# **2.3 Ad Valorem Import Tariffs Under Preferential Trading Arrangements**

Lower tariffs can create trade, but when a country offers lower tariffs preferentially and selectively so as to discriminate between trading partners, the result can also be a distortion of trade. Here we provide an investigation into our fourth thematic question: when setting tariffs, do countries discriminate in important ways across their trading partners?

This question is both important and difficult to answer. First, the number of preferential trading arrangements (PTAs) in existence has exploded since the early 1990s; yet, as we established in Section 2.1.4, this period also coincides with a broad decline in applied MFN tariffs for many countries. Second, the WTO (2011) has found that the share of intra-PTA trade in world trade has nearly doubled from 18 percent in 1990 to 35 percent in 2008; including intra-EU trade in these calculations leads to an increase from 28 percent in 1990 to 51 percent in 2008. Yet, in a detailed study of PTAs involving 85 countries and 90 percent of world trade in 2007 that matches bilateral imports to tariffs at the product level, the WTO (2011) also reports that only 16 percent of global trade was eligible for any preferential tariffs (30 percent if intra-EU trade is included). Put differently, this would imply that 84 percent (70 percent) of world merchandise trade was still taking place on an MFN basis. How can this seeming contradiction between the rise of PTAs, the rise of intra-PTA trade, and yet the continued importance of MFN tariffs, be reconciled?

We begin in Section 2.3.1 by defining and then introducing the different forms of PTAs that have arisen across the trading system. The many different arrangements that countries use to implement a lower tariff toward a particular trading partner - arrangements which comply with basic GATT/WTO exceptions to the MFN principle of nondiscrimination - include free trade agreements, customs unions, unilateral preference schemes, and the lesser-known partial scope agreements.<sup>33</sup> Section 2.3.2 provides more detail on the potential economic significance of tariff preferences arising under these PTAs. We begin by characterizing the scope of products for which countries can and do offer tariff preferences (given their MFN tariffs), the size of the discriminatory preference margins that are granted, and the trading partners to which they are being offered. Our productlevel bilateral tariff preference data is sufficiently rich that we can examine the bilateral tariff rates offered by 27 of our economies to the 30 trading partners in our sample.<sup>34</sup> While we document considerable variation across countries, a number of interesting patterns emerge. First, high-income countries, which generally have very low MFN tariffs, have relatively fewer products over which they can offer any preferential tariffs. These countries tend to offer

> noteworthy because this policy was designed by the WTO Agreements to be less discriminatory than other policy tools, like antidumping. In practice, the use of safeguards is a politically useful way for governments to discriminate between foreign suppliers, such as against varieties from a low-priced trading partner while minimizing the impact on a high-priced trading partner. See, for example, Turkey’s safeguards on imports of footwear described in Bown, Karacaovali and Tovar (2015).

> 33These exceptions include the original GATT 1947’s Article XXIV and the 1979 ‘Enabling Clause’ that permits non-reciprocal and non-comprehensive preferential tariff coverage for developing countries involved in PTAs.

> 34Bilateral tariff data is not available for four of the countries in our analysis. Furthermore, for tractability, we restrict the analysis to variation across 30 trading partners. This obviously misses additional variation associated with other trading partners.

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