4. QUANTIFYING THE IMPACTS OF DESIGNATING RICE AS A SPECIAL/SENSITIVE PRODUCT IN GLOBAL TRADE LIBERALIZATION

The impact of designating rice as a special or sensitive product under global trade reform is assessed using the Global Simulation Model (GSIM).^[27] GSIM provides a modelling strategy for the partial equilibrium analysis of global trade policy changes. GSIM is a static, deterministic, single commodity bilateral trade model driven by export supply and bilateral import demand equations. Imports and exports are assumed to be a function of the world price after taking into account relevant bilateral trade taxes or subsidies. Since tariffs are bilateral and differ from country to country, changes in tariffs lead to changes in relative prices that drive differential changes in imports from various sources. Elasticities of substitution (the so-called Armington elasticities) determine the extent to which changes in relative prices lead to switches in the source of imports. The model solves numerically to find market clearing prices such that global imports equate to global exports. A fuller explanation of the model structure is provided in the annex to this paper.

Because the partial equilibrium approach ignores other products that may be substitutes in consumption or production, losses and gains are potentially overestimated, as transfers of resources to or from other sectors are ignored. However, the approach has the useful advantage of allowing for a relatively rapid and transparent analysis of a wide range of trade policy issues with a minimum of data and computational requirements.

4.1 Modelling rice in the GSIM framework

Data and key assumptions are as follows:

• Geographical Coverage: The model pre-selected 40 countries and regions, listed in Table 5, on the basis of their importance for the international rice economy.

• Trade Data: Bilateral trade flow data are derived from the exports-by-source-and-destination database maintained by FAO and refer to the period average 2002-2004. Values are obtained by multiplying trade quantities by the world prices of indica (Thai 100%B) and japonica (USA No. 2 Medium Grain) respectively. Countries with no bilateral exports cannot become exporters. For example, Egypt cannot start exporting to Japan no matter how relative prices change. Nor can exports from an initial exporting country be totally eliminated.

• Elasticities: Rice exports from each country are treated as a distinct product. Consequently, the elasticities are in a bilateral ‘Armington’ form, which determine the extent to which changes in relative prices lead to a switch in the source of imports. The greater the elasticity, the greater is the switch from one source to the other, implying greater product homogeneity. The bilateral specification allows a distinction between: (i) domestic and imported rice; (ii) imported rice from different sources; and (iii) rice of different varieties. It is customary that the elasticity of imports from one source vis-à-vis another source has twice the value of that between domestic and imported rice (these elasticities are assumed to be 10 and 5, respectively). This reflects the notion that imported rice is seen as quite distinct from domestically produced rice but imports from different sources are much more substitutable. In addition, a relatively low substitutability (a value of 1) between the different varieties of rice, namely indica and japonica is assumed. The composite elasticities of demand and supply are taken from Agricultural Trade Policy Simulation Model (ATPSM).

TABLE 5
Countries/Regions specified in the model

* Net exporter

Policies included are as follows:

• Tariffs: Bilateral bound and applied tariff rates are employed in the model with binding ‘overhang’ captured through differentials in the two rates. Applied tariffs are taken from the GTAP database version 6.5, while bound tariffs are taken from ATPSM, which in turn draws on the WTO IDB database. Tables 6 and 7 show the bound and applied rates used in the model, respectively. Upon comparing both tables, it should be noted at this early stage that substantial binding overhang exists in several key importing countries, which could limit the impacts of reform.

• TRQs: Import quotas are modelled by keeping them fixed. This is done, for example, by setting the elasticity of import demand to zero. If the quota allocation between exporters is not fixed - first come first served or licenses on demand, for example - changes in tariffs may lead to a change in the mix of export shares. The model allows for this if the Armington elasticities are positive. If the quota is allocated historically, this is modelled by setting the relevant Armington elasticities to zero. If the quota is increased but the exporters’ shares are maintained, the elasticity of demand is non-zero while the Armington elasticities remain at zero. All importers are assumed to capture the import quota rents and these accrue to government revenue. Furthermore, there is no switching between in-quota and out-quota tariffs.

• Export Subsidies: EU rice export subsidy expenditure amounts to € 36.8 million, equivalent to US$50.86 million. This is divided over the value of EU exports of US$74.47 million to give an export subsidy equivalent of 60 percent. This ignores the reality that subsidies are applied to a WTO maximum volume of subsidized exports of 133 400 tonnes. Likewise, export subsidy expenditure by the United States, of US$2.4 million, is allocated across the country’s total exports of US$18 million, giving an average subsidy of 0.26 percent.

• SSP/SPP: The importance placed by a single country on rice and the likelihood that it designates rice as an SSP or SPP was gauged through the following rule: countries with bound tariffs equal to at least 50 percent and/or countries having already assigned a SSG or ST clause to rice in their current WTO schedules. Table 8 provides a list of potential rice SSP/SPP designating countries, assumed in the model. Note that Bangladesh and Cambodia would have been candidates to designate rice so, but were not included in the list because of their "Least developed country" status, which will exempt them from undertaking tariff reduction commitments.

4.2 Scenarios

To assess the impact of trade reforms in the context of SSP/SPP, six hypothetical scenarios are analysed, including three derived from the Harbinson proposal, which deals with cuts in tariffs based on tiered approach, with differential treatment for developing countries.^[28]

TABLE 6
Initial Bilateral Bound Tariffs (%)