Tariff Rate Quotas and the Economic Impact of Agricultural Trade Liberalization in the World Trade Organization

By Herrmann, Roland; Kramb, Marc et al. | International Advances in Economic Research, February 2001 | Go to article overview

Tariff Rate Quotas and the Economic Impact of Agricultural Trade Liberalization in the World Trade Organization


Herrmann, Roland, Kramb, Marc, Monnich, Christina, International Advances in Economic Research


CHRISTINA MONNICH [*]

Since their implementation at the Uruguay Round, tariff rate quotas (TRQs) have become a widely used instrument of trade policy in agricultural trade. With almost 1,300 TRQs scheduled at the World Trade Organization, this paper will examine their economic effects more closely. First, the theoretical background of TRQs is examined. Then, a short overview of the Uruguay Round and their institutional background is given. We demonstrate that official statistics, which do not count TRQs as nontariff barriers, are at least highly misleading. Very often, their effects are the same as those of regular quotas, including redistributive effects. The prominent example of the European banana regime is used to illustrate all of these points. (JEL F10)

Introduction

The Uruguay Round Agreement on Agriculture (URAA) is regarded by many economists as major progress in the international debate on trade liberalization. In all earlier rounds under the General Agreement on Tariffs and Trade (GATT), the intention had been to liberalize agricultural trade, but it was never successful prior to the finalization of the URAA in 1994. The major policy decisions of the URAA include tarifficating nontariff barriers, reducing the level of agricultural protection in stages between 1995-96 and 2000-01, reducing agricultural subsidies, and setting a minimum access to the domestic agricultural markets of World Trade Organization (WTO) members. Regarding tariffication, important nontariff barriers in agriculture, such as variable import levies, are prohibited. Given this background, international organizations such as the Organization for Economic Cooperation and Development [1997, Table 8.1] stress that the number of nontariff barriers has declined strongly since 1994. Many economists have the general impression that the decline in the level of protection was not yet very strong, but that the URAA was the first important step toward a further reduction of trade distortions [Josling and Tangermann, 1999].

However, the actual liberalization steps are combined with some substantial new nontariff trade barriers (NTBs), at least if nontariff barriers are meaningfully defined in economic terms. This point has been unobserved in the general economic debate and has only been discussed in detail by some agricultural economists. In some cases, no real tariffication occurred as in the case of the European Union (EU) grain policy [Thompson et al., 2000]. More important, the URAA has led to a very large number of tariff rate quotas (TRQs) [Skully, 1999a; Boughner and de Gorter, 1999]. Many countries, including the EU and the U.S., introduced quotas besides the bound tariffs to fulfill the minimum access rule. Tariffication and quotification occurred simultaneously. In many cases, there is considerable "water in the tariff" and the quota component is binding. Quota rents occur, then, as under traditional nontariff barriers, although TRQs are counted as tariffs under the WTO rules.

Given this background, this paper will show the importance of TRQs in agricultural trade under the URAA and elaborate the economic impact of agricultural TRQs. The theory of agricultural TRQs is presented in the second section and it is shown how the administration of TRQs affects their economic impact. The third section will summarize how decisions on agricultural trade liberalization fostered the introduction of TRQs. For the Common Market Organization for Bananas (CMOB), the fourth section will show how the administration of TRQs affected its economic impact. The CMOB is particularly interesting as it led to an international trade dispute, and general rules on the use of TRQs were specified by two WTO panels on bananas. The fifth section gives a summary and conclusions are drawn.

The Theory of Agricultural TRQs

Here, the economic impact of TRQs from a theoretical perspective is examined. It is aimed to show that TRQs contain characteristics of both quantitative restrictions (QRs) and tariffs, either one of which can prevail depending on the particular market setting.

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