MODULE

3

Tariffs and Tariff Negotiations

ESTIMATED TIME: 4 hours

OBJECTIVES OF MODULE 3

  • To explain the main elements relating to tariffs in the WTO framework.
  • To explain the different types of tariffs, including "bound tariffs" and "applied tariffs", as well as tariff schedules and the Harmonized Commodity Description and Coding System ("Harmonized System").
  • To explain the tariff negotiations conducted under the auspices of the GATT 1947, including the principles applicable to tariff negotiations and the main negotiating techniques for tariff reductions.
  • To introduce the Information Technology Agreement (ITA) and tariff negotiations within the process of accession to the WTO.

Module3...... Tariffs and Tariff Negotiations

I.INTRODUCTION......

II.TARIFFS......

II.A.TYPES OF TARIFFS......

II.B.DIFFERENCE BETWEEN TARIFFS AND OTHER CHARGES......

II.C.THE WELFARE EFFECT OF AN IMPORT TARIFF......

II.D.BOUND TARIFFS VS. APPLIED TARIFFS......

II.E.TARIFF PEAKS AND TARIFF ESCALATION......

III.TARIFF SCHEDULES AND THE ''HARMONIZED SYSTEM'' ......

III.A.TARIFF SCHEDULES......

III.B.THE HARMONIZED SYSTEM......

IV.GATT/WTO TARIFF NEGOTIATIONS ON NON-AGRICULTURAL PRODUCTS......

IV.A.PRINCIPLES OF TARIFF NEGOTIATIONS......

IV.B.GATT NEGOTIATIONS ON TARIFFS ......

IV.C.POST-URUGUAY AND PRE-DOHA......

V.SUMMARY......

I.INTRODUCTION

As explained in Module2, the term ''market access'' in the WTO refers to the totality of government-imposed conditions under which a product may enter a country. In the context of trade in goods, tariffs and non-tariff measures (NTMs) are the two main categories of measures which determine the conditions of access to a market. Both categories are considered in the WTO Agreements. The Preamble of the Agreement Establishing the WTO recognizes that the progressive reduction or elimination of tariffs and other barriers to trade can contribute, together with the non-discrimination principle, to achieving the objectives of the WTO. As a matter of fact, the progressive reduction and elimination of tariffs makes markets more open, and access more predictable and transparent.

Customs duties or "tariffs" are the most commonly used and visible market access barrier for trade in goods. In this Module, we will explain the different concepts and rules concerning tariffs and tariff negotiations, with a focus on those related to non-agricultural products. Schedules of concessions, where each individual Member records its product specific concessions and conditions of market access, as well as the process for the modification of these Schedules, will be explained in Module4. Non-tariff measures will be explained in Module5. Having studied the basics on these issues, Module6 will then explain the Doha negotiations on non-agricultural market access (NAMA).

II.TARIFFS

What is a tariff?
Tariffs, also known as "customs duties", are the most visible and commonly used trade measures that determine market access for goods. In the context of international trade, a tariff is a financial charge in the form of a tax, imposed at the border on goods going from one customs territory to another. Tariffs applied to imports are usually collected by customs officials of the importing country when goods are cleared through customs for domestic consumption. Although tariffs can also be imposed on exports, import tariffs are the most common type of tariffs and have been the main focus of attention of GATT/WTO negotiators.

WTO Members (referred to in the past as GATT Contracting Parties) have committed to engage in multilateral negotiations on tariff concessions on a regular basis.

As you studied in Module1, GATT Contracting Parties held eight rounds of negotiations during the life of the GATT. Indeed, tariff negotiations (i.e. the establishment of new bindings and tariff reductions) was one of the GATT's traditional and most successful negotiating areas! The ongoing Doha negotiations, which is the first round of negotiations to be held under the auspices of the WTO, also aims at increasing the number of bindings and reducing tariff barriers as part of a broader package that also includes several other issues.

In practice, most tariff negotiations in the past took place through so-called ''market access negotiations'', which encompassed all products. Since the negotiation of the Agreement on Agriculture during the Uruguay Round, the rules on market access for agricultural products have been negotiated separately from the rules on market access for non-agricultural products.

II.A.TYPES OF TARIFFS

Tariffs can be classified into different kinds depending on the way they are calculated:

II.A.1.Ad valorem Tariff

A tariff calculated on the basis of the value of the imported good, expressed as a percentage of such value. As you will study in Module5, the rules contained in the WTO Agreement on Customs Valuation play a key role in determining these values.

Example : 2 per cent advalorem

An ad valorem tariff of two per cent on an imported truck worth US$ 1000 would lead to a requirement to pay US$ 20 as customs duty.

II.A.2.Specific Tariff

A tariff calculated on the basis of a unit of measure, such as weight, volume, etc., of the imported good. Since the calculation of these duties does not involve a "value", the rules in the Agreement on Customs Valuation are not relevant.

Example : US$ 10 per ton

A tariff of US$ 10 per ton on an imported truck of one ton in weight would lead to requirement to pay US$ 10 as customs duty.

II.A.3.Mixed Tariff

A tariff calculated on the basis of either the value of the imported goods (an ad valorem duty) OR a unit of measure of the imported goods (a specific duty). It is frequently calculated by selecting the higher value, although there are cases in which the lower one is chosen (as stated in the mixed tariff itself).

Example : 5 per cent advalorem 0R US$ 10 per ton, whichever is higher

If an imported truck has a value of US$ 1000, and weighs two tons, the ad valorem component of the duty would be US$ 50, while the specific component would be US$ 20. Since 50 is higher than 20, the requirement would be to pay US$ 50 as customs duty.

II.A.4.Compound Tariff

A tariff calculated on the basis of both the value of the imported goods (an ad valorem duty) AND a unit of measure of the imported goods (a specific duty). It is normally calculated by adding a specific duty to an ad valorem duty.

Example : 5 per cent advalorem + US$ 10 per ton

If an imported truck has a value of US$ 1000, and weights two tons, the ad valorem component of the duty would be US$ 50 while the specific component would be US$ 20. This would lead to a requirement to pay US$ 70 as customs duty.

II.A.5.Technical/Other Tariff

Some tariffs are calculated on the basis of the specific contents of the imported goods, the duties payable by its components or certain related items.

Example : US$ 3 each + US$ 2 per kg on the battery

An imported laptop with a battery of 1.5 kg in weight would lead to a charge of US$ 6 (US$ 3 + US$ 2 * 1.5 kg) as customs duty.

Ad valorem Tariffs, Non-Ad valorem (NAV) Tariffs & Ad valorem Equivalents (AVEs)
All tariffs other than ad valorem tariffs are considered non-ad valorem (NAV) tariffs. Although ad valorem duties are the most commonly used form of tariffs among WTO Members in respect of non-agricultural products, there are some Members that apply non-ad valorem duties on some products.
Trade economists commonly share the view that ad valorem duties are preferable over non-ad valorem duties mainly because the former are more transparent than the latter. Take specific duties for example. Since specific duties are calculated on the basis of a unit of measure of the imported product (e.g. weight, volume), the impact of such duties on market access for goods is sometimes difficult to assess. This lack of transparency could make it easier for special interest groups of the importing country (i.e. import competing industries) to obtain governmental support for higher levels of protection. Furthermore, the protective effect of a specific duty tends to vary with changes in the prices, making them difficult to implement during inflacionary periods. For example, to maintain the same level of protection during the periods of high inflation, governments would constantly need to increase the values of the specific tariffs. Similarly, if the price of the goods decline, the level of protection will increase. For that same reason, non ad-valorem duties disadvantage low cost imports by subjecting them to relatively higher percentage payments than higher cost imports. The lower the import price of a product, the higher the relative protection afforded by such duties. By contrast, an ad valorem tariff remains constant irrespective of the product's price.
If one wanted to compare the effect of a non-ad valorem duty with an ad valorem one, it would be necessary to calculate an ad valorem equivalents (AVE). As we will study in Module6, WTO Members have broadly agreed to convert non-ad valorem tariffs for non-agricultural products to ad valorem equivalents and to bind them in ad valorem terms in the context of the on-going NAMA negotiations.

II.B.DIFFERENCE BETWEEN TARIFFS AND OTHER CHARGES

It is important to note that not all financial charges imposed at the border are considered and disciplined as import tariffs in the framework of the WTO, although most of them are regulated by other provisions. Some of the main measures not deemed to constitute a tariff under the WTO framework include the following:

Other duties or charges (ODCs): these measures are envisaged in the second sentence of ArticleII:1(b) of the GATT 1994 and the Understanding on the Interpretation of ArticleII:1(b) of the GATT 1994 that was negotiated during the Uruguay Round. They include all taxes levied on imports in addition to the customs duties (some times called "para-tariffs"), and can only be charged if they were recorded in the Member's WTO Schedule of concessions.

''Fees'' or ''charges'' connected with importation or exportation: these measures are defined in ArticleVIII of the GATT 1994 and include all fees and charges of whatever character (other than tariffs and other than internal taxes within the purview of ArticleIII of the GATT 1994) imposed by the Members on or in connection with importation or exportation. These include licence fees, inspection fees, etc. In general terms, these charges shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes.

Internal taxes: these measures are subject to ArticleIII:2 of the GATT 1994 - national treatment principle applicable to internal taxation (studied in Module2). According to this provision, internal taxes (e.g. value-added tax or sales tax) shall be applied to imported products and domestic like products in a non-discriminatory manner.

Anti-dumping or countervailing duties: as studied in Module2, anti-dumping and countervailing measures are normally applied in the form of additional customs duties, which may exceed the bound tariff rate (the maximum level of customs duty to be levied on products imported into a Member). Therefore, they may be applied as a deviation from ArticleII of the GATT 1994, subject to certain requirements provided in the Anti-Dumping Agreement and the SCM Agreement respectively.

II.C.THE WELFARE EFFECT OF AN IMPORT TARIFF

A tariff levied on an imported product has an effect upon both the country exporting the product concerned as well as on the country importing that product and imposing the tariff.

In the exporting country, producers of the good at issue would face worse market access conditions in the importing country than as it would be in the absence of the tariff, provided that other conditions remain unchanged. Although normally paid by the domestic importers, a tariff is equivalent to a tax that foreign exporters have to pay in order to sell the good in the domestic market. The application of the tariff increases the price of the imported good, thereby making it more expensive in the domestic market. The increase in the price discourages the importation of the good.

For the importing country, an import tariff could serve mainly two purposes. First, an import tariff can be used to give a price advantage to a local good over a similar imported good, as the entry of the good is conditional upon the payment of the tariff. In other words, tariffs may be used to protect domestic industry from the competition of imports. Second, tariffs provide revenue to the government of the importing country. Whether it is mainly used in practice for the first or the second purpose depends on the particular conditions of each country.

Figure 1 below shows the welfare effect of a tariff on a small importing country unable to affect world prices (price-taking country) under condition of perfect competition. While a tariff on an imported good generates gains for domestic producers of like products and the government of the importing country, it causes loses to consumers (and possibly other producers who use that good as an input) since they would have to pay more for the imported goods than would have been the case in the absence of the tariff.

From an economic perspective, the sum of national economic welfare for a small country imposing an import tariff is lower than without the tariff. This is mainly because the tariff cost for domestic consumers outweighs the gains for domestic producers and the government.

Figure 1:The welfare effects of a tariff on a small importing country

The graph illustrates the welfare effect of a tariff on a small importing country unable to affect world prices (price-taking country) under condition of perfect competition.

National economic welfare consists of consumer surplus (the difference between the willingness to pay and the actual price the consumer pays), producer surplus (the sum of profits earned by suppliers) and government tariff revenue. Consumer demand is represented by demand curve D and producers are in a competitive market with supply curve S.

Without a tariff, consumers in the importing country would buy Do at the price Po. Domestic producers would supply So and the rest (Do - So) would be imported from other countries. Consumer surplus is given by the sum of a, b, c, d, e and f whereas producer surplus is given by g.

With a tariff per unit at price Pt (Po + tariff), consumers in the importing country would buy D1 (since the tariff would lead to a higher price, Pt, the quantity demanded would be lower than Do). Domestic producers would supply S1 (since the price they can get thanks to the tariff is higher, they will produce more than So) and the remaining quantity (D1 – S1, which would be lower than Do – So) would be imported from other countries.

Consumer surplus: Area a+b, consumers loose c+d+e+f [consumers have to pay more due to the increase of both the price of the imports and the price of domestic substitute products]

Producer surplus: Area g+c [part of the consumer loss is captured by domestic producers who gain from the increase of their sale prices]

Government revenue: Area e [part of the consumer loss is captured by the government - revenue resulting from the tariff].

BUT What about the loss represented by Area d+f ?

Net national loss as a result of the tariff: Area d+f.

No one captures the consumers’ loss represented by area d+f, which is normally called "deadweight loss". As a result of the price increase, some consumers are driven out of the market and this loss is captured by triangle f. The increase of domestic production entails costs that exceed the costs of the imports they replace. The loss of surplus associated with domestic production is captured by triangle d. Thus, for the country the net welfare effect of the tariff is negative.

Based on: World Trade Report 2009, page 60.

II.D.BOUND TARIFFS VS. APPLIED TARIFFS

II.D.1.BOUND TARIFFS

A "bound tariff" is a tariff for which a WTO Member accepts a legal commitment not to raise it above a certain level. In the framework of the GATT/WTO, Members commit to ''bind'' their tariffs (often during negotiations), and the bound rate represents the maximum level of import duty that can be levied on a product imported into that Member. By binding a tariff, Members agree to limit their right to set tariff levels beyond a certain level which is listed in that Member's Schedule of concessions. By doing so, Members set the minimum market access conditions they can benefit from in each other's markets, and ensure the application of a transparent and predictable tariff level. Tariff 'bindings'' prevent Members from undoing the liberalization that has been achieved through negotiations and ensure transparency and predictability.

The bound rates are often referred to as ''tariff concessions'' in the WTO jargon and are specific to individual products, as listed in each individual Member's Schedule of tariff concessions on goods. It is worth noting that not all non-agricultural products have a bound tariff rate. Indeed, there is no WTO obligation to bind all tariffs, and several Members retain unbound tariff lines. However, as tariff bindings are a cornerstone of the MTS there is a trend to bind all tariffs (universal binding coverage). It is worth noting, however, that -pursuant to the MFN principle- WTO Members are obliged to apply all their applied tariffs to products originating from other Members on a non-discriminatory basis, irrespective of whether the products are bound or unbound. The main WTO disciplines on tariff bindings and Schedules of concessions are laid down in ArticleII of the GATT 1994, which will be explained in Module4.

WTO Schedule of Concessions on Goods
WTO negotiations normally produce general rules that apply to all Members and specific commitments made by individual Members. The country-specific commitments are listed in documents called “Schedules of Concessions”, which consist of a list of products for which specific tariff commitments (bound tariffs) and other commitments have been recorded by each Member in the context of trade negotiations. These concessions are granted on an MFN basis. The Schedules form an integral part of the binding commitments made by WTO Members and have the same legal status as any of the WTO Agreements.The WTO Schedules of concessions (including their structure) will be explained in detail in Module4.

Once bound, a tariff rate becomes permanent and a Member can only increase its level after negotiating with its trading partners and compensating them for possible losses of trade. These so-called re-negotiations are foreseen in ArticleXXVIII of the GATT 1994 and will be explained in Module4.