Linear reduction with conditions on minimum cuts. This was the formula used in the Uruguay AoA (36 percent average reduction with a 15 percent minimum per tariff line). Although tariffs were reduced by an average of 36 percent, the method left many tariff peaks, as countries had the freedom to cut tariffs on "sensitive" products by only the minimum 15 percent while reducing by more for others, in order to reach the (un-weighted) average of 36 percent. This formula could be improved, e.g. by raising the minimum to, say 25 percent, or by seeking a balance in the trade volume between those with higher and lower than average cuts, i.e. trade-weighted tariff reductions.
The Uruguay formula with the same base as in the Uruguay. Rather than using the bound rates reached at the end of the implementation period of the Uruguay as the benchmark for further reduction, a further 36 percent cut in the average level of tariffs from the same base as in the Uruguay would imply a 72 percent cut over the two reform periods, a significant reduction over a dozen years or so. This approach has some other advantages, e.g. giving a sense of the continuity of the process of reform by using the same formula; no controversy over the choice of a new base period; and full "credit" for unilateral reductions during the negotiation period.
Successive linear reductions. Compared with the linear method, here the base tariff rate, T0, is adjusted every year to its new level. The formula for this, also known as a radial formula, is
Tn = (1-r)t * T0. With this, if r = 0.06 and t = 6 years, a tariff level of 100 percent is reduced to 69 percent, compared with 64 percent with the linear formula. As the base itself gets reduced every year, the overall reduction at the end of the period is smaller. However, for a smaller reduction rate and a shorter time period, the difference in reduction rates from the two formulae is not much.
Harmonization of tariff rates - the Swiss Formula. This formula was used in the Tokyo Round to harmonize tariff peaks on industrial products left as a result of the linear formula used in the Kennedy Round. The Swiss formula is Tn = (amax * T0)/(amax + T0), where amax is the upper bound on all resulting tariffs. With amax = 50, an initial tariff of 40 percent would be reduced to 22 percent while a 100 percent tariff would be reduced to 33 percent. On the other hand, with amax = 25, a 40 percent tariff is reduced to 15 percent and a 100 percent tariff is reduced to 20 percent. The value of amax then becomes the parameter for negotiations. Figure 1 shows how three of these methods discussed here compare in terms of tariff reductions.
Capping all tariffs at some maximum rate. For example, a maximum rate of 60 percent could be agreed to which all higher tariffs would have to be reduced over an agreed period. This rule may be applied in conjunction with other reduction methods.
Using actual protection rates for recent years as the benchmark. In this approach, negotiators agree to eliminate the gap, or a good part of it, between the bound and the applied rates, the so-called "discretionary protection" or "water in the tariff", using some recent period to measure the gap, e.g. 1995-97. This approach, while it makes some economic sense, appears problematic due to problems associated with measuring (or agreeing with the measurement of) the protection rate. This was one of the problems that led to inflated tariff equivalents (and thus bound tariffs) on many commodities in the Uruguay, which came to be known as "dirty tariffication". This method is less helpful for developing countries where domestic prices tend to be lower than or similar to world reference prices, resulting in negative or zero bound rates, which would not be acceptable.
As the tariffs existing after the tariffication of non-tariff barriers are very high in several cases, there would be no meaningful market access opportunities. Hence, particular provisions were made in the document for market access opportunities. There are three types of such provisions.
Current access opportunity.
Opportunity has to be provided for a level of import equal to the average annual import level during the base period 1986-88 by having very low tariffs for imports up to this extent.
Minimum access opportunity.
Opportunity for a level not less than 3% of the annual consumption in the period 1986-88 has to be provided in 1995. This level would be raised to 5% by the end of 2000 by developed countries and by the end of 2004 by developing countries by having very low tariffs for imports up to this extent.
Special minimum access opportunity.
Members who have opted for non-tariff measures instead of tariffication have to provide such opportunity, i.e., Japan, the Philippines and the Republic of Korea for rice, and Israel for sheepmeat, wholemilk powder and some dairy products. For developed Members, it means import in 1995 to the extent of 4% of the annual average consumption in the base period 1986-88, and an increase of 0.8% of the base period consumption every year thereafter up to the end of 2000. For developing Members, it means import in 1995 to the extent of 1% of the annual average consumption in the base period, rising uniformly to 2% in 1999 and then to 4% in 2004.
These above-mentioned access opportunities are to be provided by tariff quotas, i.e., by having very low tariffs up to the stipulated extent of imports, and above that level, having the normal tariffs which, in the case of agricultural products, are generally very high. Except for cases of bilateral and plurilateral agreements, these quotas should generally be global quotas, i.e., on a non-discriminatory basis, rather than country-specific quotas.
This is what a tariff-quota might look like: Imports entering under the tariff-quota (up to 1,000 tons) are charged 10%. Imports entering outside the tariff quota are charged 80%. Under the Uruguay Round agreement, the 1,000 tons would generally be based on actual imports in the base period or an agreed “minimum access” formula.
Tariff quotas are also called “tariff-rate quotas”.
Generally, safeguard action can be taken only if there is existence of serious injury or the threat of serious injury to domestic production, whereas the special safeguard action can be taken without the demonstration of any adverse effect on domestic production. A special safeguard action can be taken if the import price falls below a particularly prescribed level (trigger price) or if the import quantity rises above a particularly prescribed level (trigger quantity).
The trigger price is normally to be determined as the average cost, insurance and freight (CIF) import price of the product during the 1986-88 base period. If the trigger price is high, the import price may fall below this level more often, and consequently, it will be easier to take the special safeguard action.
Formula for the calculation of the ceilings of price trigger.
1) if the difference between the trigger price and the import price is 10% of the trigger price or less, no additional duty can be imposed;
2) if the difference is more than 10%, but not more than 40%, the additional duty will be 30% of the amount by which the difference exceeds 10%;
3) if the difference is more than 40%, but not more than 60%, the additional duty will be 50% of the amount by which the difference exceeds 40%, plus the duty in 2);
4) if the difference is more than 60%, but not more than 75%, the additional duty will be 70% of the amount by which the difference exceeds 60%, plus the duty in 3);
5) if the difference is more than 75%, the additional duty will be 90% of the amount by which the difference exceeds 75%, plus the duty in 4).
For example, when the trigger price is $200 per unit, and the current price falls to $80 per unit, the difference is $120.
According to 1), there is no additional duty if the difference is only up to 10% of the trigger price, i.e., $20.
According to 2), up to $80, the duty is 30% of $60 (%80-$20), i.e., $18.
Thereafter, up to a difference of 60%, i.e., $120, the duty is 50% of the difference exceeding 40%, i.e., 50% of $40 ($120-$80), i.e., $20.
Hence, the additional duty may be to the extent of $18+$20, i.e., $38 on each unit.
If the volume of imports is higher than a trigger level of 105-125% of the average level of imports during the preceding three years, and the import is above 30% or 10-30% of the domestic consumption, special safeguard measures can be imposed. Higher import penetration will enable a Member to take SSP action at a lower level of increase in imports.
Formula for the calculation of base trigger level, i.e., the increase in the import quantity:
1) if the import is 10% of domestic consumption or less, 125% of the average quantity of imports in the three preceding years for which data are available;
2) if the import is 10-30% of domestic consumption or less, 110% of the average quantity of imports in the three preceding years for which data are available;
3) if the import is above 30% of domestic consumption or less, 105% of the average quantity of imports in the three preceding years for which data are available;
The actual trigger level is the sum of the increase in import quantity and the change in domestic consumption, and must not be less than 105% of the average quantity of imports in the three preceding years for which data are available.
The measure is, under the SSP, an increase in duty, which must not exceed one-third of the ordinary customs duty and will terminate by the end of the imposing year. For example, when domestic consumption is 1000 units and the import quantity is 280 units, i.e., 28% of domestic consumption, the base trigger import quantity level will be 110% of 280 units, i.e., 308 units. Suppose the consumption has grown to 1000 units from 900 units, which means a change in consumption of +100 units, the actual trigger level in this case is 308+100, i.e., 408 units. If the import quantity exceeds 408 units, an additional duty can be imposed. Suppose the ordinary customs duty on this item is 30%, the maximum additional duty that can be imposed is one-third of 30%, i.e., 10%.
Reduction of domestic support.
Domestic support measures are disciplined through reductions in the Total Aggregate Measurement of Support (Total AMS), including product-specific AMS and non-product-specific AMS. The Total AMS is a means of quantifying the aggregate value of domestic support or subsidy given to each category of agricultural products.
Example: Calculation of the current total AMS.
Member X (developed country), year Y
Wheat:
> Intervention price for wheat = $255 per tonne
> Fixed external reference price (world market price) = $110 per tonne
> Domestic production of wheat = 2,000,000 tonnes
> Value of wheat production = $510,000,000
> Wheat AMS (AMS 1) ($255–$110) x 2,000,000 tonnes = $290,000,000
(de minimis level=$25,500,000)
Barley:
> Deficiency payments for barley = $3,000,000> Value of barley production = $100,000,000
> Barley AMS (AMS 2) = $3,000,000
(de minimis level=$5,000,000).
Oilseeds:
> Deficiency payments for oilseeds = $13,000,000> Fertilizer subsidy = $1,000,000
> Value of oilseeds production = $250,000,000
> Oilseeds AMS (AMS 3) = $14,000,000
(de minimis level=$12,500,000)
Support not specific to products.
> Generally available interest rate subsidy = $ 4,000,000
Value of total agricultural production = $860,000,000
> Non-product-specific AMS (AMS 4) = $4,000,000
de minimis level=$43,000,000
Current total AMS (AMS 1 + AMS 3) = $304,000,000.
If a support measure exists but the method of calculation of the AMS cannot be applied to it, the calculation of an equivalent measurement of support (EMS), i.e., budgetary outlays, will be made and included in the Total AMS.
Generally, price support is measured by multiplying the gap between the applied administered price and a specified fixed external reference price, i.e., world market price, by the quantity of production eligible to receive the administered price. The fixed external reference price is the average unit price during the period 1986-88. It is the FOB price for the net exporting country and the CIF price for the net importing country.
The schedule on the reduction in domestic support prescribes that the Base Total AMS must be reduced by 20% for developed Members over 6 years (1995-2000 both inclusive) and 13.3% for developing Members over 10 years (1995-2004 both inclusive), while there is no reduction required of least-developed countries.
Measures of domestic support.
Domestic support measures are the aid granted to agricultural production that are not export subsidies. These aids are classified into three categories of two types: green and blue box measures free of reduction commitments and yellow/amber box measures subject to reduction commitments.
Green box measures: measures having no or at most minimal trade-distorting effects or effects on production, and must be provided through a publicly-funded program (including revenue foregone) not involving transfer from consumers. It implies a preference for agriculture support policies financed in a transparent way by the taxpayer as opposed to price support policies financed by the consumers.
1) Government service programs for agriculture and the rural community, such as pest and disease controls, support for training and information, infrastructure (water, electricity) or research programs, which involve no direct payments.
2) Domestic food aid programs for people in need, provided that products are bought from producers at market prices, and aid for public storage of agricultural products for food security purposes.
3) Direct payment: aid for developing agricultural structures such as resource retirement programs, or investment aid for producers totally and permanently retire from production, or de-coupled income support measures granted to producers suffering an income loss and not related to the quantities produced or the prices charged or factors of production employed.
4) Regional assistance for farmers in disadvantaged regions and environmental aid
5) Payments for relief from natural disasters.
Blue box measures: direct payments under production limiting programs made on fixed areas and yield or a fixed number of livestock, or on 85% or less of production in a defined base period, particularly aids respecting certain criteria precisely met by European direct support (the central pillar of the very recent CAP reforms) for products subject to quantitative production limits and deficiency payments granted by the US.
Blue box measures can be considered to be partially-decoupled, that is, production is still required in order to receive the payments, but the actual payments do not relate directly to the current quantity of that production.
Amber/yellow box measures: any domestic support measures not correspond to the exceptional arrangements of the green and blue boxes are classified as being yellow and must therefore be included in the calculation of reduction commitments. The reduction commitment is a global commitment. In other words, Members have not undertaken to reduce the support granted to each product by 20%. A Member is considered to be in compliance with its domestic support commitments if its domestic support in favor of agricultural producers expressed in terms of current total AMS does not exceed the corresponding annual or final bound commitment level specified in its Schedule.
1) development measures: measures of assistance, whether direct or indirect, designed to encourage agricultural and rural development and that are an integral part of the development programs of developing countries, including investment subsidies, agricultural input subsidies available to low-income or resource-poor producers in developing countries and domestic support to encourage diversification from growing illicit narcotic crops in developing countries.
2) de minimus levels of support: When the aggregate value of product-specific or non-product-specific support does not exceed 5% (for developed countries) or 10% (for developing countries) of the total value of production of the agricultural product in question, there is o requirement to reduce such trade-distorting domestic support.
The main complaint about policies which support domestic prices, or subsidize production in some other way, is that they encourage over-production. This squeezes out imports or leads to export subsidies and low-priced dumping on world markets. The Agriculture Agreement distinguishes between support programmes that stimulate production directly, and those that are considered to have no direct effect.