Tariffs, bound tariffs and safeguard measures

1. What a tariff is

A tariff, or customs duty, is a tax on goods when they cross the customs frontier. Import duties are by far the most common; export duties are used occasionally to conserve raw materials or control prices. Tariffs raise revenue and protect domestic producers by raising the price of imports. GATT prefers them to other forms of protection because they are visible, can be negotiated down, and leave the price mechanism working; quotas are generally prohibited (Article XI).

• Ad valorem: a percentage of the value of the goods, for example 10 per cent. Most Indian duties are of this kind, valued under section 14 of the Customs Act, 1962 and the WTO Customs Valuation Agreement (transaction value).
• Specific: a fixed amount per unit of quantity, for example so many rupees per kilogram.
• Compound or mixed: a combination, or whichever is higher.
• Tariff-rate quota: a lower rate for a set quantity, a higher rate beyond it, common in agriculture after tariffication under the Agreement on Agriculture.
• Preferential rates under free-trade agreements, subject to rules of origin.

Two descriptive terms often appear in essays. Tariff peaks are very high duties on a few sensitive products. Tariff escalation means higher duties on processed goods than on raw materials, which discourages processing in exporting developing countries.

2. Bound tariffs: GATT Article II

Each member has a Schedule of Concessions annexed to GATT 1994. Under Article II:1(a) a member must accord to the commerce of other members treatment no less favourable than that provided in its schedule, and under Article II:1(b) products described in the schedule are exempt from ordinary customs duties in excess of those set out in it. The scheduled rate is the bound rate, a ceiling.

• Bound rate versus applied rate. The applied rate is what the member actually charges. It may be lower than the bound rate but not higher. The difference is the “binding overhang” or “water”. India's bound rates, especially on agricultural goods, are much higher than its applied rates, so it can raise applied duties without breaching Article II.
• Why binding matters. It gives traders and investors security and predictability; a negotiated concession cannot be withdrawn at will. The Uruguay Round greatly widened the proportion of tariff lines bound, and all agricultural tariffs were bound.
• Other duties and charges (Article II:1(b), second sentence) were recorded and bound under the Uruguay Round Understanding on Article II:1(b).
• Charges permitted beyond the bound rate (Article II:2): a charge equivalent to an internal tax consistent with Article III, anti-dumping and countervailing duties under Article VI, and fees commensurate with the cost of services rendered.
• Information Technology Agreement (1996): participants, India among them, bound duties on listed IT products at zero. In India – Tariff Treatment on Certain Goods in the Information and Communications Technology Sector (panel reports, 2023), duties on mobile phones and components were found to exceed India's bound zero rate; India appealed the reports.

3. Changing a binding: Article XXVIII

A member may modify or withdraw a concession by negotiation with the members with which it was initially negotiated and those with a principal supplying or substantial interest, normally offering compensatory concessions on other products. If agreement is not reached, it may still act, but the affected members may withdraw substantially equivalent concessions. Article XXVIIIbis provides for periodic tariff negotiations.

4. The Indian framework

• Customs Act, 1962, section 12: the charging section, levying duties at rates specified in the Customs Tariff Act, 1975; section 25: power to exempt.
• Customs Tariff Act, 1975: the First Schedule (import tariff, based on the Harmonized System) and the Second Schedule (export tariff); section 8A, emergency power to increase import duties; section 8B, safeguard measures; sections 9 and 9A, countervailing and anti-dumping duties. Preferential rates under trade agreements are given by exemption notifications under section 25 of the Customs Act.

5. Safeguards: the idea

A safeguard is temporary protection against a surge of fair imports. Unlike anti-dumping and countervailing duties, it does not require any unfair practice by the exporter. The justification is political and economic: liberalisation would not be accepted if members could not respond to sudden, damaging import surges. Because the imports are fair, the conditions are strict, and the measure normally applies to imports from all sources.

6. GATT Article XIX and the Agreement on Safeguards

• Conditions (Article XIX:1(a); Safeguards Agreement, Article 2.1): a product is being imported in such increased quantities, absolute or relative to domestic production, and under such conditions, as to cause or threaten serious injury to the domestic industry producing like or directly competitive products, as a result of unforeseen developments and of GATT obligations.
• Serious injury (Article 4.1(a)) is a significant overall impairment in the position of the domestic industry, a higher standard than the “material injury” of anti-dumping. A causal link must be shown and injury from other factors must not be attributed to imports (Article 4.2(b)).
• Investigation (Article 3) with public notice and hearings.
• Non-discrimination (Article 2.2): applied to the product irrespective of source.
• Provisional measures (Article 6): in critical circumstances, as tariff increases, for not more than 200 days.
• Duration (Article 7): only as long as necessary, ordinarily not more than four years, extendable, with a total limit of eight years; measures over a year must be progressively liberalised. Developing countries may extend to ten years (Article 9.2).
• Compensation (Article 8): the member must try to maintain an equivalent level of concessions; affected exporters may otherwise suspend concessions, but not during the first three years where the measure follows an absolute increase in imports.
• Developing-country imports (Article 9.1): not applied against a developing country whose share of imports is not more than 3 per cent, provided such countries together account for not more than 9 per cent.
• Grey-area measures such as voluntary export restraints and orderly marketing arrangements are prohibited (Article 11).

Leading reports: Argentina – Footwear (Appellate Body, 1999), requiring that increased imports be recent, sudden, sharp and significant; Korea – Dairy (1999) on unforeseen developments; and US – Steel Safeguards (Appellate Body, 2003), where the United States failed to demonstrate unforeseen developments and causation.

7. Safeguards in Indian law

Section 8B of the Customs Tariff Act, 1975 allows the Central Government, after such enquiry as it deems fit, if satisfied that an article is imported in such increased quantity and under such conditions as to cause or threaten to cause serious injury to domestic industry, to apply safeguard measures by notification: a safeguard duty, a tariff-rate quota or other appropriate measure. The proviso exempts developing-country imports within the 3 and 9 per cent thresholds. Under section 8B(8) a measure ceases after four years unless extended, and in no case continues beyond ten years from first application. Investigations are conducted by the Directorate General of Trade Remedies under the Customs Tariff (Identification and Assessment of Safeguard Duty) Rules, 1997. Quantitative safeguard restrictions may also be imposed under section 9A of the Foreign Trade (Development and Regulation) Act, 1992.

How this is examined

For a short note on a bound tariff: define it, quote Article II:1(b), distinguish the applied rate, explain why binding gives security, and add Article XXVIII and the ITA dispute. For a note on tariffs: kinds, purposes, GATT preference for tariffs over quotas, and binding. On safeguards: the idea of fair-trade relief, the conditions of Article 2.1, serious injury, the time limits, and section 8B. Contrast safeguards with anti-dumping in one paragraph, since examiners like that comparison.