Tariff and Protectionism:

Key Practices

Lecture 2
Tariff and International Business:
Some Issues and Observations
1. In which regions tariff continue to pose a problem?

Source: WTO
 2. Average Applied Tariff Rates: Sector-Country
Product Categories Bangladesh China Japan India US
Animal products 19.3 14.1 10.6 31.1 2.2
Dairy products 23.5 12.3 63.4 33.5 18.3
Fruits, vegetables, plants 20.3 14.7 9.4 29.4 4.8
Coffee, tea 21.3 14.9 14.4 56.3 3.2
Cereals and preparations 14.1 23.0 33.5 31.3 3.1
Oilseed, fat and oils 9.6 10.9 6.0 34.0 7.4
Sugar and confectionary 20.3 28.7 23.0 35.9 15.7
Beverages and tobacco 25.0 23.7 15.1 69.5 18.6
Cotton 3.5 22.0 0.0 6.0 4.8
Other Agricultural Products 11.7 11.9 3.1 22.3 1.1
Fish and fish products 23.9 10.8 5.6 29.9 0.7
Minerals 12.8 7.8 1.0 8.5 1.7
Pereoleum 15.7 5.3 0.7 4.2 1.8
Chemicals 9.9 6.6 2.3 8.1 2.8
Wood, paper 15.3 4.1 0.9 8.9 0.5
Textiles 19.4 9.6 5.4 11.9 7.9
Clothing 24.4 16.0 9.0 15.1 11.6
Leather, footwear 14.7 13.3 7.7 10.1 3.9
Non-Electrical machinery 3.9 8.1 0.0 7.2 1.2
Electrical machinery 12.9 8.6 0.1 7.3 1.5
Transport equipment 11.5 12.3 0.0 24.9 2.9

Source: World Tariff Profiles 2018

 Average Applied Tariff Rates: Sector-Country
Product Categories Bangladesh China EU India US
Animal products 19.3 13.2 15.6 30.8 2.3
Dairy products 24.0 12.3 37.1 35.7 18.4
Fruits, vegetables, plants 21.2 12.2 10.6 30.2 4.6
Coffee, tea 22.5 12.3 5.9 56.3 3.2
Cereals and preparations 16.0 19.5 13.7 32.9 3.1
Oilseed, fat and oils 10.3 10.9 5.3 33.9 7.2
Sugar and confectionary 19.7 28.7 24.5 50.9 13.8
Beverages and tobacco 25.0 18.2 19.1 75.8 17.9
Cotton 3.5 22.0 0.0 6.0 3.7
Fish and fish products 23.7 7.2 11.6 29.9 0.7
Chemicals 9.7 6.2 4.5 8.1 2.8
Wood, paper 15.2 3.2 0.9 10.2 0.5
Textiles 19.5 7.0 6.5 13.9 7.9
Clothing 24.4 6.8 11.5 21.5 11.6
Leather, footwear 14.3 10.6 4.1 13.7 3.9
Non-Electrical machinery 4.0 6.8 1.8 7.8 1.2
Electrical machinery 13.6 5.6 2.2 9.3 1.4
Transport equipments 11.9 9.6 4.7 25.3 2.9

Source: World Tariff Profiles (2021)

 Average Applied Tariff Rates: India
Product Categories India (2006) India (2015) India (2020) India (2021)
Animal products 33.0 31.1 32.5 30.8
Dairy products 35.0 33.5 35.7 35.7
Fruits, vegetables, plants 31.5 29.4 33.2 30.2
Coffee, tea 56.3 56.3 56.3 56.3
Cereals and preparations 37.3 31.3 37.1 32.9
Oilseed, fat and oils 52.5 35.1 52.0 33.9
Sugar and confectionary 48.4 35.9 51.5 50.9
Beverages and tobacco 68.9 68.6 74.7 75.8
Cotton 17.0 6.0 26.0 6.0
Fish and fish products 30.0 29.9 30.0 29.9
Chemicals 15.0 7.9 10.2 8.1
Wood, paper 13.5 9.0 10.0 10.2
Textiles 20.2 11.8 22.3 13.9
Clothing 22.4 12.3 23.9 21.5
Leather, footwear 15.4 10.1 13.1 13.7
Non-Electrical machinery 14.3 7.1 8.1 7.8
Electrical machinery 12.3 7.2 9.1 9.3
Transport equipments 24.8 19.4 31.2 25.3

Source: World Tariff Profiles (various years)

3A. Non-Ad Valorem Tariff in the US: Specific and Compound
HS Code Description Tariff Rate

290545 Glycerol [0.5 cents/kg]

350211 Egg albumin, dried "e.g. in sheets, scales, flakes, powder" [47.6 cents/kg]

420232 Wallets, purses, key-pouches, cigarette-cases, tobacco- [12.1 cents/kg +

pouches and similar articles carried in the pocket or handbag, 4.6%]
with outer surface of plastic sheeting or
520300 Cotton, carded or combed [31.4 cents/kg]

540753 Woven fabrics of yarn containing >= 85% by weight of [18.8 cents/kg
textured polyester filaments, incl. monofilament of >= 67 + 17.4%]
decitex and a maximum diameter of <= 1 mm
610190 Overcoats, car coats, capes, cloaks, anoraks, incl. ski jackets, [61.7 cents/kg
windcheaters, wind-jackets and similar articles of textile + 16%]
materials, for men or boys, knitted or
620990 Babies'' garments and clothing accessories of textile [31.8 cents/kg
materials (excl. of cotton or synthetic fibres, knitted or + 14.4%]
crocheted and hats)
650400 Hats and other headgear, plaited or made by assembling strips [94 cents/doz.
of any material, whether or not lined or trimmed (excl. + 4.6%]
headgear for animals, and toy and carnival

Source: US Tariff Schedule (WTO)

 High Value-Added Product: What Policy?
• 100% Cotton Shirt
• 500 gm
• Import Price Rs. 1500/-
• Domestic Price – Rs. 1550/-

• SD – Rs. 5/kg – Rs. 2.5/- - Rs. 1502.5/-

• AVD – 10% - Rs. 150/- Rs. 1650/-
• CD - Rs. 5/kg + 10% - Rs. 2.5/- and Rs. 150/- Rs. 1652.5/-

High Value Product: CD > AVD > SD

 Low Value-Added Product: What Policy?
• Palm oil (10 Rs./Lt)
• 300 litre
• Price Rs. 3000/-
• Domestic Price – Rs. 12/- / Lt

• SD – Rs. 5/lt – Rs. 1500/- - Rs. 4500/-

• AVD – 10% - Rs. 300/- - Rs. 3300/-
• CD - Rs. 5/kg + 10% - Rs. 1800/- - Rs. 4800/-

Low Value Product: CD > SD > AVD

How to Interpret the Protection
Orientation of Countries?
3B. Non-Ad Valorem Tariff in India: Basis of Selection
 Hypothetical Example: Indian Overcoat Sector
• India Overcoat Domestic Price: Rs. 10500 /p

• Import Price from US: Rs. 10000 /p

• SD: Landed Price of Imported Overcoat: Rs. 10540/-
• AVD: Landed Price of Imported Overcoat: Rs. 11000/-
• CD: Landed Price of Imported Overcoat: Rs. 11540/-

• Import Price from Thailand: Rs. 6000 /p

• SD: Landed Price of Imported Overcoat: Rs. 6540/-
• AVD: Landed Price of Imported Overcoat: Rs. 6600/-
• CD: Landed Price of Imported Overcoat: Rs. 7140/-

• Import Price from China: Rs. 4000 /p

• SD: Landed Price of Imported Overcoat: Rs. 4540/-
• AVD: Landed Price of Imported Overcoat: Rs. 4400/-
• CD: ?
• Indian Customs Tariff:
https://www.cbic.gov.in/resources//htdocs-
cbec/customs/cst2022-010122/chap-1-98.pdf.
• Why this type of Tariff formulation?
Tariff Policy: Possible Drivers?
Challenges from National Policies: China

Source: https://isdp.eu/content/uploads/2018/06/Made-in-China-Backgrounder.pdf
Manipulation of Tariff Policy to
Gain Advantage?
 4A. Effective Rate of Protection
• Nominal tariff rate: based on tariff applied to value of finished
product
• Effective tariff rate: based on tariff applied to finished product and
imported inputs – shows the total increase in domestic productive
activities (value added) that an existing tariff structure makes
possible
• ERP = (n – ab) / (1 - a), where
• n = nominal tariff rate on final product,
• a = ratio of imported input to total value of the product,
• b = nominal tariff rate on imported input.
• Example: A country imposes a 10 % tariff on a product costing $ 100. $ 80 is the value
of imported input for that purpose. Initially the inputs enters the country duty free.
Now suppose tariff changes. Then ERP becomes:
Tariff on b Tariff on Final Share of inputs in ERP
imported Product = 10 final product (a) –
Inputs (%) percent (n) 80 Percent

0.0 0 0.1 0.8 50

2.0 0.02 0.1 0.8 42
4.0 0.04 0.1 0.8 34
5.0 0.05 0.1 0.8 30
7.5 0.075 0.1 0.8 20
10.0 0.1 0.1 0.8 10
Tariff Escalation

Garments – 10%

Fabric – 5%

What is the policy benefit?

Fibre – 2%

Cotton Yarn - 0%
 ERP: Policy Implication
Produced in Foreign Country Home Country

Foreign Radio Import Cost ($) Domestic Competing Radio Cost ($)

Component parts 80 Component parts 80

Assembly activity (value 20 Assembly activity (value 30
added) added)
Nominal tariff on final 10%
product in Home
Nominal tariff on input 0% Nominal tariff on input 0
product in Home product in Home
Import price for Home 110 Domestic Price 110

ERP = {(30 - • Foreign radio (priced $100) is imported in the country with a tariff rate
20)/20}*100 of 10 percent.
• However, imported components enter the country duty-free.
• Under free trade, the domestic producers need to keep assembly
activities at $ 20. However, the 10 percent tariff enables them to get
away with an inefficient assembly cost structure at $ 30.
• The assembly cost is higher by $ 10, which is 50 percent increment over
free trade cost. This is the ERP in this case.
• By formula, ERP = (0.1 – 0.8*0) / (1 – 0.8) = 0.1/0.2 = 0.5 = 50 percent
• The effective protection is 5 times the nominal rate.
 ERP: Global Scenario
Nominal and Effective Tariff Rates, US (%)

Product Nominal Effective

rate rate
• The degree of ERP
Wearing apparel 27.8 50.6 increases as the value
added by the domestic
Textiles 14.4 28.3 producers decline.
Glass products 10.7 16.9 • Higher tariff imposed on
the inputs used in the
Mineral products 9.1 15.9
production process reduces
Footwear 8.8 13.1 ERP.
Furniture 8.1 12.3 • So, are Indian exports
facing low nominal tariff
Miscellaneous 7.8 11.1 but high ERP abroad?
manufactures

Metal products 7.5 12.7

Electrical machinery 6.6 9.4

Conclusion: When material inputs or intermediate products enter a

country at a very low rate of duty while the final imported commodity
is protected by a high rate of duty, it results into a high ERP for 20
domestic producers.
 Tariff Escalation: Global Canvas
• Greater protection (higher tariffs) on intermediate and finished
goods and lower tariffs on raw materials
• Perverse incentive for developing nations to expand production of
raw materials?
• Disincentive for developing nations to compete in market for
finished goods – significant entry barrier

Is tariff
escalation a
developed
country
phenomenon?
 Tariff Escalation in the US ..
HS Code Description Tariff Rate (%)

410150 Whole raw hides and skins of bovine "incl. buffalo" or equine 0.0
animals, whether or not dehaired or split, of a weight per skin
> 16 kg, fresh, or salted, dried,
410210 Raw skins of sheep or lambs, with wool on, fresh or salted, 0.0
dried, limed, pickled or otherwise preserved (excl. those of
Astrakhan, Caracul, Persian, Broadtail or
410221 Raw skins of sheep or lambs, without wool on, pickled, whether 0.0
or not split
420239 Wallets, purses, key-cases, cigarette-cases, tobacco-pouches 5.3
and similar articles of a kind normally carried in the pocket or
handbag, with outer surface of
521112 Woven fabrics of cotton, containing predominantly, but < 85% 7.7
cotton by weight, mixed principally or solely with man-made
fibres and weighing > 200 g/m², in
610332 Men's or boy’s jackets and blazers of cotton, knitted or 13.5
crocheted (excl. wind-jackets and similar articles)
720810 Flat-rolled products of iron or non-alloy steel, of a width of >= 0.0
600 mm, in coils, simply hot-rolled, not clad, plated or coated,
with patterns in relief directly due
730719 Cast tube or pipe fittings of iron or steel (excl. products of 5.6
non-malleable cast iron)
22
Tariff Escalation in India? US Tariff Schedule (WTO)
 Tariff Escalation in India ..
HS Code Description Tariff Rate (%)

410150 Whole raw hides and skins of bovine "incl. buffalo" or equine 0
animals, whether or not dehaired or split, of a weight per skin
> 16 kg, fresh, or salted, dried,
410210 Raw skins of sheep or lambs, with wool on, fresh or salted, 0
dried, limed, pickled or otherwise preserved (excl. those of
Astrakhan, Caracul, Persian, Broadtail or
410221 Raw skins of sheep or lambs, without wool on, pickled, whether 0
or not split
420239 Wallets, purses, key-cases, cigarette-cases, tobacco-pouches 15
and similar articles of a kind normally carried in the pocket or
handbag, with outer surface of
521112 Woven fabrics of cotton, containing predominantly, but < 85% 10
cotton by weight, mixed principally or solely with man-made
fibres and weighing > 200 g/m², in
610332 Men''s or boys'' jackets and blazers of cotton, knitted or 20
crocheted (excl. wind-jackets and similar articles)
720810 Flat-rolled products of iron or non-alloy steel, of a width of >= 12.5
600 mm, in coils, simply hot-rolled, not clad, plated or coated,
with patterns in relief directly due
730719 Cast tube or pipe fittings of iron or steel (excl. products of 10
non-malleable cast iron)
23
Tariff Escalation in India? Indian Tariff Schedule (WTO)
 The Other Side ..
Tariff Escalation Inverted Duty Structure

Garments – 10% Garments – 0%

Fabric – 5% Fabric – 6%

Fibre – 2% Fibre – 8%

Cotton Yarn - 0% Cotton Yarn - 12%

 ERP: Inverted Duty Structure
• ERP = (n – ab) / (1 - a), where
• n = nominal tariff rate on final product,
• a = ratio of imported input to total value of the product,
• b = nominal tariff rate on imported input.
• Example: A country imposes a 0 % tariff on a product costing $
100. $ 80 is the value of imported input for that purpose. Initially
the inputs enters the country at 10 % import duty. Now suppose
tariff changes. Then ERP becomes:
Tariff on b Tariff on Final Share of inputs in ERP
imported Product = 0 final product (a) –
Inputs (%) percent (n) 80 Percent

10 0.1 0 0.8 -40

7.5 0.075 0 0.8 -30
5 0.05 0 0.8 -20
4 0.04 0 0.8 -16
2 0.02 0 0.8 -8
0 0 0 0.8 0
A closer look to Implications of
Inverted Duty Structure
Duty on Intermediate Products: Implications
Domestic Interventions
 5. Offshore Assembly Provision (OAP)
• Outsourcing – aspects of production process occur in another country
• Reasons: motivation to take advantage of low cost, labor intensive products (e.g.
electronic components made in Japan will be sent to Cambodia to assemble them
into PC sets).
• Other reasons: tariff-jumping motive, obtaining specific raw materials,
specialized components etc.
• Beneficial for the economy of outsourcing developed country as well – leads to
employment and output growth in key activities.
• OAP – tariffs applies only to portion of production occurring in another country
(e.g. motor vehicles, office machinery etc.)
• Benefits: reduces effective tariff rate for domestic consumers ($ 330 and $
310), incentive for foreign producers to use local components in production
• Costs: detrimental to local workers who also produce the same finished goods
Normal Import Value ($) Import under OAP Value ($)
Component parts from Country 200 Component parts from Country 200
Role of A to country B A
RTAs and
ROOs Local parts / services in 100 Local parts / services in 100
Country B (value added) Country B (value added)

Total import value in country A 300 Total import value in country A 300
Nominal tariff rate (%) 10 Nominal tariff rate (%) only on 10
outsourced part
Import price 330 Import price 310
Under OAP, the effective tariff is only 3.3 percent, good for consumers
Practical
Application
 RVC and CTH
• Suppose, India exports 42023210 to Sri Lanka
• Sri Lanka imports 42023200 from India

• We know, India and Sri Lanka are party through Regional Trade Agreements (RTAs)

• Sri Lanka Customs – Advance Rulings

• Rule of Thumb: When Sri Lanka provide tariff preference to Indian exports, it’ll make
sure that only Indian exports / other regional trade partners get the facility. All
other countries, who are not party to the RTA (either with Sri Lanka or with India
and Sri Lanka jointly), will face the MFN tariff.
• India-SL FTA: if product is originating in India or Sri Lanka (Tariff Preference can be
given)
• SAFTA: if product is originating in all the member countries (Tariff Preference can
be given)
• Regional Cumulation:
• The raw material of final product from these two locations are considered as RVC.
• If no FTA with a country from which the final product or the raw material comes,
MFN tariff will be imposed.
 RVC
Region: India-
X – Leather Boxes (Rs. 100) Lanka FTA;
India Sri Lanka
Tariff: ILFTA
M – Raw Hides and Skin (Rs. 20) Tariff

Region:
SAFTA;
X – Leather Boxes Tariff: ILFTA
India Sri Lanka or SAFTA
Tariff,
M – Raw Hides and Skin depending on
ROO
Bangladesh Compliance

M – Raw X – Leather Boxes Wholly Obtained and

Hides India Sri Lanka Produced; Tariff:
and Skin ILFTA Tariff

X – Leather Boxes (Rs. 100) No Region;

India Sri Lanka Tariff: MFN,
ILFTA or
M – Raw Hides and Skin (Rs. 30) SAFTA Tariff,
depending on
Sudan ROO
Compliance
 RVC

Region:
SAFTA;
X – Leather Boxes (Rs. 100) Tariff: ILFTA
India Sri Lanka or SAFTA
M – Raw M – Raw Hides and Skin (Rs. 20) Tariff,
Hides depending on
and Skin ROO
(Rs. 60) Bangladesh Compliance

DVA RVC (ILFTA) RVC (SAFTA)

20 40 100
Transformation and Domestic Value Addition
No. Imported Exported Substantial Imported Exported Domestic
Raw Final Product Transformation Raw Final Value
Material Material Product Addition
Value Value (FOB) (DVA)
1 410310 420232 Change in Tariff 30 100 70
Chapter (CC)
CC + 70% DVA

2 420421 420232 Change in Tariff 40 100 60

Heading (CTH)
CTH + 60% DVA

3 420221 420232 Change in Tariff 60 100 40

Sub-Heading (CTSH)
CTSH + 40% DVA

• Which one is more stringent: CC / CTH / CTSH?

• Which one is more stringent: 60% DVA / 50% DVA / 30% DVA?
• CC + 20% DVA - Flexibility?
 RVC and CTH
• Consider the case of Indian Exports:
• Final value of exports – Rs. 100
• Imported a raw material – 410310 (Rs. 30) – Sri Lanka
• Value Addition: 30% in Sri Lanka, 70% in India
• RVC – 100%

• Export Price = 100 (Tariff 0%)

• Suppose, Sri strictly defined value addition requirement from India as 40%
• Indian Exporter:
• Final value of exports – Rs. 100
• Imported a raw material – 410310 (Rs. 70) – Sri Lanka / Sudan
• Value Addition: 70% in Sri Lanka / Sudan, 30% in India
• RVC – 30% (from India), so MFN tariff will be imposed on the product

• Export Price = 130 (Tariff 30%)

Why RVC? Sri Lanka would otherwise be taxing the domestic exporter of
raw hide and skin to India.
 Transformation and Value Addition
No Import Exported Substantial Importe Exported Domestic ROO Tariff
. ed Raw Final Transformation d Raw Final Value
Materia Product Material Product Addition
l Value Value / RVC
(FOB)
1 410310 420232 Change in 30 100 70 MFN, 30%,
(USA) Tariff Chapter APTA, 27%,
(CC) SAFTA, 7.5%, 0%
ILFTA
CC + 70% DVA

2 420421 420232 Change in 40 100 60 MFN, 30%,

(Bangla Tariff Heading (100%) APTA, 27%,
desh) (CTH) SAFTA, 7.5%, 0%
ILFTA
CTH + 60% DVA

3 420221 420232 Change in 60 100 40 MFN, 30%,

(Sri Tariff Sub- (100%) APTA 27%
Lanka) Heading (CTSH)
CTSH + 40%
DVA
 Which of the following is more
restrictive?

CC CTH CTSH
RVC 0%
RVC 30%
RVC 35%
RVC 40%
RVC 50%
RVC 60%
Practical
Application
 Fulfilling ROO Compliance
Import Import Import Indian DVA RVC (SL)
from SL From BNG from Export
Sudan
/ROW
1 0 0 0 100 100 100
(ILFTA,
SAFTA)
2 20 30 10 100 40 ILFTA –
60
SAFTA -
90
3 20 30 40 100 10 ILFTA –
30 SAFTA
- 60
4 100

5 100

6 100
Role of FTAs or Policy Support in
Production Relocation Decision?
 6. Dodging Import Tariffs
• Basic Instinct: importers often try to ensure a lower tariff on
imports, be it semi-processed or final products
• Tariff avoidance: legal method of reducing or eliminating the
amount paid in tariffs
– Brazilian raw sugar shipped to Caribbean and refined there into ethanol
then imported to the U.S. duty free
– Under Indo-Lanka FTA, copper ore was exported to Sri Lanka and
processed copper product was imported in India duty free
– Ford converting 5-passenger wagons imported from Turkey to 2-seat cargo
vans in US, as tariff on the two categories are 2.5 and 25 percent
respectively.
o Tariff evasion: illegal means of reducing or eliminating tariffs
– False reclassification of products – steel import from Ukraine in US; import
of metal waste and scrap in several countries
– Falsification of country of origin – suppose under AFTA, import of a leather
product from Nepal is free, while the same from China is not. An importer
might try that route.
– Altering composition of product itself – often observed for chemical, steel
products, fabrics etc., as tariff varies with different composition

Postponing Import Tariffs: No duty if raw material / parts

and components processed and exported from EPZ / FTZ
The Scenario