Tariff barriers to international trade

International tariff escalation
Virtually all of the developed countries, while permitting raw materials to enter free or at low rates of tariff, apply tariffs on processed products which as a rule are progressively higher the more highly processed is the imported product. This naturally tends to inhibit exports of processed products from developing countries, and favours the expansion of trade in raw or relatively less processed forms.

The matter of tariff barriers does not, however, end there. In the first place, as is being increasingly recognized, the nominal duty rates do not in themselves express the degree of protection accorded. That protection is expressed by what is called the effective or implicit rate of tariff, which takes account not only of the tariffs paid on the final product, but also of the value added in processing and of the duties that may be paid on materials used in the process of production. The effective tariff rate, which thus takes account of the whole tariff structure of the importing country, rises with increasing duties levied on the product of the manufacturing process and with decreasing values added. It declines with increasing duties levied on the materials used in the manufacturing process. It is negative if those duties exceed the duties levied on the product itself. It follows that the differences between the duty rates applied to imports of raw and processed products do not necessarily give a full picture of the tariff protection actually accorded to agricultural (or other) processing industries.

Further, even the level of the effective tariff rate is not a complete measure of the degree of protection it affords. Another factor is the supply and demand elasticities for the product in the exporting and importing countries. If both are high, and assuming that the change in tariff results in price changes, even a relatively small decrease in the effective tariff rate may lead to substantial increases in imports, and vice versa. Clearly these elasticities will vary not only from product to product but also from country to country, so that even identical changes in tariff structures will not always lead to the same changes in trade.

Finally, the effect of tariff changes on trade will also depend on the comparative advantage of the exporting and importing countries in producing the goods in question. The effect of tariffs is restrictive if they offset the comparative advantage of the exporting country. Conversely they are of little or no effect when levied on products for which the importing country in any case has a comparative advantage.

The last twenty years has seen a continuation of the general liberalization of tariff barriers undertaken in the context of the [General Agreement on Tariffs and Trade] (GATT). As a result of the [Tokyo Round], the cuts in tariff rates on industrial products will be around 30% by 1987. While the major cuts were concentrated on industrial items of interest to the countries taking an active part in the negotiations, the principle of unilateral concessions to the developing countries was accepted. After years of negotiation, starting from the first session of the [United Nations Conference on Trade and Development], a number of preferential schemes in favour of imports of manufactures on semi-manufactures from the developing countries was adopted by the end of 1972. The schemes have not, however, become as "generalized" as was initially hoped. Moreover, although most of the developing countries are covered by the preferential schemes, the lists of beneficiaries under the schemes are by no means uniform. For the European Economic Community the list varies according to product groups. In connection with its proposed scheme, the USA has pressed for the phasing out of the reverse preferences accorded by some developing countries.

A preliminary analysis of market access concessions in the [Uruguay Round] (1993) notes that while tariffs in developed countries will in general be brought down to 3.9 percent on average, much more remains to be done for developing countries. While benefiting from liberalization in all sectors a significant proportion of their exports incur duties exceeding 10 percent; in particular for products in sectors of export interest to them, such as non-tropical agricultural products, textile and clothing, leather and footwear. For the very poorest countries the erosion of preferential tariffs, the expected higher cost of imported technology and foodstuffs and the procedural and administrative burden of the more intensive disciplines implied by the agreements may add to their difficulties in market access.

It remains true that, even though in most cases the effective protection of agricultural processing in developed countries is not known, a reduction in the nominal tariff rate would of necessity result in a decrease in the effective protection. Given the urgent need of the developing countries to expand their exports as well as to develop their industries, the case therefore remains strong for a speedy reduction or elimination of the nominal duty rates on processed agricultural and other products imported from these countries. In the longer run, however, the greatest economic efficiency would be achieved by concentrating the effort to liberalize tariffs on products for which the demand and supply elasticities are such that the lowering or elimination of tariff protection is most likely to result in increased export earnings; and the competitive advantage lies on the side of the developing countries. With regard to the latter two points, and particularly competitive advantage, it is important to take a dynamic view, by making allowance for changes both in supply elasticities and in comparative advantage as the exporting countries develop their infrastructure and their industrial base.
(C) Cross-sectoral problems