International Business, Update 2003 Cases
Cow Diseases and Trade: The European Epidemics
Background
Bovine spongiform encephalopathy (BSE),1 or Mad Cow Disease, is a fatal neurological illness found in cattle. It causes afflicted animals to exhibit aggressive behavior, eventually leading to disorientation and death. BSE has overwhelmingly struck herds in Britain, where over 177,500 cases have been confirmed on over 35,000 farms. Though 95 percent of all BSE cases are in Britain, the disease has also been found in native-born cattle throughout Western Europe.
Despite various theories, experts cannot fully explain the cause of Britain’s misfortune. One widely held theory points to the parallel incidence in Britain of a related disease found in sheep, known as scrapie. British cow feed processors, in order to provide a more nutritious feed, traditionally “cooked” sheep and other animal remains at unusually low temperatures (100°C, as compared to 130° to 140°C in other countries), perhaps too low to kill the scrapie protein thought to be transmitted to cows. Furthermore, due to the lack of available soybean (the other widely-used cow feed supplement) in Britain, the diets of British herds consist of a greater proportion of sheep and other animal-derived feed than do those of herds in other countries. These and other factors have been linked by experts to Britain’s BSE epidemic. Conclusive answers to the most basic of questions regarding BSE, however, remain a mystery. After more than ten years of research, experts cannot even agree on how to dispose of frozen, diseased carcasses.
In the 1980s, concerns over the spread of BSE resulted in most European countries banning all types of animal-derived cow feed. France and Ireland took the further precaution of destroying entire herds that experienced one or more cases of BSE. In the United States, where there has never been a reported case of BSE, an effort to head off an outbreak resulted in a ban on the importation of live British calves and cattle products. Britain responded to the new discovery by making BSE an identifiable disease in 1988. As a means of avoiding a spread of the disease, a ban was instituted within Britain on the use of cow-derived cow feed. Despite these developments, herds of British-born cattle continued to be raised in numerous countries, including France and the Netherlands, which together imported an estimated 400,000 British calves in 1995. Overall, Britain’s beef industry remained strong during the first half of the 1990s, generating nearly 1 million metric tons of product in 1995. Production in 2001 was less than 65 percent of what it had been ten years earlier (see Figure 1).
A Possible Link to Humans
The possibility that BSE could be transmitted to humans through consumption of beef was always a lingering question. It was not until 1996, however, that the likelihood of such a link was scientifically identified. A British government health commission reported in March of that year that ten recent deaths in the United Kingdom were attributed to a new variant form of Creutzfeldt-Jakob disease (vCJD), a human spongiform encephalopathy. Classical CJD, first identified in the 1920s, is a debilitating disease of the central nervous system that causes degeneration of the brain and ultimately death. The new variant differs from the classical form of the disease in that it affects individuals at a much younger age—an average of 28 versus 63. At about 13 months, the variant takes about twice as long to run its course. Scientists are also noting that vCJD may have an incubation period of about 30 years before it can be detected in humans.
There have been at least 110 confirmed cases of vCJD in Britain as well as two in France and one in Ireland since 1995 (see Figure 2). Since the 1996 government report, two other high-profile reports in Britain found evidence of a causal relationship between vCJD and BSE. In Britain and throughout most beef-consuming nations, the report caused immediate alarm. Media reaction to the news was “widespread and at times hysterical,” according to a U.S. embassy report. Beef consumption and production throughout Europe dropped significantly within days of the commission’s announcement, buoying sales of pork, poultry, fish, and vegetarian burgers. The multinational fast-food chains McDonald’s and Burger King immediately switched to non-British beef. McDonald’s action alone was expected to cost British beef producers $38 million in lost sales for 1996. British consumers were generally unable to differentiate between domestic and imported beef, prompting supermarkets and restaurants to hastily adopt national origin labeling policies in order to maintain sales.
The promises of European butchers and meat merchants not to sell British beef allayed few fears, as consumers questioned the extent of the spread of BSE throughout Europe. In the large German farming state of Bavaria, the market for beef practically collapsed. A major Munich slaughterhouse reported within days of the announcement that the number of cattle being prepared for slaughter had dropped by 80 percent. In addition to beef, consumers were careful to avoid all sorts of other cattle-derived products. Processed cow fats are sometimes used to make cookies and salty snacks taste rich and to make lipsticks glide smoothly. Cow proteins show up in shampoo. Collagen, extracted from the inner layer of cattle hide, is used to balm wounds and cosmetically puff up lips. Gelatin, refined from cattle hide and bones, is found in such foods as ice cream, gummy candies, and marshmallows—as well as the capsules encasing drugs. While no evidence exists that CJD or BSE can be transmitted through these various products, consumers reacted with extreme caution. Tesco, a large British supermarket chain, pledged to label all of its products to indicate whether they contained any British cattle products.
The Government Reaction
The British government immediately sought to reassure consumers and announced that it was prepared, if necessary, to destroy all 11 million cows in Britain. This drastic solution was soon downplayed, and government officials began a campaign of stressing the “extremely low” risk of contracting an illness from beef. “It isn’t the cows that are mad, it’s the people,” said Britain’s Secretary of State for Health Stephen Dorrell, “I eat beef, and I let my children eat beef.” The British Agriculture Minister went so far as to feed a hamburger to his four-year-old daughter on live television.
Despite the British government’s pleas for “reasonable” measures, concerned foreign governments immediately imposed various restrictions on British cattle and beef products. Russia and South Africa, which had been key markets for British beef, turned primarily to Australia for shipments. Denmark compiled a blacklist of products made from British beef, ranging from foodstuffs to cosmetics. In the Middle East, fears that Irish herds might also be contaminated led Iran to halt Irish beef imports. Egyptian authorities turned away three shiploads of Irish cattle, stranding the herds offshore for several days. Egypt also banned British leather, while Jordan refused British and Irish dairy products. Hong Kong banned frozen and chilled British beef imports, and Taiwan, which banned most British beef products in 1990, added canned British beef products to the list. In Costa Rica, as in other Latin American countries, customs officers searched tourists’ bags for contraband steaks. Ghana and Libya banned imports of all European beef, regardless of origin.
The complete ban on British cattle and beef products instituted by the Commission of the European Union, however, sent the greatest shockwaves. By April, the EU issued its preliminary conditions for having the ban lifted. Under the plan, all British cattle (the majority of which are dairy cows) over thirty months in age would be slaughtered and incinerated at the end of their useful life. This program, termed the “thirty-month cull,” would serve to keep the meat of 4.6 million cows born and raised prior to 1993–1994 (the beginning of Britain’s most comprehensive BSE preventive measures), out of the food chain. In addition, under what was designated the “selective cull,” Britain was required to slaughter for incineration several tens of thousands of additional younger cattle that were identified as “high risk,” including those from herds that had experienced a case of BSE. In recognition of the significant costs to be incurred by British farmers and renderers, the EU agreed to cover 70 percent of related costs, the same level used to compensate Germany during its 1994 outbreak of swine fever.
By mid-April, Britain released its response to the EU proposal, containing most of the details requested by the EU, but falling short in some respects, including the number of cows to be included under the selective cull. Several EU governments were unsatisfied with Britain’s proposal, suggesting that the ban remain in place until the next review, six weeks hence. The European Commission conferred, explaining that Britain would have to undertake more drastic measures before a lifting of the ban could be considered. Despite the disagreement, Britain began the culling program.
The “Beef War”
What followed has been described as one of the most serious strains in Britain’s historically frayed relationship with the rest of Europe. Repeated attempts by Britain throughout the first half of 1996 to have the costly EU ban lifted failed. Elections in 1997 were fast approaching and the economic impact of the ban was building. British trade unions reported that over 8,000 beef industry workers had lost their jobs in a period of a few weeks. Experts stated that the United Kingdom economy as a whole was poised to lose 1 percent of annual growth and 100,000 jobs, while sustaining nearly 2 percent of added inflation due to higher beef, milk, and related prices. Some suggested that Britain was facing its worst economic catastrophe since the pound had to be bailed out by the IMF in 1976.
After a month, the crisis escalated to threats of a trade war. Advisors to then prime minister John Major let it be known that he was “incandescent” with rage and “fuming” over European leaders’ unwillingness to lift the ban. The British government warned that a retaliatory ban on an unspecified list of European imports would be seriously considered. For good measure, Britain brought its case before the European Court of Justice in the hopes of proving the ban illegal. “This is quite a serious crisis,” said Kenneth Minogue, a political scientist at the London School of Economics, “(It could) lead to a serious rupture” of British–EU relations.
When many thought the friction could get no worse, the EU’s agriculture minister, Franz Fischler, stated in mid-April that the ban was inspired largely by concern for the European beef market, rather than by health fears. He remarked, “(I) wouldn’t hesitate to eat beef in England.” Other EU officials also conceded that the ban was in response to the health of the market, rather than that of the public. Even McDonald’s, in announcing its intentions to halt the use of British beef in its U.K. outlets, stated that British beef is safe, but it could not disregard the growing unease of its customers. The president of McDonald’s British operations stated, “This is about public confidence and I have to tell you that people are not feeling confident about British beef right now.”
One month after Fischler’s admission, in conjunction with additional failed attempts at having the ban lifted, the British government began a strategy of “noncooperation” within the EU governing bodies. Prime Minister Major accused fellow EU members of “willful” behavior and a “breach of faith” in maintaining the two-month-old ban. Addressing the House of Commons, he said Britain “cannot be expected to continue to cooperate normally” in the business of the EU. “We cannot continue business as usual with Europe when we are faced with this clear disregard by some of our partners of reason, common sense and Britain’s national interest.” The government’s primary targets were EU decisions that required unanimous approval from members countries. The first casualty of this noncooperation was a new set of Europewide bankruptcy rules. After month’s time, Britain managed to block more than seventy policy decisions, bog down an intergovernmental conference on the EU’s future, and disrupt plans for a June EU summit meeting.
Adding to the British government’s frustration was the continuing domestic slump in beef retail sales. For the three-month period ending June 5, 1996, consumption of beef in the United Kingdom was down about 24 percent over the prior-year period. Major supermarkets had begun refusing “clean” beef from slaughterhouses that were also active in the government’s new culling program. One supermarket executive said the government was “naive” to believe that material from culled cattle would not find its way into the food chain. In a unique move, Britain’s ASDA supermarket chain announced its support of domestic beef by refusing to sell foreign beef. ASDAs CEO stated, “British beef is the best and safest in the world and our shoppers want to buy it.”
A Tenuous Compromise
By June of 1996, the British-imposed paralysis of EU decision making and the prospects of a deepening European crisis, finally prompted an agreement between Britain and the EU to have the beef ban gradually lifted in exchange for various measures by Britain, designed to isolate the risks of BSE and assure the global beef market.
Under the agreement, Britain would be required to fully implement corrective measures already underway, as well as to meet several new EU demands. In addition to the complete implementation of the thirty-month cull, the EU imposed an increase of Britain’s selective cull, which would now target 147,000 cattle, up from the previous number of 80,000. In addition, the new agreement required Britain to establish a new system to identify cattle and their movements; the removal of meat and bone meal from feed mills and farms; new regulations on farm and equipment cleaning; and tighter controls on the British rendering industry. Despite predictions by John Major that conditions would be met and the ban would be lifted by early 1997, no firm dates or time frames were specified in the agreement.