Commodity Price Volatility and Special Safeguard Mechanisms

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Commodity Price Volatility and Special Safeguard Mechanisms A Proposal for the Doha Round

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Economic and Political WeeklyFebruary 3, 2007418agricultural product or productsfrom the short-term fluctuationsof international prices and also from sudden import surges.Consequently, the SSM is a temporary and short-term measure andis not meant to insulate a country from the price signals emanatingfrom long run or secular movements of commodity prices.The HKMD has reiteratedthat in the Doha development roundsuch a provision will be made available to all developing andleast developed countries that are members of the WTO. Para-graph 7 of the HKMD states:Developing country members will also have the right to haverecourse to a special safeguard mechanism based on import quantityand price triggers, with precise arrangements to be further defined.Special products and the special safeguard mechanism shall bean integral part of the modalities and the outcome of negotiationsin agriculture.This implies that, according to the HKMD, a WTO membercountry will have the right to impose SSMs if it finds that importsare increasing to the extent that local markets are being disruptedor threatened (a “volume trigger” in WTO jargon) or if thereis a collapse of the international price of that commodity whichundermines or threatens to undermine the otherwise viable domesticproduction (a “price trigger”).5The ministerial declaration shows that though the concept ofan SSM has been agreed to, the exact mechanisms of the imple-mentation of the SSMs have not yet been spelt out. For example,price and volume triggers have not been defined. It has not beendecided what kind of temporary market access barriers can beerected to insulate a country from import surges and price volatility.It is also not clear what legal provisions the member countrieswill have to follow to use this safeguard mechanism.It is important to mention here that in the Uruguay roundAgreement on Agriculture (AoA) a similar safeguard mechanismwas available to a select group of countries. This safeguardinstrument was called Special Safeguards (SSG). In the currentround,6 it has been decided that a new agricultural safeguardmechanism will be provided as a part of S&D treatment to alldeveloping and the least developed members of the WTO.7However, the developed-country members will not have accessto this instrument.Need for New Safeguard MechanismInternational commodity prices have always been volatile andthe need for a safeguard measure to protect countries from thisvolatility has long been recognised. To tackle this problem, aprovision of a special safeguard to allow countries to imposetemporary market access barriers existed in the Uruguay roundAoA. But this provision was not available to all WTO members.In the AoA, the SSG provisions were only offered with referenceto products for which certain previous barriers were tariffied(converted into ordinary customs duty). SSGs were not availablefor products which did not undergo the tariffication process andfor which the concerned WTO member undertook only bindingcommitment.8 The argument behind this dichotomous treatmentwas that when a country opted for the “bound rate approach”and declared a certain bound tariff rate; it had the flexibility tofactor in a safety margin over and above the tariff rate deemedsufficient to protect the concerned product. Therefore, the “boundrate approach” already had a certain amount of flexibility builtinto it and it was felt that an additional SSG instrument wouldnot be required for these countries.The implementation experience of the Uruguay round AoAshows that the existing SSG mechanism did not prove to be usefulto developing countries. There are two reasons behind this. Thefirst, and the most obvious reason, is that the right to use the SSGwas not available to a majority of developing countries. Second,even when the SSG was available, the use of this instrument wasquite limited. Data show that among the 22 developing countrieswhich had the right to invoke SSGs, only six have actually usedit during the period 1994-2004 [FAO 2004]. These countries havetriggered the SSG only 163 times over the period 1995-2004.FAO (2004) has calculated that the overall “SSG utilisation rate”– the ratio of actual use to potential use – is about 1 per centwhen the potential uses by all 22 developing countries are takeninto account. The paper by the Food and Agricultural Organisation(FAO) shows that even in cases where there were import surgesbased on depressed import prices, many developing countries didnot impose the SSG measures. It has been hypothesised that thelow utilisation of SSG may stem from the fact that the applicationof an SSG can be cumbersome9 or can involve significantadministrative cost. This is understandable because most devel-oping countries lack resources to track and monitor import volumesin real time and if a country has multiple ports or trading pointsthen this issue becomes even more complex. Therefore, mostdeveloping countries found it extremely difficult to monitor andsatisfy the volume trigger criteria laid out in the Uruguay roundAoA. Price-based SSGs are much easier to monitor and invokebut most developing countries had not exercised this optionduring the implementation period.The other possible reason for the limited use of SSG couldbe that although import prices fell or/and imports surged, theauthorities may have determined that this would not lead to theinjury of the domestic economy and so might not have felt theneed for a response. Sometimes it is also argued that price-trigger-based SSGs were not used much by developing countries becausethe level of the bound tariffs was high enough for countries toraise the applied rates to an appropriate level to offset the effectsof depressed import prices. However, in the Doha round ofnegotiations, it has been proposed to reduce the bound tariff ratessignificantly. As a result, these flexibilities will be greatly reducedfor developing countries. This is another reason why an SSMwill be important for these countries. This issue will be discussedin greater detail below.On the other hand, users of SSGs have predominantly beendeveloped countries (Figures 1 and 2).10 These figures show thatfor the period 1995-2001, apart from a couple of countries suchas Costa Rica and the Slovak Republic, almost all the users ofSSGs belonged to the OECD group of countries.11One of the main reasons behind the demand of developingcountries for a special safeguard is the continued high volatilityor instability of international commodity prices.International commodity prices have, traditionally, been highlyvolatile in nature. A number of factors, both from the supplyside as well as the demand side, contribute to this high volatility.From the supply side, a distinguishing feature of internationalagricultural trade is that only a limited number of exportingcountries dominate international trade. Figure 3 shows that forcertain crops, the share of the top five exporters can account foras much as 98 per cent of global exports. Even for a widelyproduced crop like rice, the share of the top five exporters ismore than 76 per cent and for all cereals the share of the topfive is almost 75 per cent. As a result of this trade pattern, any

Bound Rate Post-cut Bound Rate Applied Rate Bound Rate Applied Rate Post-cut Bound Rate

Economic and Political WeeklyFebruary 3, 2007422Developing countries have been arguing that the relevance ofthe agriculture sector for developed and developingcountriesis fundamentally different and should not be treated in thesame manner. This argument is backed by the fact that whereasagriculture accounts for 2 per cent of GDP and less than 4 percent of employment in developed countries, the share of agri-culture in the GDP of low-income countries is as high as 24 percent and it provides more than 60 per cent employment in poorereconomic regions like south Asia and sub-Saharan Africa.19The combination of high poverty and low risk-taking abilitymakes farmers in developing countries extremely vulnerable toexogenous shocks. These countries argue that given the inabilityof the farmers to bear risks arising out of any external shocks,an effective safeguard mechanism for preventing a surge inimports becomes absolutely essential for preserving theirlivelihood.20 It has also been pointed out that standard WTOsafeguard instruments may not be effective enough for thispurpose. The WTO has a set of safeguard measures to tackleemergency situations. However, to invoke these standardsafeguard mechanisms a member country has to go through alengthy administrative procedure. The complaining country hasto prove that an import surge or price depression has occurred.Second, based on a number of indicators mentioned in theagreement, it has to prove that the surge in imports is havingadverse effects on its domestic economy. Third, it has to establishthat there exists a clear causal link between the import surge andthe adverse effect. And, finally, it must properly identify andaccount for (non-attribution) injury caused by other factors(besides imports).Given the nature of agriculture in developing countries, thecomplex provisions of general safeguards available under theAgreement on Safeguards are extremely time consuming and maynot provide timely protection to the distressed population.Therefore, to protect the vulnerable section of the farmingcommunity, there is a necessity for a quick-acting and easy toadminister safeguard instrument. A SSM along the lines of thespecial safeguard provisions (article 5) of the AoA is an instru-ment better suited for these countries because to invoke this typeof safeguard it is sufficient to establish that an import surge ora sharp price decline has occurred and is occurring. No proofof injury, causation or non-attribution is required.The arguments in favour of a SSM for developing countrieshave got a further boost from a recent set of in-depth studiesdone under the “FAO import surge project” on the various facetsof an import surge and their impact on developing countries.Under this project, Nigris (2005) studies the frequency of importsurges across various countries and commodities for the period1984 to 2003. The author has defined import surge as a “30 percent positive deviation from a three-year moving average ofimport data and, alternately, as one standard error above themoving average” [Sharma 2005]. Using this definition, his findingsshow that import surges have occurred more frequently in thepost-1994 period with only a few exceptions. He has found outthat the percentage occurrence of import surges (under the 30per cent deviation) is higher in the post-1994 period for allcommodities – the only exceptions being wheat, rice, maize andpalm oil. As far as the countries are concerned, his results showthat though almost all countries have experienced import surges,some were affected more often than others. According to hisfindings, import surges were more frequent in India and Bangladesh(Asia), Zimbabwe, Kenya, Nigeria, Ghana and Malawi (Africa)and Ecuador and Honduras (Latin America). Under the sameproject, another paper by Sharma (2005) has listed a number ofcase studies where import surges have negatively affecteddomestic production. A few of these cases are worth mentioninghere. For example, in Sri Lanka, vegetable-producing sub-sectorslike onions and potatoes have suffered from import surges.In 1999, an import surge of onions and potatoes resulted in adecline in the cultivated area of these crops and affected thelivelihood of approximately 3,00,000 persons involved in theirproduction and marketing. As there were not many options forthe affected farmers to diversify into other crops, the economiceffects of this importsurge have been significantly negative.Similarly, in two other widelycited cases, rice production in Haiti(in the late 1980s) and Honduras (in the early 1990s) sufferedfrom import surges. What is even more disturbing is that, in boththe cases, import surges have inflicted a permanent damage tothe production of rice. According to Sharma, this situation isknown as “material retardation” where imports prevent the revivalof the industry following a shock.The discussion in this section highlights the fact that due tostructural problems with agriculture in developing countries,a very large number of people who depend on this sector arehighly vulnerable to exogenous shocks such as international pricespikes. Moreover, the complexity of the existing safeguardmechanisms makes it difficult for developing countries to usethem effectively. Therefore, the availability of special safeguardinstruments like SSMs will be imperative for protecting thelivelihood of these people. This requirement becomes evenmore important because evidence show that incidences ofimport surges have increased in the post-Uruguay roundperiod and there are a number of cases where these importsurges have resulted in material injury and loss of productionbase in developing countries. It is not surprising that since thebeginning of the current round of WTO negotiations on agri-culture, one of the unanimous demands from the developingcountries has been the universal availability of SSMs as aS&D instrument.Special Safeguard Mechanisms in Doha RoundDuring the mandated (article 20) re-negotiations on agriculture,there was a convergence of opinion among members that a specialsafeguard instrument in line with the SSG should be given todeveloping and least developed countries. However, the conceptof the SSM, its coverage and implementation have gone througha number of transitions during the negotiations.The Doha mandate emphasised S&D treatment for developingcountries and brought food security and rural development under,“development needs”.Harbinson’s text or the first draft modalitiespaper introduced the term “special safeguard measure” or SSM.However, Harbinson’s text perceived very limited coverage ofthe SSM. Subsequent revisions of Harbinson’s text and theDerbez text (the draft Cancun ministerial text) suggested a widerscope for the SSM.The July framework categorically mentionsthat SSM will be established for use by developing-countrymembers. A more detailed exposition of the SSM was made inthe HKMD. The HKMD unequivocally mentions that developingcountries will have the right to impose both price-trigger andvolume-trigger-based SSMs.If one looks at the country positions regarding SSM, mostdeveloping countries demanded that the right to impose special

Economic and Political WeeklyFebruary 3, 2007423agricultural safeguards should be given to all developing and leastdeveloped countries in the WTO. Many developing countries –and some developed countries like Australia – also argued thatthe SSG provisions for developed countries must be abolishedin the present round of negotiations.On the other hand, most developed countries (including theEuropean Commission, Norway and Japan), while supportingthe demand by developing countries to have access to aspecial safeguard provision, wanted the SSG to continue fordeveloped countries as well. However, the US seems to have avery strong and extreme view on SSGs. In a recent submissionto the WTO,21the US says that SSGs should be eliminated onthe first day ofthe implementation of the Doha round agreements.It also suggests that developing countries may use the SSM, undersome very strict conditions, till the end of the implementationof the Doha round. In spite of hectic negotiations on the issueof the SSM, a number of critical issues remain unresolved.Particularly, there is a division among the countries about thecoverage and usability of SSMs.The contentious issues regarding SSMs have been ear-marked in anote prepared by the chairman of agriculturenegotiations. In this note, the chairman has highlighted thefollowing issues:22(1) What is the coverage of tariff lines that would be eligiblefor the SSM and should this be based on self-selection, guidedby criteria or based on specific criteria and, if so, what arethese criteria?(2) For the import quantity triggers, what should be the meth-odology for calculating the trigger including factors such as baseperiod(s), trigger quantities, cases where no or minimal quantitieswere imported in the base period, etc?(3) On what basis should the quantity-based SSM be calculated?(4) For the import price triggers, what should be the methodologyfor calculating the trigger, including base period(s), the degree,if any, of the price fall permitted before the SSM can be triggered,etc?(5) On what basis should the price-based SSM be calculated?In the following sections, we will analyse these issues,review the country positions and try to provide answers to thesequestions.Some Operational IssuesProduct coverage for SSMs is probably the most contentiousissue about SSM administration in the current round of tradetalks. Most developing countries are of the opinion that theSSM should have broad coverage and should be available formost if not all products. However, some countries, which areessentially agricultural exporters, feel that a wide coverage ofproducts will lead to increased protectionism and, hence, theywant limited availability of the SSM. For example, the US isof the opinion that the coverage of SSMs should be restrictedand should be limited to a certain “per cent of tariff lines at thedetailed duty level that take the full tariff cut as specified bythe general tariff reduction formula for developing countrieswhich result in new bound tariffs below current applied tariffs;and products that are produced domestically or are close sub-stitutes of products produced domestically” (United StatesCommunication on Special Agricultural Safeguard (SSG) andthe Special Safeguard Mechanism (SSM), JOB(06)/120, datedApril 24, 2006).Most developing countries, including the G-33, the Africangroup, the African, Caribbean and Pacific group, and the leastdeveloped countries, strongly objected to this proposal andcommented that the SSM is required to address their legitimatenon-trade concerns and proposals to restrict its usage is notacceptable to them.23 The position taken by these countries isnot unjust because there is no a priori reason to restrict the useof the SSM. This is so because of four reasons. First, developingcountries are demanding instruments like SSMs and SPs toprotect the food security and livelihoods of low income andresource poor farmers from the uncertainties associated withinternational trade. These objectives are perfectly consistent withthe mandate of the Doha ministerial declaration and, therefore,no constraints should be imposed to reduce the effectiveness ofthese instruments. Moreover, the SSM is an emergency measurewhich will only be applied if there is a sudden surge in importsor depression in price. The volume and price triggers can bedefined in such a manner so as to ensure that SSMs are onlyapplicable in very special situations. Given these restrictions, itis not necessary that SSMs should be restricted further throughproduct coverage.Second, the results of the FAO import surge project show thatimport surges have occurred across a very wide range of productsand if product coverage is restricted it is almost certain that somedeveloping countries will face problems protecting their domesticeconomy from such import surges.Third, the distortions of world agriculture and the associatedproblems of excessive price volatility and price depression arelargely attributable to the production and trade distorting sub-sidies given by developed countries. Simulation results clearlyindicate that the Doha round will not lead to a substantial re-duction of these subsidies [Pal 2005]. Unless these distortionsare completely removed, the rights of developing countries toimpose safeguards should not be constrained.Finally, the fear that the universal availability of SSMs maylead to protectionism may not be justified. As mentioned before,SSMs are only applicable if the conditionalities for their appli-cation are fulfilled. There can be built-in mechanisms to preventmisuse. But, more importantly, historical evidence of the usageof SSGs by eligible developing countries in the Uruguay roundhas shown that availability of SSGs to some developing countriesdid not resultin either overuse or abuse of the safeguard. In fact,developed countries used SSGs much more intensively than thedeveloping ones.However, given the objective of SSMs, it appears that thereis a case to restrict the SSMs to domestically produced goodsand to goods which are substitutes of domestically producedgoods.In administering a volume-trigger-based safeguard measure,an important requirement is to define what exactly constitutesan import surge. Similarly, for a price-trigger-based mechanismit is important to define a “price depression”. To a large extent,the effectiveness of the safeguard mechanism depends on thesedefinitions. To have an effective safeguard measure, thethresholdof volume and price triggers should not be set so highthat the usability of the safeguard mechanism is compromisedbut on the other hand, it should not be set so low that the safeguardbecomes too easy to invoke and essentially becomes a traderestrictive measure.In the current round of negotiations, countries have suggestedalternate views on volume triggers. The G-33 has suggested that

Economic and Political WeeklyFebruary 3, 2007424even a 5 per cent increase from the average volume of importsof the preceding three years can set off a volume trigger. Onthe other hand, the US is of the opinion that an SSM can beinvoked only if imports are 130 per cent of yearly average mostfavoured nation (MFN) imports over the most recent 36-monthperiod, or 130 per cent of the yearly average 2002-4 MFN imports.Nigris (2005) has conducted extensive research on volumesurge under the FAO import surge project. He has used twoalternate approaches for identifying a surge. They are: (1) Movingaverage-based measures where an import surge is defined as a30 per cent positive deviation from a three-year moving averageof import data and, alternately, as one standard error abovethe moving average or (2) The AoA volume trigger definitionof SSG.Interestingly, Nigris finds that, compared to the moving averagemethod, the SSG definition identifies a much larger number ofcases as incidences of “import surge”.It is to be noted here that within the moving average method,the threshold selected for identifying “import surges” has asignificant impact on the frequency of import surges reported.For example, data reported by Nigris show that for the period1982-2003 and for wheat, changing the threshold from 10 percent positive deviations from three-year moving averages to 50per cent brings down the reported cases of import surges from609 to 100. Similarly, if a five-year moving average is chosenover the three-year moving average, then it increases the numberof reported “import surges”. These results underscore the fact thatthe parameters chosen for determining import surges will havea significant impact on the working of the new SSM and WTOmembers must arrive at a consensus on these critical operationalissues. Erring on either side will negatively affect the purposeof SSMs. Also, there may be a case to have a price element tothe volume trigger. If a surge in import volume takes place withouta decline in international prices, the logic of imposing an SSMis somewhat weak. In this kind of a situation, it can be arguedthat imports are dictated more by domestic demand and produc-tion imbalances rather than international conditions.When defining a price trigger, it must be kept in mind thatWTO safeguards do not intend to insulate countries from lowagricultural prices emerging from long-term or secular declineof commodity prices. But the objective of the safeguard instru-ment is to protect the member countries from short-term priceinstability and the resultant sudden import surges. Therefore, fora price-trigger-based SSM, the following factors need to beclearly defined. First, one should define the method to calculatea reference price. As Valdes and Foster (2005) have pointed out,there are several methods of doing so, including price trends andmoving averages of various lengths, base-period average prices,the preceding year’s price, and a minimum average cost of theworld’s “most efficient” exporter. In the negotiations, movingaverage-based methods have found support among many coun-tries. However, Valdes and Foster suggest that the moving averagemay not be the most appropriate technique to use as they foundit to be “inconsistent with the objective of protecting againstexceptionally low prices”. They find regression-trend-basedmethods to be better. In this context, we propose that a variantof the method used by United Nations Conference on Trade andDevelopment (UNCTAD) to calculate price instability can beused for calculating the reference price for an SSM. UNCTADuses an exponential-trend-based technique and members canconsider using it for calculating reference prices.Second, it is also required to define the length of the periodfor calculating a long-term trend. Generally, a three to five-yearperiod (based on monthly data) can be suggested for calculatingreference prices.Finally, there should be a proper definition of price depression,i e, there should be a clear guideline about what percentagedeviation from the trend line actually constitutes a surge. A 20per cent drop below the reference price can be thought ofas the price trigger. The G-33 will find it difficult to pushits demand (that the trigger should be activated when the pricedrops 5 per cent below the reference price) in this round ofnegotiations.Overall, we feel that price-trigger-based mechanisms are superiorto volume-trigger-based mechanisms. The volume trigger isanexpost defence and it can only be activated if a sufficientlylarge quantity of import already gets into a country. Therefore,some amount of damage may already occur before imposing theSSM. On the other hand, price-trigger-based mechanisms aresuperior as they can be triggered in the wake of a fall in inter-national prices and can, thereby, pre-empt any damage to thedomestic agriculture.An SSM, by definition, is a temporary mechanism. Therefore,for such a mechanism, it is important to have a provision fora sunset clause. It was decided that a SSG invoked any time duringthe year would automatically lapse at the end of that calendaryear, that is, on December 31 of that year. If the country wishedto continue the special safeguard it would have to take stock ofthe situation and analyse whether the surges which necessitatedthe safeguard were still there. This mechanism worked satis-factorily for the SSG. However, some argue that lapsing ameasure at the end of a calendar year may be somewhat ad hocand arbitrary. It will be more rational that a safeguard measureinitiated will lapse at the end of 12 months.For price-trigger-based mechanisms, we propose that themember country government should be given at least sixmonths to ensure that the price decline which initiated thesafeguard action has corrected itself. To elaborate, supposethe price of a certain commodity dips below the trigger leveland the price-trigger-based SSM is activated in January.Then, in April, the international price of that commoditytouches or exceeds its trend level (either a moving averageorexponential trend, depending on the indicator the pricetrigger is based on). We propose that the member countryshould beallowed to continue the SSM at least for the next sixmonths (till October) to ensure that the upward movementof the international price is not merely a short-run price fluc-tuation. During these six months the monthly internationalprice of that commodity should be consistently above theprice-trigger level.Proposed Methodology forAlternate Price-Trigger-Based SSMIn this section, we propose a price-based SSM, which wefeel satisfies the criteria of (a) providing enough latitude todeveloping countries to protect their domestic economy fromprice fluctuations and (b) has a built-in mechanism to preventoveruse or excessive protectionist use of the safeguard instrumentby the countries. Here we assume the price trigger is alreadydecided and is based on a three or five-year moving average ofinternational prices.

P*MA(1+tariffbound)...This is the maximum price a member can target using the variable levy based SSM P*MA...This is the long-term international price of the commodity when the surge happened. This can be taken as constant or can be periodically reviewed P*(1+tariffbound) P* ...this line shows the current international priceprice (t) This is the gap between P*MA and P* which invokes the SSM (price trigger)

pp

P − P*

= , pp

P

P*

p

ppPp ≤ P* (1 + tariff )

PMA bound

Economic and Political WeeklyFebruary 3, 2007426proposed a formula for a volume-trigger-based SSM (Table 2). Tonsure that implementation of such a formula is not overly defensive,one can propose using the SSM component of it in conjunctionwith some variant of a ceiling tariff level mentioned above.Possible Problems with ImplementationEven if the WTO allows the use of SSMs, one concern thathas been expressed by many analysts is whether some of thepoorer and less developed members of the WTO will have theinfrastructure and the state machinery to actually implement iteffectively. Volume-trigger-based SSMs imply that a countrywill have to centrally monitor imports from all its ports and ona shipment basis. Second, there is some confusion regardingwhether imports coming through regional trading partners willbe counted for invoking volume-trigger-based SSMs. It is likelythat these imports will have to be tackled separately as mostregional trade agreements (RTAs) tend to have clauses preventingcountries from imposing safeguards on imports coming fromregional partners. This requires further monitoring and classi-fication of imports on a “rules of origin” basis. It is obvious thatfor this kind of monitoring a good infrastructure in informationtechnology needs to be established. Many developing and leastdeveloped member countries may not have the backbone of suchinfrastructure and trade facilitation. In comparison, price-basedsafeguards are easier to monitor. International price data areavailable on a daily basis and it is not at all difficult to identifya price depression. However, since the special safeguards arequick-acting mechanisms, in both cases it is required that therebe co-ordination between the government agencies which moni-tor imports (typically the customs department and the ministryof commerce) and the agency which formulates tariff policies(typically the ministry of finance). Only then can these instru-ments be used effectively. There is an apprehension that manydeveloping and least developed countries may not at present havesuch a well coordinated system in place. As a result, their abilityto take advantage of the SSM will be suspect.ConclusionIn the Doha round of trade negotiations, developing countriesare demanding that a special agricultural safeguard be made avail-able to them. The analysis in this paper shows that developingcountries have a number of valid reasons to seek an SSM in thisround. The most fundamental reason is that international commod-ity prices are extremely volatile and bound tariff rates may not beenough to protect countries from the gyrations of internationalcommodity prices. Calculations in this paper show that implemen-tation of the AoA has not been successful in bringing down theinstability of international commodity prices. Moreover, a numberof studies have also pointed out that import surges have increasedin the post-Uruguay round period and that in many cases theseimport surges have inflicted irreparable damage to domesticproductionand to the livelihood of farmers in developing countries.Under these circumstances, developing countries are justified intheir demand for a temporary safeguard mechanism.To complicate the matter further, simulations show that themarket access negotiations in agriculture will lead to significantcuts intariff rates in most developing countries. As a result, thegap between the bound and applied tariff rates will come downconsiderably during the implementation of the Doha round. Asimulation analysis has been done in this paper using the G-20tariff reduction formula and India’s tariff rates at the six-digitHS level. The results show that for a number of important productsthe gap between bound and applied rates will either disappearor will become negligible. During the Uruguay round, the tariffoverhang allowed some degree of flexibility to developingcountries to deal with contingencies associated with a suddenchange in commodity prices. The Doha round of tariff cuts willtake away this flexibility from developing countries. Therefore,it is not surprising that many developing countries have arguedthat unless the WTO allows these countries to have access toSSMs itwill be difficultfor them to accept the tariff liberalisationpackage of the Doha round.So far, the progress in the negotiations shows that the WTOrecognises these problems and has agreed to provide bothprice-based and volume-based SSMs to developing and leastdeveloped countries. However, the precise working mechanismsof these safeguards have not been finalised and there are effortsfrom a handful of countries that are big exporters of agriculturalcommodities to restrict the usability of SSMs. These countriesare apprehensive that widespread availability of SSMs may leadto increased protectionism but this concern is not really justified.The implementation experience related to SSG has clearly shownthat access to safeguard instruments does not necessarily translateinto overuse or abuse of the system. Moreover, as per the Dohamandate, developing countries have a legitimate right to protecttheir domestic economy from the distortions that arise out of hugesubsidisation of the farm sector in developed countries. The SSM,along with the SPs, is going to be an important instrument forprotecting the domestic production base, food security andlivelihood security of farmers in developing countries. Imposingapriori and overly strict restrictions may hamper the usabilityof these instruments. Also, it is possible to develop in-built criteriafor the implementation of SSMs so that their misuse can beminimised. This paper has outlined a possible method of doingso. It has been suggested in this paper that a built-in mechanismshould be in place to ensure that countries are protecting theirmarkets only from short-term fluctuations and not from secularprice trends of agricultural commodities. Usingthese broadparameters, this study has proposed an alternate frameworkofSSM based on variable levy. It has been argued that in theabsence of QRs, a variable-levy-based safeguard instrument canprovide adequate protection against international commodityprice volatility.However, mere availability of safeguard instruments may notbe sufficient for ensuring protection from price volatility andimport surges. Developing countries need to have a propermechanism in place to take advantage of these instruments.There isconcern that the infrastructure in most developingTable 2: Volume-Trigger-Based SSM Proposed by G-33Import VolumeSSM ComponentLess than 5 per cent increaseover the three-year averageNo SSM5-10 per cent increase over the50 per cent of bound rate orthree-year average40 percentage points10-30 per cent increase over the75 per cent of bound rate orthree-year average50 percentage pointsMore than 30 per cent increase100 per cent of bound rate orover the three-year average60 percentage pointsSource:G33 proposal on the SSM, available at http:/www.ictsd.org/ministerial/hongkong/docs/G33_Proposal_on_SSM_final.pdf

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