Originally published on 02/25/2007
By reading the popular press one might form the impression that the WTO has one set of trade rules for all countries. The truth is there is no common set of WTO trade rules. Instead each country has made a set of promises, or commitments, to reduce trade barriers from its earlier levels. In the area of tariffs on commodities, each country has committed itself to a maximum tariff rate – called a tariff binding – for each product category. The level of each country’s commitment varies, typically by level of development. For example, the bound tariff rates for developed countries are generally much lower than bound rates by developing countries. In addition many developing countries have many product categories on which there is no bound rate, or maximum tariff. For these products a developing country is free to set any rate it wishes.
In this Table, we can see some of the patterns. For example just 67% of the Philippines goods have a tariff binding. The average bound tariff rate is 21.3%. Notice also that their average applied rate is just 9.1% meaning that they choose to set many of their tariffs below the bound levels and thus are more liberalized than promised. On the other hand, they are also free to raise tariffs considerably without violating their WTO promises putting traders of these products at some risk.
Notice that Sri Lanka has bindings on only about 10% of product lines and the average tariff in these goods is 17.9%. Their average overall tariff is higher at 19.8% because so many products are unbound.
In contrast, developed countries have almost 100% of their tariff lines bound and applied rates are typically set at the bound level. Because developed countries also have much lower applied rates on average, this has become the basis for calls that developing countries should commit to liberalize trade much further to reciprocate for lower agricultural subsidies by the developed countries.
