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Dec 3, 2012 (4 years and 11 months ago)

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Monsanto and Genetically Modified Organisms

01/2001
-
4932

This case was written by Sara McDonald, Assistant, under the supervision of Olivier Cadot, Professor
of Economics and International Business at the University of Lausanne and Senior Research Fellow a
t
I
NSEAD
; H. Landis Gabel, Otto Fellow of Environment Resource Management, and Daniel Traça,
Assistant Professor of Economics, both at
I
NSEAD
. It is intented to be used as a basis for class
discussion rather than to illustrate either effective or ineffecti
ve handling of an administrative
situation.

Copyright © 2001 INSEAD, Fontainebleau, France.

N.B.

P
LEASE NOTE THAT DETA
ILS OF ORDERING
INSEAD

CASES ARE FOUND ON T
HE BACK COVER
.

C
OPI ES MAY NOT BE MAD
E
WITHOUT PERMISSION
.

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Copyright © 2001 INSEAD, Fontainebleau, France.

In 1997, Monsanto CEO Robert B. Sha
piro laid out, in an interview published by the
Harvard
Business Review
, an ambitious vision in which innovation and corporate responsibility
blended harmoniously to create shareholder and customer value in an environmentally
sustainable way. “The market
,


he explained, “is going to want sustainable systems, and if
Monsanto provides them, we will do quite well for ourselves and our shareowners.
Sustainable development is going to be one of the organizing principles around which
Monsanto and a lot of other
institutions will probably define themselves in the years to
come.”
1

Shapiro saw the application of biotechnology to agriculture as part of a broader
technological revolution in which information, whether coded in DNA or in computer chips,
would greatly r
educe our reliance on material inputs, in particular non
-
renewable ones. His
ideas, which, for some, set him apart as one of a few visionary CEOs, created tremendous
excitement in and outside of the company.

Yet, only two years later, everything seemed to

be falling apart for the company and its CEO.
In Europe, a virulent anti
-
GMO campaign was raging, run by an odd coalition of consumers,
environmentalists, and farmers; and of all the companies that were active in agricultural
biotechnology, Monsanto was p
articularly vilified. On the policy front, a major transatlantic
trade conflict was looming, as the EU’s restrictive regulatory regime for GMOs was
effectively shutting American exporters out of the European market. This combination of bad
-
mouthing and tra
de restrictions damaged Monsanto so much that, with its stock
-
market
capitalization down by a third and sitting over valuable intellectual property, the company
was becoming, by 1999, an attractive takeover target. Had Monsanto failed to take heed of
Europ
ean cultural sensitivities? Had it fallen victim to a broad conspiracy aimed at keeping
US
-
made biotechnology products out of the EU’s market? Had it simply stuck its neck out too
visibly in an environment that was turning increasingly hostile to large, Am
erican
-
based
multinational companies?

The Life Science Company Concept

When molecular biology labs ignited the “biotech revolution” in the mid
-
1980s, the industry
was ready to seize the opportunity. Plagued with cyclical sales, intense price competition, l
ow
growth and mounting environmental challenges, the chemical industry’s giants were on the
lookout for new value
-
creating strategies. The news from R&D labs triggered a gold rush,
with key players redeploying assets through an unprecedented wave of divest
itures, mergers,
and integration. Du Pont sold Conoco, its oil subsidiary, which used to bring in half of its $45
billion annual revenue; Novartis sold its processed food subsidiaries, Wasa bread and
Biscottes Roland, while Monsanto got rid of Nutrasweet
-
-
producer of aspartame
--

and
Canderel. The spinoffs generated some of the cash that was to be invested in biotechnologies.
But the required R&D investments were so large that, in addition, mid
-
size European players
like Rhône
-
Poulenc or Hoechst had to merg
e (together, Rhône
-
Poulenc and Hoechst formed
Aventis, a finely balanced Franco
-
German company with headquarters strategically located in
Strasbourg). If the R&D effort was considerable, the rewards were commensurate, and
numerous synergies were expected b
etween the health and agricultural applications of



1


Joan Magretta, “Growth Through Global Sustainability: An Interview with Monsanto’s CEO, Robert B.
Shapiro”,
Harvard Business Review
, January
-
February 1997, p. 84.

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molecular biology if managed as an interconnected system. With a strong presence in both
health and agro
-
chemicals, Monsanto was well placed to leverage those synergies. Its
pharmaceutical subsidiary Searl
e had been particularly successful in recent years with its
1998 launch of a series of new drugs for arthritis treatment, one of which was second only to
Pfizer’s celebrated Viagra in terms of total prescriptions (Viagra was not for athritis).
2


In additio
n to “horizontal” mergers, forward and backward integration was taking place along
new lines. The most aggressive forward
-
integration strategy was pursued by Monsanto,
which, under Shapiro’s leadership, took over DeKalb (a seed producer) the international
operations of Cargill (a seed trader) and a number of other companies
3

for a total bill
approaching $8 billion.
4

According to Shapiro’s vision, a “life sciences company” could
benefit from synergies between some of its traditional crop
-
protection activitie
s, herbicides
and pesticides, and the new genetically engineered products (see Exhibit 1). Among
Monsanto’s most valuable products was its best
-
seller herbicide Roundup, whose patent in the
US, the last country where it was protected, was to expire in 2000
. The company expected
tough price competition after the patent’s expiration; in the worst case, Roundup’s US price
could creep down to the low levels at which it was sold in Asia, a fraction of its current US
price. Thus it was clear to Monsanto Managemen
t that growth in Roundup revenues, if any,
would have to come from increased volumes rather than prices.
5

How could this be achieved?
This was where genetically
-
engineered seeds could play a role. Roundup was a broad
-
spectrum herbicide, which could be spra
yed only before sowing, since it would otherwise kill
the crop itself. Seeds modified to be resistant to Roundup could allow farmers to spray
Roundup not only before sowing, but also after. Thus, a marketing strategy involving joint
sales of Roundup
-
resist
ant seeds (so
-
called “Roundup
-
Ready”) priced at a relatively high
level in order to recoup the investment in R&D, and Roundup itself priced relatively low so as
to undercut the competition, could extend the useful life of the herbicide well beyond its
pate
nt’s expiration.

One problem with this strategy was that many farmers traditionally “brownbagged” seeds, i.e.
saved them for replanting the following year or for sale to other farmers. Monsanto’s pricing
policy, which would encourage them to do so, could t
hus become self
-
defeating, unless seeds
could be genetically engineered so as not to be re
-
usable. As it turned out, the US Department
of Agriculture (USDA) had for several years supported private and university research on
genetic seed sterilization techn
iques aimed at reducing the risk of unwanted escape into the
environment,
6

and in March 1998, a US company, Delta and Pine Land, won a series of joint
patents with the Agricultural Research Service on one such technique. The technique,
officially named Tec
hnology Protection System but better known under the nickname



2


Monsanto,
Delivering on the life sciences strategy
, Annual Report 1998, pp. 1
and 8.

3


Pierre
-
Benoit Joly and Stéphane Lemarié, “Industry Consolidation, Public Attitude and the Future of Plant
Biotechnology in Europe”,
Agbioforum
1
, 1998, pp 1
-
2.

4


Richard Ernsberger Jr et al., “High
-
Tech Harvests”,
Newsweek
, July 13, 1998, p. 42
.

5


“Monsanto Company: The Coming of Age of Biotechnology”, HBS case 9
-
596
-
034, 1996.

6


Rick Weiss, “Gene Police Raise Farmers' Fears”
,

The Washington Post
, February 3, 1999.

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“Terminator”,
7

could be what Monsanto needed. Although the company’s senior management
was not entirely convinced of the viability of this particular technology,
8

plans were made to
acquire Delt
a and Pine Land.

Cultural Revolution at Monsanto

Under CEO Shapiro, Monsanto did not just refocus
, i
t went t
h
rough a cultural revolution.
Shortly after taking over in 1995, Shapiro convened 500 of the company’s employees from
around the world to a “Glo
bal Forum” addressing five themes: strategies for achieving
aggressive growth and for becoming truly global; operational excellence; encouraging
entrepreneurship within the corporation, and sustainable development.
9

Sporting a sweater
-
vest decorated with l
ittle quilted cats,
10

he laid out his vision of the company

flexible,
forward
-
looking, and environmentally responsible.
11

Once heavily hierarchical, the new
company was to emphasize “openness, innovation and initiative, and the ability to act quickly
and d
ecisively
,

12

and this would be achieved through a sweeping reorganization of the firm
into a flatter and leaner structure.

Shapiro’s speech at the Global Forum riveted the crowd, and at a dinner in Chicago’s Field
Museum that evening, one enamoured emplo
yee even hung her name tag around his neck.
13

Encouraging open debate and insisting on employees calling him Bob, his relaxed style stood
in stark contrast to the company’s traditional ways. Together with his bold vision (which was
also remote from anything

the company had been familiar with) his new leadership style won
him the unconditional loyalty of a group of people, sarcastically referred to by others as
“Friends of Bob”. Outsiders, who charged that there were few voices in his inner circle
providing a

reality check, dismissed Shapiro’s style as “New Age management”. But he
viewed it simply as a way of “setting the metronome at a higher speed to compete”.
14

Monsanto’s corporate
-
culture revolution was not limited to style, and had in fact started
before S
hapiro was appointed CEO. As early as 1990, Monsanto had become the first Fortune
500 company to publish a full
-
fledged annual environment report, and in 1994

it had started
to seek the advice of environmental thinkers like Amory Lovins or Herman Daly. Th
e



7


“Terminator” was a nickname successfully tagged on the sterilization gene by

Rural Advancement Fund
International, a Canadian NGO campaigning against GMOs.

8


Robert Shapiro, speech delivered at the conference on “Trade and the Environment: Conflict or
Compatibility?”, INSEAD, June 2000.

9


Carl Frankel, “Monsanto Breaks the Mold”
, Tomorrow, May
-
June 1999.

10


Scott Kilman and Thomas Burton, “Farm and Pharma: Monsanto Boss’s vision ‘Life Sciences’ firm now
confronts reality”; The Wall Street Journal Europe, December 21, 1999.

11


Joan Magretta, “Growth through Global Sustainability:
An interview with Monsanto’s CEO, Robert B.
Shapiro”; Harvard Business Review, January
-
February 1997.

12


Monsanto, ibid., p. 1.

13


Scott Kilman and Thomas Burton, ibid.

14


David Barboza, “At Monsanto, Can Openness Last? Casual Style Could Become a Casualty

of Talks With
Du Pont”, International Herald Tribune, May 4, 1999, p. 1.

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“company enviros love to hate”, which once produced such poisonous products as PCBs or
Agent Orange, a defoliant used massively during the Vietnam War and containing dioxin, was
now at the forefront of Business for Social Responsibility (BSR), a San Fran
cisco
-
based
progressive industry association. Monsanto’s corporate communication was in line with its
new culture. The company’s new motto, “Food, Health and Hope”
,

conveyed the message that
biotechnologies held the promise of better health and improved n
utrition for the 850 million
malnourished people in the developing world.

By 1998, Monsanto’s strategy was a resounding success. Reductions in Roundup’s price led
to tremendous sales increases because of the high elasticity of demand: in Canada, a 33%
pr
ice cut over a six
-
year period (
19
92
-
98) led to a 287% sales increase; in Brazil and
Argentina, price cuts between 50% and 60% led respectively to 647% and 28
-
fold sales
increases. An augmentation in herbicide use, together with “conservation” (i.e. reduce
d)
tillage, was touted by the company to reduce soil erosion and CO
2

emissions, thus benefiting
the environment. Of the 28 million hectares of genetically modified crops planted worldwide,
Monsanto varieties accounted for over 70%.
15


Once a stodgy chemical
s producer, in 1995 Monsanto repositioned itself with investors as a
biotech stock. The markets’ reaction was enthusiastic, with the company’s total capitalization
soaring to $38 billion in 1998 from under $10 billion in 1994, well ahead not only of the
S&
P500 (see Exhibit 2), but also of direct competitors.

GMOs: The Health and Environmental Issues

But not everyone shared
in

Bob Shapiro’s vision. In the UK, widespread distrust of official
science after the mad
-
cow disease epidemic made consumer confiden
ce particularly
vulnerable to health alarms. In 1998, Dr Arpad Pusztai, a researcher at the Rowett Institute in
Aberdeen, triggered a bitter controversy by claiming that rats who were fed genetically
modified potatoes suffered, after 10 days of the diet, l
ower levels of lymphocytes and
degraded intestine walls compared to a control group. A few days after Pusztai disclosed the
results of his study on British TV, the Rowett Institute suspended him, declaring that “[t]he
institute regrets the release of misle
ading information about issues of such importance to the
public and the scientific community
.


As justification for dismissing Dr Pusztai, the institute
stated that publicizing controversial results, especially in such a sensitive area, before
submitting
them to peer review violated a basic rule of academic conduct. A two
-
page note in
which Pusztai and a co
-
author described the experiment was published in October 1999 by
The Lancet
16

after being reviewed by six referees,
but with a warning from the journal
’s
editor that publication was not to be construed as giving a seal of approval to the authors’
results. Other scientists were highly critical, with the Royal Society declaring the study
“flawed in many aspects of design, execution and analysis
,


and addi
ng that “no conclusions
should be drawn” from it.




15


Robert Service, “Chemical Industry Rushes Toward Greener Pastures”;
Science

282
, October 23, 1998, p.
608.

16


W.B. Ewen, A. Pusztai, “Effect of diets containing genetically modifi
ed potatoes expressing Galanthus
nivalis lectin on rat small intestine”,
The Lancet

354
, October 16, 1999, 1353
-
4.

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Copyright © 2001 INSEAD, Fontainebleau, France.

Other health hazards were widely mentioned in the press. The use of antibiotic
-
resistance
marker genes in genetic manipulations was feared to induce the development of antibiotic
-
resistant bacteria, which
could reduce the effectiveness of antibiotics in therapeutic uses
against various infections. But according to some scientists, these concerns were off the mark,
as modern techniques allowed the separation of DNA containing the gene of interest (e.g. the
o
ne coding a protein toxic for pests) from DNA containing the antibiotic
-
resistant gene.
Transgenic plants currently on the market were the offspring of plants that had been produced
using an old technique which did not allow for such separation. But the pr
oblem, if indeed
there was one, could be rapidly overcome. Moreover, they pointed out that a large proportion
of the bacteria present in human digestive tracts w
as

already resistant to the antibiotics in
question

and to a host of other ones, for that m
atter.
17


Even as the evidence that GMOs represented a direct hazard to human health remained
inconclusive, controversy erupted over their environmental effects. In what was perhaps the
most publicized issue, the Monarch Butterfly, to which many Americans a
re sentimentally
attached, was said to be at risk from exposure to genetically modified crops. In a Cornell
University study published in
Nature
,
18

M
onarch larvae were fed milkweed leaves sprayed
with transgenic (bt) corn pollen. The larvae were found to d
evelop more slowly and had a
significantly higher mortality rate than a control group: after only four days, 44% of those
exposed to transgenic pollen had died, against none in the control group. Seizing on the issue,
Greenpeace activists staged colorful d
emonstrations with protesters dressed like butterflies.
Some scientists, however, expressed doubts on the severity of the problem, questioning
whether corn pollen travels in sufficient quantities to accumulate substantially on milkweed,
which grows on fiel
d edges. Some also said that, contrary to the paper’s assertion that “corn
fields shed pollen for 8
-
10 days between late June and mid
-
August, which is during the time
when
M
onarch larvae are feeding” (p. 214), the periods in fact do not really coincide.
19

European scientists added that, out of three transgenic corn varieties authorized in Europe in
1999, only one had the bt toxin present in its pollen; thus, if the
M
onarch issue was really a
serious one, simply banning the variety in question would take ca
re of the problem. Finally,
nobody seemed to notice that some of the insecticides sprayed on corn in conventional
agriculture were also toxic to butterflies.

In spite of scientific doubt, the campaign against GMOs went on unabated
––
at times run by
organ
izations that were simultaneously stressing the importance of scientific evidence in the
global warming debate. Private citizens began taking legal action against biotech companies
and regulatory bodies in several countries, and experimental GM crops were
uprooted by
angry demonstrators in Germany, the Netherlands, Ireland and France. In the UK, shipments
of genetically modified products from the US in the Fall of 1997 provoked an outcry that Sir
John Gummer, UK Minister of Agriculture, tried to control by
issuing bland statements such
as “[t]here is no reason to believe that genetic modification of maize will give rise to adverse
effects on human health from its use in human food”. Of course, the fact that he had earlier



17


See Francine Casse, “Le mais et la résistance aux antibiotiques”, La Recherche 327, Janvier 2000, 35
-
39.

18


J.E. Losey, L.S. Rayor and M.E
. Carter, “Transgenic pollen harms
M
onarch larvae”, Nature 399, 1999,
214
-
215.

19


Andrew Chesson and Philip James, “Les aliments avec OGM sont
-
ils sans danger?”, La Recherche 327,
Janvier 2000, 27
-
35.

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given similar reassurances regarding

mad
-
cow disease did little to enhance his credibility.
20

Monsanto itself attempted to stem the tide of hostility with an ad campaign featuring
environmental
-
friendly slogans like “we believe food should be grown with less pesticides” or
“worrying about sta
rving future generations won’t feed them. Food biotechnology will”. The
campaign posters listed phone numbers or web addresses of anti
-
GMO associations, as a way
of conveying the company’s readiness for dialogue. But the effort proved fruitless; perhaps
ev
en counter
-
productive, some argued, because

by raising Monsanto’s profile, the campaign
was making a target of the company. Surfing on public anxieties whipped up by alarmist
tabloid reports and by Prince Charles’ crusade against GMOs, in 1998
-
99 British
supermarket
chains, starting with Iceland, all adopted “GMO
-
free” slogans. In March 1999, Sainsbury’s,
Marks&Spencer, Carrefour and Superquinn set up a consortium to buy jointly non
-
GM foods.
In the end, while the UK had been considered by biotech companie
s, for a variety of reasons,
to be a potentially friendly market for GMOs, it became clear that the “battle of the aisles”
had been fought and lost in British supermarkets.
21

EU Resistance

Biotechnologies encountered difficulties on other fronts as well, a
s European governments
and the EU Commission appeared to multiply hurdles to the import of US
-
made transgenic
products. The EU’s regulatory regime was based on two pieces of legislation: Directive
90/220 concerning the release of genetically modified organ
isms, adopted by the European
Council in April 1990, which covered essentially genetically modified crops and their
environmental risks, and Regulation 258/97 concerning novel foods, adopted in January 1997,
which concerned essentially foodstuffs containin
g GMOs and their risks for food safety. The
“90/220” process was a complicated mixture of subsidiarity
22

and centralized decision
-
making. Producers or importers of GMOs like GM seeds were required to notify the
regulatory authority of the relevant member st
ate (Article 11), which could either withhold
approval or issue a favorable opinion. In the latter case, other member states would be
allowed to raise objections (Article 13); if none objected, the file would come back to the
original member state for fina
l “written consent”. In case of objections, member
-
state
regulatory authorities would try to reach a consensus; failing to do so, the Commission would
take over and conduct a scientific review at the end of which a committee of member
-
state
representative
s would rule at the qualified (two
-
thirds) majority. If no qualified majority
emerged, the Commission itself would draft a decision and submit it to the European Council.
If the Council failed to reach a decision (again at the qualified majority), the fina
l word would
go back to the Commission (Article 21) and, if positive, the file would return to the original





20


David Levy, “Oceans apart? Comparing business respo
nses to the environment in Europe and North
America”; mimeo, 2000.

21


Vivian Moses, “GM Foods: What Went Wrong”; Wall Street Journal Europe, March 15, 2000.

22


Subsidiarity is a Euro
-
jargon term meaning that the European Commission should be involved only
in
matters in which it has a clear comparative advantage over member states, i.e., basically, in matters
involving cross
-
border externalities.

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member state for official approval.
23

Then, according to the mutual recognition principle, the
product could be marketed in all member states, incl
uding those that had objected. Regulation
258/97 set up a fairly similar procedures for foodstuffs, but in contrast with the original
version of Directive 90/220 it also contained a labelling requirement (a labelling requirement
was also appended to 90/220

in 1997).

Notwithstanding its complication, the EU’s regulatory process relied on principles and
methods of scientific risk assessment that were not fundamentally different from those used in
the US by the Department of Agriculture, the EPA and the FDA.
24

However the philosophy
of the European and American regulatory regimes differed in a key way. The latter was based
on the premise that GMOs were not fundamentally different
products
from conventional
seeds and foodstuffs and, as such, did not require a se
parate regulatory regime. The former, by
contrast, held that GMOs were different from other agri
-
food products because, although their
physical attributes might be similar, they were produced by different production
processes
,
and as such required specific

regulation. Thus, US and EU regulations were based on different
premises. But philosophical differences in the regulatory processes were probably not the
most important source of friction. In 1999, the Assistant USTR also charged that:

“In practice, the 9
0/220 process has proven to be susceptible to political
interference, non
-
transparent and virtually endless in duration. Scientific reviews
that take months in the US are measured in years under 90/220. Member states
have increasingly acted outside of the
90/220 procedures, most recently just last
month when the original sponsoring member state for two GMO varieties of
cotton failed to vote in favor of final EU approval because of concerns outside the
90/220 process.”
25

In February 1998, with only 18 product
s approved since 1991, the EU had proposed to amend
its 1990 directive to make the approval process speedier and more transparent; however there
was little improvement in the eyes of American exporters. The new system, adopted by the
European Parliament in

April 2000,
26

was seen to be as unpredictable and arbitrary, if not
more so, than the old one. As one American grain exporter put it, “[w]e are being asked to
jump from the Empire State Building and check mid
-
way if the parachute is opening.”

As if the EU
’s procedures weren’t slow enough, some member countries were raising
additional barriers. In 1998, France blocked the import of GM maize varieties that had been
cleared by the EU Commission. The following year, Austria and Luxembourg also banned a
Brussel
s
-
approved product. France was targeted by a Commission procedure, however



23


This summary description is taken from Sebastian Princen, “Genetically Modified Foods and Food
Products”, mime
o, September 2000. See also
EC Council Directive 90/220/EEC of 23 April 1990 on the
Deliberate Release into the Environment of Genetically Modified
O
rganisms
, OJ L 117, 8 May 1990, pp.
15
-
27.

24


Princen, op. cit., p. 20.

25


Statement by James Murphy, Ass
istant US Trade Representative for Agricultural Affairs before the US
House Agriculture Committee, Subcommittee on Risk Management, Research and Specialty Crops,
http://www.useu.be/archive/biotech34.html.

26


See details on
http://www.europarl.eu.int
, or
http://www.europa.eu.int/eur
-
lex
.

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Austria’s and Luxembourg’s action, coming at a time where the Commission was weakened
by a corruption scandal, went unchallenged. US Agriculture Undersecretary Schumacher Jr.
compla
ined that the Europeans’ bureaucratic delays cost the US $200 million in 1998 alone.
27

In 1999, political pressure heightened to a point where the Commission found itself unable to
clear any new genetically
-
engineered product and, on June 26, suspended all
new GMO
approval procedures.
28

Even some Europeans recognized that “European Union rules for approving genetically
modified products are absurdly cumbersome and, in some cases, offend basic rules of
democracy.”
29

But from the US’s standpoint, these rules wer
e not only absurd: they also
violated international law. Product
-
approval rules and labelling requirements were covered by
two key WTO agreements, namely one on Technical Barriers to Trade (TBT) and one on
Sanitary and Phytosanitary Standards (SPS) (see Ex
hibit 3). These agreements were meant to
ensure that product standards were not used as hidden barriers to trade. If there was little
doubt in the US that EU rules violated the spirit if not the letter of these agreements, whether
consultations or even an
official complaint at the WTO would solve the matter within a
reasonable time frame was another question. The record of EU compliance with the decisions
of GATT and WTO panels in another key dispute, on bananas, did not make Americans
overly optimistic in
this matter. Moreover, public sentiment on the issue ran so strong in
Europe that a US victory at the WTO would run the risk of undermining the WTO itself.

Charges that the EU was deliberately using technical regulations to restrict access to its
market wo
uld make sense if the EU was lagging in biotechnology and could consequently be
suspected of resorting to “infant
-
industry” protection. After all, infant
-
industry protection,
albeit in a different form (loans and subsidies rather than restrictions on marke
t access) had
paid off in other areas such as civil aeronautics,
30

where Europe had also been trailing the US.
As heavy
-
handed industrial policy
à la
Airbus was increasingly difficult to reconcile with
WTO rules, the EU could be expected to use instead indi
rect ways of favoring domestic
producers at the expense of foreign ones, such as imposing discriminatory health regulations.

Europe’s Competitive Position

Did Europe have a competitiveness problem? The EU’s performance in high
-
tech sectors had
been lacklu
ster in the past two decades, but pharmaceuticals had been one of the few
remaining strongholds
--
that is, until the biotech revolution hit the industry. A 1997 study
commissioned by the industry association, Europabio,
31

suggested that in the new and
growi
ng biotech sector, Europe suffered from a growing competitiveness gap relative to the
US. Exhibit 4 shows rough indicators of the size of the “specialist biotechnology” sector



27


Newsweek
, 13 July 98.

28


Sept Jours Europe

7
, 25 April 2000, supplement, p.
1
.

29


Financial Times
, 13 June 1999.

30


“Reinventing A
irbus”,
I
NSEAD

case [ref.], 1999.

31


Benchmarking the competitiveness of Biotechnology in Europe
, Europabio, June 1997.

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(typically small R&D
-
intensive firms, with a few larger ones such as Chiron, Amg
en,
Genentech or Genzyme) in Europe and the US. In the agricultural biotech sector, the gap
between Europe and the US was striking when considering indicators such as the number of
field trials (67% in the US, against 22% in Europe) or areas planted with g
enetically modified
crops (3.5 million acres, against virtually zero in Europe). This could be argued to be the
consequence, rather than the cause, of stringent regulations
;

however the same gap appeared
in the drug sector, where public hostility was not
an issue. For instance, 70% of the gene
therapy drugs that were developed in 1995 were American, whereas only 22% were
European. Patenting activity showed similar trends: between 1981 and 1995, 40% of the
human DNA sequence patents were granted to American

firms, against 24% to European
firms. A count of the automated DNA sequencers in current use showed that 60% of them
were located in North America, versus only 25% in Europe.

In sum, it was hard to escape the conclusion that Europe was
off

to a slow st
art in
biotechnology, pretty much as it had been slow to embark on the information
-
technology
revolution. Having a clear first
-
mover advantage in the industry, and suffering a severe trade
deficit in other sectors, the US was accordingly keen to press ahea
d and prevent the erection
of barriers to its exports. In the words of a Department of Agriculture official,

“US multinational companies are among the leading developers of genetically
modified crop varieties
--
especially export crops such as corn, soybean
s, and
cotton
--

and U.S. producers of these crops are adopting this new technology at a
rapid rate. The acceptance of GMOs in the world market is critical for the future
prosperity of U.S producers of corn, soybeans, and cotton, and for the companies
that
provide the technology, because of these crops’ dependence on exports.”
32

The Labelling Controversy

Cumbersome product
-
approval regulations weren’t the only US concern. Labelling
requirements were spreading quickly around the world, in particular in Japan,
Australia, New
Zealand, and the EU, where they were part of the new version of 90/220. The US government
deemed these labelling requirements discriminatory and detrimental to the interests of US
exporters:

“We are […] very concerned, as are many US exporte
rs, about EU regulations
adopted this past September which require the labelling of foods containing GMO
corn or soybeans. These regulations focus on how a food was produced rather
than on whether the use of biotechnology has changed its quality, safety or

nutritional composition.

The costs to producers and consumers of labelling regulations that are confusing,
based on questionable science, impractical, and time consuming will be immense
as will be the potential for ongoing trade disputes and disruption. A
gain, we have
communicated our position clearly and directly to EU officials and also within the



32


USDA web site (http://www.usda.gov/biotechnology/research).

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WTO, where we have presented detailed written comments to the Committee on
Technical Barriers to Trade.”
33

A former FDA official and adviser to the US delegatio
n to the Codex Alimentarius
Commission, another international body, was even less friendly to the labelling schemes,
writing that
:

“Among the most egregious [requirements] is something called ‘traceability’, an
array of technical, labelling and record
-
keep
ing mechanisms to keep track of a
plant ‘from dirt to dinner plate’, so that consumers will know whom to sue if they
get diarrhoea from GM prunes […]. The prospect of unscientific, overly
burdensome Codex standards for GM foods is ominous, because members
of the
WTO will, in principle, be required to follow them, and they will provide cover
for unfair trade practices.”
34

The Japanese labelling scheme had officially nothing to do with safety, as the Japanese
government was a supporter of GMOs, but was only “a

matter of giving consumers choice.
That is how it should be seen.”
35

But as a lobbyist for a major soybean processor put it, “once
you get a mandatory labelling scheme in place, it will be damn hard to make a positive claim
about your product.”

Meanwhile,
the Europeans claimed good faith and rejected all accusations of red tape and
hidden trade barriers. Instead, they argued, their procedures simply reflected the
“precautionary principle” according to which a product should be cleared for public use only
af
ter all doubts about its safety for human health and the environment have been dispelled.

In contrast with this cautious approach, the Europeans claimed, the US was trying to ram
through potentially hazardous products without adequately consulting or even

informing
consumers. A somewhat cavalier American attitude was illustrated by US obstructionism in
international negotiations aimed at drafting a biosafety protocol to regulate the movement of
Living Modified Organisms (LMOs) having the potential to harm
biodiversity. After failing
to ratify the Rio Convention and consequently losing their voting right in the Biosafety
Convention, the US nevertheless used their observer status to lead a small group of countries
opposing any agreement, the so
-
called “Miami
group”. It was only in January 2000 that,
feeling increasingly isolated,
36

the US administration dropped its opposition to an agreement
officially recognizing the “precautionary principle” and giving the host country the power to
restrict the import of LMOs
.




33


James Murphy, Jr, Assistant USTR for Agricultural Affairs, Speech to t
he House Agriculture Committee,
March 4, 1999.

34


Henry Miller, “Anti
-
biotech sentiment has its own risks”, Science Viewpoint,
Financial Times
, 22 March
2000.

35


Michiyo Nakamoto, “Japan’s food labels decision may fuel trade friction”,
Financial Times
, Sep
tember 6,
1999, p. 10.

36


“Talks on Modified Food Put US on Defensive”, no byline,
International Herald Tribune
, 25 January 2000.

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The labelling issue also illustrated, from the European point of view, the lack of respect that
the US administration and producers of GMOs had for the consumers’ rights to know what
they were eating. In fact, as labelling schemes spread worldwide in spi
te of US discontent,
Agriculture Secretary Dan Glickman recognized that “[a]t the end of the day, many observers,
including me, believe that some type of informational labelling is likely to happen.”
37

Monsanto in the eye of the storm

While US official effo
rts to promote the biotech industry abroad were losing steam, other
clouds were appearing in the industry’s sky. In July 1999, a study released by the USDA
suggested that the effectiveness of GM crops in raising yields, a key argument for the
promoters of
GMOs, wasn’t quite as impressive as initially claimed. Beyond the obvious fact
that “expected benefits appear to have outweighed expected costs, as evidenced by the rapid
adoption rates”, the study found that yield increases attributable to the use of herb
icide
-
resistant crops were, for many varieties, “statistically insignificant”. Only in the case of pest
-
resistant crops (so
-
called bt cotton and bt corn) did the study find statistically significant
increases in yields, at least in areas with high infestat
ions levels.
38


By 1999, mounting doubts over the marketability of GM crops led traders to offer a premium
for non
-
GM crops.
39

As a result of this, after several years of explosive growth the total US
crop area planted with GM seeds was expected to decline i
n 2000.
40

In a further blow to its
corporate strategy, Monsanto’s plan to buy Delta and Pine Land ran into difficulties with the
US Department of Justice. In October 1999, bowing to intense public and media pressure,
Shapiro announced in an open letter to t
he Rockefeller Foundation that Monsanto was
renouncing the use of Delta and Pine Land’s “Terminator” (seed sterility) technology.

Partly as a result of the difficulties and contradictions met by Monsanto in developing its
“life
-
science company” model, by
1999 it found itself embroiled in a web of lawsuits. Some
of these had the potential to seriously affect its bottom line, like Delta and Pine Land’s action
for $1 billion after the failed takeover.
41

Some others, initiated by the company itself,
contributed

to its public
-
relations disaster. In order to protect its intellectual property, and
having officially renounced the use of seed
-
sterility technology, Monsanto had to deter
farmers from brownbagging GM seeds, which unfortunately involved suing some of the
m. In
the U.S., the company opened more than 475 seed piracy cases, generated from over 1800
leads. According to Monsanto's Kate Marshall, more then 250 of these cases were under
active investigation by five full
-
time and a number of part
-
time investigator
s, and by



37


Kurt Kleiner, “Soft Words, Big Sticks”,
The New Scientist
, July 24, 1999, p. 12.

38


Agra Europe, July 9, 1999, EP/6.

39


“G
MOs: Thanks but No Thanks”, Deutsche Banc Alex Brown, 1999.

40


Scott Kilman, “US Becomes Increasingly Wary of Genetically Modified Crops”,
Wall Street Journal
Europe
, 3 April 2000.

41


Shereen El Feki, “Agriculture and Technology: A Survey”,
The Economist
,
March 25, 2000, p. 5.

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Pinkerton, a private detective firm.
42

However the lawsuits could go both ways. In 1999, a
shipment of US corn that was certified organic was found by a European importer to contain
GMOs, and the contamination was attributed to cross
-
pollinization

on a Texas farm.
43

This
type of incident could lead to countless lawsuits against farmers using GM seeds. In
anticipation of such lawsuits, a bill was introduced in 1999 in the Nebraska state legislature
making GM seed companies liable for damages awarded

against farmers in cross
-
pollinization
cases.
44

How far could the liabilities go? As if all this wasn’t enough, in late 1999 a number
of NGOs and farmers organizations launched a multi
-
country antitrust lawsuit against
Monsanto. The action was not consider
ed likely to be successful; however it reflected
growing unease with the potential abuse of dominant positions by the huge life
-
sciences
companies in their relations with farmers.

All this was taking its toll on Monsanto’s stock
-
market performance. With a

capitalization
down to $22 billion, and with the drug Celebrex alone estimated by analysts to be worth at
least $23 billion, the group’s agri
-
biotech activities were valued by markets at less than
zero.
45

Indeed, as if their agri
-
biotech activities were be
coming a liability, competitors were
busy spinning them off and focusing on the less controversial pharmaceuticals business.
Finally, in the Fall of 1999, Monsanto announced a “merger of equals” with Pharmacia &
Upjohn, after which Robert Shapiro would bec
ome non
-
executive chairman. The adventure
looked all but over.

In his 1998 Letter to Shareowners, Shapiro had conceded that “[changes] happened at a fast
pace. Could we have stretched the process over a few more years? Certainly, that would have
been attra
ctive from many standpoints. It would have reduced the strains on our balance sheet
and our people. It would have reduced the likelihood of making mistakes, both in reaching
decisions and in implementing them. And it would have given our shareowners more t
ime to
understand the changes that were happening and the reasons for those changes.” Shareowners
and employees were probably not the only ones who could have done with a little more time
to understand what the new Monsanto was up to. Kate Fish, the compan
y’s director of public
policy, admitted a few months later that “[w]e’re beginning to recognize that a global
company can’t afford to ignore the long
-
term downstream consequences of its actions
.

46

But then, quoting Shapiro again, “[w]hether we’ve been to
o aggressive or not aggressive
enough, […], whether we’ve bitten off more than we can chew or been too timid
---
these
questions always arise for companies that choose to lead in fast changing markets.”
47




42


Ariane Kissam, “Fact Sheet on Genetic Engineering” in
Agriculture Farmers' Declaration on Genetic
Engineering in Agriculture,
National Family Farm Coalition, Washington, D.C.;
http://www.inmotionmagazine.com/geff6.html.

43


Megan La
dage, “The Front Line for Biotech”,
Grocery Headquarter

5
, May 1999, p. 45.

44


David Stipp, “Is Monsanto’s Biotech Worth Less than a Hill of Beans?”,
Fortune
, 21 February 2000, p. 21.

45


David Stipp, op. cit., p. 80.

46


Carl Frankel,
op. cit
., p. 63.

47


Ro
bert Shapiro, “Delivering on the life sciences strategy”, Letter to Shareowners, Monsanto, Annual Report
1998, p. 4.

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Questions



What were the Europeans’ key concerns with
regard to GMOs? What answers did
Monsanto have to offer to alleviate these concerns?



Why did the anti
-
GMO campaign focus on Monsanto? Did the company have an image
problem? Was the integrated “Life Science Company” concept flawed?



Did the EU deny market a
ccess to US companies for strategic reasons? Without
prejudging of an eventual panel ruling on the matter, do you feel that EU restrictions on
the commercialization of GMOs were broadly compatible with WTO rules as shown in
Exhibit 3? Would you advise the
US government to lodge a formal complaint at the
WTO?

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Exhibit 1

The L
i
fe
-
Sciences Company Concept




















Exhibit 2

Monsanto’s Stock Market Valuation


Source:

Datastream.

The Monsanto
Company

Pharmaceuticals

Agribusiness

Crop protection



Herbicides



Pesticides

Seed
s

A
CQUISITIONS

G
ROWTH

A
LLIANCES

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Exhibit 3

WTO Agreement on Technical Barriers to Tra
de, Article 2.2:

“Parties shall ensure that technical regulations and standards are not prepared, adopted or
applied with a view to or with the effect of creating obstacles to international trade. For this
purpose, technical regulations shall not be more
trade
-
restrictive than necessary to fulfil a
legitimate objective, taking account of the risks non
-
fulfillment would create. Such legitimate
objectives are, inter alia: national security requirements; the prevention of deceptive practices;
protection of hu
man health or safety, animal or plant life or health, or the environment. In
assessing such risks, relevant elements of consideration are, inter alia: available scientific and
technical information, related processing technology or intended end
-
uses of pro
ducts.”

WTO Agreement on Sanitary and Phytosanitary Measures, Article 2.2:

“Members shall ensure that any sanitary or phytosanitary measure is applied only to the extent
necessary to protect human, animal or plant life or
h
ealth, is based on scientific pr
inciples and
is not maintained without sufficient evidence, except as provided for in paragraph 7 of Article
5.”

Article 5.7:

“In cases where relevant scientific evidence is insufficient, a Member may provisionally adopt
sanitary or phytosanitary measures
on the basis of available pertinent information, including
that from the relevant international organizations as well as from sanitary or phytosanitary
measures applied by other members. In such circumstances, Members shall seek to obtain the
additional in
formation necessary for a more objective assessment of risk and review the
sanitary or phytosanitary measure accordingly within a reasonable period of time.”

Article 5.8:

“When a Member has reason to believe that a specific sanitary or phytosanitary measur
e
introduced or maintained by another member is constraining, or has the potential to constrain,
its exports
,

and the measure is not based on the relevant international standards, guidelines or
recommendations, or such standards, guidelines or recommendati
ons do not exist, an
explanation of the reasons for such sanitary or phytosanitary measure may be requested and
shall be provided by the Member maintaining the measure.”

Exhibit 4

Size Indicators in the Biotech Sector, 1996


Indicator

Europe

USA

Turnover
(


m.)

1,700

11,700

R&D expenditure (


m.)

1,500

6,300

Number of companies

700

1,300

Number of publicly quoted companies

50

300

Number of employees

27,500

118,000

Source:

“Benchmarking the competitiveness of biotechnology in Europe”, Europabio, 1997,
p. 31.