Every policy realm has its jargon. Trade policy is no exception, though the jargon can be more entertaining than most other policy areas. The World Trade Organization (WTO) publishes a guide to “WTO speak” on its website.
There are diplomatic euphemisms: “Special and differential treatment” or “flexibilities” refer to a variety of exceptions developing countries might take from WTO agreements. WTO members can negotiate “plurilaterals,” a term describing agreements among a subset of WTO members.
When it comes a country’s tariff commitments, WTO members agree to individual “tariff bindings,” which constitute their commitment not to increase a rate of duty beyond an agreed level. The bound rate serves as a ceiling. This rate is listed in each country’s “tariff schedule”.
But Not in a Bind
But every country also has “applied rates,” which refer to the customs duties actually charged on imports. Countries can increase or decrease the tariffs they apply as long as they do not exceed the bound rates in their tariff schedules. They may decide to do this, for example, when the imported product is not made domestically. Rather than overcharge domestic importers, the government may decide to apply a five percent duty instead of the 20 percent bound duty, which only represents a ceiling they committed to in the tariff schedule.
For most developed countries, the bound rates are the same as the rates actually charged. But many developing countries have maintained bound rates that are higher than what they charge at the border. The difference is called “water in the tariff schedule”.
How WTO Members Cut Tariffs
WTO members have taken varying approaches to negotiating tariff reductions. The simplest and most efficient is cut tariffs to a single rate for all products (ideally zero). This approach is most common in bilateral or regional free trade agreements among a smaller number of “parties” or participants.
Another straightforward method is to reduce all or some tariffs by a flat percentage, no matter the starting point of the original tariff. In the Uruguay Round, members agreed to an average percent cut across all agricultural tariffs, with minimum percent cuts for each product.
“Harmonizing” cuts are designed to induce steeper cuts on higher tariffs to narrow the gap between high and low tariffs. For years, in the Doha Development Round of negotiations, WTO members debated mathematical formulas for implementing a harmonizing approach.
Wring Out the Excess Water
The reason it matters in trade negotiations is that developed countries would like for developing countries to use their applied rates as the starting point for tariff cuts, instead of using their bound rates. Otherwise, it would be possible for developing countries to commitment to a high percentage tariff cut that looks good on paper but makes little difference in practice.
For example, India applies a 30 percent tariff on some imported meats (like for lamb vindaloo), but its bound tariff rate is 100 percent. India could agree as part of a WTO negotiation to take a 70 percent tariff cut on all imported meats. Sounds good, but it really only brings India down to its applied rate. There’s no real difference in savings for U.S. lamb meat exporters.
Even the outcome in this example might represent important progress. Why?
Because at least such cuts would wring the “water” out of countries’ tariff schedules, providing more certainty for producers of commodities whose global prices may be significantly affected by tariffs that can change on an ad hoc basis by governments. And it would also provide a clean and clear basis for future tariff negotiations in the WTO.
Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. She is a nonresident Senior Fellow at the Chicago Council on Global Affairs and an adjunct fellow with CSIS. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught International Trade for the last fourteen years as an Adjunct Associate Professor at Georgetown University’s Master of Science in Foreign Service program.