Modeling Tariff Rate Quotas in a Global Context: The Case of Sugar Markets in OECD Countries

We use mixed-complementarity-problem programming to implement tariff rate quotas (TRQs) in the global computable general equilibrium (CGE) Linkage model. We apply the approach to TRQs in sugar markets in OECD (Organization for Economic Cooperation and Development) countries. We calibrate the model on 2000 policy levels for OECD countries to reflect the full implementation of their World Trade Organization commitments. We look at reforms of TRQ and TRQ-like schemes in the European Union, the United States, and Japan, as well as multilateral trade liberalization. We derive the impact of reforms on welfare, bilateral trade flows, and terms of trade. A 33 percent multilateral decrease of ad valorem tariffs, combined with a 33 percent increase in imports under TRQ-like schemes in the European Union, the United States, and Japan, induces a global welfare gain of about $889 million. These three countries' trade policies create substantial trade diversion, which excludes many low-cost producers from trading opportunities. An expansion of their import quotas alone, without multilateral trade liberalization, induces welfare gains but preserves most of the trade diversion patterns. The latter diversion benefits some least-developed countries' producers because of granted bilateral TRQ allocations. In the context of greater market access, reductions in tariffs in the European Union and the United States, and in border "surcharges" in Japan, will have to be dramatic before they can affect trade flows significantly as compared to TRQ expansion. Full multilateral trade liberalization induces global welfare gains of about $3 billion.