Free Trade, Pesticide Regulation and NAFTA Harmonization

Pesticides are an important farm input both in terms of cost and in terms of their impact on crop yields and quality. With freer trade in agricultural output, differences in cost of production, yield and quality can have a large effect on competitiveness. Thus there is an increased demand by farmers in Canada and the United States for harmonization of pesticide regulations, and in particular for the option to import registered pesticides for their own use. Under NAFTA the three national governments are moving to make pesticide regulation more uniform, but there are still significant differences in regulatory structure and these effectively preclude direct imports by farmers at this time. Moreover, while farmers believe they would as a group benefit from a single market this is unlikely to be the case. Under the current regulatory system pesticide companies have an incentive to practice price discrimination, which results in farmers with the most inelastic demand facing a higher price. In a single market one would expect prices to equalize, but at a price closest to the price prevailing in the larger-volume market. In addition if one market is relatively small it may no longer be profitable to serve it and those farmers could lose access to certain compounds, because there would be no domestic registration. Thus this paper argues that the welfare gains from introducing free trade in pesticides are more complex than have normally been assumed. In particular, regulators in Canada, Mexico and the United States should consider differences in market structure in their efforts to harmonize pesticide regulations.