The purpose of this paper was to illustrate an approach to compute the so-called appropriate levels of tariffs as called for in several negotiating proposals, notably those in the context of the Development and Food Security Boxes. For a variety of reasons such as continued distortions in world markets of basic foods, vulnerability of agriculture in developing countries and lack of capability to resort to WTO safeguards, it is claimed in these proposals that the developing countries would need these tariffs to safeguard food security and livelihoods from such external shocks as depressed import prices and/or import surges. In the WTO framework, tariffs are typically meant for protection while there are several safeguards to resort to for a rainy day. Although it is nowhere explicit in the proposals, it seems that the intended purpose of the appropriate tariffs, in the form of the WTO bound rates, is safeguard rather than protection.
The results show that, for stabilizing domestic prices fully and all the time, appropriate tariffs would have to be in the 40-60 percent range for most basic foods. The simple average for the 18 products was 53 percent, with tariffs below 50 percent in nine cases and above 60 percent in four cases. This range is not out of line from applied tariffs actually raised temporarily by several developing countries during recent years when world prices were depressed. Moreover, that some countries with bound rates on basic foods in the 30-35 percent range had to resort to the WTO emergency safeguard, or considered that action in this period (e.g. Chile), also shows that these bound rates were not high enough to insulate the shocks when prices were really depressed.
In practice, separating the protective and safeguard elements in a given bound rate is next to impossible. In general, applied rates in developing countries are much lower than bound rates and so they have a larger scope for varying tariff when faced with some shock. Applied tariffs in developed countries by contrast are closer to the bound level and so this scope is small.15 Given the complexities with resorting to safeguards, even the paper work involved with agricultural SSG, most countries would opt for tariff variation up to the bound rate before taking recourse to safeguards. The proponents of the appropriate tariff proposal would like to retain, or have it if they do not have, this flexibility for selected products as a SDT. An alternative that follows from the type of analysis done in this paper is for bound tariffs to cover a good part of the price risk, leaving the coverage of the extreme risks to simpler safeguard. This would also be a form of SDT, while fully-stabilizing appropriate tariffs would be super-SDT for countries that need deeper special treatment.
The practice of the GATT/WTO multilateral negotiations has traditionally been to reduce tariffs that are already bound in the previous round. Reduction is the key word. On the other hand, setting “appropriate” tariffs using any approach - no matter how objective and fair it is - is different from this tradition. What has been called for here is tariff “rationalization”, which is different from reduction based on past bindings, as the only basis.
If developing countries were to be allowed to “rationalize” tariffs on basic foods as they called for, what could be some of the implications? For many of them, tariff bindings of about 50 percent (this varies from product to product) will mean substantive reduction from current levels - a happy outcome for all other Members, and hopefully for those who reduce also, knowing that these rates provide the necessary policy space for stabilizing domestic markets. The other form of “rationalization” would be raising tariffs currently bound at lower levels to “appropriate” levels as estimated in this paper. This is also in the negotiating proposals. It is true that many developing countries have bound their tariffs at low levels for a variety of reasons, e.g. lack of an appreciation of the strategic role a bound tariff plays, loan conditionality and even through “genuine” tariffication although they could have taken the “dirty” route. Raising bound tariffs without going through the complex process of re-negotiation under GATT 1990 Article 28 would not be liked by those with a strong attachment to the GATT/WTO tradition.
Besides not being in the spirit of the GATT/WTO tradition, this approach is bound to invite some criticism from the economics profession. Some would point that the optimum tariff rate for most small trading countries is zero or very low. In fact, there is a strand of model-based literature that invariably concludes that even unilateral market opening is welfare-increasing. Others would remark that a tariff is not the first-best instrument for addressing domestic economic problems. The mood in Geneva of course is very different from that world. Still others would indicate that varying applied tariffs within the bound rates, although WTO-legal, only adds up to instability in world prices, although the combined contribution to the instability by intended beneficiaries of this proposal, being small trading and consuming nations, would be small (see also Nordstorm 2001on this). There could be several other similar issues that the profession would point to, but as said earlier the purpose of this paper is not to debate these points but to make a technical contribution to the ongoing negotiations by illustrating how appropriate tariffs as called for by many developing countries may be quantified using a transparent objective basis. Ultimately, this debate would need to weigh these benefits of market opening against likely socio-economic costs of market disruptions in economies with high degree of food insecurity, as are being increasingly documented by inter alia international non-governmental organizations (e.g. Action Aid 2002; Oxfam 2002a and 2002b; Sreenivasan and Grinspun 2002)
In conclusion, whether deserving developing countries are allowed to rationalize tariffs to appropriate levels of tariff bindings or negotiators follow the tradition without exception16 depends essentially on the weight placed on the arguments made in support of the proposal. Access or otherwise to the current SSG or similar simpler safeguard would change markedly the analytical approach and conclusions in this paper, but the issue of the access to SSG is itself being debated as one of the options. The main contribution is to demonstrate that there is an objective basis for estimating appropriate levels of bound tariffs that reflects particular handicaps and concerns of the developing countries. The rest is politics.
15 This does not mean that tariff protection of basic foods is lower in developed countries.
16 In the Uruguay Round, exceptions were made for some food security products by allowing countries to resort to AoA's Article 5. Countries could postpone tariffication but this option was at the cost of higher TRQs. Very few countries resorted to this option then and so the real value of this provision - in its current form - is uncertain in the context of this paper.
