News and Analysis • Volume 11 • Number 6 • October 2007

Accessibility and Effectiveness of the New SSM: Lessons from Country Simulations

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In July 2004, WTO Members agreed that a new mechanism would be established to help developing countries cope with sudden surges in agricultural imports or price depression. The negotiations, however, have made slow progress, partly due to scant data on the potential effects of such a measure.

A new study commissioned by the International Centre for Trade and Sustainable Development examined three specific issues in order to evaluate the Special Safeguard Mechaniam or SSM proposals of the G-33 and various modifications suggested by other negotiating parties in the WTO.1

First, it attempted to determine the historical frequency and severity of import surges and price depressions in countries covered by the study, and assess whether there is sufficient basis for demanding special safeguard privileges. Second, on the assumption that an SSM is warranted, the study assessed the accessibility of the mechanism by quantifying the frequency in which remedies could be availed of during episodes of import volume surges and price depressions under various trigger, threshold and other parameter settings. Third, it examined the effectiveness of the SSM by isolating periods of problematic gaps between import and domestic prices and calculated the frequency with which the SSM would have been able to bridge the gap between the two during such situations.

The simulation model developed for the study used historical data on monthly import volumes and prices and domestic prices, mainly from 2000 to 2005 from six countries (the Philippines, Ecuador, Fiji, Senegal, Indonesia and China) for 27 commodities. Available statistics on production and consumption, tariff rate quota (TRQ) commitments were also utilised in the simulations, as were most-favoured-nation (MFN) tariffs.2

Frequency and Severity of Import Surges

The analysis revealed a significant frequency of import volume surges and price depressions among the commodities in the countries covered. On average, annual cumulative imports exceeded three-year import volume moving averages by more than 10 percent in about one out of every six months. Price depressions occurred slightly more often, with import prices falling below three-year moving average roughly one out of every five months. The frequency of both import quantity surges and price depressions settled at a still significant level of 11 percent of total months covered when a higher 30 percent threshold over historical moving averages was applied.

Access to the Special Safeguard Mechanism

Access to SSM remedies averaged nearly half of total months when applying a uniform 10 percent threshold over three-year moving averages for both volume and price-based measures. Overall, a five instead of three-year average for both volume and price triggers resulted in a slightly better access rate for any type of SSM (50 percent versus 48 percent). The availability of the remedy was not significantly impaired even when thresholds were raised to 30 percent, or when the maximum period for imposing SSM duties was adjusted to six months, or allowed only up to the end of each year, as against the 12-month duration originally proposed by the G-33. This implies that there may be room to accommodate Ambassador Falconer’s assumption that SSM measures should be invoked only in ‘extraordinary’ and ‘special’ cases, such as those involving large deviations from triggers.Access to the SSM increased per-ceptibly when a July-June implementation cycle was utilised instead of a calendar year, and more so when restrictions on the appli-cation of safeguard duties on imports falling within TRQ commitments were suspended.

Importantly, the availability of the SSM dropped to less than half when so-called market tests were imposed, i.e. when volume surges had to coincide with price depressions in order to trigger remedies. In this regard, it could be argued that the link between import volumes and prices is not always symmetrical, nor do abrupt movements in both volumes and prices need to coincide in order to result in serious harm to producers in importing countries. In fact, irretrievable harm to domestic markets and local producers may have already occurred by the time import price and volume trends are aligned in a way that allows SSM remedies under market test conditions. Further, previous episodes of sudden short-term surges in cheap imports have had widespread and protracted effects on domestic farmers’ production cycles and markets.

Effectiveness

On average, in six out of twelve months in a year, the prices of imports – inclusive of MFN bound duties – fell below corresponding domestic prices by more than 10 percent. SSM remedies were available in about four of these six ‘problematic’ months, but were effective in reducing the price gaps to less than 10 percent in only two of the months involved. The effectiveness of the remedy did not appear to be considerably influenced by adjustments in the way import prices were converted to local currencies, or when imposition periods were adjusted from twelve to six months or only up to the end of each year. There also appeared to be some room for increasing thresholds and reducing remedies without unduly impairing the quality of the SSM.

Effectiveness rates improved when a July- June instead of a calendar year was used as the annual implementation cycle, and more significantly when restraints on the application of safeguard duties on TRQ imports were set aside. In turn, the ability of the measure to correct ‘problematic’ price gaps was cut to a third of baseline levels when market tests were applied. The SSM was also significantly less effective if WTO Members were not allowed to exceed Uruguay Round bound rates when they applied the additional duty. In this scenario, the effectiveness rate plunged to two percent, thereby rendering the SSM virtually useless (see figure below). Among the 20 commodities covered that registered positive effectiveness rates under the baseline scenario, eleven saw their effectiveness rates drop to zero, while the rest experienced declines of at least 88 percent compared to their baseline levels.

Countries could also study the costs and benefits of unilaterally lowering their bound tariffs on selected products to in-quota levels in exchange for enhanced access to the SSM. A legal opinion would, however, be needed on whether such a unilateral move would allow a country to start imposing safeguard duties on imports falling within their original TRQ commitments.

Product Coverage

Although the simulation did not specifically address the issue of product coverage, the results of the simulation can be used by each country to identify specific commodities that tend to be particularly vulnerable to import surges and price depressions. There may be some merit to suggestions to exclude exported commodities from SSM coverage, as alluded to by Ambassador Falconer. However, there are logically defensible situations where the poor state of marketing infrastructure forces the production in a remote area to be exported to nearby foreign markets while imports are allowed to satisfy demand in the consumption areas. Limiting SSM coverage to domestically produced commodities and their substitutes is also problematic. In some countries, almost all types and varieties of fruit are considered substitutes and competitors of the few locally produced fruit commodities.

Perhaps a better approach to this issue is to be flexible and liberal in the matter of product coverage, as the G-33 have proposed, while ensuring that triggers, thresholds and remedies are able to prevent an arbitrary and unreasonable application of SSM measures.

Preferential Trade

Some export-oriented countries have proposed that imports under preferential trade agreements be excluded in computing volume and price triggers and in determining whether SSM remedies could be invoked. Unfortunately, it was not possible to accommodate this proposed modality in the simulations. Limited as they already were, the import statistics could not be disaggregated by source country. It was also impossible to separate imports subjected to MFN tariffs from those benefiting from preferential rates under regional and similar trade agreements. This in itself raises questions about the extent to which such an approach could be put into practice in developing countries.

That said, excluding non-MFN imports from trigger computations and threshold breaches would be similar to raising the minimum level of deviation from triggers before SSM duties can be invoked. In this regard, the simulations show that overall access to the SSM did not decrease significantly when the volume threshold was raised from 10 to 30 percent. It is, however, improper to immediately infer from these simulation results that excluding non- MFN imports from triggers and threshold breaches can be accommodated to some extent without impairing the effectiveness of the SSM. The magnitude of the volumes and level of prices of imports under preferential trade agreements vary greatly by country and commodity, and a uniform threshold adjustment will not be able to take into account all possible scenarios.

It does not necessarily follow that excluding non-MFN imports from the SSM mechanism will result in better market access for MFN exporters. Volume triggers will be reduced, while price triggers may go down, such that both will be easier to breach. MFN exporters will have to compete exclusively with each other for a smaller SSM-exempt import volume, while their non-MFN competitors will effectively be shielded from any safeguard duty.

Some Preliminary Conclusions

There appears to be substantial latitude for WTO Members to accede to higher thresholds, and even reduced levels of remedies, without diminishing either access to, or the effectiveness of, the SSM. However, this clearly has limits, and particular attention should be paid to proposals to introduce consumption parameters in the determination of triggers, market tests, or remedies and caps based on percentages of bound tariffs, particularly if a country’s bound tariffs are already low. Priority should also be given to price-based remedies, given their clear superiority over volume-based measures, and the fact that the harmful effects of imports – including volume surges – are normally expressed in the form of price depressions.

A potentially less controversial six-month limit to the period for imposing SSM duties also appears to be bearable, as would a year-end limit modelled on the SSG.

The simulations also show that, since SSM remedies would be effective in bridging problematic price gaps in only two out of every six ‘problematic’ months in a year, historical levels of market access are unlikely to seriously impaired. This may help assuage the concerns of export-oriented WTO Members that SSM duties would be imposed in an abusive manner. And finally, if developing countries are to benefit from the SSM, they need to upgrade their capacity to collect accurate data in order to have the capacity to detect import surges and price depressions promptly, and impose safeguard duties when necessary.

Raul Montemayor is National Business Manager of the Philippine Federation of Free Farmers Co-operatives.