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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.

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.

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:

• Agriculture in the Uruguay Round
• Export Subsidies
• Domestic Support Policies
• Green Box Policies and the Environment
• Market Access: Tariffication and Tariff Reduction

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