Modalities for an SSM: product eligibility and alternative triggers

1. Modalities for an SSM:product eligibility and alternative triggers Informal ICTSD Dialogue on Special Products and SSM 25 November 2005 Geneva Jamie Morrison and Ramesh Sharma Food and Agriculture Organisation

2. Why is an SSM needed? • Vulnerability to external shocks • Climatic; subsidized production/exports; anti-competitive trading behaviour • Particular concern to countries developing/diversifying their agriculture sectors • Phenomena against which trying to protect • Volume surges • Price depression • FAO studies show increasing incidence of surges in imports since mid 1990s, with negative impacts on local production • Frequent for meats and vegetable oils • Concern that this will intensify as tariffs are reduced further

3. Features of the SSG • Assumption that current SSG will influence design of SSM • Experience with use of the SSG • Of 22 eligible developing countries, only 6 users • Ratio of actual to potential use only about 1% • Why has use been limited? • Complex formula? • High tariff bindings? - internal and external constraints • Cost of application > benefit? • Widespread application/misuse unlikely

4. Building blocks of an SSM • Country eligibility • Product eligibility • Triggers • Remedy • Duration

5. Product eligibility • Criteria for eligibility are difficult to define & operationalize • Development related criteria • Relation to depth of tariff cuts or level of bound tariff • Instrument to offset price/income risk • Limited alternatives  Should not be limited to selected product groups  Should not be limited to products produced in-country – issue of substitutes and “like products” • But should there be a limit on number of products for which SSM can be triggered simultaneously? • Enforceability?

6. Price Trigger • SSM should be effective in responding to sharp, short term price depressions • Key parameter = Reference price • Alternative reference prices • Fixed reference price • Moving average • Others... • Criteria • Simplicity • Effectiveness

7. Fixed reference price Simplicity • Known in advance • No need to update/ less difficult to compute • Key attribute if extending to all products Effectiveness • But no information on price trends • can inappropriately trigger if base is period of high prices • Choice of base year is critical

8. Simulated number of SSG price triggers for various base periods for reference prices The total number of potential triggers is 160 (16 products covered times 10 years, 1995 to 2004).

9. Moving average Simplicity • Data requirements • Choice of period Effectiveness • Better reflection of recent trends • When price is rising, reference price remains below - desirable • But can get inconsistent outcomes due to nature of fluctuations of prices • The shorter the “memory”, the more sensitive to sharp drops, but not where prolonged period of depressed prices • MA-3 misses about 20% of cases of depressed prices • MA-5 triggers in these cases

10. Example: Raw sugar • MA-3 doesn’t trigger in 2001 or 2003 because 1999 and 2000 already depressed

11. Fixed vs MA 3 vs MA5 21 years, 10 products, 10% “de minimis”

12. Volume trigger SSG Formula MT = (Mavg * x) + ∆C • Bias against countries with lower level of openness • Scaling factor greater for less open economies • Imported food less than 10% total consumption in countries with 15% undernourished compared to 25% of total in countries with better nourished populations • Bias against countries where consumption is rising or consumption data is not available (increased scaling factor) • Sensitivity to e.g. drought

14. Volume trigger • SSG and G33 both have MA component • Similar issues to price trigger relating to “memory” • E.g. effect of drought 2 years in past can prevent trigger now • Don’t always trigger when there is a clear surge • G33 triggers more than SSG (latter includes consumption) • 4 countries for 10 yrs: SSG 13% of cases; MA-3 43% • G33 removes biases against lower income countries • Is it possible to simplify further? • “actual import need” based on production data (Early Warning) and consumption trend?