Table 1 shows appropriate tariffs for complete price stabilization all the time (or maximum tariffs in the computations) for 18 food products under five assumptions about reference prices.13 Although the maximum rates for various reference prices are interesting on their own, the purpose of this analysis is not to review alternative reference price schemes but to obtain a rough order of magnitude of the tariffs for various reasonable assumptions about stabilized prices. It is for this reason that discussions are based mostly on the simple averages resulting from the five references, shown in the last column of Table 1. The table shows that these maximum tariffs ranged from about 30 percent for lamb to 100 percent for coconut oil, with the simple average for all 18 products being 53 percent. Many tariffs fall within a 40-60 percent range.
Sugar is a product whose world market is well known to be highly volatile, with prolonged periods of depressed prices. Not surprisingly, the maximum tariffs required for stabilizing sugar prices stand out in Table 1, with 90 percent on average for raw sugar. By contrast, tariffs on meats are relatively low, averaging 42 percent for the four types of meat.
In the case of wheat for which tariffs were computed for three different origins, the range was very wide, with 37 percent for the Australian wheat and 70 percent for the Argentine origin. Should one consider a 70 percent binding, which covers most of the price risks, or 50 percent, the average of the three tariffs, which is adequate in only one of the five reference scenarios in the case of Argentine wheat? There is no satisfactory answer to this question and all that can be said here is that countries facing this dilemma need to examine their own situation in the light of recent experience. In the case of rice, where tariffs are computed for three grades, the range is not as large. Moreover, the maximum tariffs for the two main varieties imported by developing countries (Thai A1 and Thai 100 percent) are similar.
If indeed the proponents of the Development Box, or of similar proposals, had in mind appropriate tariffs conceptualized and defined as in this paper, the above estimates serve that purpose. Individual countries could fine-tune their own negotiating positions using these estimates as a rough order of magnitude. The use of the bases other than world prices could obviously give different results, but there are few such bases that are as objective and commodity-specific as world prices. If reforms under the Doha Development Round lead to significant lowering of world market distortions in the coming decade, the appropriate tariffs would be lower than computed here.
Having presented the estimated tariffs, there are some issues in this approach that may be worth noting. One of them is that the estimated maximum tariff, designed to provide complete insulation all the time, was based on the largest price gap for the period covered in the analysis. Since such extreme gaps (relative to assumed reference prices) can occur only with small probabilities, the question asked is whether such a high coverage of the price risk makes sense. In that case, an alternative would be the level of tariff, which may still be called appropriate, that is only partially-stabilizing. Since average price gaps are generally much lower than the maximum gaps, the maximum tariffs for partial stabilization are relatively much lower. In this approach, while still providing an objective basis for setting appropriate tariffs, extreme price shocks like those not covered by the tariff will have to be responded to with safeguards, such as the SSG or other trade remedy measures.
As an illustration of this alternative, maximum tariffs were computed for the case where these cover the price shocks some 84 percent of the time, or for 5 out of 6 months, leaving the remaining 16 percent risk to trade remedy measures, or to other instruments such as market-based risk management tools and domestic compensation measures.14 The full results are not shown, but Figure 4 shows these tariffs for 11 individual food products (collapsing some products into one category, e.g. vegetable oil) together with those for full stabilization as estimated earlier. For partial price stabilization, the simple average tariff for all products is only 32 percent versus 53 percent for complete stabilization (i.e. 40 percent lower). As said above, since average price gaps are generally much lower than maximum gaps, the maximum tariffs for partial stabilization are relatively low. For example, for raw sugar with 1900-2000 average world prices as the reference price, the partially-stabilizing maximum tariff is 57 percent compared with 101 percent in the case of full stabilization.
What is the worth of this alternative set of estimates? Perhaps the most important message is that average price gaps are much lower than extreme gaps - and so there could be significant trade-offs, and costs, in trying to achieve 100 percent coverage of risks with tariffs. A safeguard is a safeguard - an instrument for extreme situations - a role that tariff can not play. Where a simpler instrument like the agricultural safeguard is available to all those countries that deserve it and is practical for them, one would need to think twice about the desirability of binding tariffs at levels that provide 100 percent insulation all the time. Alternatively, one may consider the fully-stabilizing bound tariffs as a super-SDT while partially-stabilizing tariffs could be the general SDT. It may be justifiable to extend the super-SDT to the most vulnerable and institutionally weakest countries (e.g. the least-developed countries) while limiting the general SDT to other developing countries.
13 The analysis actually uses 22 price series - 18 individual products plus two each additional price series for wheat and rice reflecting different product grades and sources of origin.
14 This 84 percent roughly corresponds to mean + 1 standard deviation (SD) in the context of the statistics being considered here (positive price gaps or negative tariffs are not being considered).
