A Review of Tariff Rate QuotaAdministration in Canadian Agriculture

Richard R. Barichello

To analyze Canada’s Tariff Rate Quota (TRQ) administration, a model of efficient quota

administration is put forward. After examining the operation of the Canadian TRQ system for

its twenty-one TRQs, conclusions are drawn. In general this system has worked well in

Canada. The quotas are almost all filled, and the administration is transparent and not costly

for quota-holders to use. Among the international lessons from Canada’s experience are that

few WTO rules may be needed in this area, aside from steps to ensure the TRQ is fully

available to users and can be freely transferred among them.

Tariff Rate Quotas (TRQs) emerged as an impor-tant element of the trade policy landscape in theUruguay Round Agreement (URA). However,their operation was largely left to individual coun-tries to determine. This has led to some dissatis-faction with how they are working, particularly asthere have been many cases where actual importshave fallen below the TRQ levels. It is the purposeof this paper to review the operation of TRQs inCanada to determine whether the TRQ system hasworked efficiently and as intended, and to see ifany lessons can be drawn to help in guiding thenext round of WTO negotiations,

Three Objectives

Before getting into the details of Canada’s TRQregime, I will start by addressing three broad ob-jectives of TRQ administration. First, and probablymost important from an international trade per-spective, is the objective of allowing access oppor-tunities up to the full amount of the TRQ level.This is how the URA was intended to deal with the

Richard R. Barichello is a professor with the Food and Resource Eco-nomics group at the University of British Columbia. Funding from theFamr Foundation and the International Agricultural Trade Research Con-sortium is gratefully acknowledged,

1 would like to acknowledge the generous input I received from ofti-cials in the Export and Import Controls Bureau of the Department ofForeign Affairs and International Trade, and in the Trade Policy group atAgriculture and Agri-Food Canada, particularly Pam Cooper. Valuablecomments were also received from Harry de Gorter and Jean-ChristopheBureau. In addition, I would like to rhank Roxana Quinde and WendyNatnwidjaja for their very able research assistance. However, 1 am re-sponsible for all remaining errors and omissions.

remaining high tariff and non-tariff barriers thatinhibit trade: by making the TRQs as a small tun-nel through those barriers. The introduction ofTRQs was a step toward achieving greater open-ness to trade via additional market access, but onlyif the TRQs were fully utilized. (Of course, thisassumes that domestic prices are above world mar-ket prices due to the existence of trade barriers. Ifdomestic prices are below world prices, then thereare no binding border protection measures and it isnot desirable to force inefficient imports throughTRQs.)

Second, from a home country perspective ofmaking the most efficient use of domestic re-sources, there is the objective of having the lowestcost or highest revenue firms do the importing. Inother words, we would like to see the TRQs allo-cated to those firms that can make the best use ofthem by generating the highest profits from theimporting activity. Third, it would be desirable thatthe system of administration of TRQs is designedto operate efficiently in that it does not unneces-sarily waste the country’s resources.

An Efficient TRQ Administration Model

Given these objectives, we now describe whatwould constitute an efficient regime for adminis-tering TRQs, by discussing the means for achiev-ing each objective.

Full Utilization of TRQ

To ensure full use of the TRQ, many models andprocedures could be followed. The full use of

Agricultural and Resource Economics Review 29/1 (April 2000) 103-114Copyright 2000 Northeasterrr Agricultural and Resource Economics Association

104 April 2000 Agricultural and Resource Economics Review

TRQs has two aspects: the aggregate TRQ for acountry should be fully allocated to importing en-tities (firms), and the entities receiving TRQsshould fully use their allocation. (This assumes thatsome quota is imposed. Alternative access mecha-nisms like first-come, first-served (FCFS) with noprior allocation or simply applying a tariff, mecha-nisms with no quantitative restrictions, are not be-ing considered as true TRQs here.) For the firstaspect, the main means of assuring full utilizationis for the administering agency to fully distributeimport quotas to importers, and to do so relativelyearly in the quota period. Other rules for operatingthe TRQ administrative system must be designedto facilitate a full, rapid and transparent distribu-tion of the quota.

For the second aspect, there are many means ofensuring that importers holding the quota make fulluse of it. In a market economy, one would wish topreserve the profit motive for importers so thatthey would import the item in question as long asdomestic prices are higher than world prices bymore than the cost of importation. This can beaccomplished by having private firms receive theimport quotas. It can also be accomplished by al-lowing firms to compete to obtain these importrights. The general point here is that the TRQ sys-tem should involve many importers and not createa situation where there is a monopoly importer.

Similarly, allowing quotas to be rented out orrented in, or bought and sold openly, will createstrong incentives for the firms that obtain the quo-tas to use them fully. The application of carefullyconstructed additional regulations can alsostrengthen the incentives for firms to make full useof their quotas. One example is the widely ob-served rule for all types of quota systems, for thequota holder to “use it or lose it.” Such a regulationremoves quota from quota holders if they do notuse some high percentage of their quota. Whethersuch added regulations are necessary is a separatequestion, but most countries seem to believe sobecause this type of regulation is almost universalacross and within countries.

TRQs Allocated to Firms That Make Best Useof Them

The second objective is to ensure that those im-porters receiving the quota are the most efficientimporters in terms of net profit (lowest costs, high-est revenues). One widely suggested method ofachieving this is to use quota auctions to allocatethe TRQ. (Although this allocation mechanism iseconomically efficient, there may be legal WTO

issues that inhibit its use. The fee that is paid insuch an auction, although it is bid by the would-bebuyer, could be seen as a breach of the tariff bind-ing, the in-quota tariff in this case, and that fee isnot related to the cost of import service,) Alloca-tion by auction will result in those firms that makethe highest net importing profit acquiring thequota. However, other methods can achieve thissame end. One effective but overlooked mecha-nism is to allow quota resale and transfer, Howeverthe quota is initially allocated, if there is a well-developed (and legal !) market in quota for resaleand transfer, a firm that is unlikely to utilize itsquota fully can sell it and realize the quota profits.In the process the quota passes along to a firm thatwill necessarily use it to recoup the costs of buyingit. The point is often lost, that resale provisions willresult in the quota ending up in the same hands(i.e., that it is as economically efficient) as with anauction. This point has practical importance be-cause many jurisdictions find some reason for notallowing quota transfer and sale.

Efficient TRQ Operating System

The third objective is to have efficient quota ad-ministration and regulations. This can be accom-plished most effectively by following a basic rulein regulating quota use, and that is to keep theregulatory system as simple as possible. All firms(existing ones or newcomers) should be allowed toacquire the quota; there is no reason for limitingthe quota validity period (i.e., they should be ableto use the quota whenever they wish within thequota period); and buying and renting should befine for all firms of whatever size or with whateverfacilities. Put differently, the rules need only to saywhich commodity item can be imported (HS num-ber) and that imports must be made by the end ofthe quota period. The temptation to use the quotaregulatory system to meet other objectives shouldbe resisted.

Another way to keep the quota administrationsystem as simple as possible is to minimize theuncertainty and rule changes associated with theregime. Even if there are a number of rules, if theserules are transparent, well publicized and notchanged too often, the uncertainty factor facingquota users is substantially reduced. This is par-ticularly an issue in developing countries wherequota regimes are often characterized by little in-formation and a complete lack of transparency andopenness, usually to facilitate corruption of varioustypes.

One added rule type may be useful, and that

Barichello A Review of Tariff Rate Quota Administration 105

concerns the general question of the distribution ofquota rents and whether the recipient should payfor the quota. (Note the possible legal issues sur-rounding any payment for the quota, beyond thein-quota tariff and a cost of service, as mentionedabove.) It may be judged desirable to tax awaysome of the profits (quota rents) accruing to quotaholders, This can be done effectively and com-pletely by an auction, but it can also be done lessthoroughly by imposing a charge to acquire thequota. This can have the advantage of generatingsome public revenue as well as leaving some prof-its in the hands of the quota recipient (althoughreducing those profits by the amount taxed by thischarge), And the charge can be infinitely varied toachieve any desired split in revenues (quota rents)between the quota recipients and the treasury. Onedisadvantage of such a charge system is the diffi-culty in knowing, at least at the outset, what tocharge. Observations on the transfer price prevail-ing in private transactions can be a guide to thetotal rents and to an appropriate charge to levy oninitial allocations.

One advantage of both these payment schemesis that they have the effect of reducing rent seekingor corruption by those wishing to obtain the quotas.Rent seeking induced by a quota allocation schemecan make the system very inefficient in terms ofthe waste of time and money spent in lobbying,especially when quota values are high. This can bereduced or prevented by making the receipt of quo-tas less lucrative by auctioning them or charging afee for them that is close to the auction price. Inaddition, rent-seeking can be reduced by keepingthe quota allocation system rules-based, with clearreallocation criteria and a mechanical reallocationprocess with no scope for case-by-case adjust-ments or individual judgments. (Keeping the sys-tem rules-based is still consistent with imposingpenalties that may result in quota reallocations forbehavior by quota holders considered undesirableby quota administrators. The key issue is that thesepenalties be specified in advance and not discre-tionary,)

Another way to make the quota system workmore efficiently is to define two types of quota—permanent and annual. TRQs are usually valid foronly one year. In some cases, it may be more ef-ficient for a firm to own the quota outright, so thatthe amount of quota the firm will have in futureyears is known with certainty. This can be accom-plished by defining a permanent quota, accordingto which the firm would receive the annual importrights every year in perpetuity (subject to the pos-sible future demise of the regime, of course, andsubject to” use it or lose it” provisions). This is the

type of quota used to limit farm production in mostsupply management regimes in Canada. Yet tohave only such a “permanent” quota is less effi-cient than giving the permanent quota owner theflexibility of being able to rent out (or in) of somepermanent quota from year to year. In other words,an efficient quota system will involve both perma-nent quota (for acquisition for long-term reasons)and one-year quota or the rental of permanentquota (for short-term reasons of fluctuating mar-kets and general flexibility). Designers and man-agers of such schemes can draw on the experienceof TRQ administration for short-term, one-yearrental arrangements and on the experience associ-ated with farm marketing quotas for long-term,permanent quota arrangements,

Issues Surrounding TRQ Systems

A number of other issues regarding TRQ systems,including Canada’s, are worth discussing here.These issues concern the efficiency of the quotaadministrative system, the profitability (size ofquota rents) of the export opportunities opened upor restricted by the TRQ, and the equity of quotaallocations. This allocation issue is not so muchabout which entities within Canada receive importrights, but which countries gain the right to exportinto Canada through the TRQs.

Five issues are addressed, How aggregated areTRQ commitments, and at what level of commod-ity aggregation are TRQs administered? Second,should TRQs be targeted partly or completely tospecific countries’ exports (“country reserves”)?Third, should state trading enterprises (STES) behandling or be the recipient of TRQs? Fourth,should impo~ allocations be restricted to industrysegments, establishments, and product end-uses?And fifth, are there administrative matters concern-ing handling the TRQs, such as validity periodsand unfilled quota provisions, that lead to fewerimports or lower-valued imports that lower thevalue of the TRQ to the exporting country? Finally,there is some confusion about whether a problemin the eyes of an exporter is due to Canada’s TRQimplementation system or to the negotiated accessand commitments agreed upon in the UR. Onesuch example would be the debate about tariffpeaks, which is not a TRQ issue per se, and willnot be discussed here. Another is the actual level ofthe TRQ, which was also negotiated and is nowexogenous and not an issue of TRQ administration.

On the subject of aggregation, to maximize thevalue of the TRQs one would like to see commit-ments defined as broad aggregates and adminis-

106 April 2000 Agricultural and Resource Economics Review

tered similarly. However, if the TRQ is definedbroadly (e.g., “eggs”), yet in terms of administra-tion it can be used only to import processed eggs,not table eggs, the tariff will be valid only forlow-valued egg products. This mix of commitmentand administration detail effectively reduces themarket access of the TRQ. To maximize the valueof market access for a given TRQ, the commitmentshould be made across a broad commodity cat-egory, without further administrative constraint,and the trade should determine which products toimport within that broad commodity category.

The country reserve or preferential trade issue isreally one of equity in distribution of TRQs amongdifferent countries’ exports. But limiting a TRQ toa specific country’s exports lowers the value of theTRQ compared with allowing any country’s ex-ports under that quota, as in the previously dis-cussed case. Of the 21 TRQs administered byCanada for agricultural commodities, five havesome kind of partial or complete country reserve(cheese to the EU, butter to New Zealand, pow-dered buttermilk to New Zealand, condensed milkto Australia, and beef and veal to Australia andNew Zealand). Certain country allocations existedprior to the URA, and these were continued toensure that those countries would not lose as aresult of Canada’s URA commitments under theUR guidelines for establishing current access com-mitments.

The matter of STES handling TRQs remainscontentious. One argument is that the STE, oftenless influenced by market considerations, mayhave no incentive to fill the TRQ. A simple statis-tical correlation, as done by the WTO Secretariat inJune 1998, may show that state trading enterprisesfill their TRQs as completely as other recipients ofTRQ allocations. Although it may be more likelythat STES do not have the incentive to fill theirTRQs, in an actual situation this depends on thespecific incentives faced by the firm, agency, orSTE. That kind of detail is not available in simplecorrelations, and so this approach offers an incom-plete test of STE behavior in general in fillingTRQs.

Another complaint is that the STE, especially ifit represents producer interests, will choose to limitthe TRQ to lower valued imports within that cat-egory or to pay the exporter lower prices for thegood in question than would be paid under a pri-vate market transaction. Therefore, the argumentgoes, allocating TRQs to STES is likely to reducethe market access represented by that quota, eitherquantitatively or in value terms, Canada has onecase of an STE holding a TRQ in which the Ca-nadian Dairy Commission receives the butter TRQ.

New Zealand has complained that this arrangementhas reduced the prices it can receive for its butterexports to Canada. This complaint covers two is-sues, the general potential of an STE to lower thevalue of its TRQ, and the specific use of a policydirective to import New Zealand butter for pro-cessing, not retail, use.

In answer to the fourth question, about restrict-ing import allocations to industry segments, estab-lishments, and product end-uses, this will also re-duce the value of the market access represented bythe TRQ, In effect, such restrictions reduce thedemand for those imports, compared with unre-stricted, open-market allocation of those imports.Although this restriction puts allocations into thehands of those who will use it, the recipients arewilling to pay less to get the allocation than otherswould be. If not, the restriction would be unnec-essary. Consequently, this type of restriction hasthe same effects as do country reserves and, argu-ably, allocating TRQs to state traders. Any restric-tions on who can use or receive TRQs will reducethe demand for and lower the implicit value of thatTRQ, to the disadvantage of would-be exporters.There are several examples of this kind of TRQallocation in Canada. It has usually arisen for his-torical reasons, where pre-URA end-use alloca-tions have been preserved in the current TRQ al-locations.

With regard to administrative restrictions in han-dling of TRQs, such as limited validity periods forthe quota and unfilled quota provisions, the tighterthose restrictions, the more costly it is to complyand the lower the demand for TRQ imports. Thiscould lead to fewer or lower-valued imports, orsimply to a reduction in import quota rents (or inthe implicit value to the importing country of theTRQ). This situation will harm the importing coun-try as much as the exporting country and is dis-cussed in the previous section under efficiency ofTRQ administrative arrangements.

The Canadian TRQ System

In Canada, jurisdiction for imports, like all ele-ments of international trade, falls to the federalgovernment. The administration of tariff rate quo-tas since 1995 has been undertaken by the Exportand Import Controls Bureau (EICB) of the Depart-ment of Foreign Affairs and International Trade(DFAIT), which also was previously responsiblefor the administration of all import quotas, In keep-ing with this continuity in jurisdiction, the shift inadministration from the previous import quota re-

Barichello A Review of Tariff Rate Quota Administration 107

gime to the current TRQ system has been smoothand largely seamless.

The firms that receive import allocations (or“quota-shares”) are mostly private, with the post-1995 exception that a state enterprise, the CanadianDairy Commission (CDC), is the sole organizationthat will ordinarily be granted import permits forbutter by the EICB. Import allocations are decidedupon annually. The property right to this quota,year after year, is weak in strictly legal terms, butthere has been a great deal of continuity in alloca-tions over the years. There has also been consid-erable variation in the number of holders of importpermits or allocations across dairy products. In1991, for example, there were 237 quota holdersfor cheese, 33 for ice cream, 28 for yogurt, 1 forbuttermilk, and 1 for evaporated and condensedmilk (Canadian International Trade Tribunal1992).

TRQs have been handled in much the same wayas were the previous import quotas, The number ofquota holders by product has not changed appre-ciably, although now there is a TRQ for butter(held by the CDC) whereas before there was nospecific import quota. Many regulations for obtain-ing and using the quotas are the same as in thepre-1995 period. There are now twenty-one TRQsin Canada.

Current Procedures

The procedures that are now followed can be sum-marized across commodities in terms of whichfirms are likely to be given priority in TRQ allo-cations and what restrictions must be followed. Ingeneral, new entrants are heavily discriminatedagainst in Canada, although there are cases (e.g.,chicken) where there is a gradual shift away fromhistorical allocations. For TRQ allocations, somecommodities emphasize historical importers andfirms with established operations and distributionlines, Sometimes allocations are proportional toproduction or sales, and sometimes an allocationdepends upon specific component needs in the pro-duction process, In other cases, TRQs are allocatedon a first come, first served basis. Almost alwaysthere is an adjustment for any previous quota leftunfilled. “Use it or lose it” is the rule almost uni-versally applied, with an allowance for sufficientprior notification to the administering agency.There are some size restrictions per company forthe holding allowed, and some Canadian residencyconditions.

No financial element is involved in the quotaallocation process between quota recipients and theadministering agency. In other words, there is no

auctioning and no charge for a quota allocation.Therefore, it is still a policy decision that all quotarents accrue to the recipient of the quota. Somecommodity rules still do not allow rentals or inter-firm quota transfers, but in most cases quotas canbe rented and sold, a change from the situation in1991,

Pe~ormance of TRQ Regime in Terms of FillRates for TRQ

Another aspect of Canada’s TRQ regime is theextent to which TRQ levels have been filled byactual imports, In general, the percentage is closeto 100% across all categories. Therefore, the situ-ation in Canada is generally unlike that in manyother country jurisdictions where there have beenproblems of “underfdling” TRQs. This appears inpart to be the natural outcome of vesting the TRQsin private hands, outside the farm production sideof the industry where there is a commercial incen-tive to import the products in question, Anotherobservation is that there are available import per-mits, supplementary to the TRQs (and outsideTRQ access), for those processing firms wishing toimport dairy raw materials or products, manufac-ture or further process other dairy products, andexport them internationally. Imports for re-exportare outside the TRQ system and are not counted aspart of Canada’s fill.

We have data for 1995 to 1998 for all twenty-one products or product categories (beef, poultry/eggs, dairy products, a close dairy substitute (mar-garine), and wheat/barley) that fall under the juris-diction of the Export and Import Controls Bureauon the TRQ levels and actual quantities imported.All categories are reviewed below. Ignoring theopen wheat/barley category, for 1997 there areonly four cases where TRQs are not virtually 100~0filled: yogurt (88% filled), heavy cream (63%), drywhey (83$ZO),and margarine (1.6%). In 1998, thereare two such cases: heavy cream (83%), and mar-garine (6%). There are no data for liquid milk, forwhich Canada’s TRQ is 64,500 tons, due to theunique means of dealing with this TRQ which al-lows individual cross-border shoppers to importthe product subject to the conditions which appliedin the base period.

Commodity-Specific Detail forCanada’s TRQs

Margarine

Canada had a TRQ of 6348.8 tons of margarine in1998, rising to 7558 tons in the year 2000. In 1998,

108 April 2000 Agricultural and Resource Economics Review

actual imports under the TRQ were 404.43 tons,indicating a fill rate of only 6.4Y0. This might ap-pear to indicate that protective or overly rigid mea-sures are being practiced in the implementation ofthis TRQ in order to restrict margarine imports, butthere are no indications that this is the case. TheTRQ is administered on a first-come, first-servedbasis. Since the establishment of the tariff quota,all requests for imports have been granted. Thereare no restrictions on access to these permits, otherthan a 500 ton limit per applicant, and that has beenraised from 200 tons per applicant, Further in-creases in that level have not yet been requested.The only imports are specialty spreads.

It is most likely that domestic margarine produc-tion in Canada is highly competitive with importsto the extent that general margarine imports intoCanada are not profitable. This is not surprising,given that Canada is an exporter of canola, a majoringredient in margarine production, and hencecanola is available relatively cheaply within thecountry. All oilseeds can also be imported withoutduty. Furthermore, this low fill rate for the marga-rine TRQ has persisted over the TRQ period.

Broiler Hatching Eggs and Chicks

The quota level for broiler hatching eggs andchicks has been arranged in a bilateral agreementbetween Canada and the U,S. at 21.1% of the cur-rent year’s estimated domestic production. Thislevel has been split into two separate access com-mitments for eggs (17.4%) and chicks (3,7Yo). TheTRQ level under the WTO is 7.9 million dozen inegg equivalents (one chick equals 1.27 hatchingeggs). The larger of these percentages is applied toarrive at the TRQ each year.

Individual quotas are allocated to federally reg-istered hatcheries on the basis of market share(production), with appropriate downward adjust-ments for any hatchery’s underutilization of theprevious year’s quota. There is the opportunity togrant supplemental quota to deal with marketshortages. However, application for supplement-al must be made to the EICB, which consults withthe Canadian Broiler Hatching Egg MarketingAgency, the national agency representing all pro-vincial producer marketing boards, to determinewhether there is domestic product available andhence whether a market shortage exists, Supple-mental imports can also be granted to allow forre-exports.

The fill rate for this TRQ appears to have beenin excess of 10070 in each of the last four yearssince the TRQ was established in 1995. In 1998,actual imports were 175% of the WTO TRQ level,

and in 1997 actual imports were 132?L0of the WTOTRQ level. However, the NAFTA commitment ex-ceeds the WTO quota so the larger level of importsare actually allowed, and the fill rate relative to the(smaller) WTO quota looks to be in excess of100%. Properly measured, the fill rates are ap-proximately 100%.

Shell Eggs

Canada’s import quota under the FTA and NAFTAfor table eggs and egg products was agreed to at2.988% of the previous year’s domestic produc-tion, split among shell eggs (1.65%), egg productssuch as frozen, liquid, and further processed eggs(0,71%), and powdered eggs (0.63%). For 1999this is equivalent to 13.318 million dozen. TheWTO commitment established a TRQ level of19.66 million dozen for 1999, which was about 5$10of the base year, The higher access level betweenthese two quotas is applied, and since 1996 this hasbeen the WTO commitment.

For both shell eggs and egg products, the quotais allocated to historical (pre-1974) importers ofshell eggs and egg products who keep their initialallocation minus any adjustments for underuse.The remainder of the quota for these two catego-ries of imports is allocated to registered egg sta-tions (shell eggs) and processors, wholesalers, anddistributors (for egg products) on the basis of theirmarket share. The quota for powdered eggs is al-located on a modified first-come, first-served basisto registered processed-egg stations and furtherprocessors that use powdered eggs in their manu-facturing processes, adjusted for previous un-deruse. A new allocation for nest-run eggs forbreaking purposes (i.e., ungraded shell eggs) wasintroduced in 1996 for the increase in import ac-cess that occurred under Canada’s larger WTO ac-cess commitment. This is allocated each year toregistered processed egg stations on a market sharebasis, with the usual adjustment for underuse.

This latter allocation has been contentious be-cause all the increased market access agreed tounder the WTO goes to egg imports for breakingpurposes, with none of the access going to thehigher-priced shell-egg market. This is an exampleof an end-use quota restriction that has deniedWTO import access to higher-valued portions ofthe egg market by preserving that market for do-mestic producers, but one that Canada has vigor-ously defended.

A supplementary quota scheme exists for theusual two reasons: to prevent shortages of shelleggs or egg products, and to allow imports of eggsto be reexported in some form. However, to obtain

Barichello A Review of Tariff Rate Quota Administration 109

this quota (for the former reason) involves makingapplication to the EICB, which consults with theCanadian Egg Marketing Agency, the nationalagency that oversees the activities of the provincialproducer marketing boards, to determine whether ashortage exists or whether there is domestic prod-uct available.

The fill rate of Canada’s egg TRQ has beenclose to or above 1009o since 1995. In the last twoyears, 1997 and 1998, the fill rates were 120% and132Y0, respectively, on an egg-equivalent basis, al-though these numbers include supplementary per-mits.

Chicken

The quota level for chicken also differs betweenthe FTAfNAFTA and the WTO. Under NAFTA,the agreed quota level was 7.570 of the previousyear’s domestic production. The WTO commit-ment has been 39,844 tons (eviscerated productbasis) for both 1997 and 1998. Due to continuinggrowth in the domestic market, the access levelunder NAFTA has been higher and consistentlyapplied since 1995.

The method of allocating this quota was revisedin 1996, and it has now become quite complex.Three groups receive quota. First, any firms, re-gardless of their end use, who imported chickenprior to 1979 receive their initial allocation, ad-justed for underuse. Second, processors of chickenproducts that are not on the Import Control List,and who hence must compete with imports thathave open access to the Canadian market, receiveenough quota (“F’TA quota”) to cover their “needs”but they must satisfy an “activity” test. Firms in thefood services sector receive a share (5.6%, or 2.7million kgs.) of the TRQ remaining, dependingupon the firm’s market share. Finally, the remain-der of the TRQ is split 70:30 between chickenprocessors (on the basis of market share) andchicken distributors (on the basis of equal shares).Any firm with a historical share can opt (irrevers-ibly) for a market share or equal share, dependingupon whether they are a processor or food servicesfirm, or a distributor, respectively. There are mini-mum “threshold levels” for firms to qualify forquota in these various categories, with some pro-vision for minimum quota allotments for small op-erations. Firms with historical quota shares aresubject to use-it-or-lose-it provisions.

Supplemental quota is available under four cat-egories: when there are shortages in the Canadianmarket; for firms who need imports destined forreexport; for firms who wish to test-market newproducts or processes; and to allow further proces-

sors to compete with imports. Requests for quotafor the first category (shortages) must be made tothe EICB, which consults with the Chicken Farm-ers of Canada who determine whether domesticsupplies are available for that use. For the otherthree categories, supplementary permits are issuedon request. It should be noted that there are nocountry reserves within the chicken quotas.

The fill rates for the chicken TRQ have been at100% since 1995. In 1997 and 1998, the fill rateswere calculated as 13990 and 146Y0, respectively,but this was due to the fact that NAFTA quotalevels are higher than the WTO quota levels usedas the basis for the TRQ fill rate calculations. How-ever, it is also true that the market for chicken,particularly for further processed categories, hasbeen growing quickly, and supplemental quota al-locations (above the TRQ) have been common.

Turkeys

The FTA/NAFTA quota level for turkey wasequivalent to 3.570 of the current year’s estimatedproduction. Under the WTO, the TRQ level nego-tiated for 1999 was 5.4 million kgs. (on an evis-cerated-product basis), and for 1999 the expectedWTO access level was slightly larger and thereforedominant, The WTO quota has incorporated agrowth factor since it was defined, growing by20% from 1995 to 1999. As in the cases of theother poultry quotas, there are no country reserves.

These import quotas have been allocated to twogroups. First, there are fourteen traditional or his-torical (pre-1974) importers, and, as in the casesabove, they receive their initial allocations, ad-justed downward for any underutilization. Second,there are Non-Import Control List or FTA Quota-holders for firms producing products like potpies,soups, and TV dinners. They receive quota “to theextent of their needs,” as quoted in the regulations.New entrants can qualify here, based on their pro-duction in the previous year. Remaining unallo-cated quota is allocated in the first six months ofthe year for special requests. The provisions forsupplemental permits are based on the usual fourcategories: to cover domestic market shortages,imports for reexports, test-marketing of new prod-ucts, and for “further processors” who need rawturkey imports so that they can compete with fur-ther-processed turkey imports. Requests forsupplemental quota in the category of “shortages”must be made to the EICB after the produceragency, the Canadian Turkey Marketing Agency,has attempted to find sources of domestic product.After the first six months of the year, remaining

110 April 2000 Agricultural and Resource Economics Review

quota is allocated to historical quota holders on a fluid milk TRQ has been challenged by the U. S.,pro-rata basis. but a WTO Panel appeal judgment earlier this year

Regarding TRQ fill rates, the turkey TRQ has accepted the procedure and removed the $20 limit.been filled since its inception in 1995. In 1995 the Because there is no formal counting of fluid milkfill rate was 105%, in 1996 it was marginally be- imported by individual consumers, no publishedlow 100%, in 1997 it was 101%, and in 1998 the notifications are made and we cannot verify the fillfill rate was 103.370. rate.

Beef and Veal Heavy Cream

Although there is free trade between Canada andthe U.S. under the FTA/NAFTA, Canada has aTRQ commitment under the WTO. It has agreed toa TRQ for non-NAFTA countries (except Chile) inthe amount of 76,409 tons for fresh, chilled, andfrozen beef and veal. The TRQ does incorporatetwo country reserves, for New Zealand and Aus-tralia, with the New Zealand share of the totalquota at 29,600 tons and the Australia share at35,000 tons. The remaining amount, 11,809 tons, isopen to all other countries.

The beef TRQ is allocated to importers in twopools, one for processors and retailer-processors,and one for distributors. The former pool, of57,307 tons, is allocated based on the amount ofbeef and veal from countries other than the U. S.,Mexico, and Chile processed in these processors’own facilities from November 1 to October 31 ofthe previous year. The second pool, of 19,102 tons,is allocated to distributors based on sales of beefand veal from countries other than the U. S.,Mexico, and Chile, from November 1 to October31 of the previous year, A system of supplemen-tary quotas has been implemented to deal withmarket shortages.

The beef and veal TRQ has been filled or virtu-ally so in all years since 1995. In 1995 the fill ratewas 1139t0, in 1996 the rate was 9’7.4~0, in 1997 itwas 117%, and in 1998 it was 11 l?ZO.

Fluid Milk

In the case of fluid milk, Canada has a TRQ of64,500 tons. This is a global TRQ, accessible byany country supplier, but in practice, due to trans-portation costs, it is likely to be filled only from theU.S. This TRQ is unique in that Canada does notallocate it to any importer, but leaves its importa-tion to individual residents of Canada who shop inthe U.S. and choose to bring fluid milk home, Un-der General Import Permit #1, “any resident ofCanada may import up to $20 worth of dairy prod-ucts, including fluid milk and cream, for the per-sonal use of the importer and his household. ThisGeneral Import Permit may be invoked an unlim-ited number of times.” This method of handling the

This is a relatively small TRQ, with Canada’s ac-cess commitment at only 394 tons. It is a globalTRQ, and by its product description applies tocream in excess of 690 fat without added sweeten-ing and not concentrated. The scheduled commit-ment, and therefore TRQ, is restricted to sterilizedcream with a minimum 23% butterfat in cans ofvolume not exceeding 200 ml. and to “specialtycreams.”

The allocation of this TRQ is on a modifiedfirst-come, first-served basis. Allocations are alsomade to certain firms and lines of business, with“priority to importers with established distributionlines for specialty creams.” Any remaining balancein the TRQ can be allocated, upon application, toother firms that can demonstrate they have in placea distribution line for specialty creams.

In the administration of this TRQ, companiesthat cannot fill their quotas are not allowed totransfer the unutilized part of their quota to anotheruser. But any such unused quota is allocated toother would-be importers on a first come, firstserved basis, so the allocation system is still quiteopen; transfers are effectively made through theEICB. Firms who turn in unused parts of their TRQretain their TRQ without penalty for the nextyear’s allocation.

This TRQ is quite unique among Canada’s ag-ricultural TRQs in that, like margarine, it has notbeen completely filled in any of its years of opera-tion since 1995. Its fill rates since 1995 have been77%, 80%, 63%, and in the marketing year 1998/1999, 83%.

Concentrated and Condensed MilWCream

The TRQ level for this small category is 11.7 tons,and it has not changed since 1995. However, thisTRQ is allocated entirely to one traditional or his-torical importer, and can be sourced only fromAustralia. The reason for this situation is that Aus-tralia was the sole supplying country when thisitem was placed on the Import Control List.

This TRQ has been completely filled in each ofthe four years from 1995 to 1998, at 100910,100%,12670, and 121 Yo,

Barichello A Review of Tarljf Rate Quota Administration 111

Yogurt

Canada’s WTO commitments for yogurt have re-sulted in a TRQ of 332 tons, a quota that has stayedconstant in size since 1995. It is a global quota,without restriction on country suppliers.

This TRQ has been allocated to historical im-porters, regardless of their sector of activity. Thequota amount is made in proportion to each im-porter’s historical imports. Underutilization penal-ties do apply, and any quota obtained through thesepenalties is made available to historical and newimporters who make application, without other re-striction.

This TRQ has been somewhat underfilled overthe period since 1995, although the fill rate hasbeen increasing each year to 100% in the last year.Its pattern of fill has been the following: 1995,729io; 1996, 86%; 1997, 88%; and 1998, 100%.

Powdered Buttermilk

Canada’s WTO commitment in the case of pow-dered buttermilk is a TRQ of 980 tons that hasstayed constant over the period from 1995 to date.Unlike yogurt, however, it is not a global commit-ment; rather, the supplying country is New Zealandfor the full TRQ allotment. Furthermore, the TRQis allocated to one historical importer. The reasonfor this country reserve is the same as for Australiaand condensed milk, that when powdered butter-milk was placed on the Import Control List, NewZealand was the traditional and sole supplier, andthis arrangement rolled over into the WTO com-mitments,

The administrative arrangements are standard,including that the importer is subject to a use-it-or-lose-it restriction on the TRQ. However, the im-porter has completely filled this TRQ in each yearsince 1995. The fill rates have been 1995, 116Yo;1996, 133%; 1997, 101%; and 1998, 120%.

Dry Whey

This product has a TRQ of 3198 tons. Its level hasbeen constant since 1995 and can be sourced fromany country. The allocation of the dry or powderedwhey TRQ is on a modified first-come, first-servedbasis. Allocations are made to specific firms whoseuse of this product conforms to certain end-useconditions. Priority is given to users of specialtywheys not available from domestic sources whocan show that specialty wheys are required in theirmanufacturing or product formulations. Any re-maining TRQ, after the needs of this first group are

met, is allocated to processors and further proces-sors who can show a requirement for whey in theirmanufacturing process. Again, any unused quotafrom one firm cannot be transferred directly to an-other firm, but rather should be turned into theExport and Import Controls Branch who reallocateto other users on a first come, first served basis.

The fill rates on this TRQ have been highly vari-able. In 1995 the rate was 669io. It increased to fullusage in 1996 (1019io), fell to 83% in 1997, thenrebounded to 160% in 1998/1999.

Products of Natural Milk Constituents

The TRQ for this category of products is 4345tons, a level that has been constant since 1995.This TRQ can be sourced from any country and isallocated on a modified first-come, first-served ba-sis. However, its allocation is to firms that havecertain manufacturing characteristics, just as in thecase for dry whey, discussed above. Priority goesto users of milk protein concentrate who can showthey need this product in their manufacturing orproduct formulations. The remainder of this TRQis allocated to processors and further processorswho can demonstrate a need for these products intheir manufacturing and production processes. Theusual administrative requirements apply, such asthe use-it-or-lose it condition.

This TRQ started out being often unfilled, buteach year its usage has increased, to 10070 fill ratesin the years 1997 and 1998. However, in 1995 thefill rate was only 4690, and in 1996 it was 67910,

Butter

As one of the most protected of Canada’s dairyproducts, butter had been on the Import ControlList for forty years with the Canadian Dairy Com-mission as the sole importer. In most years prior to1995, there were no butter imports. When butterwas imported, it was only to relieve a temporarymarket shortage. In 1995, as part of Canada’s URcommitments, a TRQ for butter was initiated, witha growth factor built in and with a country reservefor New Zealand. The level of the TRQ for 1995was 1,964 tons, increasing to 3,274 tons in 2000.Of this, New Zealand’s reserve started at 1,200tons (61 %) of the 1,964 tons in 1995, increasing to2,000 tons (61 %) of Canada’s total 3,274 tons inthe year 2000. This level accounts for less than 3~0of Canada’s base-period butter consumption.

This TRQ has been fully allocated by the EICBto the Canadian Dairy Commission, the national

112 April 2000 Agricultural and Resource Economics Review

agency that oversees dairy policy in Canada andwhich is a state trading enterprise by virtue of itsright as the sole importer of butter. The furtherallocation of this quota is restricted to use only byprocessors and further processors. As noted earlier,this allocation of the butter quota to the CDC hasbeen contentious, with New Zealand complainingthat it has received lower export prices for its but-ter than would otherwise be the case.

The TRQ has been filled in each year since 1995with a fill rate of 100% in the 1995, 1996, 1997,and 1998 dairy marketing years.

Cheese

A cheese import quota was introduced in 1975 at50 million pounds, which was reduced to 45 mil-lion pounds (20,41 2 tons) in 1978. There was thenan agreement between Canada and the EuropeanUnion for a country reserve. The current EU share(since 1996) is 66%, with the remainder open toimports from all other countries. The TRQ estab-lished for cheese under the URA was fixed at thissame level of 20,412 tons until 1999 and beyond.In addition, the country reserve to the UE wasincorporated into the administration of Canada’scheese TRQ. It is the view of some industry ex-perts that the EU reserve produces a result that isnot that different from what the pattern of importswould be with open markets, and therefore wouldarguably be consistent with GATT 1994 Arti-cle 13.

A large number of private cheese importers havebeen actively involved in the cheese trade for manyyears and have retained their rights to annual al-lotments of this TRQ since 1995. Regardless ofwhat sector of activity they are engaged in, thesehistorical importers still receive their traditional al-lotment, as long as they remain active in the cheesetrade and as long as they utilize at least 95% oftheir import allocation. These TRQs can be boughtand sold among cheese-trade participants, includ-ing newcomers. In fact, there has been enoughtrade in these quotas that 7270 of current cheesequota holders have entered the cheese trading sys-tem since 1985. There is also a provision forsupplemental quotas for market shortages and forreexport, but these allocations are rare.

As far as fill rates are concerned, cheese quotashave been filled in each of the four years since1995, at 100% until 1997, and at 101% in 1998.

Other Dairy Products

This category is for food preparations that containmore than 10910by weight of milk solids, packaged

for the wholesale and industrial trade. The TRQ isset for 70 tons and is open to all countries. Thequota is allocated to those who apply, and there isa requirement that quota holders are users of thesefood preparations and can show a need for theseproducts in their manufacturing and product for-mulations. This quota has always been filled, usu-ally at a fill rate considerably above 100910,In thefour years from 1995 to 1998, the fill rate has been100%, 310910, 224Y0, and 197% respectively, re-flecting issuance of supplementary permits.

Ice Cream

This product was only named to the Import ControlList in 1988, but then placed under a TRQ like allother agricultural products in 1995. The TRQ levelwas initially 347 tons, rising by 1999 to 456.6 tons.It is open to all countries and has no restrictions onthe types of importing firms that receive the quota.

The TRQ is allocated to historical importers,regardless of their sector of activity, in proportionto their historical imports. Underutilization penal-ties apply if imports fall below 90% of the import-er’s allocation, and such quota is reallocated peri-odically to those who apply, new or traditionalimporters, without restriction.

The fill rate on this quota has been quite highand steadily rising to more than 10070. In 1995 itwas 89Y0, in 1996 it was 99Y0, in 1997 it was104%, and in 1998 it was 121%, even though therewas a growth factor in the TRQ.

Wheat, Barley and Their Products

There are four TRQs under this category, and theyare items not under supply management regimes,The items are wheat, barley, wheat products, andbarley products, The TRQ levels for 1998/99 were:wheat, 190,582 tons; barley, 335,160 tons; wheatproducts, 123,557 tons on a grain-equivalent basis;and barley products, 16,070 tons on a grain-equivalent basis. In addition to these quota levels,under NAFTA provisions Mexican wheat, barley,and their products can still enter at the within-quota tariff rates, even if the TRQ is full. The sameapplies to the U.S. for wheat and wheat products,and now also for barley products.

TRQs for these grains and products are availableto importers from the U.S. and Chile on a first-come, first-served basis. Revenue Canada, Cana-da’s customs and income tax department, keepstrack of the volumes, and once the TRQ level isreached, the over-TRQ tariff then applies. Initially,importers need General Import Permit No. 20 andthey pay the within-quota tariff. No application for

BaricheUo A Review of Tarl~ Rale Quota Administration 113

these GIP permits (both No. 20 and No. 100) isrequired. After the TRQ is filled, General ImportPermit No. 100 is necessary, and this covers un-limited imports, but all such imports pay the higherover-TRQ rates of duty, There is, in addition, asupplementary access regime to cover the situationof market shortages. Importers make applicationand the Minister of Foreign Affairs considers theavailability of “like or directly substitutable” prod-ucts on the Canadian market in making the deci-sion to grant supplemental permits.

Fill rates are quite variable within these graincategories, The fill rates for the wheat TRQ in thefour marketing years from 1995/1996 to 1998/1999 were 18, 74, 27, and 331%0,respectively, Forbarley over the same four years fill rates were 5,31, 12, and 18%. For wheat products the TRQ wasalways filled, with fill rates of 114, 100, 110, and102%. For barley products the fill rates were 75,70, 59, and 60%. Despite less than complete fillrates, there appears to be no administrative con-straint that reduces market access. Permits are freefor the asking and no application is required. Fur-ther, access to the TRQs is on a first-come, first-served basis. The explanation would appear to bethat imports of wheat, barley, and barley productsare often not profitable, particularly for wheat andbarley grain, given the competitiveness of Cana-dian grain production and processing.

Lessons Learned from the Canadian TRQ System

In terms of fill rates, the Canadian record is rela-tively good. Most categories are filled or nearly so.When categories have low fill rates, it appearsmost often to be due to the importation being un-profitable. Further, the rules and procedures forthese TRQs appear to be transparent and not toodifficult to use. In other words, for this criterion,the Canadian TRQ system appears to be workingas desired. Explaining why fill rates are so high isa tall order, but some observations can be made.First, the quotas are usually allocated to privatefirms that are independent and do not profit fromdomestic production. So there would appear to bestrong incentives for these firms to fill their TRQsas long as the underlying economics of importationare attractive. Further, the administration of theregime is quite open, straightforward, and predict-able, not burdening importers with large costs.

In terms of quota allocation, the domesticeconomy and foreign exporters will gain from al-locating quotas to those importers who can gener-ate the highest profits from the quotas. One wouldwant to see a minimum of regulations restrictingwho can gain access to the quota, by enterprise

characteristics or industry sector (e.g., further pro-cessors, or end-uses). Also, one would want to al-low new entrants to get into importation readily,TRQ allocation in the Canadian system has donelittle to help accessibility by often relying on allo-cation to historical importers, Some changes arenow beginning to give more access to newcomers.

The most effective means of meeting an objec-tive of open access is to allow quotas to be boughtand sold on a permanent basis and for there to beeasy short-term rentals (buying and selling thequotas for that import year). The advantage of al-lowing this kind of transferability is that it makesthe initial allocation largely irrelevant for achiev-ing an efficient quota system. On this score,Canada has improved its regime by allowing thequotas to trade in many categories, but furthergains are possible by allowing quotas to be boughtand sold legally within the year or rented readily inall categories. (This does not apply in those caseswhere quotas are not constraining, such as whenthey are allocated on a first-come, first-served ba-sis.) This would be a most effective means of get-ting quotas into the hands of the most efficientimporters. Then the initial allocation can be donesimply to transfer income to desired groups (e.g.,further processors), and the initial allocations canbecome irrelevant for keeping the regime operatingefficiently. Allocating quotas by auctions becomesless an issue of efficiency for the regime and morea question of how to split up the quota rents.

Regarding the objective of keeping the admin-istration of the quota system efficient, this calls forkeeping costs to the importer of accessing quota aslow as possible, keeping transparency high, andkeeping uncertainty from rule changes, additions,or interpretations as low as possible. Across thetwenty-one TRQ categories, Canada’s regime ap-pears reasonably successful in meeting this objec-tive. There are still many gains from further sim-plifying quota administration. Some of the poultryallocations seem particularly good candidates forfurther simplification. In fact, it would seem un-necessary to have any rules governing quota ad-ministration other than that the quota or permit isneeded to undertake importation, and that the quotamust be used within the quota period, Further gainsin domestic efficiency can be arrived at by somechanges in system design. One example mentionedabove is to allow quota rental (within the year) aswell as permitting the quota to be held permanently(the property right to be granted the annual importpermits, as for farm marketing quotas). This allowsthe flexibility of adjusting your quota holding eachyear in case of excess demand or your inability thatyear to completely use your quota, and it provides

114 April 2000 Agricultural and Resource Economics Review

the certainty of knowing you will be receiving yourimport quota each year.

It may be desirable to spread the quota rentsmore widely than is practiced at present. Thiscould be achieved by having quota auctions, or forthe government to levy a charge on quota recipi-ents to receive the quota each year. There are sev-eral advantages to such charges, but Canada hasnot yet gone any distance down this path in itsquota administration.

In terms of more international issues, there is thequestion of targeting TRQ supplier countries withthe use of country reserves. Canada does have fiveof these (one-fourth of all TRQs), but does notappear to consider the existence of such reserves apolicy objective. These reserves do not seriouslyaffect the operation of Canada’s regime, do notcontribute to quota under-fill, and are valuableonly to the recipient exporter. Another issue is therole of State Trading Enterprises, Canada has onlyone case, butter, in which the TRQ is allocated tothe Canadian Dairy Commission. One worry aboutsuch a role for STES is that they may have weakerincentives to fill the quota. But the evidence inCanada is that the STE monopoly importer is fullyutilizing its butter TRQ.

Implications for the Next Round

require that TRQ levels are actually importedwhere there is a market demand for such imports.Penalties should be imposed on governments (ortheir implementing agencies) for failure to allocatequotas to importers, allowing them to be guided byprivate economics as to how much to import. If theimporter is not an independent private firm (e.g.,an STE), additional penalties may be necessary toinduce them to import their TRQ import levels,assuming there is a private demand for those im-ports.

It is not clear why any additional WTO rulesshould be adopted in this area, other than to ensuremeeting privately profitable TRQ levels as dis-cussed above. From the Canadian experienceabove, it would not seem necessary to requirequota allocation to private firms, to disallow allo-cations to STES, or to require the auctioning ofquotas. Most of these additional rules could con-tribute to filling TRQs and reducing the economiccost of quota administration and system operations.But if we can deal directly with the filling of TRQsas suggested above, such other rules are either re-dundant or are primarily matters for domesticpolicy.

Reference

From this review, the primary lesson for dealing Canadian International Trade Tribunal. 1992. An Inquiry into

with TRQ administration in the next round is to the Allocation of Import Quotas. Ottawa.