Elaboration of a Feasible Proposal for a Special Safeguard Mechanism for Developing Countries. Trócaire Research Paper

Transcription

1 Elaboration of a Feasible Proposal for a Special Safeguard Mechanism for Developing Countries Trócaire Research Paper November 2005

2 This research paper has been produced by Trócaire, the Irish Catholic Agency for World Development. Trócaire is a member of CIDSE and Caritas Internationalis. The paper researched and written by Francis A.S.T. Matambalya* and Stephen Muyakwa** Executive Summary written by Michael O Brien, Trócaire. * Dr. Francis A.S.T. Matambalya is a Professor of International Marketing and Economics, and Lead Researcher/Trade Consultant of the Trade and Integration Studies Programme (TRISP) of the University of Dar es Salaam, Tanzania. His contacts are P.O. Box University of Dar es Salaam, fmatambalya@yahoo.com, Mobile Tel. No ** Mr. Stephen Muyakwa is a Development Consultant and Interim Co-ordinator of the Civil Society Trade Network of Zambia (CSTNZ). P.O Box 51347, Lusaka, Zambia. E- mail: smuyakwa@coppernet.zm. Tel: / Cover photo: Nigasty Kindeya (30) a single mother of four from Ethiopia with her herd of goats. Photo: Noel Gavin/AllPics Designed and printed by Genprint Ireland Ltd. Tel:

3 Contents Acronyms Table of Contents List of Acronyms 1 Executive Summary 2 1 Context 4 2 Methodology Used to Generate the SSM Proposal 4 3 Architecture of the Proposed SSM Mechanism Country Eligibility Criteria for Selection of Products Triggers for Safeguard Actions Preconditions for Initiating Safeguard Actions Geographic Coverage Permitted Trade Remedies Restrictions on the Use of Trade Remedies under SSM Time Scale Other Rules Governing the Use of SSM 13 GATT GDP LDCs LIFDCs NTBs QRs SDT SPs SSA SSG SSM TRQs WTO General Agreement on Tariffs and Trade Gross Domestic Product, a measure of national income Least Developed Countries Low-Income Food-Deficit Countries Non-Tariff Barriers Quantitative Restrictions (on imports, for example) Special and Differential Treatment envisaged for developing and least developed countries under WTO rules Special Products products on which developing countries farmers depend for food security, livelihood security and are key to rural development. Sub-Saharan Africa Special Safeguard provisions under the WTO Agreement on Agriculture Special Safeguard Mechanism for developing countries envisaged but not elaborated under the WTO July Framework Tariff Rate Quotas, under which a country or region may offer tariff preferences for selected products for limited groups of developing countries World Trade Organization 1 4 Conclusions 14 Appendices 15

4 2 Executive Summary Like aid, trade has the potential to be a powerful catalyst for human development. Under the right conditions trade could provide a major impetus for progress towards the Millennium Development Goals (MDGs), but the human development potential of trade is diminished by unfair trade rules and structural inequalities between countries. The Least Developed Countries (LDCs), most of which are in Sub- Saharan Africa (SSA), have become increasingly marginalised from the international trading system. The 689 million people of SSA now account for a smaller share of the world s exports than Belgium, with 10 million people. 1 With two-thirds of all those people who survive on less than a dollar a day living and working in rural areas (74% of the total labour force in LDCs are engaged in agriculture 2 ), the livelihoods of the very poor are directly affected by the rules governing agricultural trade. Unfair trade practices systematically undermine the livelihoods of smallholder farmers, agricultural labourers and their families, hampering progress towards the Millennium Development Goals. Since the mid-1990s there have been increasing reports of developing countries experiencing surges in food imports. These tend to disrupt local markets, through for example the transmission of depressed world prices to domestic 1 UNDP Human Development Report, UNCTAD (2002), Least Developed Countries Report 2002 Escaping the Poverty Trap 3 FAO Committee on Commodity Problems, Sixty Fourth Session, Rome 2003 markets, with negative effects on local production in many cases 3. In the WTO, relevant trade remedy measures allow importing countries to take remedial measures raising duties, for example when certain specified conditions are met. However, use of the Special Safeguard (SSG) is restricted and excludes the majority of developing countries. In a more liberalised agricultural system, developing countries must have the means to protect their vulnerable producers against import surges and/or disastrously low import prices. The fact that LDCs will not have to undertake further tariff reduction commitments under current arrangements does not mean that they do not need a Special Safeguard Mechanism (SSM). LDCs are vulnerable to import surges arising from subsidised competition and under normal conditions of competition. The need to deal effectively with the threat that import surges pose to vulnerable small farmers, food security and rural economies makes the availability of SSM a policy imperative for developing countries. It is within this context that the Group of 33 at the WTO talks has led an advocacy campaign for the establishment of an SSM for developing countries. Such a mechanism must be responsive to the particular needs of the most vulnerable agricultural economies, particularly the LDC agricultural economies. An SSM for developing countries must, therefore, build on the flexibilities embedded in existing safeguard provisions the SSG, in particular. This paper supports the correction of imbalances in existing WTO safeguards, on the premise that they do not adequately address the needs of developing countries. The WTO July 2004 Framework states that A Special Safeguard Mechanism (SSM) will be established for use by developing

5 countries. The absence of detail on how the concept of SSM is to be developed to meet the needs of developing countries, and LDCs in particular, encouraged this study. This paper underlines the importance of establishing an effective mechanism at the Hong Kong Ministerial, and details how the concept of SSM might be operationalised to best meet the needs of developing countries. In late 2004, Trócaire commissioned two studies in Tanzania and Zambia to explore what the architecture of a feasible, prodevelopment and pro-poor SSM, which would add value to the negotiations on effective trade remedies to deal with import surges and price falls, might look like. This paper contributes to these discussions by elaborating on nine key dimensions of the technical framework for SSM and making concrete recommendations in relation to each. The key dimensions address: country eligibility, treating the countries that may apply the instrument; product coverage, treating the products that may be eligible; reasons for safeguard action; addressing the triggers that would allow the use of safeguard action; and preconditions for the application of safeguard measures, treating the measures that a country should comply with before taking safeguard action. They also include: geographic coverage, outlining countries against which safeguard action may be taken; type of remedies, addressing the remedial measures that might be taken; restrictions on the use of those trade remedies permitted under an SSM; the time scales involved; and other feasible rules that would make the safeguards particularly practical and effective. Among the key proposals advanced in this paper are that: The SSM should be available to all developing countries. The criteria for product selection should include both market stabilisation and the significance of the product to food security, livelihood security and rural development. The SSM should provide differentiated treatment of LDCs and non-ldcs in relation to proportion of products that can be protected. Import surges and/or a drop in prices should trigger safeguard action, with the price trigger representing the best trigger option for developing countries. Safeguard action should be applicable to developed and developing countries alike, focussing on whatever countries are causing the problem. The permitted remedies should include both tariff-type measures and quantitative restrictions. A concise summary of the paper s proposals is presented in Appendix 2. 3

6 4 1. Context There is a consensus among member states of the World Trade Organization (WTO) regarding the need for the establishment of a Special Safeguard Mechanism (SSM) for use by developing countries. This consensus is enshrined in both the July (2004) Framework and the Decision of the General Council of the WTO. Generally, it is postulated that the foreseen agricultural safeguard measures shall address serious injury to domestic production and safeguard food security, livelihood and rural development. However, though firmly endorsing the idea of SSM, the July (2004) Framework does not provide specific guidelines concerning the possible architecture of this trade policy instrument. Considering their special interests in the instrument, developing countries, including Least Developed Countries (LDCs) are keen to ensure that the negotiations produce SSM with practical utility in stimulating pro-poor and sustainable development. This paper sets out to contribute to the debate on SSM. A first version of this paper was presented at a workshop of civil society representatives at the June 2005 Ministerial Meeting of LDCs in Livingstone (Zambia), as well as at a special session of the representatives of the Africa Group of nations in Geneva in July This revised version endeavours to include observations made by the LDC civil society group and representatives of the Africa Group. Building on Trócaire sponsored studies in Tanzania and Zambia, the paper outlines a template for the architecture of a propoor, pro-development SSM that could be used as a toolkit for other developing countries, and elaborates on nine main dimensions of an SSM. Given that the selection of special products (SPs) is directly related to the SSM debate, the paper proposes as SP criteria the contribution of the targeted products to food security, livelihood security, and rural development. 2. Methodology Used to Generate the SSM Proposal The proposal for the architecture of SSM presented here is a product of a combination of review of a substantial body of policy and scholarly literature on safeguards (including proposals for SSM), consultation of subject experts from various parts of the world, and collection of ideas from state actors as well as non-state actors. In developing the ideas proposed here for SSM, the authors conducted field work in Tanzania, Zambia and Switzerland (Geneva). Experts from other parts of the world were contacted by telephone or .

7 3. Architecture of the Proposed SSM Mechanism As noted earlier, the architecture of the SSM centres around nine key dimensions: Country eligibility Criteria for selection of products (product coverage) Triggers for safeguard actions Preconditions for initiating safeguard actions Geographic coverage (in terms of targeted countries) Permitted trade remedies (safeguard actions) Restrictions on the use of trade remedies under SSM Time scale Other rules governing the use of SSM. Appendix 1 presents a detailed summary of the proposed framework for the architecture of concrete dimensions of SSM. Further elaboration of these dimensions is contained in Tables 1, 2, and 3, in the main body of the proposal. Appendix 2 presents a concise summary of the major negotiations issues, and Appendices 3 and 4 demonstrate the comparable changes of import duties for SSG 4 and SSM. 4 Special Safeguard (SSG) provisions under the WTO Agreement on Agriculture 5 UNCTAD 2002, Least Developed Countries Report 2002-Escaping the Poverty Trap, New York and Geneva, United Nations 6 Notably, apart from multilateral, regional, and bilateral liberalisations, most developing countries have very substantially liberalised as part of their commitments with the World Bank and the International Monetary Fund. 7 The FAO classification of Low Income Food Deficit Countries (LIFDCs) provides invaluable information for determining the eligible products for individual developing countries, but should not be used to discriminate overall eligibility among countries. 3.1 Country Eligibility In most developing countries, agriculture is the largest sectoral contributor to GDP and a major source of livelihood security and employment/income security. Fifty seven percent of the labour force in all developing countries is employed in agriculture, with 71% of the Zambian labour force and 81% of Tanzania s employed in this sector. 5 Moreover, the ability of developing countries to address the risk to farming communities, associated with surges in imports and/or declines in prices is limited by a combination of factors, such as openness of markets due to multi-track liberalisation processes 6, insufficient development of domestic markets and institutions of a market economy, and lack of fiscal options to compensate or protect the farming community. Consequently, there is ample evidence of liberalisation-induced import surges in both LDCs and non-ldc developing countries. (cf. Matambalya 2005, Muyakwa 2005). It is, therefore, reasonable to make SSM available to all developing countries, regardless of their level of development, though a differentiated treatment of LDCs and non-ldc developing countries should be made on the basis of the proportion of products that can be protected under SSM (cf. subsection 3.2 below). 7 Another reason why SSM should be available to all developing countries is that SSG (for which several developed countries are eligible) does not discriminate between countries. In addition, the July (2004) Framework simply stipulates that an SSM will be established for use by developing country members, and does not discriminate between them. 3.2 Criteria for Selection of Products In WTO language, product selection is usually discussed under the term 5

8 6 coverage (alongside geographic coverage, and nature of safeguard action). Product eligibility is one of the areas where innovations are feasible. In this regard, there are two key options. The first is to use SSM for all agricultural products, as advocated by the G33 Group of smaller developing countries at the WTO agriculture session from 30 May to 3 June Under the second option, safeguards would not be used in blanket form to cover all agricultural products. Instead, they would be used when justified by both the economic significance of the product (for stabilisation of markets and promotion of economic transformation) and socio-economic significance of the product (for livelihoods, rural development, poverty alleviation). A selective application of SSM is more in line with promoting international trade as well as more consistent with WTO principles of liberalisation (under which the blanket protection of a sector is discouraged). While the primary motive for the use of SSM should be to stabilise markets, the products targeted should include those that are strategically important for production, consumption and trade. 9 Consequently, in determining whether or not a country should take recourse to SSM with respect to a particular product, the following additional elements should be considered: (a) Evidence of a critical mass of the contribution of the product to exports (say 3 percent); (b) Evidence of a critical mass of the contribution of the product to GDP (say 1.5 percent); (c) Evidence of a substantial number of people directly dependent on the product for their livelihoods (say 1.5 percent of population); 8 G33 comprises 42 countries, mainly developing countries, which are concerned about food security, livelihood security and rural development needs 9 Although sustainable stability depends on horizontal and vertical diversification of production and trade, this development target cannot be pursued by SSM under the current framework of WTO rules. (d) Evidence of substantial proportion of contribution of the product to calorie intake. Invariably, the indicative percentages underline the need to set feasible thresholds for each criteria for product selection. FAO classification of low-income fooddeficit countries (LIFDCs) provides a good basis for determining the eligible products for individual countries. However, a differentiated treatment of LDCs and non-ldc developing countries should be made not on the basis of LIFDCs, but by allowing the LDCs to protect a larger proportion of their trade using SSM than non-ldcs. A simple rule could be to allow LDCs and non-ldc developing countries to protect up to ρ 1 percent and ρ 2 percent of their total agricultural trade, where ρ 1 > ρ Triggers for Safeguard Actions The primary triggers for SSM are those that apply to SSG, namely surges in volumes and/or declines in prices. However, innovations are possible with respect to the specific thresholds. Hence, in the concrete architecture of SSM, the following are proposed: SSM should allow a lower volume trigger than specified for SSG; SSM should allow a higher price trigger than specified for SSG A Simple Model for Estimating the Volume Trigger In the SSM, the volume of imports should trigger safeguard action. However, due consideration should be given to the fact that the practical value of the volume trigger, used in the conventional manner, is eroded by at least two factors: Eligible countries must have complex systems for the management of trade data to be able to use the volume trigger.

9 Considering that imports do not enter the country at the same time, the application of the volume trigger will de facto result in the discrimination between exporters by punishing the late exporters, i.e., those businesses exporting their product to a country after the specified volume trigger has been surpassed. Nevertheless, innovations can be made to minimise the caveats associated with the volume trigger and ascertain its practicality. Feasible innovations can be made with respect to time unit of measurement, length of interval historical data, and actual method used to compute the reference average import volume. In this regard, time unit of the measurement for the trigger level of volumes should be a shorter period than a year. Concretely: Safeguard action shall be taken, if the actual volume of imports (M Q ) in any quarter of the year exceeds the trigger level. The quarterly trigger level shall be calculated as the average import volume (M AV ) of the same quarter for the base period, say the five preceding years, plus a proportion of the annual change in domestic consumption estimated by the normal share of imports in domestic consumption; inflated by a coefficient, say α, where α is set at different levels depending on the (normal, expected) share of imports (S) in domestic consumption. Table 1 presents the various levels of α set out in the SSG, compared to levels of α proposed for inclusion in SSM, where γ is the absolute annual change in domestic consumption. Expressed in simple mathematical terms, this means that safeguard action shall be taken, if in a given quarter, M Q > α [M AV + S γ] (1) The length of the interval of historical data used for estimating the trend, as well as the actual method used to compute the reference figure pose important issues, which need further deliberations. A longer time interval shall offer a better forecast, while the selected method should not isolate domestic producers from long-run changes in world prices. Table 1: Computation of Volume Trigger Levels for SSG and SSM S/N S SSG SSM 1. S 10% 125% 105% 2. 10% < S 30% 110% 103% 3. S > 30% 105% 102% Source: Matambalya Therefore, it is recommended that a fiveyear moving average be computed using the exponential smoothing method. This is because exponential smoothing gives more weight to the more recent observations, in generating the forecast. The merit of this approach is that more recent observations contain the information about what is likely to happen in future. Accordingly, the fiveyear moving average shall be computed as follows: M AV = ω 1 M Qt-5 + ω 2 M Qt-4 + ω 3 M Qt-3 + ω 4 M Qt-2 + ω 5 M Qt-1 (2) where ω 1 + ω 2 + ω 3 + ω 4 + ω 5 = 1; and M Qt-5, M Qt-4, M Qt-3, M Qt-2, and M Qt-1 are the quarter s import volumes in years t-5, t-4, t-3, t-2 and t-1 respectively (i.e., the last five years). Usually, ω 1 < ω 2, ω 2 < ω 3, ω 3 < ω 4, and ω 4 < ω 5. However, in a modified computation, it is also possible to allocate the same weight to some (consecutive) years. The essence of the recommended volume trigger for SSM is that: (a) Developing countries should be allowed substantially lower volume trigger levels, considering that even a α 7

10 1 percentage point change in imports will usually affect many small producers. This is taken care of by having lower levels of α for SSM, compared to the one for SSG (cf. tables 1 and 2). (b) Increases in domestic demand should not be interpreted as surges in imports. This is taken care of by the inclusion of γ in the model. (c) Domestic producers should not be isolated from long-run changes in world prices. This is taken care of by using exponential smoothing to estimate M AV. The transmission of long-run changes in world prices enhances international trade, consistent with the main objective of the WTO. The following simple example demonstrates the manifestation of a lower volume trigger for SSM compared to SSG. 10 Suppose in a given quarter, M Q = 10,000 metric tonnes, the quarterly import average of the past five years = 8,000mt, the absolute annual change in domestic consumption γ = 3,200mt (i.e., it rises by 2 percent), and the normal (expected) share of imports (S) in domestic consumption = 5 percent. The computation and recommendation for safeguard action will be as indicated in Table 2. Thus, the Safeguard Action Trigger Level (SATL) in the case of SSM = 8,568mt. This means that the increase in domestic consumption of 3,200mt will be shared as follows: 568mt (equivalent to percent) to foreign producers and 2,632mt (equivalent to percent) to domestic producers A Simple Model for Estimating the Price Trigger The price trigger presents the best trigger option for developing countries. This is because the use of the price trigger is relatively easy. In order to be able to invoke safeguards action an eligible country needs to have in place trade data management systems that facilitate the availability of systematically updated price data for the targeted products at import entry points. Invariably, this means that a longer time period can be taken as a base period in estimating the shift from the domestic price trend. Therefore, even an LDC can readily use this facility, since data for the purpose can be easily extracted from national trade statistics. Concretely: Safeguard action shall be taken, if for a given consignment, the border import price plus ordinary tariff falls below the trigger standard price. The trigger standard price shall be set as 8 Table 2: Example of Computation of Volume Trigger Levels for SSG and SSM S/N Data SSG SSM 1. SATL* M Q > [α M AV ] + γ M Q > α [M AV + S γ] 2. M Q = 10,000 [α M AV ] + γ = α [M AV + S γ] = M AV = 8,000 γ = 3,200 [ ] [ ] S = 5% = [ ] = 8568 TDC = 160, Findings M Q < [α M AV ] + γ M Q > α [M AV + S γ] 4. Recommendation No safeguard action Initiate safeguard action * SATL is the Safeguard Action Trigger Level. Source: Matambalya Expressed algebraically, for SSG, safeguard action is taken if M Q > [α M AV ] + γ where M Q is the Safeguard trigger level of imports, and α depends on the expected share of imports S in domestic consumption (computed as the average of the three preceding years). Thus, S 10%, α = 125%; if 10% < S 30%, α = 110%; and if S > 30%, α = 105%. (cf. also table 1).

11 the average domestic price during the preceding five years. Overall, in this case as well, innovations are required with respect to length of interval of historical data, actual method to be used to compute the reference average price, proportion of surchargeable price difference and actual level of surcharge Setting the Trigger Price The length of the interval of historical data used for estimating the trend, as well as the actual method used to compute the reference figure raise important decision issues. Commensurate with the arguments in the previous subsection, a longer time interval shall offer a better forecast, while the selected method should not isolate domestic producers from long-run changes in world prices. Therefore, in this case too, it is recommended that a five-year moving average be computed using the exponential smoothing method. Along the line of arguments presented here, the five-year moving average shall be computed as follows: P AV = v 1 P t-5 + v 2 P t-4 + v 3 P t-3 + v 4 P t-2 + v 5 P t-1 (3) where v 1 + v 2 + v 3 + v 4 + v 5 = 1; and P t-5, P t-4, P t-3, P t-2, and P t-1 are the computed Cost, Insurance and Freight (CIF) import prices plus standard tariff T S ; in years t-5, t-4, t-3, t-2 and t-1 respectively (i.e., the last five years). In this case as well, usually, the different years carry different weights (i.e., v 1 < v 2, v 2 < v 3, v 3 < v 4, and v 4 < v 5 ) though the same weight can be allocated to some (consecutive) years. Expressed in simple mathematical terms, this means that price-based safeguard 11 For instance, safeguard action can be applied to less than 100 percent of the difference between the trend and the actual price. This means that if the 100% difference between the trend and actual price is D, safeguard action will be applied to only a predetermined proportion of D. Thus, if a surcharge rate of 10 percent is used and safeguard action is applicable to only 90 percent of D, safeguard action will be 10 percent of 90 percent of D, which is equivalent to only 9 percent of D. action shall be taken, if in a given year, P M + T s < P AV (4) where P m = actual CIF import price and T s = standard tariff Determining the Proportion of Surchargeable Price Difference Another important decision that should be made with respect to the price trigger is the proportion of the price for which safeguard action (e.g., surcharge) can be applied. Generally, T a, the additional duty above bound rate can be applied on either [P AV - (P m + T s )], i.e., the entire difference between the trend price and the actual price; or λ[p AV - (P m + T s )], i.e., part of difference between the trend price and the actual price, where 0 < λ < 1. Though other options are viable 11, considering the vulnerability of developing countries, safeguard action should be applied to 100 percent of the difference between the trend and the actual price. This means that if D is the absolute price difference (i.e., 100 percent difference between the trend and actual price) = [(P m + T s ) - P AV ], safeguard action will be applied to D. If a surcharge rate T a = 10 percent is used, safeguard action will be 10 percent of D. Optionally, a differentiation between LDCs and non-ldc developing countries may take the form depicted in Table 3. Table 3: Determining of Price Difference for Using Surcharges LDCs Non-LDC Developing Countries Computation of additional duty T a D T a λ D where D = [P AV - (P m + T s )] and 0 < λ < 1. The example in Table 3 shows that while for LDCs, the surcharge is applied on 100 percent of D, for non LDC developing countries, the charge is applied on a 9

12 certain percentage of D, determined through coefficient λ Determining the Level of Surcharge As in the case of SSG, it is recommended that the surcharge be decided dependent on δ = D/P AV = percentage fall of import price below price trigger. 12 Notably, T a is computed by multiplying δ by a fixed coefficient (Φ), and adding the product to a preset percentage (ranging from 10 to 100). Table 4 shows the additional duty above bound tariff, depending on proportion of price decline below trigger level, with the Φ coefficient increasing as δ increases. Thus, the higher the price gap, the higher the coefficient Φ. Considering the vulnerability of developing countries, it is proposed that Φ ranges from 0.5 percent to 5 percent, depending on the level of δ (cf. table 4). In line with paragraph 5 of Article 5 of the Agreement in Agriculture SSG, the additional duty, expressed in ad valorem equivalent (T a ), may be imposed according to schedule presented in the column for the SSG in Table 4. The column for SSM presents the author s proposal of the formula for computing the level of surcharge for SSM. Note that the formula for determining the level of surcharge for SSM approach has 10 ranges, compared to the five ranges for SSG. Note also that the formula for computing T a for SSM, in this form, is much simpler. Suppose, P AV is the trigger price for SSM (computed as the quarterly moving average of the past five years); and that P AV = US $ Following a fall in import price, the corresponding shifts in import price before additional duty and the additional duty are graphically presented in Appendix 3. Furthermore, using simulations in which the same level of CIF import price plus ordinary duty is assumed (note that the computation of is different), Appendix 4 Table 4: Formulae for Determining the Level of Surcharge for SSM and SSG SSM 1 SSG 2 Range Computation Range Computation No. δ SSM of T a No. δ SSG of T a 1. δ 10% 10% + (0.5 δ) 1. δ 10% % < δ 20% 20%+(1.0 δ) 2. 10% < δ 40% 0.27(P AV /P m ) % < δ 30% 30%+(1.5 δ) 3. 40% < δ 60% 0.39(P AV /P m ) % < δ 40% 40%+(2.0 δ) 4. 60% < δ 75% 0.47(P AV /P m ) % < δ 50% 50%+(2.5 δ) 5. δ > 75% 0.52(P AV /P m ) % < δ 60% 60%+(3.0 δ) 7. 60% < δ 70% 70%+(3.5 δ) 8. 70% < δ 80% 80%+(4.0 δ) 9. 80% < δ 90% 90%+(4.5 δ) 10. δ > 90% 100%+(5.0 δ) Notes: 2. Computed according to a formula derived from paragraph 5 of Article 5 of the WTO Agreement on Agriculture 1. Authors proposal. Source: Matambalya Note however, that the computations for δ SSM and δ SSG differ. This is because, in determining the SATL for SSM, the T a is taken into account while the determination of SATL for SSG is restricted to CIF import price. 13 Assume a level of T s, say T s = 5 percent, the import prices after additional duty can also be computed.

13 presents the expected changes in additional duty triggered by decline in import prices under the SSG instrument. A comparable presentation of the SSM and SSG instrument is made in Appendix Summary Remarks on Volume and Price Triggers Overall, a model for estimating the volume trigger for SSM should achieve the following: (a) Developing countries should be allowed substantially higher price trigger levels. This is taken care of by having lower level of δ trigger SSM action, compared to the one for SSG (i.e., safeguard action is allowed at δ 10%); plus a fixed coefficient Φ, where 0.5 Φ 5. (b) At any level of price drop, the formula should give T a for SSM > T a for SSG. (c) It should be possible to use the price trigger on consignment-byconsignment basis. (d) Domestic producers are not isolated from long-run changes in world prices. Invariably, the model should allow reasonable transmission of world price shifts to domestic prices. This is taken care of by using exponential smoothing to estimate P AV. 3.4 Preconditions for Initiating Safeguard Actions The preconditions for initiating safeguard action present another area where innovations intended to improve the practicality and practical utility of SSM are possible. Thus, proof of injury to a country, or the threat of injury, due to import surges, should be replaced by proof of dependency on the product. 14 The reason for using this criteria is that many developing countries are both exporters and importers of some products of interest to them. A surge in imports may permanently damage the country s export base. Besides, this criteria enables developing countries to use SSM for broader development goals. In order to underline economic dependence and a product s significance for market stabilisation, eligible countries should give evidence of critical mass of the share of the product in exports 14, and critical mass of the share of the product in GDP. In both cases, the average of the representative three years should be taken as the threshold. Additionally, in order to establish a product s socio-economic significance, the eligible countries should give proof of number of people dependent on the product for their livelihood (average of past representative 3 years), and the contribution to calorie intake (average of past representative 3 years). 3.5 Geographic Coverage Geographic coverage (as a dimension of coverage alongside product coverage and the nature of safeguard action) specifies the countries that can be targeted by safeguard action. Traditionally, safeguard measures have been applied in a nondiscriminatory manner. Moreover, import surges can often be traced to a few countries. An innovation in the form of selective coverage should, therefore, be considered in the SSM architecture. In this regard, selective coverage means that SSM measures should target only those countries that cause the problem. This will allow developing countries invoking SSM to deal with a few countries causing the problem in a manner that does not distort international trade, and also reduces the administrative burden in terms of human resources and costs. Countries invoking safeguard action within the framework of SSM should apply it to developed countries which are the causes of import surges. Regarding the treatment of other developing countries, there are two feasible options. In the first option, the instrument should be applied to developing countries provided they are the sources of import 11

14 12 surges. This is because, in practice, import surges in one developing country can be caused by exports of another developing country. In Tanzania in the 1990s, the production subsidies extended by Bangladesh (another LDC) to jute led to the surge of imports of jute bags. This exacerbated the challenges facing Tanzania s sisal industry in general, and caused huge losses to factories producing sisal bags in particular. Initial surveys in Mwanza, Tanzania s second largest city and the commercial centre of gravity of the Lake Victoria Zone, also show that surge of imports of eggs from neighbouring Kenya (a non- LDC developing country) seriously damaged domestic producers in the late 1990s. Though no study has been undertaken, the same can be said about several agricultural imports from South Africa. The second option would be where safeguard action is not applied at all to other developing countries. This appears to be a less realistic option, since it is regularly the case that import surges in developing countries come from other developing countries. 3.6 Permitted Trade Remedies The permitted remedies should include both tariff-type measures and quantitative restrictions(qrs). The tarifftype measures should be flexibly interpreted so that, in addition to the built-in situation, where countries are unconditionally allowed to raise duties up to bound rates to certain thresholds, they should also conditionally allow duties to be raised beyond bound rates. However, the second proposal is predicated on the willingness of developing countries to lower their bound rates and should only be used to prevent severe injury to domestic producers due to import surges and price declines. Also, although QRs are not allowed under SSG, they should form part of the architecture of SSM. This is because, compared to tariff-type measures, the QRs offer more reliable instruments in restricting imports. In simple terms, the import ceiling may be set at the SATL = [M AV + S γ]. However, this may prove to be too restrictive. A possible scenario is one in which domestic supply response cannot sufficiently cover a rise in domestic consumption. If this happens, the importing country may need to restrict imports at a higher level. Thus, the importing country may set an import volume ceiling υ, beyond which the import volume should not grow in a given quota. υ is the tolerable proportion of imports, by which import volume is allowed to deviate from the reference trend value. It should allow smooth evolution of trade, without abruptly ruining domestic production. This could be computed as: υ = [M AV + S γ] + [(M AV + S γ)]κ (5) where κ is the tolerable percentage rise over 100 percent of [M AV + S γ]. In this case, a greater share of increase in domestic consumption may end up being captured by exporters, without harming domestic production. Equation (5) can be simplified and be rewritten into, υ = [M AV + S γ] [1 + κ] (6) 3.7 Restrictions on the Level of Use of Permitted Trade Remedies Restriction on SSM remedies triggered by Volume Any restrictions of the application of permitted trade remedies should not be open-ended. Instead, it should reflect import demand, given domestic supply,

15 and therefore offer the required protection effectively. In order to balance the situation, and although an unlimited surge of imports is undesirable, imports should be allowed to grow beyond previous levels. Moreover, an appropriate formula can also be developed in order to restrict the import volume, consistent with arguments in previous section, so that: M Q α [M AV + S γ] υ (7) where υ is the upper import volume limit Restrictions on SSM remedies triggered by Price With respect to the price trigger, any restrictions should ensure that either the entire price difference or its proportion is covered. Overall, the extra levy imposed should only seek to strike a balance between the prices of domestically produced and imported products. The concrete suggestion is that: The additional duty should fully or partially cover difference between the nominal price of the shipment concerned in domestic currency and the reference price fixed as the average value of the product over the period. 3.8 Time Scale The time scale should take into consideration the salient features of the products and markets in question. Due consideration should also be given to the fact that developing economies tend to take a longer time to recover from a disturbance. Thus, in the architecture of SSM, a time scale of 12 to 36 months is proposed. Where a shorter time scale is taken (up to 12 months, for example), immediate repeated use of SSM should be allowed, as long as there is evidence of import surges and vulnerability of importing country. This recommendation is important, considering the prospects of low prices, which have in practice been observed for commodities. Moreover, if a longer time scale is taken (say, 24 to 36 months), repeated used should only be permissible after a reasonable period (say, 2 years) has lapsed. 3.9 Other Rules Governing the Use of SSM Concerning the other rules to govern the application of SSM, the following are proposed: (a) Safeguard action within the context of SSM should not be concurrently undertaken with another trade remedy for the same product. (b) Eligible countries invoking safeguard actions should be excluded from compensation requirements. (c) The targeted countries and the WTO Secretariat should be notified of the intended invocation of safeguard actions. The notification should include evidence of dependence and requirement for safeguard action. Thus, relevant data and information on production, trade and consumption should be presented. (d) Countries taking safeguard action within the framework of SSM should not be subjected to any kind of retaliation action by targeted countries. (e) The application of SSM should not be subject to dispute settlement mechanism. However, consultation as may be requested by the affected exporting country should be permitted, without jeopardising the right of the eligible country to invoke safeguard actions. 13

16 4. Conclusions This paper has demonstrated the technical feasibility of SSM for use by developing countries, which should be an integral part of the trade rules of the Multilateral Trading System. 14 The advanced model of SSM delineates the underlying requirements for a prodevelopment and pro-poor trade policy instrument with a view to informing the various stakeholders (i.e. decision makers, policy managers, advocacy institutions represented by many trade networks, etc.) in an objective manner. In the long term, vulnerability to import surges can be overcome by instituting a profound structural transformation of the agricultural sector in particular and the national economy in general. This transformation of the economy is, in turn, a subject of a country s performance in terms of horizontal and vertical diversification of production and trade. In order to pursue more sustainable development and reduce their vulnerability, developing countries should negotiate for innovative instruments within the context of Special and Differential Treatment (SDT), in order to foster horizontal and vertical transformation of their economies.

17 Appendices Appendix 1. Detailed Summary of Proposed Framework for the Architecture of SSM (Page 1 of 3) Item/ Article XIX GATT 1994 Special Safeguards Proposed Additional Elements of SSM S/N parameter and Safeguards Agreement Article 5 Agreement on Agriculture for Tanzania and Zambia I Country Non discriminatory in terms of Non discriminatory in terms of eligibility, Give access to all developing countries, LDCs and non-ldcs Eligibility eligibility provided country has converted NTBs into tariffs II Criteria for 1. Country identifies Special Products 1. Blanket coverage or Selection of 2. Concrete criteria for selecting SP not 2. Country to identify SPs on the basis of: Products specified Critical mass of proportion of exports (at least 3%) Number of people dependent on product for their (Product livelihood (1.5% of population) coverage) Critical mass of proportion of GDP (at least 1.5%) Contribution to calorie intake III Reason for Import surges 1. Import surges 1. Import surges action 2. Drop in prices 2. Drop in prices (triggers) 3. Revised thresholds IV Preconditions 1. Prove through an investigation 1. No need to prove injury or threat thereof to 1. Prove economic dependence on the product through: for the based on objective evidence, local production. Proof of critical mass of proportion of exports (average of application of injury to domestic industry 2. Automatically triggered (volume trigger and past 3 years) safeguard caused by increased imports price trigger) Proof of critical mass of proportion of GDP (average of measures 2. Prove through an investigation representative past 3 years). based objective evidence, 2. Prove dependence on the product for livelihood and food threat to injury to domestic security through: industry caused by increased Proof of number of people dependent on product for their imports livelihood (average of representative past 3 years) Proof of contribution to calorie intake (average of past representative 3 years) 15

18 16 Appendix 1. Detailed Summary of Proposed Framework for the Architecture of SSM (Page 2 of 3) Item/ Article XIX GATT 1994 Special Safeguards Proposed Additional Elements of SSM S/N parameter and Safeguards Agreement Article 5 Agreement on Agriculture for Tanzania and Zambia V Geographic Non-discriminatory Non-discriminatory 1. Allow selective use, focusing on countries which cause the coverage problem The de minimis provisions provides 2. Aim: to reduce administrative burden and costs that no safeguards shall be taken SSM should apply to developed and developing countries alike against imports from developing countries, as long as the individual and joint share of imports of the product in the importing country do not exceed 3% and 9% respectively. VI Type of 1. Tariff measures: additional 1. Additional duties for volume -triggered 1. Allow the raising of duties beyond bound rates. relief/remedy duties beyond bound tariff safeguard 2. Allow QRs, consistent with Article XIX and Safeguard measures rate: Surcharges, Surtaxes, 2. Additional duties price-triggered safeguard. Agreement. (Scheme of Compensatory taxes, Tariff actions) Rate Quotas (TRQs) 2. Non-tariff measures: quantitative restrictions: Global import quotas, Discretionary licensing, Import authorisation and similar measures, Import deposit schemes

19 Appendix 1. Detailed Summary of Proposed Framework for the Architecture of SSM (Page 3 of 3) Item/ Article XIX GATT 1994 Special Safeguards Proposed Additional Elements of SSM S/N parameter and Safeguards Agreement Article 5 Agreement on Agriculture for Tanzania and Zambia VII Restrictions on 1. In case of tariffs: no specific Volume trigger: the additional duty shall not 1. Volume trigger: should reflect import demand, given domestic the use of restrictions as to the level of exceed approximately 30 per cent of the applied supply; and hence offer effective protection (safeguard action reliefs/ remedies the additional duties to be rate in effect the year the measure is triggered. should not distort total demand, given domestic supply imposed Price trigger: The additional duty can only capacity). 2. In case of quantitative compensate for a fraction of the difference 2. Price trigger: should cover the price difference and hence offer restrictions: ensure that between the nominal price of the shipment effective protection. quantity of imports is not concerned in domestic currency and the reduced below the average of reference price fixed as the average value of the [Additional duty should fully or partially cover difference between the last three representative product over the period the nominal price of the shipment concerned in domestic currency years (i.e., previous and the reference price fixed as the average value of the product representative period) for over the period] which data is available. Global quota may be determined by importing country and allocated among exporting countries. VIII Time Scale Safeguards are temporary 3. Safeguards are temporary measures. 1. Take into consideration the salient features of specific measures 4. Use of SSG is permitted during the reform products and markets. process as per Article 20 of Agreement on 2. Allow time scales of 12 to 36 months. Agriculture 3. Permit immediate repeated use of safeguards (for shorter time scales). 4. Permit repeated use after a reasonable break (for longer time scales) 5. Make SSM integral part of WTO rules on permanent terms IX Other Rules Some rules pose compliance Some rules pose compliance difficulties to Other rules to govern the application of SSM should be more difficulties to developing developing countries flexible and less stringent, without causing the erosion of the countries predictability of the multilateral trade rules. Developed countries to provide technical assistance to manage the SSM. Source: Matambalya 2005, prepared from various sources 17

20 18 Appendix 2: Concise Summary of SSM Proposal S/N Negotiations Issue Proposal I Country Eligibility Give access to all developing countries II Criteria for 1. Selective coverage of products Selection 2. Country to identify Special Products on the basis of: of Products Contribution to trade: set a (low) minimum threshold for contribution to product to exports (Product coverage) Contribution to agricultural production: set a (low) minimum threshold for contribution of product to agricultural production Contribution to GDP: set a (low) minimum threshold for contribution of product to GDP Link to Livelihood: set a (low) minimum threshold of number of people directly and indirectly dependent on product for their livelihood Link to Food security: set a (low) minimum threshold of the product s contribution to calorie intake. III Reason for action 1. Import surges (trigger) 2. Drop in prices 3. Revised thresholds to allow: Lower volume triggers than specified for SSG Higher price trigger than specified for SSG IV Preconditions for 1. Prove economic dependence on the product through: the application of Setting a low export dependency threshold safeguard Setting a low GDP dependency threshold measures 2. Prove dependence on the product for livelihood and food security through: Set a low livelihood dependency threshold Set a low calorie dependency threshold V Geographic Allow selective use, focusing on countries which cause the problem coverage Apply to developed and developing countries alike VI Type of relief/ Tariffs: remedy measures Unconditionally allowing the raising of duties up to bound rates (Scheme of actions) Allow the raising of duties beyond bound rates. Quantitative Restrictions Allow QRs, consistent with Article XIX and Safeguard Agreement VII Restrictions as to 1. Volume trigger: should reflect import demand, given domestic supply; the level of and hence offer effective protection. compensation 2. Price trigger: should cover the price difference and hence offer effective admissible protection. VIII Time Scale 1. Take into consideration the salient features of specific products and markets. 2. Allow time scales of 12 to 36 months. 3. Permit immediate repeated use of safeguards (for shorter time scale). 4. Permit repeated use after elapse of reasonable time (for longer time scale) 5. Make SSM an integral part of WTO rules on permanent terms IX Other Rules 1. Allow automatic recourse to SSM 2. Allowed usage to be more flexible and less stringent 3. Should not cause erosion of the predictability of the multilateral trade rules Source: Matambalya 2005, prepared from various sources

21 Appendix 3. Additional Duty with a Fall in Import Price for Price-Triggered SSM 500% 450% % Increase in Import Duty 400% 350% 300% 250% 200% 150% 100% 50% % Increase in Import Duty under SSM 0% 0% 20% 40% 60% 80% 100% Source: Matambalya 2005 % Fall in Import Price Appendix 4. Additional Duty with a Fall in Import Price for Price-Triggered SSG 300% 250% % Increase in Import Duty 200% 150% 100% 50% % Increase in Import Duty under SSG 19 Source: Matambalya % 0% 20% 40% 60% 80% 100% % Fall in Import Price