Theoretical Analysis of Special Safeguards Kyle W. Stiegert: UW-Madison Shinichi Taya: OECD, JMA
WTO-Special Safeguards (SSG) Became a policy tool in the Uruguay Round (1992) negotiations Originated as outcropping of the tariffication process for agriculture. Allowed for those nations that tariffied quotas. Provides for an add-on tariff when quantity or price trigger is hit.
SSGs Continued Purpose was to protect fragile rural economies now opened up to free trade. Bit of an odd policy tool with freedom to set triggers and protectionist strategies for just a few nations. Fundamentally unfair but used to push other nations to make greater commitments.
SSGsSSMs However, only 39 nations allowed access to the SSG-mostly developed nations. By 2005, WTO had risen to 148 Members SSGs Became a rising source of tension. Led to proposed SSMs for developing nations.
Special Safeguard Mechanisms Similar Mechanism to SSG Key issues from economic viewpoint is: --Tariff rate (t) --Trigger level ( ) Principally for developing nation contingent.
Extant Literature Hallaert (2005) critical of SSG overuse. Jales (2005) detailed information and useful SSM case study of Jamaica Valdes and Foster (2005), Somwaru and Skully (2005), and Grant and Meilke (2006). Simulation models to show how trigger functions and provide welfare assessments.
Purpose of the Study To evaluate the SSM policy technology under imperfect competition. Provide relevant findings about use of the SSM in various oligopoly settings. Investigate strategic opportunities afforded firms with SSMs in play.
Why Imperfect Competition Presence of large state traders (Canadian Wheat Board, AWB, ABB). Large multinational agribusiness firms (ADM, Cargill, etc.) SSMs directed toward small and very small economies which can be served by one firm.
Four Models of Duopoly Quantity Setting Games, Linear Demand Base outcome is the standard Cournot Equilibrium. Model 1: 2 foreign firms Model 2A: One foreign and one domestic Model 2B: 2A + storage Model 2C: 2A + domestic firm can import
Model 1: Basic Features Two foreign firms No domestic industry Perfect substitutes (product homogeneity) Tariff level and trigger known
Firm 1: Regions of Activity: (a) firm 2 triggers tariff: no decision for Firm 1 (b) Easy: choosing period 1 optimum does not trigger the tariff (c) Interesting outcomes.
Major Findings Setting high SSM tariffs benefit foreign firms by inducing them to cut imports. Foreign firms lose when tariffs are triggered. Substitute industry benefits, but consumers lose. Government revenue increase when tariff is triggered.
Model 2A One Foreign Firm (Firm 1) One Domestic Firm (Firm 2) Trigger and Tariff only driven by Firm 1 level of trade. Firm 2 benefits when SSM is triggered or when it binds period 1 imports.
Major Findings from 2A Fairly easy to bind imports and not trigger the tariff. To trigger the tariff, trigger level will have to be very restrictive, and the tariff rate will have to be low. Presence of multiple equilibria case makes for uncertain outcome.
Impact of Storage Storage only occurs when tariff is triggered. Triggering the tariff now more likely when in case 1 (model 2A). Government loses some revenue due to strategic storage and tariff avoidance. SSM complicates trade and may lead to volatile import surges near the trigger level.
Impact of Import Feature Foreign firms strategic advantage severely curtailed. Domestic firm holds all the cards Tariff triggered or not triggered as a best response to firm 2 (domestic) decision. Domestic firm may curtail production to trigger the tariff.
Conclusions SSM in the presence of oligopoly generates perverse and unpredictable outcomes for home nations. Depending on the setting, tariffs can be triggered quite often or hardly ever. Domestic firm is usually protected either through tariff avoidance behaviour or from tariff triggering. Added source of government revenue.