Trade Note September 10, 2003 Market Access: Agricultural Policy Reform and Developing Countries The Introduction sharply in that time period, from 77 percent to 63 percent currently. World Bank The conversion of all non-tariff meas- ures into bound tariffs with reduction The shift away from border protection in Group commitments and the introduction of OECD countries to domestic support oc- minimum access commitments in the curred mostly in the grains and oilseeds www.worldbank.org form of import quotas (as a share of sectors (figure 1). The overall rate of pro- domestic consumption) are two of the tection for grains and oilseeds dropped rap- most important achievements of the idly after 1987, and has stabilized since. Uruguay Round Agreement on Agricul- These developments came primarily be- ture (URAA). Nevertheless, import cause in 1986 and 1987, tariffs were ab- protection for agriculture remains very normally high (when world prices were high and nontransparent, especially in abnormally low), and were mainly due to International rich countries. The average agricultural unilateral policy reform, not binding WTO Trade bound tariff worldwide is estimated to commitments. The overall rate of protection Department be 62 percent, with a large variation of started at close to 120 percent in 1986 for import protection rates among com- grains and oilseeds and fell to a low of 50 modities and countries. In addition, percent in 1996, but stood at 77 percent in about 28 percent of domestic produc- 2001. The cyclical component of protection tion in countries belonging to the over time reflects changes in world prices OECD is protected by import quotas more than changes in policy. The overall By with high out-of-quota tariffs. Tariff average protection for grains and oilseeds is Harry de Gorter, peaks remain very high--500 percent 80 percent for the time period 1986­2001. Merlinda Ingco, or more in some cases--and tariffs in The growth in domestic support payments, Laura Ignacio, many countries increase by degree of especially in recent years, is evident. and processing, creating an escalating tariff The rates of protection for all other com- Jana Hranaiova structure that limits imports of proc- essed food products. modities, however, have a far less pro- nounced downward trend in protection, Within OECD countries, total transfers although the average rate of protection is These notes summarize to farmers (from taxpayers and con- lower at about 50 percent (figure 2). Pur- recent research on global trade issues. They reflect sumers) averaged to about USD 235 chased input subsidies and output price sup- solely the views of the billion (B) per year in 2000­02. Al- port have been fairly constant for the grains authors, and do not neces- sarily reflect the views of though still a very high number, the and oilseed sectors and all other the World Bank Group or rate of protection--support as a per- commodities. Although support for these its Executive Directors, or centage of farm revenues at world other commodities is still dominated by the countries they repre- sent. prices--decreased from 62 percent in border protection, this is declining. Many 1986­88 to 49 percent in 2000­02. Of developing countries have reformed agri- these transfers, USD 148 B came from cultural policies and have lower protection import barriers, down from USD186 B rates. Several middle income countries, Trade Note 6 in 1986­88. The share of transfers to however, have moved toward more border farmers from border measures declined protection in agriculture. TRADE NOTE September 10, 2003 Figure 1: OECD protection in grains and oilseeds Figure 2: OECD protection in commodities other than grains and oilseeds 120 120 Border Support Domestic Support Border Support Domestic Support 100 oni 100 tionc odur 80 oductr p p 80 of of s ue 60 luea 60 val v e e th 40 th 40 of of t rcene 20 entcre 20 P P 0 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 The URAA provisions on market access had only a to make them more transparent, to improve fill modest impact on trade liberalization, mainly be- rates so imports are not discouraged or blocked, cause tariff reductions were based on average re- and to ensure access by lowest-cost suppliers. duction in tariffs, rather than a reduction in the · Limiting the application of special safeguard, average tariff, and because of the high tariff base anti-dumping and countervailing duties, and year upon which reductions were made. Poor per- other contingent measures so that they are not formance of global agricultural production should used to unfairly restrict market access. not be blamed on trade liberalization because very little has transpired and because increases in other · Rationalizing product regulations such as sani- forms of support have kept total support more or tary and phytosanitary (SPS) conventions, la- less constant since 1988. Even though rates of bor- beling laws, other non-trade concerns, so that der protection are trending downwards, mostly in they cannot be formulated as non-tariff barriers. grains and oilseeds, the number of farms has de- · Devising rules of special and differential treat- clined even faster, so per farm subsidies have in- ment for developing countries that provide creased. greater benefits from a more liberalized trading Although the URAA itself may not have led to environment. much liberalization of agricultural trade, it does This note discusses the first three of these negotiat- limit the type of border instruments countries can ing issues and presents some ideas for reform. use. The new quantitative commitments now uni- versally established in agriculture have made mar- Import Tariffs ket access issues considerably easier to negotiate in The most relevant items on the agenda for market the current WTO negotiations. Issues in market access are abnormally high tariffs, with bound rates access that are particularly relevant for developing higher than the applied rates (called "tariff over- countries include: hang") and a gap between the world price plus the · Lowering tariffs, tariff escalation and effective applied tariff and the observed domestic price (also protection, tariff peaks and tariff dispersion called "tariff water"). Water indicates that the pro- across commodities and countries. tection provided by the tariff is redundant, and may occur when import quotas are binding, but with · Increasing import quotas. their tariff equivalent lower than the applied tariff, · Improving the rules on quota administration or when the product is exported or not traded, mak- methods (including State Trading Enterprises) ing the applied tariff irrelevant. 2 TRADE NOTE September 10, 2003 Barriers in market access were collapsed into two to introduce TRQs nor to commit to tariff reduc- forms by the URAA: tariffs and formal tariff rate tions on these products. quotas (TRQs) (with a large number of agricultural and food products having tariffs and TRQs simulta- Regional average bound tariffs for WTO members neously); and remaining contentious non-tariff bar- range from an ad valorem equivalent of 25 percent riers like SPS. The tariffication process in the to 113 percent. With the exception of Non- URAA assured access at bound tariffs for all com- European Union Western Europe, the regional modities, but each country was also required to des- groups with the highest average tariffs are com- ignate tariff rate quotas for most commodities posed of developing countries. However, this com- where quantitative barriers were tariffied. Import parison is not indicative of the actual protection quotas are commitments to allow access at least up used by developing countries because these bound to the quota level at the in-quota tariff rate. The tariffs are much higher than applied tariffs (tariff quota specified was either the level of imports in overhang). Because overhang is most common in the 1986­88 base period or 3 percent of domestic developing countries, the estimated levels of tariff consumption (to increase to 5 percent by the year overhang for a selected group of commodities and 2000) whichever was larger. Where prior imports developing countries are depicted in figure 3. On exceeded these levels, countries were required to the other hand, tariff water occurs mostly in devel- use TRQs based on current import market opportu- oped countries, where binding import quotas are nities. Out-of-quota imports were allowed, but only prevalent. Some evidence of tariff water is given in at the (often much) higher out-of-quota tariffs. Out- figure 4 for some commodities in a selected group of-quota tariffs were to be reduced by an un- of OECD countries. The magnitude of both tariff weighted simple average of 36 percent (minimum water and tariff overhang implies that a substantial of 15 percent per tariff line) by 2000­01 (and four reduction in tariffs may be needed to achieve sig- years later for developing countries). nificant trade liberalization. Requiring an average cut in tariffs rather than a cut The average tariff for agricultural products in de- in average tariffs meant that a country could make a veloping countries declined from 29.6 percent in large cut in a tariff that was already low (for exam- 1990 to 22.9 percent in 1995 and to 18.4 percent in ple, a cut from 2 percent to 1 percent represents a 2000­higher than tariffs on manufacturers of 11.4 50 percent reduction) or in sec- tors with low political sensitiv- Figure 3: Estimates of Tariff Overhang for Selected Developing Countries (percent) ity, while making only the minimal cut required in sensitive Argentina product categories. The effec- Brazil tiveness of tariffication was fur- Colombia ther compromised because out- Ecuador of-quota tariffs were often ini- El Salvador Tariff Overhang tially set at such high levels Guatemala Applied Tariffs (known as the process of "dirty Mexico Bound Tariffs tariffication") as to effectively Nicaragua prevent all imports above the Pakistan quota levels. To address the Panama concern of sudden import surges Paraguay or depressed import prices, a Philippines special safeguard for agriculture Tunisia was added but only for products Uruguay that had been tariffied. Develop- Venezuela ing countries were not required 0 20 40 60 80 100 120 to undertake tariffication but Source: de Gorter, Ingco, and Ignacio in Agriculture and the WTO, Creating a Trading System instead could opt for ceiling for Development. bindings, and were not required 3 TRADE NOTE September 10, 2003 Figure 4: Estimates of Tariff Water for Commodities in Selected OECD processed resource-based com- Countries (percent) modities, characterized by low value added. This is an obstacle Sugar to commodity dependent devel- Oilseeds AppliedTariff (%) oping countries in their attempt Rice Tariff Equivalent (%) to diversify their export base. Maize Tariff Water (%) Barley Sorghum Suggestions for New Rules on Wheat Tariff Reduction Commit- Milk, conc. ments Pigmeat Milk, fresh The process by which the Poultry URAA intended to increase Bovine Meat market access has made only Sheep Meat limited progress toward its goal. 0 20 40 60 80 100 120 140 160 180 200 The current regime in agricul- tural trade is dominated by Source: de Gorter, Ingco, and Ignacio in Agriculture and the WTO, Creating a Trading System mechanisms that are non- for Development. transparent (e.g., quotas, spe- percent in 2002. Annual average quota rents and cific tariffs) and highly trade- tariff revenues world-wide are in the order of USD distorting. The current negotiations should make 49 B. the system more transparent and significantly in- crease access by achieving cuts in tariffs that are Although tariff quotas were to increase market ac- sufficiently deep to "squeeze out" the existing water cess for commodities that previously faced quantita- and reduce the tariff overhang, as well as ensuring tive barriers, the high in-quota and out-of-quota that the influence of quotas and other non- tariffs still remain. Across all WTO members, the transparent protective devices is minimized. Sev- average out-of-quota tariff for commodities with eral options are presented here and in box 1 for import quotas is 123 percent while the simple in- making progress toward these objectives. quota tariff average is 63 percent. The average tar- iff mark-up of out-of-quota tariffs over in-quota · Aim for larger reductions in high tariffs in order tariffs is 336 percent. to reduce tariff dispersion and tariff escalation, perhaps using a Swiss-formula type mecha- Of the 46 commodity aggregates, average tariffs on nism. 18 of the groups are above the global agricultural tariff average of 62 percent. These commodities · Establish a maximum tariff with a more liberal include tobacco, dairy, meats, sugar, vegetables and tariff rate quota for products at or near the grains. Data demonstrate there is a high dispersion maximum tariff. in tariff rates in OECD countries, with a large num- · If countries are to have flexibility in reducing ber of tariff peaks for products of interest to devel- individual tariffs, ensure that there are incen- oping countries, such as sugar and rice. A uniform tives for larger reductions in higher tariffs. tariff structure is preferred over highly dispersed tariffs because resource misallocation is exacer- · Reduce all in-quota tariffs to zero. bated with an increasing degree of tariff dispersion. · Tighten the rules on anti-dumping, countervail- Average tariffs on processed agricultural products ing and special safeguard duties--although a are found to be systematically higher than raw ma- limited set of safeguards may be required for terials or products with low levels of processing, politically sensitive commodities in developing phenomenon known as "tariff escalation." Escala- countries. tion is a pervasive feature in both developed and · Convert all specific tariffs to ad valorem developing countries. It biases exports towards un- equivalents. 4 TRADE NOTE September 10, 2003 Box 1: What Should be Done? Expand Quotas or Reduce Tariffs? Trade liberalization with import quotas is very complex, involving two tariffs, a quota, and sometimes several spe- cific situations such as over-quota imports at the in-quota tariff, quota under-fill, preferential quotas, and preferen- tial tariffs. Given that only minimal market access has been ensured by the implementation of quotas, what is the appropriate objective for trade negotiators? Negotiators should focus on reducing out-of-quota tariffs, especially in those cases with out-of-quota imports or if the out-of-quota tariff is close to the tariff equivalent of the binding quota. If this tariff equivalent is far below the out-of-quota tariff, increasing the quota will have a greater chance of liberalizing trade in the short run. A reduction in in-quota tariffs will liberalize trade only if the out-of-quota tariff is close to or below the in-quota tariff, in which case both tariffs need to be reduced, or if under-fill is signifi- cant because the in-quota tariff is bindingotherwise, quotas will also have to be increased in order to obtain trade-liberalizing effects. But as long as quota rents remain with a tariff quota regime, beneficiaries will resist trade liberalization. The best solution would be to eliminate quotas altogether and reduce the out-of quota tariff signifi- cantly, given the prevalence of tariff water and tariff overhang. · Do not employ tariffs to fulfill "non-trade" con- firms to remain in business. Each firm is allocated cerns. the same number of licenses, depending on the number of trading firms requesting licenses, regard- Import Quotas less of the underlying cost structures of the partici- Since 1995, 1,425 TRQs have come into effect as a pating firms. Inefficiency results because low-cost result of the URAA. Rents generated by import firms on average get relatively fewer licenses than quotas provide an opportunity for firms to spend is optimal, and quota under-fill also results because resources in competing for these rents, with the high-cost firms use licenses only up to their desired amount of rents wasted depending on the method by level of imports. which import quota licenses are allocated across "First come, first served" is the next most com- firms and countries. No specific provisions were monly used administration method. This allows im- approved in the URAA regarding administration of ports at the in-quota tariff rate until the quota is quotas, although relevant WTO rules for import filled. This method is prone to wasting resources quotas in general were to apply. Imports are techni- by concentrating imports at the beginning of the cally allowed to exceed the quota, but a higher tariff season, increasing storage costs for importers, and is paid on the out-of-quota imports. The higher tar- discriminating against competitive exporters with iff can be prohibitive and as a result, effective entry different seasonal prices. The cost to traders of es- of the product is often limited to the import quota. tablishing a business relationship over time with Understanding the characteristics of efficient tariff importers is a factor contributing to quota under-fill. quota administration methods is a requisite step to- "Historical allocation" is a method whereby li- ward reform. An efficient tariff quota administra- censes are issued in relation to past imports. Either tion method allows the lowest-cost importing firm import licenses are allocated to importing firms or or exporting country to obtain the licenses or quo- country specific export quotas are granted to ex- tas. Transparency is key and can be accomplished porters on the basis of historical shares. This leads with a simple regulatory system including tradabil- to a waste of global resources if the lowest-cost ex- ity of licenses and quotas. porting country or importing firm does not receive Almost 50 percent of the total tariff quotas notified the rights to import, because the historical share of to the WTO is administered with applied tariffs, imports does not reflect changes in market condi- which means no quota shares are allocated and im- tions or comparative advantage across trading firms ports are permitted at unlimited quantities at the in- or countries over time. quota tariff rate or lower. The impact on efficiency when a "State Trading Of the other methods, "license on demand" is the Enterprise" (STE) controls the import quota de- most commonly used. Import licenses are allocated pends critically on its objective function (whether to in relation to quantities demanded and requests are maximize producer income or self-sufficiency, typically reduced pro rata if the total request ex- etc.). The impact also depends on the STE's degree ceeds the quota volume. This allows inefficient of control, whether it has an obligation to fill the 5 TRADE NOTE September 10, 2003 quota or not, how quota rents are distributed, and clines and production increases. Limits on quota the level of the quota relative to in-quota and out- shares do not allow for economies of size and coor- of-quota tariffs. However, a general conclusion is dination, again resulting in the dissipation of quota that STEs may have fewer incentives to fill the rents. Limits on quota shares discriminate against quota. Allocating quotas to STEs, especially pro- more distant suppliers for whom shipload amounts ducer-representing ones, can reduce efficiency if are the economic size of shipment, rather than they discriminate across countries or choose low truckload lots, for example. quality products for political reasons, even with 100 percent fill rates. The method of quota allocation can have significant implications for trade liberalization. The best option The "lottery" option for distributing import quotas is to replace all tariff quotas by complete tariffica- is not discussed in WTO documents but is used by tion. The second best outcome is to reform current many countries including the US. Lottery is effi- quota administration rules. In order to make quota cient in that a firm cannot affect the likelihood of administration rules more transparent, to improve obtaining the license, and so has no incentive to quota fill rates and to ensure access by low-cost engage in lobbying activities. Nevertheless, there suppliers, negotiators should consider the following are incentives for firms to break down into many options for reforms: small firms to increase the probability of receiving a license. Such rent-seeking activities involve eco- · All countries could adopt auctions of quotas to nomic inefficiencies. Furthermore, high-cost firms the highest bidder and eliminate all other quota may win the lottery and this, if the licenses are non- administration methods listed above. This has tradable, results in economic waste. significant advantages over other schemes. Not only does it ensure that quotas are allocated to "Auction" is the remaining method of administra- the lowest-cost producers who would be able to tion. Under auctioning, licenses are allocated on bid the highest, but it also ensures that quotas the basis of a competitive bid system. While the are fully utilized. auction itself is a relatively efficient way of distrib- uting quotas, many times other conditions are at- · All quotas and licenses could be tradable be- tached to quota allocations. Additional conditions tween firms and countries. This has the same can take various forms, including a domestic pur- advantages as distribution by auction. Even if chase requirement (a condition requiring the pur- not originally auctioned, these quotas would be chase of domestic production of the product in purchased and used by the most efficient pro- order to be eligible), limits on tariff quota shares ducers. (which limits the maximum share or quantity of the · All preferential quotas could be collapsed into quota allowed), export certificates (a condition that the proposed "development box" put forward requires an export certificate administered by the by a number of developing countries. This exporting country), and past trading performance would help ensure that only developing coun- (which limits eligibility to established importers of tries benefit but in a fair way. the product concerned). · State trading enterprises (STEs) could be disci- Additional conditions can lead to wasteful rent- plined to provide greater transparency in their seeking activities as well. A domestic purchase re- quota administration activities. quirement increases the cost for some importing firms and encourages high-cost domestic produc- · All "additional conditions" could be eliminated tion. Thus, part of the quota rent is dissipated and in the administration of tariff quotas. fill rates are lower as domestic consumption de- This note is based on "Market Access: Economics and the Effects of Policy Instruments," by Harry de Gorter, Merlinda Ingco, and Laura Ignacio and "Quota Administration Methods: Economics and Effects With Trade Liberalization," by Harry de Gorter and Jana Hranaiova, both in Agriculture and the WTO: Creating a Trading System for Development. This Trade Note can be downloaded at http://www.worldbank.org/trade/tradenote 6 TRADE NOTE September 10, 2003 7