Tariff Reduction formulas

No method or formula for further reduction of the tariffs has been identified as yet for the next round within the formal WTO process - in fact, this itself would be a subject for negotiations. However, reflecting the importance of this matter, this subject has attracted considerable attention from analysts. What follows is a summary of various ideas, albeit all informal, by which tariffs may be reduced. Given that tariff binding is a matter of strategic concern, it is important for countries to be aware of these possible methods and how these would affect their currently bound tariff rates.

Across-the-board linear reduction. A linear reduction formula is simply Tn = (1-r*t)*T0, where Tn and T0 are new and original tariff rates respectively, r is agreed reduction rate and t is the time period for reduction. For example, if r = 0.06 (i.e. 6 percent reduction per year) and t = 6 years, a 100 percent tariff is reduced to 64 percent. This method was applied in the Kennedy Round with the "r*t" set at 50 percent. As a result of some exceptions negotiated subsequently, the final reduction was 35 percent. The approach is both simple and transparent. While tariffs could be cut significantly if the reduction rate is high (e.g. 50 percent compared to 36 percent on average in the Uruguay), another linear cut would still leave many tariff peaks in agriculture left by the Uruguay formula.

Linear reduction with conditions on minimum cuts. This was the formula used in the Uruguay AoA (36 percent average reduction with a 15 percent minimum per tariff line). Although tariffs were reduced by an average of 36 percent, the method left many tariff peaks, as countries had the freedom to cut tariffs on "sensitive" products by only the minimum 15 percent while reducing by more for others, in order to reach the (un-weighted) average of 36 percent. This formula could be improved, e.g. by raising the minimum to, say 25 percent, or by seeking a balance in the trade volume between those with higher and lower than average cuts, i.e. trade-weighted tariff reductions.

The Uruguay formula with the same base as in the Uruguay. Rather than using the bound rates reached at the end of the implementation period of the Uruguay as the benchmark for further reduction, a further 36 percent cut in the average level of tariffs from the same base as in the Uruguay would imply a 72 percent cut over the two reform periods, a significant reduction over a dozen years or so. This approach has some other advantages, e.g. giving a sense of the continuity of the process of reform by using the same formula; no controversy over the choice of a new base period; and full "credit" for unilateral reductions during the negotiation period.

Successive linear reductions. Compared with the linear method, here the base tariff rate, T0, is adjusted every year to its new level. The formula for this, also known as a radial formula, is

Tn = (1-r)t * T0. With this, if r = 0.06 and t = 6 years, a tariff level of 100 percent is reduced to 69 percent, compared with 64 percent with the linear formula. As the base itself gets reduced every year, the overall reduction at the end of the period is smaller. However, for a smaller reduction rate and a shorter time period, the difference in reduction rates from the two formulae is not much.

Harmonization of tariff rates - the Swiss Formula. This formula was used in the Tokyo Round to harmonize tariff peaks on industrial products left as a result of the linear formula used in the Kennedy Round. The Swiss formula is Tn = (amax * T0)/(amax + T0), where amax is the upper bound on all resulting tariffs. With amax = 50, an initial tariff of 40 percent would be reduced to 22 percent while a 100 percent tariff would be reduced to 33 percent. On the other hand, with amax = 25, a 40 percent tariff is reduced to 15 percent and a 100 percent tariff is reduced to 20 percent. The value of amax then becomes the parameter for negotiations. Figure 1 shows how three of these methods discussed here compare in terms of tariff reductions.

Capping all tariffs at some maximum rate. For example, a maximum rate of 60 percent could be agreed to which all higher tariffs would have to be reduced over an agreed period. This rule may be applied in conjunction with other reduction methods.

Using actual protection rates for recent years as the benchmark. In this approach, negotiators agree to eliminate the gap, or a good part of it, between the bound and the applied rates, the so-called "discretionary protection" or "water in the tariff", using some recent period to measure the gap, e.g. 1995-97. This approach, while it makes some economic sense, appears problematic due to problems associated with measuring (or agreeing with the measurement of) the protection rate. This was one of the problems that led to inflated tariff equivalents (and thus bound tariffs) on many commodities in the Uruguay, which came to be known as "dirty tariffication". This method is less helpful for developing countries where domestic prices tend to be lower than or similar to world reference prices, resulting in negative or zero bound rates, which would not be acceptable.

Tariff Quota.

As the tariffs existing after the tariffication of non-tariff barriers are very high in several cases, there would be no meaningful market access opportunities. Hence, particular provisions were made in the document for market access opportunities. There are three types of such provisions.

Current access opportunity.

Opportunity has to be provided for a level of import equal to the average annual import level during the base period 1986-88 by having very low tariffs for imports up to this extent.

Minimum access opportunity.

Opportunity for a level not less than 3% of the annual consumption in the period 1986-88 has to be provided in 1995. This level would be raised to 5% by the end of 2000 by developed countries and by the end of 2004 by developing countries by having very low tariffs for imports up to this extent.

Special minimum access opportunity.

Members who have opted for non-tariff measures instead of tariffication have to provide such opportunity, i.e., Japan, the Philippines and the Republic of Korea for rice, and Israel for sheepmeat, wholemilk powder and some dairy products. For developed Members, it means import in 1995 to the extent of 4% of the annual average consumption in the base period 1986-88, and an increase of 0.8% of the base period consumption every year thereafter up to the end of 2000. For developing Members, it means import in 1995 to the extent of 1% of the annual average consumption in the base period, rising uniformly to 2% in 1999 and then to 4% in 2004.

These above-mentioned access opportunities are to be provided by tariff quotas, i.e., by having very low tariffs up to the stipulated extent of imports, and above that level, having the normal tariffs which, in the case of agricultural products, are generally very high. Except for cases of bilateral and plurilateral agreements, these quotas should generally be global quotas, i.e., on a non-discriminatory basis, rather than country-specific quotas.

A tariff-quota.

This is what a tariff-quota might look like: Imports entering under the tariff-quota (up to 1,000 tons) are charged 10%. Imports entering outside the tariff quota are charged 80%. Under the Uruguay Round agreement, the 1,000 tons would generally be based on actual imports in the base period or an agreed “minimum access” formula.

Tariff quotas are also called “tariff-rate quotas”.