WORLD TRADE  
ORGANIZATION  TN/MA/W/13/Add.1 
21 June 2005 
 (05-2642) 
Negotiating Group on Market Access Original:   English 
  
 
MARKET ACCESS FOR NON-AGRICULTURAL PRODUCTS 
 
A rational approach for setting base rates for unbound tariff lines  
 
Communication from Mexico 
 
Addendum  
 
  The following communication, dated 20 June 2005, is being circulated at the request of the 
Delegation of Mexico.  
_______________ 
 
1.  Introduction  
 
 As indicated in document TN/MA/W50, we think that Members should solve the issue of the base rates to be utilized for unbound lines, separatel y from and prior to the agreement on the formula 
coefficients and flexibilities. The objective of this document is to contribute to the discussion of the 
treatment of ‘ unbound lines’ .  
 
 Our perception of the discussions so far is that the preferred approach is a “Mark up” 
approach to establish base rates, to be subseque ntly reduced through the application of the general 
tariff reduction formula.     This paper further elaborates on such approach .  In doing so, it uses a flexible formula-based 
methodology to address the problem of estab lishing base rates for unbound tariffs.     
  Such formula approach ( Rational Formula ) provides an answer to the following question: 
Given that we know the initial applied tariff for a product x, how much should product x’s base rate 
be? The formula proposed here will answ er this question for all products x, and will have the 
following characteristics:  
 (i)  Base rates should be higher than the app lied tariffs to address the concerns expressed by 
Members with low applied tariffs.  
 
(ii)  The goods with the higher applied tariffs s hould end up with equal or higher base rates.  
 (iii)  The goods with the higher applied tariffs should have lower increases. This condition reflects 
the reality that high applied tariffs already have significant protection. 
  The elaboration of the Rational Formula focuses on defining the methodology to reach 
desired results through the establishment of base rates based on the applied tariffs in order to apply the 
general reduction formula.   TN/MA/W/13/Add.1 
Page 2  
 
  We worked under the principle of binding all tariff lines and making them subject to the tariff 
reduction formula, while recognizing the need to ad dress Members’ concerns regarding the treatment 
of low unbound lines.   Simplicity is also a desirable element in the context of a multilateral negotiation, and 
therefore the advantages of having a more precise a nd flexible formula approach should be weighted 
against the cost in terms of additional parameters and a more complex mathematical expression.   
2.  “The Rational” Formula  
  This formula-based approach proposes the following rational expression for the difference 
between the base rate and applied tariffs for good x:  
 
  (1) 
βα
+=−)()( )(
00 1xtxtxt  
 
Where: )(1xt : the base rate tariff for good x’s 
)(0xt : the corresponding initial applied rate 
α and β are positive constant parameters that can be specified in the course of the 
negotiation 
  This expression can also be interpreted as the “mark up” a Member requires for binding its tariff for good x.. This is a smooth function that satisfies all the properties stated before, as long as 
αβ≥1. The general shape of the function is shown in Figure 1 for a benchmark example with 
α=100 and β=10. Figures 2, 3 and 4 illustrate th e effects of changing the parameters2. By fixing the 
parameters α and β, it is possible to know the tariff increase for any level of initial applied tariff. It 
is also possible to select α and β to obtain any desired specification for the level and the slope of 
the curve. For example, increasing both parameters  will lower the mark up for the goods with low 
applied tariffs while raising it for the goods with high applied tariffs (see Figure 4)  
 
                                                      
1 When αβ< , then the tariff after binding is not always an increasing function of the applied tariff levels, 
that is, condition (ii) is not satisfied. This problem arises especially for the goods over the low end of the tariff schedules , 
and can be remedied by forcing these goods with low appl ied tariffs to have the sa me constant base rate.  
2 An increase in the parameter α has two effects (i) raising the level of compensation (or tariff increase) for every 
initial applied tariff, a nd (ii) making the curve steeper, which means even  higher compensation for the goods with relatively 
low initial applied tariffs. An increase in the parameter β  has, in general the opposite effect: reducing all levels and 
making the curve less steep. Unlike α, however, the effect of β becomes insignificant for very high applied tariffs. 
Because of this difference, an increase in both parameters tends to reduce the slope of the curve while leaving its level 
unaffected, and has the effect of making the compensations lower for goods with low applied tariffs, and higher for goods 
with high applied ta riffs (see Figure 4)    TN/MA/W/13/Add.1 
 Page 3 
 
 
  
Figure 1 
Increase in Base Rate  
as a Function of Applied Tariff 
 
 
  
 
Figure 2 
An increase in the parameter α 
 Figure 3 
An increase in the parameter β 
 
 
    
 t0 0 2 4 6 8 10 12 
0 10 20 30 40 50 60 70 80 90 ∆t0 
   
024681012
010 20 30 40 50 60 70 80 90  ∆t0
 β=10
β=20
 0 5 10 15 20 25 
0 10 20 30 40 50 60 70 80 90∆t0 
 
  
t0α =200  
α =100    
t0TN/MA/W/13/Add.1 
Page 4  
 
  
Figure 4 
An increase in α and β 
 
 
 
  
• An example: deriving a full tariff schedule under the “Rational” Formula 
 
 We will estimate equivalent base rates by ap plying the proposed rational formula.  The 
general tariff reduction formula (to be agr eed) would be subsequently applied.  
 
 In order to determine the parameters 
α and β, all we need to know is the base rates that we 
want to assign to a pair of goods. Suppose that we want a good x0 with an applied tariff of zero to 
have a base rate of 15%, and we want  all goods with applied tariffs above 60% to have a base rate that 
is close to the applied level that is 15)()(0 0 01 =− xt xt  and 5)()(1 0 11 =− xt xt , with )(0 0xt =0 and 
)(1 0xt =60. By plugging these values in equation (1), we  obtain the following system of two equations 
and two parameters:  
 
⎪⎪
⎩⎪⎪
⎨⎧
=+=−==
56060)(15 )(
110 1
βαβα
xtxt
, with a solution
⎩⎨⎧
==
30450βα
 
 
The formula that solves this problem is: 30)(450)()(
00 1+=−xtxt xt    (2) 
 
 The resulted base rates of applying this formula to an example of tariff schedule are shown in 
Figure 5 and Table 1.    0 2 4 6 8 10 12 
0 10 20 30 40 50 60 70 80 90
alpha=100, beta=10;∆t0   
t0
   
alpha=150,  beta=20  TN/MA/W/13/Add.1 
 Page 5 
 
 
 • A second example: 
  Now suppose that we want a good x
0 with an applied tariff of zero to have a base rate of 20%, 
and we want all goods with applied tariffs above 60% to have a base ra te that is close to the applied 
level that is 20)( )(0 0 0 1 =− xt xt  and 5)()(1 0 11 =− xt xt , with )(0 0xt =0 and )(1 0xt =60. By 
plugging these values in equation (1), we obtain th e following system of two equations and two 
parameters:  
 
⎪⎪
⎩⎪⎪
⎨⎧
=+=−==
56060)(20 )(
1 10 1
βαβα
xtxt
, with a solution
⎩⎨⎧
==
20400
βα
 
 
The formula that solves this problem is: 20)(400)( )(
00 1+=−xtxtxt    (3) 
 
 The resulted base rates of applying this formula to an example of tariff schedule are shown in  
Table 1.   
Figure 5 
Equivalent Base Rate  
Rational Formula  
0.020.040.060.080.0100.0
0 1 2 3 4 5 6 7 8 9 1011 1213 14 1516 17 1819 20
Good xTariff Rate %
Base rate Applied
 
 
 
 Once the base rates are obtained, the formul a for tariff reductions should be applied 
accordingly. 
     
 
   TN/MA/W/13/Add.1 
Page 6  
 
 C. Simulation 
 
 Table 1 shows the results of applying the “rationa l” approach to a given tariff structure. In the 
first and second columns, we establish a tariff schedul e over 19 products with their applied tariffs. In 
the third column of the table, we show the equivale nt base rates, computed by the rational formula.  
 
Table 1 
Applied and base rates tariffs in a hypothetical case 
Good X 
 (1) 
  Applied Tariff t0(x) 
 (2) 
 Base Rate Rational Formula t1(x) 
 (3) 
 Base Rate Rational Formula t1(x) 
 (4) 
 
1 0 15.0 20.0 
2 5 17.9 21.0 
3 10 21.3 23.3 
4 15 25.0 26.4 
5 20 29.0 30.0 
6 25 33.2 33.9 
7 30 37.5 38.0 
8 35 41.9 42.3 
9 40 46.4 46.7 
10 45 51.0 51.2 
11 50 55.6 55.7 
12 55 60.3 60.3 
13 60 65.0 65.0 
14 65 69.7 69.7 
15 70 74.5 74.4 
16 75 79.3 79.2 
17 80 84.1 84.0 
18 85 88.9 88.8 
19 90 93.8 93.6 
 
 
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