RESEARCH: Special agricultural safeguards To protect local producers from a temporary drop in price, or surge in quantity, of certain agricultural imports, some countries can invoke additional import duties that were introduced in the World Trade Organization’s Uruguay Round of trade talks. These safeguards form the basis of a special mechanism that negotiators under the Doha Round have agreed to create for developing countries. But a new IMF Working Paper warns that because the safeguards are, in fact, protectionist devices, caution must be exercised in designing the new mechanism.

Abstract

RESEARCH: Special agricultural safeguards To protect local producers from a temporary drop in price, or surge in quantity, of certain agricultural imports, some countries can invoke additional import duties that were introduced in the World Trade Organization’s Uruguay Round of trade talks. These safeguards form the basis of a special mechanism that negotiators under the Doha Round have agreed to create for developing countries. But a new IMF Working Paper warns that because the safeguards are, in fact, protectionist devices, caution must be exercised in designing the new mechanism.

In the World Trade Organization’s (WTO) current Doha Round of trade talks, negotiators are discussing the future of the special agricultural safeguards that were introduced in the Uruguay Round. These safeguards allow certain WTO members to levy an additional duty on selected agricultural imports so as to protect local producers from the effects of a temporary drop in the price of these imports or a surge in their quantity. At the same time, negotiators have agreed to create a special safeguard mechanism—along the lines of the special safeguards—for use solely by developing countries for agricultural imports. A new IMF Working Paper draws lessons from the experience with agricultural safeguards for the design of the proposed mechanism.

One of the aims of the Uruguay Round’s Agreement on Agriculture was to improve market access for agricultural products by encouraging WTO members to convert their nontariff barriers (such as quotas and imports bans) into tariffs. Some countries, however, feared that this reform would trigger domestic market disruptions. WTO members therefore agreed that those members “tariffing” their nontariff barriers could invoke the special safeguard.

At first glance, the impact of the special safeguards appears limited, given that only 39 WTO members are eligible to invoke them on only a small portion of their agricultural imports (see box), and only 14 of these eligible members (Barbados, Costa Rica, Czech Republic, the European Community (EC) 15, Hungary, Japan, Korea, Nicaragua, Philippines, Poland, the Slovak Republic, Switzerland, Taiwan Province of China, and the United States) have actually implemented them. In fact, however, the safeguards have become a protectionist device for several reasons:

Lack of transparency. Since their creation 10 years ago, about 1,500 special agricultural safeguards have been reported to the WTO. The number of safeguards actually implemented, however, has been much higher: although WTO rules require countries to report their special agricultural safeguards at the time of implementation, many do so with a substantial lag. As of mid–2005, for example, the Republic of Korea, the EC, and the United States had not reported special agricultural safeguards they had been implementing since 2001, 2002, and 2003, respectively. These three WTO members accounted for more than 70 percent of all the special agricultural safeguards notified during 1995–2000.

These safeguards also lack transparency because the additional duty is difficult to estimate. WTO rules do not require countries to report the additional duty, and only Costa Rica, Nicaragua, and the Slovak Republic have done so. It appears that in these cases, the additional duty was substantial: 24 percent on average, adding to an already high tariff of 43 percent.

Total tariffs can exceed the bound rate. Special agricultural safeguards effectively allow the imposition of a total tariff higher than the bound tariff (the maximum tariff on an import to which a WTO member commits itself). Exceeding the bound rate can also occur with regular safeguards, but these tend to be less damaging because they are rarely invoked. About 150 regular safeguards were invoked during the 50 years of the General Agreement on Tariffs and Trade, while 10 times as many special agricultural safeguards have been implemented over 10 years. The latter are more frequently used as they are easier and cheaper to invoke because no proof of injury or compensation is required.

Extended use. Examples of extended use of special agricultural safeguards are plentiful. Perhaps the most obvious case is Hungary, which imposed a continuous safeguard on sugar from the end of May 1999 through the end of April 2004 when the country joined the EU. This continuous use violates the spirit of the Agreement on Agriculture, which intended the safeguards to be used to cope with temporary shocks, not as a long-term protectionist device.

Special safeguards: who has reserved the right?

Among the World Trade Organization’s 148 members, 39 currently reserve the right to use a total of 6,156 special safeguards on agricultural products. The numbers in parentheses show how many products are involved, although the definition of what is a single product varies.

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The table describes the situation prior to the 2004 enlargement of the European Union. The 10 new European members are implementing the European trade policy, including its special agricultural safeguards.

Data: World Trade Organization.

Sensitive commodities. Special agricultural safeguards invoked by the EC, for example, cover only about 5 percent of its imports of agricultural goods, but affect virtually all of its imports of sugar.

Further protection for already sheltered commodities. The commodities for which countries invoke special agricultural safeguards also often benefit from substantial subsidies. The OECD estimates, for example, that the EC’s total support for sugar amounted to 51 percent of total gross farm receipts over 1999–2001.

Special agricultural safeguards also provide additional protection to commodities already sheltered by specific and seasonal duties. Virtually all tariff lines for which the EC has reserved the right to invoke special safeguards are protected by mixed or specific duties, which are often very high. The WTO estimates, for example, that the ad valorem equivalent of the EC specific duty on beet sugar reaches 114.4 percent. This is not unique: Japan can invoke the special agricultural safeguards on 56 percent of the tariff lines it protects with specific or mixed tariffs.

In addition, special agricultural safeguards magnify the protectionist impact of tariff-rate quotas—a combination of an import tariff and an import quota in which imports below a specified quantity enter at a low (or zero) tariff and imports above that quantity enter at a higher tariff. The EC, for instance, has reserved the right to invoke special agricultural safeguards for 90 percent of agricultural tariff lines protected by a tariff-rate quota, and virtually all special agricultural safeguards invoked by the United States are on agricultural products protected by tariff-rate quotas. Since the additional duty can be imposed only on over-quota imports, the special safeguard further increases the protectionist impact of tariff-rate quotas. In 2002, the EC’s over-quota average tariff for agricultural goods was 2.6 times higher than the average bound tariff; that of the United States was 4.3 times higher.

Finally, some economies such as Japan and Taiwan Province of China invoke special agricultural safeguards on products for which there are no imports. This is clearly protectionism because if there are no imports, there cannot be an import surge and changes in world prices cannot disrupt domestic markets.

Lessons for the Doha Round

The exploitation of loopholes in the design of special agricultural safeguards—including the absence of a requirement to justify the use of the safeguard or to provide compensation for its abuse—has transformed these safeguards into protectionist devices. Designed to facilitate liberalization, they have in reality been used to protect a few commodities in an opaque manner. For this reason, the Working Paper argues, they should be eliminated. To prevent the special safeguard mechanism from being riddled with the same pitfalls, negotiators should be guided by these main objectives:

The additional tariff should be ad valorem, that is, specified as a percentage of the value of the good being taxed, and nondiscriminatory. The use of quantitative restrictions proposed by some WTO members should be rejected. Quantitative restrictions would jeopardize one of the main achievements of the Uruguay Round: converting nontariff barriers into ad valorem tariffs. Moreover, they would make the special safeguard mechanism more costly to manage, less transparent, and easier to use as a protectionist device.

The mechanism should be used to address only large, sudden, and temporary shocks. Limiting the use of special agricultural safeguards to temporary shocks necessitates the rejection of proposals that insulate the agricultural sector from long-term trends and limit, for each product, the number of successive years the safeguard can be invoked. Proof of injury can also be requested to ensure that the mechanism deals with only large and sudden shocks. The proof of injury would need to be simpler than the one required for regular safeguards; otherwise there would be no justification to create a new mechanism. This would also avoid the use of the mechanism to prevent access to closed markets.

Transparency requirements should be enforced. Transparency is crucial for a safeguard mechanism especially when it is for the use of developing countries whose customs administrations may face problems of poor governance. A nontransparent implementation of the additional duty would complicate valuation problems, promote bribery, and undermine progress in trade facilitation.

Of course, negotiators will face trade-offs. Although they have agreed that the special safeguard mechanism will be for the use of developing countries only, country eligibility remains unclear. Are all developing countries eligible, or only some? Country eligibility will also affect product coverage. If most developing countries are eligible, then product coverage needs to be limited. Otherwise, the special safeguard mechanism may undermine liberalization commitments, and its welfare gains and their positive impact on poverty could vanish.

Copies of IMF Working Paper No. 05/131, Special Agricultural Safeguards: Virtual Benefits and Real Costs—Lessons for the Doha Round, by Jean-Jacques Hallaert, are available for $15.00 each from IMF Publication Services. Please see page 332 for ordering details. The full text is also available on the IMF’s website (www.imf.org).