Trade Policy Implications of a Changing World: Tariffs and Import Market Power

IMF Working Papers, January 13, 2023

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Economic theory suggests countries’ tariff commitments in trade agreements reflect their import market power at the time of negotiations.
As countries grow, market power in different sectors can change and commitments may no longer reflect current economic conditions.
Using a newly built dataset of pre-Uruguay Round applied tariffs and the theoretical framework of the terms-of-trade motive for trade agreements, the paper estimates hypothetical tariff commitments under current levels of market power and compares them with actual tariff commitments.

Dataset used: newly built dataset of pre-Uruguay Round applied tariffs.
Theoretical framework: terms-of-trade motive for trade agreements.
Comparative approach: estimate hypothetical tariff commitments under current import market power and compare to actual tariff commitments.

Lower tariff commitments that would reflect current economic conditions would amount to a reduction in annual tariff costs of up to $26.4 billion.
$26.4 billion is equivalent to nearly 10% of global tariff costs.
Product-level tariff reductions implied by updated commitments would range from 0 to 18.5 percentage points.
Average reductions are largest for China.
Substantial heterogeneity exists between countries and sectors.
Sectors with the largest potential tariff cost reductions:
- Vehicles (HS 87)
- Machinery and appliances (HS 84-85)

The findings support reviving the WTO's negotiation function to update tariff commitments, similar to how the GATT/WTO system previously adjusted commitments through periodic negotiation rounds.
Updating tariff commitments to reflect current market power could reduce annual global tariff costs substantially and address cross-country and cross-sector heterogeneity in tariff burdens.