AoA Issues Series: Market Access: Tariffication and Tariff Reduction
John Wainio USDA, Economic Research Service
Tariffication, the conversion of nontariff barriers (NTB) into
equivalent bound tariffs, was one
of the most important outcomes of the Uruguay Round Agreement on Agriculture
(AoA). Adoption of a tariffs-only approach for agriculture
was a sweeping reform that went a long way toward subjecting agricultural
trade to the same disciplines applied to other traded goods.
However, some of the potential benefits that tariffication holds for
spurring efficient production and stimulating increases in consumption
and trade of agricultural products will have to await the results
of subsequent multilateral trade negotiations. This is because many
countries fixed initial tariffs at levels significantly higher than
required to provide import protection equivalent to the NTB's they
replaced. Nevertheless, the immediate benefits of tariffication
are substantial, as bound tariffs, compared with NTB's, are far more
transparent in their application, less intrusive into the market,
and less of an impediment to changing competitive conditions.
Background
One of the cornerstones of the General Agreement on Tariffs
and Trade (GATT) is the general rule against the use of quantitative
restrictions on trade. Tariffs are preferred by the GATT because
they are inherently less trade distorting than nontariff
barriers (NTB). Unlike NTB's, tariffs do not establish
maximum ceilings on imports. While NTB's tend to insulate
markets, tariffs allow global price changes to be transmitted to
the domestic market. Tariffs are predictable and transparent
to exporters, and they do not discriminate between suppliers nor
exclude imports of lower-cost goods. Despite these advantages,
prior to the Uruguay Round, GATT members had never reached agreement
on how to discipline the use of NTB's to protect domestic agricultural
sectors from international competition. Many NTB's were integral
and essential elements of domestic agricultural policies in place
in each country and could be disciplined only if accompanied by
changes in domestic policies.
Results of the Uruguay Round Agreement on Agriculture (AoA)
The scope of reform in the AoA rules for agricultural trade was
a remarkable achievement. In the area of market access, countries
agreed to convert all NTB's (including quantitative import restrictions,
variable import levies, discretionary import licensing, nontariff
measures maintained through state trading enterprises and voluntary
export restraints) to tariff equivalents and to bind
these and any other existing tariffs. Countries were also
prohibited from adopting new NTB's. All tariffs were to be
reduced from their base period rates (1986 for existing tariffs
and 1986-88 for tariff equivalents) by a total of 36 percent, on
a simple average basis, with a minimum cut of 15 percent for each
tariff.
Table 1. Summary of Uruguay Round tariff provisions |
Changes in policies |
Trade liberalization |
Safeguards, exceptions, special and differential
treatment |
Non-tariff barriers to be converted to tariff equivalents
equal to the difference between internal and external prices
existing during the base period (1986-88).
All tariffs to be bound (i.e., cannot be increased
without notification and compensation).
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Reduce existing and new tariffs by 36 percent (24 percent
for developing countries), on a simple average (unweighted)
basis, in equal installments over 6 years (10 years for developing
countries).
Reduce tariffs for each item by a minimum of 15 percent
(10 percent for developing countries).
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Special temporary agricultural safeguard mechanism put in
place for products subject to tariffication; imposed if increase
in volume of imports or drop in price of imports exceeds certain
trigger levels.
Special treatment allows countries, under certain conditions,
to postpone tariffication to end of implementation period
as long as minimum access opportunities are provided.
Developing countries allowed the flexibility of ceiling
bindings, longer implementation periods, and lower
reduction commitments in tariffs; least developed countries
subject to tariffication and binding but exempt from
reduction commitments.
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Countries also agreed to provide minimum levels of import opportunities
for products that were subject to tariffication. Where imports
were less than 5 percent of domestic consumption in the base period,
minimum import access opportunities equal to 3 percent of domestic
consumption in the base period were established in the first year
of the Agreement (1995), increasing to 5 percent by the end of the
implementation period (2000). Where imports exceeded
5 percent of domestic consumption in the base period, countries
were required to maintain the access opportunity that existed in
the base period. To ensure that these access opportunities
could be met, countries established two-tiered tariffs, called tariff-rate
quotas (TRQ's), which included the minimum or current access
level of imports on which the country agreed to impose a "low
or minimal" bound tariff. A higher bound tariff (the
"tariff equivalent" calculated via the tariffication process)
would apply to any imports in excess of the minimum or current access
commitment. (See Tariff-Rate Quota Administration).
The Processes of Tariffication and Tariff Reduction
Having successfully negotiated a set of new rules for agriculture,
countries faced the details of putting these rules into effect.
In the case of tariffication, the GATT provided countries with a
loose set of guidelines to follow in converting their NTB's into
tariffs and in formulating tariff reduction schedules.
The proposed method for setting tariff equivalents in the AoA was
based on a U.S. proposal that relied on calculating the gap between
the internal (domestic) price and the external (international) price.
Although it had the advantage of simplicity, this method of calculating
a tariff equivalent may not always accurately reflect the level
of protection afforded by the nontariff barriers they replace.
When this is done as it was in the AoA, the process often results
in significantly higher initial tariffs than more precise calculations
might have produced and levels of protection that sometimes bear
little resemblance to those provided by the NTB's being replaced.
The guidelines for tariffication allowed governments considerable
latitude in their interpretation; consequently, governments tended
to interpret them in ways that benefited their domestic interests.
They were able to set their initial tariffs at very high levels
while minimizing the amount by which these tariffs were to be reduced.
This process effectively postponed the time when countries would
face any real international competition—particularly in those
politically sensitive commodities for which they did not have a
competitive advantage. The high tariff levels were achieved
in the following ways:
- Selecting a high base period. The 1986-88 base
period tied tariffication to a time when protection was at its
highest. By the time the Uruguay Round had concluded, many
countries had already undertaken domestic agricultural policy
reforms that included sharp reductions in price supports.
Thus the choice of the base period guaranteed that base tariffs
would overstate the existing protection at the time of tariffication.
- Overestimating the domestic price and/or underestimating
the international price. Countries often inflated the
gap between the two prices, thereby increasing the tariff-equivalent
calculation. This practice, referred to as "dirty tariffication,"
was particularly common for politically sensitive commodities.
It allowed governments to set some base tariffs for these commodities
at levels that provided greater protection than had existed in
1986-88.
- Minimizing the effect of reductions. The
requirement for reductions of 36 percent, on a simple average
basis, had limited significance. The tariffs most critical
for protection of domestic agriculture generally are only a subset
of the total. By making rather large cuts in tariffs for
commodities that do not compete with domestic production, or large
percentage cuts in tariffs that already were very low, the 36-percent
average reduction could be achieved with minimal cuts in politically
sensitive tariffs. In many cases, the higher cuts would be
for commodities the countries were not producing at all or not
producing on a competitive basis. Figure 1 illustrates
how this strategy of tariff reduction in the grain sector led
to a pattern whereby the higher the initial tariff, the smaller
the percentage reduction.
- Making superfluous reductions. Some countries
reduced the above-quota tariffs for commodities subjected to TRQ's
by the minimum amount of 15 percent. By also reducing the
within-quota tariffs for these commodities by large enough amounts,
they could achieve the required 36 percent cut in tariffs, on
a simple average basis. However, reductions in the within-quota
tariff, while they have an effect on quota rents, contribute nothing
to trade liberalization, since the within-quota tariff was supposed
to be set at a rate sufficiently low for profitable trade to take
place at the quota level.
The overall result was that tariffication and tariff reduction were
carried out in a manner that minimized the reductions in import
protection in the agricultural sector (and, in some cases, may have
actually increased protection). Base tariffs on some commodities
were set at such high levels that, even by the end of the implementation
period, imports above the minimum access levels are unlikely to
occur.
While it may seem that the level of protection was not significantly
reduced by the AoA, the greater transparency associated with a tariffs-only
regime was itself a significant achievement. Tariffication
eliminated the use of the most trade-distorting protectionist policies
used around the world. Since the level of protection provided
by NTB's was often opaque and hard to measure, tariffication resulted
in more transparent world markets. With further reductions in tariffs,
tariffication should lead to more trade over time. Because
the level of protection provided by tariffs is so highly visible,
this visibility should help make tariffs more susceptible to reduction
in future negotiations.
Issues for New Negotiations
As the United States undertakes new agricultural trade negotiations,
it is essential to clearly recognize the issues that remain to be
addressed. The level of protection afforded by tariffs around
the world is high, if uneven. Agricultural tariffs in industrialized
countries now average about 45 percent, slightly higher than the
average (trade-weighted) most-favored-nation
tariff rates on industrial goods that existed at the end of World
War II and significantly higher than the average level for industrial
tariffs today (an estimated 4 percent). Moreover, agricultural
markets continue to be plagued by high levels of tariff dispersion
(widely varying tariff levels across commodities and countries)
and tariff escalation (higher tariffs on processed goods than on
the raw materials). These problems are not new to the agricultural
sector, but tariffication has made them more visible. One of
the main challenges facing negotiators in the new agricultural negotiations
is how to sufficiently reduce tariffs to provide significant
new trade opportunities.
- Having successfully negotiated a modest reduction in tariff
rates, WTO members are now well positioned to negotiate further
reductions in tariffs. A large across-the-board linear
cut in agricultural tariffs is one way to begin the process
of liberalizing trade in agricultural products. The appeal
of an across-the-board linear cut is that it results in automatic
reciprocity, one of the objectives of the multilateral trade talks.
Theoretically, if all countries cut all tariffs by a fixed percentage,
then each gives and receives the same concession on total exports
and imports. However, a cut from 30 to 15 percent is likely
to be more significant than a cut from 300 to 150 percent.
Thus, the disadvantage of a linear cut is that it may not be large
enough to make a difference in markets subject to extremely high
megatariffs. Use of other
tariff-cutting formulas, which impose deeper cuts for higher initial
tariffs, are likely to be discussed as a means of getting megatariffs
down to levels where trade can take place at the tariff-inclusive
price.
- A second for the agricultural negotiations is understanding
the tradeoffs between further reductions in tariffs and
expansion of TRQ's. If greater liberalization can be achieved
through modest expansions in quotas rather than by large cuts
in tariffs, then countries may want to concentrate on negotiating
an increase in quotas. If quotas are to be expanded, however,
the extent to which the administration of TRQ's results in quotas
being under filled will have to be addressed. TRQ administration
has been one of the most contentious issues resulting from implementation
of the AoA. (See Tariff-Rate Quota Administration)
- Extreme disparities in tariffs exist both within and across
commodity markets. Based on the tariff reduction schedules
submitted to the WTO, it would appear that tariff dispersion
has increased in many markets, which may have led trade to become
more, rather than less, distorted. A tariff-cutting formula
that reduces higher tariffs by greater amounts than lower ones
would help to reduce this dispersion.
- Closely related to the dispersion of tariffs within commodity
markets is the problem of tariff escalation within
countries. Tariff escalation refers to the situation where
tariffs are zero or low on primary (unprocessed) products, then
increase, or escalate, as the product undergoes additional processing.
Tariff escalation can result in a significant bias against trade
of the processed product. An effort is likely in the agricultural
negotiations to ensure that disproportionately large cuts for
inputs versus finished products do not lead to higher effective
protection for finished products.
- While a gap between (lower) applied and (higher) bound
tariffs should generally be considered a positive
element insofar as it expands trade, it may generate other problems.
Some countries use high bound tariffs as an umbrella under which
to vary their applied tariffs
to insulate their domestic market from fluctuations in world prices.
In this case, even though the applied tariffs are lower, they
are frequently raised, and the resulting uncertainty can have
a dampening effect on the level of additional trade created.
More importantly, a country's failure to stabilize its tariffs
eliminates much of the advantage that bound tariffs have over
NTB's and this failure can contribute to greater instability in
world prices. Recent data for wheat tariffs in selected
countries (figure 2) gives an indication of the extent to which
applied tariffs around the world are significantly below the bound
rates. When the bound and applied tariffs are equal, the
tariff will be on the diagonal of the chart. In the case
of the wheat market, the gap between the two tariffs tends to
increase the larger the country's bound tariff. The larger
the gap, the longer it will take to eliminate it, and thus the
longer it will take to realize any significant new trade opportunities
in that market.
- During the final stages of the Uruguay Round negotiations, some
member countries explored the possibility of a zero-for-zero
agreement in the oilseed sector. This approach sought
complete elimination of tariffs on oilseeds and oilseed products
as well as elimination of export subsidies and differential export
taxes and rebates. Although agreement was not attained,
this concept could again be pursued in the next negotiating round.
Complete removal of tariffs in some commodity sectors but not
others would tend to increase tariff dispersion across markets
and could lead to trade diversion, with the lower cost (duty-free)
commodities replacing competing products subject to high tariffs.
Over time, however, this may exert pressure to liberalize trade
in competing products as well. The zero-for-zero approach
has already resulted in the elimination of tariffs on such items
as pharmaceutical products, steel, furniture, toys, beer, distilled
spirits, and paper and construction, medical, and agricultural
equipment in many countries.
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