Free trade for inclusive and resilient growth

SDG indicators

SDG target 17.10: Promote a universal, rules-based, open, non-discriminatory and equitable multilateral trading system under the World Trade Organization, including through the conclusion of negotiations under its Doha Development Agenda.
SDG indicator 17.10.1: Worldwide weighted tariff-average (Tier I)


SDG target 17.12: Realize timely implementation of duty-free and quota-free market access on a lasting basis for all least developed countries, consistent with World Trade Organization decisions, including by ensuring that preferential rules of origin applicable to imports from least developed countries are transparent and simple, and contribute to facilitating market access.
SDG indicator 17.12.1: Average tariffs faced by developing countries, LDCs and SIDS (Tier I)


SDG target 10.a: Implement the principle of special and differential treatment for developing countries, in particular least developed countries, in accordance with World Trade Organization agreements
SDG indicator 10.a.1: Proportion of tariff lines applied to imports from LDCs and developing countries with zero-tariff (Tier I)

The Addis Ababa Action Agenda -—
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acknowledges that international trade is an engine for inclusive economic growth and poverty reduction. Target 17.10 is of paramount importance to advancing economic growth and fostering global competitiveness, as it promotes a universal, rules-based, open, non-discriminatory and equitable multilateral trading system. Market access conditions are an important factor for the effectiveness of trade, and tariffs are an important determinant of market access.

Making free trade work for sustainable development

In recent years, several empirical studies have reaffirmed that trade reforms which significantly reduce import barriers have on average a positive effect on economic growth. -—
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estimate that economic growth is roughly 1.7 percentage points higher after trade liberalization than a benchmark (compared to the situation without those reforms). -—
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finds that the positive correlation between trade liberalization and economic growth has increased since the 1990s. -—
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notes that free trade and economic openness are in everyone's interest. -—
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, taking the case of the ECOWAS, estimate that from 15 to 26 per cent of the average annual value of net official assistance received by coastal ECOWAS members could be achieved through trade facilitation. This ratio is even higher for Nigeria, where the saving would account for around 31 to 46 per cent of net official assistance.

However, the ultimate economic gains from trade liberalization may vary considerably with domestic contexts and, as underlined by -—
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, developing countries need to be mindful of the potential impacts of trade and investment liberalization on the ability to mobilize domestic resources for development. Revenues accrued from tariffs may constitute a significant portion of a government’s public revenue, particularly in low-income countries, where the need for coordination of tariff liberalization with other tax policies is of particular importance.

Resilience from regional trade agreements

In 1947, major economies involved in global trade signed the GATT, an agreement through which countries entered into “reciprocal and mutually advantageous arrangements aimed at the substantial reduction of tariffs and other barriers to trade and to the elimination of discriminatory treatment in international commerce” -—
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. The conclusion of the “GATT-94” multilateral trade negotiations led to the creation of the WTO in 1995, with a mandate to develop an integrated, more viable and durable multilateral trading system. The WTO TFA was the first multilateral trade agreement concluded since the establishment of the WTO. It came into force in 2017 with the aim of boosting the speed and efficiency of cross-border trade procedures while reducing cost. Full implementation of the TFA could cut global trade costs by 10 to 18 per cent -—
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and increase export gains by up to US$ 1 trillion per year, with the biggest gains in the poorest countries -—
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Article 1 of the “GATT-94” stipulates that members set their tariffs on a MFN basis meaning that any advantage, favour, privilege or immunity granted to any product originated in and destined for other countries becomes immediately and unconditionally applicable to all contracting parties -—
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. Article 24 of the GATT, Article 5 of the GATS and the Enabling Clause (Paragraph 2(c)) allow WTO members to conclude RTAs as a special exception, provided the agreements help trade flow more freely among the countries in the RTA without barriers being raised on trade with the outside world -—
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. Since the inception of the GATT/WTO system, most economies across the world have negotiated bilateral or multilateral trade agreements with the objective of reducing barriers to trade and promoting exchange of goods and services among members. Nowadays, practically all countries participate in at least one RTA, with some countries forming more bilateral and regional RTAs than others. More than 50 per cent of global trade takes place between countries that are members to PTAs, one third under DTAs that go beyond traditional tariffs and existing WTO agreements -—
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. Only a limited number of countries, largely in East Asia, trade mostly under so-called shallow agreements. Most of the trade of African countries still occurs outside of any PTAs -—
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According to the WTO RTA Database, as of 15 March 2022, 354 RTAs were in force for both goods and services, as compared to 135 in 2005 -—
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(see Figure 1).

Figure 1. Evolution of RTAs, 1970-2022

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Note: Goods, services and accessions to an RTA are counted separately. The cumulative lines show the number of RTAs currently in force (by year of entry into force).

The coverage of PTAs has also expanded. While the average PTA in the 1970s covered less than ten policy areas, since the 2000s most new PTAs included between 10 and 20 policy areas (see Figure 2). Such agreements with larger scope tend to include not only traditional trade policy, such as tariff liberalization, but also trade-related regulations like subsidies or technical barriers to trade, as well as areas not related to trade, for example, labour, environment, and migration -—
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Figure 2. Number of policy areas covered by PTAs, 1970-2019

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Note: Number of policy areas covered in an agreement is calculated as the count of policy areas included in a PTA, a maximum number of policy areas being 52.

Trade within RTAs demonstrates greater resilience in response to global shocks, compared to trade outside those -agreements. A recent case study by UNCTAD on intra RTA trade resilience during the COVID-19 downturn -—
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reveals that trade within trade agreements declined significantly less than other trade, and that RTAs with deep provisions, or deep RTAs, have provided relatively better stability against the global trade collapse of 2020 than shallow RTAs. The results also reveal some heterogeneity across developing and developed countries, as well as across developing countries’ regions. Figure 3 shows that, while a decline in bilateral trade for an average country was around 14 per cent, the decrease under an RTA amounted to about 11 per cent. In addition trade between members of a deep RTA fell by about 6 percentage points less than trade between members of a shallow RTA.

Figure 3. Average growth of exports by RTAs, 2020

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Note: These estimates are based on an analysis of bilateral trade flows of 139 countries.

Trade, peace and security

Most-favoured-nation (MFN) is a cornerstone of the multilateral trading system. The exception to this rule is an issue of “essential security interests” of the Article XXI of the GATT-94 -—
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, the provisions of which allow countries to suspend concessions for reasons of national security. In fact, Article XXI states that the GATT will not prevent a WTO member from lifting the MFN rule when “considered necessary for the protection of its interests, taken in time of war or other emergency relations”. Both the WTO’s agreement on trade in services (GATS) and its agreement on intellectual property (TRIPS) contain similar exceptions.

“Even though trade has been viewed as a vehicle for peace”, recent developments worldwide show that trade sanctions in response to hostilities in international relations are on a rise -—
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. Examples of a “security exceptionalism in trade” -—
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are numerous, and includes the United States of America, in early 2018, imposing a tariff of 25 per cent on steel and of 10 per cent on aluminum imports under Section 232 of the Trade Expansion Act of 1962; India lifting the MFN status from Pakistan in 2019, after a suicide attack by a Pakistan-based Islamist group; Bahrain, Saudi Arabia and the United Arab Emirates invoking altogether a series of sanctions against Qatar, in July 2017, over allegations of Qatari support for terrorism; Canada, the United States of America, the G-7 countries and the European Union announcing their intentions to revoke MFN treatment, in March 2022, from Russia and its ally Belarus, over the Russian war on Ukraine. As emphasized by -—
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, these increasing conflicts between national security interests and rules defining the multilateral trade system might have serious adverse effects on development and the overall growth of the world economy. The international community faces the challenge of finding the right balance between the nations’ rights to decide what needs to be done to protect essential security interests and the urge to safeguard global trade as a key engine for growth and sustainable development, especially in a world battered by the economic fallout of the pandemic and the war in Ukraine -—
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Making non-discriminatory tariff reforms work for development

After 2019, many countries recorded a sharp drop of weighted average tariffs on imports. Palau’s average import tariff dropped to 9.6 per cent in 2020 from a rate as high as 118.2 per cent in 2019. The United States of America, in 2020, reduced their weighted average tariff on imports from 13.8 per cent in 2019 to 1.5 per cent. India imposed a tariff of 6.2 per cent on average, while China's average rate was 2.5 per cent in 2020. The weighted average tariff applied in the EU was 1.5 per cent in 2020. In 2020, the country with the highest weighted average import tariff worldwide was Gambia, at 17.8 per cent, followed by Bermuda at 24.1 per cent. The lowest weighted average tariff rate, zero per cent, was recorded in Hong Kong SAR, China, Macao SAR, China, and Sudan (see Map 1).1

Map 1. Worldwide weighted average tariff, latest available data (SDG 17.10.1)
(Percentage)

Source: World Bank estimates -—
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, based on -—
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Since 2010, tariffs have been trending downwards, mostly on a preferential basis. Simple-average MFN tariffs on agriculture, manufacturing and natural resources have remained largely constant in 2020, amounting to 16.5 per cent, 6.4 per cent, and 2.6 per cent, respectively (see Figure 4). The increase of PTA schemes has contributed to about 2 percentage points to the reduction of simple agricultural tariffs and to about 1 percentage point to manufacturing tariffs. However, preferential tariffs have increased on a trade weighted basis, indicating an increase in tariffs among some of the major trading nations. In the natural resources sector, liberalization continued both in MFN and preferential terms, leading to tariffs rates of 2.6 per cent and 1.6 per cent, respectively, on a simple average basis, in 2020 -—
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Figure 4. Multilateral and preferential tariff liberalization
(Percentage)

Source: UNCTAD, ITC and WTO calculations based on -—
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Tariffs on exports of LDCs and developing countries decreasing slowly

The average level of customs tariff rates (indicator 17.12.1) faced by developing countries and LDCs illustrates the pace at which the multilateral system is advancing toward the implementation of duty-free and quota-free market access -—
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. SDG target 17.12 calls for “timely implementation of duty-free and quota-free market access on a lasting basis for all least developed countries”. Recognizing LDCs’ special economic circumstances, developed countries and other economies2 agreed to grant LDCs duty-free and quota-free preferential market access.

Preferential market access for developing countries has been granted by most developed countries since the early 1970s under the aegis of UNCTAD -—
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. These unilateral trade preferences, called GSP, allow developed countries to apply different tariffs between different groups of trading partners without violating Article I of the GATT stipulating non-discriminatory and equal treatment of trading partners.

Trade preferences under the GSP program are granted by the EU, the United States of America, Japan, Canada, Australia, New Zealand, Norway, Belarus, Iceland, Kazakhstan, the Russian Federation, Switzerland, Turkey, etc.

Figure 5 shows that in 2020 import tariffs applied by developed countries to products from LDCs registered a slight decline since 2015 throughout all groups of products. The average tariff amounted to 1.1 per cent in 2020. Tariffs, including preferences, faced by LDCs vary across product groups. Tariffs for clothing and textiles amounted to 5.9 per cent and 2.5 cent, while tariffs for industrial products were relatively low, at 0.4 per cent.

Figure 5. Average tariff faced (incl. preferences) in developed regions, by selected product groups
(Percentage)

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The degree of developing countries’ export competitiveness can partly be measured by the size of the preferential tariff margin, that is the difference between the preferential and the non-preferential tariff rate, of developing countries’ exports. The higher the margin the greater the market shares of these countries in preference granting countries. Figure 6 shows that LDCs’ preferential margins are strongest in low-skill manufacturing sectors, such as clothing, leading to a tariff advantage of six percentage points in entering developed countries' markets vis-à-vis the foreign competitors, on average. Preferential margins for LDCs are also substantial for textiles and agricultural products (between three and six percentage points). For developing countries, a substantial share of exports of clothing is attributed to markets in which countries have preferences (4 percentage points). For SIDS, the highest preferential margins, of more than 15 percentage points, are registered for exports of agricultural products.

Figure 6. Preferential tariff margins for developing countries, LDCs and SIDS exports in developed-country markets, 2020
(Percentage)

Source: : UNCTAD, ITC and WTO calculations based on -—
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Note: The preferential margin is measured as the difference between the preferential tariff and the MFN rate

To assist LDCs in the elaboration of studies on DFQF market access, UNCTAD produced two Handbook on "Duty-Free and Quota-Free Market Access and Rules of Origin For Least Developed Countries" -—
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and a database on the utilization of trade preferences -—
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Import restrictiveness differs substantially across countries, even within the same region. Table 1 presents a matrix of the average tariff rates imposed on trade flows between and within regions in 2020. Intraregional trade (in the shaded cells of the tables) is generally subject to lower tariffs than interregional trade. However, much South-South trade is still burdened by relatively high tariffs. This is the case, for example, for the trade between Latin America and South Asia, on which an average tariff of about 10 per cent is applied. South Asia faced the highest intraregional tariffs, with tariffs of 5.4 per cent in 2020 -—
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Table 1. Tariff restrictiveness, matrix by region, 2020
(Percentage)
Importing RegionExporting Region
Developed economiesAfricaLatin AmericaEast AsiaSouth AsiaRest of Asia
Developed economies1.70.91.35.72.81.0
0.00.30.53.50.10.3
Africa9.22.68.912.99.312.1
0.50.20.60.70.85.8
Latin America3.32.81.38.19.75.3
-0.30.0-0.10.1-0.10.8
East Asia4.72.24.81.52.91.6
-0.70.50.7-1.0-0.70.0
South Asia10.55.78.48.45.46.1
1.6-1.21.9-0.1-2.0-0.6
Rest of Asia3.71.97.64.63.83.0
0.00.42.10.00.10.3

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Note: Changes between 2010 and 2020 are shown in smaller font.

Tariffs are particularly high for agricultural products, as well as apparel, textiles and tanning. For example, tariffs above 15 per cent are imposed on about 7 per cent of global trade in food (26 per cent of the products in this group). About 12 per cent of world trade in apparel (21 per cent of the products in this group) is subject to tariff peaks of 15 per cent or more (see Figure 7).

Figure 7. Tariff peaks, by product groups, 2020
(Percentage)

Tariff peaks

Tariff peaks, by sector

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The objective to improve market access for LDCs’ exports by granting special and differential treatment to them in accordance with the WTO agreements was outlined not only in SDG target 17.12, but also in SDG target 10.a. -—
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More than half of merchandise exports from developing countries are duty-free

Most developed countries grant either full or almost full duty-free and quota-free, i.e. DFQF, market access for LCDs, and an increasing number of developing countries are in the process of extending similar treatment to most imports from LDCs. Australia, New Zealand, Norway and Switzerland provide full duty-free access through preferential LDC schemes. For Canada, Chile, the EU and Japan, more than 97 per cent of tariff lines are free of duty for products originating from LDCs. China grants duty-free access for LDCs on about 97 per cent of its tariff lines. India, Iceland, the Republic of Korea and Montenegro have a duty-free coverage of around 90 per cent or higher -—
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However, progress on export expansion from LDCs is slow. Despite considerable growth of LDCs’ exports since 2000, their share in world trade has remained at 1 per cent over the last ten years, while their share in the world population has been increasing, reaching 13.6 per cent in 2020 -—
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Tariff barriers remain significant in some countries, notably the United States of America. In 2019, 67 per cent of LDC exports were dutiable under the United States’ GSP scheme for LDCs, in US dollar terms, with a trade-weighted average tariff of 11.4 per cent -—
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SDG indicator 10.a.1 shows the extent to which special and differential treatment has been applied through import tariffs.3

LDCs were granted duty-free market access on 63.9 per cent of tariff lines in 2020 (see Figure 8); the respective share for all developing countries was around 53.2 per cent. 4

The highest proportion of exports from LDCs relieved from customs duties excluding oil, was found in trade in agricultural products (72.3 per cent). The second highest rate was recorded for trade in industrial products (70.5 per cent). As for developing countries, 54.5 per cent of their exports of agricultural products and 55.3 per cent of industrial products entered the world markets duty free (see Figure 8).

Figure 8. Share of duty-free products (exported products) to world from developing countries and LDCs, by product, 2020 (#SDG 10.a.1)

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Figure 9 shows that almost 68 per cent of international trade of agricultural products in 2020 was duty-free, with 19 per cent of this accounting for duty-free on a MFN basis and the rest under preferential tariffs. The remaining tariffs for agriculture are fairly high, averaging to 20.2 per cent. Preferential access is also important for trade in manufacturing products, for which it accounted for 33.5 per cent. The simple average tariff for manufacturing products is also high and stood, in 2020, at 9.4 per cent. For natural resources, preferential access is less important, as trade in these goods is largely tariff-free under MFN rates. The remaining tariffs are generally very low, with tariffs averaging 5.8 per cent.

Figure 9. Free trade and remaining tariffs, by broad category
(Percentage)

Source: UNCTAD, ITC and WTO calculations based on -—
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The rise of non-tariff measures

NTMs often impede international trade more than border duties. Trade costs associated with NTMs are estimated to account for as much as 1.6 per cent of global GDP, amounting to US$1.4 trillion -—
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, more than double the amount of ordinary customs tariffs. According to UNCTAD -—
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estimates, in Asia and the Pacific, NTMs affect around 58.0 per cent of trade in the region. For intra-African trade, the average import-weighted tariff is 7.0 per cent, while the ad-valorem equivalent cost of non-tariff barriers is estimated to be 14.3 per cent -—
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NTMs, as policy instruments, are both directly and indirectly linked to sustainable development. Direct linkages include NTMs' intended impact on social and environmental issues, such as their contribution to food security (SDG 2) and nutrition and health (SDG 3); protecting endangered species and the environment (SDGs 14 and 15); supporting sustainable production and consumption (SDG 12); contributing to sustainable energy (SDG 7); and combatting climate change (SDG 13). Indirect effects may arise from trade policies that influence trade which can restrict economic growth and create negative spillover effects on sustainability -—
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A considerable number of NTMs are regulatory measures, which respond to a public demand for protection against environmental and health hazards -—
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. Technical NTMs, such as TBT, which includes labelling, standards on technical specifications and quality requirements, as well as all conformity-assessment measures, affect 31.6 per cent of product lines and 67.1 per cent of world trade (see Figure 10). SPSs, which typically prevail in agriculture, affect 16.1 per cent of product lines and 15.7 per cent of world trade. Figure 10 shows that the agricultural sector is more often regulated than manufacturing and natural resources, where most of world agricultural trade is subject to SPS and TBT. Almost 40 per cent of all exports are subject to at least one export regulation measure -—
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Figure 10. NTMs in world trade, by type and broad category, 2020
(Percentage)

Source UNCTAD, ITC and WTO calculations based on -—
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Note: The frequency index is defined as the percentage of HS 6-digit lines covered; and coverage ratio is defined as the percentage of trade affected.

In LDCs and developing countries as a whole, about 40 per cent of imports are subject to NTMs. This is less than half as much as in developed countries. NTMs in developing countries and LDCs are less diversified than in developed countries. On average, developing countries use two different NTMs on any regulated product, and LDCs one, compared to four in developed economies -—
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Statistics on NTMs are still incomplete. As of today, the TRAINS -—
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database developed by UNCTAD in partnership with several regional and international organizations is the most complete collection of publicly available data on NTMs at the HS six-digit level. As of 2018, UNCTAD has collected comprehensive and comparable NTM data, covering 109 countries and containing more than 65 000 measures.

Trade measures and COVID-19

The COVID-19 pandemic emerged in the context of already increasing protectionism and faltering globalization, as reflected, for instance, by the Brexit and the trade war between China and the United States of America. It highlighted major ongoing shifts in the objectives of national governments and companies and put considerable pressure on the multilateral rule-based trading system. Axioms of free trade, free movement of capital, or freedom of energy supplies have often been questioned against a cruder metric: “What’s in it for me?” -—
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Governments have been challenged to find the right balance between the need to import medical supplies and personal protective equipment (PPE), such as hand soap, sanitizer, face masks and protective spectacles, against the loss of tariff revenues associated with them.

Trade measures target both exports and imports. WTO estimated that, by mid-October 2021, the trade coverage of ongoing COVID-19 trade-facilitating measures stood at US$112.1 billion, while the coverage of trade-restrictive measures amounted to US$92.3 billion -—
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As of 15th of March 2022, WTO members had submitted a total of 453 COVID-19 related notifications, covering a range of products, including PPE, food, live animals, medical equipment and medicines. TBT (201) and SPS measures (122) made up the bulk of them, along with quantitative restrictions aimed at ensuring domestic food and medical supplies (87) (see Figure 11). Examples of the notifications include, inter alia, member states streamlining certification and authorization for medical goods, permitting the use of scanned and electronic SPS certificates, relaxing certain aspects of technical regulations for some food products.

Figure 11. WTO members' COVID-19 related notifications, by type
(Percentage)

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Notes

  1. Data are classified using the Harmonized System of trade at the six- or eight-digit level. Tariff line data were matched to the SITC revision 3 codes to define commodity groups and import weights. To the extent possible, specific rates have been converted to their ad valorem equivalent rates and have been included in the calculation of Weighted mean applied tariff. Import weights were calculated using the UN Comtrade database -—
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    . Effectively applied tariff rates at the six- and eight-digit product level are averaged for products in each commodity group. When the effectively applied rate is unavailable, the most favoured nation rate is used instead.
  2. Following the WTO Hong Kong Ministerial Decision in 2005 -—
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  3. Limitations of this indicator include the following: tariff-based measures are only a part of trade limitation factors; inability to comply with rules of origin criteria limits the utilization of preferential treatments; using data on zero-tariff lines assumes full utilization of benefits; low MFN tariffs mean that duty-free treatment is not always preferential -—
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  4. Proportion of total number of tariff lines applied to products imported from LDCs and developing countries is presented in per cent, corresponding to a 0 per cent tariff rate in HS chapter 01-97. This indicator allows observing how many products from developing countries and LDCs have free access to markets in developed countries.

References

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