Trade bans, imperfect competition and welfare: BSE and the US beef industry

The discovery in May 2003 of a Bovine Spongiform Encephalopathy (BSE) case in Alberta, Canada led to a ban on Canadian cattle imports into the US. The ban lasted until July 2005. The discovery in December 2003 of a BSE case in the State of Washington led to an export-ban on US beef that lasted from January 2004 until July 2006. So both bans were in place concurrently between January 2004 and July 2005. How the two bans jointly and separately affected the welfare of the beef industry poses an interesting economic problem that is addressed in this dissertation. For a framework, we consider the profit-maximizing problem of price-discriminating oligopolistic/oligopsonistic beef processors who sell beef and procure live cattle domestically and internationally, and face a beef export-ban and/or cattle import-ban. Two optimality conditions—one for procuring domestic cattle, the other for procuring Canadian cattle incorporate the effect of the ban on processor strategic interdependence and are estimated econometrically using monthly observations from January of 1992 until September 2006. We estimated two separate models. The first consists of both optimality conditions and was estimated with the sub-sample of observations not containing the period of the Canadian cattle ban. The second model was estimated using the whole sample but consisted only of the optimality condition of domestic cattle. The econometric estimates of Model 1 were used to measure the welfare effects of the US beef export ban on beef consumers, beef processors, and cattle producers. The econometric estimates from Model 2 were used to measure the welfare effects of both bans on the same participants in the beef marketing chain. The difference between the two welfare effects is attributed to the import ban on Canadian cattle. What we find is that the ban on Canadian cattle resulted in a $935 million gain to cattle feeders, a $465 million loss to consumers, and a $204 million loss in rents to beef processors, adding up to a net social welfare gain of $266 million. Part of the gains to cattle feeders are offset by losses from the beef export-ban, leaving a net gain of $312 million from both bans. Losses to packers from the closure of the Canadian border are more than offset by gains from the beef-export ban, resulting in a gain of $992 million from both bans. Consumers are the biggest losers. They lost an additional $697 million from the beef export ban, for a total loss of $1.16 billion from both bans