSE shock is motivating industry to limit exposure to future access risk Dis-integration of cattle market a deep shock Canadian industry looking at increasing domestic beef packing capacity Feedlots and packers in northern U.S. continue to diversify sources of cattle Alberta vs. U.S. Weekly Steer Price Discovery of BSE in Canada Alberta Steer U.S. 5 Market 65-80% Choice Steer Discovery of BSE in the U.S.

Future of integration hinges on industry perception of “closure risk” Further integration requires industry confidence in gov’t management of border risks If not, industry may self-insure against risks Supply chain dis-integration Trade in final products rather than intermediate goods Source: Kerr, 2003 Status quo policy may risk unintentionally eroding integration and losing its benefits

…and maintain access to world markets Challenge for policymakers is to work together to minimize perception of this risk… Domestic policy ineffective unless reality of North American integration taken into account World increasingly views NA as one market Agri-food markets already so well-integrated that it is difficult to contain hazards within national boundaries Need to cooperate, recognize to create food safety “perimeter” around North America Reduce risk of food safety event in any of three countries …and maintain access to world markets

Options for enhanced cooperation Agreement on “behind-the-border” measures to prevent food safety events Co-ordinated standard setting, harmonization, mutual recognition Development of agreed procedures for timely response to food safety events should they occur Establish timelines for bilateral/trilateral consultation, exchange of information, and announcement of joint measures Minimize duration and scope of border closures and establish clear criteria for border re-opening

Options for enhanced cooperation Build on existing mechanisms for trilateral/bilateral collaboration NAFTA committees and working groups, bilateral/trilateral agricultural accords, BSE committee, etc. Champion NA approach as template for future multilateral agreements Multilateral negotiations on food policy (WTO, Codex, OIE) progressing slowly and with difficulty

Issues for discussion How best can governments work together to reduce the perceived risk of complete border closures in future? Where are the remaining opportunities to strengthen coordination of food safety and border policies? What changes are possible to facilitate greater co-ordination of regulatory processes? Are existing forms of institutional cooperation adequate or do we need new ones?