TARIFFS AND TARIFF STRUCTURES

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SEATRANET ADVANCED COURSE
NON AGRICULTURAL MARKET ACCESS
(NAMA)
Module 2

TARIFFS AND
TARIFF STRUCTURES

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Outline of Module 2
1.

The WTO and Tariffs

2.

What is a Tariff?

3.

Elements of Tariff Structure

4.

Tariffs in Modern Trade Policy

5.

Developing Countries and the WTO

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1. The WTO and Tariffs

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The WTO and Tariffs

• The WTO is based on five easy to understand principles :
- Trade Without discrimination
- Freer trade, gradually, through negotiations

- Predictability, through binding and transparency
- Promoting fair competition
- Encouraging development and economic reform

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Trade Without
Discrimination

• Most favoured Nation (MFN)
treatment
–

Embodied in GATT Article 1

– Must treat all WTO members the same or as well as the most
favoured member
– Prohibits discrimination at the border based on the source of a
product

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Trade Without
Discrimination

• A few MFN exceptions are permitted
- Goods imported under free trade agreements

(Article XXIV)
- General waivers (Article XXV)
- Better access for developing countries
- To counteract unfairly traded products

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Trade Without
Discrimination

• National Treatment
– Embodied in GATT Article III
–

Equal Treatment for domestic and foreign
after they have entered the market.

goods

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Trade Without
Discrimination

• A few National Treatment exceptions are permitted
– Article XX provides for general exceptions based on public
morals, human and animal health, etc.
– Article XXI provides for exceptions based on national security

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Predictability Through Binding and
Transparency

• Binding: Each WTO member publishes its
schedule of bound tariffs
– Subject to some specific exceptions a “bound” tariff is a

contractual undertaking: It is the maximum tariff permitted
based on the GATT. Actual (“applied”) tariffs can be lower,
however.

• Transparency is now a basic principle of many
WTO agreements, but greatest source is
through the Trade Policy Review.

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•

Encouraging Development and
Economic Reform

Part IV of the GATT deals specifically
with Trade and Development
– The Enabling Clause provides for discrimination in
favour of developing and least developed countries.
– Interests of developing countries are clearly taken
into account in GATT agreements and individual
articles.

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2. What is a Tariff?

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What is a Tariff?

• A tariff is a tax on an imported good
when it crosses the border.
– Tariffs can sometimes be applied to exports too, but this is much
less common.

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What is a Tariff?

• Tariffs have four principle functions:
– A source of government revenue
– Protection of domestic industry
– Punitive function to remedy trade distortions
– As negotiating tool to reduce tariffs of others

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Other border measures

• Quantitative restrictions (QR) used to be the most
common alternative to tariffs.

• Article XI of the GATT states:
“No prohibitions or restrictions other than duties, taxes
or other charges … shall be instituted or maintained by
any member”

• This clearly bans QRs

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Why are Tariffs preferred
over QRs?

• Tariffs are transparent and predictable.
– QR lead to economic rents depending on how the quotas are
allocated.

• QRs do not reflect changes in prices or foreign
exchange or tastes
• Negotiation processes for reduction of bound tariffs are
easily managed

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Why are Tariffs preferred
over QRs ?

• Tariffs lead to greater economic efficiency.
• Quotas are often linked to corruption.
• QRs are do not generate revenue for the government.

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•

Types of Tariffs

There are four basic types – they differ in
how the tariff is computed.
1.
2.
3.
4.

Ad valorem tariff
Specific tariff
Compound tariff
Mixed tariff

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Types of Tariffs

• Ad valorem tariff is a fixed percentage of the
value of the imported product (“ad valorem” is
Latin for “in proportion to the value”)

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Types of Tariffs

• Specific tariff is a fixed charge per unit of
imports

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Types of Tariffs

• Compound tariff is one which incorporates both
an ad valorem and a specific tariff

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Types of Tariffs

• Mixed tariff is both ad valorem and specific
tariffs and the one producing the highest (or in
other cases the lowest tariff) is to be used.

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Types of Tariffs

• Ad valorem and specific tariffs are normally
simple to understand and are transparent
• There are two “other” types of tariffs that are
more complex:

– Component based tariff
– Content based tariff

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Tariff examples

Component: based on an ad valorem tariff on one
component of the product and a specific tariff on
another
Example: In the US system a wristwatch imported into
the US faces an ad valorem tariff on the case and strap
as well as a specific tariff of 5.1 cents and a 5.3% ad
valorem tariff on the battery.

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Tariff examples

Content based tariff is based on a specific material content
Example: a tariff on 0.55 cents /kg on the manganese
content

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Types of Tariffs Cont

“Tariff Rate Quotas” (TRQ) continue to exist in
Agricultural trade.
– A TRQ permits the importation of a certain volume or value of a
specific product at a fixed rate.
– All imports greater than that volume or value face a higher
tariff.

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