1. TARIFF RATE QUOTAs (TRQs) Lecture 11: AHEED Course International Agricultural Trade and Policy Taught by, Alex F. McCalla, Professor Emeritus, UC Davis. April 5, 2010 University of Tirana, Albania Lecture courtesy of Professor Colin A. Carter, UC Davis 1

2. Tariff Rate Quotas (TRQs) A tariff quota is a two-tiered tariff. In a given period, the lower in-quota tariff (t) is applied to the first Q units of imports and higher over quota tariff (T) is applied to all subsequent imports. Important for CA agric as TRQs are commonly used to restrict imports of fruits & vegetables. Worldwide, there are more than 350 TRQs placed on trade in fruits & vegs & more than 25% of all agric TRQs are concentrated in fruit & vegs trade. 2

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4. Tariff Rate Quotas (TRQs)-2 TRQs account for 20% of total agric. tariff lines in WTO developed countries. Legally, TRQs are not quantitative restrictions because they do not limit the imported quantity. However, if the over-quota tariff is prohibitive under normal market conditions it will yield exactly the same import volume as a traditional quota. 4

5. Tariff Rate Quotas (TRQs)- 3 URAA required tariffication of NTBs & required min. access to pry open markets, such as Japanese rice & Canadian poultry. WTO Members were required to maintain imports at 1986-88 base levels, & where access was < 5% of domestic consumption, additional min. access had to be opened on a most-favored-nation (MFN) basis; to reach 5% of consumption by 2000. Japan dragged it heels on rice 5

6. Tariff Binding: all countries declare the highest tariff for each commodity = Bound Rate 3-5% to be imported to promote trade In quota volume based on 1985 consumption In quota volume to have a lower tariff 6 Tariff Rate Quotas (TRQs)- 4

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8. 8 http://www.ers.usda.gov/db/wto/

9. 9 Average Ag. tariffTariff lines CountryAll Tariffs In- quota Over- quota Without TRQs In-quota tariffs Over- quota tariffs TRQ lines as % of total lines %Number% Average for table59 11533,3924,8766,82720 Australia41926 784 11 10 1 Brazil37728 1,417 4 6 0 Canada7374 939 115 250 27 China14643 938 46 5 EU221779 1,516 315 277 18 Japan1922420 1,154 188 123 11 Korea,2719309 1,127 195 180 16 Mexico3548148 882 69 68 8 New Zealand707 971 4 4 0 Norway101213204 706 363 497 70 Taiwan1120179 1,257 111 91 7 US51035 1,270 193 376 30 http://www.ers.usda.gov/db/wto/

10. Raises a domestic policy question: How much protection actually needed to keep out imports & preserve domestic rents? Put differently – how much can the over- TRQ tariffs be lowered, with no effect on domestic industry prices & profits? How much unused protection exists with current TRQs? (i.e., water in the tariff) 10 Difference Btwn Bound & Applied Tariff Rates

11. 11 e.g., in negotiations & lobby efforts, Canadian dairy industry repeatedly argues against lowering over-TRQ tariffs, even at the cost of giving up an increase in TRQ levels, increasing imports (Barichello) Political economy debate about TRQs liberalization focuses on increase in the quota (Q), reduction in the in-quota (t) or out-of-quota (T) tariffs Difference Btwn Bound & Applied Tariff Rates - 2

12. Difference Btwn Bound & Applied Tariff Rates - 3 There are numerous cases where countries have TRQs in place with very large over-TRQ tariffs imposed. Prominent examples of mega-tariffs (over 100%): – Canadian Poultry products – US sugar – EU sugar – Japanese rice – Korean rice 12

13. Tariff Rate Quotas (TRQs)- #s As of May 2005, there were 1,434 different agricultural TRQs notified to the WTO: 45 countries employing TRQs. TRQs generate quota rents, legitimize a role for state trading, & allow importers to discriminate among exporters. Based on theory, it is questionable whether the implementation of TRQs improves market access & global welfare. 13

14. Tariff Rate Quotas (TRQs) - How Administered Only 1% of all TRQs notified to the WTO in 2000 used auctions (about 4% in 04). Quota fill rates are significantly higher for historical allocation & state trading. In practice, trading quota rights tends to be prohibited by quota administrators. The displacement of inframarginal traders by extramarginal traders is a source of inefficiency in TRQ administration. The availability of quota rents provides an incentive for extramarginal traders to enter the market. 14

15. Tariff Rate Quotas (TRQs) Reforms? Skully (2001) argues that if TRQs cannot be abolished or converted to tariffs, then 2 nd best option is to make all TRQs global & auction them. Quota expansion & in-quota and over-quota tariff reductions would achieve maximum liberalization results (OECD 2002). IATRC (2001) advocated that further WTO negotiations should focus on developing better rules for the administration of quota licenses. 15

16. Tariff Rate Quotas (TRQs)-Experience Brazil complained to WTO that EU import scheme for poultry products nullified or impaired any benefits from the TRQ regime. U.S. has pressured China to reform its TRQs; & US is concerned with Japans rice TRQ. Benefits of TRQ access have been reduced by administration methods (Skully 2001). WTO (2001) & OECD (2002) stated that quota administration methods have had only a limited influence on fill rates. Li & Carter find that administration methods do matter in terms of granting market access to exporters. 16

17. 17 Notified Enforced Source: http://www.ers.usda.gov/Briefing/WTO/trq.htm

18. 18 Source: http://www.ers.usda.gov/Briefing/WTO/trq.htm

19. 19 Source: Skully

20. 20 small country world price: W excess demand in-quota tariff quota not binding quota not binding but huge in quota rents quota binding Skully

21. 21 TRQ admin = rationing F. trade: CS = A+B+C+D+Rent+Tariff Tariff: DWL = D TRQ: CS = A; Rent may be dissipated Skully D&S left of equib. are inframarginal

22. In 2007, Japan failed to meet its WTO min access commitment of rice imports. Out of the 682,000 MT quota, approximately 65,000 MT were left unfilled Normally filled by US (~50%); Thailand (~40%); & China (~10%) About 600,000 Mt of MA rice is now going into the feed sector & some into ethanol. 22 Japanese Rice TRQ

23. 23 Japanese Wheat Imports by Source (MT) YearU.S.ShareCanadaAustraliaTOTAL CY 20063,002,09756.2%1,193,1541,133,5405,337,110 CY 20073,166,97460.0%1,136,261948,2515,275,108 CY 20083,658,26563.3%1,180,784932,6655,780,711 Source: Ministry of Finance Japanese Wheat TRQs Japanese Govt resells imported wheat @ ~ double world price; MAFF uses a Simultaneous-Buy-Sell (SBS) system; Imports about $5.7 mmt per year; $1.14 Billion import rents

24. 24 DAIRY TARIFFS WTO bound tariffs RegionMeanMedian % North America8345 Central America6860 Caribbean87100 South America4335 European Union8770 Non-EU Western Europe22193 Eastern Europe8451 Middle East6535 North Africa7487 Sub-Saharan Africa7580 Southern Africa2322 Asian Pacific Rim7130 South Asia104100 http://www.ers.usda.gov/db/wto/

25. China WTO evaluates TRQ administration by two criteria: nondiscrimination and quota fill. China has TRQs for cotton, wheat, corn & vegetable oils, etc. U.S. complains China gave quotas for reprocessing & export rather than domestic consumption, & has allocated the quotas in amounts too small to be commercially viable. USTR (2008) reported that Chinas agric TRQs are not functioning as per accession agreement & they are impaired by inadequate transparency. Chinese govt allegedly allocates quotas to favor state trading enterprises. 25

26. 26 1.117 mmt = 2.457 billion lbs; Or $246 million in rents @ 10 ¢/lb Taiwan is a large net importer of sugar (400,000 mt/yr) Over$30m Rents/yr

27. Concludes that auctions are the best way to administer a TRQ. 1st-come, first-served & license-on-demand methods present a moderate risk of biased trade. State trading organizations & producer groups that directly administer TRQs can also bias trade. Historical allocation is the method most likely to be discriminatory. 27 Skully

28. Li & Carter Recommendations for the best way to liberalize agricultural TRQs vary. Abbott and Paarlberg (1998) argued that a reduction of the above-quota tariff on pork would boost pork imports into the Philippines. Introduction of TRQs in the EU banana market, for instance, induced a high degree of rent seeking (Herrmann et. al. 2001). It has been argued that increasing quota volumes would result in greater welfare gains than would tariff reductions in the EU (Bureau and Tangermann 2000). 28

29. Li & Carter - cont TRQ fill rates, on average, dropped from 66% in 1995 to 58% in 2002. Relatively low fill rates suggest that the agric. TRQ regime has not led to a significant improvement in market access. 29

30. Tariff Rate Quotas (TRQs) –Fill Rates 30 Fill Rate(y)FrequencyPercentCumulative Percent 043010.24 0<y0.145410.8121.04 0.1<y0.22024.8125.85 0.2<y0.31553.6929.54 0.3<y0.41252.9832.52 0.4<y0.51383.2835.80 0.5<y0.61263.0038.80 0.6<y0.71112.6441.44 0.7<y0.81473.5044.94 0.8<y0.91673.9848.92 0.9<y<1.03899.2658.18 1175741.82100.00 Total4201100.00

31. Li & Carter - again Identify factors affecting the performance of TRQs in terms of improving market access. Analysis covers individual TRQs notified by 28 WTO member countries from 1995 through 2000. Results show that reducing in-quota tariffs will significantly improve market access while the market access effect of any reduction in over-quota tariffs is marginal. Also find that the empirical ranking of the efficiency of alternative TRQ administration methods differs from the theoretical ranking. 31

32. 32 Rank of the Impacts on Fill Rates across Administration Methods Impacts on Fill Rates Theoretical RankingEmpirical Results LowMarket allocation AT methods AU AT OT MX HI MediumQuasi-market FC methods LD HI FC PG LD HighDiscretionary PG methods ST ST AU Note: AT = Applied tariffs, AU = Auctioning, FC = 1 st -come, 1 st served, HI = Historical importers, LD = Licenses on demand, PG = Producer groups, ST = Imports by state trading enterprises MX = mixed allocation, OT = Other { { {