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Theoretical Analysis of Special Safeguards

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.

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Theoretical Analysis of Special Safeguards

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  1. Theoretical Analysis of Special Safeguards Kyle W. Stiegert: UW-Madison Shinichi Taya: OECD, JMA

  2. 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.

  3. 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.

  4. 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.

  5. Special Safeguard Mechanisms • Similar Mechanism to SSG • Key issues from economic viewpoint is: --Tariff rate (t) --Trigger level ( ) • Principally for developing nation contingent.

  6. 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.

  7. 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.

  8. 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.

  9. 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

  10. Model 1: Basic Features • Two foreign firms • No domestic industry • Perfect substitutes (product homogeneity) • Tariff level and trigger known

  11. 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.

  12. Relative Position of Cournot Equilibrium

  13. Relative Position of Cournot Equilibrium

  14. 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.

  15. 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.

  16. 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.

  17. 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.

  18. 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.

  19. 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.

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