which it retains very high tariffs.

We conclude this section with a brief discussion of our first broad finding, which is that there can be surprisingly large differences across countries in the average level of tariffs. Overall, both applied tariffs and tariff binding levels are negatively correlated with GDP per capita.

A first important research question is thus why tariffs are so much higher for lower income countries in particular. One long-standing explanation for why developing countries set higher tariffs is that collecting government revenue at the border may be more efficient administratively than other forms of taxation. For example, Keen (2008) reports import tariffs account for 20 percent or more of tax revenues in many developing countries, and Baunsgaard and Keen (2010) find that low-income countries undergoing trade reforms have been only partly successful (20-25 percent) at recovering lost tariff revenue by switching to other sources of taxation.<sup>13</sup> Country-level differences are likely explained not only by fiscal concerns, but also by the transparency of the country’s government, its form of governance, and its responsiveness to public welfare (Gawande, Krishna and Olarreaga, 2009; Mitra, Thomakos, and Ulubasoglu, 2002).

A second important research question involves the potential implications of lower-income country decisions to retain sizeable differences between binding and applied tariff rates. A nascent research literature suggests that such differences may affect a country’s ability to reduce the sort of trade policy uncertainty that leads to inefficient levels of firm investment, output, and exporting (Handley and Lim ̃ao 2014, 2015; Handley 2014; Crowley, Song and Meng, 2016).

# **2.1.2 MFN applied tariffs across sectors**

The second main question of our chapter asks if tariffs are set at different rates across sectors within countries. Here we begin by inquiring whether there are some sectors that uniformly receive more import protection than others, and if there are patterns to this variation across countries.

Figure 2 provides detail on the average applied MFN rates and legal bindings by industry for three groups of policy-imposing countries - the G20 high-income, the G20 emerging, and the other developing countries as classified in Table 1. We break up the universe of imported goods in the Harmonized System into sixteen different sectors.<sup>14</sup> The figure illustrates a number of relatively clear patterns to the cross-sectoral variation in applied tariff levels. First, high-income countries have lower average applied MFN tariffs than emerging economies and other developing countries almost universally across sectors; sector-bysector, higher-income economies have lower tariffs than emerging economies which, in turn, have lower tariffs than poorer developing countries. Second, across country groupings, the average applied MFN tariffs are also typically higher in sectors such as agriculture (animals, vegetables, and

> 13As a point of comparison, consider the importance of customs revenue in total fiscal revenue in the United States before the ratification of the 16th Amendment in 1913 which made constitutional the US federal income tax. Data from International Historical Statistics (Palgrave MacMillan, 2013) reports that customs revenue made up an average of 47 percent of total federal tax revenue collections during the decade of 1900-1909. On the other hand, after both the income tax and the beginnings of the GATT tariff liberalization, customs revenue made up an average of less than 1 percent of US total federal tax revenue collections during the decade of 1950-1959.

> 14Industry classification is given in Table Appendix B.

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