Improving Market Access: The Role of Auctions in Converting Tariff-Rate Quotas into Single Tariffs

Market access in the WTO is highly fragmented due to exceptions from GATT principles. Tariff-rate quotas (TRQs) stand in contradiction to the principle of the GATT, according to which all quantitative restrictions in international trade should be eliminated. Bhagwati’s theorem of the non-equivalence of tariffs and quotas leads to the conclusion that under imperfect competition, market access can be improved by converting TRQs into single tariffs. In order to find the ‘new’ tariff, Bergsten (1987) proposed to auction quotas and to use the realized auction price for setting the equivalent tariff. There is empirical evidence from auctions of TRQs in Switzerland that the observed auction prices are below the equivalent tariffs. This is in line with the analysis of McAfee et al. (1999) that auction prices are considered as a useful lower bound for determining the equivalent tariffs. A change from quotas to tariffs will hardly raise protection but it may reduce price support by the new tariff. As a consequence, a country which replaces TRQs by single tariffs through auctions, in so doing, has already reduced tariffs to some extent. Finally, it is important that auctions are competitive and collusion among bidders can be prevented. In this regard, Lengwiler (1999) recommends the ‘variable supply’ auction format which resists collusion. This anti-collusive mechanism ensures competitive auctions in the event of high buyer’s concentration and imperfect competition.