Introductory Trade Issues: History, Institutions, and Legal Framework
Read this chapter. While we are all a part of the economy, we can't see all parts of an economy at any one time. This chapter describes policy issues, controversies, and the history of international trade. You will learn about international economics, FTAs, GATT, WTO, anti-subsidy laws, and bound vs. applied tariffs. You will read about real-world issues such as policies restricting trade and forging agreements to reduce trade barriers. Test your knowledge by answering the exercises in each section.
Appendix B: Bound versus Applied Tariffs
The WTO agreement
includes commitments by countries to bind their tariff rates at an
agreed-upon maximum rate for each import product category. The maximum
tariff in a product category is called the bound tariff rate. The bound
tariff rates differ across products and across countries: some countries
agree to higher maximums; others agree to lower maximums. In general,
less-developed countries have higher bound tariff rates than developed
countries, reflecting their perception that they need greater protection
from competition against the more highly developed industries in the
developed markets.
However, some countries, especially those with
higher bound tariffs, decide to set their actual tariffs at lower
levels than their bound rates. The actual tariff rate is called the
applied tariff rate. Table 1.4 "Bound versus Applied Average Tariffs"
lists the average applied tariff rates compared to average bound tariffs
for a selected set of WTO member countries.The averages are calculated
as a simple average: namely, the ad valorem tariff rates (bound or
applied) are added together and divided by the total number of tariff
categories. These are not trade-weighted average tariffs. Also, when
specific tariffs are assessed for a product, they are excluded from the
calculations. (Note that specific tariffs are set as a dollar charge per
unit of imports.) Also listed is the percentage of six-digit tariff
lines that have a tariff binding. For products that have no tariff
binding, the country is free to set whatever tariff it wishes. The
countries are ordered from the highest to the lowest gross domestic
product (GDP) per person.
Table 1.4 Bound versus Applied Average Tariffs
Country | Applied Rate (%) | Bound Rate (%) | % Bound |
---|---|---|---|
United States | 3.6 | 3.6 | 100.0 |
Canada | 3.6 | 5.1 | 99.7 |
EC | 4.3 | 4.1 | 100.0 |
Japan | 3.1 | 2.9 | 99.6 |
South Korea | 11.3 | 16.0 | 94.7 |
Mexico | 12.5 | 34.9 | 100.0 |
Chile | 6.0 (uniform) | 25.1 | 100.0 |
Argentina | 11.2 | 32.0 | 100.0 |
Brazil | 13.6 | 31.4 | 100.0 |
Thailand | 9.1 | 25.7 | 74.7 |
China | 9.95 | 10.0 | 100.0 |
Egypt | 17.0 | 36.8 | 99.3 |
Philippines | 6.3 | 25.6 | 66.8 |
India | 15.0 | 49.7 | 73.8 |
Kenya | 12.7 | 95.7 | 14.6 |
Ghana | 13.1 | 92.5 | 14.3 |
Table 1.4 "Bound versus Applied Average Tariffs" reveals the following things worth noting:
- More-developed countries tend to apply lower average tariffs than less-developed countries (LDCs).
- Average bound tariff rates are higher for less-developed countries. This means that the WTO agreement has not forced LDCs to open their economies to the same degree as developed countries.
- The less developed a country, the fewer tariff categories that are bound. For the most developed economies, 100 percent of the tariff lines are bound, but for Ghana and Kenya, only 14 percent are bound. This also means that the WTO agreement has not forced LDCs to open their economies to the same degree as developed countries.
- For LDCs, applied tariffs are set much lower on average than the bound rates. These countries have the flexibility to raise their tariffs without violating their WTO commitments.
- China has lower tariffs and greater bindings than countries of similar wealth.
- Since the most developed economies have applied rates equal to bound rates, they cannot raise tariffs without violating their WTO commitments. WTO-sanctioned trade remedy actions can be used instead, however.
Exercise
- Jeopardy Questions. As in the
popular television game show, you are given an answer to a question and
you must respond with the question. For example, if the answer is "a tax
on imports," then the correct question is "What is a tariff?"
- The term for the maximum tariff rate a country agrees to assess on imports from other WTO member countries.
- The term for the actual tariff rate a country assesses on imports from other WTO member countries.
- Between developed or less developed countries, these tend to have much higher bound tariff rates.
- The percentage of tariff lines on which the Philippines has agreed to set maximum tariffs in the WTO.
- The average WTO-bound tariff rate in Ghana.
- One country that has agreed to much lower bound tariffs than other countries of comparable income and wealth in the WTO.