The Swiss Formula is a mathematical formula designed to cut and harmonize
tariff
A tariff is a tax imposed by the government of a country or by a supranational union on imports or exports of goods. Besides being a source of revenue for the government, import duties can also be a form of regulation of foreign trade and pol ...
rates in
international trade
International trade is the exchange of capital, goods, and services across international borders or territories because there is a need or want of goods or services. (see: World economy)
In most countries, such trade represents a significant ...
. Several countries are pushing for its use in
World Trade Organization
The World Trade Organization (WTO) is an intergovernmental organization that regulates and facilitates international trade. With effective cooperation
in the United Nations System, governments use the organization to establish, revise, and ...
trade negotiations. It was first introduced by the Swiss Delegation to the WTO during the current round of trade negotiations at the WTO, the
Doha Development Round
The Doha Development Round or Doha Development Agenda (DDA) is the trade-negotiation round of the World Trade Organization (WTO) which commenced in November 2001 under then director-general Mike Moore. Its objective was to lower trade barriers ...
or more simply the Doha Round. Something similar was used in the
Tokyo Round.
The aim was to provide a mechanism where maximum tariffs could be agreed, and where existing low tariff countries would make a commitment to some further reduction.
Details
The formula is of the form
:
where
: ''A'' is both the maximum tariff which is agreed to apply anywhere and a common coefficient to determine tariff reductions in each country;
: ''T''
old is the existing tariff rate for a particular country; and
: ''T''
new is the implied future tariff rate for that country.
More Details on the Swiss Formula
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So for example, a value ''A'' of 25% might be negotiated. If a very high tariff country has a rate ''T''old of 6000% then its ''T''new rate would be about 24.9%, almost the maximum of 25%. Somewhere with an existing tariff ''T''old of 64% would move to a ''T''new rate of about 18%, rather lower than the maximum; one with a rate ''T''old of 12% would move to a ''T''new rate of about 8.1%, substantially lower than the maximum. A very low tariff country with a rate ''T''old of 2.3% would move to a ''T''new rate of about 2.1%.
Mathematically, the Swiss formula has these characteristics:
# As ''T''old tends to infinity, ''T''new tends to ''A'', the agreed maximum tariff
# As ''T''old tends to 0, ''T''new tends to ''T''old i.e. no change in tariffs as it is already low
# When ''T''old is equal to ''A'', the maximum, then ''T''new is half of ''A''. Thus the maximum tariff which is agreed is cut in half.
Criticisms
It has been argued however that the formula is too simple for use in tariff negotiations and that it does not lead to proportionate reduction in tariffs across all countries. It is because of this that those who believe an "ideal formula" exist are still looking for the ideal formula, with the Koreans having already suggested an alternative formula, though it has not yet been adopted nor is there any proof that an ideal formula exists.
References
International trade theory
Commercial policy
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