The economics of GMO labelling laws

Should manufacturers of food products that contain GMOs (genetically modified organisms) be required to disclose the presence of GMOs on their product labels? In Canada, Health Canada does not require GMO disclosure by food manufacturers.

However, in the United States, legislatures in a handful of states (most notably, Vermont, whose GMO labelling law took effect on July 1, 2016) have enacted laws that require GMO disclosure. Widely lauded by consumer activists and environmentalists, GMO labelling laws are almost universally unpopular with food manufacturers and distributors.

Accordingly, industry groups representing food manufacturers are currently challenging the Vermont law in federal courts as unconstitutional. In response to this court challenge, as well as to pressure from various trade groups, the U.S. Congress recently enacted its own (weaker) GMO labeling law, which will pre-empt stricter state regulations like Vermont’s once it’s signed by President Obama.

From a public health perspective, the scientific consensus speaks with a nearly unanimous voice: countless studies have shown that there are no significant health risks associated with the consumption of foods containing genetically modified ingredients.

In spite of the fact that the American Medical Association, the World Health Organization, and the National Academy of Sciences have all endorsed this consensus, a majority of Americans and Canadians continue to believe that GMOs are unsafe. It would appear that scaremongering by environmental activists has been effective in shaping popular opinion about GMOs in much the same way as campaigns by anti-vaccine groups have contributed to falling vaccination rates among school-aged children.

The current debate, however, is not about banning the consumption and production of foods with GMOs but rather requiring manufacturers to disclose the presence of GMOs on product labels. Is there an economic argument for mandatory GMO labelling?

To the extent that consumers are willing to pay a premium for GMO-free food but are unable to distinguish between foods that contain GMOs from foods that do not, regulations that require manufacturers to disclose the presence of GMOs on their labels could potentially help create a market for GMO free foodstuffs. In this instance, GMO labelling laws might be justified as a solution to an asymmetric information problem regarding product ingredients.

That industry groups have been opposed to most GMO labelling laws suggests that mandatory GMO disclosure is unlikely to function in this way. For if GMO labelling helped reduce informational asymmetries, producers of GMO-free foodstuffs would presumably have an incentive to lobby in favour of GMO labelling regulation, since these laws would allow them to distinguish their products from their competitors and charge a premium for their wares.

Indeed, given that nothing precludes manufacturers from labelling or advertising their products as GMO-free, the potential premium associated with being GMO-free gives producers of GMO-free goods a strong incentive to market their products in this way, even in the absence of mandatory GMO disclosure. Industry’s overwhelming opposition to GMO labelling, as well as the fact that relatively few products were marketed as GMO-free even prior to the adoption of the Vermont labelling law, suggests that food manufacturers are skeptical that consumers are willing to pay a significant premium for the assurance that their products are indeed GMO-free.

Accordingly, the economic case for requiring GMO labelling is weak at best.

Unfortunately, in Vermont, consumers are beginning to feel the negative consequences of mandatory GMO labelling. Food manufacturers will no longer be selling many of their wares in the state as it is economically senseless to separately label products to cater to a small market of only 620,000 potential customers. Additionally, foodstuffs made by smaller firms (for instance, kosher food manufacturers) are among the most likely to disappear from Vermont grocery shelves, because these firms lack the economies of scale to absorb the fixed costs of complying with the Vermont law.

What Vermonters have gained in terms of information (of questionable value) they will be quickly losing in terms of choice.