Policy Space In Agricultural Markets

As an outcome of the Uruguay Round Agreement on Agriculture, all agricultural products now have a bound tariff rate on their imports. This system of bound tariffs combines the rigidity of an upper limit that is independent of future economic conditions but discretion as governments have a whole array of choices in terms of applied tariffs as long as they are set below the bound rate. One recurring argument is that bound rates may limit countries’ policy flexibility, or policy space, in response to particular economic circumstances. This paper looks at the use and availability of this policy space in agricultural markets. This is first done in a descriptive setting, then by assessing what plays a role in determining this space using an empirical analysis. A general finding is that policy space in agricultural products is generally available, and only limited for developed countries. Many developing countries have ample room to raise tariffs in most agricultural imports without infringing binding commitments. For LDCs there is virtually no imports for which policy space is not available. The findings indicate that four specific factors are related to the use of policy space, which are the elasticity of import demand, the fact that the goods are being used as intermediates, food security and protection of local producers. The results suggest that policy space tends to be used relatively less for products with lower elasticity of demand and for intermediate products. In regard of products relevant for food security, the results suggest that policy space is larger. In regard to products that face domestic competitors, the results indicate lower tariff water and more use of policy space, suggesting that producer protection is an issue related to the level of policy space to use and the level of market protection to set.