Trade is not a win-win game when there is corruption

Open world trade has received a very bad press lately—particularly from the government. You may be confused about what your opinion is on the issue, after all, economics teaches us that trade is a non-zero sum game: a game in which everyone can be a winner at the same time. And, in general, economists seem to be welcoming of policies that aim at opening trade—at least in theory.

Trade can benefit everyone but it won’t necessarily do so. In prescribing free trade policies, free market economics ignores much complexity of political, social and industrial institutions. Pray that the example I will expose in this article does not make it to your dinner plate this week.

If you are a meat eater, I bet that your concerns over the origin of your beef have grown over the last week. Last week, it was exposed that Brazilian meatpackers were being allowed to export rotten meat.

The story started with allegations that major businesses bribed inspectors to get health certificates and masked tainted meat as fit for consumption. The story has unfolded violently. Brazilian meat is exported to more than 150 countries. China has already suspended meat imports from Brazil and the EU called for a partial ban. Brazil is facing a potential loss of export revenues of about 3.5 billion dollars.[1] The scandal could derail the country’s economy.

What is almost comical about the story is that people seem to be surprised.

Health safety standards in Brazil, or more precisely, the lack of them, was a hot topic during the Rio Olympics. The Olympics were a high profile event, and even then, it was obvious that Brazilian authorities could not control the safety of their water. You may remember a scandalous report back in August revealing that the water in Rio’s Olympic venues held viral levels 1.7 million times what would be considered alarming in the US and Europe.[2]

Apart from exposing the difficulties that food safety logistics impose of authorities, the rotten meat scandal exposes another angle of the scale and extent of Brazilian corruption.  Brazil is famous, or rather infamous, in Latin America for being the region’s leading exporter of corruption—and, let me restate, the region is Latin America. With such a reputation, what guarantee can there be that the Brazilian food safety system meets its purpose?

The American National Cattlemen’s Beef Association is among the most critical groups raising concerns about Brazilian food safety standards in the beef sector.

Back in October of 2016, the US and Brazil sealed an agreement to allow access to each other’s beef market. Until then, beef imports from Brazil were restricted to cooked products because of disease-prevention restrictions. Even then, Brazil provided a significant portion of the total cooked beef imported into the US.[3] Now, thanks to the agreement, the US allows imports of fresh and frozen Brazilian beef.

When the beef trade agreement with Brazil was being negotiated, the American National Cattlemen’s Beef Association questioned the rigor of the risk-evaluation protocols. The most important concern expressed by the NCBA regards the Foot-and-Mouth Disease.[4]

Nevertheless, these concerns were mostly disregarded by the US Food Safety and Inspection Service. The Food Safety and Inspection Service rendered the Brazilian food safety system governing meat products equivalent to that of the US.

It is possible that the FSIS disregarded the NCBA’s claims because they came from a group that would be directly impacted by increased competition from Brazilian beef producers. However, it is also possible that the US FSIS’ decision was influenced by the Ministry of Agriculture. During the times of negotiation, the MA explicitly recognized the beef deal with Brazil as an excellent economic opportunity for US beef exporters. Brazilians are big beef consumers. In annual per capita terms, the average Brazilian consumes around seven more pounds of beef than the average American. Thus, gaining access to a market of around 200 million beef eaters does not sound too bad for American exporters after all. [5]

Furthermore, beef consumption by volume in the US seems to be in decline largely due to the increased popularity of substitute leaners meats such as fish and poultry.[6] Therefore, food safety standards aside, American beef producers may be very welcoming of this new trade deal with Brazil.

In the aftermath of this trade story, American beef producers win but American beef consumers do not. So, can it be said that America wins as a whole from this beef trade agreement with Brazil?

As I stated earlier, trade can good for everyone but it won’t necessarily be so. I just shared a case in which there is not a clear win-win from trade without government regulation. In the case of the beef trade deal with Brazil, the extent and scale of Brazilian corruption justifies protectionist measures in the US and any domestic market considering Brazilian meat imports. Partial and complete bans, like those imposed by China and the EU are necessary to protect domestic consumers and are a legitimate way to protect the international community and prevent future corruption by stigmatizing systems that allow bribery at a large scale as it is commonplace in Brazil.