Trade growth enhances a country’s income-generating capacity, which is one of the essential prerequisites for achieving sustainable development (UNCTAD, 2016b). An increase in imports at competitive prices can improve consumer surplus and the prospective competitiveness of domestic producers that use imported intermediates. An increase in exports enhances the country’s income growth, at least at the aggregate level. Market access conditions, both foreign market access for a country’s exports and domestic market access for imports, are thus an important determinant of the effectiveness of trade as a means of implementation.
Market access conditions in international trade have been determined largely by the height of tariffs. Tariffs, or customs duties on imports, are a tax levied on imported goods at the border. Revenues accrued from tariffs may constitute a significant portion of the government’s public revenue, particularly in low-income countries.
A government determines tariff ratesA tariff rate is generally defined ad valorem, that is, as a percentage of the unit c.i.f. price of an imported good at the border..
more on different products according to product-specific or sector-specific policy objectives, or depending on the need for tariff revenues. For example, products that exhibit low demand elasticityA tariff rate is generally defined ad valorem, that is, as a percentage of the unit c.i.f. price of an imported good at the border..
more may be selected for higher tariff rates with a view to ensuring steady tariff revenue. Tariff rates for certain goods may be reduced or eliminated to increase consumer surplus. Tariff rates for sensitive sectors17.38 may be set high to protect the producers in those sectors from foreign competition. Tariff rates on intermediate goods may be set high or low, depending on the country’s industrial development policy. A government with significant market power may also look for gains in the commodity terms of trade17.39 to achieve the optimal tariff level at which a country’s welfare is maximized (Humphrey, 1987). In most cases, tariff rates are set with a view to maximizing a weighted average of all the above-mentioned domestic interests and concerns (Amador and Bagwell, 2012). For this reason, the Inter-agency Expert Group on Sustainable Development Goal Indicators (IAEG-SDG) has selected a
worldwide weighted tariff average as the appropriate indicator to measure progress towards this target (United Nations, 2016).
The situation in which each country unilaterally optimizes tariffs carries an inherent risk of “trade wars”, where countries retaliate against tariff barriers in their trading partners by raising their own tariffs. In 1947, the major economies involved in international trade signed the General Agreement on Tariffs and Trade (GATT). With GATT, countries entered into
reciprocal and mutually advantageous arrangements aimed at
the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce (GATT, 1947). Article 1 of the Uruguay Round Agreement, known as GATT-94 (GATT, 1994), which incorporates the provisions of the original GATT, GATT-47, stipulates that members set their tariffs on a most-favoured-nation (MFN) basis in such a way that
any advantage, favour, privilege or immunity granted to any product originated in and destined for other countries becomes
immediately and unconditionally applicable to all contracting parties. The conclusion of the GATT-94 multilateral trade negotiations led to the creation the World Trade Organization (WTO) with a clear mandate to
develop an integrated, more viable and durable multilateral trading system encompassing GATT, other Uruguay Round agreements and past trade liberalization efforts. Under the Uruguay Round agreements, the WTO members set a maximum limit for tariffs levied on all agricultural goods and the majority of non-agricultural goods17.40.
Since the establishment of GATT, the average applied tariffs in international trade, particularly on manufacturing goods, have been reduced via trade liberalization in the multilateral framework, as well as in a regional setting or unilaterally17.41. According to UNCTAD (UNCTAD, 2015e), the simple average of the world MFN-applied tariff in 2014 was around 6 per cent for manufacturing goods and just below 3 per cent for natural resources (figure 17.18). For agricultural products, the average tariff remained relatively high at around 15 per cent, although the rate had declined by two percentage points since 200817.42.
In practice, a significant portion of world imports receive preferential tariff rates that are lower than the MFN rates. The simple average agricultural tariff in preferential trade arrangements is approximately 8 per cent, which is almost half of the MFN counterpart. The trade-weighted average tariffs are generally lower than the corresponding simple average tariffs. In both cases, the average tariffs have declined since 2008 under both multilateral and preferential liberalization17.43.
Only the weighted average preferential tariff on manufacturing imports have increased, albeit slightly. This has resulted from a shift in the composition of traded goods under preferential schemes from products facing low tariffs to those facing higher tariffs. Over 60 per cent of agricultural trade in 2014 was duty-free, with 20 per cent of this accounting for duty-free on the MFN basis and the rest under preferential tariffs (figure 17.20).
Figures 17.21 and 17.22 provide the trade-weighted average applied tariffs of seven country groups in 2008 and 2014 in three major sectors: - agriculture, manufacturing and natural resources. The country groups are developed countries, transition economies and developing countries in five different regions (East Asia, South Asia, Latin America, sub-Saharan Africa, and West Asia and North Africa). The weighted average is of applied tariffs and takes into account preferential tariff rates whenever they are applicable.