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Weekly UpdatesViews on the applicability of quantitative trade policy models differ widely. Critics often point to the problem of policy aggregation. For example, Sumner (1993) argues that policy models are too aggregated and may be harmful to the policy debate. Meilke and de Gorter (1996) contend that quantitative analyses are "woefully inadequate" when trade policy negotiations intensify into sensitive product lines. Gardner (1993) claims that computable general equilibrium (CGE) models have not been illuminating because key elements of the proposals dealt with nonstandard policy instruments (i.e., tariff-rate quotas (TRQs)). Bureau and Salvatici (2003) note that differences in methods of aggregating protection is one of the main reasons why policy results are fundamentally different between models analyzing an almost identical set of liberalization scenarios. (1)
In this article, we illustrate a methodology to deal explicitly with the issue of policy aggregation, particularly when TRQs are present and administration procedures differ across countries and product varieties. More specifically, a highly disaggregated, export-differentiated, "tariff line" policy model calibrated to 2001 protection levels is developed as a mixed-complementarity problem (MCP) to investigate bilateral and multilateral TRQ reform options using the heavily protected U.S. specialty cheese import market as our case study. (2) The MCP framework (Rutherford 1995) enables us to trace out the entire path of TRQ liberalization as exporters move through different regimes. We focus on in- and out-of-quota imports, quota rents, composite imports, and import prices as TRQ liberalization progresses. This enables us to rank the effectiveness of four TRQ liberalization strategies.
TRQ liberalization in U.S. dairy is complex because there are two tariffs, a quota, three possible regimes, and a complex set of quota administration procedures. U.S. specialty cheese quota administration can be country specific, through designated quota licenses, or on an "any-country" (i.e., most favored nation (MFN)) basis across very disaggregate and heterogeneous tariff lines. Thus, effective analysis of TRQs requires manipulating them at the "tariff line."
Previous studies investigating the impact of TRQs typically focus on complete liberalization because of the difficulty in handling regime changes (Cox et al. 1999; Lariviere and Meilke 1999; Elbehri et al. 2004; van der Messenbrugghe, Beghin, and Mitchell 2003; Langley, Samwaru, and Normile 2006). Moreover, TRQ administration methods that differ by country and variety at a very detailed product level are not amenable to aggregation for use in many quantitative policy models. As Stillman (1999) notes: "It would be interesting to see an empirical application of dairy products limited by TRQs in the U.S. to identify what level of quotas and tariffs are necessary to cause an increase in global trade" (p. 5, italics added). This study is the first of its kind to highlight the interaction between country-specific and MFN TRQ administration methods in a quantitative framework. (3)
U.S. Dairy Trade and Protection
In 2001, U.S. dairy imports amounted to $1.5 billion dollars and accounted for the largest sectoral share of agricultural imports (Nicholson and Bishop 2004). The largest class of U.S. dairy imports in 2001 is cheese, which accounts for 59% of the total value of dairy imports at the HS4-digit level. (4) At the HS6-digit level, a sharper picture emerges. Over 50% of U.S. dairy imports by value are specialty cheeses (HS 040690). (5) Together, the European Union (EU), New Zealand, Australia, Argentina, and Canada supplied over 95% (90) of U.S. specialty cheese (total dairy) imports in 2001 with EU countries accounting for the largest share.
Figure 1 summarizes 2001 protection levels in U.S. dairy taken from the Market Access Maps data set (MAcMap) (Bouet et al. 2004). The length of the bar depicts the simple average applied tariff rate, which is composed of an ad valorem tariff and the ad valorem equivalent (AVE) of specific tariffs. The United States applies specific lad valorem) tariffs on twenty-two (fifteen) out of twenty-four tariff lines. What is notable in figure 1 is that the United States has established TRQs on eighteen dairy product lines.
TRQs were introduced in the Uruguay Round (UR) as a compromise for countries seeking additional policy flexibility after the conversion of nontariff barriers into bound tariff equivalents (Abbott and Morse 2000; Boughner, de Gorter, and Sheldon 2000). (6) TRQs combine quantitative restrictions and tariffs. Exporters face a lower in-quota tariff when import demand is below the quota level (regime 1). When import demand is stronger but the out-of-quota tariff is prohibitive, the TRQ is similar to a de facto quota (regime 2). Quota rents can accrue to the importing or exporting country or both depending on the method of TRQ administration. When import demand is sufficiently strong, imports can occur in unlimited quantities but a much higher out-of-quota tariff applies on shipments above the quota level. However, imports up to the quota level face a much lower tariff rate. Thus, the problem is who gets the right to supply under the quota?
This has led to a complex web of quota administration methods in U.S. specialty cheese imports. (7) Specialty cheese imports that enter under the quota are subject to licensing requirements (IATRC 2001). (8) Prior to the UR, specialty cheese quotas were allocated primarily by designated (i.e., country-specific) licenses. After the UR, however, the United States introduced MFN, or "any-country" licenses for quota. The newly created MFN quota was a strategic choice because it helped increase its market access commitments agreed to during the UR. Thus, further MFN quota expansion may be an important part of future TRQ liberalization in U.S. dairy.
[FIGURE 1 OMITTED]
One of the contributions of this article is to identify some important interactions between existing country-designated quotas and newly created MFN (i.e., any-country) quota.
The Subsector Dairy Model
Dairy products are differentiated by country of origin (Armington 1969). In what follows, g denotes one of twenty-four HS6-digit dairy products; d denotes final or intermediate demand segments; and r and s index source and destination regions, respectively. (9)
Subsector dairy products are produced using a constant elasticity of transformation (CET) function that permits dairy capacity to be shifted between twenty-four HS6-digit products: (10)
(1) [Y.sub.r] = [([summation over (g)] [([[theta].sup.Y.sub.g,r] [P.sup.Y.sub.g,r]).sup.1+[gamma]]).sup.1/1+[gamma]]
where [Y.sub.r] is the CET unit revenue function that determines the responsiveness of individual product supply to price, [[theta].sup.Y.sub.g,r] is the CET share parameter, and [gamma] is the elasticity of transformation.
Market clearing ensures subsector output is sufficient to cover demand:
(2) [MATHEMATICAL EXPRESSION NOT REPRODUCIBLE IN ASCII].
The expression on the left-hand side of (2) represents production activity, where [X.sup.Y.sub.g,r] is the value of subsector output, and PrY is the CET unit revenue function at the industry (dairy sector) level. The first term on the right-hand side of (2) represents domestic demand activity ([X.sup.D.sub.g,r]). The variable [t.sup.D.sub.r] ([[bar.t].sup.D.sub.r]) is the (benchmark) tax rate on domestic goods and [sigma] is the elasticity of substitution between domestic goods. The second term is the activity level for export demand; [X.sup.EX.sub.g,r,s] is the activity level of subsector bilateral trade, [M.sub.g,s] denotes subsector imports into region s, and [[sigma].sub.M] is the elasticity of substitution between imports.
We introduce several bilateral and one global MFN TRQ for specialty cheeses. Equilibrium in tariff-quota trade implies zero profits after appropriate distribution of quota rents. Following the MCP convention (Rutherford 1995), we use perp notation ([perpendicular to]) to signify complementarity conditions. The zero-profit condition for in-quota trade ([X.sup.IQ]) is
(3) [X.sup.IQ.sub.SC,r,s] [greater than or equal to] 0 [perpendicular to] [P.sup.X.sub.SC,r,s] - [P.sup.Y.sub.SC,r] [T.sup.in.sub.g,r,s] - [q.sup.rent.sub.g,r] [less than or equal to] 0
where [T.sup.in.sub.g,r,s] denotes the power of the in-quota trade cost between r and s, including taxes/subsidies and transport margins. For [X.sup.IQ.sub.SC,r,s] [greater than or equal to] 0 to hold with strict inequality, [P.sup.X.sub.SC,r,s] [less than or equal to] [P.sup.Y.sub.SC,r] [T.sup.in.sub.g,r,s] + [q.sup.rent.sub.g,r] must hold with strict equality. Thus, the complementarity condition states that either [X.sup.IQ.sub.SC,r,s] or [P.sup.X.sub.SC,r,s] - [P.sup.Y.sub.SC,r] [T.sup.in.sub.g,r,s] - [q.sup.rent.sub.g,r] must equal zero such that [X.sup.IQ.sub.SC,r,s] [sup.*]([P.sup.X.sub.SC,r,s] - [P.sup.Y.sub.SC,r] [T.sup.in.sub.g,r,s] - [q.sup.rent.sub.g,r]) = 0. In the case of regime 2 (pure quota regime), quota rents ([q.sup.rent.sub.g,r]) precisely exhaust the difference between the domestic supply price in the source region ([P.sup.Y.sub.SC,r]) and the tariff-inclusive import price ([P.sup.X.sub.SC,r,s]) once in-quota imports hit the quota level. In other words, [q.sup.rent.sub.g,r] is a slack variable that takes on value once [X.sup.IQ.sub.SC,r,s] hits the quota level denoted [X.sup.UP.sub.SC,r,s] which is country specific:
(4) [q.sup.rent.sub.g,r] [greater than or equal to] 0 [perpendicular to] [X.sup.IQ.sub.SC,r,s] [less than or equal to] [X.sup.UP.sub.SC,r,s]
where [q.sup.rent.sub.g,r] > 0 can only occur if [X.sup.IQ.sub.SC,r,s] [less than or equal to] [X.sup.UP.sub.SC,r,s] holds with strict equality. Quota rents are assumed to accrue to the source region (r).
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