Potential Implications of a Special Safeguard Mechanism in the World Trade Organization: the Case of Wheat

Abstract

The special safeguard mechanism-both quantity-and price-based-was key in the July 2008 failure to reach agreement in the World Trade Organization negotiations under the Doha Development Agenda. A stochastic simulation model of the world wheat market is used to investigate the effects of the special safeguard mechanism. As expected, the quantity-based safeguard is found to reduce imports, raise domestic prices, and boost mean domestic production in the countries that implement it. However, rather than insulating developing countries in those regions from price volatility, the quantity-based safeguard increases domestic price volatility, largely by restricting imports when domestic output is low and prices are high. The quantitybased safeguard shrinks average wheat imports nearly 50 percent in some regions, and global wheat trade falls by 4.7 percent. The price-based safeguard discriminates against lower price exporters and contributes to producer price instability.

Agricultural trade distortions during the global financial crisis

“…At the same time, however, developing countries have added to the WTO's Doha agenda a proposal for a Special Safeguards Mechanism (SSM) that would allow those countries to raise their agricultural import barriers above their bindings for a significant proportion of agricultural products in the event of a sudden international price fall or an import surge. This is the exact opposite of what is needed by way of a global public good to reduce the frequency and amplitude of downward food price spikes (Hertel, Martin and Leister 2010). Moreover, the above evidence from the mid-1980s experience suggests that if food-importing countries were to exercise that proposed freedom, food-surplus countries would respond by lowering their export restrictions -thereby weakening the efforts of the food-importing countries to insulate their domestic markets from the international price fall, and further depressing that price.…”

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“…However, such agreements are not always fully successful or effective because many countries limit imports by imposing nontariff barriers, including import licenses and quality restrictions [46,47]. In some cases, these nontariff barriers can be effective in stabilizing and insulating domestic prices of agricultural commodities against lower priced imports [48].…”

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“…The scenario is motivated by the large number of real world situations where the interest is on understanding the price volatility, often of an agricultural commodity, under different policy regimes, given historical short term fluctuations in productivity, such as agricultural yields. Examples of this problem can be found in Valenzuela et al (2007), Hertel, Martin, and Leister (2010) and Villoria and Mghenyi (2016). In these works, the customary strategy is to run stochastic simulations with and without polices and use the GTAP implementation of Systematic Sensitivity Analysis via Gaussian Quadratures (GQ-SSA) (Pearson and Arndt, 2000).…”

“…However, as discussed by Villoria and Preckel (2017), GQ-SSA can be imprecise and, as implemented, inadequate to capture higher moments of the distribution of model outcomes, such as those in figure 2 where the price and outcome distributions are clearly asymmetric. It is only natural to expect fewer symmetric distributions when the policies involve discrete shifts in policy regimes, such as in the case of import safeguards in Hertel, Martin, and Leister (2010) or tariff-rate quotes. Moreover, in applications of climate change, extreme events are likely to be expressed as changes in the tail of the distributions, which even when assumed away by using the triangular distribution currently used in GTAP's GQ-SSA, may induce skewness in economic outcomes such as outputs and prices.…”

“…Examples of a Department of Agricultural Economics, Kansas State University, 222 Waters Hall, Manhattan, KS (nvilloria@ksu.edu). these applications are found often and range from the evaluation of policies that can abruptly change price regimes (Hertel, Martin, and Leister, 2010) to agricultural productivity shocks whose distribution may be asymmetrical (Ramirez, Misra, and Field, 2003).…”