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1.9 Appendix B: Bound versus Applied Tariffs

The WTO agreement includes commitments by countries to bind their tariff rates at an agreed-upon maximum rate for each import product category. The maximum tariff in a product category is called the bound tariff rate. The bound tariff rates differ across products and across countries: some countries agree to higher maximums; others agree to lower maximums. In general, less-developed countries have higher bound tariff rates than developed countries, reflecting their perception that they need greater protection from competition against the more highly developed industries in the developed markets.

However, some countries, especially those with higher bound tariffs, decide to set their actual tariffs at lower levels than their bound rates. The actual tariff rate is called the applied tariff rate. Table 1.4 "Bound versus Applied Average Tariffs" lists the average applied tariff rates compared to average bound tariffs for a selected set of WTO member countries.The averages are calculated as a simple average: namely, the ad valorem tariff rates (bound or applied) are added together and divided by the total number of tariff categories. These are not trade-weighted average tariffs. Also, when specific tariffs are assessed for a product, they are excluded from the calculations. (Note that specific tariffs are set as a dollar charge per unit of imports.) Also listed is the percentage of six-digit tariff lines that have a tariff binding. For products that have no tariff binding, the country is free to set whatever tariff it wishes. The countries are ordered from the highest to the lowest gross domestic product (GDP) per person.

Table 1.4 Bound versus Applied Average Tariffs

Country Applied Rate (%) Bound Rate (%) % Bound
United States 3.6 3.6 100.0
Canada 3.6 5.1 99.7
EC 4.3 4.1 100.0
Japan 3.1 2.9 99.6
South Korea 11.3 16.0 94.7
Mexico 12.5 34.9 100.0
Chile 6.0 (uniform) 25.1 100.0
Argentina 11.2 32.0 100.0
Brazil 13.6 31.4 100.0
Thailand 9.1 25.7 74.7
China 9.95 10.0 100.0
Egypt 17.0 36.8 99.3
Philippines 6.3 25.6 66.8
India 15.0 49.7 73.8
Kenya 12.7 95.7 14.6
Ghana 13.1 92.5 14.3

Table 1.4 "Bound versus Applied Average Tariffs" reveals the following things worth noting:

  1. More-developed countries tend to apply lower average tariffs than less-developed countries (LDCs).
  2. Average bound tariff rates are higher for less-developed countries. This means that the WTO agreement has not forced LDCs to open their economies to the same degree as developed countries.
  3. The less developed a country, the fewer tariff categories that are bound. For the most developed economies, 100 percent of the tariff lines are bound, but for Ghana and Kenya, only 14 percent are bound. This also means that the WTO agreement has not forced LDCs to open their economies to the same degree as developed countries.
  4. For LDCs, applied tariffs are set much lower on average than the bound rates. These countries have the flexibility to raise their tariffs without violating their WTO commitments.
  5. China has lower tariffs and greater bindings than countries of similar wealth.
  6. Since the most developed economies have applied rates equal to bound rates, they cannot raise tariffs without violating their WTO commitments. WTO-sanctioned trade remedy actions can be used instead, however.

Exercise

  1. Jeopardy Questions. As in the popular television game show, you are given an answer to a question and you must respond with the question. For example, if the answer is “a tax on imports,” then the correct question is “What is a tariff?”

    1. The term for the maximum tariff rate a country agrees to assess on imports from other WTO member countries.
    2. The term for the actual tariff rate a country assesses on imports from other WTO member countries.
    3. Between developed or less developed countries, these tend to have much higher bound tariff rates.
    4. The percentage of tariff lines on which the Philippines has agreed to set maximum tariffs in the WTO.
    5. The average WTO-bound tariff rate in Ghana.
    6. One country that has agreed to much lower bound tariffs than other countries of comparable income and wealth in the WTO.