THE IMPACTS OF TARIFF-RATE IMPORT QUOTAS ON MARKET ACCESS

Xianghong Li and Colin A. Carter Department of Agricultural Economics, Kansas State University, KS, USA University of California, Davis, CA, USA March 2009 ABSTRACT The utilization of tariff-rate quotas (TRQs) for enhancing market access is a key component of global agricultural trade negotiations. We identify factors affecting the performance of TRQs in terms of improving market access. The analysis covers individual TRQs notified by 28 WTO member countries from 1995 through 2000. Our results show that reducing in-quota tariffs will significantly improve market access while the market access effect of any reduction in overquota tariffs is marginal. We also find that the empirical ranking of the efficiency of alternative TRQ administration methods differs from the theoretical ranking. JEL no. F13, Q17, Q18. Key words: agricultural trade, market access, tariff-rate quotas, quota administration.

Please address correspondence to Colin A. Carter, Department of Agricultural And Resource Economics, University of California, Davis, One Shields Avenue, Davis, CA 95616, USA. Email: cacarter@ucdavis.edu. Phone:+1 530 752 6054. Fax: +1 530 752 5614.

THE IMPACTS OF TARIFF-RATE IMPORT QUOTAS ON MARKET ACCESS Agriculture remains a holdout when it comes to global trade liberalization. The 1994 Uruguay Round Agreement on Agriculture (URAA) set new rules for trade in agricultural products but this agreement was a modest reduction in import protection (Anania et al 2004). A key systematic change regarding market access was the replacement of quantitative trade restrictions and other non-tariff barriers with tariffs
known as tariffication. To ensure current and minimum market access in the process of tariffication, a system of tariff rate quotas (TRQs) was instituted. TRQs are two-tiered tariffs in which a limited volume of imports (i.e., the quota) is imported at a lower tariff rate and all additional above quota imports are subject to a higher tariff. As a result of the URAA, TRQs were broadly adopted in agricultural trade. For many importers, non-tariff trade barriers were converted to TRQs as a way to manage trade and at the same time comply with the URAA. These instruments now affect international trade in most agricultural commodities, ranging from imports of wheat into the EU, pork into Japan, cotton into China, milk powder into India, and sugar into the United States, for example. As of May 2005, there were 1,434 different agricultural TRQs notified to the World Trade Organization (WTO), with a total of 45 countries employing TRQs (WTO 2005). TRQs were a compromise between exporters and importers. The introduction of TRQs ensures one thingthat agricultural trade policies continue to be very complex. In principle, TRQs can improve market access for exporters compared to simple quantitative restrictions because under TRQs the import quantity is not limited and over-quota imports are permitted at the higher tariff. However, TRQs can still be used as a significant barrier to trade and they have a number of undesirable features. For instance, TRQs generate quota rents, legitimize a role for state trading agencies, and allow importers to blatantly discriminate among exporting countries.

Hence, from a theoretical point of view, it is questionable whether the implementation of TRQs improves market access and global welfare. So far, experience with agricultural TRQs suggests that the TRQ regime has failed as a market access instrument (Abbott 2002) because agricultural TRQs are underutilized by a significant margin (Podbury and Roberts 1999; WTO 2000 and 2001). For the implementation period 1995-2002, the fill rates of more than one-quarter of all agricultural TRQs were below 20% (WTO 2005). The average yearly unweighted TRQ fill rate was less than 70%. In addition, TRQ fill rates, on average, dropped from 66% in 1995 to 58% in 2002 (WTO 2005). The relatively low average fill rates suggest that the agricultural TRQ regime has not led to a significant improvement in market access. The most effective way to further reform agricultural TRQs may be to change those factors that reduce TRQ fill rates the most. Several studies have identified factors that impede market access under specific TRQs and have singled out ideas for further TRQ reform. The recommendations for the best way to liberalize agricultural TRQs vary across the different studies. Abbott and Paarlberg (1998) argued that a reduction of the above-quota tariff on pork would lead to more pork imports into the Philippines. Alternatively, it has been argued that increasing quota volumes would result in greater welfare gains than would tariff reductions in the EU (Bureau and Tangermann 2000). The combination of quota expansion and in-quota and overquota tariff reductions would achieve maximum liberalization results for the OECD countries (OECD 2002). On the other hand, one study (IATRC 2001) advocated that further WTO negotiations should focus on developing better rules for the administration of quota licenses. The maximum gain from reforming TRQs would presumably be realized through liberalizing those factors that influence the performance of TRQs the most. Trade theory offers

several possible explanations for the poor performance of TRQs. Theoretical analysis can provide a possible ranking of such factors, but cannot identify which factors are empirically the most important. However, there is a lack of empirical evidence on the impacts of TRQ implementation practices on market access. There are some case studies in the literature that are country and commodity specific, but this previous work has failed to uncover general factors governing implementation of TRQs. The commonly used descriptive approach in the literature can provide general conclusions regarding the overall performance of agricultural TRQs, but may exaggerate the effect of a single factor because it ignores complex interrelationships. Only Monnich (2003) has attempted to empirically untangle explanations of TRQ fill rates. However, her study only covered agricultural TRQs in the EU, which account for less than 7% of total global agricultural TRQs. Moreover, her model specification failed to capture the double-censored nature of TRQ fill rates. To expand the literature, we conduct a comprehensive study of agricultural TRQs. We identify factors that impede market access under TRQs and draw out implications for reforming current agricultural TRQs. Our analyses are conducted at the individual TRQ level in order to avoid aggregation problems. Each TRQ notified to the WTO during the 1995-2000 time period is included in this study. An empirical model is carefully specified to best capture trading behavior under the TRQ regime and a two-limit random-effects Tobit model is used to deal with the double censored nature of TRQ fill rates. In policy circles, there is a difference of opinion whether or not institutional regulation is a major factor hindering trade reform, without explicit measurement of its effects. For instance, Brazil complained to the WTO that the EU import licensing procedures for poultry products nullified or impaired any benefits from the TRQ regime. The U.S. has pressured China to reform

its TRQs. Many economists have expressed concern that the benefits of TRQ access have been reduced by administration methods (Abbott 2002; IATRC 2001; Skully 2001). In contrast, the WTO (2001) and OECD (2002) have stated that quota administration methods have had only a limited influence on fill rates. A major contribution of this paper is that we explicitly examine whether administration methods affect market access of agricultural TRQs, and to what degree these methods matter. We find that administration methods do matter in terms of granting market access to exporters. The Economics of TRQs A TRQ scheme contains a low in-quota tariff (T1), a quota (Q0) that defines the maximum volume of imports that are subject to the low in-quota tariff, and a relatively high over-quota tariff (T2). Figure 1 shows the basic analytics of a TRQ mechanism. Here, we assume that the importing country is small.1 For imports within quota, importers face the price Pw+T1. For imports over quota, the import cost is Pw+T2. Hence, the excess supply curve is a step function consisting of three sections: a horizontal section (Pw+T1)A for the in-quota tariff, a vertical section AB for the quota, and another horizontal section BC for the over-quota tariff. Imports under TRQs are determined where the excess demand curve in the home country intersects the world excess supply curve. A main quantifiable indicator of market penetration under a TRQ regime is the TRQ fill rate. It is often constructed to assess the performance of TRQs relative to market access goals. The TRQ fill rate is a simple descriptive statistic defined as the actual import volume through TRQs relative to the scheduled quota volume (i.e., Q0 in Figure 1) and can range from 0 to +
.

The small country assumption is reasonable in the context of agricultural TRQs. For instance, the total TRQ quota volume of a typical agricultural product in 1995 accounted only for 3% to 7% of the total world trade in that product (FAO 2000). The quota volume of each individual TRQ for an individual country is even smaller. For instance, the U.S. sugar TRQs accounts for less than 5% of world imports.

Figure 1. Imports under TRQs

P

Pw+T2 Pd Pw+T1 Pw

B C

ES

ED5 ED2

ED3

ED0 ED1 0
M1 M2=Q0 M3 M0

ED4

Four categories of TRQ fill rates can be identified: underfilled, just filled, overfilled, and zero fill, respectively. If the excess demand curve lies between ED0 and ED4 in Figure 1(e.g. ED1), the 1st tier tariff is the binding instrument. The TRQ is said to be underfilled with a fill rate (M1/Q0) between 0 and 1 and a portion of the quota is not utilized. If the quota regime is the effective instrument (i.e., the excess demand curve falls within the range of ED4 to ED5 in Figure 1), then the quota fill rate will equal 1 as the quota is just filled. In the case of a strong import demand, the 2nd tier tariff becomes effective. The fill rate (M3/Q0) is then greater than 1, and the TRQ is said to be overfilled. It is also possible that the TRQ is not filled at all. If the excess demand curve lies to the left of ED0 (including ED0), the fill rate equals zero and there are no imports at the current in-quota tariff level. Various administration methods have been adopted to implement TRQs, and TRQ administration fundamentally is a rationing problem (Skully 2001). It determines the volume and distribution of trade as well as the distribution of quota rents. Alternative administration methods

typically result in different hidden costs and fill rates. The introduction of TRQs in the EU banana market, for instance, induced a high degree of rent seeking (Herrmann et. al. 2001). Moreover, it is possible for the government to assign a large number of small quotas so that any one quota is commercially infeasible to import. Furthermore, administration methods may allocate TRQs to high-cost third country producers and thereby cause inefficiency (Herrmann et. a.l 2001; Boughner et. al. 2000) . The impact of administration methods can be depicted in Figure 1 as a leftward shift of ED by the amount of the transactions costs. The weakening of import demand reduces the import quantity. The magnitude of the shift in the excess demand curve determines how the fill rate is affected. If the transactions costs are relatively high, they could even change the binding instrument. For instance, if ED2 in Figure 1 shifts to ED1 due to administration costs, the quota is no longer effective, and the 1st-tier tariff will instead become binding. As a result, the TRQ moves from being just filled to being underfilled. Ten principal TRQ administration methods have been identified by the WTO and are defined in the Appendix below. Each method has its own advantages and disadvantages, incurs transactions costs of different magnitudes, and affects imports differently. The applied tariffs method is the most commonly employed and accounts for almost 50% of the total TRQs. The licenses on demand method serves as the second most popular approach, accounting for about one-quarter of the total TRQs. Producer groups and other methods are seldom used The non-specified method was used only once and was dropped from our regression analysis. Four additional conditions and certain combinations of these conditions are used to help administer TRQs, in addition to the ten principal administration methods. These additional requirements are applied to more than 22% of the TRQs each year. Among these four methods,

limits on tariff quota shares per allocation (LA) is the most intensively used, and is applied to more than 45% of the TRQs that have additional conditions. In addition, the domestic purchase requirement and past trading performance requirement together account for more than 40% of those TRQs with additional conditions. The Model
* We define the TRQ fill rate of a commodity i in year t, y it , as

* = y it

Yit* . Q0

(1)

where Yit* is imports of commodity i in year t, and Q0 is the scheduled or notified quota quantity for this commodity in year t. The TRQ scheduled (notified) quota for a specific commodity is set in multilateral negotiations and predetermined before implementation of the TRQ. In practice, importers have rarely changed the notified quota quantity during our study period. Hence, the only random component in a TRQ fill rate is actual imports. Consequently, we start the model construction by modeling a countrys importing behavior. If the domestic price deviates from the world price, arbitrage opportunities should exist and result in imports. Hence, import demand, Y, is modeled as a function of the domestic price, Pd, the world price, Pw, and a vector of other exogenous demand shifters, XD,2
Y = f(Pd , Pw , XD) .

(2)

Four sets of variables are included in the exogenous demand shifters, XD, and these variables are defined in Table 1. The first two sets of demand shifters include both principal administration methods and additional conditions as per the above discussion. Three policy
Both the world price and the domestic price are included in the model because the included policy instruments can not fully account for the imperfect transmission between these two prices.
2

instrumentsthe 1st-tier tariff (
1 ), the 2nd-tier tariff (
2 ), and quota volume ( Q0 )are included in the model as the third set of demand shifters. The last set of variables includes each countrys income (Inc) and population (Pop). Because prices and import quantities are simultaneously determined, it is quite possible that some factors embodied in the random error term, eit, are also correlated with those explanatory variables representing prices. Assuming that the international market is perfectly competitive and that every importing country is simply a price taker in the world market, the world price can be treated as an exogenous variable. However, the domestic price is likely serially correlated with the random error term. To deal with this endogenous variable problem, a one-period lagged production variable is used to proxy the domestic price. Thus, net imports are estimated as a function of world price, lagged domestic supply, trade policies, and administration method. The effects of principal administration methods and additional conditions are represented by two groups of dummy variables in our specification. To avoid perfect multicollinearity, the applied tariffs method dummy is dropped. This administration method does not impose quantitative restrictions on imports and requires the least administrative effort. Therefore, this method is considered the most efficient way to administer TRQs. Choosing this dummy as the benchmark facilitates the interpretation of the results. The alternative additional administration methods variables do not cause a multicollinearity problem because more than one-half of the global agricultural TRQs are not subject to these additional requirements.

Table 1. Regressors in the Import Equation

Regressors Principal Administration Methods AT FC LD AU HI ST PG OT MX Additional Conditions DPR LA EC PT Policy Instruments In the form of dummy variables Applied tariffs First-come, first-served Licenses on demand Auctioning Historical importers Imports by state trading enterprises Producer groups/associations Other Mixed allocation methods In the form of dummy variables Domestic purchase requirements Limits on quota shares per allocation Export certificates Past trading performance

1
2 Q0
Other Regressors Pd Pw Inc Pop C E Plag

1st tier tariffs 2nd tier tariffs Quota quantity

Domestic price in terms of domestic currency World reference price in domestic currency Income Population level Individual-specific effects Random error term One-period lagged production

We also add individual specific effect variables to control for the unobserved individual heterogeneity and measurement error. This gives the following specification for TRQ fill rates:3
* yit = X '
+ c + e

=
0 +
1 Plagit +
2 Pwit +
3 AU it +
4 FCit +
5 LDit +
6 AU it +
7 HI it +
8 STit +
9 PGit +
1OTit +
11MX it +
12 DPRit +
13 LAit +
14 ECit +
15 PTit +
16 Popit +
17 Incit +
18 1it +
19 2it + ci + eit ,

(3)

The quota quantity is not explicitly included in the model, but its effect on the fill rate is embodied in the constant term.

where ci is the unobserved individual specific effect. The dependent variable, the TRQ fill rate, is censored. It is left-censored at 0 because no imports occur for some TRQs during some years either due to insufficient demand or a prohibitive in-quota tariff. It is also censored from the right because the quota is binding for some TRQs with fill rates equal to 1. As in Figure 2, the observed fill rate equals 1 for any demand curve lying from ED1 to ED3. Hypothetically, if there was no quota, a fill rate of 1 would be observed only with demand curve ED1. Excess demand curves other than ED1 would lead to imports higher than Q0 and the quota fill rate greater than 1. For instance, imports for demand ED2 in Figure 2 would occur at M2 and would result in a fill rate higher than 1, the quota instrument was not contained in the TRQ regime. Figure 2. Imports under TRQs When the Quota is Binding
P

M2 , if Q0

Pw+
2 Pd Pw+
1 Pw

B C A

ES

ED3 ED2 ED1 0

M=Q0

M2

M3

* Hence, the TRQ fill rate, y it , is a latent variable. Theoretically, the observed fill rate, yit,

can be defined as:

10

    yit =      

0 yit * 1 yit * +

if yit *  0 if 0 < yit * < 1 if 1  yit *  M3 Q0

(4)

19 2 Q0

if yit * >

M3 , Q0

Empirically, TRQ fill rates greater than 1 are censored to 1 to assure consistency among countries. All WTO members are obligated to notify their TRQ import quantities. However, notification procedures are not uniform across countries. Some countries report all imports governed by a TRQ regime, while many countries notify only imports up to the quota level, and do not report over-quota imports. Hence, TRQ fill rates are censored from both sides and confined between 0 and 1 (i.e., y it
[0,1]). To account for this critical factor, we specify a double-censored Tobit model suggested by Maddala (1983) as follows:

0  yit =  yit * 1 

if yit *
0 if 0 < yit * < 1 if 1
yit *

(5)

* is defined in equation (3). and y it

In this specification, the true values are observed only when TRQs are underfilled. The observed TRQ fill rates are 0 when no imports are reported. If agricultural TRQs are just filled or overfilled, we observe fill rates of 1. Data Description A panel data set including scheduled quota quantities, notified quantities imported, relevant inand over-quota tariffs, production, and world prices, were primarily derived from the Agricultural Market Access Database (AMAD) as updated on July 5, 2004. The information on administration methods was from a background paper by the WTO (2002). The exchange rates

11

were obtained from the International Financial Statistical Yearbook by the International Monetary Fund (2005). Other data, including population and national income, were obtained from the 2004 World Development Indicator published by the World Bank. Harmonized system (HS) codes were used as the concordance tool to map the information from different sources. In the case of changing HS codes, descriptions of HS codes were carefully inspected and the concordance was drawn based on similarities between descriptions. Our data set includes every TRQ notified by twenty-eight member countries that scheduled TRQs from 1995 to 2000.4 This time period coincides with the TRQ implementation period as part of the URAA for developed countries. To some extent, this period can be viewed as the trial period for agricultural TRQs, providing valuable information for possible reform of this trade regime. The sample descriptive statistics are reported in Tables 2 and 3. Table 2 shows that the dependent variable, the TRQ fill rate, is censored from both sides. No imports were reported for 10.2% of the 4,201 agricultural TRQs covered in this paper. At the same time, 41.8% of the covered agricultural TRQs were just filled or overfilled. This double-censored feature suggests that a two-limit Tobit model specification rather than a simple linear specification is appropriate. The majority of agricultural TRQs are employed by developed countries that can afford to protect their agricultural sector. TRQs provide rich countries with considerable flexibility in terms of managing imports. Moreover, agricultural TRQs are heavily used in the trade of politically sensitive commodities. A large number of the TRQs apply to trade in fruits and

Five additional countries also scheduled TRQs beginning in 1995 but were not included in this study. El Salvador and Nicaragua did not notify any TRQs because they did not offer quotas for any of the products on their schedules. Malaysia, Mexico and Romania only notified a few of their scheduled TRQs, for one or two years. Hence, these five countries were dropped from this study.

12

Table 2. Distribution of Agricultural TRQ Fill Rates, 1995-2000

Fill Rate(y) 0 0<y
0.1 0.1<y
0.2 0.2<y
0.3 0.3<y
0.4 0.4<y
0.5 0.5<y
0.6 0.6<y
0.7 0.7<y
0.8 0.8<y
0.9 0.9<y<1.0 1 Total
Source: Complied from AMAD.

Frequency 430 454 202 155 125 138 126 111 147 167 389 1757 4201

Percent 10.24 10.81 4.81 3.69 2.98 3.28 3.00 2.64 3.50 3.98 9.26 41.82 100.00

Cumulative Percent 10.24 21.04 25.85 29.54 32.52 35.80 38.80 41.44 44.94 48.92 58.18 100.00

Table 3. Basic Descriptive Statistics for Key Variables, 1995-2000

Variable Fill ratea 1st-tier tariffa 2nd-tier tariffa Productiona World pricea Exchange rateb Income per capitac Populationc Measurement Unit 0-1 Mean 0.65 Standard Deviation Overall 0.41 Between 0.36 Within 0.20 Overall 108.81 Between 108.30 Within 23.14 Overall 359.15 Between 218.58 Within 283.09 Overall 246.00 Between 250.43 Within 5.59 Overall 3.71 Between 3.52 Within 0.93 Overall 534.20 Between 481.66 Within 210.55 Overall 14637.38 Between 14536.58 Within 1067.14 Overall 112.65 Between 113.45 Within 1.57

61.69

147.42

Million metric tons

15.14

US$/kg

1.70

Domestic currency/US$

230.00

US$

16628.83

Millions

67.49

Number of Observations

4201

Source: a. compiled from AMAD; b. International Financial Statistical Yearbook; c. 2204 World Development Indicator.

13

vegetables, dairy products, meat products, and cereal crops. Historically, these products have received more protection than other agricultural commodities. Furthermore, agricultural TRQs are subject to high tariff protection, with an average in-quota tariff of 62%. The average overquota tariff is 147%. Such high tariff protection is not surprising if we consider why these TRQs are in place. Summary statistics for the important regressors are reported in Table 3. The standard deviation is decomposed into between and within components (see the last column of Table 3). Clearly, variation of the regressors mainly arises from variation between individual TRQs, as any variation of an individual TRQ over the years is relatively small. Estimation The pooled Tobit model without individual specific effects can be estimated by maximizing the log-likelihood function. When the unobserved effects are included, either a fixed-effects approach or a random-effects approach can be used. As the cross section dimension increases and the time dimension is fixed, the estimators of limited dependent variable models with fixed effects using panel data are, in general, inconsistent due to the incidental parameters problem (Greene 2004). The problems are most acute when the time dimension of the panel is short. 5 In contrast, the estimates of random-effects limited dependent variable models are consistent even when the length of the panel is short, if the model is specified correctly. Therefore, the individual specific variable ci enters the fill rate model (3) as a random-effects variable in this study. Assume that the random-effects variable ci is not correlated with other

Honore (1992) developed trimmed least squares estimators, a semi-parametric method, to obtain consistent estimates of a fixed-effects Tobit model in a short panel,. However, this method cannot be used to estimate the consistent coefficients of variables that lack variation over time. Hence, this method is not appropriate for our model because, principal and additional administration methods do not change over time once they are first specified.

14

regressors, and has a normal distribution and the disturbance term, eit, is also normally distributed. The traditional two-limit random-effects Tobit model is specified as:

0  yit =  yit * 1 

if yit *
0 if 0 < yit * < 1 if 1
yit *

(6)

* is defined in equation (3), and in which where y it

ci | X i ~ N (0,
c2 ),

and
eit | X , ci ~ N (0,
e2 ) .

This standard random-effects Tobit model strictly assumes the individual specific effects are exogenous from the regressor X. A more general Chamberlain-like random-effects Tobit model allows the random-effects variable ci and other regressors, X, to be correlated in a certain way (Wooldridge 2002). We assume ci is related to X in the following manner:
ci =  + X i
+ a i ,

(7)

where X i is a vector of the average of each regressor X in the group i over the time dimension and is time-invariant. Under this assumption, the Chamberlain-like model can be specified as

0  yit =  yit * 1 

if yit *
0 if 0 < yit * < 1 if 1
yit *

(8)

* =  + X it
+ X i  + ai + eit , and in which where y it

eit | X i , ci ~ N (0,
e2 )

and

15

2 ai | X i ~ N (0,
a ).

Moreover, we assume that the set of error terms, {eit}, is serially independent conditional on (Xi, ai). Hence, the Chamberlain-like random-effects two-limit Tobit model is the traditional random-effects Tobit model with an additional set of time-constant explanatory variables. Results Three modelsa simple pooled two-limit Tobit model, a standard random-effects two-limit Tobit model, and a Chamberlain-like random-effects two-limit Tobit modelwere estimated. The results are presented in Table 4. A likelihood ratio test was performed to compare the standard random-effects model with the pooled model. A Chi-square test statistic of 2,547.70 with 1 degree of freedom clearly rejects the null hypothesis that individual specific effects are not present. Therefore, the random-effects model is preferred to the simple pooled model. In the Chamberlain-like model, the time-invariant means of the continuous variables are added to the standard random-effects model. The Chi-square test statistic of 56.13 with 7 degrees of freedom indicates that the null hypothesis is rejected and that the time-invariant variables are jointly significant. Individual significance tests of the time-invariant variables show that some coefficient estimates are statistically different from zero. The results of these tests therefore indicate that the Chamberlain-like random-effects model best fits the data. Hence, the following discussion is based on that model. The estimate of the world price coefficient has a negative sign as expected but is not significantly different from zero, suggesting that the world price is not an important determinant of fill rates. This result seems a bit surprising. One possible explanation is that variation in the world commodity prices over the six year study period was relatively small and this results in the insignificant coefficient. A higher exchange rate makes imports more expensive in terms of the

16

domestic currency, discouraging imports and leading to lower fill rates.6 This negative estimate helps explain the import price story because world transactions prices of most commodities are in U.S. dollars. A one-period lagged production variable is included as the instrument for the domestic price. Its estimated coefficient has the correct sign. When domestic supply is higher, the demand for imports is lower and the fill rate decreases. But this estimated coefficient is statistically insignificant, which suggests a weak link between the domestic and the international market, implying that other factors may play a more important role in determining imports. However, production data is more aggregate than trade data for many TRQ commodities, and the aggregated data may also reduce the estimated production effect. The estimated impacts of the population and per capita GDP variables on fill rates are found to be trivial. The coefficient estimate of population is statistically different from zero only at the 10% significance level while that of income is insignificant. This result is not surprising given the short panel nature of the data. During the period under study, the standard deviations of these two variables over time are quite small (Table 3) and hence their influence on the fill rate may not be fully picked up in such a short time period. At the same time, most TRQs are used by rich countries, where population and income growth are not strong drivers of food imports. Two policy instruments, the in-quota and the over-quota tariffs, are both subject to pressure for reduction as part of the WTO trade negotiations. These two tariffs increase the import price and should reduce fill rates. Surprisingly, the coefficient estimates seem to show that neither of these two tariff rates play an important role in determining fill rates and that the

The exchange rates used in the study are defined as the amount of domestic currency that can be exchanged for one U.S. dollar. Hence, a higher exchange rate means a weaker domestic currency.

17

pass-through effect of these tariffs is weak, which implies that further tariff reductions would not sharply improve market access. Table 4. Regression Results for TRQ Fill Rate Models
Regressors AU FC HI LD MX OT PG ST DPR PT LA EC World price Exchange rate Production 1st-tier tariff 2nd-tier tariff Income Population Pooled Tobit -0.844 (12.11)** -0.243 (5.06)** -0.188 (3.80)** -0.487 (10.72)** -0.362 (6.32)** 0.103 (0.65) -0.132 (0.97) -0.099 (1.12) 0.602 (8.35)** -0.136 (2.34)* -0.022 (0.47) 0.248 (2.90)** 0.002 (0.58) 1.37e-04 (4.00)** 1.89e-05 (0.37) -0.001 (5.36)** 2.65e-04 (3.49)** 6.31e-06 (5.44)** 2.73e-04 (1.80) Random-Effects Tobit -0.589 (9.72)** -0.061 (1.09) -0.246 (5.62)** -0.328 (5.66)** -0.308 (5.71)** -0.247 (2.00)* -0.371 (4.07)** -0.359 (3.10)** 0.457 (5.50)** -0.175 (2.86)** -0.148 (2.68)** 0.102 (1.23) -0.005 (1.88) -4.10e-06 (0.12) 4.33e-05 (1.26) -4.13e-04 (2.57)* 1.75e-04 (3.20)** 3.51e-06 (2.45)* -2.90e-04 (1.96)* Chamberlain-like Random-Effects Tobit -1.096 (17.21)** -0.315 (5.31)** -0.167 (3.46)** -0.492 (9.86)** -0.162 (3.13)** -0.221 (1.73) -0.395 (4.58)** -0.806 (9.43)** 0.116 (1.66) -0.057 (1.07) 0.032 (0.69) -0.173 (2.69)** -0.003 (0.26) -2.69e-04 (4.34)** -0.001 (1.13) 0.001 (1.45) 5.12e-05 (0.64) -4.68e-07 (0.06) 0.008 (1.69)

Note: Continued on next page.

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Table 4. Regression Results for TRQ Fill Rate Models (Continued)

Regressors 1st-tier tariff (average) 2nd-tier tariff (average) World Price (average) Exchange rate (average) Production (average) Income (average) Population (average) Constant Pooled Tobit Random-Effects Tobit Chamberlain-like Random-Effects Tobit -0.002 (3.54)** 0.001 (5.82)** -0.002 (0.20) 0.001 (9.16)** 0.001 (1.16) 9.18e-06 (1.25) -0.007 (1.51) 0.792 (21.56)** -2595.07 4201

0.903 0.936 (28.09)** (23.07)** Log likelihood -3897.99 -2624.14 Observations 4201 4201 Note: 1. Absolute value of t statistics in parentheses 2. *significant at 5%; ** significant at 1% 3. AU = Auctioning, FC = First-come, first-served, HI = Historical importers, OT = Other, LD = Licenses on demand, MX = Mixed allocation methods, PG = Producer groups, ST = Imports by state trading enterprises, DPR = Domestic purchase requirement, LA = Limits on quota shares per allocation, PT = Past trading performance, EC = Export certificates.

The results from the corresponding time-invariant estimated coefficients for these two tariffs, however, prevent us from reaching such a strong conclusion. The coefficient estimate for the time-invariant average of each TRQs 1st-tier tariff is statistically significant and negative. However, changes in the in-quota tariff of each TRQ over time do not strongly influence TRQ fill rates. The dominant effect of average in-quota tariff is plausible because the annual changes in each in-quota tariffs are small since the 1st-tier tariffs were not subject to reduction during the URAA implementation period. The significance of the average in-quota tariff also indicates that some unobserved factors related to the in-quota tariff serve to reduce fill rates. For instance, strong domestic pressure for protecting a commodity can lead governments to deliberately set the

19

in-quota tariff so high that the fill rate is significantly lowered. In summary, the regression results regarding the in-quota tariff imply that further reductions of the 1st-tier tariffs will increase agricultural TRQ fill rates. On the other hand, the coefficient estimates for the time-invariant average of each TRQs over-quota tariff are positive, which at first seems counterintuitive but is plausible. For instance, an important factor, the quota rent, is closely linked to the over-quota tariffs but is not observable. A higher 2nd-tier tariff can generate a higher per unit quota rent, which tends to encourage importers to use the quota to gain windfall profits. As a result, TRQs are more likely to be filled and fill rates may go up. This result does not imply that the 2nd-tier tariff rate should be increased, however. In interpreting the impacts of the in-quota and over-quota tariffs on market access, it is worth noting that the estimated effects of tariffs could be underestimated due to the possible positive impact of fill rates on tariff levels. Tariffs and fill rates could mutually affect each other rather than one-way causation where tariffs only affect fill rates. It is well known that higher tariff rates raise import costs and thereby result in lower fill rates. However, an expected high TRQ fill rate may motivate the government to intentionally set high tariffs in order to prevent the fill rate from becoming too high. Hence, two factors may be present-the negative effect of tariffs on fill rates and the positive effect of fill rates on tariffs. The signs of the estimated impacts of tariffs on fill rates depend on the relative magnitude of these two effects. The potential presence of the positive effect has two implications for the results. First, the actual fill-rate-reducing effect of the first-tier tariff should be higher than the estimated coefficient, if fill rates also positively affect tariffs. Moreover, this possible positive effect of fill rates provides another plausible explanation for the positive estimated coefficient of the over-

20

quota tariff. The data show that the average over-quota tariff for TRQs that are just filled or overfilled is higher than that of TRQs that are underfilled, which suggests that positive causation is very possible. Hence, in addition to the quota rent story, it is possible that the positive effect of fill rates on over-quota tariffs is stronger than the negative effect, so that we observe the surprising result that a higher over-quota tariff may lead to a higher fill rate. Regarding the principal administration methods, the regression results show that administration affects the implementation of TRQs and plays an important role in determining fill rates. The coefficient estimates on all of the principal administration method dummy variables with the exception of the other method are statistically significant and have a negative sign. These results suggest that, in practice, the costs generated by administration methods are high enough to reduce fill rates. The estimation results indicate that the benchmark method, applied tariffs, has the least negative effect on market access. Under the applied tariffs method, imports are allowed in unlimited quantities at the in-quota tariffs. No quantitative component is specified under this method, so that no foreign market shares are allocated and no quota rents are generated. TRQs managed by this method are actually equivalent to simple tariffs. Hence, this administration method is transparent and the most efficient. It is surprising that the auctioning method has the largest negative (estimated) effect on market access, given that it is the second most efficient administration method in theory. However, in practice the capacity of the auctioning method to function as a price-discovery mechanism is hindered if the market is not sufficiently liquid (Skully 2001). If markets are thin, transactions costs for this method can be very high, which in turn leads to low fill rates. The different bidding systems designed by governments adopting auctioning methods can affect

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the competitiveness of bidding and thereby reduce imports. For example, Switzerlands auctions are based on a principle of maximum bid, maximum share. This auctioning system allows one group to purchase the entire import quota, and that group can then limit imports to maximize its revenue, which in turn often results in relatively low fill rates (Khorana 2004). The first come, first served (FC), license on demand (LD), and historical importer (HI) methods all belong to the quasi-market allocation group. However, their estimated impacts on market access differ because each method allocates import rights in different ways. Of the three methods, our estimates show that LD has the strongest negative influence on fill rates. Under this method, licenses are issued among applicants based on quantities requested. It is the uncertainty surrounding the actual share that a firm will realize that probably leads to low fill rates. To try to obtain a larger share, importers have an incentive to exaggerate their quota requests. Moreover, the eventual market shares from the pro rata allocation can be so small that individual importers choose not to import in order to avoid high transportation costs per unit. Hence, some quota may not be filled. The estimated negative effect of the FC method is slightly lower than that of the LD method. The FC method places a premium on timing because the timing of imports determines the applicable tariff. If an importer is caught importing over the quota, then he will incur huge costs through a prohibitive tariff, storing the product outside the border, or trans-shipping the product to another country. This inherent risk of being caught over quota is probably the main reason for the low fill rates for this method. The historical importers method has the least negative impact on fill rates of the three methods. Under this method, quotas are allocated to firms primarily based on their past market shares. The main concern over this method is its discriminatory nature. Historical suppliers are

22

given market share irrespective of whether or not they have a cost advantage and whether they even have surplus production for export. On the other hand, this method has the advantage of predictability and brings certainty into the exporters planning processes. Licensed exporters have an incentive to fill the quota to secure future market shares, which helps raise the fill rate. Compared with the applied tariffs method, the other method does not run much risk of lowering fill rates, given that the coefficient estimate for this method is only statistically different from 0 at the 10% significance level. Any discussion of the effects of this method is difficult because the definition of this method is ambiguous and detailed information is lacking. One known other method is a scheme that allocates import rights through some form of lottery. The lottery mechanism is similar to other quasi-market methods. However, it does not involve the risk of being caught over quota the way the first come first served method does. Moreover, every competitor has the opportunity of obtaining an import license, which is an improvement over the rigidity of the historical importers method. Hence, it is not too surprising that this mechanism actually performs better than quasi-market allocation methods. The negative effect of the mixed allocation method is mild. Similarly, it is difficult to provide a convincing explanation for this result, because of a lack of information. This method involves more than one administration method and no one single method is dominant. It is possible that none of the individual methods employed under this administration procedure are too restrictive, so that the combined effect on the fill rate is relatively small. Under the last two methods, the producer groups (PG) method and the state trading (ST) method, the import-sourcing decisions are made by a specific domestic group. Many factors that may have nothing to do with economic considerations are involved in import decisions in these cases and they could easily bias imports away from low-cost suppliers. The

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estimation results reveal that state trading has a large negative effect on fill rates, while the producer groups method only moderately impedes imports. Although all of the principal administration methods have negative impacts on TRQ fill rates, the magnitudes of their impacts differ. We tentatively rank the effects of each method on fill rates according to the size of the empirically estimated coefficients (see Table 5). Surprisingly, the empirical ranking is quite different from the theoretical ranking by Skully(2001). It is the auctioning method, the second best method in theory that results in the lowest fill rates of all the principal methods. The producer groups method has a medium influence on fill rates. Moreover, the most discriminatory method, the historical importers method, has a rather small impact on TRQ fill rates. Table 5. Rank of the Impacts on Fill Rates across Administration Methods
Impacts on Fill Rates Low Theoretical Ranking Market allocation methods AT AU Empirical Results AT OT MX HI FC PG LD ST AU

Medium

Quasi-market methods

FC LD HI PG ST

High

Discretionary methods

Note: AT = Applied tariffs, AU = Auctioning, FC = First-come, firs- served, HI = Historical importers, LD = Licenses on demand, PG = Producer groups, ST = Imports by state trading enterprises.

Fulfilling additional conditions places additional costs on imports and can potentially decrease TRQ fill rates. Hence, it is not surprising that export certificates (EC) and past trading performance (PT) conditions are negatively related to quota fill rates. The former condition requires export certificates in addition to import licenses so it significantly increases 24

import costs and reduces fill rates. The past trading performance condition is quite similar to the historical importers method. Under this condition, import licenses are allocated only to established importers. Given the small magnitude of the estimated impact of the historical importers method, it is reasonable that the effect of this additional condition is also insignificant. The limits on quota shares per allocation (LA) condition does not impose additional significant effects on the fill rates. The coefficient estimate on the domestic purchase requirement (DPR) condition is significant at the 10% level. This additional condition requires the purchase or absorption of domestic production of the imported product in order to gain eligibility for a share of the import quota. This requirement obviously increases costs for some firms. However, the estimation results show that this additional condition can actually promote higher fill rates, which is a bit puzzling. One possible reason for this result is that firms are perhaps more likely to commit to imports once they obtain their quota share because they are involved in the domestic industry, which leads to higher overall fill rates. Robustness of Results We estimated several additional models to test the sensitivity of our results and found our results to be rather robust.7 In the first set of these models, applied bound tariffs rather than applied base tariffs were used. In the second set of models, dummy variables for country or product that represent characteristics of each TRQ were included. The main conclusions remain valid and the results are statistically reliable. Greenes results (2004) also provide support for the robustness of our results. His results showed that, even in the extreme case in which traditional random-effects models are clearly inappropriate, they do not perform too badly. In particular, the dummy variable coefficients are essentially correctly estimated.
7

The results of these additional models are not reported here because they are similar to those in Table 4.

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Other issues could potentially weaken the robustness of our estimation results. First, the empirical analysis pertains to calendar years that may differ from crop years for some agricultural products. The discrepancy between crop and calendar years could lead to a scenario in which calendar-year imports and fill rates do not reflect domestic demand cycles. However, if the harvest is normal, the seasonality disguised by calendar-year annual data will not cause the calendar-year fill rates to differ from the crop-year fill rates, because the bias is averaged out given the time series nature of the data. But if the harvest in a particular crop year is poor, calendar-year fill rates will deviate from crop-year fill rates and may not reflect true market access in that year. In that case, dramatic fluctuations in fill rates for a specific TRQ could be observed over time. However, significant systematic fluctuations in fill rate patterns do not appear in our data set, suggesting that discrepancies between crop years and calendar years do not bias our empirical results in any significant way. In addition, this study covers only the 1995-2000 time period due to data availability. For several reasons, we believe that the estimation results based on these six years would not change much even if data for the years after 2000 were added. First, no significant trends in agricultural TRQ fill rates were observed during the study period. Moreover, the estimated coefficient for a time trend variable is statistically insignificant if it is included in the model. Furthermore, implementation of TRQs since 2000 has not changed much for developed countries because no consensus has been reached about TRQ reform in the Doha round. At the same time, implementation of TRQs in developing countries has not changed much either because the URAA implementation period for developing countries ended in 2004 and no new agreement has been reached. Summary and Conclusion

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The 1994 Uruguay Round Agreement on Agriculture (URAA) marked a historic turning point in reform of the global trading system. As part of the URAA process of tariffication, over 1,400 tariff-rate quotas (TRQs) emerged as a mechanism to manage agricultural imports. TRQs combine elements of both tariffs and quotas in a complex way. An examination of the implementation of agricultural TRQs from 1995 to 2000 confirms the a priori belief that TRQs effectively protect agricultural commodities from foreign competition. The relatively low fill rates raise an interesting question. What factors limit market access the most under TRQs and what is the best way to reform the TRQ regime to achieve greater market access? We conduct a systematic analysis to find explanations for the relatively low TRQ fill rates. Our results show that under the general TRQ regime, the linkage between the domestic and international market is weak due to many non-market factors. Imports of TRQ protected commodities do not respond well to changes in domestic production. Our results suggest that high in-quota tariffs serve to reduce fill rates, which means that further reducing in-quota tariffs will improve market access. It is surprising that we find the current over-quota tariffs have a positive effect on TRQ fill rates. But this result is most likely explained by the existence of unobserved quota rents. This does not imply that the over-quota tariffs should be left untouched. It simply means that the over-quota tariffs are not currently as relevant as the in-quota tariffs in terms of affecting market access. Reforming TRQ administration methods is a key issue in future WTO trade negotiations. Participants in the negotiations generally accept that there is no single best method for administering TRQs. However, the negotiations could potentially sort out which allocation methods should be encouraged and which should not (WTO 2004). Our empirical results suggest that all administration methods reduce market access compared to the applied tariffs method of

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quota allocation. We find that the effects of alternative administration methods on fill rates differ in practice, implying that the choice of the TRQ administration method is important. Moreover, the empirical ranking of their impacts on fill rates deviates from the theoretical ranking. We conclude that WTO negotiation efforts devoted to making agricultural TRQ administration simpler and more transparent will surely improve market access. The result that the applied tariff method is superior to other administration methods and has the least impact on market access suggests that the sooner the transitional TRQ regime is phased out and replaced by a tariff-only regime, the greater will be market access. References Abbott, P. C. 2002. Tariff-rate Quotas: Failed Market Access Instruments? European Review of Agricultural Economics, 29:109-130. Abbott, P. C., and P. L. Paarlberg. 1998. Tariff Rate Quotas: Structural and Stability Impacts in Growing Markets. Agricultural Economics, 19(3): 257-267. Anania, G., M.E. Bohman, C.A. Carter, and A.F. McCalla, ed. 2004. Agricultural Policy Reform and the WTO: Where Are We Heading?. Cheltenham, UK: Northampton, MA : Edward Elgar. Boughner, D., H. de Gorter, and I. M. Sheldon. 2000. The Economics of Two-Tier Tariff-Rate Import Quotas in Agriculture. Agricultural and Resource Economics Review, 29(1):58-69. Bureau, J.C., and S. Tangermann. 2000. Tariff Rate Quotas in the EU. Agricultural and Resource Economics Review, 29(1): 70-80. Greene, W. 2004. Fixed Effects and Bias Due to the Incidental Parameter Problems in the Tobit Model Econometric Reviews, 23(2):125-47. Herrmann, R., M. Kramb, and C. Mnnich. 2001. Tariff rate quotas and the economic impact of agricultural trade liberalization in the world trade organization. International Advances in Economic Research, 7(1):1-19. Honore, B. 1992. Trimmed LAD and Least Squares Estimation of Truncated and Censored Regression Models with Fixed Effects. Econometrica, 60 (3):533-65.

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International Agricultural Trade Research Consortium. 2001. Agriculture in the WTO: Issues in Reforming Tariff-Rate Import Quotas in the Agreement on Agriculture in the WTO. Commissioned Paper 13, IATRC, University of Minnesota. International Monetary Fund. 2005. International Financial Statistical Yearbook 2004. IMF, Washington DC. Khorana, S. 2004 Tariff Rate Quotas: A Market Access Barrier for Developing Countries Products? The Case of Switzerland.www.aes.ac.uk/downloads/conf_papers_04/Khorana.pdf. Maddala, G. S. 1983. Limited Dependent and Qualitative Variables in Econometrics. New York: Cambridge University Press. Monnich, C. 2003. Tariff Rate Quotas: Does Administration Matter? Paper presented at the International Conference on Agricultural Policy Reform and the WTO: Where Are We Heading?, Capri, Italy, June 23-26. Organization for Economic Cooperation and Development. 2002. Agriculture and Trade Liberalisation: Extending the Uruguay Round Agreement. Paris OECD. Podbury, T. and I. Roberts. 1999. WTO Agricultural Negotiations: Important Market Access Issues., ABARE Research Report 99.3, Canberra. Skully, D. 2001. Economics of Tariff-Rate Quota Administration: Economic Analysis of TRQ Administrative Methods. Economic Research Service/USDA. http://www.ers.usda.gov/publications/tb1893/tb1893d.pdf. United Nations, Food and Agriculture Organization. 2000. Multilateral Trade Negotiations on Agriculture-a Resource Manual/Agreement on Agriculture, Rome. http://www.fao.org/documents/show_cdr.asp?url_file=/docrep/003/x7353e/x7353e05.htm. Wooldridge, J. 2002. Econometric Analysis of Cross Section and Panel Data. Cambridge, Massachusetts: MIT Press. World Bank. 2004. 2004 World Development Indicator. World Bank, Washington DC. World Trade Organization. 2000. Tariff Quota Administration Methods and Tariff Quota Fill. Background Paper by the Secretariat, G/AG/NG/S/8, May. ____. 2001. Tariff Quota Administration Methods and Tariff Quota Fill, Revision. Background Paper by the Secretariat, G/AG/NG/S/8/Rev. 1, May. ____. 2002. Tariff and Other Quotas. Background Paper by Secretariat, TN/AG/S/5, 22 March. ____. 2004. WTO Agricultural Negotiations: the Issues, and Where We Are now. December 1. http://www.wto.org/english/tratop_e/agric_e/agnegs_bkgrnd_e.pdf.

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____. 2005. Tariff Quota Fill. Note by the Secretariat, TN/AG/S/20, 4 July. Appendix. WTOs Definition of Principal Administration Methods Administration Methods
Applied Tariffs (AT)

Description
No shares are allocated to importers. Imports of the products concerned are allowed into the territory of the Member in unlimited quantities at the in-quota tariff rate or below. Importers' shares are allocated, or licenses issued, largely on the basis of an auctioning or competitive bid system. No shares are allocated to importers. Imports are permitted entry at the in-quota tariff rates until the tariff quota is filled; then the higher tariff automatically applies. The physical importation of the good determines the order and hence the applicable tariff. Importers' shares are allocated, or licenses issued, principally in relation to past imports of the product concerned. Importers' shares are generally allocated, or licenses issued, in relation to quantities demanded and often prior to the commencement of the period during which the physical importation is to take place. This includes methods involving licenses issued on a first-come, first-served basis and those systems where license requests are reduced pro rata where they exceed available quantities. Import shares are allocated entirely or mainly to a producer group or association which imports (or has direct control of imports undertaken by the relevant Member) the product concerned. Import shares are allocated entirely or mainly to a state trading entity which imports (or has direct control of imports undertaken by intermediaries) the product concerned. Administration methods which do not clearly fall within any of the above categories. Administration methods involving a combination of the methods as set out above with no one method being dominant. Tariff quotas for which no administration method has been notified.

Auctioning (AU)

First-come, First-served (FC)

Historical Importers (HI)

Licenses on Demand (LD)

Producer Groups (PG)

State Trading Entities (ST)

Other (OT)

Mixed Allocation (MX)

Non-specified (NS)

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