Towards inclusive trade in a post-COVID world

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.

Do trade reforms promote economic growth?

Recent research in trade theory suggests that trade reforms which significantly reduce import barriers have on average a positive effect on economic growth, although the economic effect of such trade policies vary across countries -—
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report that economic growth is roughly 1.7 percentage points higher after trade reforms than a benchmark (compared to the situation without any trade reforms). -—
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finds that the positive correlation between a good trade policy and economic outcomes has increased since the 1990s. -—
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notes that free trade and economic openness are ultimately in everyone's interest. Safaeimanesh and Jenkins -—
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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 across borders. This ratio is even higher for Nigeria: around 31 to 46 per cent of net official assistance.

On the other hand, 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.

Trade agreements

In 1947, major economies involved in international 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 10-18 per cent -—
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and increase gains from exports up to US$ 3.6 trillion per year -—
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Article 1 of the “GATT-94” stipulates that members set their tariffs on a MFN basis in such a way 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 exchanges 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 now takes place between countries that are members to PTAs, and one third under DTAs that go beyond traditional tariffs and existing WTO agreements -—
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. According to the WTO RTA Database, as of 1 June 2021 , 350 RTAs were in force for both goods and services, as compared to 137 in June 2005 -—
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(Figure 1).

Figure 1. Evolution of RTAs, 1970-2021

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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 (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.

Making non-discriminatory tariff reforms work for development

Even though most developed countries have pushed for lower tariffs in recent years, there are still many parts of the globe where they remain high. In 2019, the country with the highest weighted average tariff worldwide was Palau, classified as an LDC, at 118.2 per cent, followed by Bermuda at 103.2 per cent. Among major global economies, India imposed a weighted tariff-average of 6.6 per cent, while China's average rate was 2.5 per cent. The United States of America applied a weighted average tariff of 13.8 per cent on its imports, representing an increase of more than 8.6 times compared with 2018. The weighted average tariff applied in the EU was 1.8 per cent in 2019. The lowest weighted average tariffs, at zero per cent, were recorded in Hong Kong SAR, China; Macao SAR, China and Brunei.1

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

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, based on -—
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Since 2010, tariffs have been trending downwards, mostly on a preferential basis. MFN tariffs on agriculture, manufacturing and natural resources have remained largely constant and amounted in 2019 to almost 17 per cent, 7 per cent, and 3 per cent, respectively (figure 3). The proliferation 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. On the other hand, preferential tariffs have increased on a trade weighted basis, indicating an increase of tariffs among some of the major trading nations. In the natural resources sector the liberalization occurred both in MFN and preferential terms, and, in 2019, amounted on a simple average basis to 2.6 per cent and 1.3 per cent, respectively -—
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(see figure 3).

Figure 3. Multilateral and preferential tariff liberalization
(Percentage)

Source: UNCTAD, ITC and WTO calculations based on -—
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Tariffs applied to exports of LDCs and developing countries are slowly reducing

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 aims to “realize timely implementation of duty-free and quota-free market access on a lasting basis for all least developed countries...”. Recognizing LDCs’ special economic situation, 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 initiated by most developed countries since the early 1970s under the aegis of -—
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. These unilateral trade preferences called the GSP allow developed countries to apply different tariffs between different groups of trading partners without violating Article I of the GATT requiring non-discriminatory and equal treatment of trading partners.

Trade preferences under the GSP program are granted, not only by the so-called QUAD countries, namely the EU, United States, Japan and Canada, but also by Australia, New Zealand, Norway, Belarus, Iceland, Kazakhstan, Russian Federation, Switzerland, and Turkey.

Figure 4 shows that in 2019 import tariffs applied by developed countries to all products from LDCs registered a slight decline since 2015 and amounted to 1.1 per cent in 2019 . Tariffs, including preferences, faced by LDCs vary across product groups. Tariffs for clothing and textiles in 2019 amounted to about six per cent and nine per cent, while tariffs for industrial products remained low, at 0.4 per cent.

Figure 4. Average tariff faced (incl. preferences) in developed regions, by selected product groups
(Percentage)

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The true value of developing countries’ export competitiveness that is granted duty free treatment can be in part measured by the magnitude of the preferential tariff margin, that is the difference between the preferential tariff rates applicable to the developing countries’ exports and the non-preferential tariff rates. The higher margin indicates the greater market shares of these countries in preference granting countries. Figure 5 shows that LDCs’ preferential margins are the strongest in low-skill manufactures, such as clothing, providing a tariff advantage of six percentage points in entering developed countries markets vis-à-vis foreign competitors. 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 bound to markets where countries have preferences (four percentage points). For SIDS, the highest preferential margins of more than 15 percentage points are registered for exports of agricultural products.

Figure 5. Preferential tariff margins for developing countries, LDCs and SIDS exports in developed-country markets, 2019
(Percentage)

Source: UNCTAD, ITC and WTO calculations based on -—
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To assist LDCs in the elaboration of studies on DFQF market access, UNCTAD produced two Handbooks on Duty-Free and Quota-Free Market Access and Rules of Origin For Least Developed Countries, -—
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and a database -—
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on utilization of trade preferences.

Import restrictiveness differs substantially across countries, and even within the same region. Table 1 presents a matrix of the average tariff levels imposed on trade flows between regions in 2019. Intraregional trade is generally subject to lower tariff trade restrictiveness than interregional trade. However, a large number of South-South trade flows are still burdened by relatively high tariffs. This is the case, for example, for trade between Latin America and South Asia, which face an average tariff of about 10 per cent. Market access for sub-Saharan Africa and South Asian countries often enjoys better interregional trade conditions than for intraregional trade. South Asia, and Western Asia and North Africa faced the highest intraregional tariffs, with tariffs of 5.7 per cent and 4.8 per cent respectively, in 2019 -—
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North-North tariffs are on average lower than North-South tariffs because of tariff peaks within product groups, which are of significant export interest to developing countries, such as agriculture and apparel. However, low income countries, within product categories, do receive higher preference margins, averaging three percentage points above other countries. Lesotho and Afghanistan, receive preference margins as much as ten percentage points. In contrast, such countries as Cuba and the Democratic People’s Republic of Korea face tariffs about 5 percentage points higher than other countries -—
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Table 1. Tariff restrictiveness, matrix by region, 2019
(Percentage)
Importing RegionExporting Region
Developed economiesEast AsiaLatin AmericaSouth AsiaSub-Saharan AfricaWestern Asia and North Africa
Developed economies2.05.71.12.20.61.2
0.33.40.4-0.60.20.6
East Asia5.41.95.23.52.61.8
-0.6-1.51.2-0.10.6-0.1
Latin America3.68.21.210.23.83.2
-0.1-0.3-0.2-0.11.6-0.1
South Asia107.010.25.75.65.7
0.8-1.43.1-1.4-1.1-0.8
Sub-Saharan Africa7.310.48.78.52.56.3
1.2-0.21.60.80.71.3
Western Asia and North Africa6.67.17.84.53.44.8
1.40.51.70.6-1.22.0

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Note: Changes between 2010 and 2019 are shown in smaller font.

Tariffs are particularly high for products of interest to low-income countries, such as agricultural products, as well as apparel, textiles and tanning. For example, tariffs on about 8 per cent of global trade in food products (and 26 per cent of the products in this group) are above 15 per cent. Some 10 per cent of world trade (and 21 per cent of the products in this group) in apparel is subject to tariff peaks of 15 per cent or more (figure 6).

Figure 6. Tariff peaks, by product groups, 2019
(Percentage)

Source: UNCTAD, ITC and WTO calculations based on -—
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The objective to improve market access conditions for LDCs’ exports by giving special and differential treatment to LDCs in accordance with the WTO agreements was not only outlined in SDG target 17.12, but also in SDG target 10.a.

More than half of merchandise exports from developing countries benefit from duty-free market access

Most developed countries grant either full or nearly 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, 97 per cent of tariff lines are free of duty for products originating from LDCs. China and India grant duty-free access for LDCs on more than 94 per cent of their tariff lines. 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 in 2020 remained less than 1 per cent, whereas the share of LDCs in world population was more than 13 per cent -—
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Tariff barriers remain an issue in some countries, notably the United States. In 2018, some 60 per cent of LDC exports were dutiable under the United States’ GSP scheme for LDCs, in dollar terms, with a trade-weighted average tariff of over ten per cent. Nevertheless, some LDCs enjoy significant duty-free access to the United States of America under the AGOA and the CBERA -—
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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 more than 66 per cent of tariff lines in 2019 (figure 6); the respective share for all developing countries was around 52 per cent. 4

The highest proportion of products from LDCs, excluding oil, in the zero-duty trade were the trade in agricultural products, followed by the trade in industrial products, 75.1 per cent and 74.4 per cent, respectively. In the case of developing countries, almost 54 per cent of agricultural products and 54.4 per cent of industrial products entered world markets duty free (See figure 7).

Figure 7. Share of duty-free products (exported products) to world from developing countries and LDCs, by product, 2019 (#SDG 10.a.1)

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Figure 8 shows that almost 68 per cent of international trade of agricultural products in 2019 was duty-free, with 19 per cent of this accounting for duty-free on the MFN basis and the rest under preferential tariffs. The remaining tariffs for agriculture are fairly high, averaging to 20.7 per cent. Preferential access is also important for trade in manufacturing products, for which it accounted for more than 33 per cent. The simple average tariff for manufacturing products is also high and stood, in 2019, at almost 10 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 8. 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 imports more than border duties. Trade costs associated with NTMs are estimated to account for as much as 1.6 per cent of global GDP, or US$1.4 trillion -—
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, more than double that of ordinary customs tariffs. According to -—
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estimates for Asia and the Pacific, NTMs are now affecting around 58 per cent of trade in the region. For intra-African trade, the average import-weighted tariff is almost 7 per cent, while ad-valorem equivalent cost of non-tariff barriers is estimated to be 14.3 per cent -—
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NTMs, as policy instruments, can be either directly or indirectly linked to sustainable development. Direct linkages include policies that have an immediate impact on social and environmental issues and help achieve SDGs: food security (SDG 2); nutrition and health (SDG 3); protect endangered species and the environment (SDGs 14 and 15); ensure sustainable production and consumption (SDG 12); energy (SDG 7); and combat climate change (SDG 13). On the other hand, indirect linkages may arise from trade policies that influence trade, which in turn can restrict economic growth and create negative spillover effects on sustainability objectives -—
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Today, 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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5. Technical NTMs, such as TBT, which includes labelling, standards on technical specifications and quality requirements, as well as all conformity-assessment measures, affect more than 30 per cent of product lines and almost 70 per cent of world trade (figure 9). SPS, which typically prevail in agriculture, affect almost 20 per cent of world trade. Figure 9 shows that agricultural sector is more often regulated than manufactures and natural resources, with most of world agricultural trade subject to forms of SPS and TBT. Almost 40 per cent of all exports are subject to at least one export measure -—
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Figure 9. NTMs in world trade, by type and broad category, 2019
(Percentage)

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

In LDCs and developing countries, 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, TRAINS -—
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database developed by UNCTAD in partnership with several regional and international organisations 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 NTMs 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, with Brexit and the trade war between China and the United States of America, for instance. It highlighted major ongoing shifts in the objectives of countries and companies and put considerable pressure on 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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Trade policy saw a rise of protectionist measures worldwide in response to COVID-19. Many countries sought to increase their self-sufficiency in strategic industries and reduce their reliance on single sources of supply, thus triggering the reconfiguration of value chains around the world and fueling a damaging spiral of trade restrictions -—
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Trade measures targeted both exports and imports. As of the end of May 2021, WTO members had submitted a total of 371 COVID-19 related notifications. TBT and SPS measures made up the bulk of them, 162 and 94, respectively, along with quantitative restrictions aimed at ensuring domestic food and medical supplies (64) (figure 10).

Figure 10. WTO members' COVID-19 related notifications, by type
(Percentage)

Source: -—
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While most tariff measures were aimed at facilitating trade and concerned imports with over 100 countries either reducing or eliminating tariffs on essential goods, NTMs, although for the most part adopted on a temporary basis, were largely used to restrict trade and applied to exports, in particular of medical goods -—
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. The EU placed export restrictions on medical equipment exports to non-EU countries. India, the world’s largest pharmaceutical producer, enacted restrictions on the export of dozens of drugs, including various antibiotics. Personal protection equipment products, such as, aprons, medical masks and protective clothing were subject to tariffs of over ten per cent. In some countries, for example in Iran, tariffs on medical masks and protective clothing were as high as 65 per cent and 100 per cent of the import value, respectively -—
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While the majority of trade measures were introduced as countermeasures against COVID-19, some do not seem to be directly linked to managing the health emergency, while others appear to primarily seek to protect domestic industries -—
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. Examples of such measures include the increased tariffs on petrol imports in Fiji, restrictions of cement imports in Kazakhstan, and bans on imports of tobacco products in Botswana, on all non-essential goods in Sri Lanka, and on used clothing in Kenya.

WTO estimated that 2.8 per cent of G20 trade was affected by import-restrictive measures implemented from the mid-October 2019 to mid-May 2020. Import-restrictive measures applied since 2009 and still in force affect an estimated 10.3 per cent of G20 imports (US$1.6 trillion) -—
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The inability of some countries to produce and export domestically manufactured equipment during the pandemic led to high procurement costs and delays elsewhere. For instance, the global supply of ventilators is highly concentrated: only seven countries account for 70 per cent of ventilators exports, hence exports ban from even one of them could lead to up to a 10 per cent temporary increase in prices and adversely affect billions of lives across importing countries -—
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. Moreover, trade restrictions negatively impacted the access to other basic care services, other than those needed to target COVID-19, including vaccines needed for mass immunization campaigns -—
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Governments have been challenged to find the right balance between the need to import medical supplies and protective equipment against the loss of tariff revenues associated with them. In order to facilitate timely availability of essential medical supplies, for example, the EU set up the COVID-19 clearing-house for medical equipment and abolished temporary controls on exports of essential equipment -—
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. Pakistan, for example, exempted medical equipment from import duties, and Brazil introduced new legislation that simplifies the customs clearance process for articles used to combat the spread of COVID-19. Argentina streamlined the import clearance process of certain critical medical products, and Iran removed an import ban on ethanol, used to produce sanitiser -—
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The current health crisis has the potential to further exacerbate tensions and to create more segmented and polarized global trade relationships, with obvious negative consequences for many countries -—
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. A recent report estimated that high tariffs and trade restrictions could slow economic recovery from the COVID-19 crisis and reduce global GDP by US$10 trillion per year unless repealed or reduced by governments -—
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. In the post-pandemic era, the recovery will be much faster and stronger if society strengthens international cooperation, countries work together to open their economies and to reduce trade costs through better connectivity and logistics, and to build up new areas of consensus on issues of common ground, such as climate change, cybersecurity risks, the need for building transformative productive capacities, and many others -—
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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 UNSD’s Commodity Trade (Comtrade) database. 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: (i)Tariff-based measures are only a part of trade limitation factors. (ii) Inability to comply with rules of origin criteria limits the utilization of preferential treatments. (iii) Using data on zero-tariff lines assumes full utilization of benefits. (iii) 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 least developed countries 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 on how many products developing countries and LDCs will have free access to Developed countries markets.
  5. According to WTO, for non-agricultural products the product coverage of tariff binding by developed country members was 100 per cent, while that of developing country members was around 73 per cent -—
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References

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