1
Journal of Korea Trade
Vol. 13, No. 2, May 2009, 1-19
Korea’s Tariff Rate Quota System: Impact of the
Doha Development Agenda Proposalsa
SONG SOO LIMb, DAVID BLANDFORDc
Abstract
The analysis in this paper shows that quota administration methods have a significant
impact on fill rates for Korea’s TRQs. The proposed introduction of an under-fill
mechanism in current Doha Round WTO negotiations, with a benchmark fill rate of 65
percent is likely to have important implications for Korea. According to our analysis,
roughly 30 percent of current TRQ products would need to have increased imports.
Static analysis using a tariff-quota equivalency test sheds light on whether it would be in
Korea’s interest to use the sensitive products’ provisions in the draft agreement on
agriculture to limit reductions in out-of-quota tariffs. Our analysis suggests that if Korea
wishes to pursue the objective of minimizing import competition, it will need to give
careful consideration to the choice of sensitive products. It may be preferable to
implement the proposed reduction in tariffs in full for some products, rather than
adopting smaller tariff reductions and increasing TRQs, particularly given the greater
scrutiny that is proposed for fill rates under the proposed Doha Round agriculture
agreement.
Keywords: Tariff rate quotas, sensitive products, Doha Development Agenda, Korea
8
I. Introduction
One of the achievements of the Uruguay Round negotiations (1986-1994) under
the General Agreement on Tariffs and Trade was that agricultural trade was finally
brought under international disciplines. Non-tariff barriers were converted into
tariffs; limits were placed on the value of the most trade-distorting forms of
government subsidies; and restrictions were placed on the volume and value of
____________________
a
This research was supported by the William and Flora Hewlett Foundation. The authors are grateful
for constructive comments and suggestions made by the anonymous referees.
b
Corresponding Author: Department of Food and Resource Economics, Korea University; E-mail:
[email protected]
c
Department of Agricultural Economics and Rural Sociology, The Pennsylvania State University,
The United States; E-mail: [email protected]
2
Journal of Korea Trade
Vol. 13, No. 2, May 2009
subsidized exports (Josling et al. 1996). However, tariffs for many commodities
were set at high levels and were subject to modest reductions. In the light of this, a
tariff rate quota (TRQ) system was created under which a certain volume of imports
could enter at a low in-quota tariff (IQT), while additional imports would be subject
to a higher out-of-quota tariff (OQT). The aim of the system was to guarantee
exporters at least some access to markets for commodities that would otherwise
continue to be highly protected (Monnich 2003).1
Under the Uruguay Round Agreement (URA), quotas were determined on the
basis of either minimum market access (MMA) or current market access (CMA)
(Dupraz and Matthews 2007).2 The MMA provides for imports up to 5 percent of
domestic consumption for the base period of 1986-88. The CMA provides a TRQ
equal to imports in that base period. A total of 1,434 TRQs are applied by 45
members (WTO 2006). The largest users are Norway (232) and Poland (109). In
contrast, Chile and the Former Yugoslav Republic of Macedonia designate only one
TRQ product (WTO 2005). The importance of TRQs is reflected by the fact that
they apply to an estimated 43 percent of agricultural trade and 51 percent of
domestic production in OECD countries (de Gorter and Kliauga 2005).
The aim of this paper is to analyze the operation of Korea’s TRQ system and to
evaluate the impact of potential changes in the context of the current Doha
Development Agenda (DDA) negotiations under the World Trade Organization
(WTO) that were launched in 2001. Korea has 63 TRQs covering 190 tariff lines
under the harmonized tariff system (HS) at the 10 digit level.3 We examine the
import restrictiveness of the system and use a static partial equilibrium approach to
assess the potential impact of proposed tariff reductions and quota expansion under
the DDA for selected products.
II. Korea’s TRQ Regime
The average in-quota tariff under Korea’s TRQ system is 18 percent. The highest
out-of-quota tariff is 887 percent for manioc; the lowest is 9 percent for fowls, and
flours, meals and pellets of meat. The simple average out-of-quota tariff is roughly
335 percent, compared to an average of 64 percent for all agricultural tariff lines.
This difference in tariff averages indicates the importance of the TRQ system in
providing protection for a range of commodities.
1. Tariffs and Quota Levels
Figure 1 graphs the combinations of Korea’s in-quota and out-of-quota tariff rates.
____________________
1
Appendix I describes the economics of the TRQ mechanism.
The market access issues under the WTO can be compared with those of regional trade agreements
(Cheong 2008).
3
The number of TRQs has fallen from 67 under the URA to 63 since orange juice, chicken and pork
(1997) and beef (2001) were transformed to tariff only regimes.
2
Korea’s Tariff Rate Quota System: Impact of the Doha Development Agenda
3
In-quota rates range from 0 to 50 percent; out-of-quota rates range from 9 percent to
over 800 percent. The standard deviations are 16 and 255, respectively. The highest
in-quota tariff (50 percent) applies to jujubes, garlic, red peppers, chestnuts,
mandarin, onions and oranges. Sesame seeds and oil, green tea, ground nuts, whole
milk powder, milk and cream, and butter are subject to 40 percent in-quota tariffs.
[Figure 1] Combination of Korea’s In-quota and Out-of-quota Tariff Rates
Note: Rice consists of 16 HS 10 tariff lines. It is subject to MMA without bound tariffs. Korea agreed to
increase annual imports progressively from 225,575 tons in 2005 to 408,700 tons by 2014. For the
purpose of the chart, the tariff rate is assumed to be 400 percent.
Source: Korea’s URA Country Schedule
[Figure 2] Profiles of Out-of-quota Tariffs and All Tariffs in Korea
Note: TRQ tariffs refer to out-of-quota rates.
Source: Korea’s URA Country Schedule
An insight into the restrictiveness of the system can be obtained by comparing the
4
Journal of Korea Trade
Vol. 13, No. 2, May 2009
difference between in-quota and out-of-quota tariffs. Products for which the
difference between these tariffs is low include fowls of meat, silkworm eggs and
various fruit trees. Products having the highest difference in tariffs include maniocs,
other cereals and grain sorghum for seed. These products are the ones that are most
protected under the TRQ system.
Another way to view TRQs is to compare the profile of out-of-quota tariffs to that
for all agricultural tariff lines (Figure 2). This comparison shows that although they
account for only 13 percent of the total tariff lines, TRQs account for most of the
peak tariffs.
Table 1 gives the share of TRQ imports in total agricultural imports by value for
the 2000-05 period. The average was 21 percent. Corn (livestock feed) makes up
more than half of the imports. The next largest share of 17 percent is for soybeans
(for oil and livestock feed). Other significant shares are fodder roots at 4 percent and
sesame at 3 percent.
[Table 1] TRQ Imports and Total Agricultural Imports by Korea, 2000-05
(Unit: million dollars)
2000
2001
2002
2003
2004
2005
Average
TRQ Imports (A)
1,788
1,800
1,884
2,138
2,774
2,413
2,133
Total Imports (B)
8,450
8,463
9,584
10,221
11,220
11,889
9,971
Share (A/B)
21%
21%
20%
21%
25%
20%
21%
Source: Authors’ calculations based on MAF (2006a)
The ratio of TRQ products to domestic production in value terms averaged 49
percent for the period 2000-05 (Table 2). The largest ratio was for rice with 28
percent. Milk product imports (milk powder and other dairy products) were
equivalent to 4 percent of domestic production. Other significant products were red
pepper (3.5 percent), eggs (2.4 percent), ginseng and mandarin (each 1.5 percent).
[Table 2] Value of TRQ Products and Domestic Production in Korea, 2000-05
(Unit: billion won)
2000
2001
2002
2003
2004
2005
Average
TRQ Product (A)
17,413
18,046
16,477
15,513
17,484
16,157
16,848
Production (B)
33,139
33,568
33,445
33,016
37,289
36,273
34,455
Share (A/B)
53%
54%
49%
47%
47%
45%
49%
Note: Figures are approximations due to the difficulty of matching tariff lines and domestic products and
because of missing data.
Source: Authors’ calculations based on the database of the Korea National Statistical Office (http://www.
kosis.kr)
2. TRQ Administration and Fill Rates
TRQ administration involves the distribution of the right to import at the in-quota
5
Korea’s Tariff Rate Quota System: Impact of the Doha Development Agenda
tariff. According to the WTO (2006), the administration methods used by WTO
members consist of the following: applied tariffs (AT), first-come/first-served (FC),
license on demand (LD), auctioning (AU), historical import allocation (HI), state
trading (ST), producer groups (PG), other (OT), mixed allocation methods (MX),
and non-specified (NS).
Table 3 shows Korea’s use of administration methods. The differences in
administration methods between the WTO and Korea arise because the government
has changed them since 1995 (Im and Hong 2007; Suh et. al 2004).
[Table 3] TRQ Administration Methods in Korea
Classification by
WTO
Product
Korea
ST
Minimum Market Access
Current Market Access
rice, garlic
-
State trading
(ST)
ST+AU
onions, ginger
sesame seed, buckwheat,
ground nuts
ST+LD
red pepper
beans
Producer groups (PG)
ST+AU
LD
Auctioning (AU)
Historical importers
(HI)
other potatoes
-
pine-nuts, mandarin, ginseng
-
AU
whole milk powder, other
milk, chestnuts, jujube
-
HI
milk cows, swine, green tea,
fowls, butter, manioc,
potatoes starch, manioc
malting barley, corn, potato
starch, sweet potato starch,
flour, other cereals
lactose, ethyl alcohol, malt
LD
LD
HI
powder of bone, forage,
mixed feeds, supplementary
feeds
HI
ST+HI
-
ST+AU
meat flour
white silk
barley
ST+LD
Mixed allocation
(MX)
silk-worm cocoons
birds’ eggs, silkworm eggs,
manioc pellets, roots &
fruit trees, mulberry trees,
tubers, rye, seed corn, rye,
seed potatoes, sweet potatoes,
sorghum, artificial honey
millet, oil-cake
License on
demand (LD)
Applied tariff (AT)
-
-
soybeans
oranges
-
ST+AU+LD natural honey
LD
AU+LD
HI
-
wheat starch
-
sesame oil
skim milk powder
-
whey
Source: Authors’ classification based on WTO (2006) and MAF (2006b)
6
Journal of Korea Trade
Vol. 13, No. 2, May 2009
Korea has a relatively complicated system that uses six out of the ten
administration methods, ranking second only behind Canada, which uses seven. The
European Community, Switzerland and Israel operate five methods. Out of the 45
WTO members that apply TRQs, 15 countries use only a single method.4 The most
common method used by Korea is HI, covering 45 tariff lines or 24 percent of the
total tariff lines at the HS 10-digit level. LD and ST methods are applied to 42 and
40 tariff lines, respectively. Producer groups administer imports of pine-nuts and
mandarin (Korean citrus), which have been presumed to have a high risk of bias
with a tendency towards quota under-fill and the protection of inefficient importers
(Skully 1999; WTO 2001). For all countries, AT is the majority method, accounting
for 47 percent of the total tariff lines over the 1995-2004 period, followed by LD
with 24 percent and FC with 10 percent.
Korea applies ST to its most sensitive products, including rice, garlic, red pepper,
potatoes and sesame seed. Consisting of 42 tariff lines, these products accounted for
32 percent of agricultural production by value and 2 percent of the value of
agricultural imports on average over the 2002-05 period.
[Table 4] No. of TRQ Products by Administration Method in the G-10 Group of Countries
Iceland
Israel
Japan
Norway
Switzerland
Taiwan
Korea
Mode
1995
-2004
1995
-2004
1995
-2005
1995
-2004
1995
-2007
2002
-2007
19952004
Total
AT
741
20
-
1,230
77
-
-
2,068
AU
100
-
-
100
45
81
56
382
FF
-
-
-
-
23
-
-
23
HI
-
10
-
38
7
-
170
225
LD
-
64
143
10
62
14
200
493
MX
-
16
11
-
129
21
100
277
ST
-
-
44
-
-
-
100
144
OT
-
10
11
-
-
-
-
21
PG
-
-
-
-
-
-
30
30
Total
841
120
209
1,378
343
116
656
3,663
Note: The numbers are based on actual products, not tariff lines. Liechtenstein and Mauritius are
excluded, because they have not notified any TRQ implementation methods.
Source: WTO (2006)
To place Korea’s TRQ system in context, it is useful to compare it to the systems
applied by other major importing countries. Table 4 compares administration
methods across the G-10 group of countries, which includes the leading agricultural
importers in the WTO. The numbers in the table represent the frequency with which
____________________
4
This comparison is based on 2004. The numbers can vary due to changes in administration methods
over time.
7
Korea’s Tariff Rate Quota System: Impact of the Doha Development Agenda
an administration method is applied to actual products, rather than tariff lines, for the
periods specified. For example, the WTO data for Korea relate to 63 TRQ products
consisting of 190 tariff lines. As noted earlier, Norway is the leading user of quotas,
accounting for 38 percent of the G-10 total; AT is used for 89 percent of Norway’s
TRQs. The second largest user, Iceland, also primarily uses AT. Overall, AT is used
for more than half of the TRQs used by the G-10.5 LD is a major method in Israel,
Japan and Korea, making it the second most popular method within the group. Only
Japan and Korea use ST in order to protect highly sensitive products including rice.
FC is applied only by Switzerland; Korea is the only country to use PG.
Fill rates vary widely by administration method (Table 5). A weighted average of
the fill rate under AT is 6,387 percent, outperforming all others by a significant
margin. In other words, the countries imported roughly 64 times more than the
quotas governed by AT during the periods indicated in the table. The largest excess
importer is Norway followed by Iceland. Switzerland had a fill rate of 1,649 percent
under FC. MX and LD end up with more than 200 percent each. Although AU might
be presumed to be the most economically efficient method, it has an average fill rate
of 136 percent, which is lower than the average for ST. Korea’s PG resulted in the
lowest average fill rate of 70 percent.
[Table 5] TRQ Fill Rates by Administration Method in the G-10 Group of Countries
Iceland
Israel
Japan
Norway Switzerland Taiwan
Korea
1995
-2004
1995
-2004
1995
-2005
1995
-2004
1995
-2007
2002
-2007
19952004
AT
26.88
12.74
-
90.91
1.00
-
-
AU
0.44
-
-
0.25
8.67
0.45
0.42
2.05
1.36
FC
-
-
-
-
16.49
-
-
16.49
16.49
HI
-
99.78
-
0.94
1.61
-
1.86
26.05
6.05
LD
-
3.75
0.60
0.35
6.59
0.74
1.38
2.24
2.08
MX
-
8.87
0.42
-
3.26
0.74
1.07
2.87
2.49
ST
-
-
1.07
-
-
-
1.84
1.46
1.61
OT
-
2.46
0.00
-
-
-
-
1.23
1.17
PG
-
-
-
-
-
-
0.70
0.70
0.70
Simple
Average
Weighted
Average
32.88
63.87
Note: If the fill rate is less than one, the quota is under-filled.
Source: Authors’ calculations based on countries’ WTO notifications (http://docsonline.wto.org)
In theory, AT and AU are the most preferred methods in terms of maximizing
economic efficiency (Skully 2001; de Gorter and Kliauga 2005). It is because AT
does not limit imports and AU allows import competition by market prices. The
quasi-market methods of FC, LD and HI add uncertainty and transaction costs. The
____________________
5
The AT average of 47 percent relates to all 45 countries using this method between 1995 and 2004
(WTO 2006).
8
Journal of Korea Trade
Vol. 13, No. 2, May 2009
most discretionary methods are ST and PG in which the domestic importers may
exercise price discrimination and act by political incentives. Despite the fact that fill
rates do not necessarily represent economic efficiency per se, empirical assessment
of the various TRQ methods in terms of their performance may shed light on the
direction of trade reforms.
To investigate the relationship between quota administration methods and fill
rates for the case of Korea, a panel data set was constructed for 63 TRQ products
(i=1, 2,...,63) over the period 1995 to 2004 (t=1995, 1996,...,2004). The regression
model shown in equation (1) expresses fill rates (Fit) as a function of the gap
between in- and out-of-quota tariff rates (DTit), dummies for each administration
method and exogenous demand shifters including a one-period lagged production
(Qit-1) and income per capita (Yit). By utilizing a one-way error component model for
disturbance, υi denotes the unobservable individual specific effect and εit is the
remainder disturbance (Baltagi 2008).
Ft = β0 + β1 AU t + β2 HI t + β3 LDt + β4 PGt + β5 STt
+β6 DTt + β7Qt−1 + β8Yt + ϑi + εt
(1)
As noted earlier, DTit is an indication of the degree of protection that policy
makers seek to provide through the TRQ system. From the perspective of suppliers
of imports to Korea, it is an indication of the potential returns from market access.
Higher rates of protection presumably translate into a larger difference between
Korea’s domestic prices and world prices. As a result, we would expect that the
incentive for suppliers to take advantage of the access provided by quotas is
positively related to the tariff difference. MX is the base or reference administration
method for the set of dummy variables.
Table 6 shows basic descriptive statistics for variables. Data sources are MAF
(2007; 2006a).
[Table 6] Descriptive Statistics for Variables
Variable
Unit
Mean
Frequency
Standard deviation
Fill rate (F)
%
142
-
249
Difference in tariffs (DT)
%
272
-
244
Production (Q)
2005=100
128
-
146
Mill. won in 2000
12.1
-
14.1
Auctioning (AU)
No.
-
50
-
Historical importers (HI)
No.
-
170
-
License on demand (LD)
No.
-
200
-
Producer groups (PG)
No.
-
30
-
State trading (ST)
No.
-
100
-
Mixed allocation (MX)
No.
-
80
-
Income per capita (Y)
Korea’s Tariff Rate Quota System: Impact of the Doha Development Agenda
9
Table 7 summarizes the estimation results. Except for LD, all coefficients for
administration methods are statistically significant under the pooled estimation.
Despite the fact that AU wins high praise for its economic efficiency, it turns out to
have the largest negative effect on fill rates. As expected, there is a positive
relationship between difference in tariffs (DT) and fill rates while PG contributes
negatively to fill rates.6 The production (Q) has the correct sign, but it is not
statistically significant. The model also suggests that income is an important
determinant of fill rates.
The estimated coefficients by the random-effect model are very similar in size and
show the same signs with the pooled regression. The only difference is that the
coefficients for PS and DT are no longer statistically significant under the randomeffect model.
[Table 7] Estimation Results for Impact of Administration Methods on Fill Rate for Korea
Variable
Constant
Pooled Least Square
Random Effects
0.046(0.518)
-0.006(0.632)
Auctioning (AU)
-0.763(0.067)
***
-0.760(0.226)***
Historical import (HI)
0.671(0.068)***
0.677(0.229)***
0.272(0.198)
0.254(0.638)
License on demand (LD)
Producer groups (PG)
***
-0.465(0.337)
***
0.645(0.229)***
-0.469(0.100)
State trading (ST)
0.655(0.071)
Difference in tariffs (DT)
0.086(0.029)***
0.088(0.094)
Production (Q)
-0.0004(0.003)
-0.0001(0.0002)
Income per capita (Y)
No. of observation
R2
0.0007(0.0004)
630
0.041
*
0.0008(0.0004)*
630
0.041
Note: ***p<0.01; *p<0.1; and standard errors in parentheses
Two important implications can be drawn from these results. First, administration
methods appear to have an important systematic effect on Korea’s imports under the
TRQ system. Second, ST has a quite large positive impact on fill rates, while AU
has the largest negative effect. This supports the earlier observation that the fill rate
is not necessarily a good indicator of economic efficiency (de Gorter and Kliauga
2005). As a less market-oriented administration method, ST might be expected to be
more restrictive for imports, while AU might be expected to be less restrictive.
However, since AU is likely to reduce the profitability of market access for
exporters, they may choose not to participate in the auction process. In contrast,
traditional patterns of supply are more likely to be maintained on a regular basis
under state trading.
____________________
6
Intriguingly, Li and Carter (2009) found the in-quota tariffs are more relevant than the out-of-quota
tariffs in explaining market access.
10
Journal of Korea Trade
Vol. 13, No. 2, May 2009
There may be other factors that affect fill rates. For instance, there may be no or
weak import demand for some products (e.g. bird’s eggs, silkworm eggs, fruit trees,
mulberry trees, seed potatoes, rye and milk and cream), the application of sanitary
measures (e.g. milk cows, swine, fowls and powder of bones) may be also be
important. Changes in domestic production and competition from imports of close
substitutes may affect fill rates. Finally, many under-filled products are imported
out-of-quota. This suggests that transactions costs are a factor in discouraging inquota imports.
III. TRQs in the Current WTO Negotiations
The agricultural negotiations under the DDA encompass three key areas: market
access, domestic support and export competition. TRQ expansion and administration
are covered under market access. Proposed modalities tabled by the WTO (2008)
suggest that developed countries will face cuts of 50 percent for bound tariffs in the
range of 0-20 percent; a 57 percent cut for tariffs in the range of 20-50 percent; a 64
percent cut for tariffs from 50-75 percent; and a 70 percent cut for tariffs greater
than 75 percent. Developing countries (a category that includes Korea) will reduce
tariffs by two-thirds of the cut for developed countries. The bound tariff ranges are
0-30, 30-80, 30-130, and greater than 130 percent, respectively. Called as a tiered
formula for tariff cuts, this approach is to harmonize tariff structure by reducing high
tariffs to a greater extent.
Countries have some leeway in their tariff reductions. Developed countries will be
able to designate 4 percent of dutiable tariff lines as sensitive products, which will
be subject to tariff cuts reduced by one-third, one-half or two-thirds from the tiered
formula. In exchange for smaller tariff cuts, sensitive products are required to entail
3 to 4 percent of domestic consumption as new TRQs.7 Developing countries will be
allowed to assign one-third more of sensitive products. The quota expansion will be
two-thirds of that of developed countries. Additional options are available to
developing countries in terms of the degree of tariff cuts, implementation periods or
TRQ expansion.8
In addition, the draft modalities propose a quota under-fill mechanism. This
requires an importing country to modify its administration methods if the fill rate
falls below 65 percent. The modification would require the use of either a first-come,
first-served method (FC) or an automatic, unconditioned license on demand method
(LD).
____________________
7
It is not clear yet whether the provisions of sensitive products will be technically applicable only to
existing TRQ products.
8
See WTO (2008) for detailed proposals and Sharma (2006) for economic implications of those
proposals to developing countries.
11
Korea’s Tariff Rate Quota System: Impact of the Doha Development Agenda
IV. Assessment of Potential DDA Impacts
The WTO proposals are likely to affect the ways that TRQs are administered and
to create greater competition from imports. This can be illustrated through a simple
counter factual simulation applied to historical import data for Korea (Table 8).9
[Table 8] Counterfactual Simulation of Imports under the 65 Percent Under-fill Mechanism
Unit
Imports
in 2004
Net increase under the 65
percent rule
head
0
694
Other milk and cream
ton
0
85
Birds’ eggs
ton
0
12,685
Powder of bones
ton
0
304
Silkworm eggs
1000box
0
6,175
Fruit trees (apple, pear, peach & citrus)
1000box
0
94
Mulberry trees
1000box
0
911,755
Seed potatoes
ton
0
1,234
Grain sorghum(for seeds)
ton
0
9
Foxtail millet(for seed)
ton
0
0.3
Artificial honey
ton
0
4
Oil-cake
ton
0
138
Silk-worm cocoons
ton
2
741
Sweet potatoes(fresh)
ton
163
11,884
Meat flours
ton
73
2,014
Mandarin
ton
150
1,213
Whole milk powder
ton
99
273
Manioc pellets(dried)
ton
194,076
455,924
White silk
ton
1,226
239
Chestnuts
ton
1,334
77
Product
Milk cows
If the 65 percent fill rate rule had been operating in 2004, roughly 20 of Korea’s
63 TRQ products would have faced increased in-quota imports. This would have had
a significant impact, especially for those products that have not been imported at all
or have had low fill rates. For example, mandarin had a fill rate of 7 percent with
imports of only 150 tons from the quota of 2,097 tons. The 65 percent under-fill
requirement would have resulted in an increase in imports of 1,213 tons.
From a trade policy perspective, the application of the proposed 65 percent rule
may be a double-edged sword. It could help to eliminate embedded inefficiencies in
____________________
9
Note that in these calculations, Korea is treated as a developing country.
12
Journal of Korea Trade
Vol. 13, No. 2, May 2009
quota administration since countries would no longer be able to suppress quota
imports by imposing transaction costs on quota holders. In contrast, the risk of
importing unwanted products would increase. In Korea’s case, the low fill rate for
mandarin is largely attributable to the lack of domestic demand for imports and the
impact of sanitary and phytosanitary (SPS) measures. If a country has to import a
good regardless of market conditions, this would add to inefficiencies and create
distortions. In such cases, it would be preferable to eliminate the quota completely.
The use of other measures that restrict imports, such as sanitary and phytosanitary
measures, are covered by other WTO agreements.
To address the issue of increased competition from imports, countries can rely on
the provision for sensitive products in the draft modalities. This allows a tradeoff to
be made between tariff cuts and TRQ expansion. For it to be preferable for a country
to elect to exercise this provision, the impact on imports would have to be less than
under the tiered formula tariff reductions. To explore whether this is the case for
Korea, we use a static approach to conduct a tariff-quota equivalency test for major
products.
Following Lee (2006), the demand for the domestic good ( H D ) is specified as a
function of prices for domestic ( PH ) and import goods ( PM ).10 Other factors
including income are assumed constant.
DH = f H ( PH , PM )
(2)
The supply of domestic good (SH) is explained by own price. Input prices are
assumed constant.
S H = g H ( PH )
(3)
Since domestic and import goods are substitutes, import demand ( DM ) is
affected by PH and PM .
DM = f M ( PH , PM )
(4)
Korea is assumed to be a small country such that its import price ( PM ) is
determined exogenously by the given world price ( PW ) and the ad valorem tariff
rate ( τ ). The applicable bound tariff rate ( τ ) is estimated from initial tariffs ( τ 0 )
and the rate of the tariff cut ( γ ):
PM = PW × (1 + τ )
____________________
10
A similar approach is adopted in Lim et al. (2006) and Kim (2006).
(5)
13
Korea’s Tariff Rate Quota System: Impact of the Doha Development Agenda
τ = τ 0 × (1− γ )
(6)
Equation (6) shows that the change in γ is linked to the rate of the change in
tariff ( Δτ / τ = −Δγ ). Equations (5) and (6) are rearranged to yield the rate of
change in import price ( ΔPM / PM ) with θ = τ / (1 + τ ) and its reduction rate:
ΔPM / PM = −τ / (1 + τ )× (Δτ / τ ) = −θΔγ
(7)
From the market equilibrium conditions of equations (2) and (3), the rate of
change in domestic price ( ΔPH / PH ) is shown to be determined by elasticities of
own-price ( η H ), cross-price ( η HM ) and supply ( εH ):
ΔPH / PH = η HM / (η H − εH )×θΔγ
(8)
The rate of change in supply can also be derived from the market equilibrium
condition:
ΔS H / S H = ΔDH / DH = η HM ε / (η H − εH )×θΔγ
(9)
Finally, the rate of change in import demand ( ΔDM / DM ) is obtained from
equation (4):
ΔDM / DM = ηMH ΔPH / PH + ηM ΔPM / PM
= [(η HM − εH )ηM − ηMH η HM ] / (η H εH )×θΔγ
(10)
where ηM is the elasticity of demand for the import good.
Table 9 shows estimated import changes for key products in Korea resulting from
proposed tariff reductions in the draft modalities and quota expansion. The 23
products are selected on the basis of significance and the availability of elasticities.
Non-TRQ products such as beef, pork and poultry are also included, since these
could be considered for sensitive product status by Korea.
Four scenarios are examined to assess potential DDA impacts. The base scenario
is a reduction in tariffs on the basis of the tiered formula (the “tiered cut” scenario).
Three other scenarios are determined by the extent of deviations from the tiered
formula (one-third, one-half and two-thirds) for products defined as sensitive. The
associated changes in imports resulting from tariff reductions are estimated by
equation (10) and compared to quota expansion. The new quotas are assumed to be
either completely met (“filled”) or imports are at historical fill rates (“avg. fill”). If
14
Journal of Korea Trade
Vol. 13, No. 2, May 2009
the historical fill rates are less than 65 percent, they are adjusted to meet the
minimum requirement; the assumption being that Korea would choose to avoid a
potential challenge to its TRQ system under the proposed under-fill rule. The
average fill rate for each product is estimated over the 2002-04 period.
[Table 9] DDA Impacts: Increases in Imports
(Unit: M/T )
Average
imports
(2003-05)
Mandarin
Tiered
cut
1/3 Deviation
Avg.
Filled
fill
12,976
8,436
1/2 Deviation
Avg.
Filled
fill
14,416
9,372
2/3 Deviation
Avg.
Filled
fill
15,855 10,307
83
9
20,789
7,226
24,496
24,496
25,478
25,478
26,460
26,460
Potatoes
Sweet
Potatoes
Red pepper
1,017
298
8,159
5,373
8,994
5,898
9,829
6,424
26,628
4,868
7,666
6,134
7,346
5,643
7,026
5,153
Ground nuts
32,170
9,337
7,308
7,137
5,872
5,682
4,436
4,228
2,362
14,740
14,740
15,809
15,809
16,879
16,879
Poultry
Soybeans
Jujube
96,386
1,374,008
23,205 137,896 137,896 147,631 147,631 157,367 157,367
1,737
266
436
429
420
412
405
396
188,996
2,853
26,886
26,886
29,186
29,186
31,487
31,487
51,863
691
11,674
10,750
12,805
11,778
13,936
12,806
Buckwheat
3,239
1,026
831
831
677
677
522
522
Chestnuts
6,075
878
2,126
1,587
2,151
1,552
2,176
1,517
202,975
27,863
28,392
26,074
24,839
22,263
21,286
18,452
Pork
Garlic
Barley
Ginger
Beef
Onion
Ginseng
Pine nuts
Whole milk
powder
Sesame seed
Natural
honey
Skim milk
powder
Red bean
11,467
3,810
3,441
3,299
2,906
2,748
2,371
2,197
221,371
6,379
14,359
14,359
14,418
14,418
14,478
14,478
23,873
3,116
27,041
21,968
29,295
23,658
31,549
25,349
9
1
399
303
443
336
487
370
519
45
116
113
118
115
120
117
1,573
99
263
194
268
192
274
189
72,547
23,624
17,885
17,885
14,185
14,185
10,485
10,485
982
605
1,173
1,108
1,158
1,085
1,143
1,063
4,887
309
1,022
737
1,062
744
1,101
752
25,168
1,993
2,183
2,183
1,946
1,946
1,709
1,709
Note: Elasticities were obtained from various studies produced by the Korea Rural Economic Institute
(KREI). See Appendix II for detailed information on the values used.
The base scenario turns out to yield the lowest increases in imports for roughly
three quarters of the products. For the remainder, it occurs under the two-thirds’
deviation scenario. No commitment for additional quotas and relatively low cross-
Korea’s Tariff Rate Quota System: Impact of the Doha Development Agenda
15
price elasticities contribute to small increases in imports under the base scenario. For
example, a tariff cut under the tiered formula would generate an estimated increase
in imports of only 9 tons for mandarin. If categorized as a sensitive product,
mandarin imports would range from 8,436 to 15,855 tons depending on specified
options. Thus, if the government wants to minimize imports, it will allow the
product to be subject to tiered cuts rather than treatment as a sensitive product. This
also applies to current non-TRQ products such as poultry, pork and beef.
Some caution should be used in interpreting these results. The results of the
analysis rely heavily on the elasticities used and these may not be immune from
errors. Other policy aspects may need to be considered. For example, imports under
the quota system are more predictable than under a tariff-only scheme. This may be
valued by policy makers and domestic interest groups, particularly agricultural
producers.
V. Conclusions
The TRQ system created by the Uruguay Round trade negotiations has
contributed to the creation of new market access opportunities and some expansion
in imports. Considering that the products involved were heavily protected by nontariff measures before the Uruguay Round, TRQs have increased transparency.
TRQs are important for Korea ―TRQ imports have accounted for an average of 22
percent of total agricultural imports over the period of 1995-2006 and the products
involved account for an average of 48 percent of the value of total agricultural
production between 2002 and 2007.
Nevertheless, the TRQ system has various shortcomings, particularly in terms of
administration. A particular challenge is posed by under-filled quotas. The empirical
analysis in this paper confirms that quota administration methods have a significant
impact on fill rates. In comparison to other methods, there is room for improvement
particularly through quotas administered by producer groups (PG). The proposed
introduction of an under-fill mechanism in current WTO negotiations, with a
benchmark fill rate of 65 percent is likely to have substantial effects on market
access for Korea. According to our analysis, roughly 30 percent of TRQ products
would need to have increased imports. Despite the usefulness of this proposal in
reducing administrative inefficiencies, it could create problems for products that face
weak domestic demand.
Static analysis using a tariff-quota equivalency test sheds light on whether it
would be in Korea’s interest to use the sensitive products’ provisions in the draft
agreement on agriculture for particular products. Our analysis suggests that if Korea
wishes to pursue the objective of minimizing import competition, it will need to give
careful consideration to the choice of sensitive products. It may be preferable to
implement the proposed reduction in tariffs in full for some products, rather than
adopting smaller tariff reductions and increasing TRQs, particularly given the
greater scrutiny that is proposed for fill rates under the proposed DDA agriculture
16
Journal of Korea Trade
Vol. 13, No. 2, May 2009
Received: April 5, 2009.
Accepted: May 15, 2009.
agreement.
References
Baltagi, Badi (2008), Econometric Analysis of Panel Data, 4th Edition, John Wiley & Sons, Ltd.,
West Sussex, U.K.
Cheong, Inkyo (2008), “Importance of Market Access in Paving the Way toward an East Asian
FTA.” Journal of Korea Trade, Vol. 12, No.3, pp. 55-88.
de Gorter, H., and E. Kliauga (2005), Reducing Tariffs versus Expanding Tariff Rate Quotas, In K.
Anderson and W. Martin (eds), Agricultural Trade Reform and the Doha Development
Agenda, World Bank, Washington, DC.
Dupraz, C. and A. Matthews (2007), A Graphical Analysis of the Functioning of Tariff Rate
Quotas: Market Access and Welfare Effects for Exporting Countries, Trinity College Working
Paper 07/15.
Im, J.B. and S.J. Hong (2007), “Progress of the Korean Tariff Rate Quota System in Agricultural
Sector and Policy Implications,” Korea Journal of Agricultural Economics(in Korean), Vol.
48, No. 2, pp. 135-176.
Josling, T.E., S. Tangermann and T.K. Warley (1996), Agriculture in the GATT, MacMillan,
Basingstoke, England.
Kim, Y.S. (2006), “Analysis of the FTA Impacts Considering Substitute Effects in a Partial
Equilibrium Model.” Korea Journal of Agricultural Economics, Vol. 47, No. 3, pp. 31-51.
Lee, Y.K. (2006), “The Impact of Korea-US Free Trade Agreement on Beef Industry: An
Approach of Consumption Substitution,” Korean Journal of Agricultural Management and
Policy, Vol. 33, No. 4, pp. 988-1005.
Li, Xiang hong and C. Carter (2009), The Impacts of Tariff-Rate Import Quotas on Market Access,
Research Paper, Dept. of Agricultural and Resource Economics, Univ. of California-Davis.
Lim, S., S. Kim, S.Y. Lim, Y. Lee and Y. Choi (2006), Potential Impacts of the DDA in the
Agricultural Sector, Korea Rural Economic Institute, Research Report C 2006-37, Seoul.
Ministry of Agriculture and Forestry(MAF) (2006a), DDA Agricultural Negotiation Information.
Gwachon.
Ministry of Agriculture and Forestry(MAF) (2006b), Import and Recommendation Methods for
Agricultural Minimum Market Access, Gwachon.
Ministry of Agriculture and Forestry(MAF) (2007), Major Statistics for Agriculture and
Forestry(in Korean), Gwachon.
Monnich, Christina (2003), “Tariff Rate Quotas: Does Administration Matter?” Discussion Paper
No. 16, Center for International Development and Environmental Research, Univ. of Giessen.
Sharma, Ramesh (2006), “On the Equivalence of Tariffs and Quotas for Sensitive Products in the
WTO Agricultural Negotiations,” Food and Agriculture Organization (FAO), Rome.
Skully, David (1999), The Economics of TRQ Administration. IATRC Paper #99-6, Washington
DC.
Skully, David (2001), Economics of Tariff-Rate Quota Administration: Economic Analysis of
TRQ Administrative Methods, Economic Research Service/USDA, Technical Bulletin No. 27,
Washington DC.
Suh, J.K., S.H. Kim, S.Y. Lim, and S.K. Nam (2004), New Directions for the Improvement of
TRQ System in Korea, Research Report C2004-07, Korea Rural Economic Institute, Seoul.
World Trade Organization (2001), Market Access: Unfinished Business, Special Study 6.
World Trade Organization (2005), Tariff Quota Fill. Note by the Secretariat, TN/AG/S/20.
World Trade Organization (2006), Tariff Quota Administration Methods and Tariff Quota Fill,
Korea’s Tariff Rate Quota System: Impact of the Doha Development Agenda
Note by the Secretariat, TN/AG/S/22.
World Trade Organization (2008), Draft Modalities for Agriculture, TN/AG/W/4/Rev. 4.
17
18
Journal of Korea Trade
Vol. 13, No. 2, May 2009
Appendix I. The Economics of the TRQ System
The TRQ system consists of a low in-quota tariff ( τ i ), a quota ( QQT ) and a high
out-of-quota tariff ( τ O ). In a competitive international market, a small importing
country confronts the price PW (world price) +τ i for imports within quota and the
price PW + τ O for imports over quota. Imports are determined where the step
function of the world excess supply curve (ES) intersects the excess demand curve
(ED) in the importing country. Three basic cases can be identified under the TRQ
system. First, an under-filled quota occurs when the in-quota tariff is binding at EDU
(the fill rate lies between 0 and 1). Second, the quota is binding at EDF (the fill rate
is 1). Finally, the out-of-quota tariff is binding at EDO (the fill rate is greater than 1).
The Doha negotiations address further trade liberalization by lowering the tariffs ( τ i
and τ O ) and expanding the quota. Newly categorized as sensitive products, existing
TRQs will be subject to tariff cuts and quota expansion.
[Figure A1] The TRQ Mechanism
EDO
Price
EDF
PW +τO
ES
EDU
PD
PW +τ i
QU
Note: PD is the domestic price.
QQT
QO
Import
19
Korea’s Tariff Rate Quota System: Impact of the Doha Development Agenda
Appendix II. Elasticities
εH
ηH
ηM
ηHM or ηMH
Mandarin
0.32
-0.55
-0.49
0.30
Potatoes
0.32
-0.60
-1.00
0.10
Sweet Potatoes
0.70
-0.50
-1.00
0.50
Red pepper
0.45
-0.22
-0.57
0.15
Ground nuts
0.44
-0.28
-1.00
0.28
Poultry
0.32
-0.52
-0.78
0.50
Soybeans
0.22
-0.17
-0.05
0.05
Jujube
0.50
-0.45
-0.55
0.40
Pork
0.31
-0.60
-0.30
0.22
Garlic
0.38
-0.07
-0.04
0.04
Buckwheat
0.40
-0.30
-1.00
0.20
Chestnuts
0.25
-2.02
-0.47
0.21
Barley
0.92
-0.28
-0.45
0.28
Ginger
0.40
-0.50
-1.00
0.30
Beef
0.49
-1.06
-0.34
0.34
Onion
0.34
-0.38
-0.62
0.31
Ginseng
1.02
-0.72
-0.20
0.20
Pine nuts
0.30
-0.40
-0.25
0.15
Whole milk powder
0.43
-0.52
-0.32
0.32
Sesame seed
0.21
-1.09
-1.00
0.50
Natural honey
1.09
-2.17
-1.89
0.30
Skim milk powder
0.43
-0.52
-0.32
0.32
Red bean
0.32
-0.25
-0.28
0.20
Product
Source: Taken from studies conducted by staff of the Korea Rural Economic Institute (KREI).