Outline 1.What is a Tariff? 2.Elements of Tariff Structure 3.Tariffs in Modern Trade Policy 4.Developing Countries and the WTO
What is a Tariff? A tariff is a tax on an imported good when it crosses the border. – Tariffs can sometimes be applied to exports too, but this is much less common. Tariffs have four principle functions: – A source of government revenue – Protection of domestic industry – Punitive function to remedy trade distortions – As negotiating tool to reduce tariffs of others
Other border measures Quantitative restrictions (QR) used to be the most common alternative to tariffs. Article XI of the GATT states: “No prohibitions or restrictions other than duties, taxes or other charges … shall be instituted or maintained by any member” This clearly bans QRs
Types of tariff There are four basic types – they differ in how the tariff is computed. 1.Ad valorem tariff 2.Specific tariff 3.Compound tariff 4.Mixed tariff
Tariffs can be Bound or Unbound Binding sets a maximum for each tariff, above which it cannot be raised without negotiations (Article XXVIII) –Governments may “Apply” rates lower than the bound rate. –Binding provides transparency and predictability to traders and facilitates negotiation of tariff liberalization.
Flat tariff structure A Flat tariff is the same for all products – Given the relationship with commercial policy this is unusual Eg: All goods enter at a fixed ad valorem tariff of 8%.
Evaluate Impact of Proposed Policy With information developed should be able to outline best possible trade policy to follow given the social and political priorities. Should be able to make an assessment of both the benefits and costs to all interested groups in society. Very useful to do an economic projection of various scenarios.
Tariff Escalation “Tariff escalation” takes place when tariff levels increase with the degree of processing. – Often used to promote the development of an infant or developing industry. – This leads to high rates of “effective” protection of the value added in the domestic manufacturing process. Example: Raw logs enter at a tariff of 5% ad valorem. Cut lumber enters at a tariff rate of 12% ad valorem.
Tariff Escalation Tariff Escalation occurs in all types of countries – In developing countries there is often escalation between raw materials/low technology products and intermediate technology goods. – In developed countries rates often increase with each level of processing, with raw materials facing zero tariff.
Tariff Inversion Tariff Inversion takes place when the tariffs on inputs are higher than those on the finished products – This is not common because it leads to negative “effective” protection of the value added activities.
Tariff Peaks No agreed definition of “Tariff Peaks”. The two most common definitions are: – Any tariff equal or greater than three times the national average.(Most often supported by developing countries) – Any tariff greater than 15%. (Most often supported by developed countries)
Tariff Harmonization Means that all tariffs have roughly the same level: -Relatively little difference among tariffs in any specific country; -Also when there is relatively little difference between the tariff schedules of different countries.
Tariff Classification before the Uruguay Round Until the completion of the Uruguay Round there were no GATT rules regarding classification. –Individual or groups of countries maintained their own individual systems In 1988 the “Harmonized Commodity Description and Coding System” or “H.S” was developed at the World Customs Organization.
The Harmonized System Cannot be modified by individual states. The entire system has 97 chapters classifying all commodities Each specific commodity gets a six digit code.
Example Chapters 84-85of the HS are “Electrical Equipment” Within that: 84.71 is“Electronic Data processing machines” 8471.50 is the 6 digit code for computers. Within that: 8471.50.10 are self contained main frame computers 8471.50.20 are self contained mini computers 8471.50.30 are self contained microcomputers (PCs) 8471.60are separate input or output devices. 8471.60.13 are laser-jet printers. (An eight digit code)
The Harmonized System The fundamental principle is that goods are classified by what they are, not by where they were made or other similar designations –The system is logically structured by economic activity or component material.
The Harmonized System Governments have found multiple uses: –Customs tariffs –Collection of International trade statistics –Rules of Origin –Collection of international taxes –Trade negotiations –Transport tariffs and statistics –Monitoring of controlled goods –Customs controls and procedures
Tariff Liberalization The first five rounds of negotiations reduced average tariffs from 50 to 12 per cent. Uruguay Round was generally the most ambitious and very significant for tariffs –Developed countries cut tariffs by 40% with the average tariff reduced from 6.3 to 3.8 %. –Tariff lines facing no tariff in developed countries increased to 44% from 20%.
Some Results of the Uruguay Round 989910030129 100 927066 AverageBound Tariff Rate Scope of Bindings JPUSEUINDOTHAIPHILI Pre UR 22.214.171.1240.437.323.9 Post UR 126.96.36.1996.928.024.6
More Agreements An agreement liberalizing trade in Information Technology Products (ITA) was negotiated in 1997 The ITA eliminated all tariffs on an MFN basis Approximately 40 participants--Indonesia was a charter member The other primary form of liberalization has been through regional agreements (article XXIV) Approximately 300 regional agreements exist today.
Market Access in Developing Countries No formal WTO definition of developing countries, rather an informal grouping –Least developed countries (LDCs) are those in the UN list. Part IV of the GATT deals with Trade and Development –Most relevant element is the non-reciprocity principal where Developed countries do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of developing countries.
Market Access in Developing Countries The “Enabling Clause” is the most important provision. It is a framework text that was negotiated during the Tokyo Round and was confirmed by the Contracting Parties and is now a part of “GATT 1994”. The Clause is divided into four parts.
Outcome of Hong Kong WTO Ministerial Developed and Developing countries wishing to do so shall – “Provide duty-free and quota free market access on a lasting basis, for all products originating from all LDC’s by 2008 or no later than the start of the implementation period in a manner that ensures stability, security and predictability.”
Outcome of Hong Kong WTO Ministerial Developed countries given flexibility to originally provide such access for 97% of tariff lines, but, must progressively lead to compliance. – Clearly some products of LDC interest may, at least initially, be excluded and some developed countries may limit access of specific products from specific countries.
Preferences Under Waiver The WTO permits the waiving of specific obligations under exceptional circumstances. (Article IX:3 of the WTO Agreement) –A waiver requires a three-fourths majority of Members –Waivers are for a fixed period of time and are reviewed on an annual basis
Preferences Under Waiver Examples of waivers to provide preferential treatment include –the EC/France Trading arrangements with Morocco, –The U.S. Caribbean Economic Recovery Act and the ACP-EC Partnership Agreement. A 1999-2009 waiver permits developing countriesto provide preferential treatment to LDC’s.