Understanding import tariffs under WTO law

Written by Gisela Grieger.

In 1947, drawing on the lessons learnt from the global economic damage caused by trade protectionism and tariff wars prior to World War II, 23 countries, including the United States, initiated the General Agreement on Tariffs and Trade (GATT) as a platform for multilateral negotiations aimed at liberalising and boosting global trade. To this end, GATT members – and since 1995 the members of the then newly created World Trade Organization (WTO) – gradually reduced their import tariffs and tariff quotas, creating a multilateral system of country-specific tariff commitments. These commitments, in conjunction with the general principles for their application, have since constrained WTO members’ ability to unilaterally set tariffs higher than what they have committed to.

Multilateral tariff negotiations under the GATT

Under Article XXVIIIbis GATT, GATT members have held rounds of multilateral reciprocity-based negotiations since 1947 to lower import tariffs and bind them at a certain level, while committing not to raise applied import tariffs beyond the set ceiling of bound tariffs. GATT members have successfully reduced their import tariffs on industrial products during the various rounds of negotiations. During the first rounds (1948-1962), tariffs fell on average by 36 %, during the Kennedy Round (1964-1967) by 37 %, during the Tokyo Round (1973-1979) by 33 %, and during the Uruguay Round (1986-1994) by 38 %. The latter round also included negotiations on agricultural goods, resulting in a ‘tariffication package’ that converted former non-tariff barriers into agricultural trade tariffs. The accession of new GATT/WTO members and plurilateral negotiations on sector-specific tariff reductions (e.g. the 1996 Information Technology Agreement and its extension in 2015) have provided further opportunities for lowering tariff barriers to trade.

The principle of setting tariff ceilings in WTO members’ individual tariff schedules

All current 166 WTO members have set tariff ceilings for imports of industrial and agricultural products under the World Customs Organization’s Harmonized Commodity Description and Coding System (HS), although not all WTO members have set tariff ceilings for all products. Pursuant to Article II GATT, these import tariff ceilings are set out in what are referred to as ‘schedules of concessions’ annexed to the revised GATT 1994, which was incorporated in the Marrakesh Agreement establishing the WTO.

WTO members have agreed to a maximum tariff (ceiling) for every traded product. These maximum tariffs are known as ‘bound tariffs‘. A product’s bound tariff can be lowered, but it cannot be raised beyond the set ceiling. Raising import tariffs unilaterally is thus a violation of WTO law. The idea behind this principle is that tariff ceilings are locked in to prevent WTO members from raising them in the future, thus sustaining a trend of a gradual lowering of import tariffs. If a WTO member wishes to raise a bound tariff beyond its ceiling, multilateral re-negotiations under Article XXVIII GATT are required to re-balance the past trade concessions made under the reciprocity principle. Developing countries, however, have the flexibility under Article XVIII GATT to raise maximum tariffs in order to boost their economic development.

WTO members typically set their import tariffs below their maximum ‘bound tariff’. When a WTO member lowers its tariffs from the set ceiling, these tariffs are referred to as ‘applied tariffs‘. Applied tariffs typically align with the most favoured nation (MFN) tariffs, unless there are exceptions under Article XXIV GATT (see below).

The most-favoured nation principle applied to WTO members’ tariff concessions

Article I GATT contains the most important horizontal GATT discipline for the use of tariffs by WTO members, designed to ensure the non-discriminatory application of tariffs: the most favoured nation (MFN) principle. This principle compels WTO members to apply the import tariffs they committed to under the GATT on an erga omnes basis, i.e. they must grant them to all WTO members equally. Within the GATT, there are therefore two types of tariffs: bound tariffs and applied MFN tariffs. A bound tariff represents the maximum MFN tariff level for a given product. Exceptions allow WTO members to grant tariffs lower than the MFN tariff. Given the significant differences in import tariff levels across WTO members, multilateral tariff reduction rounds have not led to harmonised tariff levels, with (former) developing countries enjoying considerable policy space between applied and bound tariffs (see Table 1).

Table 1 – Selected WTO members’ simple average bound and MFN applied tariffs by category of goods in 2022 (in %)

Source: World Tariff Profiles 2023.

Exceptions from the application of MFN tariffs

WTO members can grant tariffs that are lower than MFN tariffs in the following two cases:

1. If, pursuant to Article XXIV GATT, WTO members create a customs union (as in the case of the EU) or enter into a free trade agreement (as in the case of Canada, Mexico and the United States (US) under the US-Mexico-Canada Agreement, the USMCA) and if this new agreement covers ‘substantially all the trade’. When in 2016 the EU and South Africa concluded an economic partnership agreement,’substantially all trade’was interpreted to mean an average of 90 % of the total value of trade among the parties. The resulting tariffs cannot be raised unilaterally, unless exceptions are applicable such as those allowing for the adoption of trade remedies (see below).

2. Under the GATT’s enabling clause, WTO members may offer developing countries non-reciprocal trade agreements that unilaterally lower tariff rates in exchange for certain non-tariff commitments. One example are the unilateral tariff concessions in the form of the Generalised Scheme of Preferences (GSP).

Exceptions from the prohibition to raise tariffs beyond bound tariffs

Article VI GATT provides for an exception from the prohibition of raising tariffs beyond a WTO member’s bound tariffs in respect of the application of trade remedies (anti-dumping and countervailing measures) that entail the suspension of concessions or obligations in response to another WTO member’s breach of WTO law. Article XIX GATT and the provisions of the Agreement on Safeguards also allow for a similar exception for the application of safeguards.

Another exception under Article XXI GATT is related to a WTO member’s essential security interests. For decades, WTO members had not made use of this exception. However, in 2018 disputes arose between the US and nine WTO members, after the US imposed universal aluminium and steel tariffs under Section 232 of the 1962 Trade Expansion Act and invoked the exception as a justification. The disputes involved Canada (DS550, mutual agreement), China (DS544, appealed by the US), the EU (DS548, arbitration suspended), India (DS547, mutual agreement), Mexico (DS551, mutual agreement), Norway (DS552, appealed by the US), Russia (DS554, panel lapsed), Switzerland (DS556, appealed by the US), and Turkey (DS564, appealed by the US). As the WTO Appellate Body is paralysed, the appeals remain in limbo and the winning party cannot enforce the panel report’s result. The panel in the dispute with China found that the US justification did not meet the requirements of Article XXI GATT (‘taken in time of war or other emergency in international relations’) and that the US acted inconsistently with WTO law. In a statement of 9 December 2022, the US insisted that it ‘will not cede decision-making over its essential security to WTO panels’.

Read this ‘at a glance’ note on ‘Understanding import tariffs under WTO law‘ in the Think Tank pages of the European Parliament.