How Will the May 2008 “Modalities” Text Affect Access to the Special Safeguard Mechanism, and the Effectiveness of Additional Safeguard Duties
by Raul Q. Montemayor
Agricultural Trade and Sustainable Development Series • Issue Paper 15
The revised draft modalities text circulated in May 2008 by the chair of the WTO negotiations on agriculture represents a major advance in the effort to secure a consensus agreement in the Doha Development Round negotiations. The draft includes the latest version of the special safeguard mechanism (SSM), which was originally proposed by the G-33 to provide developing countries with a simplified and more effective tool to address import volume surges and price depressions. Understandably, the proposal has been criticized by countries with export interests, who fear it could be abused by importers and could distort normal trade flows among countries. As a result, the SSM draft text contains many provisions on which no agreement has yet been reached, even though it has narrowed down differences on some of the less controversial aspects of the measure.
This study attempts to assess the extent to which the proposals contained in the latest draft text would affect countries’ ability to access the SSM, and the extent to which it would be effective in bridging the gap between domestic and international prices. For this purpose, a simulation model was developed utilizing monthly data on imports of 27 agricultural commodities in six developing countries from 2000 to 2005. These monthly data were used as proxies for individual shipments.
In order to determine the extent to which countries would have access to the SSM, the study calculated the percentage of months during which the volume or price-based SSM would allow additional safeguard duties to be applied, based on varying levels of thresholds and other conditions. To measure the effectiveness of the SSM, the study first calculated the number of “problematic months” – those during which import prices plus bound tariffs fell below domestic prices by more than ten percent. The effectiveness rate was considered to be the percentage of problematic months in which additional safeguard duties could be applied and could prop up import prices beyond this ten percent threshold.
The study first analysed a ‘baseline scenario’, which adopted a number of the provisions of the SSM draft text, such as the lower settings for ‘thresholds’ and higher ones for the additional safeguard duties (or ‘remedies’) that countries would be allowed to impose. In this scenario, the SSM was accessible in an average of about 4½ out of every twelve months, but was effective in only one out of every four “problematic” months. Adjusting thresholds and remedies to mid-range levels did not have major effects on access and effectiveness rates, indicating some room for compromise on these aspects. Changes in thresholds however tended to have more discernible effects on the quality of the SSM than alterations in remedy levels. Notably, effectiveness rates did not exceed 46 percent of “problematic” months in any scenario, pointing to the limited utility of the measure even under the most ideal parameter settings.
Imposing caps based on Doha Round starting bound tariffs, current Uruguay Round bindings or applied tariffs clearly had a more debilitating effect, with access rates effectively cut in half, and the effectiveness rate plunging from the baseline level of 27 percent to only 2 percent of “problematic” months. Countries with relatively low tariffs were particularly vulnerable to such caps, which effectively limited remedial duties to the extent of tariff cuts per year in absolute percentage terms. Further simulations indicate that caps in the form of percentages of bound tariffs or absolute percentage points may yield less controversial results, although the actual effect will depend on the tariff profile of a country.
The proposed option allowing for foreign currency exchange adjustments in case of abnormal depreciation of the local currency did not significantly influence access or effectiveness rates. The 12-month maximum imposition period for the volume-based safeguard, coupled with the chair’s proposal for applying the price-based safeguard on a shipment-by-shipment basis, appeared to be superior to a 6-month or end-of-year alternative imposition period, although not by an overly significant degree. The ‘cross-check’ requirement, which disallows the use of the price-based safeguard if imports are declining, had a perceptible impact on access rates but affected the effectiveness of the SSM less significantly.
Given the fact that safeguard duties cannot be imposed on imports falling within tariff rate quota (TRQ) commitments, access and effectiveness rates may be enhanced if TRQs created in the Uruguay Round are not carried over to the Doha Round. This will however require, at the very least, a lowering of bound tariffs to in-quota levels and verification as to whether such a unilateral move is compliant with WTO rules. Finally, reclassifying special or regular products as ‘sensitive’ had detectable effects on the performance of the SSM, mainly due to the creation of new TRQ commitments, but access and effectiveness rates did not vary much with changes in the degree of deviation from the normal tiered tariff reduction formula.