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M y C o u r s e s e r i e s

OBJECTIVES

Explain the main elements relating to tariffs in the WTO framework;

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");

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;

Introduce the Information Technology Agreement (ITA) and tariff

negotiations within the process of accession to the WTO.

WTO E-LEARNING COPYRIGHT © 12

Detailed Presentation of Tariffs and Tariff Negotiations

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I. INTRODUCTION

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 a another Module as is also the case for non-tariff

measures.

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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.

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.

The rules contained in the WTO Agreement on Customs Valuation play a key role in determining these values.

Example : 2 per cent ad valorem

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.

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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 ad valorem 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 ad valorem + 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.

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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). 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 Article II:1(b) of

the GATT 1994 and the Understanding on the Interpretation of Article II: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

Article VIII 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 Article III 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 Article III:2 of the GATT 1994 - national treatment principle

applicable to internal taxation. 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.

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Anti-dumping or countervailing duties: 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

Article II 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.

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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.

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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 Article II of the GATT

1994.

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 a separate Module.

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 Article XXVIII of the GATT 1994 and will be explained in a separate Module.

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II.D.2. APPLIED TARIFFS

Although bindings represent a maximum tariff level that can be imposed on the importation of a good, in

practice Members often charge a rate below that maximum level. An ''applied tariff'' is the duty that is actually

charged on imports on an most-favoured nation (MFN) basis. Applied tariffs are not recorded in the WTO

Schedules of concessions, but are rather specified in the national tariff schedules of the importing country.

A WTO Member can have an ''applied tariff'' for a product that differs from the ''bound tariff'' for that product

as long as the applied level is not higher than the bound level contained in that Member's Schedule of

concessions. For example, a Member having a bound level of 30 per cent on bicycles has the liberty to impose

any applied duty level it wishes, as long as this is not higher than 30 per cent. The difference between the

"bound" tariff rate and the actual "applied" level is often referred to in the WTO jargon as "binding overhang"

or "water".

Why are Tariff Bindings important?

Tariff bindings are important from a practical point of view in at least three aspects:

They set an upper limit on the amount by which an applied rate can be raised, enhancing the

predictability of trade for traders;

Since they are enumerated in WTO Schedules of concessions which are publicly available, they

enhance transparency;

They establish a baseline from which future tariff negotiations will take place.

II.E. TARIFF PEAKS AND TARIFF ESCALATION

Notwithstanding the significant improvements in the reduction of tariffs that previous GATT Rounds, and

particularly the Uruguay Round produced, tariffs continue to be an important barrier to market access for

goods as "tariff peaks", high tariffs and "tariff escalation" remain. This section provides a brief introduction to

these concepts, which will be explained later on when presenting the post-Uruguay tariff situation for non-

agricultural products (see section on Post-Uruguay and Pre-Doha).

II.E.1. TARIFF PEAKS

Tariff peaks are tariffs that exceed a selected reference level. Although there is no agreed definition of a tariff

peak in the GATT/WTO, the Organisation for Economic Co-operation and Development (OECD) establishes a

distinction between "national peaks" (where the reference level is defined in relative terms as those levels

above three times the national import-weighted average rate) and "international peaks" (which are defined in

absolute terms as those tariffs at above 15 per cent and above). 1 Tariff peaks are further discussed in

Section IV.C.

1 World Trade Organization (2001), Special Studies Market Access 6, page 12.

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II.E.2. TARIFF ESCALATION

Tariff escalation describes the situation where the tariff rate applicable to a product increases with the level of

processing, that is, tariffs are higher on semi-processed and processed/finished products than on un-processed

products and raw materials. Tariff escalation is further discussed in Section IV.C below.

EXERCISES:

1. Briefly explain the different types of tariffs explained in this Module, according to the way they are

calculated.

2. What is the difference between a "bound tariff" and an "applied tariff"?

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III. TARIFF SCHEDULES AND THE ''HARMONIZED

SYSTEM'' 2

III.A. TARIFF SCHEDULES

When a product reaches customs in an importing country, customs authorities must know exactly what the

products are in order to assess which treatment it should receive, including what tariff rate should apply. Since

products vary considerably, the practice in most, if not all, countries is to "classify" them following a coding

standard. National tariff schedules serve this purpose. They normally contain structured lists of products,

their description, classification and coding, as well as their corresponding customs duties. The national tariff

schedules of practically all countries are based on the Harmonized Commodity Description and Coding System

("Harmonized System").

III.B. THE HARMONIZED SYSTEM

The ''Harmonized System'' (HS) is an international product nomenclature for the description, classification and

coding of goods, which was developed and is administered by the World Customs Organization (WCO). The HS

was established through the International Convention on the Harmonized Commodity Description and Coding

System (hereinafter the HS Convention), which entered into force on 1 January 1988.

III.B.1. WHAT IS THE HARMONIZED SYSTEM?

The HS provides a common system for classifying traded goods so that countries applying it "speak the same

language", facilitating trade amongst them. It provides a coding system that is based on a hierarchical

structure, starting with Sections at the higher level and getting more specific at the Chapter (two digit),

heading (four digit) and subheading (six digit) levels. The longer the code, the greater the specificity

concerning a product. The scope of each level is dependent on the descriptions of the higher levels; that is,

longer codes are always sub-sets of the higher level.

The HS consists of 21 Sections, 97 Chapters, around 1200 four-digit headings and more than 5000 six-digit

subheadings, which are revised periodically. They cover all commodities in international trade.

The HS consists of 21 sections covering 99 chapters. These are:

Section I Chapters 1-5, live animals and animal products

Section II Chapters 6-14, vegetable products

Section III Chapter 15, animal or vegetable fats and oils

2 See also: Yu, Dayong, The Harmonized System – Amendments and their Impact on WTO Members

Schedules, WTO Staff Working Paper ESRD-2008-02.

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Section IV Chapters 16-24, prepared foodstuffs, beverages and spirits, tobacco

Section V Chapters 25-27, mineral products

Section VI Chapters 28-38, chemical products

Section VII Chapters 39-40, plastics and rubber

Section VIII Chapters 41-43, leather and travel goods

Section IX Chapters 44-46, wood, charcoal, cork

Section X Chapters 47-49, wood pulp, paper and paperboard articles

Section XI Chapters 50-63, textiles and textile products

Section XII Chapters 64-67, footwear, umbrellas, artificial flowers

Section XIII Chapters 68-70, stone, cement, ceramic, glass

Section XIV Chapter 71, pearls, precious metals

Section XV Chapters 72-83, base metals

Section XVI Chapters 84-85, electrical machinery

Section XVII Chapters 86-89, vehicles, aircraft, vessels

Section XVIII Chapters 90-92, optical instruments, clocks and watches, musical instruments

Section XIX Chapter 93, arms and ammunition

Section XX Chapters 94-96, furniture, toys, miscellaneous manufactured articles

Section XXI Chapter 97, works of art, antiques

Table 1: Overview of Sections and Chapters of the Harmonized System

The codes of the HS subheadings, comprised of a six-digit code, consists of three pairs of codes (normally in

the form XXYY.ZZ) which provide information on its three different levels of detail. The first two digits (XX)

represent the Chapter in which the goods are classified, which together with the next two digits (YY), identify

the heading within the Chapter where the goods are described. Finally, the addition of the last two digits (ZZ)

represent the most detailed subdivisions of the HS.

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EXAMPLE OF THE HARMONIZED SYSTEM

Section XI textiles and textile articles

Chapter 62: Articles of apparel and clothing accessories, not knitted or crocheted

Heading 62.07: Men's or boys' singlets and other vests, underpants, briefs nightshirts,

pyjamas, bathrobes, dressing gowns and similar articles

- Underpants and briefs :

6207.11 -- Of cotton

6207.19 -- Of other textile materials

- Nightshirts and pyjamas :

6207.21 -- Of cotton

6207.22 -- Of man-made fibres

6207.29 -- Of other textile materials

- Other :

6207.91 -- Of cotton

6207.92 -- Of man-made fibres

6207.99 -- Of other textile materials

Countries, under the HS Convention, are free to introduce national distinctions beyond the six-digit level.

Reasons for doing this often include charging differentiated duties, collecting more detailed statistics and other

purposes. These additional ''breakouts'' are often referred to as "national tariff lines". Many countries have

expanded their national tariff nomenclature beyond the HS six-digit level to eight-digit and even ten-digit tariff

lines.

III.B.2. THE HARMONIZED SYSTEM AND THE WTO

As of February 2009, the HS was used by more than 200 countries (including 173 Contracting Parties to the HS

Convention) as a basis for their customs tariffs and for the collection of international trade statistics. Over 98

per cent of the merchandise in international trade is classified in terms of the HS. The Contracting Parties to

the HS Convention are not allowed to alter in any way the numerical codes and the corresponding product

descriptions associated to a heading or a subheading. This is, precisely, what keeps the nomenclature

''harmonized''.

The objective of having a common nomenclature is that it provides a coded description of goods which ensures

that any good will fall within the same tariff sub-heading (i.e. the same tariff classification) irrespective of the

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country where it is being traded, providing a common language for countries to negotiate and making it easier

to establish and compare concessions. In this way, the adoption of the HS ensures greater uniformity among

countries in customs classification and thus, a greater ability for countries to monitor and protect the value of

tariff concessions given and gained.

There was no obligation under the GATT, nor under the WTO, to use any specific "nomenclature" of

classification in their WTO Schedules of concession for goods. 3 Several different nomenclatures were used by

GATT Contracting Parties in the past (e.g. Brussels Tariff Nomenclature (BTN), Customs Cooperation Council

Nomenclature (CCCN), nationally defined). The divergences in the nomenclatures posed several difficulties for

monitoring GATT concessions and for conducting tariff negotiations. In addition, import and export data were

normally kept using a nomenclature different from the tariff nomenclature.

In 1983, GATT Contracting Parties decided to introduce the HS in their Schedules of concessions . The "1983

Decision on GATT Concessions under the Harmonized Commodity Description and Coding System" laid down

the main procedures in connection with the introduction of the HS in national tariffs and Schedules of

concessions (L/5470/Rev.1). The main principle to be observed was that existing GATT bindings should be

maintained unchanged. The procedure of expressing tariff concessions -which are in a certain nomenclature–

into another nomenclature without changing their scope or value is called "transposition of concessions", which

is equivalent to a "translation" of the existing concessions into a new nomenclature language. In this regard,

simplified procedures under Article XXVIII of the GATT for the modification of tariff concessions, were

envisaged for special circumstances. Most of the Schedules resulting from this transposition of concessions

were annexed to Protocols (GATT Protocols 1987, 1988, 1992-1994).

Although not formally part of the WTO Agreements, the HS has a special relationship with them. The HS

nomenclature is referred to and utilised in several WTO Agreements (both multilateral and plurilateral), for

instance to define their product coverage. The Agreement on Agriculture (Annex 1) and the Agreement on

Rules of Origin (Article 9:2(c)) are examples of multilateral agreements which make express reference to it;

while the Agreement on Trade in Civil Aircraft and, more recently, the Information Technology Agreement

(ITA), are examples of plurilateral agreements also making reference to the HS.

As of January 2009, there were 118 WTO Members (counting the EC-27 country members individually) which

were Contracting Parties to the HS Convention. Practically all the remaining 35 WTO Members apply the HS

nomenclature de facto (i.e. in spite of not being parties to its Convention). The HS plays an important role

within the multilateral trading system. Most of the WTO Members have used it to describe their concessions in

their corresponding WTO Schedule of concessions. The HS has also been used as the basis for tariff

negotiations in the GATT/WTO.

In the Doha negotiations, the draft modalities on non-agricultural market access negotiations (NAMA) expressly

provides that the new Schedules of concessions should be prepared on the basis of the HS. 4

3 See L/5470/Rev.1.

4 Draft NAMA Modalities, para. 3 of the (TN/MA/W/103/Rev.3).

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Why is the HS important in international trade?

The HS serves several important purposes, including to:

facilitate trade by providing international uniformity in the classification of goods for customs

purposes;

facilitate the collection, analysis and comparison of world trade statistics;

provide a common international language for coding, describing and classifying goods for commercial

purposes; and,

provide a nomenclature that is updated over time to take account of technological developments and

changes in international trade patterns.

In practice, since the HS provides rules that ensure that a certain product will be classified world-wide with the

same numeric code , it contributes to:

simplifying the analysis of trade data;

reducing costs and simplifying the customs procedures associated with importation; and,

forming the basis for trade negotiations and thus, facilitating such negotiations.

III.B.3. HARMONIZED SYSTEM AMENDMENTS 5

The HS is subject to periodic review by the Harmonized System Committee of the WCO. As of 2009, it has

been amended four times - in 1992, 1996, 2002 and 2007. An additional amendment is envisaged for 2012.

The purpose of the periodical review and amendments is to take into account of changes in technology and

patterns in international trade.

These amendments can be categorized into two main types depending on whether the revision will alter the

product coverage of one or more related headings and subheadings. 6

i. a clarifying change, which does not relate to any change of scope of the concerned HS subheading. It

may take the form of a revision of Section/Chapter notes or product description, or a correction of

typographical errors, neither of which changes the scope of the corresponding HS subheading;

ii. a structural change, which relates to changes of product coverage of one or more HS subheadings. This

type of change includes : (i) splitting one existing subheading into two or more subheadings; or (ii)

merging several existing subheadings into new one subheading; or (iii) both. However, none of these

amendments should change the overall product coverage of the whole HS nomenclature. Thus, the

removal of one product/products from one subheading would lead to the relocation of such product or

products to another subheading or other subheadings.

5 For more information, please refer to:

http://www.wto.org/english/tratop_e/schedules_e/goods_schedules_table_e.htm.

6 Yu, Dayong, The Harmonized System – Amendments and their Impact on WTO Members Schedules, WTO

Economic Research and Statistics Division, Staff Working Paper ESRD-2008-02.

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The first set of amendments in 1992 included mainly clarifying changes, while the other three have consisted

mainly of structural changes which covered a wide range of products. The Table below provides an overview of

the latest three HS amendments.

All Contracting Parties to the HS Convention are required to implement these amendments in their national

tariff nomenclatures for customs tariffs and international trade statistics. A WTO Member introducing the HS

amendments at the national level also needs to introduce these into their WTO Schedules of concessions. In

general terms, this is a way of ensuring that Member are able to monitor the tariff concessions and to ensure

that the applied duties are not being charged in excess of the bound duties (which could be very difficult to do

if the applied and bound tariffs are in different nomenclatures).

HS1996 HS2002 HS2007

Number of sets of

amendments

around 400 373 360

Number of structural

changes / total changes

- * - 172 (46%) 182 (51%)

Number of correlations 884 900 1223

Major products subject

to changes

Steel, chemicals,

woods, electronics and

machinery

Papers, leather,

chemicals, woods and

metals

Chemicals, woods,

Information Technology

(IT) products

Before After Before After Before After

Total number of

subheadings

5018 5113 5113 5224 5224 5052

Affected by

amendments

481(10

%)

576(11%) 401(8%) 512(10%) 773(15%) 603(12%)

Unaffected by

amendments

4537 4537 4712 4712 4449 4449

Table 2: Overview of Harmonized System Amendments from 1996 to 2007

* Statistics not available

Source: ''Yu, Dayong, 'The Harmonized System – Amendments and their Impact on WTO Members'

Schedules", WTO Staff Working Paper ESRD-2008-02'', page 6.

EXERCISES:

3. What is a tariff schedule?

4. What is the HS and why is it important within the MTS?

17

IV. GATT/WTO TARIFF NEGOTIATIONS ON NON-

AGRICULTURAL PRODUCTS

IN BRIEF

Tariff concessions are one of the most successful achievements of the multilateral trading system (MTS) since

the inception of the GATT 1947. Tariff negotiations were envisaged in the GATT 1947, and now in the WTO, as

a means to achieving substantial reduction of tariffs and wide coverage of bound tariff lines which,

consequently, have brought enhanced and predictable conditions of market access for goods.

In practice, most tariff negotiations have taken place in the context of negotiating rounds, which were

launched by the GATT Contracting Parties or, more recently, by WTO Members (i.e. the Doha Development

Agenda (DDA)).

There were eight rounds of negotiations launched by the GATT CONTRACTING PARTIES, which were initially

referred to as "tariff conferences". While the first negotiating rounds were primarily devoted to tariff

reductions, the subsequent rounds also encompassed negotiations on non-tariff measures (NTMs). It was not

until the Uruguay Round that agricultural products were covered in a substantive manner. After the Uruguay

Round, bilateral and plurilateral negotiations on tariff concessions have continued.

Tariff reductions also take place within the negotiations for accession to the GATT/WTO of new Members, as

well as in the context of plurilateral negotiations aimed at eliminating tariffs on specific sectors. The most

successful plurilateral negotiations, at least as far as the number of participants is concerned, were those

carried out pursuant to the Information Technology Agreement (ITA). It is worth noting however, that

liberalization has continued on an ongoing basis for trade in pharmaceutical products (sometimes referred to as

the "Pharma").

The November 2001 Declaration of the Fourth Ministerial Conference in Doha, Qatar, launched the first

round of negotiations under the WTO, named the Doha Development Agenda (DDA). The DDA provided the

mandate for negotiations on a range of subjects, including the reduction or as appropriate elimination of tariffs

for non-agricultural products, in the context of the NAMA negotiations. Negotiations under the DDA

negotiations are still ongoing.

The original mandate, underlying the principles and techniques for tariff negotiations, was set out in

Article XXVIIIbis of the GATT 1947 (now the GATT 1994).

Article XXVIIIbis: Tariff Negotiations

1. The Contracting Parties recognize that customs duties often constitute serious obstacles to trade;

thus negotiations on a reciprocal and mutually advantageous basis, directed to the substantial reduction of

the general level of tariffs and other charges on imports and exports and in particular to the reduction of

such high tariffs as discourage the importation even of minimum quantities, and conducted with due regard

to the objectives of this Agreement and the varying needs of individual contracting parties, are of great

importance to the expansion of international trade. The Contracting Parties may therefore sponsor such

negotiations from time to time.

18

2. (a) Negotiations under this Article may be carried out on a selective product-by-product basis or by

the application of such multilateral procedures as may be accepted by the Contracting Parties concerned.

Such negotiations may be directed towards the reduction of duties, the binding of duties at then existing

levels or undertakings that individual duties or the average duties on specified categories of products shall

not exceed specified levels. The binding against increase of low duties or of duty-free treatment shall, in

principle, be recognized as a concession equivalent in value to the reduction of high duties.

(b) The Contracting Parties recognize that in general the success of multilateral negotiations would

depend on the participation of all Contracting Parties which conduct a substantial proportion of their external

trade with one another.

3. Negotiations shall be conducted on a basis which affords adequate opportunity to take into account:

(a) the needs of individual Contracting Parties and individual industries;

(b) the needs of less-developed countries for a more flexible use of tariff protection to assist their

economic development and the special needs of these countries to maintain tariffs for revenue purposes;

and

(c) all other relevant circumstances, including the fiscal,* developmental, strategic and other needs

of the Contracting Parties concerned.

(*) See Ad note to Article XXVIIIbis Paragraph 3

Article XXVIIIbis of the GATT 1994 lays down several important aspects regarding tariff negotiations, including:

the importance of tariff negotiations, that is, the common recognition among GATT Contracting

Parties of the trade-restrictive effects of tariffs on international trade, in particular of those which are

high and discourage the importation even of minimum quantities (paragraph 1);

the mandate, which calls for multilateral tariff negotiations to take place periodically (paragraph 1);

the principle of tariff negotiations, which explicitly calls for these to take place on a ''reciprocal

and mutually advantageous'' basis (paragraph 1);

the use of tariff negotiating techniques, which may be carried out on a selective product-by-

product basis (i.e. request-offer) or by other multilateral procedures as agreed by the Contracting

Parties (paragraph 2(a));

the objective of tariff negotiations, which include the reduction of duties, the binding of duties at

then existing levels or undertakings that individual duties or the average duties on specified categories

of products shall not exceed specified levels (paragraph 2(a));

the recognition that multilateral trade liberalization is based on the participation of all Contracting

Parties (paragraph 2(b));

the recognition that tariff negotiations should take into account the varying needs of individual

contracting parties, especially developing countries which need a more flexible use of tariff

protection to assist their economic development and the special needs of these countries to maintain

tariffs for revenue purposes (paragraph 3).

Two things need to be noted about Article XXVIII bis. First, the Article does not aim at the complete

elimination of all tariffs (free trade), but to the ''substantial reduction'' of the general level of tariffs (freer

19

trade). Second, it refers to the "binding of duties at specified levels" resulting from negotiations, suggesting

that the acceptance by Members to bind tariffs is a concession with an intrinsic value to negotiating parties . 7

IV.A. PRINCIPLES OF TARIFF NEGOTIATIONS

There are, in general terms, three principles envisaged in GATT/WTO tariff negotiations: (1) reciprocity and

mutual advantage; (2) the MFN treatment principle; and (3) predictability and transparency on tariff

concessions (tariff bindings). Each of these principles are described below.

IV.A.1. RECIPROCITY AND MUTUAL ADVANTAGE

A central requirement of Article XXVIIIbis of the GATT 1994 is for tariff negotiations to be held on a reciprocal

and mutually advantageous basis. This requirement is normally referred to as ''reciprocity'', although there is

no precise definition of what it means nor an agreed procedure on how it should be measured. Generally, this

requirement implies that negotiations for reduction of tariffs should achieve a result that is mutually beneficial

to all participants. Thus, according to this principle, where a Member requests another Member to reduce its

tariffs on certain products, it must also be prepared to reduce its own tariffs on products of export interest to

the other Members.

However, the principle of "reciprocity" does not apply in the same manner to tariff negotiations between

developed and developing country Members since it has been adapted to take account of the principle of

special and differential treatment. There are two main differences in this respect:

1. The first one involves providing non-reciprocal preferential access to developing countries (including

LDCs) through arrangements under the "Enabling Clause", such as the Generalized System of

Preferences (GSP). The GSP allows developed Members to accord, on a voluntary basis, differential and

more favourable treatment to developing and LDC Members, without having to accord such preferential

treatment to developed Members, as an exception to the MFN principle. Thus, under the GSP,

developed Members offer preferential treatment, such as zero or lower duties, to products originating in

developing Members. Developing and LDC Members benefiting from such non-reciprocal preferential

arrangements are not required to open their markets to the developed Members offering them more

favourable market access conditions;.

2. The second aspect involves requiring from developing countries ''lesser'' liberalization than from

developed countries in multilateral rounds of negotiations – a principle originally referred to as "non-

reciprocity" or, more recently, as "less-than-full reciprocity" (see box below). Unlike non-reciprocal

preferential access, where no contribution is required from beneficiary developing countries, non-

reciprocity implies some level of reciprocity. 8

7 See World Trade Report 2007, Six Decades of Multilateral Trade Cooperation: What have we learnt?,

page 130.

8 See also World Trade Report 2007, page 131.

20

"Non –Reciprocity" or "Less-than-full reciprocity": Historical Background

The need for special consideration of developing countries' needs with respect to tariffs was first formally

recognized in paragraph 3 of Article XXVIIIbis of the GATT (explained above). In 1961, the Executive

Secretary of GATT submitted an Explanatory Memorandum stating that Article XXVIII bis:3(b) could be

interpreted to mean that the developing countries would "not always be held to strict reciprocity'' (L/1435,

page 7; GATT BISD, 10/172). During the Dillon Round (1960-1961), the Ministerial Declaration of 1961 stated

that "in view of the stage of economic development of [developing countries], a more flexible attitude should

be taken with respect to the degree of reciprocity to be expected from these countries" (GATT BISD, 10/26).

The concept of non-reciprocity found its first formal expression in the Ministerial Declaration launching the

GATT Kennedy Round (1963 - 1967), which provided that "in the trade negotiations every effort shall be made

to reduce barriers to exports of [developing countries], but that the developed countries cannot expect to

receive reciprocity from [developing countries]" (GATT BISD, 12/48). It was further clarified, however, that

the principle did require developing countries to undertake some tariff liberalisation, even if not at the same

level as developed countries. In other words, that it was a question of "less-than-full reciprocity", rather than

no reciprocity.

The concept of non-reciprocity was later incorporated in Article XXXVI:8 of Part IV (Trade and

Development) of the GATT. It provided that developed Members 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

Members. The Ad Note to Article XXXVI:8 states that the phrase "do not expect reciprocity" means, in

accordance to the objectives set forth in this Article, that "the [developing countries] should not be expected,

in course of trade negotiations, to make contributions which are inconsistent with their individual development,

financial and trade needs, taking into consideration past trade developments".

The concept received a great deal of attention during the GATT Tokyo Round (1973-1979), where developing

countries made proposals to define the concept. The 1979 Enabling Clause' consolidated the concept of non-

reciprocity in trade negotiations which aims at increasing commercial opportunities for developing country

Members and is the WTO legal basis for the GSP (see above). On the one hand, and similar to the provision

contained in Article XXXVI:8 of the GATT, paragraph 5 of the Enabling Clause states that the 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. On the other hand, paragraph 7 of the

Enabling Clause states that the developing countries' capacity to make contributions would improve with the

progressive development of their economies and the improvement in their trade situation. Accordingly, they

would be expected to "participate more fully" in the negotiations.

The language contained in Part IV of the GATT and the Enabling Clause was subsequently used in the Punta del

Este Declaration, which launched the Uruguay Round, as well as in paragraph 16 of the Doha Ministerial

Declaration, which states that "negotiations shall take fully into account the special needs and interests of

developing and LDC participants, including through less than full reciprocity in reduction commitments".

Based on: Hoda Anwarul (2001), Tariff Negotiations and Renegotiations under the GATT and the WTO, World

Trade Organization, Geneva, pages 56-58.

21

IV.A.2. THE MOST FAVOURED-NATION (MFN) TREATMENT

According to the MFN principle set out in Article I:1 of the GATT 1994, any tariff reduction granted by a

Member to any country (Member or not Member of the WTO) must be extended to all WTO Members

immediately and unconditionally. This applies to both "bound tariffs", as specified in Members' WTO Schedules

of concessions, as well a to "applied tariffs" (i.e. those actually charged on imports) specified in Members'

national tariff schedules. It should, however, be noted that the WTO Agreement envisages several exceptions

to this principle, including:

General Exceptions (Article XX of the GATT 1994);

Territorial Application – Frontier Traffic – Customs Unions and Free-Trade Areas (Regional Integration

- Article XXIV of the GATT 1994);

1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of

Developing Countries (the "Enabling Clause");

Security Exceptions (Article XXI of the GATT 1994);

Balance of Payment Exceptions and Temporary Application of Quantitative Restrictions in a

Discriminatory Manner (Articles XII, XVIII.B, and XIV of the GATT 1994);

Waivers (Article IX:3 of the Agreement Establishing the WTO). e.g. Decision on preferential tariff

treatment for LDCs 9 (WT/L/304);

A number of Decision and provisions on Special and Differential Treatment, eg. Decision providing

duty-free quota-free access for products originating from all LDCs 10 (DFQF Decision, Annex F of the

Hong Kong Ministerial Declaration).

The requirement of MFN treatment plays an important role in enhancing market access for goods. With respect

to tariff negotiations, the MFN rule serves as an incentive for tariff concessions by avoiding concession-erosion

after tariff negotiations. It also served as an incentive for joining the GATT/WTO. For developing countries

and others with little bargaining power in the negotiations, the MFN principle ensures that they are able to

benefit from the best trading conditions resulting from the negotiations.

IV.A.3. PREDICTABILITY & TRANSPARENCY

The obligation whereby WTO Members shall not apply tariffs beyond the scheduled bound levels is set out in

the first sentence of paragraph 1(b) of Article II of the GATT 1994, which guarantees secure and predictable

market access for goods. Security and predictability are achieved through the inclusion of a Members'

commitments (the product specific tariff bound rates in particular) in a legal instrument (i.e. the Schedules of

concessions) which is not easily changed.

9 This Decision granted a waiver to allow developing country Members to provide preferential tariff treatment

to products of LDCs without being required to extend the same treatment to products of any other Member.

10 Among others, the DFQF Decision provides that all developed Members and developing country Members

declaring themselves in a position to do so should provide duty-free and quota-free market access for all

products originating from all LDCS no later than the start of the implementation period of the results of the

DDA. Members facing difficulties in complying with that decision shall provide duty-free and quota-free access

to at least 97% of products originating from LDCs.

22

As it might be recalled, transparency is an important principle of the WTO which is contained in various

provisions. In the tariff side, trade agreements involve governments making very detailed commitments on

tariffs and other regulations that involve thousands of products. It would be difficult, if not impossible, to keep

track of all these commitments if they were not recorded in the Schedules. Although not explicitly identified as

a mechanism for transparency, the Schedules of concessions certainly enhance transparency of the tariff

commitments as they are publicly available. The WTO Schedules, which frequently run into hundreds or even

thousands of pages, codify in great detail the obligation of each WTO Member with respect to import duties and

"other duties and charges" (for trade in goods) that are to be applied to imported products from other

Members.

EXERCISES:

5. In what context do tariff negotiations normally take place under the GATT/WTO?

6. Briefly explain the principles underlying tariff negotiations.

23

IV.B. GATT NEGOTIATIONS ON TARIFFS 11

IV.B.1. GENERAL BACKGROUND

The first step in a tariff negotiation is usually for the participants to agree on the "modalities", which set the

framework in which the tariff concessions will be negotiated (see box below). At the centre of these modalities

are the methods/techniques that will be used for negotiating tariff reductions. As mentioned above,

Article XXVIIIbis of the GATT 1994 sets the broad guidelines under which tariff negotiations should be

undertaken. This Article notes that negotiations may be carried out on a selective product-by-product (i.e.

request-offer) basis or "by the application of such multilateral procedures as may be accepted by the

Contracting Parties concerned."

What are Modalities?

There is no single agreed definition of what the term "modalities" means, and its meaning tends to change

according to the context in which it is used. In the context of tariff negotiations, it is often used to refer to an

agreement that determines the way in which the new Schedules of concessions will be prepared. In simple

terms, modalities could be defined as guidelines on how WTO Members will prepare and implement their new

commitments. In the context of the NAMA negotiations, the ultimate objective is for Member governments to

reduce their tariffs and to reflect those new binding commitments in their new Schedules of concessions. The

“modalities” will tell them the conditions, requirements and flexibilities to do this.

In the early days of the GATT, tariff reductions were negotiated on a bilateral item-by-item basis, known also

as ''request-offer'' approach. Under this approach, Contracting Parties tended to focus on securing improved

market access on their most important export products. With the increasing number of Members and products

involved in negotiations, that technique became too cumbersome and GATT Contracting Parties eventually

started relying on formulae in order to determine the tariff cuts expected from each of them. This allowed

them to negotiate many more products, as negotiating time and energy would be placed on the exceptions,

rather than on the general rule for making the tariff reductions. With regard to the formulae, the modalities

normally set the cuts that should be applied to bound tariffs and the length of time for the implementation of

these cuts to take place (often referred to as the "implementation period").

However, agreeing on the general tariff cutting techniques is not the whole story as Members have traditionally

had problems in making reductions on the tariffs for their more sensitive products. While the issue was taken

care of automatically through the request-offer approach (i.e. because no Member was obliged to enter into

negotiations for a particular product if it did not wish to do so), a formula applied across the board to all

products, meant that exceptions or deviations needed to be allowed in order to accommodate these concerns.

Although such deviations were referred to as "exceptions" in the past, the term "flexibilities" has been used

more recently to denote special provisions applicable to certain developing countries. In essence, both allow

some Members to deviate from the general tariff reduction rule.

11 This section is largely based on Low Patrick and Santana Roy, Trade Liberalization in Manufactures: What is

Left after the Doha Round?, Journal of International Trade and Diplomacy, Vol. 3, No. 1, Spring 2009, pages

63-126. (ISSN 1360-1542).

24

The Table below provides an overview of the main modalities or "techniques" that were used in the GATT to

negotiate tariff reductions: 1) ''bilateral product-by-product'', 2) ''sectoral'' and 3) ''formula'' approaches. The

choice of a modality depends largely on the objectives sought by the negotiators, which are sometimes set by

the mandate launching the negotiations. However, the choice of one technique over the other may also be

constrained by political, practical or even historical considerations. These methodologies have traditionally

been employed in combination or with variations, as well as with exceptions and flexibilities 12, as explained

above (see box).

Negotiating Rounds Modality used to reduce tariffs Outcome

Geneva Round 1947 Product-by-product negotiations; 15,000 tariff concessions

Annecy Round 1949 Product-by-product negotiations; 5,000 tariff concessions

Torquay Round 1950 Product-by-product negotiations; 8,700 tariff concessions

Geneva Round 1956 Product-by-product negotiations; Modest reductions

Dillon Round 1960-1961 Product-by-product negotiations; 4,400 concessions exchanged

Kennedy Round 1963-1967 Tariffs: formula approach (linear cut

formula) with exceptions; Product-

by-product negotiations;

Average tariffs reduced by 35%;

some 33,000 tariff lines bound

Tokyo Round 1973-1979 Tariffs: formula approach (''Swiss

Formula'') with exceptions;

Product-by-product negotiations;

Average tariffs reduced by one-third

to 6% for OECD manufactures

imports

Uruguay Round 1986-1994 Tariffs: formula approach (simple

average reduction + sectoral

approach); Product-by-product

negotiations;

Average tariffs again reduced by

one-third on average

Table 3: Overview of Negotiating Modalities and Outcomes of Tariff Negotiations

(Based on: World Trade Report 2007, page 198)

In the following section, we will present the main modalities used in the GATT Rounds to negotiate tariff

reductions, as well as the outcomes achieved from the GATT Rounds of tariff negotiations.

12 Low Patrick and Santana Roy (see footnote 3).

25

IV.B.2. NEGOTIATING TECHNIQUES FOR TARIFF REDUCTIONS

1. BILATERAL PRODUCT BY PRODUCT/COUNTRY BY COUNTRY TECHNIQUE

(REQUEST/OFFER)

1.1. What is the Product-by-Product Technique?

As mentioned above, the first five rounds of tariff negotiations were conducted on a bilateral and selective

product-by-product basis - explicitly mentioned in Article XXVIIIbis on tariff negotiations (explained above). This

is the oldest negotiating technique, whereby the submission of "request lists" (a detailed enumeration of products

of interest to one Member) is followed by "offer lists" (an enumeration of products on which another Member is

willing to make concessions).

This technique, also referred to as "request-offer", required that countries participating in the negotiations would

request concessions in the products in which they were likely to be the principal suppliers to the country from

which the concession was being asked. This rule did not prevent any other participant from making a request,

but the country being asked had the right to refuse by invoking the "principal supplier rule", in case the real main

supplier of the product was not participating in the negotiations or was not a Contracting Party to the GATT. The

country that successfully secured a concession through this approach would receive an "initial negotiating right"

on that concession. These rights are important in the context of renegotiations under Article XXVIII of the GATT.

While this negotiating technique is bilateral in character, the results it produces are applied on a multilateral basis.

The idea was that all these bilateral agreements would be extended to the other participants on an MFN basis and

"consolidated" in a single document: the WTO Schedule of concessions (i.e. the resulting concessions were

multilateralized). In order to grant concessions, participants not only took into account the concessions received

from principal suppliers, but also the benefits resulting from concessions given by other participants (i.e. they

took into account all the benefits received irrespective of whether or not they had negotiated them).

1.2. Advantages and Disadvantages of the Product-by-Product Technique

One advantage of the bilateral and selective product-by-product technique lies in that it allows Members to

focus their exchange of tariff concessions on the products in which they have most interest. From a defensive

point of view, it provides to the participants some flexibility by allowing them to protect sensitive sectors.

However, the application of this approach turned out to be extremely burdensome at some point due to the

substantial increase in the number of products and participants that had to be taken into account in the

negotiations. Another shortcoming of this technique is its dependence on the ''principal supplier rule'', which

often lead to smaller reductions in cases where the supplier of a product was not participating in the

negotiations or was not a Contracting Party to the GATT. Another major disadvantage of the principal supplier

rule was that small traders with strong interest in the negotiations of a product had difficulties entering into the

negotiations as their share of trade was marginal.

1.3. Current Practical Importance of this Technique

The bilateral product-by-product approach is nowadays used mostly in the process of accession of new WTO

Members.

26

2. FORMULA APPROACH

2.1. What is the Formula Approach?

The so-called "formula" approach involves tariff reductions which are calculated in a mathematical, as opposed

to an individually negotiated manner. This approach has been favoured since the 1960s, in particular because

it allows for simplified negotiations across a large number of participants in the negotiations. Formula

negotiations involve a two-step process. First, the selection of an appropriate formula type. Second, the

definition of its parameters. Both elements will determine, to a larger or lesser extent, the contribution to be

made by the participants. 13

"Base Rate"

A key issue in implementing any tariff cutting technique, especially the formula-based approaches, is the ''base

rate'' to which the techniques/formulae should be applied on. That is, the product specific tariff rate to which

any agreed reduction will apply to. In general, two elements need to be decided regarding the base rate:

Bound tariff lines - What tariff should be the basis of the reductions? The applied tariffs or the

bound tariffs? Other? Reductions to the applied tariffs can generate more immediate market access

(as those are often the tariff rates effectively faced by exporters), but Members have used the bound

rates as the basis for their reductions. During the GATT, the practice was normally to use the bound

rates contained in countries' Schedules of concessions. For example, during the Uruguay Round,

participants decided that the base rates for the negotiations will be the bound MFN rates. In the

context of the on-going NAMA negotiations some Members considered it would be more appropriate to

apply reductions to Members' applied rates, as this was likely to result in a greater liberalisation of

markets. According to the latest text on modalities, however, Members applying the formula will use

the bound rates after full implementation of current concessions; and,

Unbound tariff lines - unbound tariff lines refer to those products for which a Member has not

accepted a bound tariff under Article II of the GATT 1994. A question for negotiators, therefore, is

how to treat them in tariff negotiations, i.e. should they simply be bound or bound and reduced?

Should their base rates be set independently or be based on the applied tariff levels? If the latter,

which date of reference should be used? In the Uruguay Round, the level of the applied tariffs on 1

September 1986 was chosen as the base rate. In the context of the NAMA negotiations, it is

envisaged that most, not all, unbound tariffs will be bound and reduced.

2.2. Types of Formula 14

In general, two types of formula can be used in negotiations depending on whether or not they are applied on

a line-by-line basis.

2.2.1. Formula Applied on a "Line-by-line" Basis

A formula is said to be applied on a "line-by-line" basis when the final bound rate is determined as a function of

the existing binding of a particular product. There are two variations of this formula:

13 Low Patrick and Santana Roy (see footnote 3), page 9.

14 See also: Negotiating Group on Market Access, Formula Approaches to Tariff Negotiations, Background Note

prepared by the WTO Secretariat (TN/MA/S/3/Rev.2).

27

the so-called "linear reduction formula", which reduces the applicable tariff rates by the same

percentage, regardless of the base rate. This type of formula is also referred to as ''tariff

independent'' formula since the percentage reduction in tariff rates is not dependent upon the initial

tariff rate subject to negotiations. What is important in this formula is simply the rate of reduction.

The ''linear reduction approach'' was used, for example, in the Kennedy Round negotiations (see

below);

the so-called "non-linear" or ''harmonization formula'' which results in steeper cuts to higher initial

tariff rates and more slight cuts to lower initial tariff rates. By doing so, this type of formula has the

effect of reducing the dispersion of tariff rates thereby "harmonizing" the duties for that Member. If

all the Members use the same formula it would lead, in addition, to a harmonization across Members.

This type of formula is also referred to as "tariff dependent" formulae in which the percentage

reduction in tariff rates depends on the initial tariff rate. One typical example of the ''harmonization

formula'' is the "Swiss Formula", which was used in the Tokyo Round (see below) and is being

envisaged in the current NAMA negotiations.

2.2.2 Formulae Not Applied on a "Line-by-line" Basis"

These are formulae which do not require each individual tariff rate to undergo a specific reduction, but rather

to apply an average reduction, a reduction to a country's overall tariff average or reducing to a certain agreed

average. In other words, the final bound rate of each tariff line is not determined as a function of the existing

binding of a particular product. They include:

the ''simple average reduction'': requires a reduction of the existing duties by a certain average

percentage. It is calculated by first determining the reduction that would result in each tariff line and

then making an average of all those reductions. By applying this formula, a Member could fulfil the

agreed benchmark by cutting very little, or even nothing, the tariffs on some products and

compensating with higher cuts on others. The so-called "Uruguay Round formula", which was used to

reduce tariffs on agricultural products, is a modified version of this approach (see below);

the "reduction in the average": requires a reduction in the average of the tariffs by a certain

percentage. It is calculated by first determining the average of the base rates and the average of the

final rates, and then determining the reduction of the latter vis-à-vis the former. One example of this

technique is, arguably, the reduction for non-agricultural products that was agreed during the

Uruguay Round. Without formally agreeing on a specific modality, Ministers agreed at the Mid-term

Review meeting that took place in Montreal in 1988 that negotiations should aim at attaining lower

and more uniform rates, with a "target amount for overall reductions" that should be at least as

ambitious as that achieved by the formula participants in the Tokyo round . This overall reduction

was widely understood to mean that participants should reduce their averages by at least one-third

(i.e. 33 per cent);

the ''target average'': consists on setting a specific average that would need to be met by the new

bindings. The focus of this technique is on the average that would result after reductions rather than

on the reductions that would be required to meet such average. Although under certain conditions

this technique could have an effect equivalent to a simple average reduction, it could lead to a certain

degree of harmonization across countries. For example, if a target average of 30 per cent is agreed

for all Members, a Member with a current average of 40 per cent would have to reduce its existing

average by 25 per cent to meet the target, while another country with a current average of 100 per

cent would have to reduce its average by 70 per cent to meet the target. It is envisaged that some

Members will apply the ''target average'' modality in the context of the NAMA negotiations.

28

2.2.3 A Combination of Formulae

Tariff negotiators have long been aware of the characteristics of the different tariff reductions modalities, so

they often have tried to find ways to combine those properties by applying them in steps or in combination.

For example, as mentioned above, one way to ensure that a "target average" or an "average cut" would result

in reductions in all tariff lines is by including a "minimum cut" requirement (technically a line-by-line formula),

which would ensure that a minimum reduction is made on every line. This was precisely the approach taken

with respect to agricultural products in the Uruguay Round, where the simple average reduction (36% for

developed countries and 24% for developing countries) coupled with a minimum cut requirement that would

apply on a line-by-line basis (15 per cent for developed countries and 10 per cent for developing countries).

There are, obviously, several other ways of combining the properties of the different formulae, such as the

application of a non-linear formula followed by an average cut, etc.

In summary:

Tariff reduction formulae can be classified as:

A. Formulae applied on a line-by-line basis.

(i) Linear formula

(ii) Non-linear or harmonization formulae (which includes the Swiss formula)

B. Formulae not applied on a line-by-line basis

(i) simple average reduction

(ii) reduction in the average

(iii) target average

C. Combination of formulae

2.2.4 Advantages of the Formula Approach as compared to the Bilateral Product-by-Product

Approach

The formula approach is arguably:

more transparent (every Member will know how the others will reduce their tariffs);

more efficient (simpler process than product-by-product approach);

more equitable (tariff reduction depends on rules rather then “bargaining power”);

more predictable (it is easier to foresee the results of the negotiations); and,

more simple (it allows negotiations to focus on the exceptions, rather than on the reductions

applicable to most goods)

We will now continue by explaining in detail the technical aspects of the three of the formulae which have been

used in the past to reduce duties on non-agricultural products, including their advantages and disadvantages.

This include the: A) linear reduction formula; B) Swiss formula; and C) the reduction in the average.

29

2.3. Linear reduction formula

Ministers noted during the Kennedy Round that the usefulness of the product-by-product/country-by-country

negotiations was no longer adequate to meet the changing conditions of world trade and that new negotiating

techniques were required. For this reason, Ministers stressed that tariff negotiations "shall be based upon a

plan of substantial linear tariff reductions with a bare minimum of exceptions which shall be subject to

confrontation and justification". 15

2.3.1 What is the Linear Reduction Formula?

As explained above, the ''linear technique'' is the method whereby all tariffs, or tariffs in a circumscribed

sector, are reduced by an agreed percentage. During the Kennedy Round, the parties agreed to use a rate of

50 per cent as a "working hypothesis" for the determination of the general rate of linear reduction. This

formula is often expressed as:

TI = C * T0

T0: Initial tariff rate or existing tariff level (prior to negotiations)

C: Percentage reduction to be negotiated

T1: Final tariff rate or new tariff level that would result from the reduction

The final tariff rate T1 would necessarily depend upon both the percentage of tariff reduction as agreed by

participants (C) and the initial tariff rate (T0). However, the rate of reduction would be depending on the

percentage of tariff reduction (C) only. Imagine a situation where a 50 per cent linear reduction is agreed as

the modality:

Example – Linear Formula:

Product "Base rate" Formula Final rate after

reduction

Percentage

Reduction

1. Suit-cases, brief-

cases (4202.10)

150% "linear cut of 50%" 75% 50% *

2. Printed or illustrated

postcards (4909.00)

10% 5% 50% *

* Note how the 50% reduction has to be applied on each tariff line, irrespective of the level of the initial tariff.

Also note how all tariffs are subject to exactly the same cut.

15 GATT BISD 12S/36-49.

30

2.3.2. Advantages and Disadvantages of the Linear Cut Formula

The application of the linear cut formula considerably simplified the negotiations on tariff reductions by allowing

the negotiators to primarily focus on the exceptions, rather than on the reductions that would be applied to

most goods.

However, this approach has one noticeable weakness: it fails to address the issue of tariff disparities between

tariff peaks and low tariffs, as well as the issue of tariff escalation. This is attributed to the fact that a

same/linear rate of reduction is applicable to all tariff lines, irrespective of the tariff rates. As a result, higher

tariffs may still remain and the gap between high tariffs and low tariffs is unable to be narrowed. To illustrate

this point, consider a ten per cent linear cut on a high tariff of 150 per cent and on a lower tariff of ten per

cent. After the ten per cent reduction, the high tariff will remain high at 135 per cent, while the lower duty will

remain low at nine per cent. The gap (or dispersion) between them remains wide.

2.4. The "Swiss formula"

The Ministerial Declaration launching the Tokyo Round provided that negotiations should aim to conduct

negotiations for tariff reduction by "employment of appropriate formulae of as general application as

possible". 16

To avoid the perceived weakness of the linear reduction formula in reducing high tariffs, tariff peaks and tariff

escalation, participants to the Tokyo Round proposed several formulae designed to cut high tariffs to a greater

extent than lower tariffs, contributing to a greater ''harmonization'' of a Members' tariff Schedule.

2.4.1. What is the "Swiss Formula"?

The “Swiss Formula” follows a special kind of ''harmonizing'' method. It is often defined as:

T1 = A * T0

A + T0

T0 = base rate

A = the coefficient, which is the only variable to be negotiated

T1 = the resulting lower tariff rate which will constitute the new final bound tariff

A key feature of the formula is the ''coefficient'' (variable A), which determines the maximum final tariff rate.

According to the formula, as the base rate T0 rises to infinity, T0/(A+T0) approaches 1, resulting in T1 = Ax1.

In other words, no duty resulting from the application of the formula (T1) will be higher than the coefficient

(A). The coefficient ''A'' sets a ceiling to the maximum tariff rate that would result from the application of the

''Swiss Formula''.

16 GATT BISD 20S/20.

31

For example, a coefficient of 20 means that no tariff will be above 20 per cent (see the example below).

Examples – Swiss Formula

Let's use practical examples to illustrate how the application of the ''Swiss Formula'' harmonizes high tariffs

and low tariffs (Example 1), and how the coefficient determines the final bound tariff (Example 2).

Example 1: Consider the application of a coefficient of A = 10 to an initial tariff of 150% (i.e. T0 = 150%) and

of 10% (i.e. T0 = 10%).

The 150% tariff will be reduced to around 9.4%, representing a percentage cut of 93.8% and around

140.6 percentage points.

(10*150) / (10 + 150) = 1500 / 160 = 9.4%

The 10% tariff will be reduced to 5% representing a percentage cut of 50%, and 5 percentage points.

(10*10) / (10 + 10) = 100 / 20 = 5%

The tariff line with the higher level experienced a much higher tariff cut than the tariff line with the lower level.

There is a harmonizing effect: while the 150% duty was 15 times the 10% duty (150 / 10 = 15), the new

higher duty of 9.4% is less than two times the new lower duty of 5% (9.4 / 5 = 1.9).

Example 2: Consider the application of a coefficient of A = 5 and another coefficient of A' = 30 to the same

initial tariff of 150% (i.e. T0 = 150%).

The coefficient of 5 leads to a final bound rate of around 4.8% with a percentage cut of 96.7%.

(5 * 150) / (5 + 150) = 750 / 155 = 4.8%

The coefficient of 30 leads to a final bound rate of around 25% with a percentage cut of around

83.3%.

(30 * 150) / (30 + 150) = 4500 / 180 = 25%

Therefore, the lower the coefficient, the higher the tariff cut for the same base rate and thus, the lower the

final bound tariff.

Example – Swiss Formula with a coefficient = 20:

Product "Base rate" Formula Final rate after

reduction

Percentage

Reduction

1. Suit-cases, brief-

cases (4202.10)

150% "Swiss formula with a

coefficient of 20"

17.6% 88.2% *

2. Printed or illustrated

postcards (4909.00)

10% 6.7% 33.3% *

* Note how the product with the highest duty (150%) is subject to a much deeper cut than the duty with the

lowest initial rate (10%)

32

2.4.2. Advantages and Disadvantages of the "Swiss Formula"

Contrary to the linear reduction formula, the Swiss Formula allows to bring the final tariffs closer by having

steeper cuts on higher tariffs. It also addresses tariff peaks and tariff escalation automatically, without the

need of having them defined. Another advantage is that it is technically simple to apply since the only element

that needs to be agreed by those involved in the negotiations is the coefficient (A).

In addition, it provides the possibility to use different coefficients for different tariff line groups or by different

sub-sets of WTO Members, which permits different levels of contribution amongst the participants. It uses a

single formula to obtain:

a narrow range of final tariff rates from a wide set of initial tariffs; and,

a maximum final rate, no matter how high the base rates were.

One difficulty in applying the Swiss formula is that, because it triggers the steepest tariff cuts to the highest

tariff rates, it results in a significant liberalization of some of the most sensitive tariff lines (assuming that

higher rated tariff lines denoted a government's intent to protect domestic producers or raise fiscal revenue).

At the technical level, a prerequisite for the application of the Swiss formula is that it can only be applied on

ad valorem duties, or, in the case of non-ad valorem duties, if ad valorem equivalents (AVEs) are calculated.

2.5. ''Reduction in the average''

With respect to the negotiation modalities on tariff reductions, the Uruguay Round Ministerial Declaration did

not provide any specific technique to be followed. Instead, participants agreed at the launching of the round

that ''Negotiations shall aim, by appropriate methods, to reduce or, as appropriate, eliminate tariffs, including

the reduction or elimination of high tariffs and tariff escalation. Emphasis shall be given to the expansion of the

scope of tariff concessions among all participants''. 17 However, as explained above, the reference to "target

amount for overall reductions" during the 1988 Montreal Mid-term Review was widely understood as a

requirement for participants to reduce their averages by at least one-third (i.e. 33 per cent).

2.5.1. What is the "reduction in the average"?

As explained above, it consists of a commitment to reduce the existing average in a certain percentage. It

requires the calculation of the current average, the new average and the percentage difference between those

two averages.

2.5.2. Advantages and Disadvantages of the "reduction in the average" Technique

This technique allows Members to shelter their sensitivities in a relatively simple manner, as a country could

fulfil the requirement by cutting very little, or even not cutting at all, the tariffs on some sensitive products and

compensating with higher cuts on other products. Imagine, for example, a modality that provides that sets an

obligation to achieve a reduction in the average of 30%. Note in the example below how the higher, and

presumably more sensitive, tariff line (suit-cases) is reduced less while compliance with the modality was made

possible by full elimination on a less sensitive item (postcards). Also note that this was possible because there

was no obligation to reduce each individual tariff line by a specified minimum amount. Predictably, this

technique often results in preserving tariff peaks and high tariffs.

17 Uruguay Round Ministerial Declaration, page 5.

33

Example – Reduction in the Average:

Product "Base rate" Formula Final rate after

reduction

Percentage

Reduction

1. Suit-cases, brief-

cases (4202.10)

150% "reduce national

average tariff by

30%"

112% 25.3%

2. Printed or illustrated

postcards (4909.00)

10% 0% 100%

National overall

average tariff

80%* 56%* 30%*

* Note how the current average of 80% is cut by 30% to a new average of 56% by fully eliminating the duty

on postcards and applying much lesser cuts on suit-cases

3. SECTORAL APPROACH

3.1 What is the "Sectoral Approach"?

The ''sectoral approach'' is a technique in which participants aim at reducing or eliminating all together tariffs

on some products in a particular sector. This technique includes the "harmonization" sectorals, in which

countries agree to reduce their bound duties to a common level in a particular sector in order to ensure similar

market access conditions. A variation is the "zero-for-zero" sectoral negotiations, in which countries agree to

fully liberalize trade in a sector at the end of an implementation period.

The sectoral technique was used before the Uruguay Round but mainly for plurilateral negotiations (i.e. where

only some -not all- WTO Members participate). The results of such plurilateral negotiations were however

extended to all WTO Members through the MFN principle.

3.2. Advantages and Disadvantages of the "Sectoral Approach"

The main benefit of the sectoral approach is that it allows Members to liberalize certain products, allowing them

to focus on their main export interests. Moreover, depending on the approach taken for the reduction or

elimination of tariffs, sectorals could allow to reduce or eliminate tariff peaks and tariff escalation, as well as

certain sector specific problems. A major problem related to sectorals, however, is that significant exporters

may decide not to participate in a sectoral negotiation in order to avoid reducing their own tariffs, while

enjoying the benefits of the sectoral negotiations once these are extended to all WTO Members (practice known

as "free-riding"). To avoid such a result, a "critical mass" requirement has been used in some cases, that is, a

minimum number of participants was required as a condition for the application of the sectoral approach. 18

18 Low Patrick and Santana Roy (see footnote 3), pages 13-14.

34

Flexibility Options in Tariff Negotiations

Leaving aside the reality that entire sensitive sectors, such as agriculture and textiles, were often carved out

from past tariff negotiations, practically all tariff rounds where the product-by-product technique has not been

used have included some form of country-specific flexibilities and/or some form of exception to the general

tariff reduction technique. In general terms, the stronger the technique used, the higher the probability that

flexibilities were needed in order to complete a negotiation successfully. Some of the flexibilities that have

been used in the past include:

i) Staging flexibilities: this flexibility requires the participant to apply generally agreed tariff reductions, but

over a different (generally longer) period of time than the one specified by the general rule.

ii) A less ambitious form of the same modality: this form of flexibility implies the application of the same

modality as generally agreed, but in a "softer", less ambitious, form.

iii) Lesser reductions for a certain number of products: under this arrangement normal tariff reductions will

be applied on most products, but a participant is allowed to moderate the reductions on some products.

This flexibility only makes sense in the context of a formula that is applied on a line-by-line basis.

iv) The possibility of deviating from the main modality by compensating with other products: this is not a

flexibility in itself, but rather a measure that could accompany other flexibilities and, in particular, the

above-mentioned lesser reduction approach and the exclusion of products option. The idea is to allow

participants to deviate from the main tariff reduction modality, while "paying" for any deviation they

would like to introduce.

v) The possibility to exclude a certain number of products: this flexibility option implies that the normal

tariff reductions will be applied on most products, but a participant is allowed not to make any reduction

in some products. This flexibility is likely only to apply in the context of a formula applied on a line-by-

line basis.

vi) The application of a different, softer, modality: this flexibility option implies that some participants are

allowed to use a different, more flexible modality with respect to a subset of products than that used by

other participants.

vii) A full exemption from tariff reductions: in this case a participant is not required to make any tariff

reductions at all, which is the situation prevailing for least-developed countries in the current Doha

negotiations.

IV.B.3. HISTORY OF TARIFF NEGOTIATIONS

From 1947 to 1994, GATT Contracting Parties organized eight rounds of negotiations. While the early rounds

dealt mainly with tariff reductions, later rounds included other areas such as anti-dumping measures and other

non tariff-barriers. The last of these rounds is the "Uruguay Round" which took place from 1986 to 1994 and

led to the creation of the WTO in 1994. The Uruguay Round brought the biggest reform to the world trading

system since the GATT was established in 1947. The table below summarizes these rounds including, the

subjects covered and the number of Contracting Parties that participated in each one.

35

Rounds of trade negotiations under the auspices of the GATT

Year Place/name Subjects covered Parties

1947 Geneva Tariffs 23

1949 Annecy Tariffs 13

1950 Torquay Tariffs 38

1956 Geneva Tariffs 26

1960-1961 Dillon Tariffs 26

1963-1967 Geneva, Kennedy

Round

Tariffs and Non-tariff measures: anti-dumping measures,

customs valuation

62

1973-1979 Geneva, Tokyo

Round

Tariffs; non-tariff measures (creation of plurilateral codes):

antidumping, customs valuation, subsidies and countervail,

government procurement, import licensing, product standards,

safeguards; and creation of the ''Enabling Clause'' – the

"Decision on Differential and More Favourable Treatment,

Reciprocity and Fuller Participation of Developing Countries".

It made permanent the GSP which was adopted as a

temporary waiver before the Tokyo Round in 1971 to accord

special and differential treatment in favour of developing

countries. It elaborated the principle of non-reciprocity which

was originally contained in Article XXXVI:8 of the GATT.

102

1986-1994 Geneva, Uruguay

Round

Tariffs; non-tariff measures: all Tokyo Round issues, plus

preshipment inspection, rules of origin, trade-related

investment measures (TRIMs) and sanitary and phytosanitary

(SPS) measures; Services, trade-related aspects of intellectual

property rights (TRIPS), dispute settlement, transparency, and

surveillance of trade policies; and creation of the WTO

(adopted as a single package by all Members).

123

During the eight GATT Rounds of trade negotiations, tariffs in developed countries were progressively reduced

and bound, with more progress being made in the non-agricultural sector than in agriculture. Although tariffs

came down significantly in developed countries, many developing countries did not make use of the MTS to

reduce or bind their tariffs until the Uruguay Round.

The Uruguay Round produced significant improvements in market access for non-agricultural products in the

developed country markets. In the case of the majority of developing countries, the most important

contribution was made in the form of new tariff bindings. In this regard, developing countries made offers on

market access for both agricultural and non-agricultural products. 19 Some developing countries also

committed to reduce their pre-Uruguay Round bound levels.

19 World Trade Report 2007, page 220.

36

1. FROM GENEVA ROUND TO DILLON ROUND (1947-1961)

The first five GATT rounds of negotiations –from Geneva Round to Dillon Round- share some common features:

they were all devoted primarily to negotiations on tariff reductions and bindings and dedicated very

little attention to NTMs;

tariff negotiations dealt almost exclusively with non-agricultural products (agricultural products were

often excluded);

they often relied on the selective product-by-product / country-by-country approach as the main

technique for negotiations on tariff reductions;

negotiations on tariffs proceeded strictly on the basis of reciprocity, which means that no government

was required to grant unilateral concessions, or to grant concessions to other governments without

receiving adequate concessions in return;

each of the rounds made progress in reducing tariffs and increasing the number of bound tariff lines,

although more progress was made by developed countries than by developing countries. By the time

the Dillon round was concluded in July 1962, about 4000 tariff concessions had been made by the

Contracting Parties covering $4.9 billion of trade 20

Despite these common features, some of the rounds during this period gave a special focus to some particular

aspects. For example, during the first negotiating rounds, the Contracting Parties attached particular

importance to the objective of the gradual elimination of tariff preferences. Another example could be the

Annecy Round 1949, where the Contracting Parties did not negotiate tariff concessions with each other, but

rather with the countries applying for accession to the GATT. Since the Dillon Round (1960-1961) took place

within the context of the formation of the European Economic Community (EEC), one of the main objectives of

the Round was to transform the individual schedules of the six EEC members into a common schedule that

would be applicable to third countries. These negotiations were carried out as foreseen in Article XXIV:6 of the

GATT, which provides that in cases where, in the context of the formation of a customs union, a Member

proposes to increase any bound rate, the procedures for modification of WTO Schedules set forth in

Article XXVIII shall apply. Whenever the EEC members wanted to deviate from this rule, they had to offer

tariff concessions on other items as compensation. 21

2. KENNEDY ROUND (1963-1967)

2.1. General Background

Compared to the previous five negotiating rounds, the Kennedy Round broke new ground in many aspects.

Firstly, the negotiating parties agreed on the inclusion of agricultural commodities as a major negotiating issue.

Secondly, the negotiations dealt with certain NTMs 22 Thirdly, it was the first time that the negotiations

explicitly addressed the concerns of developing countries. 23

20 World Trade Report 2007, page 183.

21 World Trade Report 2007, page 182.

22 The negotiations resulted in the 1967 International Anti-Dumping Code.

23 World Trade Report 2007, page 184.

37

As far as tariff negotiations are concerned, the Kennedy Round achieved substantial reductions of tariffs on

non-agricultural products, amounting to an average cut of 38 per cent covering two-thirds of developed

countries' tariff-bound non-agricultural imports, worth some US$40 billion. The tariff reduction for textiles

however, remained far below the average cut for industrial products. 24

The Kennedy Round was also innovative in at least two aspects of the negotiating modalities. Firstly, it marked

the switch to the formula approach from the bilateral product-by-product technique. Secondly, the concept of

non-reciprocity –explained above- was applied for the first time.

2.2. Some Considerations Regarding the Application of the Formula Approach (Linear Reduction

Formula) in the Kennedy Round 25

Although the negotiating parties agreed to a 50 per cent linear tariff cut across-the-board, exceptions to the

linear reduction were allowed for reasons of overriding national interests. As mentioned above, such

exceptions were supposed to be kept to a bare ''minimum and be subject to consultation and justification''.

Some countries were allowed to use the old bilateral product-by-product technique instead of the linear cut

formula due to their special economic or trade structure. In addition, one GATT contracting party was allowed

to apply less than 50 per cent cut on items on which the existing duties were already very low. Others reduced

it for some products or sectors.

Due to these exceptions, the final average tariff cut in the Kennedy Round was around 35 per cent, not as high

as the original goal of 50 per cent. In some sectors (e.g. chemicals, cotton textiles), an even smaller average

reduction was achieved. 26

3. TOKYO ROUND (1973 - 1979)

3.1. General Background

The Tokyo Round, launched in 1973, was regarded at the time as the most comprehensive and wide-ranging of

all rounds since the inception of the GATT. Although negotiations on tariff reductions were still the main task

of negotiators, non-tariff barriers were also put in the spotlight, which led to the introduction of agreements on

a number of non-tariff measures. Furthermore, agriculture was integrated into the negotiations which, from

the outset, presented the Round's greatest difficulty.

Although developed countries dominated by large the round's agenda, developing countries participated

actively and, for the first time, made a significant impact on GATT negotiations. This was reflected, amongst

others, in the adoption of the ''Enabling Clause'' and developed countries' removal of trade barriers faced by

many tropical products upon the request of developing countries, without seeking reciprocity from these

countries.

Regarding tariff negotiations, it covered approximately US$126 billion or some 90 per cent of trade in industrial

products of 1976. The Ministerial Declaration mandated to conduct negotiations on tariffs "by employment of

appropriate formulae of as general application as possible". In this regard, a number of formulae were

24 World Trade Report 2007, page 184.

25 See also documents TN.64/28, TN.64/15 and COM.TD/W/37.

26 MTN/3C/1, pages 15-16.

38

proposed during the negotiation and it was the one proposed by Switzerland that was eventually accepted for

the reduction of industrial products. This formula later became known as the ''Swiss Formula'' (explained

above).

3.2. Some Considerations Regarding the Application of the ''Swiss Formula'' during the Tokyo

Round

Although participants agreed to apply the ''Swiss Formula'' to cut tariffs in the Tokyo Round, the coefficient

differed from one country to another. While some countries made their offers on the basis of the coefficient of

14, others used a coefficient of 16 (resulting in slightly lower reductions). More importantly, the formula was

not used by all participants. In this regard, some countries used a slightly modified formula, while others

applied the bilateral product-by-product technique. Even among the participants that applied the Swiss

formula, they were allowed to exempt many groups of products by having either smaller cuts or excluding

products altogether from reduction. Deeper formula cuts on other products or group of products were then

used to compensate such exceptions or exclusions.

4. URUGUAY ROUND (1986 - 1994)

4.1. General Background

The achievements of the Uruguay Round were more impressive and far-reaching than any previous round of

negotiations. The Uruguay Round led to the establishment of the WTO as a permanent international

organization and to the adoption of a detailed set of rules covering all main aspects of international trade and

binding on all Members. It was also the first time that the MTS succeeded in covering agricultural trade in a

substantive manner.

Developed countries agreed to reduce their tariffs on industrial goods from a trade-weighted bound tariff

average of 6.3 to 3.8 per cent, with most of the cuts to be progressively implemented over a five-year period

starting from 1 January, 1995 27 (see Table below). The average tariff on developed countries' imports of

industrial products was cut by 40 per cent, if calculated on imports from all sources, and by 37 per cent if

calculated on imports from developing countries. 28 The share of non-agricultural products which would enter

the developed country markets under MFN zero duties (duty-free tariff lines) was more than doubled, from 20

to 44 per cent after the implementation of the Uruguay Round. For developing countries, the reductions

averaged 25 per cent on industrial products imported from developed countries. 29

The share of tariff peaks dropped from 14 to ten per cent. However, tariff reductions by sector varied

markedly, with lower reductions taking place in agricultural and labour-intensive industrial products. Three

product categories –1)textiles and clothing, 2)leather, rubber and footwear, and 3)transport equipment–

recorded the smallest tariff cuts (ranging from 18 to 26per cent). Exports of these product categories

continued to face the highest average tariff levels after the Uruguay Round, at 15.5 per cent, 8.9 per cent and

7.5 per cent respectively. In contrast, five other product categories (wood, pulp, paper, metals, non-electric

machinery, mineral products and manufactured articles n.e.s.) recorded above-average tariff cuts in the range

of 52 to 69 per cent, which led to average tariff rates by product category of between 1.1 and 2.4 per cent.

27 World Trade Report 2007, page 192.

28 World Trade Organization (2001), Special Studies Market Access 6: Unfinished Business, Post-Uruguay

Round Inventory and Issues, page 7.

29 World Trade Organization (2001), Special Studies Market Access 6 ,page 7.

39

Despite the persistent high tariffs and peaks in many of those sectors, the tariff escalation observed on

products of interest to the developing countries was, in general, reduced. 30

Imports from: Trade-weighted tariff average

Pre-Uruguay Post-Uruguay Percentage reduction

All sources 6.3 3.8 40

Developing countries (other than the LDCs) 6.8 4.3 37

Least-developed countries 6.8 5.1 25

Table 4: Trade-Weighted Tariff Average of Non-Agricultural Products Before and After the Uruguay Round

NOTE: This calculation covers all non-agricultural products except petroleum.

Source: The Results of the Uruguay Round of Multilateral Trade Negotiations: Market Access for Goods and

Services — Overview of the Results, Geneva, 1994.

Another major achievement was the increase in binding coverage. If measured by the number of bound tariff

lines, developed countries increased their binding coverage from 78 to 99 per cent, economies in transition

from 73 to 98 per cent and developing countries (based on a sample of developing countries from which the

comparable data is available) from 21 to 73 per cent (see Table below). The share of bound lines in all

agricultural tariff lines increased from 17 per cent to 100 per cent, although many remained at very high

levels. In the non-agricultural market access negotiations, only a subset of all developing countries agreed to

bind all their tariff lines (most of them from Latin America). In most cases however, new binding commitments

were agreed at levels far above applied rates. Nevertheless, the high percentage of bound tariffs rendered the

MTS more stable and predictable. 31

The Uruguay Round increased number of bindings - Percentages of tariffs bound before and after the 1986-94

talks

By major country group: Before After

Developed countries 78 % 99 %

Developing countries * 21 % 73 %

Transition economies 73 % 98 %

Table 5: Overview of Binding Tariffs Before and After the Uruguay Round

(These are tariff lines, so percentages are not weighted according to trade volume or value)

* Results shown are for a sample of 27 developing countries.

Source: The Results of the Uruguay Round of Multilateral Trade Negotiations: Market Access for Goods and

Services — Overview of the Results, Geneva, 1994.

30 World Trade Report 2007, pages 209-210.

40

4.2. Some Considerations Regarding the Application of the ''Simple Average Reduction'' and

"Sectoral Approach" during the Uruguay Round

The simple average reduction approach, sometimes referred to as the "Uruguay Round formula", was the

approach used to reduce tariffs on agricultural products during that Round.

For non-agricultural products, the method of tariff reductions was not decided at the outset of the Uruguay

Round. Ministers agreed at the Mid-Term Review of Montreal that negotiations should aim to bring lower and

more uniform rates, with a target amount for overall reductions at least as ambitious as that achieved by the

formula participants in the Toyo Round. Contracting Parties were free to make the cuts in the products they

wished and to the level they considered appropriate, as long as the overall reduction target of 33 per cent was

met. 32 To the end of the Round, the overall target for reduction by one-third in respect of non-agricultural

tariffs was achieved by all developed countries and some even went beyond that target. This was, in essence,

the application of a "reduction in the average" modality.

In addition to the simple average approach used for agricultural products and the reduction in the average

used for non-agricultural products, participants to the Uruguay Round - developed countries in particular- put

much effort into sectoral initiatives, where they sought the harmonization or elimination of tariffs (zero-for-

zero) for specific sectors, which were subsequently incorporated into their Uruguay Round Schedules. Thus,

some of these Schedules embody the results of this bargaining process, including eleven successful plurilateral

sectoral negotiations on agricultural equipment, beer, chemicals, construction equipment, distilled spirits

(brown), furniture, medical equipment, paper, pharmaceuticals, steel and toys.

Although the majority of sectoral negotiations that took place were of a voluntary nature and resulted in

bilateral/plurilateral agreements, it is worth noting that at least two sectoral agreements resulting from the

Uruguay Round were mandatory and taken up on a multilateral basis, namely, the Agreement on Agriculture

and the Agreement on Textiles and Clothing. 33

Finally, one should note that the bilateral product-by-product approach was also used by some Members during

the Uruguay Round.

EXERCISES:

7. List the main subjects of negotiations covered in the GATT rounds and the main tariff reduction

techniques used therein

8. Explain the different formula approaches used for tariff reductions during the GATT negotiations. Give an

example for each one.

31 World Trade Report 2007, pages 192- 226.

32 See TN/MA/S/13 and Hoda Anwarul (2001), pages 35.

33 More recently, the Information Technology Agreement (ITA) - explained below - , constitutes another

example of negotiations following the "zero-for-zero" sectoral negotiation.

41

IV.C. POST-URUGUAY AND PRE-DOHA

Despite the significant improvements in market access for non-agricultural products, tariffs continue to

constitute important barriers to world trade for the following reasons. 34

TARIFF BINDINGS

Large differences remain with regard to the binding coverage. While some Members have bound less than 10

per cent of their industrial tariff lines, others have bound 100 per cent of them. The share of post-Uruguay

Round industrial tariff lines covered by bindings is above 95 per cent for most developed countries, as well as

for most transition economies. The situation in developing countries is more varied. For example, most

countries in Latin America and the Caribbean apply a uniform ceiling binding for practically 100 per cent of

their tariff lines. The level of the ceiling is usually between 25 per cent (Chile) and 50 per cent (Belize, Guyana

and Jamaica). In Asia and Africa however, the scope of bindings tends to be more limited. 35 The situation is

also diverse in respect of LDCs, where some of them have bindings on less than 15 per cent of their tariff lines,

whereas others have all of them bound. The overall situation is as follows:

Share of tariff lines

bound (%)

No. of Members Developed

countries

Developing

countries

LDCs

100% 54* 2* 43 9

+95 < 100% 28 7 17 4

+35 < 95% 14 0 12 2

+15 < 35% 12 0 5 7

< 15% 17 0 7 10

Total 125* 9* 84 32

* Counting the EC-27 and its Member states as one, as well as Switzerland and Liechtenstein as one

Table 6: Overview of Binding Tariffs After the Uruguay Round

TARIFF DISPERSION

In many countries the bound tariff rates differ significantly across product groups. While each country tariff

structure is unique, the most typical product categories with significantly higher average tariffs are ''textiles

and clothing'', ''leather, rubber, footwear and travel goods'' and ''fish and fish products'' (see example below

34 World Trade Organization (2001), Special Studies Market Access 6, pages 7-18.

35 World Trade Organization (2001), Special Studies Market Access 6, page 7.

42

for the sectoral bound tariff rates for the US). To a lesser extent, this is also the case for ''transport

equipment''.

Figure 2: Simple Average Bound Tariff Rates by sector – United States

Source: World Tariff Profiles 2009- World Trade Organization and International Trade Centre UNCTAD/WTO.

In addition to tariff dispersion among different sectors of a single country's tariffs, the tariff structure of the

WTO Members vary significantly, leading to a dispersion in bound average rates across countries. For instance,

the simple bound average tariff rate for developed countries, range from 1.8 per cent to 14.2 per cent, while

for developing countries from zero per cent to 100 per cent (with some important exceptions). Least-developed

country Members have even higher simple average bound tariffs.

TARIFF PEAKS

Tariff peaks are tariffs that exceed a selected reference level. Although there is no agreed definition as to what

constitute a tariff peak in the GATT/WTO, the Organisation for Economic Co-operation and Development

43

(OECD) establishes a distinction between "national peaks" (defined in relative terms as those levels above

three times the national average rate) and "international peaks" (defined in absolute terms as those tariffs

above 15 per cent). 36 Both absolute and relative high levels of protection usually hint at sensitivities in those

products.

Perhaps not surprisingly, in countries where the tariff average is low, the prevalence of tariff peaks is higher in

relation to the national reference level than in relation to the international reference level. In this regard, a

tariff qualifying as a "national peak" in a country with a relatively low national average tariff would not

necessarily be a "national peak" in another country with a higher national average tariff. For example, using

the OECD definition, applied tariff rates in excess of 9 per cent would often qualify as a national peak in some

developed countries, whereas a tariff of 24 per cent may not qualify as a national peak in many developing

countries (because the average tariff is often higher than that of developed countries). On the contrary,

international peaks are more frequent than national ones in countries with relatively high average tariffs. A

country applying a uniform ceiling level across most tariff lines would not have any national tariff peaks,

irrespective of its level. However, if these tariffs were to exceed 15 per cent (the international reference level),

they would constitute international peaks.

TARIFF ESCALATION

Tariff escalation describes the situation where the tariff level increases with the level of processing. That is,

they are higher on semi-processed and processed/finished products than on un-processed products and raw

materials. As a consequence, foreign suppliers of unprocessed products and raw materials find it more difficult

to utilise international trade as a means to diversify their production by moving to higher stages of processing.

A long-standing complaint of developing countries is that developed-country ''tariff escalation'' biases

developing country production towards less processed products, thereby creating a major impediment to their

industrialization. On the other hand, several developing countries have adopted themselves tariff structures

based on tariff escalation in order to promote certain industries.

Although the overall degree of tariff escalation was reduced during the Uruguay Round, it still remains (see

Table below). The degree of tariff escalation differs greatly across Members. According to a study of the GATT

Secretariat (based on a sample of products 37), certain product categories are characterized by a high degree

of tariff escalation, even in countries where the overall tariff structure exhibits little or no escalation. This is

the case for "textiles and clothing" and "leather and leather products" where tariff escalation is present in all

stages of processing in most countries.

Tariff Peaks & Tariff Escalations

Imports Share of

each stage

Tariff

Pre-UR Post-UR Absolute reduction

All industrial products (excluding petroleum)

Raw Materials 36.7 22 2.1 0.8 1.3

36 World Trade Organization (2001), Special Studies Market Access 6, page 12.

37 World Trade Organization (2001), Special Studies Market Access 6, page 13.

44

Semi-manufactures 36.5 21 5.4 2.8 2.6

Finished products 96.5 57 9.1 6.2 2.9

Table 7: Changes in Tariff Escalation on Non-agricultural Products imported by Developed Countries from Developing Economies (Billions of US Dollars and Percentages)

Source: The Results of the Uruguay Round of Multilateral Trade Negotiations: Market Access for Goods and

Services — Overview of the Results, Geneva, 1994.

"TARIFF OVERHANG"

Some believe that a wide gap between applied and bound tariffs is also a problem, because the actual applied

duty is less predictable. In other words, because the lower applied rate can be freely increased at any time up

to the some times much higher bound rate. Although developing countries substantially increased their

binding coverage during the Uruguay Round, these commitments were often set far above the actually applied

tariff rates. This means, in practice, that these countries have considerable scope for increasing tariffs at their

will. The tariff overhang has also widened over the past decades as, since the late 1980s, many developing

countries have unilaterally reduced their applied tariff rates. For instance, as part of the self-reform process

encouraged and supported by the World Bank.

IF YOU WANT TO KNOW MORE ...

For more information on the market access situation for non-agricultural goods after the Uruguay Round

negotiations, see: World Trade Organization (2001), Special Studies Market Access 6: Unfinished Business,

Post-Uruguay Round Inventory and Issues.

Available at: http://www.wto.org/english/res_e/booksp_e/special_study_6_e.pdf

Detailed statistics concerning tariffs are contained in the World Tariff Profiles 2009 publication by the WTO:

http://www.wto.org/english/res_e/publications_e/world_tariff_profiles09_e.htm

IV.C.1. INFORMATION TECHNOLOGY AGREEMENT (ITA)

In December 1996, at the first WTO Ministerial Conference held in Singapore, the Ministers of a number of

Members and States or separate customs territories in the process of acceding to the WTO, concluded the

''Ministerial Declaration on Trade in Information Technology Products'' (commonly referred to as the

''Information Technology Agreement'' or "ITA" 38). There, they expressed their intention to ''encourage the

continued technological development of the information technology industry on a world-wide basis'' and to

''achieve maximum freedom of world trade in IT products'' by eliminating all duties and other duties and

charges on a number of IT products and the machinery and inputs used to produce them.

The liberalization of this sector was achieved without the usual negotiating process of give-and-take across all

sectors, but rather as a self-contained sectoral initiative that grew out of the recognition by its participants of

potential benefits that could accrue to their national development policies. While for major developed

38 WT/MIN(96)/16.

45

economies the average bound tariff on IT products was typically below 5 per cent, the average bound tariff for

developing countries, with some important exceptions, ranged between 10 per cent and 20 per cent. 39

The three basic requirements that one must fulfil to become an ITA participant are the following:

all products listed in the Declaration must be covered;

all tariffs applicable to covered IT products must be reduced and bound at zero; and,

all other duties and charges (ODCs) applicable to covered IT products, if any, must be eliminated and

bound at zero.

The product coverage of the ITA includes computers, telecommunication products, semi-conductors, semi-

conductor manufacturing equipment, software and scientific instruments. While there are no exceptions to its

product coverage, developing country participants were allowed to liberalise their most sensitive products in

the sector over an extended implementation period.

The commitments undertaken under the ITA in the WTO were bound in each participant's Schedule on an MFN

basis. In this manner, the benefits accrue to all other WTO Members.

At the time of the conclusion of the ITA, 29 participants signed it (including the 15 EU member states). 40 It

was unclear by then whether its provisions would be implemented. The ITA stipulated that the actions

foreseen in the Declaration will be implemented provided that participants representing approximately 90 per

cent of world trade in IT products have notified their acceptance, and provided that the staging has been

agreed to the participants’ satisfaction. 41 The original signatories did not cover as much trade in the sector.

However, in the ensuing months, a number of other countries expressed their interest in becoming participants

in the ITA and notified their acceptance. Therefore, the 90 per cent criteria was met and the ITA was

implemented, with the first staged reduction in tariffs occurring on 1 July 1997. As of August 2009, the ITA

had 46 participants (counting the EU members as one).

39 With the important exception of India (66 per cent) on the upward side and Hong Kong, China and Chinese

Taipei (0.0 per cent and 4.7 per cent) on the downside. World Trade Report 2007, pages 223-224.

40 Australia, Japan, Canada, Korea, Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu,

Norway, the European Union, Singapore, Hong Kong, Switzerland, Iceland, Turkey, Indonesia and the United

States.

41 See Annex to the Declaration, paragraph 4.

46

Why is the ITA important? 42

Information technologies are powerful tools and instruments. They have the potential to increase productivity,

generate economic growth and improve the quality of life for all. T hey can reduce many traditional obstacles

on doing business, especially those of time and distance. They have facilitated the process of globalization by

speeding the flow of information and rendering communication, products and materials cheaper than ever

before.

The elimination of tariffs on IT products contributed to the rapid development of the information and

communication industry which is observed as a major engine of the globalisation process, transforming both

the developed and developing economies. The spread of IT technologies has created many new business

opportunities, transformed many services sectors and challenged many old patterns of production and

distribution. Information intensive and IT-enabled industries and services — E-commerce, E-tourism, on-line

travel or hotel reservations, financial, transport, and professional services — have developed through lower-

cost communications networks, as well as IT equipment made cheaper through economies of scale in the

global economy. Furthermore, manufacturing processes, agricultural distribution networks, and even

producers of primary products benefit by linking with customers in a timely, efficient, and less costly manner.

World exports of ITA products over the past 10 years have more than doubled in value, reaching US$ 1'450

billion in 2005 with annual average growth of 8.5 per cent. In 2005, trade on ITA products accounted for 14

per cent of world merchandise exports, exceeding that of agricultural products, and textiles and clothing

together.

Paragraph 3 of the Annex to the Declaration states that ITA participants shall meet periodically under the

auspices of the Council for Trade in Goods to review the product coverage with a view to agreeing, by

consensus, whether in the light of technological developments, experience in applying the tariff concessions or

changes to the HS nomenclature, the product coverage should be expanded. Paragraph 5 of the

Annex provides that participants shall meet as often as necessary to consider any divergence among them in

classifying information technology products. It was also agreed that participants shall consult periodically on

non-tariff barriers to trade in IT products. Negotiations for the expansion of the product coverage of the ITA

began in 1998. 43

The participants agreed to establish a formal Committee under the WTO to carry out the provisions of the

Declaration. 44 The Committee held its first meeting on 29 September 1997. In addition, to the product

coverage, the Committee has worked on a number of issues since its inception. These include the examination

of classification divergences, consultation on NTBs, adhesion by new participants, and discussing

implementation matters.

42 Based on the statement given by WTO Director-General Pascal Lamy, in opening the WTO Information

Technology Symposium on 28 March 2007.

43 See G/IT/SPEC/1-14.

44 G/L/160.

47

IV.C.2. ACCESSION

In addition to negotiating rounds, it is worth noting that tariff negotiations can also take place in the context of

the negotiations for accession to the WTO. Article XII of the Marrakesh Agreement Establishing the WTO

provides the legal basis for accession negotiations to the WTO (accession to the GATT was previously governed

by Article XXXIII of the GATT 1947). Although Article XII of the Marrakesh Agreement Establishing the WTO

does not provide any specific guidance on how tariff negotiations should be conducted in accession

negotiations, in practice, tariff negotiations have always formed a substantial component of accession

negotiations with acceding governments, including reduction and binding of tariffs. Such tariff concessions are

confidential and are negotiated on a bilateral basis between the government applying for accession and

interested WTO Members. When all bilateral negotiations are concluded, the tariff concessions contained in

individual bilateral agreements are consolidated in a single Goods Schedule. This Schedule "multilateralizes"

the results according to the MFN principle by incorporating the most liberal terms negotiated in the market

access negotiations. For example, if an applicant has agreed to bind a tariff line at 20 per cent in its

negotiations with one Member and at 12 per cent in its negotiations with another, the rate in the Schedule will

be 12 per cent. The consolidated Goods Schedule forms an integral part of the final "Accession Package".

TO KNOW MORE... THE PROCESS OF ACCESSION AND THE NEGOTIATIONS OF TARIFF

CONCESSIONS

Negotiations on tariff concessions are conducted bilaterally on the basis of requests and offers. In practice,

it is usually the applicant who submits an initial offer of proposed bound rates before requesting bilateral

negotiations with interested Members. The offers are sent to the WTO Secretariat, which then circulates a

notice to Members of the Working Party on accession. Offers are made available to all Working Party

Members through WT/ACC/SPEC/* series documents. As the negotiations move forward, offers may be

revised on the basis of Members' requests.

Members wishing to engage in the tariff negotiations contact the applicant to arrange bilateral meetings,

which are held on the margins of Working Party meetings, by electronic means or in capitals. The number

of Members taking part in these bilateral negotiations may vary considerably from one accession to another

depending on trade interests. The most active WTO Members take part in all negotiations. The number of

rounds of bilateral negotiations depends on the dynamics of a particular negotiation and the complexity of

the issues involved.

Signed bilateral agreements recording the agreed tariff concessions are transmitted to the Secretariat. After

bilateral agreements have been concluded with all interested WTO Members, the Secretariat consolidates

them into a single Goods Schedule, along with the commitments resulting from the consultations on

agricultural domestic support and export subsidies. The Goods Schedule multilateralizes the results of the

bilateral tariff negotiations.

Since the WTO came into force in 1995, a total of 25 governments have negotiated their WTO accession and

acceded under Article XII of the Agreement Establishing the WTO. As of August 2009, 29 countries were in the

process of accession, including 12 LDCs. The recently acceded Members have bound all, or almost all, of their

non-agricultural tariff lines. Some acceding governments have also undertaken commitments under the so-

called zero-for-zero and harmonization sectoral tariff initiatives of the Uruguay Round and have become

participants in the ITA and the Civil Aircraft Agreement.

48

EXERCISES:

9. What is understood by "tariff peaks" and "tariff escalation"?

10. What is the ''ITA'' and what are the commitments made by its participants?

49

V. SUMMARY

Tariffs are the most commonly used and visible market access barrier for trade in goods. Under the

GATT/WTO, the use of tariffs is not prohibited however, Members have committed to carry out negotiations

on tariff concessions periodically, with a view to substantially reducing the general level of tariffs and other

charges on imports and exports, in particular high tariffs, as well as to bind tariffs at specific levels. Thus,

tariff negotiations are not only about negotiating tariff reductions, but also about negotiating tariff bindings.

Tariff bindings prevent Members from undoing the liberalization that has been achieved through negotiations

and ensure transparency and predictability for market access of goods.

Tariff negotiations should be conducted on a reciprocal and mutually advantageous basis according to the

principle of reciprocity. However, the principle of reciprocity does not apply in the same manner to tariff

negotiations between developed and developing countries since it has been adapted to take account of the

principle of special and differential treatment. As a result, "lesser" liberalization is required from developing

countries than from developed countries in multilateral rounds of negotiations – a principle originally referred

to as non-reciprocity or, more recently, as "less-than full reciprocity".

In practice, most tariff negotiations have taken place in the context of multilateral negotiating rounds. Tariff

reductions also take place within the negotiations for accession to the GATT/WTO of new Members, as well as

in the context of plurilateral negotiations aimed at eliminating tariffs in specific sectors.

There were eight rounds of negotiations launched under the GATT. While the first negotiating rounds were

primarily devoted to tariff reductions, subsequent rounds also encompassed negotiations on non-tariff

measures. Different modalities have been used to negotiate tariff reductions. The first five rounds of

negotiations were conducted on a bilateral and selective basis using solely the product-by-product technique.

However, a number of formula techniques have been favoured in subsequent rounds in particular because

they allow for simplified negotiations across a large number of participants.

After the Uruguay Round, bilateral and plurilateral negotiations on tariff concessions have continued. One of

the most successful plurilateral negotiations were those carried out pursuant to the Information Technology

Agreement (ITA). Under the ITA, participants agreed to eliminate all duties and other duties and charges

(ODCs) on a number of IT products and the machinery and inputs used to produce them. The commitments

undertaken under the ITA accrue to all WTO Members since they are bound in each participant's Schedule of

concessions on an MFN basis.

Despite the significant reduction of tariffs and wide coverage of bound tariff lines achieved during the GATT

multilateral trade negotiations, tariff continue to constitute important barriers to market access for non-

agricultural products. The on-going Doha negotiations, which is the first round of negotiations to be held

under the auspices of the WTO, aims at increasing the number of bindings and reducing, or as appropriate,

eliminating tariffs for non-agricultural products, as part of a broader package that includes several other

issues.. The NAMA negotiations will be explained in a dedicated Module.

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PROPOSED ANSWERS:

1. 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 can be classified into different kinds depending on how they are calculated:

Ad valorem tariff: a tariff calculated on the basis of the value of imported good, expressed as a

percentage of such value;

Specific tariff: a tariff calculated on the basis of a unit of measure, such as weight, volume, etc., of the

imported good;

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);

Compound tariff: a tariff calculated on the basis of both the value of 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.

Technical/other tariff: a tariff calculated on the basis of the specific contents of the imported goods, the

duties payable by its components or certain related items.

2. A "bound tariff" is a tariff for which there is 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 level of the tariff 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 rates

beyond certain level, which is listed in that Member's Schedule of concessions. An ''applied tariff'' is the

duty that is actually charged on imports on an MFN basis. Applied tariffs are not specified in the WTO

Schedules of concessions, but rather in the national tariff schedules of the importing country. A WTO

Member can have an ''applied tariff'' for a product that differs from the ''bound tariff'' for that product as

long as the applied level is not higher than the bound level recorded in that Member Schedule of

concessions. The difference between "bound" and "applied" levels is often referred to in the jargon as

"binding overhang" or "water".

3. A tariff schedule is a document setting out the tariff rates a country applies to imports (and, sometimes,

to exports). A tariff schedule normally contains a list of products, their description, classification and

coding, and their corresponding customs duties. In the framework of the WTO, one should differentiate a

national tariff schedule from a Member's WTO Schedule of concessions for goods. While the former

indicates the specific tariff rates that a country applies to various imported goods, the latter records a list

of bound tariff rates negotiated under GATT/WTO auspices, representing Members' specific commitments

resulting from GATT/WTO market access negotiations.

4. The Harmonized Commodity Description and Coding System (the "HS") is an international product

nomenclature for the description, classification and coding of goods established and administered by the

World Customs Organisation (WCO). The HS provides a coding system that is based on a hierarchical

structure, starting with Sections at the higher level and getting more specific at the Chapter (two digit),

heading (four digit) and subheading (six digit) levels. The longer the code, the greater the specificity

concerning a product. The scope of each level is dependent on the description of the higher levels; that

is, longer codes are always sub-sets of the higher level. Countries under the HS Convention are free to

introduce national distinctions beyond the six-digit level. The HS is subject to periodic review by the HS

Committee of the WCO. Having a common nomenclature provides a coded description of the goods which

ensures that any good will fall within the same tariff sub-heading (i.e. the same tariff classification),

irrespective of the country where it is being traded, providing a common language for countries to

51

negotiate and compare concessions. The HS plays an important role within the multilateral trading

system. Most of the WTO Members have used the HS to describe their concessions in their corresponding

WTO Schedule of concessions. The HS has also been used as the basis for tariff negotiations in the

GATT/WTO.

5. Most tariff negotiations have taken place in the context of negotiating rounds, which were launched by the

GATT Contracting Parties or, more recently, by all WTO Members (i.e. the DDA). Furthermore, tariff

negotiations can also take place in the context of the negotiations for accession to the WTO. In practice,

tariff negotiations were always a substantial component of accession negotiations and in every case, the

government requesting the accession made commitments for market access, including reduction and

binding of tariffs. Tariff negotiations have also taken place in the context of plurilateral negotiations

aiming at liberalizing trade in specific sectors, such as the Information Technology Agreement (ITA).

6. Basically, there are three principles envisaged in GATT/WTO tariff negotiations. These are:(1) reciprocity

and mutual advantage; (2) the MFN treatment principle; and (3) predictability and transparency on tariff

concessions (tariff bindings).

i. The principle of reciprocity implies that negotiations for reduction of tariffs should ensure mutual

advantage and benefits to all participants. Thus, according to this principle, where a Member

requests another Member to reduce its tariffs on certain products, it must also be prepared to

reduce its own tariffs on products of export interest to the other Members. However, this principle

does not apply in the same manner to negotiations between developed Members and developing

Members, where it has been adapted to take into account of the principle of special and differential

treatment. In the case of the latter, the principle of "non-reciprocity" or "less than full reciprocity"

normally leads to lesser tariff cuts or bound tariff lines being applied by these countries, as well as

to longer transitional periods for the implementation of negotiated tariff cuts.

ii. The MFN rule, as applied in the context of tariff negotiations, means that any tariff reduction a

Member grants to any country (Member or not Member of the WTO) must be extended to all WTO

Members immediately and unconditionally. It should be noted however, that the WTO Agreements

envisage several exceptions to this principle.

iii. The principles of predictability and transparency are fulfilled through various GATT/WTO provisions.

They are achieved mainly through the inclusion of Members' commitments (the bindings in

particular) in legal instruments (i.e. the WTO Schedules of concessions) which are not easily

changed.

7. These information can be summarized as follow:

Negotiating Rounds Subject Covered Modalities

Geneva Round 1947 Tariffs. Tariffs: product-by-product

negotiations.

Annecy Round 1949 Tariffs. Tariffs: product-by-product

negotiations.

Torquay Round 1950 Tariffs. Tariffs: product-by-product

negotiations.

Geneva Round 1956 Tariffs. Tariffs: product-by-product

negotiations.

52

Dillon Round 1960-

1961

Tariffs. Tariffs: product-by-product

negotiations.

Kennedy Round 1963-

1967

Tariffs; and Non-tariff measures:

anti-dumping measures, customs

valuation.

Tariffs: formula approach (linear cut

formula) with exceptions and product-

by-product negotiations.

Tokyo Round 1973-

1979

Tariffs; Non-tariff measures (creation

of plurilateral codes): antidumping,

customs valuation, subsidies and

countervail, government

procurement, import licensing,

product standards and safeguards.

Creation of the ''Enabling Clause'' –

the "Decision on Differential and More

Favourable Treatment, Reciprocity

and Fuller Participation of Developing

Countries" that made permanent the

GSP, which was adopted as a

temporary waiver before the Tokyo

Round in 1971 to accord special and

differential treatment in favour of

developing countries. The Enabling

Clause elaborated the principle of

non-reciprocity which was originally

contained in Article XXXVI:8 of the

GATT.

Tariffs: formula approach (''Swiss

Formula'') with exceptions and

product-by-product negotiations.

Uruguay Round 1986-

1994

Tariffs; Non-tariff measures: all

Tokyo issues, plus preshipment

inspection, rules of origin, TRIMs and

SPS measures; services, trade-related

aspects of intellectual property rights

(TRIPS), dispute settlement,

transparency, and surveillance of

trade policies; and creation of the

WTO (adopted as a single package by

all Members).

Tariffs: formula approach (simple

average reduction + sectoral approach

) product-by-product negotiations.

8. The so-called "formula" approach involves tariff reductions which are calculated in a mathematical, as

opposed to an individually negotiated manner. While the fist five GATT Rounds of negotiations on tariffs

adhered to the product-by-product approach, the formula approach has been favoured since the Kennedy

Round, in particular because it allows for simplified negotiations across a large number of participants in

the negotiations.

Formulae & Negotiating rounds Explanation Example

Linear Cut formula (Kennedy All tariffs – or tariff in a certain

sector – are reduced by an

50 % reduction in all duties of

53

Round) agreed percentage, regardless of

the initial tariff rates

non-agricultural products

Swiss Formula (Tokyo Round) Is a special kind of harmonizing

method.

T1 = A*T0/A+T0

T0 = initial tariff rate (also called

base rate).

A = the coefficient, which is the

only variable to be negotiated.

T1 = the resulting lower tariff rate

which will constitute the new final

bound tariff.

Consider the application of a

coefficient of A = 10 to an initial

high tariff T0 = 150 per cent:

(10*150) / (10 + 150) = 1500 /

160 = 9.37 per cent

The tariff of 150 per cent will be

reduced to around 9.37 per cent

with a cut of 140.63 percentage

points.

Simple average reduction

(Uruguay Round)

Reduce the existing duties on a

certain average percentage.

Tariffs on agricultural products

should be cut by an average of 36

per cent.

Target average Reduce the tariffs "to" a new

agreed average

Reduce all tariffs to an average of

30 per cent.

9. Tariff peaks are tariffs that exceed a selected reference level. Although there is no agreed definition as to

what constitute a tariff peak or a high tariff in the WTO, the OECD establishes a distinction between

"national peaks" (where the reference level is three times the national average rate) and "international

peaks" (which are defined in absolute terms as those tariffs above 15 per cent). Both absolute and

relative high levels of protection usually hint at sensitivities in those products. Tariff escalation describe

the situation where tariffs increase with the level of processing, that is, they are higher on semi-

processed and processed/finished products than on un-processed products and raw materials. As a

consequence, foreign suppliers of unprocessed products and raw materials find it more difficult to

diversify their production by moving to higher stages of processing.

10. The ITA was concluded by a number of Members and governments in the process of acceding to the WTO

at the Singapore Ministerial Conference in 1996, aiming at achieving maximum freedom of world trade in

IT products by eliminating all duties and ODC on six categories of IT products and the machinery and

inputs used to produce them. The basic requirements that must be fulfilled to become an ITA participant

are: all products listed in the Declaration must be covered, all must be reduced to a zero tariff level, and

all ODCs must be bound at zero. There are no exceptions to product coverage, however developing

countries were allowed to have an extended implementation period on certain sensitive products. The

commitments undertaken under the ITA in the WTO are on an MFN basis, and therefore benefits accrue to

all WTO Members.

54

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