Breaking the Deadlock on the SSM

ICTSDGeneva, December 2, 2008

Jaime de Melo

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3 Papers

• Will Martin and Tom Hertel, 2008. Potential Implications of the Special Safeguard Mechanism (SSM) in Agriculture: an Application to Wheat.

• Michael J. Finger, 2008. A Special Safeguard Mechanism for Agricultural Imports and the Management of Reform.

• Robert Baldwin, 2008. Resolving the conflict leading to the collapse of the Doha round.

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Background on Trigger Measures (I) • Price-based measures: Trigger comes if price is less

than 85% of reference price (computed on 3-year moving of average import price)

• Suppose: P1<0.85 P0 (P0 =1 is reference price) price-based safeguard is triggered.Ex: 1Take P1=0.70. Then choose t so that P1+t=P1+ (.85)(P0-P1)=0.7+(.85)(.15) P1+t ≈0.7+.13=0.83Ex: 2 Take P1=0.50 P1+t ≈0.5+.3=0.80

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Background on Trigger Measures (II)

• Volume-based safeguard: when M1>base imports (defined on 3 year-rolling average).

• Suppose M0 =1. Then

1.10M0<M1<1.15M0 t=25% above current binding rate or 25 percentage points

1.15M0<M1<1.35M0 t=40% above current binding rate or 40 percentage points

M1>1.35M0 t=50% above current binding rate or 50 percentage points

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Robert Baldwin (1)• The trigger mechanism was flawed and this was an

underlying cause of the disagreement.

• Under SSG for agriculture in the UR, imports were defined « … as a percentage of domestic consumption».

The effect of a percentage increase in imports depends on the import ratio (this was recognized under the SSG), but not so in trigger mechanism proposed here.

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• Case 1: 20% growth in imports (∆M/M) and initial ratio (m0=M/X=5/100). Then m1=6/100

• Case 2: 20% growth in imports and initial ratio (m0=M/X=50/100). Then m1=60/100

…but according to proposed trigger formulas in both cases, a tariff of 25% could have been applied, yet no jeopardy for the small farmer in case 1.

Robert Baldwin (2)

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• Bob’s proposal: Use as criterion the percentage increase in imports times the average consumption over the period (∆M/M) *(M+X) [or the import penetration ratio as under the UR].

• Greater tariffs would be allowed when import penetration is higher corresponding to cases where the livelihood of the poor farmers in LDC would be at risk.

Robert Baldwin (3)

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• Global simulation analysis of the price and quantity trigger mechanisms described above for the wheat market.

• With global modelling, they can take into account that triggers (these would be automatic) could extend to many countries and have spillover effects on world prices.

• They note (like Finger) that SSGs were used very infrequently (about 1% of the times when it could have been invoked)

Hertel-Martin (1)

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• Useful exercise as simulations are from a data-validated CGE model (serious effort at checking how calibrated supply-side shocks replicate observed price-volatility at the regional level)

• Distinguish between idiosyncratic case of volume triggers (Q-SSM) that come from a bad crop or import boom in importing country and price triggers (P-SSM) when a fall in world price will generate price-triggers across a group of importers.

Hertel-Martin (2)

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Results (see numbers in annex table):1) Q-SSM boosts tariff-inclusive much more than P-SSM

and are more varied across country groups greater price variability with Q-SSM than w/o.

2) Not much effect of P-SSM on price variability (bilateral P-SSM is invariant across destinations whereas Q-SSM is driven by conditions in import market)

Q-SSM is more damaging than P-SSM (greater reduction in world trade of wheat (-6.0% vs. -0.6%) and also more price volatility)

Hertel-Martin (3)

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Finger (1)

• Reviews how contingent protection has worked under the GATT/WTO.

Flexibility provisions (article XIX, AD,…) used but not overused so that overall thrust of liberalization has prevailed.

In AD no formal reciprocity, but threat of ‘reciprocal’ AD there so reciprocity continues to be a discpline.

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Finger (2)

• Problem with SSG/SSM is that it relies only on a formula with no procedural requirement which brings in transparency (notification requirements are minimal)

Step back from requirement for objective transparent reciprocal participatory process

Futhermore non-conversion of import controls by most developing countries at UR meant they did not have access to SSG. Hence pressure by them to have the equivalent at their disposal)

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Argues that the SSM does not serve the developing countries interests

• (Montemayor (2008) simulations suggest that triggering

would not have occured half the time when serious price-undercutting

• Finger-Ng:Using unit values (with unit values of developing countries often lower), yields a trigger of 6% of imports from developing vs. 2% for developed. An unintended consequence

• Recalls the unsuccessful experience with trying to stabilize in the past (buffer stocks to stabilize primary products receipts, and also the IMFs Compensatory Facility) as it is difficult to separate instability from trend.

Finger (3)

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Mike’s Recommendations1. Look for a good management tool that gives

flexibility by sorting good restrictions from bad (rather than exchange proposals between importers and exporters)

2. Effectiveness of GATT/WTO provisions (transparency, procedures and reciprocity) should be kept.

3. View tariff reductions from perspective of concessions received (export mercantilism)

Finger (4)

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ANNEX

Hertel-Martin Results

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Table 9. Deviation in mean outcomes for key variables in the world wheat market: Mean SSM - mean under no SSM (% of baseline level) Developing Country Markets Region Variable Import Price* Import Quantity Domestic Price Land Rents Output Q-SSM P-SSM Q-SSM P-SSM Q-SSM P-SSM Q-SSM P-SSM Q-SSM P-SSM CHN 16.1 0.4 -60.2 -1.4 6.9 0.1 20.9 0.3 4.7 0 OEASIA -0.9 0.5 0.2 0 -0.6 0.3 -3.4 1.7 -1 0.6 STHASIA 3.2 0.5 -5.4 -0.9 1 0.1 2.7 0.4 0.7 0.2 MEX 3.4 0.4 -5.7 -0.7 1.7 0.2 6.1 0.5 2.2 0.2 ARG 5.1 0.9 -48.1 -7.5 -2.9 -0.9 -11.4 -3.9 -3.8 -1.6 BRZ 27.7 0.9 -38.5 -1.9 7.7 0.1 45.8 1.3 8.4 0.7 RLAmer 2.9 0.5 -6.4 -0.9 0.9 0.2 2.9 1 0.9 0.4 MENA 2 0.6 -4.4 -1.2 0.7 0.2 3.2 0.9 1.1 0.4 SSA 2.9 0.5 -6.7 -1.1 0.7 0.1 7.2 1.2 3 0.6 Developed Country Markets Region Variable Import Price* Import Quantity Domestic Price Land Rents Output Q-SSM P-SSM Q-SSM P-SSM Q-SSM P-SSM Q-SSM P-SSM Q-SSM P-SSM AUS -0.1 -0.27 -5.5 2.5 -1 -0.1 -7.7 -1 -3.5 -0.6 JPN -1 -0.01 0.2 0 -0.6 0 -4.9 0.1 -1.6 -0.1 CAN -0.6 -0.01 -2.7 0.4 -1.3 0.1 -11 0.5 -5.7 0.3 USA -1.2 0.02 1.3 0.2 -0.9 0.1 -4.7 0.3 -2.1 0.1 EU15 -0.4 -0.03 0.3 0.1 -0.3 0 -2.6 0.3 -1.6 0.2 OEUR -0.7 -0.32 2.3 0.9 -0.1 0 -0.7 -0.4 -0.4 -0.2 RUS -0.2 -0.1 1.1 0.1 -0.1 -0.1 -0.4 -0.5 -0.2 -0.4 Source: Authors' simulations * Inclusive of the tariff

Greater volatility under Q-SSM than P-SSM