In implementing a formula approach, one key practical issue is whether countries are to have discretion in the depth of cuts on individual tariff lines. Where countries have discretion, an average-cut criterion was shown to provide essentially no discipline. A seemingly similar, but in fact fundamentally different, criterion of a required reduction in the average tariff rate would potentially introduce some discipline by requiring cuts in at least some high tariffs.

Our review of potential approaches to tariff reduction covers a range of line-by-line tariff formulas. The Swiss formula approach used in the Tokyo Round is seen as particularly desirable because of its ability to introduce a tariff rate ceiling, and to bring about larger reductions in the highest tariff rates. Unfortunately, it may be too restrictive to be fully applied in its original form, particularly because of the large dispersion in the average and dispersion of countries’ tariff rates, and the presence of binding overhang in many countries.

To overcome, or at least reduce, this restrictiveness, we examined the implications of targeted and flexible Swiss formula approaches. The first is a simple adaptation of the Swiss formula that is targeted to a specific reduction in average tariffs for particular country and commodity groups (eg agricultural and non-agricultural). The second is a more flexible version of the Swiss formula that would allow the same cut in the average tariff to be achieved with somewhat smaller reductions in peak tariffs. Essentially, this increase in flexibility would allow larger cuts in smaller tariff rates to be used to compensate for smaller reductions in higher tariffs. While such a change would almost certainly reduce economic efficiency, it may ultimately be preferable to a retreat into exceptions as a way of reaching a politically-acceptable agreement. This flexible formula approach potentially allows for a Swiss family of formulas, or a Swiss-army-knife type collection of instruments, with different tradeoffs between tariff cuts on higher and lower tariff rates.

We examine the potential outcomes of applying this family of formulas in three industrial country markets—Europe, Japan and the USA—and three developing country markets—Brazil, India and Thailand. As an illustration, we target cuts in average bound tariff rates in each country, considering agricultural and industrial products separately. Preliminary analysis suggests that, in this situation, only a bold cut, such as the 50 percent target used in the Kennedy Round, would make substantial progress in increasing market access in both developing and developed countries.

In the final section of the paper, we develop two simple methodologies for evaluating the consequences of different tariff formulas. The first approach evaluates the welfare consequences for the importer of different tariff reductions. When the welfare implications of different versions of the flexible Swiss formula are considered over the range from the Swiss formula to a proportional cut, we find that the gains are very similar for different degrees of flexibility. This is illustrated with data for the USA and the European Union. The basic qualitative message is the same in both cases. Increasing flexibility appears to have only a small impact on the efficiency gains accruing from a 50 percent tariff cut. From the point of view of economic efficiency in the importing country, this result suggests that the depth of cut in the average tariff may be more important than the extent to which this reduction is brought about by reducing tariff peaks.

19