Economics Stack Exchange Archive

How are the maximum WTO tariff rates for countries determined?

posted by: Nick T on 2011-12-15
tagged: international-trade
score: 5

An article in last week’s Economist, “All Change” had a graph that showed the actual vs. maximum tariff rates for various WTO countries:

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Why does the tariff ceiling vary so much by country? What determines where it’s set?

Answer 738

posted by: Jason B on 2011-12-15
score: 3

In the General Agreement on Tariffs and Trade (GATT) negotiations, countries agree to bind their maximum import tariff rates on various goods categories. Once bound, a country would face penalties if it raised tariffs beyond the maximum (for example, it would have to pay compensation to affected trading partners).

In some of the literature, these are called “weak” bindings–countries are free to lower their tariff rates below the binding level (vs. “strong” bindings where they are not). The figure you are referencing is pointing out that applied tariffs are often lower than the bound tariff rates (the “maximum permissible tariff”). This difference is called “water”.

One might reasonably ask whether the exercise of binding tariffs is useful given that the bindings often won’t bind. Some answers are:

the bindings reduce variability in trade policy, and the resulting stability has welfare benefits Francois and Martin (2004)
bindings reduce mean tariffs by limiting the protectionist response of countries
they allow countries to negotiate even if doing so might be politically difficult at home. Countries, for example, can multilaterally negotiate relatively high bound rates, but those countries in which it is politically feasible to do so can then reduce their applied tariff to the optimum rate (thus reducing mean tariffs). See Bacchetta and Piermartin (2011) and the Bagwell paper cited therein.

In general, discussions of bound tariffs center around the idea that it is better to have a firm agreement setting the limits of what countries can do than to have no agreement at all. At a minimum, such agreements avoid extreme protectionist measures such as Smoot-Hawley and the resulting cascade of retaliation that was common before the GATT.

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