Accelerated tariff elimination: When import duties are reduced faster than was originally agreed upon or projected. For instance, under NAFTA, tariffs on goods traded between the US and Canada were phased out earlier than was initially planned.

Ad valorem tariff: The tariff levied on imports, defined in terms of a fixed percentage of the goods’ value. For instance, if India imposes an ad valorem tariff of 40% on butter, it means that the tariff will be 40% of the value of the butter being imported.

Applied tariffs: The current tariff rates being charged on the import of products. Applied tariffs may be below or equal to bound tariffs, but may not exceed them. For instance, the applied tariff in Pakistan for coffee was 20%, while the bound tariff rate was 100%.

Average tariff: The simple average of all applied ad valorem tariffs (tariffs based on the value of the import) applicable to the bilateral imports of countries. This rate is calculated by adding up all the tariff rates and dividing this by the number of import categories.

Bound tariffs: In the WTO, when countries agree to open their markets to goods and services, they “bind” their commitments. For goods, these bindings amount to ceilings on customs tariff rates. Sometimes countries tax imports at rates that are lower than the bound rates. This rate is legally binding under the WTO and applies on a Most Favoured Nation (MFN) basis. If a WTO member raises a tariff above the bound rate, affected countries have the right to retaliate against an equivalent value of the offending country’s exports, or receive compensation, usually in the form of reduced tariffs on other products they export to the “offending” country. India has bound 72% of its tariff lines, with all agricultural products bound and some 68% of tariff lines bound with respect to industrial goods. India bound products such as textiles and clothing, which were previously unbound.

Compound tariff: A combination of ad valorem and specific tariffs (such as 10% plus $ 5 per kilogram).

GATT (General Agreement on Tariffs and Trade): This agreement was first drafted in 1947 to establish “free trade” between nations by limiting or eliminating tariffs and quotas on international trade. The Uruguay Round of the GATT, completed in December 1993, substantially expanded the scope of the agreement and created the World Trade Organisation (WTO).

GSP (Generalised System of Preferences): A system whereby developed countries grant preferential treatment to eligible products imported from developing countries, so that the exports of developing countries are able to compete in the markets of developed countries. The purpose of the GSP is to enable developing countries’ exports to be competitive in developed country markets. It involves reduced MFN tariffs or duty-free entry of eligible products exported by beneficiary countries to the markets of donor countries. European Union (EU) member countries have allowed equal preferential treatment in duties in the range of 2.5% on imports of clothing from both Pakistan and India under the new Generalised System of Preferences (GSP) scheme, effective from January 1, 2006 .

Harmonised system (HS): This is intended to serve as a universally accepted classification system for goods so that countries can run customs programmes and collect trade data on exports and imports. It was designed to replace the varied tracking methods used by countries and create a common classification system by which to track trade and apply tariffs.

The system uses a six-digit number to identify basic commodities. Each country is allowed to add additional digits for statistical purposes. In Canada , two additional digits are used for exports and four additional digits for imports. The US uses a 10-digit system for both exports and imports. The system was developed by the World Customs Organisation (WCO).

HS is a commodity classification system in which articles are grouped largely according to the nature of the materials they are made of. The system contains approximately 5,000 heads and sub-heads covering all articles of trade. These provisions are organised into 96 chapters, arranged in 21 sections that, along with the interpretive rules and legal notes to the chapters and sections, form the legal text of the harmonised system. The code is made up of three parts -- the first two digits identify the chapter and the next two, groupings within the chapter; the last two are the most specific. For instance, the HS code 07.06.10. can be understood as follows:

Example of HS code

Source: Harmonised Commodity Coding System , Canada Business Service Centre, www.cbsc.org

Industrial tariffs: The import taxes applied to manufactured products such as textiles and clothing, leather, wood pulp and transport equipment. They have the effect of raising the price for consumers and hence discouraging them from buying imported goods.

Mixed tariff: A choice between ad valorem and/or specific tariffs depending on the condition attached (for example, 10% or $ 5 per kilogram, whichever is greater).

Most Favoured Nation (MFN) rate: The rate of duty for a product originating from an MFN supplier. A product originating from non-MFN suppliers may be subject to a different rate of duty from the MFN rate, depending on whether the suppliers are from a territory outside of the WTO (the rate may be higher), covered by a GSP or GSTP (Generalised System of Trade Preferences) scheme (the rate is often lower) or a customs union or free trade area (a final rate of zero for covered products).

Prohibitive tariff: Tariff at a level that discourages the import of a product in any quantity. For instance, in 1995, average tariffs in OECD countries stood at 214% for wheat and 154% for barley. Similarly, Senegal levies prohibitive tariffs on imported cycles to protect a small domestic manufacturer that sells only 2,000 bikes annually.

Simple average applied tariff rate: The average of a country’s applied tariff rates.The applied average tariff is calculated by dividing the total of applied tariffs with the number of tariff lines. For instance, if a country’s tariff rate under the non-agricultural import category for three products is 10%, 25% and 33% respectively, then the average applied tariff rate for that country, under the non-agricultural import category, would be 22.67%.

Simple average bound tariff rate: The average of a country’s bound tariff rates divided by the number of tariff lines. For instance, if there are three tariff lines with a bound tariff rate of 100.7%, 63.8% and 90% in a country, the simple average bound tariff rate will be 84.33% for that country.

Specific tariff: Tariff that is levied at a specific rate per physical unit of a particular item. For instance, a tariff of $ 10 on every kilogram of butter imported.

Tariff: The tax imposed on the import or export of goods. In general parlance, however, it refers to “import duties” charged at the time goods are imported. Tariffs have three primary functions: to serve as a source of revenue, to protect domestic industry, and to remedy trade distortions. Tariffs can be ad valorem or specific or mixed.

Tariff bands: Tiers of tariff under certain slabs. Examples of two bands: tariffs between 0% and 10% and tariffs between 11% and 25%. Tariffs are put into bands to decide the percentage of tariff reduction. For example, there can be an agreement for no tariff cuts in the 0-10% band, a 25% cut for tariffs in the 11-50% band, and a 50% cut for tariffs in bands above this. India pursued a policy of tariff reduction and rationalisation of the tariff structure notably by reducing the number of tariff bands. By 2004-5, there were two bands --10% for raw materials and intermediate goods, and 20% for final products.

Tariff binding: This requires the setting of a maximum tariff rate on an imported product. While the applied tariff rate charged by an importing country could vary, an importing country cannot exceed the bound rate without re-negotiating its WTO commitments. Tariff binding comprises two sets of issues. First is the issue of tariff binding coverage, implying the number of tariff lines to be bound. The second relates to the rate at which unbound tariff lines should be bound. Developed countries have been keen that developing countries and Least Developed Countries (LDCs) increase their tariff binding coverage to 100% or near 100%. Increasing tariff binding coverage implies binding more tariff lines, thereby giving up the flexibility of being able to increase tariff rates on a particular product beyond a certain point.

Tariff classifications: National tariffs are organised in the form of tables that consist of “tariff classification numbers” assigned to goods, and a corresponding tariff rate. The way in which an item is classified for tariff purposes will have an important and palpable effect on the duties charged. When classifications are applied in an arbitrary fashion, they can in effect nullify rate reductions. The GATT contains no rules regarding tariff classifications. In the past, countries had their own individual systems. However, as trade expanded, countries began to recognise the need for more uniform classifications, which resulted in the drafting, in 1988, of the Harmonised Commodity Description and Coding System, or the HS system. Today, most countries use a harmonised system of six-digit tariff numbers.

Tariff cuts: Percentage reduction in tariffs. Different formulae propose different tariff cuts. For instance under a fixed percentage formula, the tariffs for all products are cut by a single rate, whether the starting tariff is high or low. Under this formula all tariffs can be cut by 25% in equal steps over five years. On the other hand, the Swiss formula proposes steeper cuts for higher tariffs. This means that a tariff of, say, 150% will face a higher cut than a tariff of 80%.

Tariff escalation: If a country wants to protect its processing or manufacturing industry, it can set low tariffs on imported materials used by the industry (cutting industry costs) and set higher tariffs on finished products to protect goods produced by the industry. When importing countries escalate their tariffs in this way, they make it more difficult for countries producing raw materials to process and manufacture value-added products for export.

Tariff escalation exists in both developed and developing countries. A country may choose to impose no tariff on the import of raw materials, but increase tariffs on semi-processed and final goods. For instance, the tariff average in developed countries for rubber increases from 0.0% for raw rubber to 3.3% for semi-processed products to 5.1% for finished products.

Tariff line: A single item in a country’s tariff schedule.

Tariff peaks: Most import tariffs are now quite low. But for a few products that governments may consider sensitive, tariffs remain high. These are “tariff peaks”. Some affect exports from developing countries. There are two kinds of tariff peaks:

• International tariff peaks: The percentage of tariff lines in a country that has a bound tariff rate of more than 15%. For instance, in Pakistan , 33.2% of the total tariff lines have bound tariff rates that exceed 15%.
• National tariff peak: The percentage of tariff lines in a country that have bound tariff rates at least three times higher than the country’s average tariff. In the case of dairy products as well as fruits and vegetables, developed countries impose peak tariffs that are, on average, more than three times the peak tariff applied in India .

Tariff rate quotas: A combination of an import tariff and an import quota whereby imports below a specified quantity enter at a low (or zero) tariff, and imports above that quantity enter at a higher tariff. For India, the EU and US have committed a tariff rate quota of 20,000 tonnes and 9,000 tonnes respectively, which means that imports above this quantity will be charged higher import duty.

Tariff revenue: The revenue generated for the government from tariffs.

Tariff schedule: A database maintained by the WTO Secretariat that contains, among other things, members’ commitments to reducing bound rates.

Tariff valuation: When countries assign arbitrary values for tariff purposes, they render tariff rates meaningless. GATT Article VII and the Agreement on Implementation of Article VII (Custom Valuation Agreement) define international rules for valuation.

Tariff war: When one nation increases tariffs on goods imported from or exported to another country, and that country then retaliates by also raising tariffs.

Tariffication: Conversion of NTBs (Non-Tariff Barriers) to tariffs at the level of their tariff equivalent. In the Uruguay Round, agricultural NTBs were tariffied and bound, to replace unwieldy NTBs with tariffs that could then become the subject of negotiation.

Weighted average tariffs: A measure that weighs each tariff by the share of total imports in that import category. Thus, if a country has most of its imports in a category with very low tariffs, but has many import categories with high tariffs but virtually no imports, then the trade-weighted average tariff would indicate a low level of protection. The standard way of calculating this tariff rate is to divide total tariff revenue by the total value of imports. Since many countries regularly report this data, this is a common way to report average tariffs. To illustrate the difference between simple average tariff and weighted average tariff, Canada has a simple average tariff of 7.1% but its trade-weighted average, in contrast, is a mere 0.9%.

Tariff reduction formulae and approaches

Linear tariff cut formula: Reducing tariffs by an equal percentage across the entire class of products. Linear tariff cuts can be contrasted with tariff harmonisation, which brings different countries’ measures in line with each other by requiring relatively large cuts in higher tariffs and smaller cuts in lower tariffs. Developing countries argue that their reduction commitments must be based on a linear formula, as tariff protection is their only means of safeguarding their developmental needs and protecting themselves against international price shocks. The linear tariff cut formula isT1 = T0-(C*T0), where T1 = final rate, T0 = initial rate and C = reduction coefficient.

Swiss formula: Reducing tariffs by using a harmonising coefficient that cuts higher tariffs more steeply, in proportion to lower tariffs, and establishes a maximum final rate no matter how high the original tariff was. Under a simple Swiss formula, the higher the tariff, the greater the cut. Developing countries are generally opposed to the Swiss formula, as they tend to have higher tariffs on industrial goods than their richer counterparts. The Swiss formula is T1 = (C*T0)/(C+T0) where T1 = new tariff rate, T0 = initial tariff rate and C = reduction coefficient.

Modified Swiss formula : A modification in the Swiss formula, as proposed by the Cairns Group of agriculture commodity exporting countries. The reduction coefficient proposed for developed countries under this formula is 25 (that is, C = 25). For developing countries the formula proposes that tariffs between 0% and 50% should be reduced by using the Swiss formula with a coefficient of 50. For tariffs between 50% and 250%, it proposes a linear cut of 50%, and for tariffs above 250% it proposes an across-the-board reduction to a maximum of 125%.

Blended formula: Tariff reduction formula proposed by the EC and the US . It encompasses, on a self-declaratory basis, a proportion of tariff lines subject to the Uruguay Round tariff reduction formula; a proportion of tariff lines subject to the Swiss formula, and a proportion of tariff lines to be made duty-free. This formula is not supported by developing countries like India and other members of the G20. By this formula, tariff reductions are much higher for developing countries.

Girard formula: Tariff reduction formula that takes into account the interests of developing countries by incorporating each country’s average tariff. The equation for the formula is T1 = B*T2*T0/B*T2+T0, where T1 is the final bound rate, T2 is the average of the base rates, T0 is the base rate and B is the coefficient. The higher the value of B, the less the rate of tariff reduction. For example, in the case of India , the bound tariff rate for fish and fish products is 100.7%. If the tariff reduction for this category takes place with a lower value of B, say 0.5, then the tariff rate after reduction will be 14.6%. If the value of B is changed to 1, the tariff rate after reduction would be 25.5%.

Tiered formula (banded formula) : Tariff reduction formula that classifies tariffs into various bands for subsequent reduction from bound rates, the higher tariffs being cut more than the lower ones. The actual modalities -- number of bands, threshold for defining bands, and type of tariff reductions within each band -- remain subject to negotiation. The role of a tariff cap with distinct treatment for sensitive products also remains subject to negotiation.

Uruguay Round formula: Tariff reduction formula designed to allow varied levels of tariff protection across products but nonetheless subjecting all tariff lines to a minimum degree of cuts in a linear fashion. Developed countries had to impose an average cut of 36%, with a minimum 15% cut. The corresponding figures for developing countries were 24% and 10% respectively. Developing countries contended that the Uruguay Round approach allowed developed countries to focus the largest reductions on the lowest tariffs, while allowing them to maintain high tariffs on lines that were of interest to developing country exports.

Sectoral approach: Tariff reduction approach, also called the sector-by-sector approach, whereby tariff rates on all products of export interest to developing countries and LDCs are eliminated and bound. The sectoral approach essentially means cutting or eliminating tariffs on certain sectors independent of the tariff cutting formula that is followed for other sectors. India has not made any submission on the issue of sectoral liberalisation. India ’s argument is that the sectoral approach should be voluntary in nature and should be taken up only after the issue of a tariff reduction formula is settled.

Zero-for-zero approach: Tariff reduction approach which implies that in identified sectors all countries should bring down their tariff rates to zero. This implies losing policy flexibility. For instance, in the fish and fish products category, India and Pakistan have 87% and 90% of tariff lines unbound. When such a high proportion of tariff lines is unbound in a sensitive sector it would not be prudent for these countries to support the zero-for-zero approach.

EC tariff reduction approach: Modified Swiss formula proposed at NAMA negotiations, in March 2005, by the European Commission (EC). The EC formula is T1 = (X*T0)/(T0+X) where T1 is the final tariff, X is the given coefficient and T0 is the initial tariff. The EC approach implies flexibility: while there would be an overall tariff reduction, each country would be free to determine the level of tariffs on individual products, subject to the overall reduction.

US tariff reduction approach: Modified Swiss formula proposed by the US with dual coefficients: one coefficient for developed countries and another for developing countries. The US proposal also states that the two coefficients must be “within sight of each other,” which means that the coefficient for developed countries should not be significantly greater than the coefficient for developing countries.

Norway tariff reduction approach: Proposed by Norway , this is a non-linear tariff cutting formula with two coefficients that include a simple and transparent system of credits. The formula is T1 = (A*T0)/A+C), where T1 is the new bound tariff after the formula cut, T0 is the old bound tariff, A is the coefficient indicating the level of ambition. ‘A’ will have different values for developed and developing countries. ‘C’ is the credit that the country gets for binding 100% tariff lines and participating in the sectoral approach to tariff reduction.

Argentina, Brazil and India (ABI) approach: Girard formula of tariff reduction proposed by Argentina , Brazil and India .

Pakistan tariff reduction proposal: Simple Swiss formula for tariff reduction proposed by Pakistan , with two coefficients. Based on existing bound average tariff rates, the coefficient for developed countries would be six and that for developing countries 30. This would have the effect of harmonising tariffs in both bands while retaining the difference in average tariff levels between the groups. According to Pakistan , its proposal would reduce developing countries’ average bound rates of 35% and applied rates of 25% to around 15%, while developed countries’ average bound and applied rates would be cut roughly by 4%.

References

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