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rr Potential Implications of a Special Safeguard
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Thomas W.Hertel, WillMartin, and Amanda M.Leister
The special safeguard mechanism—both quantity- and price-based—was key in the D
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oriori under the Doha Development Agenda. A stochastic simulation model of the world loa
uthuth wheatmarketisusedtoinvestigatetheeffectsofthespecialsafeguardmechanism.As ded
e Ae A epxripceecst,eda,ndtheboqousatnmtiteya-nbasdeodmseasfteicguparrodduisctfioounndintotheredcouucentirmiepsotrhtsa,triamispeledmoemnetstiitc. from
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ss restricting imports when domestic output is low and prices are high. The quantity- x
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F1,F13,F51,O24,Q1,Q17. t In
zedzed tern
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AutAut The special safeguard mechanism was key in the July 2008 failure to reach al M
e e agreement in the World Trade Organization (WTO) negotiations under the on
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osuosu Doha Development Agenda. The draft agreement would allow members to tary
clcl impose specified additional duties when the volume of imports of an agricul- F
DisDis tural product exceeds a specified level or when import prices from a particular und
c c supplier fall below a specified price (WTO 2008a). Given the substantial gains on
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this issue highlights its importance to many WTO members. Wolfe (2009) e
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Thomas W. Hertel (corresponding author; [email protected]) is Distinguished Professor and , 20
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Executive Director of the Center for Global Trade Analysis at Purdue University. Will Martin 0
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ee ([email protected]) is a Research Manager in the Development Research Group of the World
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riri Bank. Amanda M. Leister ([email protected]) is a graduate research assistant at the Center for
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hh Global Trade Analysis at Purdue University. The authors wish to acknowledge valuable comments
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urur THEWORLDBANKECONOMICREVIEW,VOL.24,NO.2,pp.330–359 doi:10.1093/wber/lhq010
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PP 330
Hertel,Martin,andLeister 331
attributes the breakdown of negotiations primarily to inadequate analysis of
the safeguard operation and implications. Analysis based specifically on the
proposed measure was limited because the proposed safeguard mechanism is
one of the most technically complex aspects of the entire modalities, because it
attempts to deal with variations in prices rather than—as with tariffs—merely
their level, and because it was presented to ministers onlya few days before the
meeting.
Agricultural producers in developing countries are vulnerable to both dom-
estic shocks—particularly from weather-related shocks to output—and shocks
to international markets. However, developing country consumers are also par- D
o
w
ticularly vulnerable to shocks to food prices, given that the poorest people n
lo
spend as much as 75 percent of their incomes on food. Policies that raise food ad
e
prices by imposing an import duty may help farmers whose incomes have d fro
fallen due to a harvest shortfall but do so at the expense of net buyers of m
food—including many farmers. Farmers isolated from world markets by poor w
b
e
infrastructure and communications receive little or no benefit from protection r.o
x
that raises the cost of food to poor consumers linked to world markets. This fo
rd
highlights the need for careful analysis of the impact of the special safeguard jo
u
mechanism that takes into account the differences between imported and dom- rn
a
estic goods. ls.o
It is important to consider the implications of the special safeguard mechan- arg
ism for global markets because they would apply to all developing countries, t In
te
which account for about two-thirds of the value of world agricultural pro- rn
a
duction. Thus, this article assesses the global implications of the proposed tio
n
price- and quantity-based safeguards for a key agricultural staple, wheat, a
l M
taking into account not just their direct impacts on import prices but also the o
n
resulting impacts on world prices when many developing countries use them at eta
the same time. The analysis also traces the resulting impacts on key variables ry F
u
such as the volume of imports, domestic producer prices, and the returns to n
d
land on which the incomes of many farm households depend. Both the average o
n
impact and the volatility of these variables are considered, since part of the Se
p
motivation for the safeguard is to reduce volatility by offsetting shocks from te
m
international markets. b
e
Countries can use either a quantity-based or price-based safeguard in a r 1
5
given year. While it would be interesting to consider a situation where , 2
0
1
countries could choose between the two types at each point in time, it is 0
unclear which option policymakers would choose when both are available.
Therefore, the article focuses on the important priorobjective of assessing each
type separately.
The article is organized as follows. Section I examines some of the key prior
contributions to the literature on the use of special safeguards. Section II con-
sidersthe nature of the specific proposals underconsideration. Section III intro-
duces a diagrammatic assessment of the qualitative effects of such
interventions, including an analysis of the extent to which it might be used.
332 THE WORLD BANK ECONOMIC REVIEW
Section IV discusses how the special safeguard mechanism can be used. Section
V explains the empirical model used to estimate the potential implications of
the safeguard for domestic and global markets. Section VI applies the model to
the quantity-based safeguard, and section VII applies it to the price-based safe-
guard. Section VIII compares the two sets of results. Section IX offers sugges-
tions for future research.
I. WHAT THE LITERATURE SAYS ABOUT THE SPECIAL SAFEGUARD
MECHANISM
D
o
w
While much technical work was available at the time of the Doha ministerial, n
lo
many key questions either had not been asked or had not been satisfactorily ad
e
resolved. Montemayor (2007, 2008) and Valde´s and Foster (2005) focus on the d fro
broad impacts of different duty rates on imports into individual countries m
without taking into account the impacts on world markets. Not surprising, wb
e
much of this initial work examines the frequency with which the special safe- r.o
x
guardmeasurecouldbeusedratherthanonwhetheritwouldachieveitsunder- fo
rd
lying economic goals, such as moderating the impact of commodity market jo
u
volatilityontheincomesoffarmersandthelivingcostsofpoorconsumers. rn
a
Valde´s and Foster (2005) rule out the quantity-based safeguard a priori, ls.o
arguing that increased import quantities are likely to be due to declines in har- arg
vests, making it difficult to justify import restrictions. They also express t In
te
concern about developing countries’ difficulties in maintaining data on rn
a
imports, and the inevitable lags between increases in imports and the tio
n
implementation of safeguards. a
l M
Finger (2009) raises several other important questions about the proposed o
n
special safeguard mechanism. For instance, would the mechanical trigger rules eta
allow import duties to be imposed when import prices are constant or rising? ry F
u
What objectives of the safeguard would be consistent with such mechanical n
d
rules? And would use of a quantity-based trigger reduce—or actually o
n
increase—the variability of domestic prices by raising duties during periods of Se
p
short domestic supply? He also raises questions about the te
m
shipment-by-shipment nature of the duty calculation of the price-based safe- b
e
guard. After calculating duties under the safeguard by comparing the price of r 1
5
each shipment with the average price of all shipments, he finds that countries , 2
0
1
that export lower price products—typically developing countries—would likely 0
face considerablyabove average safeguard tariffs.
De Gorter, Kliauga,and Nassar(2009)suggest that under both the quantity-
and price- based triggers most invocations of the safeguard in China, India,
Indonesia, and the Republic of Korea would be against exports from develop-
ing countries.
Grant and Meilke (2009) made an important step forward in the analysis of
the proposed special safeguard mechanism by taking into account the potential
impactofthesafeguardasproposedintheJuly2008modalitiesoninternational
Hertel,Martin,andLeister 333
and domestic prices. They find that the safeguard increases the volatility of
world prices. Although they believe that the impacts on world markets overall
would be fairly modest, several developing countries—most notably in the
Middle East and North Africa—would experience large increases in the vola-
tility of domestic prices. Because Grant and Meilke use a net trade model
(where imports are not linked to particularexporters), they were unable to deal
with the issue raised by Finger (2009) regarding the discriminatory nature of a
price-basedsafeguardtowardlowerpricedevelopingcountryexports.
The framework outlined in section II enriches the analysis of Grant and
Meilke (2009) by incorporating the important features of key agricultural pro- D
o
w
ducts such as wheat, which show evidence of strong differentiation by country n
lo
of origin (Uri and Beach 1997). This differentiation, due partly to differences ad
e
in physical qualities of wheat from different countries and partly to less tangi- d fro
ble factors such as differences in the terms and conditions of sale, results in m
price differences that influence the extent to which the price-based safeguard is w
b
e
invoked. Therefore, this article examines the price- and quantity-based safe- r.o
x
guards within a modeling framework, as proposed in the draft WTO modal- fo
rd
ities of December 2008, that allows for differences in relative prices of exports jo
u
from different suppliers, thereby permitting Finger’s (2009) hypothesis of dis- rn
a
crimination against developing countryexportersto be tested. ls.o
rg
a
t In
II. FEATURES OF THE PROPOSED SPECIAL SAFEGUARD MECHANISM tern
a
tio
The impacts of the special safeguard mechanism likely depend substantially on n
a
its design. The one under discussion is based broadly on the current special l M
o
agricultural safeguard, which includes two triggers—one based on the price of ne
ta
imports and one on the quantity of imports (GATT 1994). In contrast with ry
F
standard WTO safeguards under Article XIX of the General Agreement on u
n
Tariffs and Trade, there is no requirement to demonstrate that imports have d o
n
caused injury to domestic producers. S
e
The price-based safeguard uses a reference price based on a three-year p
te
m
moving average of import prices from all sources (WTO 2008a). When the
b
e
price of an individual shipment falls below 85 percent of the reference price, a r 1
5
duty can be used to remove 85 percent of the shortfall. One important feature , 2
0
of this shipment-by-shipment trigger isthat it imposes higher duties on imports 1
0
from lower price exporters. Finger (2009) and de Gorter, Kliauga, and Nassar
(2009) argue that a price-based safeguard generally imposes higher duties on
exports from developing countries.
The quantity-based safeguard can be used when imports in a year exceed
base imports—a three-year moving average of imports.1 The duty that can be
1. Since imports in any one year are compared with a three-year moving average of past imports,
steadyannualimportgrowthof5percentcompoundstoa“surge”inimportsofmorethan10percent,
againstwhichasafeguardcanbeimposed.
334 THE WORLD BANK ECONOMIC REVIEW
applied increases as imports exceed this base. Imports of 110–115 percent of
the base allow an additional duty of 25 percent of the current binding or 25
percentage points, imports of 115–135 percent of the base allow an additional
dutyof 40 percent of the binding or 40 percentage points, and imports of more
than 135 percent of the base allow an additional duty of 50 percent of the
binding or 50 percentage points. A quantity-based safeguard can be imposed
for only two years, and if used four years in a row, cannot be used for another
two years. If a safeguard duty is imposed and imports fall below the level in
the period before imposition, the trigger level is not reduced—thus preventing
the duty itself from causing the trigger level to decline. D
o
w
The draft modalities do not, in general, permit total applied dutiesto exceed n
lo
the pre-Doha limit. A major focus of debate has been on exceptions to this ad
e
limit for the quantity-based safeguard, and two specific proposals have been d fro
advanced. The “Lamy compromise” would permit duties to exceed the bind- m
ings by 15 percentage points on 2.5 percent of tariff lines when imports exceed w
b
e
the base by 40 percent (ICTSD 2008). The compromise proposed by the G-33 r.o
x
(2008) and its negotiating partners would permit tariffs up to 30 percent (or fo
rd
percentage points) above the pre-Doha bindings on 7 percent of tariff lines jo
u
when imports exceed 110 percent of base levels. The draft modalities consider rn
a
increases of 12 percent and 15 percent above the bound rate (WHO 2008a, ls.o
para. 145). arg
The next section examines the qualitative implications of using the quantity t In
te
and price-based safeguards as a guide to understanding the model-based results rn
a
in subsequent sections. tio
n
a
l M
o
III. QUALITATIVE IMPACTS OF USING THE PRICE- AND ne
QUANTITY-BASED SAFEGUARDS tary
F
u
The impacts of a price-based safeguard in a small trading economyare straight- nd
o
forward. First, consider the market for a single imported food crop, as shown n
S
in figure 1. The domestic supplyof the good is shown by the curve S, while the e
p
demand is represented by curve D. The world price falls from an initial level of tem
b
p to p . Introducing a duty of t completely offsets the decline in the domestic e
p0rice.2 1A partially offsetting duty that diminished the size of the reduction in r 15
, 2
domestic prices by 85 percent would reduce the variance of domestic prices in 0
1
0
response to thistype of shock to 2 percent of its original level.
Imports would, of course, decline relative to their level without the safe-
guard. Had domestic prices fallen from p to p , imports would have increased
0 1
from (q – d ) to (q – d ). For a small economy in which producer output is
0 0 1 1
distributed independently of world output, average farm income would rise
and the variability of farm income would decline. The average cost of food to
consumers would rise because of the safeguard tariff, but the variability in the
2. Completestabilizationwouldrequireafullsetoftaxesandsubsidiesonimportsandexports.
Hertel,Martin,andLeister 335
FIGURE 1. Impacts of a Decline in World Prices in a Single Country
D
o
w
n
lo
a
d
e
d
fro
m
w
b
Source:Authors’design. e
r.o
x
fo
cost of food would decline. Consumers eat less food because of its higher rd
jo
u
price, which generates an economic cost measured by area def in figure 1. rn
a
Another cost—measured by area bcg—arises because lower cost imports are ls
.o
replaced by highercost domestic production. rg
a
If a safeguard is introduced in a large group of countries, the world market t In
price for the commodity is no longer constant. In this case, it is useful to con- te
rn
sider import demand from the group of countries using the safeguard (ED) atio
together with the export supply (ES) from the rest of the world, as illustrated na
in figure 2. An increase in supply—perhaps from a large harvest—that shifts l M
o
the excess supply curve from the rest of the world from ES to ES0 would, ne
ta
ry
F
u
n
d
FIGURE 2. Implications of a Price-Based Safeguard for the World Market on
S
e
p
te
m
b
e
r 1
5
, 2
0
1
0
Source:Authors’design.
336 THE WORLD BANK ECONOMIC REVIEW
without a safeguard, cause the world price to decline from p to p . The
0 1
decline in prices in importing countries would cause their imports to increase
from m to m . If a safeguard reduces the decline in import prices in importing
0 1
markets, the decline in world prices must be larger, because more of the price
adjustment is forced onto the exporting countries. If 85 percent of the decline
in world prices is offset by a safeguard, the increase in imports for a given
reduction in world prices is reduced to 15 percent of its level in the absence of
a safeguard. Thus, world prices would decline further, as illustrated by p in
2
figure 2.
For the importing countries, the reduction in the world price to p resulting D
2 o
w
from the safeguard requires a second-round increase in the safeguard duty on n
lo
top of that shown in figure 1. For each country, the decline in the world price ad
e
is not just the initial reduction from p0 to p1 but that from p0 to p2 shown in d fro
figure 2. Average world prices decline, since the safeguard sometimes m
increases—and never reduces—duties. Another key impact of the widespread w
b
e
use of a safeguard in importing countries is an increase in the volatility of r.o
x
world prices (see Tyers and Anderson 1992). fo
rd
An important implication of the analysis in figure 2 is that, when analyzing jo
u
the impacts of introducing a safeguard that covers all developing countries, it rn
a
may not be enoughto simply considerexperience in the absence of a safeguard. ls.o
Once the safeguard is introduced in several important markets, the volatility of arg
world prices is likely to be greater than would otherwise be the case. If this t In
te
effect is large, it will increase the probability that the safeguard will be trig- rn
a
gered in any period. tio
n
As noted in Fraser and Martin (2008) and Valde´s and Foster (2005), the a
l M
implications of a quantity-based safeguard depend heavily on the cause of the o
n
shock. If the cause is a decline in world prices of the type shown in figure 1, eta
for instance, imports rise from (q0 – d0) to (q1 – d1). If this decline is large ry F
u
enough to trigger the quantity-based safeguard, a quantity-based safeguard n
d
could be an alternative to a price-based safeguard. If the same additional duty o
n
were generated by both safeguards, there is no effective difference. Because the Se
p
link between the size of the price decline and the tariff imposed under the te
m
quantity-based safeguard is weak, this safeguard may permit a larger response b
e
than the price-based safeguard and may even cause the domestic price to rise r 1
5
when the import price falls. , 2
0
1
If the world price does not decline but imports increase, the quantity-based 0
safeguard can be triggered even though the price-based safeguard is not. In this
situation, it is important to examine the cause of the increase in imports. In
agriculture, such an increase is likely due either to a shift in the domestic
supply curve—such as a decline in the harvest associated with poor weather
conditions—or to an increase in demand, as considered by Sen (1981). The
South Centre (2009) concludes that more than 85 percent of import surges are
not accompanied by declines in import prices, suggesting that most import
surges are driven by domestic shocks, such as declines in domestic production.
Hertel,Martin,andLeister 337
FIGURE 3. Potential Effects of a Quantity-Based Safeguard
D
o
w
n
lo
a
d
e
d
fro
m
w
b
Source:Authors’design. e
r.o
x
fo
Figure 3 focuses on a reduction in domestic supply. Domestic supply is rdjo
u
initially shown by the supply curve S, which shows domestic production of q0 rna
at price p . Domestic demand is represented by curve D, and demand at price ls
0 .o
p by d . Imports are initially given by (q – d ). Without a quantity-based rg
0 0 0 0 a
safeguard, a decline in domestic supply from S to S0 does not affect the dom- t In
estic price. Imports increase to make up the larger gap between domestic te
rn
demand and supply, allowing the domestic price to remain stable. If a quantity- atio
based safeguard is used, the effect is to apply an additional duty—and thus to na
l M
raise the domestic price.
o
n
The effect of a quantity-based safeguard in this situation is to destabilize the e
ta
domestic price. For consumers, the adverse impact on prices can be avoided by ry
F
importing to make up the shortfall. For producers, prices are destabilized, but un
d
revenues and net returns may be stabilized or destabilized.3 If the tariff o
n
imposed is slightly larger than the decline in the quantity of output, producer S
e
gross revenues will be stabilized.4 However, the effect on producer net returns pte
m
may differ, depending on the nature of the shift in the supply curve (Martin b
e
and Alston 1994, 1997). r 1
5
Imposing a quantity-based safeguard would reduce imports below the level , 2
0
that would have prevailed in the absence of such a measure. In figure 3, the 10
initial level of imports is given by (d 2q ). Without a safeguard, imports
0 0
would rise to (d 2q 0). A safeguard would reduce imports below this level,
0 0
3. Consumersandproducersaretypicallynotdistinctgroups—particularlyinpoorcountries.Many
farmersarenetbuyersofstaplefoods,andsomehouseholdsclassifiedasurbanforsurveypurposesare
netsellersoftheseproducts(IvanicandMartin2008).
4. Forasmallchangeinoutput,theproportionaleffectonproducerrevenuesisgivenby@p/pþ@q/
q where @p is the change in price and @q the changes in quantity. For largerchanges, the interaction
effectbetweenthechangeinpriceandquantitybecomessignificant.
338 THE WORLD BANK ECONOMIC REVIEW
perhapsto a level similar to (d 2q 0). Whether this is greater than or lessthan
1 1
the initial level of imports is unclear. With the quantity-based safeguard, there
is a link between the extent of import penetration before the safeguard and the
size of the duty that can be imposed during the following 12 months. A 35
percent increase in imports would allow an additional duty of 50 percentage
points to be imposed. A relatively high elasticity of demand for imports at the
tariff-line level, as is usually assumed, may be enough to reduce imports sub-
stantially. However, the short-term nature of the measure makes significant
supply response unlikely, lowering the probability that imports would be
reduced below their initial level. D
o
w
n
lo
a
IV. HOW THE SPECIAL SAFEGUARD MECHANISM MIGHT BE USED de
d
fro
Because the special safeguard mechanism provides an option, but not an obli- m
gation, to protect, it is difficult to be sure how frequently it would be used. wb
e
One view is that most developing countries have considerable binding over- r.o
x
hang, with their bound tariffs considerably above their applied rates, so it is fo
rd
unlikely that a safeguard would make a significant difference to the protection jo
u
allowed under WTO rules. Another is that decisions about the duties applied rn
a
undera safeguard are likely to be taken in a different forum from those regard- ls.o
ing ordinary tariffs, which may have real implications for choices about border arg
protection. In many countries, applied tariff levels are decided by a tariff com- t In
te
mittee, which includes representatives from different parts of government and rn
a
which frequently takes a broad view about the desirability of low tariffs for tio
n
export competitiveness and the overall efficiency of the economy. A body with a
l M
a narrower focus may be more willing to provide protection that benefits pro- o
n
ducers in a particular sector. eta
One promising approach to assessing the likely use of the special safeguard ry F
u
mechanism is to examine the frequency with which the special agricultural n
d
safeguard provided under the Uruguay Round has been used. Morrison and o
n
Sharma (2005) conclude that the ratio of times that the special agricultural Se
p
safeguard was invoked to times that it could have been invoked was about 1 te
m
percent. They suggested three reasons for nonapplication: the complexityof the b
e
formulas; high tariff bindings in many developing countries, which make it r 1
5
feasible to raise applied tariffs or apply additional duties without exceeding , 2
0
1
bound rates; and a judgment that the costs of introducing such measures 0
exceed the benefits.
Several other reasons for the limited use of the special agricultural safeguard
have been offered. Finger (2009) notes that many major users of the special
agricultural safeguard posted minimum prices when the Uruguay Round agree-
ment came into effect. Under these circumstances, exporters knew that pricing
at a lower level would result in a duty and thus had a strong incentive to price
at the minimum posted price so that the safeguard would not be invoked.
Hallaert (2005) suggests that many members have ignored the requirement to
Hertel,Martin,andLeister 339
report use of the special agricultural safeguard to the WTO’s Committee on
Agriculture within 10 days of implementation, though he concludes that the
use of the safeguard has increased as WTO members become more familiar
with its provisions.
Another possible reason is that the special agricultural safeguard was often
politically unattractive because of theweak relationship between its mechanical
formulas and policymaker goals. While the quantity-based special agricultural
safeguard might permit the use of safeguards following a crop failure, policy-
makers may not have wanted to use the safeguard under those circumstances
because of pressure from consumers concerned about high food prices. D
o
w
The next section turns to the empirical framework, which permits a more n
lo
thorough assessment and comparison of the implications of the proposed ad
e
quantity- and price-based safeguards. d fro
m
w
b
e
V. EMPIRICAL FRAMEWORK AND SCENARIO DESIGN r.o
x
fo
The analysis builds on Valenzuela and others (2007), who use a stochastic rdjo
u
simulation approach to validating computable general equilibrium models, rn
a
with a focus on the world wheat market. This study employs a more recent ls
.o
version of the Global Trade Analysis Project model that has been specifically rg
a
tailored to agricultural applications (Keeney and Hertel 2005). It incorporates t In
segmented factor markets to mimic short-run rigidities in supply response and te
rn
more detailed information about supply and demand elasticities pertinent to atio
agricultural production and food consumption.5 The Armington import na
demand specification with econometrically estimated elasticities of substitution l M
o
n
between varieties of wheat in the model is used to allow for differentiation e
ta
between wheat produced in different countries (Hertel and others 2007). As ry
F
seen below, product differentiation by origin plays an important role in the u
n
d
price-based safeguard. o
n
Since demand for wheat is relatively stable and most shocks to the wheat S
e
p
market come from weather-induced shocks to production, supply-side shocks te
m
are introduced into the model. Specifically, total factor productivity in wheat in b
e
each model region is shocked by sampling from historical distributions of r 1
5
supply deviations from trend in all world regions.6 The approach used in this , 2
0
stochastic simulation ensures that each time the impacts of a new policy regime 10
5. Thismodelisfirstvalidatedbasedonhistoricalvariationinproductionandprices,followingthe
approachproposedbyValenzuelaandothers(2007).Formoredetails,seetheworkingpaperversionof
thisarticle(Hertel,Martin,andLeister2010).
6. Standard stochastic simulation techniques such as Monte Carlo procedures are cumbersome at
best,giventhelargenumberofvariablesinthemodelsoValenzuelaandothers(2007)arefollowedin
approximatingthedistributionofsupplyshocksusingGaussianquadrature.Thishasbeenshowntobe
an efficient meansof assessingthe consequencesofstochasticvariationin parametersof the shocksto
computable general equilibrium models (DeVuyst and Preckel 1997) and its implementation has been
automatedintheGEMPACKsoftwareusedtosolvethemodel(Arndt1996;PearsonandArndt2000).