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0 Protectionism and Geographical Indicators International Business Seminar Stephan Farias-Bastos April 26, 2015
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Page 1: Senior Research International Business Seminar

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Protectionism and Geographical Indicators

International Business Seminar

Stephan Farias-Bastos

April 26, 2015

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Table of Contents Introduction .................................................................................................................................................. 2

Practice of Protectionism .......................................................................................................................... 2

Impact of Protectionism in International Trade ........................................................................................ 2

History of Protectionism .............................................................................................................................. 3

Protectionism in France ............................................................................................................................ 4

Geographical Indicators ............................................................................................................................... 4

Types of Geographical Indicators .............................................................................................................. 5

Regulations of Geographical Indicators....................................................................................................... 7

Regulatory Committee ..................................................................................................................... 7

Scientific Committee ....................................................................................................................... 8

Protected Geographical Indicator & Protected Designation Origin .......................................................... 8

Exclusive Rights ................................................................................................................................ 8

Traditional Specialties Guaranteed ................................................................................................ 10

Impact of GI products ............................................................................................................................. 10

On Farmers .................................................................................................................................... 11

On Consumers ................................................................................................................................ 13

On Quantity and Quality of Products ............................................................................................. 14

Socio-Economic Impact of GI products ...................................................................................................... 15

Increase Quality of Products .......................................................................................................... 15

Increase of Market Access of Niche markets ................................................................................. 16

Rural Development ........................................................................................................................ 17

Preservation of Traditional knowledge .......................................................................................... 18

Potential negative impacts of GI products ............................................................................................... 19

Conclusion .................................................................................................................................................. 21

References .................................................................................................................................................. 22

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Nowadays protectionism is an economic practice that is controversial around the world.

Protectionism implies the restraining in trade between countries by methods such as regulations

in form of taxes, tariffs, quotas, and other governmental regulations in order to only allow a

designated amount of goods and services produced overseas. The practice of protectionism has

grown all over the world in the last years due to the high competition as a consequence of

globalization. The main idea of protectionism is to protect a country’s local business from the

global competition that has increased due to the developments in technology, making it easier for

business all over the world to compete against each other. Nowadays, the countries where

protectionism has been in practice are United Kingdom, France, India, Brazil, Australia, Russia

and even the United States.

The practice of protectionism is a controversial practice because it inhibits the

international trade in between countries. International trade itself accounts an average of 50.5%

of the world’s GDP with an amount of $37,700 Billion of goods traded annually, for France

international trade accounts for a 42.5% of the GDP and 1,200 Billion of goods traded annually

this is almost 25% of the whole European Union of traded goods annually (CIA Factbook).

However, international trade is a new concept that has only exponentially grown due to

globalization. For many countries International Trade has been vital for their growth an

expansion, one of the countries that currently has been the most benefited from international

trade is China. China has been able to extend their sales potential all over the world, maintain

their cost competitiveness and gained global market share due to their international business

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culture. In the last decade Chine has seen a sharp increase in their economy with an overall 7%

GDP growth, which compared to EU 3.3% or US 2.2% puts to shame any of the other big

economic players in the world, all of this growth mostly attributed to their international trade

growth. Furthermore, to show the value of international trade, Africa is a continent that has not

taken the fully advantage of the international trade. According to a research done by Dr. Markus

Bruckner & Dr. Daniel Lederman from the National University of Singapore, in Africa countries

with a larger trade openness ( in regards of ratio of trade over gross domestic product) have an

increase of 0.5 % of their economic growth in the short term and 0.8% in the next ten years.

History of Protectionism

Protectionism in France dates as back as the 17th

Century, when Louis XIV established a

mercantile system based on protectionism and the state control of the production of high-end

products such as luxury goods. This made France to become one of the region leaders in luxury

products (Bernitz,Ulf). Nevertheless, protectionism has recently seen a reborn when in 2014

President Szarkozy adopted a protectionist policy to boycott international investment in key

areas such as energy, water supply, transport networks, electronic communication services and

public health. France as a member of the EU has also been part of other protectionist measures,

one of the most controversial ones, their protectionism towards French Culture.

In order to understand the protectionism that happens in France, it’s vital to understand

their point of view in regards of Globalization. France is an interesting case due to their rejection

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to globalization known for years, however, since their inclusion to the EU France has opened to

globalization. Jobs opportunities, a shared currency, stabilization of prices and of course free

trades in between EU countries are an obvious consequence of their addition to the EU.

For years France has been against globalization in order to be able to protect their culture

and customs from globalization. The first time France was concerned about globalization was

back in the 80s when the right national party lead by Jean-Marie claimed that the high

unemployment in the nation was a result of the arrival of immigrants who were a direct threat to

the economic and social stability of the country. Another known moment that France has fought

against globalization was on the failure of the Multilateral Agreement on Investment in 1998

(Lukauskas, Arvid), which were concluded due to the French government negative against the

agreement. This agreement was started in order to stablish a similar treatment for foreign

investors with the national investors.

Geographical Indicators

Nevertheless, with their inclusion to the EU as mentioned before, France has had to expose them

to globalization. However, this exposure has not been completely detrimental for the French. In

order to be able to conserve the competitiveness of their products and companies the EU

stablished the Protected Designation of Origin (PDO), Protected Geographical Indication

(PGI), and Traditional Specialty Guaranty(TSG) (European Commission,Quality Policy).

Protected Geographical indication is a type of protectionist practice, which involves the produce

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of certain foods articles. All these geographical indicators established in the European Union

Law to protect the names of regional foods. This was a bilateral agreement in between the EU

countries and non-EU countries in order to protect the products from unfair competition, and to

misleading producers of similar products. This law protects a vast scope of products, these

products are; wine, cheeses, hams, olives, beer, breads, fruits, and vegetables. This law is similar

to a copyright or patent, which if violated would mean in a consequently prohibition of selling,

and production of the produce along with financial penalties.

Types of Geographical Indications

Protected Geographical indication is the name of the area or exact place where the

produce comes from. If a produce gets classified with this label it means that the produce has to

be traditionally and partially manufacture in the area specified due to the unique properties of the

area. Protected Designation of Origin is the name of the area or exact place where the produce

comes from. If a produce gets classified with this label it means that the product has to be

manufacture totally in the area specified. Traditional Specialties Guaranteed, this seal differs

from the two previously explained, this quality seal does not certify that the produce comes from

a specific area. However, shows that the product was processed the ‘traditional’ way and was

done with the legitimate raw materials. Protected geographical indication was stablished in the

EU as a way to protect not only the produce of the different countries members of the EU but

also to protect the culture and reputation of the producers. Front an international business

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standpoint, it may be seen as a negative measure since it limits the production of certain products

to only the areas where they are designated. However, since the products are monopolized by

these areas the standards demanded by the governmental entities are tremendously high

(European Commission,Quality Policy).

The origins of this type of protectionism are several but it is known that it was a measure

adopted as a way to protect the cuisine of countries from France or Italy, which relay mostly on

the quality of their products as well as their uniqueness. The first signs of protected geographical

indicators come all the way back to the beginning of the 20th

century as a consequence of the

Midi Wine Revolt of 1907 in Europe (Melkonian, Raffi.). In this period of time most of wine

producers were very concern about the recent uprising of less quality. Being Midi one of the

centers of wine production in France, and the increase in production of cheap wines had a huge

impact on the industry that lead to producers from Midi to not be able to produce at the normal

quantity because of the reduction of margins. Protest occurred in France, which were taken into

account by the local government that later passed a fraud bill that protected the production of

wine by assuring a higher quality wine as well as the legitimacy of the producers. The creation

of the actual law for geographical indication, however, was not developed until 1908 when the

French government released the Loi Cazeneuve law (London School of Economics). This law

was developed to protect the local wine producers from fraudulent production from other

producers, as well as assuring high quality products. The law was further developed 1966 when

the GI mark was given to the producers who were able to better identify their products as well as

better the efficiency of the law. Based on the French system, in 1992 the EU created a series of

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mandates under the Regulation 2081/92, in order to protect the regional producers and their

products. These regulations would provide the consumer with a guarantee of the origin, method

of manufacture and quality of the product, as well as protection for producers from 3rd

parties

who could try to imitate these products without the legal authorization. This regulation would

cover food, wine, alcohol, and any type of spirits as long as they are unique from a geographical

area in specific.

Regulations of Geographical Indications

For the EU and member countries there are two committees that are in charge of the

correct implementation of the regulation. The main committee in charge of the implementation is

the Regulatory Committee and the Scientific Committee in charge of advising.

The Regulatory committee is in charge on designations of origin and geographical

indications for agricultural products and foodstuffs, which is composed of representatives of the

Member States and is chaired by a Commission representative who does not vote. The

commission has the power to amend anything in regards with the Regulation 2081/92. The

commission is also consulted for registration of any products under the regulation. Lastly, the

committee provides with the certification for agricultural products and food related items.

The Scientific Committee is in charge of advising the regulatory committee if requested.

The main task is to examine all technical problems related to the application of Regulation

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2081/92. This committee evaluates possible problems in regards of nature of name, factors taken

into account when defining the Protected Geographical Indicator and Protected Designation

Origin, application of criteria in regards of fair competition in commercial transactions as well

as the danger of misleading consumers in cases of conflict. Finally, the committee examines any

problems in regards of the assessment of the traditional nature of a produce. The committee is

formed by a group of highly qualified experts with legal and agricultural backgrounds, and

special knowledge in regards of intellectual property rights (European Commission, Quality

Policy).

The implementation of this mandate also includes penalties for the violation of the

mandate. The registration to the mandate has major legal repercussions in terms of producers’

rights and in terms of the type and extent of protection of the registered name.

Protected Geographical Indicator and Protected Designation Origin

Exclusive Rights

The registration gives the producer with an exclusive right to registered name for their

products. This is similar to an intellectual property right. This exclusive right belongs not only to

the producer of the produce but also to the person who made the application for the produce

originally, as well as the members of the original producers association, and all the producers

determined to produce the product in the geographical area defined to do so. It’s on the

producers’ power to allow the usage of the name of a produce to other producer or the

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registration of the name, this means that registration gives full power to the producer on the

product (European Commission, Quality Policy).

This exclusive right covers the usage of market or advertisement under the same name,

meaning in that only the producers with the registration are allowed to use the PGI mark or label.

This label gives the opportunity to customers and producers to be able to determine the

difference in between the original products against the competition on the market, as well as to

show the customer the different in quality level that PGI and PDO products have against the

competition.

Lastly, the enforcement of Exclusive law is done by the member states of the regulation.

Thus, the law enforcement organizations in the different states are in the fully capability of

protecting and enforcing their individual initiatives and punishments to the entities found in

violation of this regulations product (European Commission, Quality Policy).

The protection of Exclusive rights prohibits practices in the following areas, firstly, the

usage of any commercial use of the name of products covered by the registration and products

comparables, because the simple usage of the name or product related makes use of the

reputation of the original product. Further, the misuse or imitation of style, type, method, or

production origin is prohibited if there is no registration. In few words the Exclusive rights

covers all the aspects of the product in order to protect it from becoming a generic or widely

usage of the product for commercial use.

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The registration of the product is done after a proper inspection, which is stablished by

the regulatory committee in an inspection system. The regulatory committee does not carry the

inspections; however, they are conducted by member of the states. Since the inspections are

carried by the local law enforcement from the states individually, the producers are the ones in

charge of sponsoring all the costs in regards of inspections. In order to assure an impartial

inspection by these entities, members from a different state or third parties are also part of the

inspection.

In regards of names, products made in different regions may have similar names. In order

to allow producers from different areas to use the same produce name regardless of the area,

producers are needed to have their own community logo but cannot use a different community

logo, which is only permitted to producers following the mandate. The community indication is

a TSG logo, which entitles that the product is from certain region. This is done in order to

increase the reputation of a certain region, promote awareness of the product, and to promote the

competitiveness of the product in the market.

Traditional Specialties Guaranteed

The TSG or traditional specialties guaranteed has the similar system of exclusive rights

as the PGI and PDO and it is evaluated and regulated by the same committees.

Impacts of Geographical Indicators

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Since the beginning of the 20th

century, France has been a pioneer in the regulations in

regards of geographical indicators. This way of protecting the trade names and products from

certain areas has had several impacts that have not only affected the farmers or producers but

also the customers. The following is an assessment of the overall impact of the GI in regards of

the farmers as well as the impact on the quality of the products, the consumers sentiment, the

development of this producers as a consequence of GI, and the impact on the cultural heritage

that is in the end the main reason behind the regulations by the European governments in regards

of their produce.

Impact on Farmers from GI products

The practice of Geographical Indicators for local farmers and producers is a monopolistic

environment. This is a monopolistic model due to the conditions (explained previously) where in

order for a producer to obtain the legal permission to be able to produce certain product, it has to

acquire the permission not only from the committees and state law enforcers but also from the

farmers who are legally allowed to produce the product as well from the first group of farmers

who registered the product. This mechanism assures that farmers who are willing to make certain

product under GI have to get scrutinized by these communities, however, what is the real impact

of the GI on farmers? Are they benefited by this monopolistic model?

According to a study done by the European Commission of Agriculture and Rural

Development (ETEPS), the impact of GI to farmers differs depending on the region. This study

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shows a study on the development of Comte a French cheese produced in the state of Besancon

on the south-east of the country, and study on the Parmiggiano Reggiano in Italy.

In the case of the production of French Comte, in order to produce such cheese needs a

special type of milk that is only produced in the area. This milk is not produced necessarily by

the cheese producers, thus, this milk has a higher price than the one use for normal consumption.

However, the production of this milk has a higher cost than the production of milk in the region

of Brittany (where normal consumption milk is produced at), this happens due to the more

difficult environment for the production in French-compte vs Brittany. As a consequence of

income from a farmer in the French-compte is 18% than their colleagues in Brittany (ETEPS),

Furthermore, the case of the Parmiggiano Reggiano in Italy the milk producers have a

premium of 15% vs the producers of Granna Padano (another type of cheese). However, the

study shows the producers who sell their milk to cooperatives are the ones who see the largest

profits, whereas, the ones who sell to private entities see zero to negative profits (ETEPS).

The study also suggests that one of the main reasons why GI has benefited farmers from

these designated regions is the increase in demand for the products. The increase in demand for

the French-Compte has shown an increase also in the development of agricultural employment

where in between 1992 and 2004 saw a decrease in number of farms of 29% where as in the rest

of France saw a decrease of 40% (ETEPS).

Lastly, the study recommends that the GI is a tool that helps producers/farmers to be able

to compete against other regional farmers regardless of the tougher conditions of the different

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regions. Thus, the GI are a tool to maintain farmers from less benefited areas able to continue

producing and having a appropriate remuneration due to the higher rate that their produce have.

Impact on Consumers from GI products

As seen previously the impact of GI on producers and farmers changes depending on the

region and on the product that is produced. However, the conclusion is the GI is beneficial for

producers and farmers who are located in regions where the conditions are harder and more

expensive to produce their products, this allows the market to be able to sustain itself and have a

more stable condition for all producers. Nevertheless, the other vital part of the market is the

consumers, and a consequence of GI is higher prices. How do consumers react to higher prices

for GI products?

In order to prove the impact of GI on consumers, a lot of studies have been done on

empirical date that shows the actual impact in the market. This data has been collected in two

ways, the collection of data in regards of consumption as well as the usage of surveys.

Different data from different sources shown that; GI products find a positive value in the

market, as well as a higher value than brands that are not GI. Further, consumers image GI with

quality warranty dimension and an economic support dimension (this relates to the rural

expansion as a consequence of the production of GI). National GI brands tend to have a higher

value than GI from other countries for customers. For different products the impact of GI is

different, however, in most of the products that are GI consumers seem to be positive to pay

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higher prices as a consequence of a higher quality products and for the positive consequence

these products have on the economy (Hassan,D,and S. Monier-Dilhan).

Another positive note for consumers in regards of GI is that in today’s globalized world

there is a huge range of products available in the market. This makes consumers responsible to

gather information in regards of the price of the goods and it’s characteristics, GI products

differentiate themselves due to it’s authenticity, quality, and original products that make

customers as a key tool to be informed and almost an insurance that the product will be high-

quality.

Impact of GI on the quantity and quality of products

As part of the production of GI, there is a limitation on the quantity of production that can

be done by each producer. This cap makes producers focus on maximizing the quality of their

products in order to achieve the highest quality levels that are also part of the requirement from

the Regulatory Committee and the state law enforcement entities.

In theory, the creation of a monopolistic market could negatively impact the quality

control of a product that would consequently decrease the quality of a product due to the

consumer surplus. However, for GI products are intensively scrutinized by not only the local

farmers but also the Regulatory committees as well as the scientific committee. The restraint

in quantity imposed by the GI actually has a negative impact on the consumer due to a possible

shortage of products; however this is balanced out with the higher quality of products being this

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one of the key policies that gives GI advantage over non-GI products (Giraud-Heraud, E.,

J.Mathurin).

Socio-Economic Impact of GI

Apart from the impact that the production of GI have on farmers and consumers, GI

products also impacts the socio-economic environment of the areas in which these products are

made as well as the production of the products itself.

Increase Quality of Product

GI products are a measure that was done back in the 20th

century in France in order to

protect not only producers from an increase in a misleading competition but also to help

customers to identify quality products in the market. GI is a way in which customers can

recognize the higher quality products, which creates competitiveness creates in between regions

in order to have the highest standards of production. According to the Journal of Political

Economy by Nelson P, products can be categorized in three ways depending on the way

consumer can access to information in regards of these products, these categories are; search

goods, which are goods that consumers can identified it’s quality before the purchase of these

products, Experience goods, which are goods that consumers can identify it’s quality through

experience; and Credence Goods ; which are goods that cannot be assessed by either inspection

or experience.

Based on these 3 characteristics, it can be assumed that there could be an issue with

asymmetrical information since products could not be identified as good or bad quality, this

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could consequently result in producers to have bad quality products. Here is where GI provides

the market with the issue of asymmetric information, GI provides producers with a mark/brand

that gives customers with an indicative to prove the high-quality of these products. Thus, in the

case producer decides to reduce the quality of the product the GI regulations would not permit

these quality standards to be reduced, further, by this measure the customer has to pay a premium

of the reputation and high-standards. The creation of reputation goes along with consumer

loyalty and the willingness of the customer to invest in a higher cost product.

GI provides the producers with a institutionalized reputation that reduces the risk of

asymmetric information in the market by differentiating the product and supporting it’s

reputation with their branding. A win-win situation where both consumer and producer get

benefited from the product and it’s reputation backed up by state institutions.

Increase of Market Access of niche markets

As the world becomes closer and closer as a consequence of globalization, markets have

become more globalized as well. The increased competition of markets has also impacted

negatively markets that do not have the capacity of competing against the world’s largest

producers. Commodities is a market that has been affected by globalization, and it’s volatility

also affects farmers and producers from Europe and the world (Barjolle D and Chappuis JM).

The importance of GI is that it brings the capability to differentiate to this products based on the

quality and culture that is entitle to these products. Furthermore, GI products have the

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uniqueness of creation of niche markets that make the GI products be able to differentiate and

compete against the large markets created by globalization. Most of GI products are artisanal and

very connected to the culture of the regions where they are made, thus, this differentiation

provides GI products with higher chances to succeed in larger markets regardless of a smaller

supply (Barjolle D and Chappuis JM).

Rural Development

The contribution of GI products is not limited to the consumers or producers of these

products, GI products are also beneficial for the development of the areas where these products

are produced that are normally rural areas. For the last years, GI products have been the main

player in the development of the European Union agricultural force in rural areas. This happens

as a consequence of the natural connection in between these GI products and their area of origin.

(Barjolle D and Chappuis JM). Since, most of the regions in EU have their very own products

that are unique of each area and are connected with cultural heritage of these regions. GI

products are the best expression of cultural heritage and it positively impacts the growth of these

rural areas. The main ways GI products aid the development of these areas are by the payment

that the local farmers and producers from these areas received from the production of GI

products. Going back to the reputation of GI products, these rural areas also have specific

environmental conditions, fauna, and characteristics that make them unique for the development

of certain products. This makes the GI products to be unique depending on the area as well as to

develop a differentiation in the market. These territorial unique factors bring a capability to these

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areas to have a more equitable distribution of value for their producers and communities and

compete against other areas that could be more benefited in terms of territorial characteristics,

fauna or conditions (Zografos, 2008)

Another important factor that is impacted by the GI products is that it creates a cultural

value for these areas. The direct selling of these local products, create a cultural value for these

areas that create a relationship in between customers and sellers that goes further than pure

consumer loyalty. One of the aspects benefited is the creation of income from tourism. The

impact of direct marketing of these products in ways such as e-commerce, international trades

and even retailers bring the attention to these areas that get benefited from agro-tourism or

simply tourism as part of the reputation grown from these products. A clear example is the area

of Dijon, Dijon is a city located in the south of France that is known all over the world due to one

of the main GI products which is Dijon Mustard. This world reputation makes tourist from all

over the world to visit Dijon for their fame and also to contribute to their economy and also their

development.

Preservation of Traditional Knowledge

One of the key objectives of the GI products is that it not only protects the producers

from globalization and global markets, but also it contributes to the preservation of traditional

knowledge of the culture. The way GI products protect the culture is not by the appropriation of

knowledge of production, but rather by the creation of the reputation that makes the GI products

differentiate from others. The structure of GI products makes the culture of these products to

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stay relevant throughout time as well. In order for producers of an area to be able to produce a

product, they have to meet with the state law representatives as well as with the local producers

in order to obtain the permission for the elaboration of these products, this creates a sense of

community and maintains the sense of territorialism where members of these communities work

for the development of their traditional products. Further, since the production of these products

involves the utilization of traditional elaboration methods as well as products and raw materials,

this encourages the traditional customs in the areas where GI products are produced and

maintains these practices throughout time (Babcock B and Clemens R). All this factors create a

value for the culture and traditions from the different areas, which helps to preserve the

traditional and unique knowledge from every area where GI products are part of.

Potential Pitfalls of GI products

Even though GI products have a number of positive impacts on not only the development

of small areas where there GI products are from, but also in the economy overall of a country

there are potential negative effects from GI protection.

One of the important factors of GI products is that they create a niche market, the

creation of this niche market help producers to differentiate themselves from the market and to

be able to sell their products at a premium. However, it’s arguable that the creation of this niche

markets towards the conservation of cultural relevant products has a negative impact to products

that are not represented as cultural or traditionally relevant. This could have a negative impact on

the production of these products as well as the demand of such products, since they are not

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backed up by the GI brand. This could marginalize those products and consequently affect the

overall supply/demand of the products as well as the economy where farmers of these non-

relevant products are part of (Blakeney, Michael).

Further, GI products by definition create a monopolistic industry in these regions, which

becomes in a concentration of power. This concentration of power and reputation associated to

certain areas could not benefit in the long tern the regions equally as it could benefit the

importers out of the region where is produced (Blakeney, Michael). For instance, a corporation

that has the permission of distribution of Compte cheese in the US could be benefited by this

concentration of power more than the actual producers from French-Compte due to their

monopolistic position.

Lastly, as a consequence of GI products tend to be high-end products. Thus, products that

are also cultural relevant but lower end may be marginalized. The exclusion of these products

could affect lower income areas and producers and contradict one of the purposes of GI products,

which is to preserve culturally relevant products.

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Conclusion

International trade is a vital tool for countries in order to not only obtain profit but also to

feed their internal economy with a diverse group of products and services. However, certain

countries choose to limit their international trade by the practice of protectionist practices. These

practices are executed for several reasons such as, protecting the internal market of the country;

protect the culture of the country, or to stimulate the internal production and consumption. Even

though, Europe is an active participant of international trade, it has a group of protectionist

measures in order to keep their culture and internal production safe from globalization and

international trade. One of the measures use by the EU is geographical indicators. Geographical

indicators are a group of indicators that protect culturally relevant products such as cheese, wine

and other products to not be produced anywhere else but in the areas where they were originally

produced. EU took this idea from France, one of the most protectionist counties in the European

nations, and arguably in the world. The practice of Geographical Indicators has impacts that are

positive not only for the farmers and customers but also for the whole socio-economic

environment of EU and France. As it can be assessed from the research done, Geographical

Indicators are very beneficial for the sectors involved in it, however, one of its pitfalls is that

certain products are not as benefited as the cultural relevant ones. Nevertheless, the positive

impact of the Geographical Indicators overshadow the possible pitfalls, mainly due to the impact

it has on conserving the traditional culture of these areas and in balance the overall income

regardless of the sector where the Geographical Indicators are being used. In few words,

Geographical indicators are an effective way to protect the small size producers as well as

keeping cultural traditions regardless of globalization and international free trade.

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