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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