TWN Info Service on WTO and Trade Issues (Feb10/11)
22 February 2010
Third World Network

Price-based, simple-to-use SSM indispensable, asserts G33
Published in SUNS #6863 eated 15 February 2010 

Geneva, 12 Feb (Kanaga Raja) -- The price-based Special Safeguard Mechanism (SSM) "is an indispensable trade remedy instrument" for most developing countries, and one that must be simple to use and be effective "for ensuring food security, livelihood security, and rural development of the millions of farmers, mostly small and marginal, in the developing world," the Group of 33 (G33) asserted in a paper circulated on Thursday at the World Trade Organization.

In its new technical paper (JOB/AG/5), the G33 voiced its concern that despite the mandate of the Hong Kong Ministerial Declaration on the Agriculture chapter of the Doha Development agenda that developing countries "shall have recourse" both to volume-based and price-based SSM, this issue of price-based mechanism has remained unaddressed.

According to the Hong Kong Ministerial Declaration, these are necessary Special and Differential Treatment (S&DT) instruments, and "the Doha Round must deliver on this basic S&DT requirement in order to fulfill its development mandate," the G33 reiterated.

The present modalities text, the G33 complained, includes several restrictive conditionalities that would make the instrument not only ineffective but also inoperable.

The G33 recently submitted a comprehensive 14-page paper aimed at refocusing the debate on the SSM, as well as two technical papers on specific issues relating to the SSM, namely, price and volume cross-check conditionalities and seasonal products. (See SUNS #6856 and #6861.)

In its latest technical paper, the G33 highlights some issues and concerns on the price-based SSM, and provides some analysis and technical contributions for its design and structure.

According to the paper, the Hong Kong Ministerial Declaration stipulates that developing countries shall have recourse to both "volume-based and price-based SSM". These are necessary Special and Differential Treatment (S&DT) instruments, along with the Special Products (SP), for ensuring food security, livelihood security, and rural development of the millions of farmers, mostly small and marginal, in the developing world.

"The Doha Round must deliver on this basic S&DT requirement in order to fulfill its development mandate," stressed the G33.

The price-based SSM, the G33 said, is an indispensable trade remedy instrument for most developing countries, and it is not surprising that all the developing countries that opted to use their entitlement to the Special Safeguard Provisions (SSG), over the period 1995-2004, invoked the price-based SSG.

The price-based measure is better suited to address the price sensitivities of domestic producers to low-priced and/or subsidized exports (dumped into their markets) which contribute to the volatility in the world agricultural markets. Developing countries will also be more susceptible to external shocks as trade liberalization deepens, the paper adds.

The paper draws attention to five major areas in the Chairman's revised draft modalities text (TN/AG/W/4/Rev. 4) that it says require immediate attention and resolution: (a) access to and application of the SSM (triggers and cross-check); (b) remedies and pre-Doha cap; ( c) "MFN-trade only"; (d) en route shipment; and (e) ad valorem price-based SSM option.

These areas need to be addressed with a view to ensuring that the SSM is operational, accessible, and effective for all developing countries, the G33 further stressed.

Access to the SSM is the first major step in addressing import price volatility, says the paper. The reference price and trigger threshold, among other operational elements, play the critical role in determining access to the SSM, the frequency of access to the SSM, as well as the remedy.

The 85% trigger in paragraph 135 of the Chairman's text, the G33 said, is very low as this can adversely affect access to and effectiveness of the SSM.

(Paragraph 135 of the Chair's text states: "As regards the price-based SSM, it shall be applicable where the c. i. f. import price of the shipment entering the customs territory of the developing country Member, expressed in terms of its domestic currency falls below a trigger price equal to 85 per cent of the average monthly MFN-sourced price for that product for the most recent three-year period preceding the year of importation for which data are available, provided that, where the developing country Member's domestic currency has at the time of importation depreciated by at least 10 per cent over the preceding 12 months against the international currency or currencies against which it is normally valued, the import price shall be computed using the average exchange rate of the domestic currency against such international currency or currencies for the three-year period referred to above.")

A number of studies support its view, said the G33, highlighting for instance, a South Centre simulation of import data from 56 developing countries for the period 2004-2007 that demonstrates that even using the 100% trigger (the reference price) could effectively restrict access to the SSM to about 20% of all agriculture tariff lines. If the trigger is brought down to 85%, access is further reduced to 12% of agriculture tariff lines of these countries.

Based on the above study, the principle of "universal access" of all agricultural tariff lines to the SSM ("no a priori exclusion") in paragraph 132 of the Chairman's text will be restricted by: (I) the reference price; and (Ħi) further by the trigger threshold.

(Paragraph 132 of the Chair's text states: "The SSM shall have no a priori product limitations as to its availability, i. e. it can be invoked for all tariff lines in principle. A price-based and a volume-based SSM shall be available. In no circumstances may any product be, however, subject to the simultaneous application of price - and volume-based safeguards. Nor shall there be application of either of these measures if an SSG, a measure under GATT Article XIX, or a measure under the Agreement on Safeguards is in place.)

Looking at the incidence of triggering, an International Centre for Trade and Sustainable Development (ICTSD) study covering 27 agricultural products for six developing countries during the period 2000-2005 found that at a 100% trigger, the SSM was triggered in 17% of the 72 months. At 90% of the reference price, access was reduced to 13% of the 72 months. And if the trigger was set to 80%, access to the SSM was brought down to 9% of the 72 months.

Similarly, according to the G33 paper, a study by the UN Food and Agriculture Organization (FAO) in 2006 covering 10 commodities in "which import surges are reported to be widespread in recent years", during the period 1986-2004 found that "any level beyond 10% or so will compromise the effectiveness of the reference price, for both triggers and remedies" and that a "5% threshold appears reasonable for maintaining the effectiveness of the trigger."

The volume "cross-check" outlined in Paragraph 137 of Rev. 4 (Chair's text) adds another layer of restriction before the price-based SSM can be invoked. The effects of a very low trigger threshold (e. g. 85% and below) when combined with the mandatory cross-check further constrains access to the SSM.

(Paragraph 137 states: "Developing country Members shall not normally take recourse to the price-based SSM where the volume of imports of the products concerned in the current year is manifestly declining, or is at a manifestly negligible level incapable of undermining the domestic price level.")

The paper cites an FAO study, where the maximum 47% of the 190 potential triggering of SSM (at 100% trigger threshold) of the 10 highly traded commodities in developing countries during 1986-2004 was substantially reduced to below 7% (while chicken, beef, dairy, and sugar were not triggered) if the threshold was set to 70%.

"If this very limited triggering is also subjected to the volume cross-check, the SSM will be inaccessible and therefore meaningless," said the G33.

Moreover, the G33 noted that in its paper on price and volume cross-check conditionalities (JOB/AG/3), import prices and import volumes do not always move in symmetry as abrupt movements in imports and prices do not necessarily coincide. Further, the proponents of the cross-check failed to recognize the transaction lag effects in normal business transactions since changes in demand and supply are not instantaneously translated to changes in domestic prices. These lag effects tend to be more acute in developing countries because of the very inefficient distribution system and poor and inadequate infrastructure.

The G33 believes that requiring a mandatory cross-check to accompany price declines prior to invocation of price-based SSM would make this instrument inaccessible and inoperable. The availability of and access to the price-based SSM can be adversely restricted by the parameters set out in the Chairman's text (the 85% trigger and the volume cross-check), said the G33.

On the claim of other Members that "developing countries will indiscriminately use the SSM to the fullest to protect their domestic producers by applying the SSM in every incidence of triggering", and that "the SSM will restrict normal trade" and also "drag import levels to zero", the G33 said that these fears and doubts of Members are "disproportionate", and not supported by empirical evidence on the implementation of the SSG, a similar trade remedy measure.

It cites a WTO report that revealed that developing countries hardly used the SSG (Special Safeguard provision) despite frequent triggering and only 6 out of 22 developing countries entitled to the SSG applied the mechanism. It is also important to emphasize that the rest of these 22 developing countries (the majority) abstained from using the safeguard despite experiencing import surges and import price declines in the period 1984-2000.

Looking at the applications of the price-based SSG by five developing country Members (Barbados, Costa Rica, Korea, the Philippines, and Nicaragua) the G33 paper found that the safeguard: (I) did not result in the reduction of trade; (ii) did not alter the general trends/patterns of trade; and/or (iii) did not prevent the imports to grow.

"Thus, the above experience in the use of SSG by developing countries establishes no clear basis for a very restrictive level of trigger and the introduction of the volume cross-check."

If the availability and access to SSM is the first major step in addressing import price declines, the remedy is the major element that determines the usefulness and effectiveness of the measure, says the paper.

According to the G33, unlike the level of remedy in the volume-based SSM, the determination of appropriate level of remedy for the price-based measure is more straightforward, which is the price gap. The price gap has two elements: (a) the difference between the reference price and import price; and (b) the difference between the ad valorem duty when applied to the reference price and the ad valorem duty when applied to the import price. An ideal remedy would contain both these elements.

The ability to fully offset the price gap guarantees that depressed import prices cannot dampen domestic prices to levels that can destabilize and/or obliterate domestic production. The Chairman's texts have only dealt with the difference between the import price and the reference price without capturing the second element of the price gap, i. e. the difference between the ad valorem duty when applied to the reference price and the ad valorem duty when applied to the import price.

It is clear that the 85% remedy in paragraph 136 of the Chairman's text can hardly guarantee that import price volatility will not harm the domestic industry, says the paper. In addition, assuming that the product is duty free, the 85% remedy is effectively further reduced to 72% offset since the trigger price is 85% of the reference price, instead of 100%.

(Paragraph 136 states: "The price-based SSM remedy shall apply on a shipment-by-shipment basis. The additional duty shall not exceed 85 per cent of the difference between the import price of the shipment concerned and the trigger price.")

The paper points out that in addition to the limitations of the Chairman's proposed remedy, the pre-Doha cap in paragraph 142 of the Chairman's text will further deny access to the remedy for products with zero tariff overhangs since the level of actual remedy that can be imposed mainly depends on the level of the difference between the applied and bound tariffs. Hence, for products with low or no tariff overhang there will be hardly any option to address price declines.

(Paragraph 142 of the Chair's text states: "The above provisions on triggers and remedies apply subject to the limitation that the pre-Doha bound tariff is respected as the upper limit and shall prevail as such.")

The G33 (in Table No. 5 of its paper) summarizes how much the full offset is restricted by the limitations set in paragraphs 136 and 142 of the Chairman's text: (a) price drops within the 85% of the reference price are exempted from the remedy; (b) the 85% compensation is effectively a 72% offset; ( c) the 72% offset is 33% to 53% less than the "full-offset" for the price drops of $15 to $80, respectively; and (d) the 72% offset is not applicable/available if the product has no tariff overhang, or is limited by the level of overhang.

In view of these limitations, the G33 believes that the SSM remedy under the Chairman's text is "ineffective, inapplicable, and therefore, meaningless".

The G33 maintained that whether to include "preference trade" in the SSM should be best left to the parties in a preference agreement themselves, and if the importing Member includes preference trade in its calculation of price triggers (reference price), then the preference trade should be subject to the remedy.

However, says the paper, paragraphs 135 and 138 of the Chairman's text preclude a Member from taking safeguard action against other Members which are parties to a preference trade agreement.

"Hence, this exclusion is a further restriction to the already constrained SSM in terms of its availability, accessibility and effectiveness."

(Paragraph 135 of the Chair's text is highlighted above. Paragraph 138 states: "The calculation of volume or price triggers, and the application of measures in accordance with the relevant provisions of this section, shall be on the basis of MFN trade only.")

Whatever the merit, if there is one at all, for excluding the preference trade from the SSM, nothing precludes preference trade from recourse to similar safeguard measures particularly the WTO Agreement on Safeguards and the Special Safeguard Provisions (SSG) under the Agreement on Agriculture (AoA) as the rules apply on MFN basis, the G33 paper adds.

"The rationale for precluding preference trade from the SSM is not justified when numerous bilateral and regional free trade agreements contain provisions to invoke agricultural safeguard measures."

On the issue of non-application of en route shipments, the G33 paper notes that the proposal under paragraph 139 of the Chairman's text that the SSM - whether price-based or volume-based - cannot be applied to en route shipments is technically infeasible for the price-based SSM, as it is to be imposed on a shipment-by-shipment basis in which the level of remedy for each shipment may vary depending on the level of the price gap, and by the fact that by the time the calculation of remedy is being made, the shipment has already arrived and by definition is de facto en route.

(Paragraph 139 of the Chair's text states: "Any shipments of the product in question which, before the imposition of the additional duty, have been contracted for and were en route after completion of custom clearance procedures in the exporting country, either under the price- or volume-based SSM, shall be exempted from any such additional duty, provided that where a volume-based SSM may be applicable in the next twelve-month period, the shipment of the product in question may be so counted in that period for the purposes of triggering the SSM.")

The G33 said that it had proposed (in documents JOB06/64 and JOB08/47) a well defined transparency and notification mechanism which is based on the SSG. The proposal contains two elements to be notified "in advance as far as practicable": (I) the price-triggers; and (ii) the "implementation of the first action".

Since the information on price triggers will be readily available through advance notification and other transparency mechanisms, the premise for justifying the en route issue no longer exists.

"Therefore, the en route shipment prohibition must be dropped from the Chairman's text on the price-based SSM," the G33 stressed.

Citing a previous G33 proposal of an ad valorem price-based SSM as an alternative to the shipment-by-shipment basis, the G33 said that unlike the shipment-by-shipment method, this option operates like the volume-based SSM where a uniform ad valorem SSM duty is to be applied to every price of shipment that falls below the trigger within the duration of the SSM.

In addition, this method requires notification of: (I) the date of invocation; (ii) the level of remedy; and (iii) the period of application. Therefore, this method offers a predictable price-based SSM option since once invoked, the exporters and importers would know that for a definitive period of application, any price of shipment that is below the trigger shall be remedied with the uniform level of ad valorem duty, says the paper.

In some conclusions, the G33 underscored that in accordance with the S&DT mandate of Hong Kong and Doha, the price-based SSM must be "operable, accessible and effective" in addressing temporary price declines for ensuring food security, livelihood security and rural development in developing countries.

First, as regards the trigger, a calibration of the threshold is a must so as not to unduly restrict access. The Chairman's 85% trigger provides access to the SSM at a very limited level of incidence and coverage of products and must be raised. In addition, the mandatory volume cross-check can unnecessarily restrict access to the safeguard and must be deleted from the Chairman's text.

A second concern is the structure and ineffectiveness of the remedy. These are further compounded by the introduction of the pre-Doha cap as this will penalize products that undertook early liberalization (already low tariff regime). Thus, the G33 strongly believes that for the SSM to be truly effective and meaningful, the remedy must be 100% and the pre-Doha cap must be removed.

Third, says the paper, the MFN-trade only limitation is a serious cause of concern especially with the proliferation of regional and bilateral free trade agreements. In addition, most, if not all, of the existing bilateral and regional agreements have safeguard provisions.

Thus, the G33 is of the view that it is best left to the parties in a regional or bilateral agreement to decide for themselves whether recourse to SSM is necessary.

Fourth, the non-application of SSM to en route shipment is inoperable in a shipment-by-shipment case and provides further operational difficulties amid the lack of reliable and real time data and institutional mechanisms in most developing countries. It is also technically infeasible for the shipment-by-shipment price-based SSM since the level of remedy every shipment may vary depending on the price gap.

The G33 views that advance information through notification of price triggers is already sufficient for the exporters to execute informed business decisions; and thus the en route shipment prohibition should not apply to the price-based SSM.

Fifth, the ad valorem price SSM method offers an option to institute a predictable price safeguard since a uniform duty is to be applied over a definitive period of application.

In order to move forward on the above issues on the price-based SSM, the G33 urged the Members to address these issues as soon as possible in the interest of delivering a truly developmental outcome consistent with the Doha and Hong Kong mandates. +