II. Agreement on Agriculture

PURPOSE

The purpose of this module is to provide background information on Tariff Rate Quotas (TRQs), how they came about, what commitments were made and the experience with utilisation and administration of TRQs during 1995-1997. It also discusses some issues that need to be considered in the next round for improving market access.

CONTENTS

5.1 Introduction

5.2 Market access in agriculture through TRQs

5.3 Various methods used to administer the tariff quotas

5.4 Some issues on TRQs

KEY POINTS

• Current and minimum access Tariff Rate Quotas (TRQs) were established in the Agreement on Agriculture as a further way of improving market access for exporters.
• Relatively little additional market access was actually created because of the way the TRQs were implemented. Furthermore, not all TRQs made available were actually utilized.
• Importing countries have used a wide variety of methods to allocate their TRQs between exporting countries.
• Important TRQ issues in the next round of negotiations will include whether to persevere with this approach to improving market access and, if so, whether to specify in greater detail rules on the administration of TRQs.

5.1 INTRODUCTION

One of the fundamental changes brought about by the Uruguay Round in agricultural trade was the tariffication of non-tariff barriers to trade. While this was being done, there was also a concern that the replacement of non-tariff barriers by their tariff equivalents could result in high bound tariffs, which if applied could be prohibitive for any trade to take place. This gave rise to the concept of "minimum market access" which is to be facilitated through the system of "tariff rate quotas" or TRQs. Presumably reflecting the value of these quotas for additional market access, this subject has attracted considerable attention in the WTO Committee on Agriculture over the past four years.

This module covers the following aspects:

• the way in which tariff quotas were designed in the Uruguay Round to increase market access;
• alternative methods used to administer the tariff quotas; and
• issues to be considered regarding the future of tariff quotas.

5.2 MARKET ACCESS IN AGRICULTURE THROUGH TRQS

5.2.1 The concepts - minimum and current access and TRQs

Tariff quotas were intended to encourage trade...

As part of the tariffication package, WTO Members were required to maintain for tariffied products current import access opportunities at levels corresponding to those existing during the 1986-88 base period. Where such "current" access had been less than 5 percent of domestic consumption of the product in question in the base period, an (additional) minimum access opportunity had to be opened on a most-favoured-nation basis. This was to ensure that in 1995, current and minimum access opportunities combined represented at least 3 percent of base-period consumption and that they were progressively expanded to reach 5 percent of that consumption in the year 2000 (developed country Members) or 2004 (developing country Members), respectively.

The procedures for establishing these access commitments were outlined in a document called Modalities, which served as a guideline for countries to prepare various offers during the Uruguay Round negotiations. With the signing of the Agreement, the only binding access commitments are those specified in individual country Schedules but the Modalities have a value in the interpretation of what was intended and have frequently been cited in the discussion on the implementation of TRQs. These Schedules specify an initial TRQ and a final TRQ for each product concerned. Trade up to the quota limits is to take place at minimal or low tariff rates (below the MFN rates) while the MFN rate applies to trade above that level. Hence the term tariff rate quotas or TRQs, with the term "rate" indicating the duty applied to the trade up to the tariff quota or the TQ level.

Access commitments were designed not only to encourage the development of trade where previously none or very little existed, but also to ensure that existing access arrangements were maintained. A considerable volume of trade was undertaken through bilateral arrangements at preferential tariff rates, not only between the developed and developing countries (e.g. sugar) but also between the developed countries (e.g. meat). The Agreement legitimized this trade, where included in the Schedules, in the form of current access commitments.

The vast majority of tariff quotas in agriculture originated through the Uruguay Round "tariffication" process (current and minimum access). But there were also other sources, which included quotas established by some countries during their accession as well as autonomously as part of their import policy. In some cases, some countries converted the trade previously falling under voluntary export restraints (VERs) to the TRQ regime, as current access commitments with the quotas allocated to the same beneficiary countries.

Finally, one fundamental difference in rules between the minimum and current access provisions was that the importing country was not required to offer the current access quotas on a MFN basis. On the other hand, the minimum access quotas should be allocated on a MFN basis, i.e. open to all interested exporters at the same rate.

5.2.2 Who offered the tariff quotas and how much new access opportunities were created?

Thirty-six WTO Members have tariff quota commitments in their Schedules with a total of 1 370 individual quotas (Table 1). Although 19 of these 36 countries are developing country Members, the developed countries accounted for bulk (67 percent) of the TRQs, with Norway alone accounting for 17 percent of the total.

...but relatively little additional market access was created

The total volume of the TRQs in 1995 as a percentage of the world trade in that product typically ranges between 3 to 7 percent. Only for some commodities, e.g. dairy, meat products and sugar, this level exceeds 10 percent. Perhaps a more revealing information would have been a breakdown of the total access levels in terms of current and minimum access volumes, as the latter would have to be accessible to all exporters on a MFN basis while the former is largely allocated to specified suppliers. This is not available. What is known is the level of the additional access commitments - the difference between the final quota level (in 2000 or 2004) and the initial quota level (in 1995). The data show that new access opportunities are typically small, mostly less than 3 percent of the total world trade, with the exception of dairy products at 17 percent (Table 2).

Table 1. Number of tariff quotas by WTO Member

Source: WTO (1998),

Table 2: Number of tariff quotas and estimated increase in access - selected major commodities

Source: Carson (1998), Josling (1998) and WTO (1998) based on WTO Notifications.

5.2.3 How much of the tariff quotas were utilized?

Table 3 shows tariff quota fill-rates, i.e. the actual volume of import through TRQs relative to the committed TRQ levels¹. These were just over 60 percent for both 1995 and 1996 for all agricultural products for which the TRQs were opened, and less than 50 percent for 1997 - but this could be due to the fact that the TRQ notifications for 1997 were far fewer (see footnote to Table 3). There is a wide variation in these rates for individual product groups. This being the main quantifiable indicator of market penetration under this regime, the fill rate has obviously drawn considerable attention in the WTO Committee on Agriculture. Various explanations have been given for the shortfall which are discussed later.

Table 3: Tariff quotas - simple average fill-rates by product category, 1995-97

Source: WTO (1998).

5.3 VARIOUS METHODS USED TO ADMINISTER THE TARIFF QUOTAS

The AoA itself does not specify any particular rule for the administration of the TRQs; rather, these are covered by Article XIII of GATT 1994 - non-discriminatory administration of quantitative restrictions². This Article provides the overall guideline as follows: "in applying import restrictions to any product, Members shall aim at a distribution of trade in such product approaching as closely as possible the shares which the various Members might be expected to obtain in the absence of such restrictions ...". In practice, however, it may be impossible to predict such a share and so this provision mainly serves as a general guideline, while subsequent paragraphs of this Article permit a fairly wide discretion to administer the quotas. Not surprisingly, several methods have been used to allocate the TRQs.

Table 4 documents various categories of the principal methods while Table 5 shows some additional conditions used by some countries³. The tables also show the number of tariff quotas applying to the particular methods. What follows is a short commentary on some of these methods.

As said above, Article XIII provides a broad guideline for allocating quotas and gives a good deal of discretion to countries on methods. Since each method has its own advantages and disadvantages, this subject has attracted a considerable amount of debate. Such discussions have used one or more of the following criteria to judge the methods:

• the non-discriminatory qualities of the method, i.e. fairness in accessibility to all potential exporters;
• the transparency, predictability and security of the mechanism;
• the experience with the fill-rates and reasons for under/over-fill;
• the administrative ease and expenses associated with its implementation; and
• the potential for contributing to competitiveness in trade.

Although almost 50 percent of all quotas were administered on the basis of applied tariffs (Table 4), this is obviously the case of a simple tariff-only regime. That this method was followed in so many cases may simply mean that while the importing countries had specified quota levels in their Schedules, they chose to allow an unlimited amount of import at the in-quota rate. As such, there is hardly any issue here, although these countries retain the option to revert to a more protectionist trade regime.

Table 4: Categories of the principal methods used for the administration of the TRQs

Source: WTO (1997), Tables 1 and 3.

Table 5: Categories of additional conditions for the administration of the TRQs

Source: WTO (1997), Tables 2 and 4.

Rule-based methods have the advantage of predictability...

The advantages of the first come, first-served or FCFS method include its simplicity and potentially non-discriminatory nature. The latter is particularly important as this allows new exporters (and countries) to compete on equal terms with past suppliers. As a result, quota rents would be distributed more evenly than in the case of the allocations based on historical precedent. The disadvantages are mainly in practical difficulties to operate the system. Thus, for example, where the amount of the TRQ is small and demand is strong, there could be a frantic rush to import as soon as the TRQs are opened, contributing to import surges, market disruptions and probably increased storage costs. The successful operation of this method also requires a timely flow of information to all potential exporters on the quotas, i.e. when opened, what amount and so on. From the standpoint of an importing country with several customs posts, it would also require a good information system so that the customs authorities would know when exactly the quotas have been filled.

The method of allocating quotas based on historical precedent has the advantage that it reinforces the maintenance and strengthening of trading relationships previously established - a relevant consideration for products where marketing and advertising are important. This mechanism may also be necessary to maintain current access arrangements, which is also an advantage if this is an objective of the Agriculture Agreement. For many developing countries, country-specific allocations based on historical precedent may be critical for the continuation of the access to developed country markets, as is the case with preferential access schemes. The main disadvantage of this method is its discriminatory nature: allocating quotas according to historical shares or on grounds of past precedent prevent other potential exporters from competing and accessing the quotas on an equal footing. Over time, the resulting trade pattern becomes inefficient and distorted, and thus goes against the principle of Article XIII.

Allocating quotas through some form of lottery is yet another mechanism. While this avoids the rigidities of historical precedent and the administrative difficulties of FCFS, it is potentially non-transparent and therefore open to discriminatory practices. It may also attract the interest of speculators and create a parallel market and associated rents.

...market methods are most likely to replicate the pattern of normal trade...

The strengths and weaknesses of auctioning tariff quotas are similar to those of the lottery mechanism, except that the economic rents earned are transparent and accrue to the government as the price paid for the license to import. Where the process is truly transparent, it avoids the opportunity for vested interests to capture any rents as well as associated rent-seeking activities. In addition, given that there is a cost associated with obtaining the license, auctions are likely to attract traders who are keen to fulfil the opportunity to import (or export) and create a context where quotas are more likely to be filled.

The drawback of auctions, as with FCFS and lotteries, includes the potential loss of historical trading relationships. They may also be open to manipulation by producer groups and other vested interests. Although auctioning has never been challenged in the WTO, a fundamental problem with the method is its questionable legality within the WTO rules. Where an importer includes in the price of the imported product the cost of the auction fee, as would normally be expected, and the resulting domestic price exceeds a level that would result from applying the maximum bound tariff, this would be a breach of GATT Article II - i.e. a case where the de facto duty exceeds the bound rate.

...while administrative procedures leave greatest scope for discretion

Allocation to state trading enterprises (STEs) - where the decision to import is administrative and not based on commercial consideration - may lead to the under-utilization of the quotas. Although this practice has been criticised, it is difficult to establish whether the under-utilization, where it occurs, was merely due to the fact that the quotas were given to the STEs, or other factors were also at play. Other mechanisms of a related nature that may lead to low quota-fill include the allocation of licenses to producer organizations. These organizations by their very nature would have little incentive to import the product. Finally, in some cases, licenses have also been given to processors, or required that the product imported under the TRQ be destined for further processing - in both cases it is very likely that there would be little incentive to import value-added products.

In practice, analysis of fill-rates by administrative method by the WTO Secretariat does not bear out these theoretical expectations. For example, quota fill-rates are significantly higher for historical allocation and state trading organizations than for auction allocation which is the opposite to that argued above. This may be because the method chosen to administer TRQs is not independent of commodity market conditions. Skully (1999) has argued that the more politically sensitive imports of a commodity are, the greater the probability that administration will be by discretionary methods. For these commodities, domestic prices greatly exceed world prices and, as there would have been little market access prior to the TRQs, it is fairly obvious that TRQs would fill. Such TRQs have often been administered by STEs or producer organizations. Moreover, discretionary methods tend to be scrutinized actively by potential exporters and the TRQs managed in this way are better policed and generally enforced. For less sensitive commodities where TRQs are more likely to be administered by market or quasi-market methods, the premium of domestic prices over world prices may not be that attractive to potential exporters and thus available quotas may not be filled.

5.4 SOME ISSUES ON TRQS

As said above, this topic has attracted a great deal of attention in both the formal and informal fora of the WTO Committee on Agriculture, which presumably reflects the high value attached to the TRQs, as well as the difficulties faced in implementing the measure. As a result, many issues have been raised, as discussed above. What follows summarizes some additional issues.

Should TRQs continue after the next round?

The role of the TRQ system in the coming years. One question of a fundamental nature is whether to treat this market access provision only as a "transitional measure", something that may have been essential during the UR in order to maintain trade following the tariffication process, and so to be phased out, for example, in the next round? If so, how should this be done? Gradually or abruptly? For the latter, one approach would be to expand the TRQ levels to the extent that most trade takes place at the in-quota tariff rate which then becomes a de facto MFN rate. The other way is to sharply lower the current MFN "tariff peaks" on products subject to the TRQs, in which case the TRQ system ceases to be effective in practice. The practical reality is that many countries may have a vested interest in the TRQ system - which would include those exporters that currently enjoy easier access to the quotas (and quota rents) but also probably some importing countries that would prefer this trade instrument to regulate trade at levels that they desire. Obviously, some others, e.g. competitive exporters currently experiencing difficulties in accessing the quotas, would like to see the system phased out. In preparing for the next round, individual countries may need to review their experience with, and expectations from, the system of TRQs, perhaps in comparison with the alternative of a tariff-only trade regime on a fully MFN basis.

Issues in the administration of the TRQs. As discussed in the previous section, each method of allocating the TRQs has its own advantages and disadvantages, and the choice of a particular method or methods by individual countries reflects these factors. With over four years of experience with the system, a good deal of information is at hand for an analysis of the effectiveness of the various methods of quota allocation, using some criteria as listed in the previous section. This, however, is yet to be done. As a preparation for the next round, individual countries need to undertake this review based on their own experience. In particular, they may wish to examine whether they favour market-based ways of allocating TRQs (e.g. through auctions) or administrative ways (e.g. allocation based on historical shares).

The "under-fill" of the TRQs and its reasons. This is yet another topic that has attracted considerable attention. Depending on how one sees it, the overall average fill rate of about 60 percent during 1995-97 may be considered satisfactory, or low. Perhaps, the problems are elsewhere - with individual commodity groups and products with low fill rates, e.g. below 50 percent. Many explanations have been given for the low fill rates. Most of these have to do with the way the quotas were allocated - e.g. timeliness of information, the period of time allowed to fill the quotas, the size of consignments, licensing systems, the smaller volume of the MFN quotas relative to the total, allocation to domestic producer groups having no interest to import, product grouping, higher in-quota tariff rates and so on. In addition, weak import demand itself was also stated to be a factor for the low fill rate in several cases. Under current rules, countries are not obliged to fill the TRQs - they are only required to provide the access opportunity. While the problem at hand is simple - i.e. how to fully utilize the tariff quotas - it is far less clear what improvements in the rules and procedures would lead to that.

Some issues of particular concern for the developing countries. One issue to weigh is the potential gains from the TRQ system against an alternative where these are phased out. An obvious direct consequence of the phase-out is the loss of the market access and quota rents for countries that have the access currently. But the phase-out, at least in theory, should bring about an increase the overall size of the world market, accessible to all countries including the developing countries, and higher world market prices, especially so for the quota-restrained commodities. A second area for consideration could be improving the current administrative methods for allocating the quotas. Some methods could be less complex and cumbersome for the developing countries, given their state of administrative capability. A third point to consider is whether the developing countries should consider some form of Special and Differential Treatment (SDT), e.g. a greater access for them to the TRQs.

REFERENCES

Carson, C. 1998. The Uruguay Round Agreement on Agriculture. Paris, OECD.

Croome, J. 1998. The Present Outlook for Trade Negotiations in the World Trade Organisation. Economic Research Service, US Department of Agriculture.

FAO. 1998. The Implications of the Uruguay Round Agreement on Agriculture for Developing Countries: A Training Manual, by S. Healy, R. Pearce & M. Stockbridge. Training Materials for Agricultural Planning No 41. Rome.

GATT. 1994. The Results of the Uruguay Round of Multilateral Trade Negotiations: The Legal Texts. Geneva, GATT Secretariat.

Josling, T. 1998. The Uruguay Round Agreement on Agriculture: A Forward-Looking Assessment. Paris, OECD.

Skully, D. 1999. The Economics of TRQ Administration. IATRC Working Paper #99-6.

Tangermann, S. 1996. Implementation of the Uruguay Round Agreement on Agriculture: Issues and Prospects, Journal of Agricultural Economics, Vol.47, No.3.

Tangermann, S. et al. 1997. Implementation of the Uruguay Round Agreement on Agriculture and Issues for the Next Round of Negotiations, IATRC Commissioned Paper No.12.

WTO. 1999. Guide to the Uruguay Round Agreements. WTO Secretariat and Kluwer Law International. The Hague.

WTO. 1998. Tariff and Other Quotas. Background paper by the Secretariat, May 1998.

WTO. 1997. Tariff Quota Administration Methods and Tariff Quota Fill. Background paper by the Secretariat, November 1997.

WTO. Committee on Agriculture 1997-98. Informal Papers on the Process of Analysis and Information Exchange, Nos.1, 3. 7. 9.

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¹ The fill-rates are simple averages - they give equal weight to trade irrespective of its volume or value. Also, no account has also been taken of the "over-fill", i.e. where imports exceed 100 percent of the TRQs.

² As many methods for allocating the TRQs involve licensing in one form or other, the provisions of the Agreement on Import Licensing Provisions are also relevant here.

³ These two tables are entirely from a paper by the WTO Secretariat describing the various methods used during 1995-97. See WTO (1997), Tariff Quota Administration Methods and Tariff Quota Fill, Background Paper by the Secretariat, November.