08 Autom
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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.
50
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.