Impact of Meat Import Restrictions

Analysis of the impact if Iceland's government would decrease import limitations on fresh meat on Icelandic consumers and makers of meat

Abstract

Foreign trade is usually increasing and everything governments throughout the world try to protect a few of their core domestic industries through the use of various of restrictions to keep import at a minimum. Importation of fresh beef to Iceland is prohibited but pushes with in consumers' welfare organizations are pressuring for these constraints to be reduced and beginning the market up for overseas competition. If the market would start then consumers would get lower prices, producers would probably have to lessen their prices and production. It is crucial for the makers to appeal to consumers devotion on Icelandic beef and prove their quality.

  • Margrt GunЅ Vigfєsdttir

Introduction

In Iceland, like a great many other countries, agriculture is a significant part of record, sustainability and food security. In early 20th century agriculture began facing difficulties where leaded to the federal government taking activities by subsidizing the industry. Transfer restrictions also protect home industry even today.

Geographic outlines, local climate and distance from world marketplaces cause high development cost, high transportation cost and poor terms of trade. Market conditions tend to be blamed for high food prices in Iceland especially because of small people and small market. This small market is therefore uneconomical in creation, management and trade and the benefits of economies of scale aren't possible like in other neighbouring countries of European countries for case (Snorrason, 2006).

Iceland's participation in world trade for example in the Western european Economic Area (EEA) and Term Trade Organization (WTO) has opened the opportunity of increased import of agriculture goods but the foreign market has not yet threatened Icelandic meat producers due to import limitations (orgeirsson, Bjarnadttir, & Sveinsson, 2004).

The import restriction are in form of high tariffs, import quotas and rigorous transfer permits, several certificates and documents confirming that the merchandise have been stored at a temperature of at least -18C for 30 days and a license confirming the that the merchandise are free of salmonella (EFTA Monitoring Authoroty, 2014). The Icelandic Competition Regulators, Consumer Protecting Firm and other organizations have complained that the limitations prevent healthy competition and leave consumers worse off. Lately the EFTA Surveillance Power concluded a reasoned opinion that Iceland's restriction on importation of fresh meat in breach of EEA rules (EFTA Surveillance Authoroty, 2014). The Icelandic government argues these restrictions are essential for Icelandic medical due to possible contamination to Icelandic plantation animals. Iceland can be an isolated island and plantation animals stocks and shares like lamb have remained the same for decades. Which means that Icelandic farm family pets are much more vulnerable to diseases with worse disease fighting capability than the plantation animals on the main lands of Europe.

Along with these transfer restrictions on chosen agriculture products the Icelandic federal government also subsidizes the agriculture industry by guaranteeing minimum amount price to farmers. Some have criticise that Icelandic farmers are overindulgent by the government in comparison to other nations and for this reason farmers/producers will offer higher prices than they might in more competitive market.

The Market

An oligopoly is a market with few large businesses holding the majority of the market. They offer similar products but try to differentiate to become more desirable than another. Organizations in oligopoly market are reported to be interdependent which mean that they'll consider their own actions influenced with the way the rivals might respond (Mankiw & Taylor, 2014). The Icelandic meats producers market is an oligopoly. The four largest producers of beef acquired 56% market share in 2010 2010 (Icelandic Competition Authority, 2012). The market is small credited to small society, which causes uneconomic creation, management and trade in comparison to larger countries. Price on meat was 38% low in the EU areas on average in 2009 2009 (Kristfersson & Bjarnadttir, 2011). Economies of level are hard to obtain due to high capital cost, seasonal fluctuation in support of the few large suppliers have sufficient economies of scale compared to the size of the market (Jhannesson & Agnarsson, 2004). These facts make it harder to go into the marketplace for new comers (entry hurdle).

It is very important to all producers to know how consumers respond to changes in cost. The price elasticity of demand measures how much the quantity demanded responds to a change in cost (Mankiw & Taylor, 2014). Price elasticity of goods can vary, necessities are often rather inelastic, that is, the ratio change in demand is small when prices change (PE<1). Luxuries on the other palm are elastic goods, the ratio change popular is large when prices change (PE>1). Most agriculture products like meat are inelastic goods (although specific types of meat are elastic scheduled to close substitutes, from pork to beef for example) as food is essential. Consumers maintain the consumptions of them despite changes in price (Jhannesson & Agnarsson, 2004).

Welfare economics is the analysis of how the allocation of resources affects economic well-being. Consumer and designer surplus is utilized to measure the advantages to consumers and providers of trading. When federal government introduces fees, tariffs and quotas it creates a deadweight loss. Deadweight damage is the street to redemption in total surplus that results from market distortion such as taxes (Mankiw & Taylor, 2014).

Import Restriction Impact on Economic Welfare

Icelandic importers can not import meats unless it has truly gone through various examinations and been iced for at least thirty days. Frozen meat is of course not fresh and therefor are no imports on fresh meats allowed. Now let us use the tools of economics to observe how this impacts consumers, suppliers and the monetary welfare. The demand is rather inelastic as discussed earlier. We expect that the supply is close to unit elastic due to various factors pulling in either direction. The planet supply on the other side is elastic since it is an extremely large competitive market. We could keep these assumptions about elasticity's out this section. To simplify, impact of taxation is disregarded.

Figure 1 shows current status on Icelandic fresh meats market. No fresh meats is purchased from overseas suppliers and consumer surplus (renewable) is the region A and manufacturers surplus (red) is the area B+C.

Figure 1: Current Fresh Meats Market devoid of Trade

Now let us see what goes on if Icelandic federal relieves the import limitations on fresh meat. Figure 2 shows that consumer surplus profits a great deal and equals the area A+B'+D while producer's surplus reduces (B-B'=B'') and equals the region C+B''. The purchase price falls and since the domestic quantity provided (DQS) is significantly less than the domestic amount demanded (DQD) the difference has to be imported.

Figure 2: If Limitations were Removed (devoid of Tariffs and Quotas)

Figure 2 will not shows what would happen in current situation because of import tariffs and import quotas. The transfer tariff on meat from countries within European union and EFTA is 18% and 30% from other nations. Countries with in EU are allowed to import to Iceland limited amount (tariff-quota) of pork, chicken and beef (no lamb) devoid of tariff. On the other hand, the Import quotas can be purchased to the best bidder leading to little if any gain from the free trade to the importer (Icelandic Federation of Labour, 2007).

To get the idea of how things might be if the limitations were relieved we look at the meat market generally, including frozen and processed meats. In 2010 2010 the marketplace share of brought in meat was 3%, which really is a very small ratio (Icelandic Competition Authority, 2012). The high tariffs and quotas keep carefully the import level at the very least. Physique 3 shows the way the market has been tariff and quota, supposing for simpleness that they mix the local demand at the same quantity. The area for consumer surplus has increased, from whatever we saw in body 1, by area B'+G and developer surplus has lowered by area B'. The federal government earnings (yellow), area E, is added since you can find tariff put into the world source and quotas sold. The deadweight loss (orange), or damage to society, from this tariff and quota is area D+F. The purchase price falls just a bit from P1 to P2, local quantity demanded raises and domestic volume supplied decreases. Meats must be imported to meet up with the demand from DQS to DQD (it is likely that the proportion of import is a lot smaller than mentioned in physique 3 compared to current 3% import market show).

Figure 3: If Restrictions were Relieved (Current Beef Market)

We can easily see by comparing physique 3 to figure 1 that both government and consumers gain surplus while manufacturers are worse off leading to total surplus change of area +G+E (desk 1). This infers that taking away restrictions will improve the monetary wellbeing.

Table 1: Changes in Economic Welfare if Limitations Relieved

With restrictions

Without restrictions

Change

Consumer surplus

A

A+G+B'

+B'+G

Producers surplus

C+B

C+B-B'

-B'

Government revenue

None

E

+E

Total surplus

A+C+B

A+C+B+E

+G+E

Import restrictions aren't the only thing that the Icelandic Consumer Company and others desire to be considered action on. As stated before high tariffs and quotas keep carefully the imports of meats at the very least. It is not cost efficient to transfer fresh meat and therefore the tariff income on fresh meats to the Icelandic federal is not large. In a report the Icelandic Statistical Bureau released in 2006 about reasons for high food prices in Iceland it was mentioned that if tariffs would be reduced by one half on main agriculture products the income loss for the government would be 145 million ISK, but on the other hand the go up in income scheduled to increased turnover would be 900 million ISK (Snorrason, 2006). Now lets assume that import quotas will be removed and transfer tariffs decreased as shown in figure 4.

Figure 4: If Constraints and Quotas were Relieved as well as Tariff Reduction.

The price consumers pay will show up from P2 to P3. Local quantity offered will lower and local demand increase leading in bigger import. Table 2 shows the changes of reducing import tariffs and removing quota. The full total change altogether surplus will be the area +D''+F''+D'''+F'''.

Table 2: Changes in Economic Welfare if Quotas were Removed and Tariffs Reduced

Before lowering tariffs

After reducing tariffs

Change

Consumer surplus

A+G+B'

A+G+B'+B'''+D''+E'+F''

+B'''+D''+E'+F''

Producers surplus

C+B-B'

C+B-B'-B'''

-B'''

Government revenue

E

E-E'+D'''+F'''

-E'+D'''+F'''

Total surplus

A+G+C+B+E

A+G+C+B+D''+D''' +F''+F'''

+D''+F''+D'''+F'''

The total surplus change from figure 1 to find 4 is then the area G+E+D''+F''+D'''+F'''. This area is the solution off how much the marketplace raises it's welfare. There are always losers and winners in trade. In this case the providers would always be the looser since transfer tariffs and quotas are always to protect the domestic providers. Consumers and the federal government are winners in cases like this with lower price to consumers and increased revenue for the federal government. THE FEDERAL GOVERNMENT could then use that revenue to increase subsidizes to the domestic production to keep up their competitiveness to the entire world market.

Impact of raising import restrictions

What would Icelandic consumers gain if transfer limitation where relieved. THE BUYER Protection Agency argues that as a result of poor position of the Icelandic currency ISK and current tariffs the Icelandic producers have nothing to fear. When import limitations on tomato vegetables, cucumbers and peppers from European countries where relieved in 2002 some forecasted that domestic creation would stop. The results was on the other hands that prices of the goods decreased, local development increased and providers gained more income. This would be the circumstance for fresh beef as well. Supply and variety of beef increase and consumers will have better alternatives (Icelandic Consumer Company, 2013).

Tariff protection will not protect the agriculture providers but provides shelter for high price on competitive and substitution goods. The impact of lowering tariff protection would have a big effect on the agriculture manufacturers and some might not be able to compete with the planet market. So that it would be important to aid the agriculture companies by increased subsidizes and other businesses optimizing while cutting down tariffs (Snorrason, 2006).

The impact of minimizing import constraints on fresh meat and decreasing tariffs on beef in general could lead to Iceland being dependent on foreign market concerning food security. Overseas marketplaces might face impact to their creation, such as pet disease or crop inability and would that lead to shortage and/or significant price change for Icelanders at least in the brief run (Jhannesson T. , 2004).

Will consumers be dedicated to Icelandic production

In economics there is a basic principle that says that folks respond to incentives. The consumer recognizes what he wants when two or more alternatives can be found, he is consistent in the way that if he choses product A rather than B and product B alternatively than C, that he'll then choose A rather than C. He also decides more quantity of quality rather than less quantity of quality, for example he decides three apples rather than two apples if the price is the same. Many people are though aware that they can consume less that they desire because their spending is constrained, or limited, by their income (Mankiw & Taylor, 2014).

In reality this isn't so simple as indicated above. The experience of Finland and Sweden becoming a member of the European union (free trade) revealed that individuals are prepared to pay higher charges for domestic produced goods in comparison to similar brought in goods. Regarding Icelandic vegetables, Icelanders are prepared to pay 10% more than for imported vegetables (Kristfersson & Bjarnadttir, 2011). Research has shown that 62% of Icelandic consumers think Icelandic meat is of more quality that overseas meats, 26% would pay 6%-10% higher price for Icelandic beef and 21% would pay 11-15% higher price. When consumers where asked if indeed they would prefer to buy international cheaper meats, 35% said yes, 45% no and 20% where undecided (rhallsdttir, 2012). These amounts signify that if transfer limitations where relieved or reduced then Icelandic companies of meats have to intensify and show their advantages to consumers to keep their loyalty. For instance show their proximity to the marketplace, development methods, quality and nourishment level (rhallsdttir, 2012).

Conclusion

The world is usually becoming smaller and smaller and smaller with globalization and increased trade. The pressure on Icelandic authorities to reduce limitations on importing fresh meats will only increase by time. In the event the Icelandic federal cannot prove that import of raw meats harms the fitness of humans and animals they have to reduce import limitation from countries with in EU. Icelandic farmers and providers of meat need to get ready for the market checking by promoting them self among consumers and differentiate. All restriction reduction on transfer including quotas and tariffs gain the consumers, it's just a subject of how much. Increased competition may possibly also lead to creation improvement with in the meats farmers/makers and increase their turnover and revenue like the veggie industry experienced.

Since the coverage on changes in economical welfare in this newspaper were only theoretical it might be interesting to see a research survey on the true influences in numbers, similar to the statement of the Statistical Bureau in 2006 about food prices.

References

EFTA Monitoring Authoroty. (2014, Oct 8). EFTA Monitoring Authoroty. Retrieved Dec 5, 2014 from Questions and answers - Fresh meats case: http://www. eftasurv. int/media/press-releases/ESA_Questions_and_Answers_(EN)_-_The_Icelandic_Fresh_meat_case. pdf

EFTA Security Authoroty. (2014, October 8). EFTA Monitoring Authoroty. Retrieved Dec 11, 2014 from Internal Market: Iceland's limitations on the importation of fresh meat in breach of EEA laws : http://www. eftasurv. int/press--publications/press-releases/internal-market/nr/2345

Icelandic Competition Authority. (2012). Verѕrun og samkeppni dagv¶rumarkai [Price developments & competition on convenience market]. Reykjavk: Icelandic Competition Specialist.

Icelandic Consumer Organisation. (2013, March 14). Icelandic Consumer Organisation. Retrieved Dec 5, 2014 from Um innfllutning hru kj¶ti [About imports on natural meat]: http://www. ns. is/is/content/um-innflutning-hrau-kjoti

Icelandic Federation of Labour. (2007, March 23). Icelandic Federation of Labour. Retrieved Dec 10, 2014 from Breytingar tollum 1. mars 2007 [Changes on tariffs 1. March 2007]: http://www. asi. is/media/6401/230307tollarbreytingar. pdf

Jhannesson, S. , & Agnarsson, S. (2004). Bnid er bєstlpi, bє er landstlpi [Farmer is the man of the home, a plantation is a pillar of the commuity]. University or college of Iceland, Institute of Economics. Reykjavk: Oddi hf.

Jhannesson, T. (2004). Framleislukerfi bєfjrrkt [Development system for livestock raising]. Education discussion of the agriculture industry (pp. 55-60). Reykjavk: Iclandic Farmers Relationship.

Kristfersson, D. M. , & Bjarnadttir, E. (2011). Staa slenks landbєnaar gagnvart aild a Evrpusambandinu [Icelands agruculture position towards account of the Western european Union].

Mankiw, N. G. , & Taylor, M. P. (2014). Economics. Andover: Cengage Learning.

Snorrason, H. (2006). SkЅrsla formanns nefndar sem forstisrherra skipai 16. janєar 2006 til ѕess a fjalla um helstu orsakaѕtti hs matarvers Ќslandi og gera till¶gur sem mia a ѕv a fra matvlaver nr ѕv sem gegnur og gerist ngrannarkjunum [Article from the presitend of a committe that was nominated 16th of January 2006 by the leading minister to adress the key sets off to high food price in Iceland and make an indicator to bring food price down to same level such as neighbouring countries]. Reykjavk: Icelandic Statistical Bureau.

orgeirsson, S. , Bjarnadttir, E. , & Sveinsson, . E. (2004). Atvinnuvegur krossg¶tum - Staa bєgreina breyttum tmum [Industry on crossroads - Farming position in different times]. Education conference of the agriculture industry (pp. 61-73). Reykjavk: Iclandic Farmers Connection.

rhallsdttir, S. A. (2012). Vihorf slenskra neytenda til landbєnaarframleislu - hrifaѕttir kj¶tneyslu- [Icelandic consumers attitude towards agricutlure products - Factors influencing meat cunsumption -]. Agricultural University of Iceland, Natural Resources Department. Reykjavk: Agricultural School of Iceland.

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