Tariffs and Tariff Negotiations

Transcription

1 MODULE 3 Tariffs and Tariff Negotiations ESTIMATED TIME: 4 hours OBJECTIVES OF MODULE 3 To explain the main elements relating to tariffs in the WTO framework. To explain the different types of tariffs, including "bound tariffs" and "applied tariffs", as well as tariff schedules and the Harmonized Commodity Description and Coding System ("Harmonized System"). To explain the tariff negotiations conducted under the auspices of the GATT 1947, including the principles applicable to tariff negotiations and the main negotiating techniques for tariff reductions. To introduce the Information Technology Agreement (ITA) and tariff negotiations within the process of accession to the WTO. 1

2 MODULE 3 TARIFFS AND TARIFF NEGOTIATIONS... 1 I. INTRODUCTION... 3 II. TARIFFS... 4 II.A. TYPES OF TARIFFS... 4 II.B. DIFFERENCE BETWEEN TARIFFS AND OTHER CHARGES... 6 II.C. THE WELFARE EFFECT OF AN IMPORT TARIFF... 7 II.D. BOUND TARIFFS VS. APPLIED TARIFFS... 9 II.E. TARIFF PEAKS AND TARIFF ESCALATION III. TARIFF SCHEDULES AND THE ''HARMONIZED SYSTEM'' III.A. TARIFF SCHEDULES III.B. THE HARMONIZED SYSTEM IV. GATT/WTO TARIFF NEGOTIATIONS ON NON-AGRICULTURAL PRODUCTS IV.A. PRINCIPLES OF TARIFF NEGOTIATIONS IV.B. GATT NEGOTIATIONS ON TARIFFS IV.C. POST-URUGUAY AND PRE-DOHA V. SUMMARY

3 I. INTRODUCTION As explained in Module 2, the term ''market access'' in the WTO refers to the totality of government-imposed conditions under which a product may enter a country. In the context of trade in goods, tariffs and non-tariff measures (NTMs) are the two main categories of measures which determine the conditions of access to a market. Both categories are considered in the WTO Agreements. The Preamble of the Agreement Establishing the WTO recognizes that the progressive reduction or elimination of tariffs and other barriers to trade can contribute, together with the non-discrimination principle, to achieving the objectives of the WTO. As a matter of fact, the progressive reduction and elimination of tariffs makes markets more open, and access more predictable and transparent. Customs duties or "tariffs" are the most commonly used and visible market access barrier for trade in goods. In this Module, we will explain the different concepts and rules concerning tariffs and tariff negotiations, with a focus on those related to non-agricultural products. Schedules of concessions, where each individual Member records its product specific concessions and conditions of market access, as well as the process for the modification of these Schedules, will be explained in Module 4. Non-tariff measures will be explained in Module 5. Having studied the basics on these issues, Module 6 will then explain the Doha negotiations on nonagricultural market access (NAMA). 3

4 II. TARIFFS What is a tariff? Tariffs, also known as "customs duties", are the most visible and commonly used trade measures that determine market access for goods. In the context of international trade, a tariff is a financial charge in the form of a tax, imposed at the border on goods going from one customs territory to another. Tariffs applied to imports are usually collected by customs officials of the importing country when goods are cleared through customs for domestic consumption. Although tariffs can also be imposed on exports, import tariffs are the most common type of tariffs and have been the main focus of attention of GATT/WTO negotiators. WTO Members (referred to in the past as GATT Contracting Parties) have committed to engage in multilateral negotiations on tariff concessions on a regular basis. As you studied in Module 1, GATT Contracting Parties held eight rounds of negotiations during the life of the GATT. Indeed, tariff negotiations (i.e. the establishment of new bindings and tariff reductions) was one of the GATT's traditional and most successful negotiating areas! The ongoing Doha negotiations, which is the first round of negotiations to be held under the auspices of the WTO, also aims at increasing the number of bindings and reducing tariff barriers as part of a broader package that also includes several other issues. In practice, most tariff negotiations in the past took place through so-called ''market access negotiations'', which encompassed all products. Since the negotiation of the Agreement on Agriculture during the Uruguay Round, the rules on market access for agricultural products have been negotiated separately from the rules on market access for non-agricultural products. II.A. TYPES OF TARIFFS Tariffs can be classified into different kinds depending on the way they are calculated: II.A.1. AD VALOREM TARIFF A tariff calculated on the basis of the value of the imported good, expressed as a percentage of such value. As you will study in Module 5, the rules contained in the WTO Agreement on Customs Valuation play a key role in determining these values. Example : 2 per cent ad valorem An ad valorem tariff of two per cent on an imported truck worth US$ 1000 would lead to a requirement to pay US$ 20 as customs duty. 4

5 II.A.2. SPECIFIC TARIFF A tariff calculated on the basis of a unit of measure, such as weight, volume, etc., of the imported good. Since the calculation of these duties does not involve a "value", the rules in the Agreement on Customs Valuation are not relevant. Example : US$ 10 per ton A tariff of US$ 10 per ton on an imported truck of one ton in weight would lead to requirement to pay US$ 10 as customs duty. II.A.3. MIXED TARIFF A tariff calculated on the basis of either the value of the imported goods (an ad valorem duty) OR a unit of measure of the imported goods (a specific duty). It is frequently calculated by selecting the higher value, although there are cases in which the lower one is chosen (as stated in the mixed tariff itself). Example : 5 per cent ad valorem 0R US$ 10 per ton, whichever is higher If an imported truck has a value of US$ 1000, and weighs two tons, the ad valorem component of the duty would be US$ 50, while the specific component would be US$ 20. Since 50 is higher than 20, the requirement would be to pay US$ 50 as customs duty. II.A.4. COMPOUND TARIFF A tariff calculated on the basis of both the value of the imported goods (an ad valorem duty) AND a unit of measure of the imported goods (a specific duty). It is normally calculated by adding a specific duty to an ad valorem duty. Example : 5 per cent ad valorem + US$ 10 per ton If an imported truck has a value of US$ 1000, and weights two tons, the ad valorem component of the duty would be US$ 50 while the specific component would be US$ 20. This would lead to a requirement to pay US$ 70 as customs duty. II.A.5. TECHNICAL/OTHER TARIFF Some tariffs are calculated on the basis of the specific contents of the imported goods, the duties payable by its components or certain related items. Example : US$ 3 each + US$ 2 per kg on the battery An imported laptop with a battery of 1.5 kg in weight would lead to a charge of US$ 6 (US$ 3 + US$ 2 * 1.5 kg) as customs duty. 5

6 Ad valorem Tariffs, Non-Ad valorem (NAV) Tariffs & Ad valorem Equivalents (AVEs) All tariffs other than ad valorem tariffs are considered non-ad valorem (NAV) tariffs. Although ad valorem duties are the most commonly used form of tariffs among WTO Members in respect of non-agricultural products, there are some Members that apply non-ad valorem duties on some products. Trade economists commonly share the view that ad valorem duties are preferable over non-ad valorem duties mainly because the former are more transparent than the latter. Take specific duties for example. Since specific duties are calculated on the basis of a unit of measure of the imported product (e.g. weight, volume), the impact of such duties on market access for goods is sometimes difficult to assess. This lack of transparency could make it easier for special interest groups of the importing country (i.e. import competing industries) to obtain governmental support for higher levels of protection. Furthermore, the protective effect of a specific duty tends to vary with changes in the prices, making them difficult to implement during inflacionary periods. For example, to maintain the same level of protection during the periods of high inflation, governments would constantly need to increase the values of the specific tariffs. Similarly, if the price of the goods decline, the level of protection will increase. For that same reason, non ad-valorem duties disadvantage low cost imports by subjecting them to relatively higher percentage payments than higher cost imports. The lower the import price of a product, the higher the relative protection afforded by such duties. By contrast, an ad valorem tariff remains constant irrespective of the product's price. If one wanted to compare the effect of a non-ad valorem duty with an ad valorem one, it would be necessary to calculate an ad valorem equivalents (AVE). As we will study in Module 6, WTO Members have broadly agreed to convert non-ad valorem tariffs for non-agricultural products to ad valorem equivalents and to bind them in ad valorem terms in the context of the on-going NAMA negotiations. II.B. DIFFERENCE BETWEEN TARIFFS AND OTHER CHARGES It is important to note that not all financial charges imposed at the border are considered and disciplined as import tariffs in the framework of the WTO, although most of them are regulated by other provisions. Some of the main measures not deemed to constitute a tariff under the WTO framework include the following: Other duties or charges (ODCs): these measures are envisaged in the second sentence of Article II:1(b) of the GATT 1994 and the Understanding on the Interpretation of Article II:1(b) of the GATT 1994 that was negotiated during the Uruguay Round. They include all taxes levied on imports in addition to the customs duties (some times called "para-tariffs"), and can only be charged if they were recorded in the Member's WTO Schedule of concessions. ''Fees'' or ''charges'' connected with importation or exportation: these measures are defined in Article VIII of the GATT 1994 and include all fees and charges of whatever character (other than tariffs and other than internal taxes within the purview of Article III of the GATT 1994) imposed by the Members on or in connection with importation or exportation. These include licence fees, inspection fees, etc. In general terms, these charges shall be limited in amount to the approximate cost of services rendered and shall not represent an indirect protection to domestic products or a taxation of imports or exports for fiscal purposes. Internal taxes: these measures are subject to Article III:2 of the GATT national treatment principle applicable to internal taxation (studied in Module 2). According to this provision, internal 6

7 taxes (e.g. value-added tax or sales tax) shall be applied to imported products and domestic like products in a non-discriminatory manner. Anti-dumping or countervailing duties: as studied in Module 2, anti-dumping and countervailing measures are normally applied in the form of additional customs duties, which may exceed the bound tariff rate (the maximum level of customs duty to be levied on products imported into a Member). Therefore, they may be applied as a deviation from Article II of the GATT 1994, subject to certain requirements provided in the Anti-Dumping Agreement and the SCM Agreement respectively. II.C. THE WELFARE EFFECT OF AN IMPORT TARIFF A tariff levied on an imported product has an effect upon both the country exporting the product concerned as well as on the country importing that product and imposing the tariff. In the exporting country, producers of the good at issue would face worse market access conditions in the importing country than as it would be in the absence of the tariff, provided that other conditions remain unchanged. Although normally paid by the domestic importers, a tariff is equivalent to a tax that foreign exporters have to pay in order to sell the good in the domestic market. The application of the tariff increases the price of the imported good, thereby making it more expensive in the domestic market. The increase in the price discourages the importation of the good. For the importing country, an import tariff could serve mainly two purposes. First, an import tariff can be used to give a price advantage to a local good over a similar imported good, as the entry of the good is conditional upon the payment of the tariff. In other words, tariffs may be used to protect domestic industry from the competition of imports. Second, tariffs provide revenue to the government of the importing country. Whether it is mainly used in practice for the first or the second purpose depends on the particular conditions of each country. Figure 1 below shows the welfare effect of a tariff on a small importing country unable to affect world prices (price-taking country) under condition of perfect competition. While a tariff on an imported good generates gains for domestic producers of like products and the government of the importing country, it causes loses to consumers (and possibly other producers who use that good as an input) since they would have to pay more for the imported goods than would have been the case in the absence of the tariff. From an economic perspective, the sum of national economic welfare for a small country imposing an import tariff is lower than without the tariff. This is mainly because the tariff cost for domestic consumers outweighs the gains for domestic producers and the government. 7

8 Figure 1: The welfare effects of a tariff on a small importing country The graph illustrates the welfare effect of a tariff on a small importing country unable to affect world prices (price-taking country) under condition of perfect competition. National economic welfare consists of consumer surplus (the difference between the willingness to pay and the actual price the consumer pays), producer surplus (the sum of profits earned by suppliers) and government tariff revenue. Consumer demand is represented by demand curve D and producers are in a competitive market with supply curve S. Without a tariff, consumers in the importing country would buy Do at the price Po. Domestic producers would supply So and the rest (Do - So) would be imported from other countries. Consumer surplus is given by the sum of a, b, c, d, e and f whereas producer surplus is given by g. With a tariff per unit at price Pt (Po + tariff), consumers in the importing country would buy D1 (since the tariff would lead to a higher price, Pt, the quantity demanded would be lower than Do). Domestic producers would supply S1 (since the price they can get thanks to the tariff is higher, they will produce more than So) and the remaining quantity (D1 S1, which would be lower than Do So) would be imported from other countries. Consumer surplus: Area a+b, consumers loose c+d+e+f [consumers have to pay more due to the increase of both the price of the imports and the price of domestic substitute products] Producer surplus: Area g+c [part of the consumer loss is captured by domestic producers who gain from the increase of their sale prices] Government revenue: Area e [part of the consumer loss is captured by the government - revenue resulting from the tariff]. 8

9 BUT What about the loss represented by Area d+f? Net national loss as a result of the tariff: Area d+f. No one captures the consumers loss represented by area d+f, which is normally called "deadweight loss". As a result of the price increase, some consumers are driven out of the market and this loss is captured by triangle f. The increase of domestic production entails costs that exceed the costs of the imports they replace. The loss of surplus associated with domestic production is captured by triangle d. Thus, for the country the net welfare effect of the tariff is negative. Based on: World Trade Report 2009, page 60. II.D. BOUND TARIFFS VS. APPLIED TARIFFS II.D.1. BOUND TARIFFS A "bound tariff" is a tariff for which a WTO Member accepts a legal commitment not to raise it above a certain level. In the framework of the GATT/WTO, Members commit to ''bind'' their tariffs (often during negotiations), and the bound rate represents the maximum level of import duty that can be levied on a product imported into that Member. By binding a tariff, Members agree to limit their right to set tariff levels beyond a certain level which is listed in that Member's Schedule of concessions. By doing so, Members set the minimum market access conditions they can benefit from in each other's markets, and ensure the application of a transparent and predictable tariff level. Tariff 'bindings'' prevent Members from undoing the liberalization that has been achieved through negotiations and ensure transparency and predictability. The bound rates are often referred to as ''tariff concessions'' in the WTO jargon and are specific to individual products, as listed in each individual Member's Schedule of tariff concessions on goods. It is worth noting that not all non-agricultural products have a bound tariff rate. Indeed, there is no WTO obligation to bind all tariffs, and several Members retain unbound tariff lines. However, as tariff bindings are a cornerstone of the MTS there is a trend to bind all tariffs (universal binding coverage). It is worth noting, however, that -pursuant to the MFN principle- WTO Members are obliged to apply all their applied tariffs to products originating from other Members on a non-discriminatory basis, irrespective of whether the products are bound or unbound. The main WTO disciplines on tariff bindings and Schedules of concessions are laid down in Article II of the GATT 1994, which will be explained in Module 4. WTO Schedule of Concessions on Goods WTO negotiations normally produce general rules that apply to all Members and specific commitments made by individual Members. The country-specific commitments are listed in documents called Schedules of Concessions, which consist of a list of products for which specific tariff commitments (bound tariffs) and other commitments have been recorded by each Member in the context of trade negotiations. These concessions are granted on an MFN basis. The Schedules form an integral part of the binding commitments made by WTO Members and have the same legal status as any of the WTO Agreements. The WTO Schedules of concessions (including their structure) will be explained in detail in Module 4. 9

10 Once bound, a tariff rate becomes permanent and a Member can only increase its level after negotiating with its trading partners and compensating them for possible losses of trade. These so-called re-negotiations are foreseen in Article XXVIII of the GATT 1994 and will be explained in Module 4. II.D.2. APPLIED TARIFFS Although bindings represent a maximum tariff level that can be imposed on the importation of a good, in practice Members often charge a rate below that maximum level. An ''applied tariff'' is the duty that is actually charged on imports on an most-favoured nation (MFN) basis. Applied tariffs are not recorded in the WTO Schedules of concessions, but are rather specified in the national tariff schedules of the importing country. A WTO Member can have an ''applied tariff'' for a product that differs from the ''bound tariff'' for that product as long as the applied level is not higher than the bound level contained in that Member's Schedule of concessions. For example, a Member having a bound level of 30 per cent on bicycles has the liberty to impose any applied duty level it wishes, as long as this is not higher than 30 per cent. The difference between the "bound" tariff rate and the actual "applied" level is often referred to in the WTO jargon as "binding overhang" or "water". Why are Tariff Bindings important? Tariff bindings are important from a practical point of view in at least three aspects: They set an upper limit on the amount by which an applied rate can be raised, enhancing the predictability of trade for traders; Since they are enumerated in WTO Schedules of concessions which are publicly available, they enhance transparency; They establish a baseline from which future tariff negotiations will take place. II.E. TARIFF PEAKS AND TARIFF ESCALATION Notwithstanding the significant improvements in the reduction of tariffs that previous GATT Rounds, and particularly the Uruguay Round produced, tariffs continue to be an important barrier to market access for goods as "tariff peaks", high tariffs and "tariff escalation" remain. This section provides a brief introduction to these concepts, which will be explained later on when presenting the post-uruguay tariff situation for nonagricultural products (see section on Post-Uruguay and Pre-Doha). II.E.1. TARIFF PEAKS Tariff peaks are tariffs that exceed a selected reference level. Although there is no agreed definition of a tariff peak in the GATT/WTO, the Organisation for Economic Co-operation and Development (OECD) establishes a distinction between "national peaks" (where the reference level is defined in relative terms as those levels above three times the national import-weighted average rate) and "international peaks" (which are defined in 10

11 absolute terms as those tariffs at above 15 per cent and above). 1 Section IV.C. Tariff peaks are further discussed in II.E.2. TARIFF ESCALATION Tariff escalation describes the situation where the tariff rate applicable to a product increases with the level of processing, that is, tariffs are higher on semi-processed and processed/finished products than on un-processed products and raw materials. Tariff escalation is further discussed in Section IV.C below. EXERCISES: 1. Briefly explain the different types of tariffs explained in this Module, according to the way they are calculated. 2. What is the difference between a "bound tariff" and an "applied tariff"? 1 World Trade Organization (2001), Special Studies Market Access 6, page

12 III. TARIFF SCHEDULES AND THE ʹʹHARMONIZED SYSTEMʹʹ 2 III.A. TARIFF SCHEDULES When a product reaches customs in an importing country, customs authorities must know exactly what the products are in order to assess which treatment it should receive, including what tariff rate should apply. Since products vary considerably, the practice in most, if not all, countries is to "classify" them following a coding standard. National tariff schedules serve this purpose. They normally contain structured lists of products, their description, classification and coding, as well as their corresponding customs duties. The national tariff schedules of practically all countries are based on the Harmonized Commodity Description and Coding System ("Harmonized System"). III.B. THE HARMONIZED SYSTEM The ''Harmonized System'' (HS) is an international product nomenclature for the description, classification and coding of goods, which was developed and is administered by the World Customs Organization (WCO). The HS was established through the International Convention on the Harmonized Commodity Description and Coding System (hereinafter the HS Convention), which entered into force on 1 January III.B.1. WHAT IS THE HARMONIZED SYSTEM? The HS provides a common system for classifying traded goods so that countries applying it "speak the same language", facilitating trade amongst them. It provides a coding system that is based on a hierarchical structure, starting with Sections at the higher level and getting more specific at the Chapter (two digit), heading (four digit) and subheading (six digit) levels. The longer the code, the greater the specificity concerning a product. The scope of each level is dependent on the descriptions of the higher levels; that is, longer codes are always sub-sets of the higher level. The HS consists of 21 Sections, 97 Chapters, around 1200 four-digit headings and more than 5000 six-digit subheadings, which are revised periodically. They cover all commodities in international trade. The HS consists of 21 sections covering 99 chapters. These are: Section I Chapters 1-5, live animals and animal products Section II Chapters 6-14, vegetable products 2 See also: Yu, Dayong, The Harmonized System Amendments and their Impact on WTO Members Schedules, WTO Staff Working Paper ESRD

13 The HS consists of 21 sections covering 99 chapters. These are: Section III Chapter 15, animal or vegetable fats and oils Section IV Chapters 16-24, prepared foodstuffs, beverages and spirits, tobacco Section V Chapters 25-27, mineral products Section VI Chapters 28-38, chemical products Section VII Chapters 39-40, plastics and rubber Section VIII Chapters 41-43, leather and travel goods Section IX Chapters 44-46, wood, charcoal, cork Section X Chapters 47-49, wood pulp, paper and paperboard articles Section XI Chapters 50-63, textiles and textile products Section XII Chapters 64-67, footwear, umbrellas, artificial flowers Section XIII Chapters 68-70, stone, cement, ceramic, glass Section XIV Chapter 71, pearls, precious metals Section XV Chapters 72-83, base metals Section XVI Chapters 84-85, electrical machinery Section XVII Chapters 86-89, vehicles, aircraft, vessels Section XVIII Chapters 90-92, optical instruments, clocks and watches, musical instruments Section XIX Chapter 93, arms and ammunition Section XX Chapters 94-96, furniture, toys, miscellaneous manufactured articles Section XXI Chapter 97, works of art, antiques Table 1: Overview of Sections and Chapters of the Harmonized System The codes of the HS subheadings, comprised of a six-digit code, consists of three pairs of codes (normally in the form XXYY.ZZ) which provide information on its three different levels of detail. The first two digits (XX) represent the Chapter in which the goods are classified, which together with the next two digits (YY), identify 13

14 the heading within the Chapter where the goods are described. Finally, the addition of the last two digits (ZZ) represent the most detailed subdivisions of the HS. EXAMPLE OF THE HARMONIZED SYSTEM SECTION XI TEXTILES AND TEXTILE ARTICLES Chapter 62: Articles of apparel and clothing accessories, not knitted or crocheted Heading 62.07: Men's or boys' singlets and other vests, underpants, briefs nightshirts, pyjamas, bathrobes, dressing gowns and similar articles - Underpants and briefs : Of cotton Of other textile materials - Nightshirts and pyjamas : Of cotton Of man-made fibres Of other textile materials - Other : Of cotton Of man-made fibres Of other textile materials Countries, under the HS Convention, are free to introduce national distinctions beyond the six-digit level. Reasons for doing this often include charging differentiated duties, collecting more detailed statistics and other purposes. These additional ''breakouts'' are often referred to as "national tariff lines". Many countries have expanded their national tariff nomenclature beyond the HS six-digit level to eight-digit and even ten-digit tariff lines. III.B.2. THE HARMONIZED SYSTEM AND THE WTO As of February 2009, the HS was used by more than 200 countries (including 173 Contracting Parties to the HS Convention) as a basis for their customs tariffs and for the collection of international trade statistics. Over 98 per cent of the merchandise in international trade is classified in terms of the HS. The Contracting Parties to the HS Convention are not allowed to alter in any way the numerical codes and the corresponding product descriptions associated to a heading or a subheading. This is, precisely, what keeps the nomenclature ''harmonized''. 14

15 The objective of having a common nomenclature is that it provides a coded description of goods which ensures that any good will fall within the same tariff sub-heading (i.e. the same tariff classification) irrespective of the country where it is being traded, providing a common language for countries to negotiate and making it easier to establish and compare concessions. In this way, the adoption of the HS ensures greater uniformity among countries in customs classification and thus, a greater ability for countries to monitor and protect the value of tariff concessions given and gained. There was no obligation under the GATT, nor under the WTO, to use any specific "nomenclature" of classification in their WTO Schedules of concession for goods. 3 Several different nomenclatures were used by GATT Contracting Parties in the past (e.g. Brussels Tariff Nomenclature (BTN), Customs Cooperation Council Nomenclature (CCCN), nationally defined). The divergences in the nomenclatures posed several difficulties for monitoring GATT concessions and for conducting tariff negotiations. In addition, import and export data were normally kept using a nomenclature different from the tariff nomenclature. In 1983, GATT Contracting Parties decided to introduce the HS in their Schedules of concessions. The "1983 Decision on GATT Concessions under the Harmonized Commodity Description and Coding System" laid down the main procedures in connection with the introduction of the HS in national tariffs and Schedules of concessions (L/5470/Rev.1). The main principle to be observed was that existing GATT bindings should be maintained unchanged. The procedure of expressing tariff concessions -which are in a certain nomenclature into another nomenclature without changing their scope or value is called "transposition of concessions", which is equivalent to a "translation" of the existing concessions into a new nomenclature language. In this regard, simplified procedures under Article XXVIII of the GATT for the modification of tariff concessions, were envisaged for special circumstances. Most of the Schedules resulting from this transposition of concessions were annexed to Protocols (GATT Protocols 1987, 1988, ). Although not formally part of the WTO Agreements, the HS has a special relationship with them. The HS nomenclature is referred to and utilised in several WTO Agreements (both multilateral and plurilateral), for instance to define their product coverage. The Agreement on Agriculture (Annex 1) and the Agreement on Rules of Origin (Article 9:2(c)) are examples of multilateral agreements which make express reference to it; while the Agreement on Trade in Civil Aircraft and, more recently, the Information Technology Agreement (ITA), are examples of plurilateral agreements also making reference to the HS. As of January 2009, there were 118 WTO Members (counting the EC-27 country members individually) which were Contracting Parties to the HS Convention. Practically all the remaining 35 WTO Members apply the HS nomenclature de facto (i.e. in spite of not being parties to its Convention). The HS plays an important role within the multilateral trading system. Most of the WTO Members have used it to describe their concessions in their corresponding WTO Schedule of concessions. The HS has also been used as the basis for tariff negotiations in the GATT/WTO. In the Doha negotiations, the draft modalities on non-agricultural market access negotiations (NAMA) expressly provides that the new Schedules of concessions should be prepared on the basis of the HS (explained in Module 6 on NAMA Negotiations). 4 3 See L/5470/Rev.1. 4 Draft NAMA Modalities, para. 3 of the (TN/MA/W/103/Rev.3). 15

16 Why is the HS important in international trade? The HS serves several important purposes, including to: facilitate trade by providing international uniformity in the classification of goods for customs purposes; facilitate the collection, analysis and comparison of world trade statistics; provide a common international language for coding, describing and classifying goods for commercial purposes; and, provide a nomenclature that is updated over time to take account of technological developments and changes in international trade patterns. In practice, since the HS provides rules that ensure that a certain product will be classified world-wide with the same numeric code, it contributes to: simplifying the analysis of trade data; reducing costs and simplifying the customs procedures associated with importation; and, forming the basis for trade negotiations and thus, facilitating such negotiations. III.B.3. HARMONIZED SYSTEM AMENDMENTS 5 The HS is subject to periodic review by the Harmonized System Committee of the WCO. As of 2009, it has been amended four times - in 1992, 1996, 2002 and An additional amendment is envisaged for The purpose of the periodical review and amendments is to take into account of changes in technology and patterns in international trade. These amendments can be categorized into two main types depending on whether the revision will alter the product coverage of one or more related headings and subheadings. 6 i. a clarifying change, which does not relate to any change of scope of the concerned HS subheading. It may take the form of a revision of Section/Chapter notes or product description, or a correction of typographical errors, neither of which changes the scope of the corresponding HS subheading; ii. a structural change, which relates to changes of product coverage of one or more HS subheadings. This type of change includes : (i) splitting one existing subheading into two or more subheadings; or (ii) merging several existing subheadings into new one subheading; or (iii) both. However, none of these amendments should change the overall product coverage of the whole HS nomenclature. Thus, 5 For more information, please refer to: 6 Yu, Dayong, The Harmonized System Amendments and their Impact on WTO Members Schedules, WTO Economic Research and Statistics Division, Staff Working Paper ESRD

17 the removal of one product/products from one subheading would lead to the relocation of such product or products to another subheading or other subheadings. The first set of amendments in 1992 included mainly clarifying changes, while the other three have consisted mainly of structural changes which covered a wide range of products. The Table below provides an overview of the latest three HS amendments. All Contracting Parties to the HS Convention are required to implement these amendments in their national tariff nomenclatures for customs tariffs and international trade statistics. A WTO Member introducing the HS amendments at the national level also needs to introduce these into their WTO Schedules of concessions (explained in Module 4). In general terms, this is a way of ensuring that Member are able to monitor the tariff concessions and to ensure that the applied duties are not being charged in excess of the bound duties (which could be very difficult to do if the applied and bound tariffs are in different nomenclatures). HS1996 HS2002 HS2007 Number of sets of amendments around Number of structural changes / total changes - * (46%) 182 (51%) Number of correlations Major products Steel, chemicals, Papers, leather, Chemicals, woods, subject to changes woods, electronics chemicals, woods and Information Technology and machinery metals (IT) products Before After Before After Before After Total number of subheadings Affected by amendments 481(10%) 576(11%) 401(8%) 512(10%) 773(15%) 603(12%) Unaffected by amendments Table 2: Overview of Harmonized System Amendments from 1996 to 2007 * Statistics not available Source: ''Yu, Dayong, 'The Harmonized System Amendments and their Impact on WTO Members' Schedules", WTO Staff Working Paper ESRD '', page 6. 17

18 EXERCISES: 3. What is a tariff schedule? 4. What is the HS and why is it important within the MTS? 18

19 IV. GATT/WTO TARIFF NEGOTIATIONS ON NON AGRICULTURAL PRODUCTS IN BRIEF Tariff concessions are one of the most successful achievements of the multilateral trading system (MTS) since the inception of the GATT Tariff negotiations were envisaged in the GATT 1947, and now in the WTO, as a means to achieving substantial reduction of tariffs and wide coverage of bound tariff lines which, consequently, have brought enhanced and predictable conditions of market access for goods. In practice, most tariff negotiations have taken place in the context of negotiating rounds, which were launched by the GATT Contracting Parties or, more recently, by WTO Members (i.e. the Doha Development Agenda (DDA)). There were eight rounds of negotiations launched by the GATT CONTRACTING PARTIES, which were initially referred to as "tariff conferences". While the first negotiating rounds were primarily devoted to tariff reductions, the subsequent rounds also encompassed negotiations on non-tariff measures (NTMs). It was not until the Uruguay Round that agricultural products were covered in a substantive manner. After the Uruguay Round, bilateral and plurilateral negotiations on tariff concessions have continued. Tariff reductions also take place within the negotiations for accession to the GATT/WTO of new Members, as well as in the context of plurilateral negotiations aimed at eliminating tariffs on specific sectors. The most successful plurilateral negotiations, at least as far as the number of participants is concerned, were those carried out pursuant to the Information Technology Agreement (ITA). It is worth noting however, that liberalization has continued on an ongoing basis for trade in pharmaceutical products (sometimes referred to as the "Pharma"). The November 2001 Declaration of the Fourth Ministerial Conference in Doha, Qatar, launched the first round of negotiations under the WTO, named the Doha Development Agenda (DDA). The DDA provided the mandate for negotiations on a range of subjects, including the reduction or as appropriate elimination of tariffs for non-agricultural products, in the context of the NAMA negotiations explained in Module 6. Negotiations under the DDA negotiations are still ongoing. The original mandate, underlying the principles and techniques for tariff negotiations, was set out in Article XXVIIIbis of the GATT 1947 (now the GATT 1994). Article XXVIIIbis: Tariff Negotiations 1. The Contracting Parties recognize that customs duties often constitute serious obstacles to trade; thus negotiations on a reciprocal and mutually advantageous basis, directed to the substantial reduction of the general level of tariffs and other charges on imports and exports and in particular to the reduction of such high tariffs as discourage the importation even of minimum quantities, and conducted with due regard to the objectives of this Agreement and the varying needs of individual contracting parties, are of great importance to the expansion of international trade. The Contracting Parties may therefore sponsor such negotiations from time to time. 19

20 2. (a) Negotiations under this Article may be carried out on a selective product-by-product basis or by the application of such multilateral procedures as may be accepted by the Contracting Parties concerned. Such negotiations may be directed towards the reduction of duties, the binding of duties at then existing levels or undertakings that individual duties or the average duties on specified categories of products shall not exceed specified levels. The binding against increase of low duties or of duty-free treatment shall, in principle, be recognized as a concession equivalent in value to the reduction of high duties. (b) The Contracting Parties recognize that in general the success of multilateral negotiations would depend on the participation of all Contracting Parties which conduct a substantial proportion of their external trade with one another. 3. Negotiations shall be conducted on a basis which affords adequate opportunity to take into account: (a) the needs of individual Contracting Parties and individual industries; (b) the needs of less-developed countries for a more flexible use of tariff protection to assist their economic development and the special needs of these countries to maintain tariffs for revenue purposes; and (c) all other relevant circumstances, including the fiscal,* developmental, strategic and other needs of the Contracting Parties concerned. (*) See Ad note to Article XXVIIIbis Paragraph 3 Article XXVIIIbis of the GATT 1994 lays down several important aspects regarding tariff negotiations, including: the importance of tariff negotiations, that is, the common recognition among GATT Contracting Parties of the trade-restrictive effects of tariffs on international trade, in particular of those which are high and discourage the importation even of minimum quantities (paragraph 1); the mandate, which calls for multilateral tariff negotiations to take place periodically (paragraph 1); the principle of tariff negotiations, which explicitly calls for these to take place on a ''reciprocal and mutually advantageous'' basis (paragraph 1); the use of tariff negotiating techniques, which may be carried out on a selective product-byproduct basis (i.e. request-offer) or by other multilateral procedures as agreed by the Contracting Parties (paragraph 2(a)); the objective of tariff negotiations, which include the reduction of duties, the binding of duties at then existing levels or undertakings that individual duties or the average duties on specified categories of products shall not exceed specified levels (paragraph 2(a)); the recognition that multilateral trade liberalization is based on the participation of all Contracting Parties (paragraph 2(b)); the recognition that tariff negotiations should take into account the varying needs of individual contracting parties, especially developing countries which need a more flexible use of tariff protection to assist their economic development and the special needs of these countries to maintain tariffs for revenue purposes (paragraph 3). 20

21 Two things need to be noted about Article XXVIII bis. First, the Article does not aim at the complete elimination of all tariffs (free trade), but to the ''substantial reduction'' of the general level of tariffs (freer trade). Second, it refers to the "binding of duties at specified levels" resulting from negotiations, suggesting that the acceptance by Members to bind tariffs is a concession with an intrinsic value to negotiating parties. 7 IV.A. PRINCIPLES OF TARIFF NEGOTIATIONS There are, in general terms, three principles envisaged in GATT/WTO tariff negotiations: (1) reciprocity and mutual advantage; (2) the MFN treatment principle; and (3) predictability and transparency on tariff concessions (tariff bindings). Each of these principles are described below. IV.A.1. RECIPROCITY AND MUTUAL ADVANTAGE A central requirement of Article XXVIIIbis of the GATT 1994 is for tariff negotiations to be held on a reciprocal and mutually advantageous basis. This requirement is normally referred to as ''reciprocity'', although there is no precise definition of what it means nor an agreed procedure on how it should be measured. Generally, this requirement implies that negotiations for reduction of tariffs should achieve a result that is mutually beneficial to all participants. Thus, according to this principle, where a Member requests another Member to reduce its tariffs on certain products, it must also be prepared to reduce its own tariffs on products of export interest to the other Members. However, the principle of "reciprocity" does not apply in the same manner to tariff negotiations between developed and developing country Members since it has been adapted to take account of the principle of special and differential treatment (See Module 2 section on Special and Differential Treatment for Developing Countries). There are two main differences in this respect: 1. The first one involves providing non-reciprocal preferential access to developing countries (including LDCs) through arrangements under the "Enabling Clause", such as the Generalized System of Preferences (GSP) (explained in Module 2). The GSP allows developed Members to accord, on a voluntary basis, differential and more favourable treatment to developing and LDC Members, without having to accord such preferential treatment to developed Members, as an exception to the MFN principle. Thus, under the GSP, developed Members offer preferential treatment, such as zero or lower duties, to products originating in developing Members. Developing and LDC Members benefiting from such non-reciprocal preferential arrangements are not required to open their markets to the developed Members offering them more favourable market access conditions;. 2. The second aspect involves requiring from developing countries ''lesser'' liberalization than from developed countries in multilateral rounds of negotiations a principle originally referred to as "nonreciprocity" or, more recently, as "less-than-full reciprocity" (see box below). Unlike non-reciprocal preferential access, where no contribution is required from beneficiary developing countries, nonreciprocity implies some level of reciprocity. 8 7 See World Trade Report 2007, Six Decades of Multilateral Trade Cooperation: What have we learnt?, page See also World Trade Report 2007, page

22 "Non Reciprocity" or "Less-than-full reciprocity": Historical Background The need for special consideration of developing countries' needs with respect to tariffs was first formally recognized in paragraph 3 of Article XXVIIIbis of the GATT (explained above). In 1961, the Executive Secretary of GATT submitted an Explanatory Memorandum stating that Article XXVIII bis:3(b) could be interpreted to mean that the developing countries would "not always be held to strict reciprocity'' (L/1435, page 7; GATT BISD, 10/172). During the Dillon Round ( ), the Ministerial Declaration of 1961 stated that "in view of the stage of economic development of [developing countries], a more flexible attitude should be taken with respect to the degree of reciprocity to be expected from these countries" (GATT BISD, 10/26). The concept of non-reciprocity found its first formal expression in the Ministerial Declaration launching the GATT Kennedy Round ( ), which provided that "in the trade negotiations every effort shall be made to reduce barriers to exports of [developing countries], but that the developed countries cannot expect to receive reciprocity from [developing countries]" (GATT BISD, 12/48). It was further clarified, however, that the principle did require developing countries to undertake some tariff liberalisation, even if not at the same level as developed countries. In other words, that it was a question of "less-than-full reciprocity", rather than no reciprocity. The concept of non-reciprocity was later incorporated in Article XXXVI:8 of Part IV (Trade and Development) of the GATT. It provided that developed Members do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of developing Members. The Ad Note to Article XXXVI:8 states that the phrase "do not expect reciprocity" means, in accordance to the objectives set forth in this Article, that "the [developing countries] should not be expected, in course of trade negotiations, to make contributions which are inconsistent with their individual development, financial and trade needs, taking into consideration past trade developments". The concept received a great deal of attention during the GATT Tokyo Round ( ), where developing countries made proposals to define the concept. The 1979 Enabling Clause' (explained in Module 2) consolidated the concept of non-reciprocity in trade negotiations which aims at increasing commercial opportunities for developing country Members and is the WTO legal basis for the GSP (see above). On the one hand, and similar to the provision contained in Article XXXVI:8 of the GATT, paragraph 5 of the Enabling Clause states that the developed countries do not expect reciprocity for commitments made by them in trade negotiations to reduce or remove tariffs and other barriers to the trade of developing countries. On the other hand, paragraph 7 of the Enabling Clause states that the developing countries' capacity to make contributions would improve with the progressive development of their economies and the improvement in their trade situation. Accordingly, they would be expected to "participate more fully" in the negotiations. The language contained in Part IV of the GATT and the Enabling Clause was subsequently used in the Punta del Este Declaration, which launched the Uruguay Round, as well as in paragraph 16 of the Doha Ministerial Declaration, which states that "negotiations shall take fully into account the special needs and interests of developing and LDC participants, including through less than full reciprocity in reduction commitments". Based on: Hoda Anwarul (2001), Tariff Negotiations and Renegotiations under the GATT and the WTO, World Trade Organization, Geneva, pages

23 IV.A.2. THE MOST FAVOURED NATION (MFN) TREATMENT According to the MFN principle set out in Article I:1 of the GATT 1994 explained in detail in Module 2-, any tariff reduction granted by a Member to any country (Member or not Member of the WTO) must be extended to all WTO Members immediately and unconditionally. This applies to both "bound tariffs", as specified in Members' WTO Schedules of concessions, as well a to "applied tariffs" (i.e. those actually charged on imports) specified in Members' national tariff schedules. It should, however, be noted that the WTO Agreement envisages several exceptions to this principle (explained in Module 2), including: General Exceptions (Article XX of the GATT 1994); Territorial Application Frontier Traffic Customs Unions and Free-Trade Areas (Regional Integration - Article XXIV of the GATT 1994); 1979 Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (the "Enabling Clause"); Security Exceptions (Article XXI of the GATT 1994); Balance of Payment Exceptions and Temporary Application of Quantitative Restrictions in a Discriminatory Manner (Articles XII, XVIII.B, and XIV of the GATT 1994); Waivers (Article IX:3 of the Agreement Establishing the WTO). e.g. Decision on preferential tariff treatment for LDCs 9 (WT/L/304); A number of Decision and provisions on Special and Differential Treatment, eg. Decision providing duty-free quota-free access for products originating from all LDCs 10 (DFQF Decision, Annex F of the Hong Kong Ministerial Declaration). As we have presented in Module 2, the requirement of MFN treatment plays an important role in enhancing market access for goods. With respect to tariff negotiations, the MFN rule serves as an incentive for tariff concessions by avoiding concession-erosion after tariff negotiations. It also served as an incentive for joining the GATT/WTO. For developing countries and others with little bargaining power in the negotiations, the MFN principle ensures that they are able to benefit from the best trading conditions resulting from the negotiations. IV.A.3. PREDICTABILITY & TRANSPARENCY The obligation whereby WTO Members shall not apply tariffs beyond the scheduled bound levels is set out in the first sentence of paragraph 1(b) of Article II of the GATT 1994, which guarantees secure and predictable 9 This Decision granted a waiver to allow developing country Members to provide preferential tariff treatment to products of LDCs without being required to extend the same treatment to products of any other Member (explained in Module 2). 10 Among others, the DFQF Decision provides that all developed Members and developing country Members declaring themselves in a position to do so should provide duty-free and quota-free market access for all products originating from all LDCS no later than the start of the implementation period of the results of the DDA. Members facing difficulties in complying with that decision shall provide duty-free and quota-free access to at least 97% of products originating from LDCs. See also Module 6 on NAMA negotiations. 23