rates. Our objective in this paper is to provide a framework for evaluating the trade offs between approaches such as the Swiss formula that are sharply tops-down, and approaches such as the proportional cuts approach that are less targeted to reducing peak tariffs.

The potential benefits from use of a formula approach are large. If a suitable topsdown formula can be identified and implemented, we can be relatively sure that it will lead to a global welfare gain, since the social costs of tariffs generally rise more rapidly than the rates themselves<sup>1</sup> By contrast, approaches that focus on reducing relatively low, “nuisance” tariffs face the risk of reducing economic welfare and tariff revenues by diverting imports away from higher-tariff items (see Martin 1997).

An important message from analysis of actual tariff data appears to be that the critical feature of a formula approach for welfare in the importing countries is not so much the flexibility of the formula (i.e. its willingness to go soft on peak tariffs) but rather the specification of a targeted reduction in the average rate. In other words, as long as a reduction in the average is still met, introducing some added flexibility by moving closer to proportional tariff cuts may not greatly reduce the importing country’s gains from a tops-down approach. However, moving away from a strict tops-down approach in the industrial countries does seem to reduce the market access gains for low-income countries in industrial country markets.

This paper is organized as follows. In Section 2, we first provide some detail on the current market access landscape. This highlights important issues related to tariff peaks, unbound tariffs, and gaps between bound and applied rates that will be important determinants of success for any formula approach. In Section 3, we then consider some formula-based approaches. In Section 4, we set out the concept of “flexible formula” approaches. In Section 5, we consider some practical implementation issues. For illustration, and to assess the quantitative implications of alternative formulas, we examine an initial sample of 3 industrial countries and 3 developing countries in Section 6. In Section 7, we consider the tradeoffs between increasing flexibility and two dimensions of the cost of doing so—the reductions in efficiency in the importing country, and reductions in the cuts in average tariffs facing developing countries.

# **2.**

# **A QUICK TOUR OF THE MARKET ACCESS LANDSCAPE**

Tariff negotiations in the multilateral trading system have generally been based on tariff bindings, or schedules of concessions tabled under GATT rules, and the coverage and level of these bindings is an important element of the initial conditions for negotiation. Table 1 provides information on the share of industrial-product tariffs (on a trade-weighted basis) that remains either unbound or bound above applied rates. While tariffs in the OECD (and Latin America) are generally bound, many Asian and African economy tariffs remain unbound despite more than a four-fold increase in the coverage of developing-country tariff bindings in the Uruguay Round (Abreu 1996). For almost all developing countries, existing bindings are, on average, well above applied rates, reflecting a combination of relatively high initial bindings, and the

> 1 See Vousden 1990, p233. López and Panagariya (1992) point out that the presence of non-produced intermediates weakens this general proposition.

2