Theoretical Analysis of Theoretical Analysis of Special SafeguardsSpecial Safeguards

Kyle W. Stiegert: UW-MadisonShinichi Taya: OECD, JMA

WTO-Special Safeguards WTO-Special Safeguards (SSG) (SSG) Became a policy tool in the Uruguay

Round (1992) negotiations Originated as outcropping of the

tariffication process for agriculture.Allowed for those nations that

tariffied quotas. Provides for an add-on tariff when

quantity or price trigger is hit.

SSGs ContinuedSSGs ContinuedPurpose was to protect fragile

rural economies now opened up to free trade.

Bit of an odd policy tool with freedom to set triggers and protectionist strategies for just a few nations.

Fundamentally unfair but used to push other nations to make greater commitments.

SSGsSSGs SSMs SSMs However, only 39 nations allowed access

to the SSG-mostly developed nations.

By 2005, WTO had risen to 148 Members

SSGs Became a rising source of tension.

Led to proposed SSMs for developing nations.

Special Safeguard Special Safeguard MechanismsMechanismsSimilar Mechanism to SSGKey issues from economic

viewpoint is:--Tariff rate (t)--Trigger level ( ) Principally for developing nation

contingent.

or pq

Extant Literature Extant Literature Hallaert (2005) critical of SSG

overuse.

Jales (2005) detailed information and useful SSM case study of Jamaica

Valdes and Foster (2005), Somwaru and Skully (2005), and Grant and Meilke (2006). Simulation models to show how trigger functions and provide welfare assessments.

Purpose of the StudyPurpose of the StudyTo evaluate the SSM policy

technology under imperfect competition.

Provide relevant findings about use of the SSM in various oligopoly settings.

Investigate strategic opportunities afforded firms with SSMs in play.

Why Imperfect Why Imperfect CompetitionCompetitionPresence of large state traders

(Canadian Wheat Board, AWB, ABB).

Large multinational agribusiness firms (ADM, Cargill, etc.)

SSMs directed toward small and very small economies which can be served by one firm.

Four Models of DuopolyFour Models of DuopolyQuantity Setting Games, Linear

DemandBase outcome is the standard

Cournot Equilibrium.Model 1: 2 foreign firmsModel 2A: One foreign and one

domesticModel 2B: 2A + storageModel 2C: 2A + domestic firm can

import

Model 1: Basic FeaturesModel 1: Basic FeaturesTwo foreign firmsNo domestic industryPerfect substitutes (product

homogeneity)Tariff level and trigger known

Firm 1: Regions of Activity:Firm 1: Regions of Activity:

(a) firm 2 triggers tariff: no decision for (a) firm 2 triggers tariff: no decision for Firm 1Firm 1

(b) Easy: choosing period 1 optimum (b) Easy: choosing period 1 optimum does not trigger the tariffdoes not trigger the tariff

(c) Interesting outcomes. (c) Interesting outcomes.

12a c

qb

0 q

21q

(a) (c) (b)

Relative Position of Cournot Relative Position of Cournot EquilibriumEquilibrium

Fig 1:

B D

A

21q

11q

21q 12

a cq

b

1 2 1 22 23 3( , )a c c a c cb bCournot

C

E

F

Panel A

Relative Position of Cournot Relative Position of Cournot EquilibriumEquilibrium

Figure 1:

F B D

E

1 2 1 22 23 3( , )a c c a c cb bCournot

21q 21q

11q

12a c

qb

C

A

Panel B

Figure 2:

H

H’ I’

I

G’

D F B

C

/ 2q

11q

21q

45

Panel A

Cournot ( , )c cq q

11q

21q 2

q cq

cq

A

E

G

Figure 2:

H’

I

G’

H

B F D

C

E

21q cq 2

q

11q

21q

45

Panel B

Cournot ( , )c cq q

/ 2q

cq

11q

A G

I’

Figure 2:

H’ I’

I

G’

G

B F D

C

E

21q cq 2

q

11q

21q

45

Panel C

Cournot ( , )c cq q

/ 2q

cq

11q

A

H

E

Figure 3

a c

1

2M

a cq

b

Case 1 (Non-binding q , tariff)

Case 2 (Non-binding q , tariff),

(Binding q , no tariff)

Case 3 (Binding q , no tariff)

2

9

a c

b

C

D

B

q

t O

A 2

3

a c

b

1

3

a c

b

C Cq q

F

G

M

Major FindingsMajor FindingsSetting high SSM tariffs benefit

foreign firms by inducing them to cut imports.

Foreign firms lose when tariffs are triggered.

Substitute industry benefits, but consumers lose.

Government revenue increase when tariff is triggered.

Model 2AModel 2AOne Foreign Firm (Firm 1)One Domestic Firm (Firm 2)Trigger and Tariff only driven by

Firm 1 level of trade. Firm 2 benefits when SSM is

triggered or when it binds period 1 imports.

Figure 4:

Panel A

D

Cournot

C

B’

21q =

1 2a c

qb

( )2

3

L t

b

q +( )

3

L t

b

1

2

a c

b

1a c

b

q

1 2a c

qb

11q

21q

A

B Q*

E

O C’

Figure 4:

Panel B

21q =

1 2a c

qb

( )2

3

L t

b

q +( )

3

L t

b

1

2

a c

b

1a c

b

q

11q

21q

1 2a c

qb

Cournot

A

B C Q*

F

E

D

G

Figure 4:

1

2

a c

b

1a c

b

Panel C

21q =

1 2a c

qb

( )2

3

L t

b

q +( )

3

L t

b

q

1 2a c

qb

11q

21q

Cournot

A

B C

E

D

F

Figure 5:

Case 1 (Binding q , no tariff)

Case 2 (Non-binding q , tariff),

(Binding q , no tariff) Case 3 (Non-binding q , tariff)

q

t O

1 22

3

a c c

b

1 22

2

a c c

Major Findings from 2AMajor Findings from 2AFairly easy to bind imports and

not trigger the tariff. To trigger the tariff, trigger level

will have to be very restrictive, and the tariff rate will have to be low.

Presence of multiple equilibria case makes for uncertain outcome.

Impact of StorageImpact of StorageStorage only occurs when tariff is

triggered.Triggering the tariff now more likely

when in case 1 (model 2A). Government loses some revenue

due to strategic storage and tariff avoidance.

SSM complicates trade and may lead to volatile import surges near the trigger level.

Impact of Import FeatureImpact of Import FeatureForeign firms strategic

advantage severely curtailed. Domestic firm holds all the cardsTariff triggered or not triggered

as a best response to firm 2 (domestic) decision.

Domestic firm may curtail production to trigger the tariff.

ConclusionsConclusionsSSM in the presence of oligopoly

generates perverse and unpredictable outcomes for home nations.

Depending on the setting, tariffs can be triggered quite often or hardly ever.

Domestic firm is usually protected either through tariff avoidance behaviour or from tariff triggering.

Added source of government revenue.