**1. Introduction**

Open and fully liberalised trade is crucial for the South African fruit industry given its reliance on exports. The National Agricultural Marketing Council (NAMC 2017) noted that the fruit sector contributed the largest value share in the country's agricultural exports and that 90% of fruit production was exported internationally. Only 29% of the total fruit production in South Africa goes to processing, as noted in van Lin et al. (2018). Approximately 80% of canned fruit is exported annually by South Africa and the European Union (EU) market is reported among South Africa's major export destinations (Bertelsmann-Scott and Markowitz 2018; Research and Markets 2021). Evidently, scope exists for value addition in the sub-sector of canned fruits targeted for exports. Though the EU is among the major export destinations, processed fruit products face stiff entry barriers and this has been identified in studies such as Bertelsmann-Scott and Markowitz (2018), noting how African exporters are impacted by developed countries' trade policies.

South Africa's share in the exports of "sensitive"<sup>1</sup> agricultural products to the EU<sup>2</sup> is governed by the use of tariff rate quotas (TRQs) by the EU, which seeks to protect its agricultural market. TRQs are defined in Skully (2001) as "a two-tiered tariff system" in which in-quota imports face a lower tariff than out-of-quota imports. TRQs are considered in trade theory to be less restrictive than pure quotas, thus improving welfare to the extent of the quota fill. However, full TRQ liberalisation (zero in-quota tariff) has the potential to further liberalise trade and improve market access. The TRQ that consists of a combination of canned pears, apricots, and peaches (hereafter referred to as canned fruits<sup>3</sup> TRQ) is a major (70–80%) export value contributor (see Appendix A Table A1) among six EU fruit

**Citation:** Muchopa, Chiedza L.. 2021. Economic Impact of Tariff Rate Quotas and Underfilling: The Case of Canned Fruit Exports from South Africa to the EU. *Economies* 9: 155. https://doi.org/10.3390/economies 9040155

Academic Editors: Michał Roman and Monica Roman

Received: 26 June 2021 Accepted: 10 September 2021 Published: 18 October 2021

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products TRQs implemented and administered in South Africa through a permit allocation system managed by the then Department of Agriculture, Forestry and Fisheries (DAFF)<sup>4</sup> as part of the obligations and provisions on TRQs for fruit products contained in the EU– South Africa free trade agreemen<sup>t</sup> (TDCA 1999), the Trade Development and Cooperation Agreement (TDCA). The TDCA paved the way for South Africa to export fruit products on the EU's sensitive list and the provisions of the agreemen<sup>t</sup> are such that the TRQ is administered by the exporter. There are no studies describing the TRQ administration of a unilateral TRQ offered by the EU to a third country (a country other than an EU member state)<sup>5</sup> and the present study provides context by describing such a TRQ administration, thus contributing to a better understanding of the institutional context within which the trade policy instrument operates.

Though the canned fruits TRQ is the major earner amongs<sup>t</sup> the fruit products TRQs, its performance (in terms of fill rates, the share in tariff line coverage of fruit TRQ exports to the EU, and welfare effects) needs to be more clearly understood. To this end, after describing the TRQ administration system of the exporting country, the paper assesses how the canned fruits TRQ performed focusing on the canned pears, apricots, and peaches tariff lines that correspond to the Harmonised System (HS)<sup>6</sup> of commodity description codes HS 2008.40/50/70. Tariff line coverage and fill rates of the TRQ were analysed to determine the extent to which the yearly TRQs were utilised and finally, a case study of the canned fruits TRQ was used for the empirical analysis of the welfare effects of TRQ liberalisation. Trade theory provides a framework to analyse trade policy instruments such as the TRQ implementation for which static effects can be determined in three different cases, namely, where exports are equal to the quota granted, exports are less than the quota granted, or exports exceed the quota granted (Abbott and Paarlberg 1998; Skully 2001). The case of the canned fruits TRQ in this study is the situation where exports are less than the quota granted, meaning that the effective instrument is the in-quota tariff. Hence, the goal of this study is to quantify the economic impact of the TRQ on welfare after considering a policy change where the in-quota tariff is fully liberalised. The hypothesis is therefore that the in-quota tariff impacts economic welfare. This paper uses the widely accepted static GTAP model to quantify economic welfare measured in equivalent variation. Additionally, the present study does not quantify the extent of impact of the TRQ administration system on TRQ fill but analyses the welfare impacts measured in equivalent variation (EV) in a comparison of scenarios of the filled and under-filled canned fruits TRQ.

The paper is organised as follows. The introduction section is followed by a literature review. The methodology is presented in Section 3, followed by findings and discussion in Section 4 and the conclusion in Section 5.

#### **2. Literature Review**

The theoretical literature on trade policy liberalisation focusing on the TRQ instrument, a synopsis of the global policy goals of TRQs, and the associated TRQ permitting systems as well as a summary of previous studies on TRQ liberalisation, are presented in this section. The implementation of the TRQ policy finds favour with exporters and importers for different reasons, especially in the context of sensitive agricultural products. TRQs arose under the Uruguay Round trade negotiations (1986–1994) on agriculture as a means to improve market access for imports (WTO Market Access Group 1993; Skully 2001; Pouliot and Larue 2012). Based on the same principles upon which TRQs were founded, the canned fruits TRQ discussed in this study was negotiated to achieve the main stated objective of achieving improved market access spelt out under the obligations of the TDCA. The challenge of frequent under-fill of quotas, however, as confirmed recently by Beckman et al. (2017), has dominated the agricultural market access debate. The World Trade Organisation reports (WTO Committee on Agriculture 2018, 2020) of the Committee on Agriculture note the existence of a total of 1128 schedules of TRQs and an annual average fill rate of 54% over all TRQs in 2016 and 46% in 2019. Skully (1999), at the onset, elaborated that the administration of quotas and quota fill is a principle of the General Agreement on Tariffs

and Trade (GATT) that declares that quota fill regulations need not act as trade barriers. Though the quota fill principle focuses on importer administration of TRQs, that same principle directs no particular attention to exporter administered TRQ rules, which are ideally the same rules that possibly inhibit quota fill as highlighted in some of the previous studies reviewed in Section 2.2.

#### *2.1. Theoretical Framework*

The assessment of possible welfare changes due to trade liberalisation has a theoretical basis in the analysis of policy changes credited to Harberger (1971) for identifying four sources of economic welfare induced by a policy change. The four sources identified were new technology, improved trading terms, new resources, and deadweight loss. The application of this theory was established by Huff and Hertel (1996) through implementing the conceptualisation by Harberger (1971) in the GTAP CGE model to decompose the equivalent variation welfare measure into the widely accepted sources indicated as changes in terms of trade, allocative efficiency, endowment effects, and technology effects that can be quantified following a policy shock to the model. The approach provides a mechanism to quantify economic welfare impacts of liberalising a tier of the TRQ, namely the in-quota tariff in the present study of the canned fruits TRQ. The tariff liberalisation is a policy change and the standard method in the GTAP model concerning sector aggregation is not practical to analyse the TRQ, hence the modification of the sector as stated in the methodology section was implemented for this study to accommodate the analysis of the canned fruits TRQ.

Skully (2001) provided a framework to understand the liberalisation of TRQs, identifying the liberalisation actions among which the reduction of in-quota tariffs and expansion of the quota was prescribed for persistently under filled TRQs. Furthermore, Bagwell and Staiger (2016) provided the basis to understand the terms of trade effects and explained that, once the domestic price and the terms of trade are determined, production as well as consumption and tariff revenue are all inferred. The decomposition of welfare changes in a GTAP model therefore enabled the investigation of welfare changes emanating from TRQ policy liberalisation in this present study. The pioneering study of Skully (2001) also acknowledges that the impact of different TRQ administration mechanisms<sup>7</sup> is not easy to capture in any model. Hence, this study provides a review of TRQ administration systems globally to provide further context.

#### *2.2. Global TRQ Policy Expectations and Permitting Systems*

Nagurney et al. (2019) explain that the world trade policy of TRQs is motivated by a national desire to protect domestic firms from competition and to reduce the domestic impact of such competition. The framework for the TRQ policies aimed at the agricultural trade is contained in the Agreement on Agriculture (AoA), which was negotiated during the Uruguay Round of trade negotiations and came into force in 1995 (WTO 2003). Agricultural products are defined in Article 2 of the AoA and the TRQ administration provisions to deal with the identified agricultural products are contained in the Ministerial Decision WT/MIN(13)/39 of the 2013 WTO Bali Ministerial Conference (WTO 2003, 2013b). TRQ administration as explained in WTO (2013a) refers to the methods used by governments to share quotas or quota licenses amongs<sup>t</sup> traders. In the early 2000s, Gervais and Surprenant (2000) noted that some available studies indicated that the procedures to allocate licenses are arbitrarily chosen by the concerned countries. A WTO report explains that TRQ administration under the AoA was left to the importer countries to implement as they deemed appropriate, further noting that the TRQs had not improved market access for developing countries (WTO Committee on Agriculture 2000). Perhaps a rectification in recent times is what Beckman et al. (2017) describe, which is that in 2013, the rules for quota administration were brought under the WTO Agreement on Import Licensing Procedures (AILP). The rules as given under the AILP are expected to maintain some formality. The Bali Ministerial Decision WT/MIN(13)/39 categorised TRQ administration as a process

of import licensing. Thereafter, consensus was reached that the AILP would be fully applied in dealing with TRQ administration. The AoA together with the AILP indicate the following desiderata of a TRQ administration system: that it should be transparent, predictable, uniform, non-discriminatory, and fair, with clearly specified timeframes and published explanation by the governing authority of the granting of licenses and how they are granted, and mandating countries administering the licensing should notify the WTO of the procedures followed as well as any changes to the procedures. Though the TRQ administration system is deemed central to the filling of quotas, it is widely acknowledged that the AoA does not give a directive of what TRQ administration methods to use (WTO Committee on Agriculture 2000). Recognising the long-standing issue of TRQ under-fill, the Ministerial Decision also refers to mechanisms proposed to deal with under-fill (WTO 2013b; Jatkar and Mukumba 2014).

TRQ administration mechanisms can be identified by various methods detailing their manner of implementation. Currently, seven principal TRQ administration methods have been identified in a report of the WTO Committee on Agriculture (WTO Committee on Agriculture 2018). TRQ administration includes methods such as a first-come, first-served system; licenses on demand; auctions; state trading and, domestic purchase requirement (Barichello 2000; Skully 2001; WTO 2003; Khorana 2008). Export history and the TRQ usepercentages reported by exporters are also among the aspects considered in administering TRQs (Khorana 2008). Barichello (2000) noted that there is sometimes discrimination against new entrants based on historical allocations. Khorana (2008) indicated that a combination of the different TRQ administration methods stated above can be used in one particular administration system. The practise of combining TRQ administration methods has been criticised for creating mechanisms that are complicated and non-transparent (Khorana 2008; Lim and Babula 2013). Lim and Babula (2013) further note that the method of auctioning is considered a transparent TRQ administration method and is deemed to promote high quota fill rates. Joerin (2014) discusses TRQ auctions from the point of view of the importer and argues that TRQs should only be allocated in an auction system, because this system prevents rent-seeking behaviour where firms have interests in gaining quota rents.<sup>8</sup> The theoretical literature on TRQs, such as Miranda et al. (2010), suggests that they could be beneficial to exporters in improving market access and thus be welfare improving for both exporters and the consumers of the imported products. The notion of welfare improvement is grounded in the Bali Ministerial Decision WT/MIN(13)/39, which states that TRQ administration measures should ensure consistency with Article 3.2 of the AILP. In that disposition, the decision states that "importing Members shall ensure that unfilled tariff quota access is not attributable to administrative procedures that are more constraining" (WTO 2013b). The amenability of a TRQ administration system to such measures as stated in the AILP is thus important in furthering the goal of market access for exporters. The key question to therefore ask about TRQs provided under a free trade agreement, is whether the TRQ will be filled to ensure the full market access benefits.

The methods of TRQ administration give insights into the quota fill possibilities. The extent of fill of TRQs has been allied to a TRQ administration system in studies such as Herrmann et al. (2001), Monnich (2003), Miranda et al. (2010), and Loi et al. (2016). In an evaluation of TRQ fill rates, Monnich (2003) indicated that quota administration can be influential in quota fill. In a different study, Lim and Blandford (2009) found that quota administration methods significantly influence fill rates. In a report on the Swiss agricultural sector, Loi et al. (2016) indicated that nearly all of the 28 TRQs administered through methods that include auctioning, requirements on domestic purchases, historical imports, and first-come, first-served were filled. Loi et al. (2016) further indicate that TRQs and their administration system influence the quality composition of imports and their price. The occurrence of persistent under-fill is dependent upon a TRQ administration system and such under-fill is observed for most of the TRQ administration methods with the exception of the method considering historical imports as illustrated in the WTO Committee on Agriculture reports (WTO Committee on Agriculture 2013, 2018). There are

some contradictions, therefore, in the literature concerning under-fill of TRQs in relation to the historical imports administration method.

Beckman et al. (2017) reported that fill rates recorded across all WTO notified TRQs were at an average of 59% in 2013 and that concerns raised through the WTO Committee on Agriculture were dominated by TRQ under-fill concerns. In support of these concerns, some studies (Bendini et al. 2013; Beckman et al. 2017) have shown that TRQs provided through obligations of a free trade agreemen<sup>t</sup> do not translate into full market access improvements because of unfilled quotas. The EU was identified in Bendini et al. (2013) to be among the WTO members classified as having a persistent under-fill of TRQs meaning that TRQ fill rates were below 65% for three consecutive years. The WTO Committee on WTO Committee on Agriculture (2018) indicated an average fill rate of 57% in 2016 across all TRQs notified to the WTO. Unfilled TRQs mean that planned exports differ from actual exports where actual exports are lower than the guaranteed quota level.

The literature cited above relates to TRQ analysis on the importer side. There is scant literature on the export side studies relating to exporter-administered TRQs that detail the methods used in the distribution of the rights to export. Even though the use of TRQs is prevalent in trade agreements globally, published research on TRQs is still limited, especially in relation to the agreements signed between African countries and the European Union. In addition, the available studies (Monnich 2003; Khorana 2008; Li and Carter 2009) aside from not focusing on South Africa or Africa, researched TRQ administration on the importer side. This paper therefore fills the study gap by describing the TRQ administration system implemented by DAFF/DALRRD to manage exporter access to the EU fruit products (that include the canned fruits TRQ) markets and by so doing, sets the context for the assessment of tariff line coverage and fill rates. An illustrative case of the exporter administered TRQ system in the South African case is presented in the results section.

#### *2.3. Summary of Previous Studies Modelling Welfare Impacts of TRQs*

Various studies (Drogue and Ramos 2005; Decreux and Ramos 2007; Tsigas and Mora 2009; Meade et al. 2010; Narayanan et al. 2010; Bektasoglu et al. 2011) employed CGE as well as partial equilibrium (PE) models to analyse TRQ impacts. Particular studies such as Decreux and Ramos (2007) and Meade et al. (2010) indicated that welfare gains were realised in greater portion for out-of-quota tariff liberalisation than quota expansion and the opposite was found in van der Mensbrugghe et al. (2003). Bektasoglu et al. (2011) reported higher welfare changes when import tariffs were liberalised in a model with disaggregated sectors than a model with aggregated sectors. Economic loss on welfare has also been observed for the importer countries granting a TRQ and gains have been observed for the countries receiving a TRQ preference, but the level of welfare gains differs across sectors (Tsigas and Mora 2009; Meade et al. 2010).
