Genetically Modified Crop Innovations and Product Differentiation: Trade and Welfare Effects in the Soybean Complex

Andrei Sobolevsky, GianCarlo Moschini, Harvey E. Lapan
November 2002  [02-WP 319]

We develop a new partial equilibrium, four-region world trade model for the soybean complex comprising soybeans, soybean oil, and soybean meal. In the model, some consumers view genetically modified Roundup Ready (RR) soybeans and products as weakly inferior to conventional ones; the RR seed is patented and sold worldwide by a U.S. firm; and producers employ a costly segregation technology to separate conventional and biotech products in the supply chain. The calibrated model is solved for equilibrium prices, quantities, production patterns, trade flows, and welfare changes under different assumptions regarding regional government's production and trade policies, differentiated consumer tastes, and several other demand and supply parameters. Incomplete adoption of RR technology naturally arises in the free trade equilibrium, with the United States producing both genetically modified and conventional soybeans. The United States, Argentina, Brazil and the Rest of the World all gain from the introduction of RR soybeans, although some groups of agents (producers or consumers) may lose. Compared to free trade with no domestic bans, a ban on RR production in the Rest of the World improves that region's welfare at some levels of segregation costs but hurts the United States. Introduction of the same ban in Brazil benefits its farmers but makes the region worse off, and an import ban on RR products significantly reduces welfare of all agents. Price support programs for U.S. farmers, despite hurting the United States, have the potential to further improve the world's efficiency. The distribution of welfare between consumers and producers appears to be sensitive to several parameters of the model, but region-level outcomes are robust with respect to most of them and are sensitive only to parameters defining the share of consumers conscious of genetically modified organisms and the elasticity of demand for conventional product varieties.

Keywords: biotechnology, differentiated demand, food labeling, genetically modified products, identity preservation, innovations, intellectual property rights, international trade, loan deficiency payments, market failure, monopoly, Roundup Ready soybeans.

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