THE ANDEAN PRICE BAND SYSTEM: EFFECTS ON PRICES, PROTECTION AND PRODUCER WELFARE



common external tariff policy. Price bands are established based on 60-month moving
averages of past real border prices, with the price floor based on a formula that
incorporates 1) deflated (by the U.S. CPI) monthly c.i.f. prices, 2) shipping and insurance
costs to convert f.o.b. prices to c.i.f. prices, and 3) application of the basic
ad valorem
import duty. As long as the c.i.f. price is within the band created by floor and ceiling
prices, only the basic
ad valorem tariff is applied. When the spot c.i.f. price is below the
corresponding floor price, a variable levy (surcharge) is applied on top of the basic tariff,
sufficient to raise the import cost to the floor price, which thus becomes the minimum
import price. When the spot border price exceeds the ceiling price, the variable levy is
not applied and discounts to the basic tariff are made up the full amount of the difference.
The ceiling price is calculated as one standard deviation above the floor price. The APBS
encompasses 13 different bands, including 144 individual tariff items. As an example,
Figure 1 shows the operation of the price band system for yellow corn between 1995 and
1998. The cross-hatched area shows the magnitude of the total
ad valorem tariff applied
as spot c.i.f. prices changed under the given floor and ceiling prices.

The underlying rationale of price band systems like the APBS is that they are
needed to buffer the effects of international price fluctuations on domestic markets. These
fluctuations include sources of price instability generated by the price-distorting effects
of industrialized countries’ agricultural policies which are transmitted through
international markets to developing country producers. Critics argue, on the other hand,
that price variability results from many sources, not just world market price instability,
but including trade policies, government intervention of various types, market structure
and performance phenomena, and, perhaps most importantly, exchange rate instability



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