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Tariff-Cutting Formula Modality
During each round of WTO tariff negotiations, participants have to reach agreement on the methods, or ‘modalities’, by which to commence the tariff reductions. Different rounds approached tariff-reduction modalities in different ways. For instance, the participants in the Tokyo Round used a “formula approach” in which they applied an agreed mathematical formula to cut all tariffs across the board, whereas in the Uruguay Round, participants negotiated cuts product by product as well as through sectoral tariff initiatives.
In July 2004, the Negotiating Group on Non-agricultural Market Access (NAMA) agreed to pursue work on a non-linear tariff cutting formula applied to every tariff line of WTO Members’ tariff schedules. Over the recent years, there has been increasing convergence on a Swiss formula approach with sufficient flexibility so that the methodology will work for all economies.
What is a Swiss Formula and How Does it Work?
A Swiss formula is a progressive non-linear formula under which high tariffs are cut more than low tariffs. Its functional form is as follows:
New Tariff = (Old Tariff * A)/(Old Tariff + A)
where ‘A’ is referred to as the Swiss Coefficient.
The Swiss coefficient sets a ceiling that tariffs approach but never reach, thus determining the overall level of ambition of the formula. Follow this link to view a Swiss formula calculator, which displays the effect of different coefficient options on a range of tariffs.