The falling value of tariff bindings

The strongest argu­ment for com­plet­ing the WTO’s bare­ly endur­ing Doha round of trade nego­ti­a­tions is that it will fur­ther nar­row the legal right of WTO mem­bers to adopt high­er pro­tec­tive trade bar­ri­ers in the future. But that argu­ment doesn’t seem to sway any­one much: cer­tain­ly not busi­ness­es who have large­ly lost inter­est in the WTO’s sideshow and per­haps not even gov­ern­ments that are show­ing lit­tle urgency about the deal (what­ev­er they say in pub­lic).

This lack of inter­est in the out­come of Doha reveals a low­er val­ue for the cur­ren­cy of mul­ti­lat­er­al trade nego­ti­a­tions: the WTO tar­iff bind­ing which rep­re­sents the “legal” ceil­ing on access bar­ri­ers to goods mar­kets. If gov­ern­ments and busi­ness are less inter­est­ed in secur­ing new guar­an­tees, the stock of exist­ing guarantees—the sched­ules of bound duties nego­ti­at­ed and paid for in pre­vi­ous mullti­lat­er­al trade rounds—is implic­it­ly less valu­able, too.

Such a deval­u­a­tion might be a gain for gov­ern­ments: it means few­er, or low­er-cost, con­straints on future trade pol­i­cy choic­es (albeit, fre­quent­ly sub-opti­mal choic­es). The biggest losers from the deval­u­a­tion of tar­iff bind­ings are trad­ing busi­ness­es that will have less assur­ance about the behav­iour of either their own or for­eign gov­ern­ments; espe­cial­ly in chal­leng­ing times, when pres­sures for pro­tec­tion are like­ly to be great­est. So is it pru­dent for busi­ness to be mere­ly bemused by the lack of WTO agree­ment? Is it even ratio­nal?

First, a quick reminder about tar­iff bind­ings. The ker­nel of the WTO con­tract among the 153 mem­ber gov­ern­ments is to be found in the 153 sched­ules of bound tar­iffs and ser­vices com­mit­ments annexed to the treaties. These bind­ings are set chiefly in nego­ti­a­tions among mem­ber gov­ern­ments. Except for the coun­tries that have joined the WTO since 1995 (agree­ing to bind their import duties in the process), the bound rates of duty have not changed much for fif­teen years; since the end of the last (“Uruguay”) round of mul­ti­lat­er­al trade nego­ti­a­tions. Each bind­ing fix­es the max­i­mum duty a gov­ern­ment may levy on any import from a WTO mem­ber coun­try; the bound duty may not be increased with­out the agree­ment of every oth­er mem­ber of the WTO and only then by com­pen­sat­ing all affect­ed mem­bers with equiv­a­lent cuts to oth­er bound duties. Of course, a gov­ern­ment may levy a low­er-than-bound rate of duty on imports at any time. Most do. This is the applied rate of duty that the Cus­toms agency actu­al­ly charges on imports.

The Doha round will con­clude (assum­ing it does) like its eight pre­de­ces­sors with a gen­er­al reduc­tion in WTO mem­bers’ indi­vid­ual duty bind­ings. Some of the bind­ing reduc­tions will be appar­ent­ly large (more than 50% cuts in agri­cul­tur­al tar­iff bind­ings in indus­tri­al coun­tries). But, because applied rates of duty are well below the bound rates in most coun­tries, large cuts in bound rates will not result in deep cuts in cur­rent lev­els of pro­tec­tion. I explained this in more detail back in Sep­tem­ber 2008.

At best, the draft Doha agree­ment now on the table will mod­est­ly shave applied mar­ket access bar­ri­ers for goods with prob­a­bly lit­tle or no change in ser­vices mar­kets (see Will Martin’s pre­sen­ta­tion to the WTO in 2010). The out­come is like­ly to mean no real change in cur­rent lev­els of either USA or EU dis­tort­ing farm sub­si­dies.

Still—the argu­ment goes—that would be an out­come worth bank­ing if it meant a valu­able assur­ance about the future. But is the assur­ance valu­able? To the extent that there is a per­ceived risk of gov­ern­ments putting up the bar­ri­ers in future, beyond the lev­els they had when last bound in 1994 at the end of the Uruguay Round, the answer must be “Yes”. But to the extent that risk is per­ceived as low the assur­ance may not be so valu­able.

The behav­iour of gov­ern­ments through the glob­al finan­cial mar­kets cri­sis and sub­se­quent reces­sion of 2008–9 seems like it should be a good test of what might hap­pen to bor­der pro­tec­tion in “chal­leng­ing” times. Giv­en that gov­ern­ments have no con­straints on for­mal bor­der pro­tec­tion at least up to the lev­el of the bound rates of duty agreed (most­ly) in 1994, do we observe them press­ing back toward that ceil­ing in 2009?

Simple average applied duties Maximum applied duties

In fact, we do not. The charts (click the thumb­nails) tak­en from World Bank data show sim­ple aver­age applied duties on goods and max­i­mum applied duties on goods in the pre-reces­sion and reces­sion peri­ods. Tar­iffs did not rebound (one year peri­ods show the same trend as the mul­ti-year peri­ods illus­trat­ed in the charts).

The biggest fac­tor in the appar­ent deval­u­a­tion of WTO bind­ings may be that, in a glob­al­ized world mar­ket, gov­ern­ments no longer turn to sim­ple bor­der bar­ri­ers when faced with severe busi­ness down­turns and high unem­ploy­ment. Of course they may turn to murki­er forms of pro­tec­tion although there’s no con­vinc­ing case that they have done much of that, either. In any case, the WTO tar­iff bind­ing won’t save any­one from the dan­gers of ris­ing murky pro­tec­tion. There’s no res­cue there for the val­ue of the old cur­ren­cy of nego­ti­a­tions.

Is it pru­dent for busi­ness to be unen­thu­si­as­tic about nego­ti­a­tions that promise tighter lim­its on tar­iff pro­tec­tion for goods? Cer­tain­ly, it is pru­dent to match the val­ue of the offer against the cost of pur­chas­ing the assur­ance, includ­ing the cost of obtain­ing infor­ma­tion about the offer. Even casu­al inspec­tion sug­gests that the val­ue is too small to war­rant any more atten­tion than busi­ness is giv­ing it. That is the key con­tem­po­rary chal­lenge for the most suc­cess­ful and adapt­able mul­ti­lat­er­al regime of the post-WWII era. At this point, it is begin­ning to seem like a sec­u­lar chal­lenge.

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