Bound, Applied MFN and Preferential Tariffs

A bound tariff is the maximum customs-duty rate that a WTO member has committed not to exceed for a product. The applied MFN tariff is the normal, non-discriminatory rate actually charged on that product to WTO trading partners, while a preferential tariff is a lower rate granted only to eligible countries under an allowed preferential arrangement. Thus, the bound rate is a legal ceiling, whereas applied MFN and preferential rates are rates used in practice.

Core differences

• Bound tariffs are recorded as commitments in a member’s WTO Schedule of Concessions and constitute legal ceilings for covered tariff lines.
• Applied MFN tariffs are the ordinary rates currently imposed on imports from WTO members that do not qualify for preferential treatment.
• Preferential tariffs are reduced or zero-duty rates available only to specified trading partners or beneficiaries.
• For a bound tariff line, the applied MFN rate may be below the bound rate but ordinarily cannot exceed it.
• A preferential tariff is generally below the corresponding applied MFN tariff, creating a preference margin for eligible imports.
• Some tariff lines may remain unbound, meaning that no product-specific maximum rate has been committed in the member’s WTO schedule.

Legal basis under the WTO

The three rates perform different functions within the rules on non-discrimination, market-access commitments and permitted exceptions.

• GATT Article I establishes most-favoured-nation treatment: a tariff advantage granted to one member must generally be extended to like products of all WTO members.
• GATT Article II gives legal effect to tariff bindings contained in each member’s Schedule of Concessions.
• GATT Article XXIV permits preferential tariff treatment within qualifying customs unions and free-trade areas.
• The Enabling Clause permits specified differential and more favourable treatment for developing countries, including the Generalized System of Preferences and certain regional arrangements among developing countries.
• A member seeking to raise a bound tariff above its commitment must renegotiate the concession under WTO procedures; affected members may seek compensatory concessions.

How the rates operate together

• An importer first identifies the product’s tariff classification and the importing country’s applicable customs rate.
• If the goods satisfy the eligibility conditions and rules of origin of a preferential arrangement, the preferential rate may apply.
• If no preference is available, the applied MFN rate normally applies.
• The difference between the bound rate and the applied MFN rate is often called binding overhang or tariff water; it provides policy space to raise the applied rate without breaching the binding.
• A large preference margin can improve an eligible exporter’s price competitiveness relative to suppliers facing the MFN rate.

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