AoA Issues Series: Tariff-Rate Quota Administration
David Skully USDA, Economic Research Service
Tariff-rate quotas (TRQ's)
are two-level tariffs. TRQ's were adopted during the Uruguay
Round as a method for providing greater access to markets with high
tariffs. A limited volume of imports is allowed at the lower tariff,
and all subsequent imports are charged the higher tariff. If
the demand for imports at the low tariff is greater than the volume
allowed by the TRQ, then imports must be rationed. Of the many
rationing methods currently allowed by the World Trade Organization
(WTO), some are more likely than others to bias trade unnecessarily. The
issue is whether the WTO should discipline some administrative methods,
and if so, which ones.
Background
Before the conclusion of the Uruguay Round many governments
supported domestic agricultural prices with a combination of domestic
supply controls and quantitative import controls. The Uruguay
Round Agreement on Agriculture (AoA), however, prohibits quantitative
restrictions (such as quotas) of agricultural trade. Member
nations with bans and quotas in place at the time the AoA was signed
were allowed to adopt TRQ's as a transitional instrument. The
intent is that all TRQ's eventually be transformed into simple tariffs.
What is a TRQ?
A tariff-rate quota is a quota for a volume of imports at a lower
tariff. After the quota is reached, a higher tariff is applied
on additional imports. Suppose a country replaces its quota
of 10,000 tons with a TRQ of 10,000 tons. The TRQ appears to
differ little from the earlier "absolute" quota. The
distinction is that under an absolute quota it is legally impossible
to import more than 10,000 tons, whereas under a TRQ, imports can
exceed 10,000 tons but a higher, over-quota
tariff is applied on the excess.
In principle, a TRQ provides more market access to imports than
a quota. In practice, however, many over-quota tariffs are
prohibitively high and effectively exclude imports in excess of
the quota. It is possible to design a TRQ so that it reproduces
the trade-volume limit of the quota it replaces.
A TRQ has three components:
- a quota that defines the maximum volume of imports charged the
in-quota tariff,
- an in-quota tariff, and
- an over-quota tariff. The values of these three components
are part of the AoA and are defined in member nations' tariff
schedules. If the TRQ is scheduled to be liberalized, the
rates at which the quota is to increase or the tariffs to decrease
are also specified.
The illustration demonstrates how TRQ's influence the incentives
to trade. The two-level tariff results in a stepped import
supply function. Imports within the quota are charged the lower
tariff; over-quota imports are charged the higher tariff. This results
in a vertical step when the quota volume is filled. The figure
illustrates a case in which domestic demand is sufficient to import
the full quota volume at the in-quota tariff, but the over-quota
tariff is prohibitive. That is, the domestic price is below
the price of imports with the over-quota tariff, thus there is no
incentive to import beyond the quota. Were domestic demand
to increase, it might become profitable to import at the over-quota
tariff. This opportunity would not be possible with a standard,
absolute quota.
TRQ administration involves distributing the rights to import at
the in-quota tariff. Whoever obtains such rights can make a
risk-free profit of the difference between the domestic price, and
the world price inclusive of the in-quota tariff. The area
labeled RENT' in the figure represents the value of these
profitable opportunities. Rents indicate that the demand to
trade within the quota is greater than the supply of quota; thus
the necessity to ration or administer the TRQ.
How are TRQ's Administered?
The WTO identifies seven principal methods of TRQ administration. Member
nations are to notify the WTO whether and how the tariff quotas
listed in their tariff schedules are administered. Of the 1,368
tariff-rate quotas notified to the WTO in 1999, more than half were
not enforced and imports entered at the in-quota rate. However,
the over-quota tariff can be reapplied at will. Of the 726
TRQ's that were enforced, license on demand was the most common
method of administration, accounting for almost half of enforced
TRQ's.
Table 1. TRQ Administration |
Method of TRQ Administration |
Explanation |
Percent of all TRQ's |
Applied tariff |
Unlimited imports are allowed
at or below the in-quota tariff rate; that is, the quota
is not enforced. |
47% |
License on demand |
Licenses are required to import
at the in-quota tariff. If the demand for licenses is
less than the quota, this system operates as a first-come,
first-served system. Usually, if demand exceeds the quota,
the import volume requested is reduced proportionately
among all applicants. |
25% |
First-come, first-served |
The first quota units of imports
to clear customs are charged the in-quota tariff; all
subsequent imports are charged the over-quota tariff. |
11% |
Historical |
The right to import at the
in-quota tariff is allocated to firms on the basis of
their trading volume in previous periods. |
5% |
Auction |
The right to import at the
in-quota tariff is auctioned. |
4% |
State trader or producer group |
The right to import in-quota
is granted wholly or primarily to a state trading organization
or an organization representing domestic producers of
the controlled product. |
2% |
Mixed |
A combination of two or more
of the above methods. |
4% |
Other or not
specified |
Methods that do not correspond
to the above methods or are not specified in WTO notifications. |
2% |
|
Which Countries Have TRQ's?
Of the 137 WTO members, 37 countries notified TRQ's to the
WTO in 1999. Notified and enforced TRQ's are concentrated in
a few countries. In both cases, 6 countries account for more
than half the TRQ's, and 10 countries account for two-thirds. Notified
but unenforced TRQ's are merely applied
tariffs. However, they pose a potential trade problem because
the member country can, at any time, choose to enforce them.
Rank
|
TRQ's Notified
|
Enforced
|
TRQ's Enforced
|
Applied as tariff
|
1
|
Norway
|
232
|
19
|
EU
|
87
|
0
|
2
|
Poland
|
109
|
35
|
Hungary
|
68
|
2
|
3
|
Iceland
|
90
|
12
|
South Korea
|
63
|
1
|
4
|
EU
|
87
|
87
|
United States
|
54
|
0
|
5
|
Bulgaria
|
73
|
45
|
Bulgaria
|
45
|
28
|
6
|
Hungary
|
70
|
68
|
Poland
|
35
|
74
|
7
|
Colombia
|
67
|
34
|
Colombia
|
34
|
33
|
8
|
South Korea
|
64
|
63
|
South Africa
|
25
|
28
|
9
|
Venezuela
|
61
|
2
|
Czech Republic
|
24
|
0
|
10
|
United States
|
54
|
54
|
Slovakia
|
24
|
0
|
|
subtotal
|
907
|
419
|
subtotal
|
459
|
166
|
|
all others
|
461
|
307
|
all others
|
267
|
476
|
|
Total
|
1368
|
726
|
Total
|
726
|
642
|
The countries with the greatest number of TRQ's are concentrated
among relatively wealthy economies with historically protectionist
agricultural policies. In addition, several Central and Eastern
European countries have adopted TRQ's to ease the transition of
their agricultural sectors into a market-oriented economy.
Issues for Agricultural Trade Negotiations
Two issues to be resolved in agricultural negotiations are TRQ
administration and liberalization. Liberalization concerns changing
the tariff and quota levels of existing TRQ's. Questions about liberalization
are likely to revolve around whether minimum-access levels (within
quota) should be expanded and whether and how to reduce tariffs.
TRQ administration relates to how an importing country allocates
the right to import at the in-quota tariff rate.
TRQ administration. Tariff quota administration is
fundamentally a rationing problem. The issue for TRQ administration
is to determine whether some ways of rationing are better than others. The
AoA agreement advocates two criteria for judging whether tariff
quotas are properly administered—quota fill and distribution
of trade.
- Quota fill requires that imports of the in-quota
volume be allowed if market conditions permit. Quota fill implies
a two-part test. First, was the quota filled? Second, if not,
did market conditions permit imports? In practice, the simplest
second-stage test is to determine whether the importer's domestic
price is less than the world (border) price plus the in-quota
tariff. If it is, there is clearly no demand for imports. If the
importer's domestic price exceeds the border price plus the tariff
and the quota does not fill, then one may infer that the TRQ may
have been inappropriately administered. The issue is to identify
the methods of allocation most likely to result in quota underfill.
- Distribution of trade concerns whether the distribution
of trade among countries supplying the TRQ trade resembles the
distribution that would result in the absence of the quantitative
restriction. The GATT principle of nondiscrimination asserts that
trade shares should be determined by the relative efficiency of
suppliers and not by alternative, discriminatory criteria. The
issue is to identify the methods of allocation most likely to
result in a biased distribution of trade.
If some methods are likely to result in underfill or in a biased
distribution of trade, then there may be a case for prohibiting
these methods.
A sample of on-going arguments regarding TRQ administration follows.
- Assigning the in-quota import rights to a state trading organization
or domestic producer group may not be consistent with nondiscrimination
if these organizations favor certain suppliers on noneconomic
grounds.
- Historical allocation perpetuates past patterns of trade even
though market conditions may have changed. This may increase
the risk of underfill and biased distribution.
- First-come, first-served allocation can result in a surge of
imports at the opening of the quota season. This may risk
disrupting markets and biasing the distribution of trade.
- Auctions are advocated because of their economic efficiency,
but there are concerns that auctioning quota rights amounts to
an increase in the in-quota tariff and that bidding can be manipulated.
TRQ liberalization. TRQ's can be liberalized by reducing
the over-quota tariff, increasing the quota, or both. In the context
of WTO negotiations, TRQ liberalization is a separate issue from
TRQ administration. (See the issue paper on Tariffication
and Tariff Reduction.)
Other Papers in This AoA Issues Series:
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