However, rapid growth in the value of exports does not necessarily indicatethat trade is becoming more important. Instead, one needs to look at theshare of traded goods in relation to the size of the world economy. Theadjoining figure shows world exports as a percentage of world GDP for theyears 1970 to 2005. It shows a steady increase in trade as a share of the sizeof the world economy. World exports grew from just over 10% of GDP in1970 to almost 30% by 2005. Thus, trade is not only rising rapidly inabsolute terms, it is becoming relatively more important too.One other indicator of world interconnectedness can be seen in changes inthe amount of foreign direct investment (FDI). FDI is foreign ownership ofproductive activities and thus is another way in which foreign economicinfluence can affect a country. The adjoining figure shows the stock, or thesum total value, of FDI around the world taken as a percentage of worldGDP between 1980 and 2004. It gives an indication of the importance offoreign ownership and influence around the world. As can be seen, theshare of FDI has grown dramatically from around 5% of world GDP in1980 to over 20% of GDP just 25 years later.
The growth of international trade and investment has been stimulatedpartly by the steady decline of trade barriers since the Great Depression ofthe 1930s. In the post World War II era the General Agreement on Tariffsand Trade, or GATT, was an agreement that prompted regular negotiationsamong a growing body of members to reduce tariffs (import taxes) onimported goods on a reciprocal basis. During each of these regularnegotiations, (eight of these rounds were completed between 1948 and1994), countries promised to reduce their tariffs on imports in exchange forconcessions, or tariffs reductions, by other GATT members. When themost recent completed round was finished in 1994, the member countriessucceeded in extending the agreement to include liberalization promises ina much larger sphere of influence. Now countries would not only lowertariffs on goods trade, but would begin to liberalize agriculture and servicesmarket. They would eliminate the many quota systems - like the multi-fiberagreement in clothing - that had sprouted up in previous decades. And theywould agree to adhere to certain minimum standards to protect intellectualproperty rights such as patents, trademarks and copyrights. The WTO wascreated to manage this system of new agreements, to provide a forum forregular discussion of trade matters and to implement a well-defined processfor settling trade disputes that might arise among countries.As of 2006, 149 countries were members of the WTO "trade liberalizationclub" and many more countries were still negotiating entry. As the clubgrows to include more members, and if the latest round of tradeliberalization discussion called the Doha round concludes with anagreement, world markets will become increasingly open to trade andinvestment. [Note: the Doha round of discussions was begun in 2001 andremains uncompleted as of 2006]Another international push for trade liberalization has come in the form ofregional free trade agreements. Over 200 regional trade agreements aroundthe world have been notified, or announced, to the WTO. Many countries
Special Tariff Classifications in the US A, A*, A+ Generalized System of Preferences (GSP) (More info: page 11) B Automotive Products Trade Act (More info: page 21) CA, MX North American FTA (NAFTA) Canada and Mexico (More info: page 31) D African Growth and Opportunity Act (More info: page 170) E Carribean Basin Economic Recovery Act (More info: page 23) IL US-Israel FTA (More info: page 26) J, J*, J+ Andean Trade Preference Act (More info: page 29) R US-Carribean Trade Partnership Act (More info: page 171) JO US-Jordan FTA (More info: page 172) SG US-Singapore FTA (More info: page 176) CL US-Chile FTA (More info: page 267)The products presented below were selected to demonstrate several noteworthy featuresof US trade policy. The WTO reports in the 2004 US Trade Policy Review that mostgoods enter the US either duty free or with very low tariffs. Coffee and FAX machinesare two goods, shown below, representative of the many goods that enter duty free. Theaverage MFN tariff in the US in 2002 was about 5% although for agricultural goods therate was almost twice as high. About 7% of US tariffs exceed 15%, these mostly onsensitive products such as peanuts, dairy, footwear, textiles and clothing. The trade-weighted average tariff in the US was only about 1.5% in 2003.One interesting feature of the tariff schedule is the degree of specificity of the products inthe HTS schedule. Besides product type, categories are divided according to weight, sizeor the time of year. Note especially the description of ceramic tableware and bicycles.Tariffs vary according to time of entry, as with cauliflower, grapefruit and grapes. Thisreflects the harvest season for those product in the US. When the tariff is low, thatproduct is out of season in the US. Higher tariffs are in place when US output in theproduct rises.Notice the tariffs on cauliflower and broccoli. They are lower if the vegetables areunprocessed. If the product is cut or sliced before arriving in the US, the tariff rises to14%. This reflects a case of tariff escalation. Tariff escalation means charging a highertariff the greater the degree of processing for a product. This is a common practiceamong many developed countries and serves to protect domestic processing industries.Developing countries complain that these practices impede their development bypreventing them from competing in more advanced industries. Consequently, tariffescalation is a common topic of discussion during trade liberalization talks.
Tariffs rates also vary with different components of the same product, as with watches.Note also that watches have both specific tariffs and ad valorem tariffs applied.Notice that tariffs on cars in the US is 2.5%, but the tariff on truck imports is 10 timesthat rate at 25%. The truck tariff dates back to 1963 and is sometimes referred to as the"chicken tax." It was implemented, primarily to affect Volkswagon, in retaliation forWest Germanys high tariff on chicken imports from the US. Today, Canada and Mexicoare exempt from the tariff due to NAFTA and Australia will also be exempt with the newUS-Australia FTA. The truck tax is set to be a contentious issue in current US-ThailandFTA discussions.The tariff rates themselves are typically set to several significant digits. One has towonder why the US charges 4.4% on golf clubs rather than an even 4 or 5%. Muchworse is the tariff rate on cane sugar with six significant digits.The special tariff rates are often labeled "Free," meaning thise goods enter duty-free fromthat group of countries. Note that Chile and Singapore sometimes have tariff rates inbetween the MFN rate and zero. This reflects the phase in process of the free trade area.Most FTAs include a 5-15 year phase in period during which time tariffs are reducedannually towards zero. Selected Tariffs in the US 2004 HTS Code Description MFN/NTR Special Tariff Tariff 0704.10.20 Cauliflower, Broccoli 2.5% (June 5- Free (A,CA, Oct 25) CL,E, IL,J,JO, MX,SG) 0704.10.40 10% (Other, not reduced in Free (A,CA, size) CL,E, IL,J,JO, MX) 0704.10.60 7.5% (SG) 14% (Cut or sliced) Free (A,CA, CL,E, IL,J,JO, MX) 12.2% (SG) Non-MFN: 50%
0805.40.40 Grapefruit 1.9¢/kg (Aug- Free (CA,D,E, Sep) IL, J,JO,MX, SG) 1.6¢/kg (CL)0805.40.60 1.5¢/kg (Oct) Free (CA,D,E, IL, J,JO,MX, SG)0805.40.80 2.5¢/kg (Nov- 1.1¢/kg (CL) Jul) Free (CA,D,E, IL, J,JO,MX) 2.2¢/kg (CL, SG) Non-MFN: 3.3¢/kg0806.10.20 Grapes, fresh $1.13/m3 (Feb Free (A+,CA, 15-Mar 31) CL,D,E, IL,J,0806.10.40 JO,MX,SG) Free (Apr 1-0806.10.60 Jun 30) Non-MFN: $8.83/m3 $1.80/m3 (any other time)6912.00.45 Ceramic tableware; plates not 4.5% Free (A+,CA, over 22.9 cm in maximum CL,D,E, J,JO, diameter and valued over $6 MX,SG) per dozen; plates over 22.9 but not over 27.9 cm in maximum diameter and valued over $8.50 per dozen Non-MFN: 55%7116.10.25 Cultured Pearls 5.5% Free (A,CA, CL,L,J, JO, MX) 4.1% (SG) Non-MFN: 110%
8703.2x.00 Motor cars, principally 2.5% Free (A+,B, designed for the transport of CA,CL,D, E, persons, of all cylinder IL,J,JO,MX, capacities SG) Non-MFN: 10%8704.22.50 Motor vehicles for the 25% Free (A+,B, transport of goods (i.e., trucks), CA,CL,D, E, gross vehicle weight exceeding IL,J,MX) 5 metric tons but less than 20 metric tons 15% (JO) 22.5% (SG) Non-MFN: 25%8712.00.15 Bicycles having both wheels 11% Free (A+,CA, not exceeding 63.5 cm in CL,D,E, IL,J, diameter MX) 2.2% (JO) 9.6% (SG) Non-MFN: 30%1701.11.05 Cane sugar: 1.4606¢/kg Free (A*,CA, less .020668¢/ CL,E*,IL, J,JO, kg for each MX,SG) degree under 100 degrees Non-MFN: but not less 4.3817¢/kg than .943854¢/ less .0622005¢/ kg kg for each degree under 100 degrees but not less than 2.831562¢/kg
6404.11.20 Sports footwear; tennis shoes, 10.5% Free (CA,CL, basket-ball shoes, gym shoes, D,IL,J+, MX, training shoes and the like: R) Having uppers of which over 50% of the external surface 2.1% (JO) area is leather. 9.1% (SG) Non-MFN: 35% 9506.31.00 Golf clubs 4.4% Free (A,CA, CL,E,IL, J,JO, MX,SG) Non-MFN: 30% 9101.11.40 Wristwatches 51¢ each + 38.2¢ each + 6.25% on case 4.6% on case and strap + and strap + 5.3% on 3.9% on battery battery (CL, SG) Free (CA,D,E, IL,J, J+,JO, MX,R 8517.21.00 Fax machines Free Non-MFN: 35% 0901.21.00 Coffee, non-decaffeinated Free Non-MFN: Free 0902.10.10 Tea, green tea, flavored 6.4% Free (A,CA, CL,E,IL, J,JO, MX) 4.8% (SG) Non-MFN: 20%One thing to think about while reviewing this tariff schedule is the administrative cost ofmonitoring and taxing imported goods. Not only does the customs service incur costs to
Mexico (1997) 13.2% Overall 4.2% With US Chile (1997) 11.0% El Salvador (1995) 10.1% Cyprus (1996) 16.4% Overall 7.2% with EU 37.6% Agriculture Morocco (1995) 23.5% Benin (1997) 13.0% Zambia (1996) 13.6% Malaysia (1997) 8.1% Thailand (1994) 30.0%Problems Using Average Tariffs as a Measure of ProtectionThe first problem with using average tariffs as a measure of protection in a country isthat there are several different ways to calculate an average tariff rate and each methodcan give a very different impression about the level of protection.Most of the tariffs above are calculated as a simple average. To calculate this rate, onesimply adds up all of the tariff rates and divides by the number of import categories. Oneproblem with this method arises if a country has most of its trade in a few categories withzero tariffs, but has high tariffs in many import categories in which it would never findadvantageous to import. In this case the average tariff may overstate the degree ofprotection in the economy.This problem can be avoided, to a certain extent, if one calculates the trade-weightedaverage tariff. This measure weights each tariff by the share of total imports in thatimport category. Thus, if a country has most of its imports in a category with very lowtariffs, but has many import categories with high tariffs but virtually no imports, then thetrade-weighted average tariff would indicate a low level of protection. The standard wayof calculating this tariff rate is to divide total tariff revenue by the total value of imports.Since this data is regularly reported by many countries this is a common way to reportaverage tariffs.However, the trade-weighted average tariff is not without flaws. As an example, supposea country has relatively little trade because it has prohibitive tariffs (i.e. tariffs set so high
as to eliminate imports) in many import categories. If it has some trade in a few importcategories with relatively low tariffs, then the trade-weighted average tariff would berelatively low. After all, there would be no tariff revenue in the categories withprohibitive tariffs. In this case, a low average tariff could be reported for a highlyprotectionist country. Note also that, in this case, the simple average tariff would registera higher average tariff and might be a better indicator of the level of protection in theeconomy.Of course the best way to overstate the degree of protection is to use the average tariffrate on dutiable imports. This alternative measure, which is sometimes reported, onlyconsiders categories in which a tariff is actually levied and ignores all categories inwhich the tariff is set to zero. Since many countries today have many categories of goodswith zero tariffs applied, this measure would give a higher estimate of average tariffsthan most of the other measures.(1)The second major problem with using average tariff rates to measure the degree ofprotection is that tariffs are not the only trade policy used by countries. Countries alsoimplement quotas, import licenses, voluntary export restraints, export taxes, exportsubsidies, government procurement policies, domestic content rules, and much more. Inaddition, there are a variety of domestic regulations which, for large economies at least,can and do have an impact on trade flows. None of these regulations, restrictions orimpediments to trade, affecting both imports and exports, would be captured using any ofthe average tariff measures. Nevertheless these non-tariff barriers can have a muchgreater effect upon trade flows than tariffs themselves.The Ideal Measure of ProtectionismIdeally, what we would like to measure is the degree to which a governments policies(both domestic and trade policies) affect the flow of goods and services (on both theimport and export side) between itself and the rest of the world. Thus, we might imaginean index of protectionism (IP) defined as follows:Where the numerator represents the sum of all exports and imports across all N tradecategories given the current set of trade policies, and the denominator represents thesum of all exports and imports that would obtain if the government employed a set ofdomestic policies that had no impact on trade of goods and services with the rest of theworld. If IP = 1, it would indicate that current government policies are completely non-restrictive and the economy could be characterized as being in a pure state of "freetrade." If IP = 0, then government policies would be so restrictive as to force theeconomy into a state of isolation or autarky.If we could calculate and compare the index across many countries, then we could saythat countries with a smaller value were more protectionist than countries with a higher