By Trinity Johnson

Abstract

In the early 2000s, the European Union (EU) created multiple standards on agricultural imports. This paper focuses on the effect of stricter maximum residue limits (MRLs) for pesticides on citrus fruit exports to the EU after the limits went into effect in 2005. Using a regression model on overall citrus fruit exports and an interaction term for country-level income, the data shows that the EU’s stricter MRLs hurt exports from high-income, lower-middle-income, and low-income countries. Exports from low-income countries declined the most after 2005, while only upper-middle-income countries saw an increase in exports. For product-specific models, low-income countries saw a reduction in exports to the EU for all citrus fruits, while results varied by fruit for other income classifications. The results of these models demonstrate that the EU’s tightened pesticide regulation hurt low-income countries the most. While the regulation is meant to maintain a standard of food quality in the EU, its impact on low-income countries raises important questions about the unintended effects of import regulations. The EU could maintain its quality of food while alleviating the burden on low-income countries by relaxing its MRL standards or by providing more assistance to developing nations to meet its standards.

Introduction

Maximum residue limits (MRLs)—also known as maximum residue levels—are tolerance regulations setting the highest level of pesticide residue allowed on certain commodities. These commodities are primarily fruits, vegetables, and grains. The European Union (EU) sets its MRLs well below the internationally accepted standard, and for many commodities the EU does not set an MRL at all, meaning no pesticide residue is tolerated on those commodities. In 2005, the EU adopted a strict default MRL of 0.01 mg/kg for all imports of foodstuffs where specified MRLs were not set, including citrus fruits (European Commission 2023). The EU also harmonized MRL policies between all member states over the same period, creating one standard for producers looking to export to any country in the EU. 

 The EU’s stricter MRLs since 2005 pose a challenge to developing countries that may not have the capacity to conform to these regulations. Accordingly, strict MRL policies could dampen trade with developing countries. Additionally, countries that have the EU as a major trading partner are incentivized to adopt similar MRL policies or lose access to the European market. 

 This paper explores the effects of the EU’s 2005 MRL policies on trade with countries at different income levels. It narrowly focuses on the export of citrus fruits to the EU following the adoption of stricter MRLs, as studies thus far have not explored the trade impacts of MRLs for this important commodity. The EU is a net importer of citrus, importing much more than it exports. Countries that export citrus to the EU are more diverse than countries that export other types of fruit in terms of location, income per capita, and other factors. By focusing on citrus, this study observes the effect of the MRL policy on many different types of countries simultaneously. Specifically, this study is able to highlight differences in exports by income per capita levels across countries. This paper finds that the EU’s MRL policy resulted in a reduction of citrus fruit exports from developing countries. Exports from some developed countries decreased, while others increased following the EU’s MRL policy.  

Literature Review: Higher Costs and Harmonization

Literature on the impact of MRL standards on trade falls into three main categories.  First, some studies found that more stringent MRL policies constricted trade because of the costs associated with compliance. This effect was particularly pronounced in developing countries, where it is more difficult to conform to higher import standards. Second, other studies found that EU MRL policies promoted trade through the harmonization of regulation and higher consumer preferences for stricter standards. The third category of studies found mixed effects: a trade-promotion effect through the harmonization of standards and a trade-constraining effect with developing countries due to compliance costs.

MRLs Restrict Trade

Several studies found that the EU’s strict MRL policy restricts trade. Yue et al. (2010) studied the change in tea exports to the EU before and after the enactment of stringent EU MRLs pertaining to tea. Following the pesticide tolerance reduction in 2000, tea exports to the EU reduced by 61.6 percent (Yue et. al 2010). However, exports from China rebounded a few years later, indicating that producers in China reformed their production processes to keep the European export market. Tijani and Masuku (2019) found that EU MRLs on cocoa negatively impacted exports from Cote d’Ivoire and Ghana by 34 percent and 47 percent respectively compared to exports to non-EU countries. Although Nigeria and Cameroon are also among the top exporters of cocoa, the regulation did not significantly affect their exports since they were able to reform their production to fit EU standards. The EU is their primary customer base, making the upfront cost of compliance worth it. Cote d’Ivoire and Ghana hold more than half the market share of cocoa exports and their economies are reliant on cocoa exports, making the cost of not conforming to EU standards steeper. 

Studies have also found that EU MRLs restrict U.S. exports. Karemera, Xiong, and Whitesides (2019) found that exports from the United States to the EU are elastic to changes in EU MRL policy, and bilateral trade was reduced due to the EU’s MRL policies. Hejazi, Grant, and Peterson (2020) found that a reduction in MRL stringency would increase trade between the EU and the United States. The consensus in these studies was that the low level of pesticide tolerance on imports to the EU reduces trade. 

MRLs Promote Trade

Alternatively, a few studies found that EU MRLs have promoted trade because they harmonize standards between member countries and increase consumer confidence in food products. Those wishing to export to the EU only need to meet one standard—albeit a strict standard—as opposed to complying with the regulations of several different countries. Since EU standards are so strict, countries conforming to EU standards will meet the standards of other countries outside the EU. Xiong and Beghin (2018) speak to the benefits of harmonization of standards. They found that trade between the EU and the United States would increase dramatically if tariffs were removed and MRLs between the countries were harmonized. The study estimated that harmonized MRLs alone would increase U.S. import of EU plant products by 13 percent, and EU import of U.S. plant products by 25 percent. 

Foletti and Shingal (2014) argued that the 2005 EU MRL harmonization led to an increase in trade between EU members and trade with non-EU members. This effect held for EU trade with developing countries. Ishaq et al. (2016) found that higher MRL import standards resulted in increased consumer confidence. This study used food exports from China as an example, finding that exports rose for products in which China conformed to EU food safety standards.

MRLs Have Mixed or No Effect on Trade

The last category of literature on the effect of EU MRLs on trade found a mixed effect or no effect. These studies focused on exports from Africa. Xiong and Beghin (2010) studied the effect of stricter EU MRLs on groundnut exports from Africa and found no significant impact. The study utilized various estimation methods that yielded the same result. Traoré and Tamini (2021) conducted a similar study focusing on African mango exports and found that more stringent MRLs resulted in a smaller probability of African firms producing mangoes. At the same time, the study found an increase in the volume of MRL-compliant mangoes in the global market. Tightening MRL policies may promote trade for developed countries, but they limit production in developing countries. 

While the literature is rich, and examines several different commodities, a comparative analysis of the impact of EU MRL policies on fruit exports in particular from countries of different income classes is missing from this discussion. Such an analysis would compare the trade value of fruits imported into the EU for low, lower-middle, upper-middle, and high-income countries before and after EU MRL tightening. This paper seeks to fill a gap in the literature by analyzing the effects of MRL on fruits exports to the EU with a focus on citrus fruits. Countries of all income levels export citrus to the EU, making analysis of the effect by country income level possible. As a large importing sector for the EU, the effect of MRL regulation on citrus fruit imports can have far-reaching implications for other agricultural products.

Theory: Domestic Supply and Demand Model

European maximum residue limits for pesticides affect the market for citrus fruit through both supply and demand. Countries can adopt EU MRLs as their own domestic standards, incentivizing firms to conform to the higher standard. Countries that adopt EU standards often provide assistance to firms in meeting the new standard. These countries are called “net conforming countries” for this theory. Countries that do not conform to EU MRLs are “non-conforming countries.” 

For exporting countries, assume that all firms in a country sell globally and that the domestic price is less than the world price, as would theoretically be the case for countries less developed than the EU. The figure below shows the domestic market for citrus fruit with the world price. Assuming free trade, the difference between the quantity demanded and the quantity supplied domestically equals the exports. Examining how EU MRL regulation affects the domestic market for citrus exporters will provide an estimation of the change in exports to the world market. 

The supply curve can shift due to a change in input prices, the number of suppliers, and government regulation. EU MRL policies affect these factors differently. Stricter MRLs decrease supply through input prices if the exporting country conforms and adopts a similar policy. Citrus producers will have to change their operations process to use significantly less pesticide residue or switch to biopesticide. Any adjustment will raise the price of inputs. These adjustments may cause some firms to leave the market in conforming countries, reducing the number of suppliers. Domestically, EU MRLs theoretically reduce overall domestic supply for conforming countries, which would reduce the quantity exported. 

The demand curve can shift due to several factors including changes in the price of competitors, consumer preferences, and government policies. Competitors who conform to stricter standards will have to increase prices, making non-conformers’ citrus cheaper and increasing demand from that country. This increase may be offset by consumer preferences for “cleaner” fruit with less pesticide residue. However, the EU uses MRLs as import restrictions, halting market access for non-conforming goods. This policy limits exports from non-conforming firms.  

For net conforming countries overall, supply decreases, demand may have mixed effects, and there are no import restrictions due to MRLs. This causes exports to decrease because the quantity supplied decreases. Alternatively, for non-conforming countries there is no effect on supply, the effect on demand may have mixed effects, and there are import restrictions. Export decreases because the quantity demanded decreases. EU MRLs are expected to decrease exports, particularly for low-income countries that have fewer resources to adjust to new standards. 

Data and Methodology

This paper focuses on the export of citrus fruits from all partner countries to the European Union. Citrus fruit producers use a variety of pesticides, thus MRL policies can act as barriers to trade if there is a mismatch in regulation from the country of origin to the export destination. The EU set their default MRLs on citrus fruits in 2005 to 0.01mg/kg. For reference, in 2021 the EU ended up adjusting its MRL for Dodine, a pesticide commonly used in citrus, based on multiple international fora that determined the standard was too strict. The 2021 standard allows for 150 times more pesticide residue for Dodine than the 2005 standard (Bellisai et. al 2021). 

This paper compares EU imports of citrus fruit from developing and developed countries over two periods: from 2000 to 2005 and from 2005 to 2020. Exports to the EU are broken down by exporter country for the period specified. This paper also explores the effect of MRLs on exports for individual fruits, with separate models for oranges, mandarins and tangerines, grapefruits, and lemons and limes. 

This analysis uses trade data from the World Integrated Trade Solution. This collection of databases was developed by the World Bank, the United Nations Conference on Trade and Development (UNCTAD), the International Trade Center, the United Nations Statistical Division (UNSD), and the World Trade Organization (WTO). It includes trade flows, tariffs, and trade agreements in over 170 countries. Trade flows to and from the European Union are reported starting in 2000, but other entries date back to 1962. Currently, EU imports of citrus fruits for all partner countries from 2000 to 2020 are included. The income classes of countries will be defined by the World Bank’s definition of “low-income” (LI), “lower-middle-income” (LMI) countries, “high-income” (HI), and “upper-middle-income” (UPI) countries (World Bank 2021). Trade Value is measured in thousands of USD. 

Table 1: Summary Statistics

The summary statistics show an increase in trade value in exports to the European Union since the 2005 EU MRL policy was implemented. These statistics do not separate the effect of the EU’s MRL policy from the effect of time. Trade with the EU increased dramatically over the past few decades since its inception in 1993. This paper runs several models to estimate the effect of the 2005 EU MRL policy independent of time. 

Analysis and Results

This paper uses an interaction term to quantify the impact of EU MRLs on exports from developing countries to the EU. Year and distance will be used as controls.[1] M Each regression will be modeled in this format: 

TradeValue_ij = B₀ + B₁MRL_i + B₂IncomeClass_j + B₃MRL_i*IncomeClass_j +B₄Year + B₅Distance_ij 

In this equation, i represents the European Union and j represents the exporting country. The interaction term represents the effect of the MRL policy and the income classification on trade value. Theoretically, the sign of the interaction term can be positive or negative for developing countries. EU MRLs could positively affect trade value because of the harmonization effect since developing countries gain a wider consumer base by conforming to EU standards. 

However, developing countries could be unable to pay adjustment costs, causing trade value to be negative after the MRL policy change. A correlation table, found in Appendix B, ensured the absence of multicollinearity before conducting the regression.     

Table 2 shows the same regression with robust standard errors to correct for possible heteroskedasticity. After using robust standard errors, all interaction terms are significant at the 10 percent level or below. The high-income interaction term is significant at the 1 percent level, but upper-middle-income is only significant at the 10 percent level. The lower-middle-income interaction term is significant at the 5 percent level, and low-income is significant at the 1 percent level. 

Table 2: Regression Results, Robust Standard Errors

The EU’s MRL policies resulted in a reduction of citrus fruit exports from high-income, lower-middle-income, and low-income countries. After the EU MRL policy, exports from high-income countries decreased by $4,926,000 USD on average. Upper-middle-income countries increased their exports to the European Union by $4,721,000 USD on average following the MRL policy change. Lower-middle-income countries saw a decrease of $4,548,000 USD in exports to the EU.  Low-income countries experienced the greatest drop in annual exports, an estimated $5,424,000 USD decrease. The reasons citrus fruit exports decreased may be different for high-income countries compared to lower-middle and low-income countries. The next section further analyzes exports to the European Union by HS product code. 

Results by Product 

There is a difference in coefficients and significance depending on the type of citrus fruit analyzed. Different types of citrus grow best in different climates, so regions often specialize in one type of citrus (Singh et. al 2021). There are large differences in exports of citrus by type of fruit because of this regional variation. Citrus is broken down into “oranges,” “tangerines and mandarin oranges,” “grapefruit,” and “lemons and limes.” Table 3 shows the regression results for oranges. After the EU MRL policy, high-income countries on average experienced an $8,295,000 USD reduction in annual export value, upper-middle-income countries a $2,826,000 USD increase, lower-middle-income countries a $3,170,000 USD increase, and low-income countries a $5,598,000 USD reduction. The high-income interaction term is significant at the 5 percent level, while the low-income interaction term is significant at the 10 percent level. High-income and low-income countries exported significantly less trade value in oranges to the EU after the MRL policy change. These results for oranges vary greatly from the tangerine and mandarin orange results.

Table 3: Export of Oranges to the European Union (Robust SE)

Table 4 displays the regression results for tangerine and mandarin orange annual exports to the EU. After the EU MRL policy, high-income countries on average experienced a $370,200 USD increase in annual export value, upper-middle-income countries a $947,900 USD reduction, lower-middle-income countries a $947,900 USD increase, and low-income countries a $4,104,000 USD reduction. The low-income interaction term is significant at the 5 percent level. This reduction for low-income countries is significant, especially considering the smaller size of their economies and the relative impact of $ 4 million USD in lost trade revenue. 

Table 4: Export of Tangerines and Mandarin Oranges to the European Union (Robust SE)

Generally, the income classification interaction terms were more significant in the exports of grapefruit to the European Union. Table 5 shows the regression results for grapefruit. High-income countries on average experienced a $4,880,000 USD reduction in annual export value, upper-middle-income countries a $6,503,000 USD increase, lower-middle-income countries a $7,239,000 USD reduction, and low-income countries a $3,224,000 USD reduction after the EU implemented its MRL policy. The high-income interaction term is not significant. Upper-middle-income and low-income interaction terms were significant at the 5 percent level, and the lower-middle-income interaction term was significant at the 1 percent level. 

Table 5: Export of Grapefruit to the European Union (Robust SE)

Exports of lemons and lime are similar to grapefruit in terms of sign and significance, as denoted in Table 6. High-income countries on average experienced a $4,252,000 USD reduction in annual export value, upper-middle-income countries a $9,656,000 USD increase, lower-middle-income countries a $10,059,000 USD reduction, and low-income countries a $7,023,000 USD reduction after the EU implemented its MRL policy. The high-income interaction term was not significant. The upper-middle-income interaction term was significant at the 10 percent level and the lower-middle-income and low-income interaction terms were significant at the 1 percent level. 

Table 6: Export of Lemons and Limes to the European Union (Robust SE)

The income classification interaction terms tend to have the same sign regardless of which citrus product is being analyzed. The lower-middle-income and the upper-middle-income interaction terms switch signs. The lower-middle-income interaction term is negative in the general analysis and for grapefruit, lemon, and lime annual exports. For orange, tangerine, and mandarin orange exports the interaction term is positive. The upper-middle-income interaction term usually increases after EU MRLs are implemented, except for exports of tangerines and mandarin oranges. The low-income interaction is the only term that is significant at the 10 percent level or lower for every analysis. Using this methodology, exports from low-income countries decreased for each citrus fruit product studied. 

Generally, the EU MRL policy resulted in a net decline in annual exports of all citrus fruits after 2005–the increase in exports from upper-middle income countries was more than offset by the decrease in exports for other classifications. Figure 2 condenses the coefficients of all four product specific models. Exports from low income countries decreased across the board. Grapefruit, lemon, and lime exports from upper-middle income countries saw an increase after the EU’s MRL policy, in line with the harmonization theory in the literature review. Variation in magnitude of statistically significant coefficients between products is likely due to the region of origin, as each type of citrus thrives at varying temperatures. Income classification accounts for more of the variation in import value following the EU MRL policy, with low income countries exhibiting a negative result for each type of citrus. 

Conclusion 

Implementation of the European Union’s maximum residue policy was associated with decreased exports from low-income countries across all citrus fruits. Even after running separate regressions for each type of citrus fruit, these results held. The effect on other income classification groups varied depending on the product. For grapefruit, upper-middle-income countries had a statistically significant, positive increase in exports, in line with the harmonization theory. Orange exports from high-income countries decreased significantly following the policy. Low-income countries and lower-middle-income countries decreased their export of lemons and limes to the EU. The statistically significant effect on oranges for high-income countries is likely due to the United States not conforming to EU standards and being one of the largest producers of oranges. The United States produces 5 percent of the world’s supply of oranges, the fifth largest share by country. According to WITS data used in this paper, exports of oranges from the United States to the EU dropped from $1,274,950 USD in 2004 to $690 USD in 2022. This huge drop in oranges of U.S. origin likely drives the statistically significant effect observed in this paper. 

While the European Union’s MRL policy maintains a quality standard for the import of citrus fruit, it can have negative effects on trade. Of particular concern is the effects on developing countries, since their governments have less resources to incentivize firms to conform to stricter standards. To address the trade impacts reported in this paper, the EU might consider two potential policy shifts.

First, the EU could relax its MRL standards to the internationally accepted level. Further research could conduct a cost-benefit analysis of the potential gains of relaxing MRL standards against the possible health effects. The EU’s adjustment of the MRL for Dodine in 2021, for instance, suggests there might be room for further relaxation of MRLs without compromising public health.

Second, the EU can provide assistance to developing countries to conform to higher MRL standards. The EU currently provides technical assistance for developing countries to meet its MRL standards, however this assistance is mostly capacity building and training. The findings of this paper suggest those efforts have been insufficient to help low-income countries fully come into compliance with EU standards. To close the gap, the EU could provide monetary benefits to countries willing to conform under a trade agreement. The EU could also provide discounted biopesticides to developing nations as a part of this trade agreement, as biopesticides are not covered under EU MRL standards. The success of this policy will also depend on whether governments in developing countries support firms in conforming or not. 

One area for future research is the impact of the EU’s MRL standards on the diversification in exports from developing countries. For instance, developing countries unable to meet EU MRL standards would need to consider other markets, perhaps directing them to export more to the United States. Alternatively, developing countries that conformed to EU standards may be exporting their higher quality goods to the EU, while the lower quality fruit remains in-country. More research is needed to explore this hypothesis and the ripple effects of the EU’s MRL policy on trade. 

*This article was edited by Kimberly Kreiss (Princeton University) and Nathan McQuarrie (Princeton University).

About the Author

Trinity Johnson is a master’s student at the Bush School of Government and Public Service with a BA in Economics concentrating on trade and development. She has experience working on issues related to agriculture, international economics, and China. Currently, she is leading two projects at the Bush School: a capstone project to provide an analysis of Chinese family educational investment for the World Bank and a team of students studying the effect of El Salvador's criminalization policy on migration. 

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Notes

1. For detailed description of how distance is constructed and coding information for each variable see Appendix B. (Return to Note)

References

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Appendix

Appendix A: Price as a Time Proxy

Price is used to run a sensitivity analysis, as the import of fruit into the EU can vary year by year depending on the price. A regression is run with “price” instead of “year” in the appendix. This regression finds similar results: the EU policy increased exports from upper-middle-income countries and decreased exports from high-income, lower-middle-income, and low-income countries. In every regression, the effect of the EU’s MRL policy was consistently significant and negative for low-income countries. Future research could analyze trade diversification patterns, as the 2005 EU MRL policy may have incentivized fruit producers to consider other markets. 

A consumer price index of fruit in the EU is used as a proxy for time, as there may be multicollinearity issues from including the year variable and MRL in the regression. The consumer price index from the European Union averages the monthly prices of a bundle of fruits in the European Union including citrus fruit among others. This index is from the Federal Reserve Economic Data website. Throughout the period, the consumer price index increases. There is a strong correlation between the MRL variable and Price, and Figure 3 shows the scatterplot of the two variables. 

Table 7 shows the regression including price in place of year using robust standard errors. Like the results above, the upper-middle interaction term is positive and significant at the 10 percent level. The high-income and low-income interaction terms are negative and significant at the 1 percent level. Lower-middle-income is negatively significant at the 5 percent level. Still, low-income countries remain negatively affected by the EU’s MRL policy, which holds in every regression. The EU’s MRL policy led to an increase of $4,715,000 USD in exports from upper-middle-income countries. It led to a decrease of $4,864,000 USD in high-income countries, $4,584,000 USD in lower-middle-income countries, and $5,402,000 USD in low-income countries. These results are similar to the results from Table 2.

Table 7: Regression with Price, Robust Standard Errors

Appendix B: Coding Information

To ensure an absence of multicollinearity among the independent variables, a correlation matrix is shown in Table 1 below. None of the independent variables are highly correlated with each other. The dependent variable, trade value, is slightly correlated with each of the  dependent variables. It is most correlated with the exporting country being classified as upper middle income. The results of Table 1 verify the feasibility and usefulness of conducting a regression with these variables.

Table 8: Correlation Matrix

Income classifications are coded as dummy variables: 1 if the country is classified under that distinction, and 0 if otherwise. These income variables will be multiplied by another dummy, MRL, which is coded 0 before the EU’s MRL policy in 2005 and 1 after. These brackets are readjusted every year and the dummies reflect these adjustments. 

Distance between exporting and importing countries is calculated on a five-point scale. Distance takes on the value of 0 if the country is in the European Union. The value is 1 if the partner country is not a member of the EU but is in Europe. Distance is coded as 2 if the partner country is in the Mediterranean or the Middle East. The value is 3 for countries in Africa above the equator, Asia west of India, and Greenland. The value is 4 for Africa below the equator, Asia from India to Indonesia, the United States, and Canada. The farthest countries from the EU take a value of 5 and consist of Indonesia, South Pacific, Australia, Central and South America, and the Caribbean.

The dataset has 3,621 observations. Each entry includes the European Union and its exporting partner, the year, the income classification of the partner country, the distance between the country and the EU, and the trade value reported in thousands of USD between the two. MRL is coded as 1 for observations on or past 2005, and as 0 for observations before 2005.