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Do Humans Need GMOs? -- A View from a Global Trade MarketJournal of American Academy of Business, Cambridge, Vol. 8 (1), 147
Abstract: As the population of the world continues to increase, it will be accompanied by an increase in the demand for food. Since the total acreage planted is no longer increasing, unless new production technology is adopted, such an increase in demand that is unmatched by an increase in supply in the world food market will raise food prices and lead to food shortages, especially in underdeveloped countries. In this study, a spatial equilibrium (SE) model is applied to create a world trade model. The products simulated in this study are corn and soybeans since they are the major food grains and also the most widely adopted GMO products in the world. The empirical results reveal evidence of the adoption of GMO production technology increase the quantity traded and lessen the upward pressure on food prices, although it is the major trading countries that obtain most of the benefit. Introduction: Malthus predicted that the population would grow at a faster rate than the food supply. His prediction, however, did not prove true. Thanks to the green revolution in agriculture, the production of food per capita on average rose by nearly 0.5 percent per year from 1961 to 1999 and this caused the real prices of agricultural food ingredients to fall by nearly 2 percent per year over that same period. However, recent statistics show that the acreage planted on a global basis is no longer increasing due to development and climate change. If no new production technologies are developed and adopted, the food supply curve will no longer shift. Furthermore, as the world's population continues to grow, this will cause the demand for food to increase. Such an increase in demand that is not matched by a corresponding increase in supply in the market for food will lead to an increase in world food prices. The purpose of this paper is to answer the question: "Do humans need genetically modified organisms (GMOs)?" To this end, a spatial equilibrium (SE) model is adopted to create a world trade model. The products to be simulated are corn and soybeans since they are the GMOs that have been most widely adopted in the world. section 2 of this paper reviews the demand for and supply of food from a global market perspective, while section 3 seeks to interpret the international trade theory. The world trade model for com and soybeans is presented in section 4. The simulation results both with and without the adoption ofN GMO corn and soybeans production technology are displayed in section 5. The final section concludes. Current Status and Debates on Transgenic Crops The benefits to be derived from adopting GMO technology in agricultural production include the following: high-yield and quality, savings in spraying costs, a reduction in labor, and reduced environmental impacts (Sparling, et al., 1999). For example, Just and Hueth (1993) show that nonchemical companies tend to develop biotechnology substitutes for chemicals, which benefit the environment. Qaim (1999) illustrates the increased production and cost savings in relation to disease-resistant potatoes in the MeNxican potato sector, and Falck-Zepeda, et al. (2000) show the high surpluses resulting from Bt cotton and herbicide-tolerant soybeans. To sum up, GMO technology increases production, reduces costs and lowers prices. GMO technology benefits many crops. Figures provided by the International Service for the Acquisition of Agri-biotech Applications (ISAAA) depict the shares of the four principal GM crops. At the global level, in 2003, GM soybeans occupied 41.4 million hectares (61% of the global GM area), GM corn was planted on 15.5 million hectares (23% of the global GM area), transgenic cotton was grown on 7.2 million hectares (11% of the global GM area), and GM canola occupied 3.6 million hectares (5% of the global GM Narea) (James, 2003). Health risks, on the other hand, are the most widely-disputed area in the current GMO controversy. GMO opponents worry that different protein levels in GMO products may have prolonged impacts on health (Sparling, et al., 1999). Thus studies of consumers' risk perceptions, information, and decisions regarding buying GMO products are increasing in the literature (Sheehy, et al., 1998; Wohl, 1998). The needs of some consumers for GMO-free products leads to non-GMO labeling issues (Caswell, 2000; Paarlberg, 20N02). People in EU countries are more concerned about the health risks associated with GMOs. These differences between the risk perceptions of consumers in the EU and those in the U.S. and Japan lead to disagreements in relation to the trading of GMO products. This in turn might lead to different attitudes in terms of how countries handle their nontariff barriers as reflected, for example, in the Sanitary and Phytosanitary (SPS) Agreement of the World Trade Organization (WTO). This phenomenon even threatens the Nintegrity of the World Trade Organization (Ames, 2000). The new EU regulation calling for strict labeling and tractability on all GM products will further discourage the planting of GM crops in poor countries (Paarlberg, 2002). Nevertheless, the share of transgenic crops is already large and is still growing fast. According to the ISAAA report, in 2003, the estimated global area for GM crops in 2003 was 67.7 million hectares, representing a 15% increase over the previous year, and a 40-fold increase since 1996. Six countries, namely, the U.S., Argentina, Canada, Brazil, China and South Africa accounted for 99% of the global transgenic crop area. Close to one-third (30%) of this global transgenic crop area was located in developinNg countries. The global market value of GM crops is estimated to be between $4.50 and $4.75 billion (James, 2003). Research and development plays an important role in the GMO industry. Falck-Zepeda, et. al. (2000b) show that the gene developer of the Bt cotton, Monsanto, accounted for 21% of the world surplus of Bt cotton. To motivate firms to engage in R&D, patents have become particularly important (Foltz, et. al., 2000). Demand and Supply in the Global Market As stated earlier, Malthus's theory that the growth of population will be more rapid than that of the food supply has been disproved by data for the last 50 years. As shown in Figure 1, the global food production growth rate exceeded the global population growth rate from 1961 to 2000. There are basically two reasons why the supply of food has exceeded the demand for it. The first is that the major crop production technology has improved over the last fifty years and, therefore, the crop yield per acre hasN increased. Such increases in crop yields have been due to the green revolution. The second is that the acreage under cultivation has increased. Figure 2 shows that, on a global basis, the acreage planted increased from 1961 to 1995 and then declined slightly after 1995. According to U.N. statistics and forecasts, the population of the world in 2000 was around 6.18 billion, but is expected to become 8.15 billion in 2025 (representing a 31.84% increase in just 25 years). Such population growth will of course result in an increase in the demand for food. However, the global acreage under cultivation is no longer increasing because of global climate change or for environmental reasons, and so the only way to increase the food supply is to increase crop yields. Since large quaNntities of pesticides and fertilizers have been applied on farm fields, high crop yields have resulted, but the chemicals have also negatively impacted the environment by, for instance, polluting the groundwater. It is therefore inappropriate to extensively apply these chemical inputs to the crop production process. GMO production technology may therefore be one way of increasing crop yields and food supply. In such circumstances, food prices will not need to be raised. In terms of the recent developments in the use of GMOs, the confidence of consumers has still not caught up with the advances in production technology. The protests voiced against the adoption of GMO production technology are centered around two separate issues: human health and the environmental impact. Many developed countries, such as those of Europe and Japan, have strict regulations with regard to GMO products as well as certain other products involving related processes, since uncertainty in relationN to human health exists once people consume GMO products. The other reason is that the production of GMOs may affect the environment by, for instance, damaging the ecological system. However, such issues may be ignored by developing countries from the standpoint of food security. The ratio of expenditure on food to GNP in most developing or under-developed countries is at least fifty percent. If the food price is increased by 10%, it may result in a food crisis in such countries. However, such increases maNy not have much of an impact on developed countries since the ratio of their expenditure on food to their GNP is much smaller (below 2%). This is why the regulations and the extent to which the consumers accept them differ between the developed and developing countries. Theoretical Graphics In Neoclassical trade theory, the excess demand and supply functions are derived from the domestic demand and supply functions so that they can be linked with the world market. When a shock either in relation to domestic demand or supply occurs, for instance when the GMO production technology is adopted, the supply curve will then shift to the right and a new equilibrium will be reached. Let us suppose that D^sub x^ and S^sub x0^ are the domestic demand and supply curves for an exporting country, while Dm Nand Sn, are the domestic demand and supply curves for an importing country, as shown in Figure 3. Excess demand and supply curves in the world market may then be derived from the demand and supply curves in the exporting and importing countries. When there is no government intervention and a perfectly competitive market is assumed, the equilibrium price will be P^sub w0^ while the volume of trade will be OT^sub 0^. If there is a supply shock in the exporting country, for instance when a new production technology is adopted, the supply curve will shift to S^sub x1^, which will give rise to a new excess supply curve ES^sub 1^. Therefore, the world price will fall to P^sub w1^ and the volume of trade will increase to OT^sub 1^. The gains in welfare as a result of the trade surplus both for the exporter and the importer are represented by the areas A and B, respectively. This implies that a trading country may benefit from trade even though the new production technology may be adopted in a foreign country. On the other hand, the demand for food will increase over the next 20 years due to population growth, and, therefore, the world prices will increase if the supply does not change. However, as mentioned before, the adoption of new production technologies involving GMO products could alleviate such pressure on prices. Spatial Equilibrium Model and Validation The first term of the objective function is the area under the demand curve minus the area under the supply curve, which represents the social welfare for trading country i, while the second term relates to the transportation cost. The objective function is defined as a "quasi-welfare function" (Takayama and Judge). The first constraint shows that the total demand in importing country i cannot exceed the supply that is imported, which indicates that the demand and supply balance. Similarly, the second constraint shows that exporting country i cannot export more than it is able to supply. According to the first-order condition (or the Kuhn-Tucker condition), the import price will be the export price plus the transportation cost if trading activity takes place. Such an equilibrium implies that thNe market is perfectly competitive and that prices are endogenous variables. The base year data used in the model are 1995 data. The reason why data for the year 1995 are applied here is that not a great quantity of GMO corn and soybeans were cultivated at that time. Therefore, the solution to the base year could represent the economic situation before the adoption of GMO production technology. When the GMO production technology is adopted, it will lead to a shift in the supply curve and the impact can be determined by simulating the model. To reduce the number of demand, supply, and trade variables in the empirical model, the trading countries shown in Appendix A are aggregated into regions. However, some of the major exporting and importing countries, such as the U.S., Argentina, Japan, and the EU-12 are not aggregated because of their larger market shares. The quantities and prices in relation to the production and consumption of each trading country are obtained from the FAO, USDA, the American Corn Grower Association (ACGA), and the International Service for the Acquisition of Agri-botech Applications. Population statistics are obtained from the United Nations, while the transportation costs are derived from Muller. Before simulating the adoption of GMO production technology in relation to corn and soybeans, the model has first to be evaluated. Tables 1 and 2 present the observed data and the solutions to the model in regard to both the quantities demanded and supplied. The deviations between the solutions and the observed data are also calculated. Table 1 shows that the deviatiNons for the four corn exporting regions in terms of the quantities both demanded and supplied are below 6%. A similar situation also occurs with regard to the importers. The total deviations for both the exporters and importers in relation to corn as shown in Table 1 are below 1%. Similarly, the total deviations in relation to soybeans in Table 2 are below 5%. Such small deviations indicate that the model passes the evaluation. Simulation Results Four scenarios are simulated here. The first scenario is referred to as BASE and indicates that the GMO production technology is not adopted, while the second scenario (TECH) represents the adoption of the GMO production technology in the exporting countries. The third scenario (POPUL2025) represents the shift in the demand curve due to the growth in population. The fourth scenario (TECH2025) refers to the adoption of the GMO production technology in the year 2025. The definition of each scenario is summarized as follows: BASE: base. TECH: adoption of the GMO production technology. POPU2025: shift in demand due to the growth in the population. TECH2025: shift in demand with the adoption of the GMO production technology. When the GMO production technologies in relation to corn and soybeans are adopted, either the crop yield or the costs of production will change. The magnitude of the GMO production technology is obtained from Tweeten. As corn production is adopted by the GMO production technology (Bt com), it will result in a 3.2% increase in the corn yield. If the soybean production is adopted by the GMO production technology (GR Soybeans), production costs will decline by $3.2 per hectare. The economic impacts arising from the adoption of GMO production technology on the respective markets for corn are listed in Table 3. Table 3 shows that if all exporting countries adopt the GMO production technology in relation to corn, then production, consumption, trade, and the value of welfare will all increase. The increase in the percentage for each trading region represents the increase in the proportion of its marketing share. For instance, the U.S. accounts for 83% of the marketing share in the inNternational corn trade market and will thus get the benefit of 81% of the overall increase in welfare as a result of the adoption of GMO production technology in relation to corn. Such results imply that larger trading countries will reap the most benefits from the adoption of a new production technology in an open market system. Table 3 also shows that the percentage increases in the quantities produced and consumed in relation to these four exporting countries lie between 2.17% and 0.55%, while the percentage changes in welfare range from around 0.09% to 0.14%. However, the percentage change in the quantity traded varies and ranges from 3.26% to 44.79%. The overall impacts on the quantity traded and on welfare due to the GMO production technology in relation to corn are 5.53% and 0.12%, respectively. Similarly, importing countrieNs also benefit from a lower import price as the corn production is affected by the adoption of GMO production technology. Generally speaking, major importing counties will experience a 0.54% increase in consumption while their welfare increases from 0.10% to 0.15%. However, production in the importing regions will be reduced and the reduction in percentage terms in the major importing countries will range from around 0.85% to 0.93%. The economic impacts as a result of the adoption of GMO production technology in relation to soybeans are presented in Table 4. The results in Table 4 are similar to those in Table 3 but the scale of the impacts in Table 4 is greater than that in Table 3. The overall impact of the adoption of GMO production technology in relation to soybeans will result in a 2.22% increase in the quantity traded, and 0.40% and 0.31% increases in the welfare of exporters and importers, respectively. The GMO Technology Can Lesson the Upward Pressure on Food Prices From the above discussion we can learn that the food supply will not change if the acreage cultivated as well as the crop yields remain the same. However, the food demand curve for the world as a whole will shift to the right if the population continues to grow. According to U.N. forecasts, the world population in 2025 will be 1.31 times that for the year 2000 (see Appendix B). Without income effects and without any change in the per capita demand for food, the demand for food in the world according to the Popu2025 scenario will result in the Base year demand being increased by 31%. Therefore, the simulation results based on the Popu2025 scenario indicate that the world export and import prices for corn in the year 2025 will increase by about 320.6% and 277.1%, respectively (Table 5), due to the small demand elasticity. Similarly, the world export and import prices for soybeans will rise by about 37.5% and 35.5%, respectively (see Table 5). However, if GMO production technology is adopted for both corn and soybeans, the export prices for corn and soybeans will decline by 12.6% and 4.4%, respectively, while the import prices will fall by 12.1% and 4.2%, respectively. These results indicate that if the GMO production technology is adopted, it may serve to reduce the pressure on increases in food prices in the future. CONCLUDING REMARKS In response to the question: "Do humans need GMOs?", the results of our simulation indicate that they do. The adoption of GMO production technology in relation to corn and soybeans could increase the quantity traded and reduce the upward pressure on food prices, although the major trading countries would stand to benefit the most from adopting a GMO production technology. There are some limitations to this research. The first is to assume that all exporting countries fully adopt (i.e. adopt 100%) the GMO production technology, while the importing countrieNs do not adopt such technology. If the importing countries were also to adopt the GMO production technology, the scale of the impact would be larger than that suggested by the above simulation results. The second restriction relates to the percentage change in the crop yield or the crop production cost when the GMO production technology is adopted. A 3.2% increase in the corn yield and a $3.2 per hectare reduction in the production cost of soybeans may underestimate what would happen in the future if the GMO production technology were to be promoted. Therefore, the above simulation results are underestimated. Finally, the external effects of adopting GMOs are not considered in this study. This will surely become a very important GMO-related research topic in the near future. Table 1. Validating Corn Production in an SE Model Table 2. Validating Soybean Production in an SE Model Table 3 Economic Impacts of the Full Adoption of GMOs on Corn Markets in the Current Period Table 4 Economie Impacts of the Full Adoption of GMOs on Soybean Markets in the Current Period Table 5 World Prices by Alternative Scenarios Figure I. 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