making import tariffs and market access barriers transparent

Methodology – calculating ad valorem equivalents and average tariffs for an aggregation of products

The following is a summary of the methodology used by Market Access Map for calculating ad valorem equivalent tariffs. A more detailed explanation is available upon request by emailing marketanalysis@intracen.org

Depending on the needs of the user and the intended application of the data, several methodologies can be used to calculate AVEs.

Calculating an AVE involves converting a “specific” tariff to an ad valorem tariff. The application of specific tariffs by many countries makes it difficult for example to compare a tariff of $2 per pair of shoes with $12 per kg. If all tariffs are expressed as a percentage of the value of the product then comparison is made easier.
 

What is an ad valorem equivalent tariff (AVE)?

An ad valorem equivalent tariff (AVE) is a tariff presented as a percentage of the value of goods cleared through customs. It is the equivalent of a corresponding “specific” tariff measure based on unit quantities such as weight, number or volume.

Most important to the process of calculating an AVE is the way the unit value of the product is calculated. The unit value is the value of each unit quantity imported of a product. It is based on the total value of imports of that product divided by the quantity of imports.
 

Market Access Map Methodology for calculating AVEs

About 81 countries apply specific tariffs. In Market Access Map, all specific applied tariffs are converted to ad valorem equivalents (AVEs). AVEs are calculated by dividing the specific tariff per unit by the value of the product per unit.

In Market Access Map, unit values and AVE’s are calculated on a bilateral basis (where possible). This is in order to show the equivalent level of protection actually applied by one country to another when a “specific” tariff is concerned. This is important, because the value of a product can vary considerably depending on the supplying country. That is, even if two exporting countries face an identical specific tariff on the same product exported to the same market, the country exporting the less expensive product will face a higher equivalent level of protection.

We now explain the calculation of AVEs in Market Access Map by way of the following example:

Assuming that the importing country is Switzerland, the exporter is Brazil, and the product is “sweetened cream” we would proceed as follows.

AVE’s are calculated where possible at the most detailed level – the national tariff line. In the case of sweetened milk and cream, the HS6 digit code is 040299 and Switzerland’s tariff line code for sweet cream is 04029920.

In order to calculate the ad valorem equivalent of the specific tariff applied by Switzerland to sweet cream 04029920 from Brazil, we would first calculate the unit value by dividing the value of Switzerland’s imports of this product from Brazil by the quantity imported.

We then compare this bilateral unit value with the range of unit values of Switzerland’s imports of sweet cream from all countries. If the bilateral value fits within the normal range of the unit values from all countries then we keep it. Where it is outside of the normal range (between the 1st and 3rd quartiles) then it is adjusted to fit within the range.

The AVE is then calculated by dividing the specific tariff by the unit value.

In the case where Switzerland does not import sweet cream 04029920 from Brazil (or if the trade data is not available at the tariff line level), then the unit value used is the average of the unit values of Switzerland’s imports of sweet cream from all countries. In the case where Switzerland does not import sweet cream at all (from any country), then we consider the imports by Switzerland’s Reference Group of countries, from Brazil, of the product at the HS6 digit level in this case 040299 – sweetened milk and cream.

The unit value is calculated and again compared to the range of unit values of Switzerland’s Reference Group’s imports of 040299 from all countries. If necessary, it is adjusted to fit within the 1st and 3rd quartile range.

For the calculation of AVEs, Market Access Map takes into consideration, mixed and combined tariffs (MIN, MAX, MORE, LESS, etc).

Only technical duties have not been calculated, for example, if the tariff depends on the quantity of sugar contained in the product.

In calculating unit values, Market Access Map methodology uses the most recent year’s trade data available.
 

Other Considerations

Market Access Map calculates AVEs for specific applied and bound tariffs. 

The methodologies used to calculate AVEs for bound tariffs are different to the AVE methodology for applied tariffs. The bound tariff methodologies are those used by WTO members and are as follows:

1. The methodology for agricultural products - see WTO document "Draft guidelines for the conversion of final bound NON-AD VALOREM duties into AD VALOREM equivalents. - Committee on agriculture, Special Session - 20 May 2005"

2. methodology for non agricultural (NAMA) products. See WTO document "Draft guidelines for the conversion of final bound NON-AD VALOREM duties of NON-AGRICULTURAL products into AD VALOREM equivalents. - Negotiating group on market access - 20 September 2005 ref:JOB(05)/166/Rev.1   
 

Calculating the average tariff for an aggregation of products:

If we consider the tariff applied by one country to one other, the average tariff at the 6-digit level is a simple average of the tariffs applied to the various tariff line positions within that 6-digit code.

At the 4 and 2 digit, or any other aggregation level however, it is not a simple average. In calculating average tariffs for these aggregations, the trade pattern of the importing country's Reference Group is used as a weighting. That is, the Reference Group’s imports of the product from the world (not from the bilateral partner), is used as the weighting.

In the aggregation process Market Access Map takes the best tariff preference (eg GSP, ACP) applied to that partner into account. If no tariff preference is relevant, the MFN or general rate is used.
 

Simulations of Tariff Reductions – Special Note regarding the ABI formula

Market Access Map currently calculates national and sectoral average tariffs applied by each country to the world for applied tariffs only. However in using the ABI formula to simulate a reduction on bound tariffs, the user has the option to use either the country’s national average of applied tariffs or the national average of bound tariffs (this later figure is sourced from WTO official data). National sectoral averages of bound tariffs are not yet available in Market Access Map but will be made available in due course as will ad valorem equivalents for all specific bound tariffs.
 

Country Reference Groups

A Reference group of countries is a group of countries similar to the importing country in question.

Using Reference Group of countries in the calculation of unit values and in the aggregation process makes it possible to highlight prohibitive tariffs and reduce the endogeneity bias.

In theory, tariffs should be aggregated on the basis of imports occurring under a hypothetical situation of free trade. As this structure is unknown, an endogeneity bias appears when one aggregates different tariffs to measure the global level of protection of a sector or an economy. In aggregating tariffs, using the national imports as weights, causes an endogeneity bias since these imports depend on the tariff. That is, a high tariff generates limited imports and therefore the tariff's contribution to the overall protection level of the country is reduced. A low tariff produces the reverse effect. So, using national imports as weights leads to an under-valuation of the protection level of a country. Market Access Map manages this endogeneity bias by weighting the imports of a country by the trade pattern of a Reference Group to which the country belongs. The 8 Reference Group used in Market Access Map are defined on the basis of a hierarchical clustering analysis based on GDP per capita (in terms of purchasing power parity - PPP), exports per capita and imports per capita.
 

Alternative Methodologies

Different collaborations with Market Access Map may use different methodologies depending on how the data is to be used. For the Millennium Development Goals, AVEs have been estimated based on trade data at the national tariff line level for OECD Countries. For more information see MDG 2003. www.developmentgoals.com