Price volatility, tariff structure and the special safeguard mechanism

Specific tariffs, which are levied per unit of imports, have often been shown to be discriminatory against poor countries; it is because they export low-value goods that face a higher tariff burden in ad valorem terms than high-value goods for the same specific tariff. However, specific tariffs also have a positive aspect of being able to insulate the domestic economy from global price volatility. The Special Safeguard Mechanism (SSM) is a proposed policy in the World Trade Organization (WTO) that is intended to help poor countries to be able to shield their domestic agriculture from low import prices by giving them flexibility to increase tariffs; however, the SSM causes an increase in price volatility. Therefore, specific tariffs may reduce the price volatility effects of the SSM. Aiming to test this hypothesis, our work implements the SSM and specific tariffs in a Computable General Equilibrium (CGE) modeling framework. We find decreased variability of producer prices, import prices, and output in most developed and developing countries when specific tariffs are accounted for. This work illustrates the potentially stabilizing effects of specific tariffs in the presence of the SSM, and highlights the importance of tariff regime modeling when considering the economic effects of international trade policy measures.