International Trade - Theory and Policy, 2010a

subsidies. Recall that export subsidies are subject to retaliation under the antisubsidy code but that
requirement was negated for agricultural products. This enabled countries to keep prices for farm
products high in the domestic market and, when those prices generated a surplus of food, to dump that
surplus on international markets by using export subsidies.
The result of this set of rules implemented worldwide was a severe distortion in agricultural markets and
numerous problems, especially for developing countries, whose producers would regularly be forced to
compete with low-priced subsidized food for the developed world.
The intention at the start of the Uruguay Round was a major reduction in tariffs and quotas and also in
domestic support programs. Indeed, in the United States, the Reagan administration initially proposed a
complete elimination of all trade-distorting subsidies to be phased in over a ten-year period. What
ultimately was achieved was much more modest. The Uruguay Round agreement missed its deadlines
several times because of the reluctance of some countries, especially the European Community (EC), to
make many concessions to reduce agricultural subsidies.
Countries did agree to one thing: to make a transition away from quota restrictions on agricultural
commodity imports toward tariffs instead—a process called tariffication. The logic is that tariffs are more
transparent and would be easier to negotiate downward in future World Trade Organization (WTO)
rounds. A second concession countries made was to accept at least low levels of market access for
important commodities. For many countries, important food products had prohibitive quotas in place. A
prime example was the complete restriction on rice imports to Japan. The mechanism used to guarantee
these minimum levels was to implement tariff-rate quotas. A tariff-rate quota sets a low tariff on a fixed
quantity of imports and a high tariff on any imports over that quota. By setting the quota appropriately
and setting a relatively low tariff on that amount, a country can easily meet its target minimum import
levels.
The General Agreement on Trade in Services (GATS)
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