Trade Terms Glossary (Early Beta Version)

Accession

The formal process by which a country applies to join the World Trade Organization.

To join, an applicant must not only agree to abide by all the rules of the WTO but also to liberalize its economy to the satisfaction of all existing WTO Members. This can take many years as some WTO Members insist on carefully negotiating every aspect of the applicant's trade regime, and the applicant cannot join while even a single WTO Member remains unsatisfied.

The process is therefore simultaneously a discussion between the applicant and the entire Membership on areas of common interest, and a hundred one on one negotiations on tariffs and services.

Once these one on one negotiations are completed successfully, they are pooled and the biggest liberalization commitments in each area become the applicant's commitments to all WTO Members (under the Most Favoured Nation principle).

MFN Accession Commitments Example: Mordor is undertaking its Accession. It commits to a bound tariff of 10% on horsemeat in its negotiations with Rohan, and a 15% bound tariff on swords in its negotiation with Gondor. Once Mordor completes its Accession, it will have a bound rate of 10% on horsemeat and 15% on swords from any WTO Member even if it never promised them that commitment bilaterally.

Further Reading:
WTO Accessions Home Page
Current List of Accessions

Agriculture Subsidies

Government supporting their domestic farmers by helping them directly, rather than trying to keep out foreign competition.

This kind of government assistance can take many forms, with some considered benign or even a net positive for the global economy and others considered trade distorting and problematic. Generally speaking, if a subsidy causes farmers to grow more than what they otherwise would, to sell at a lower price or to grow something different to what they would in the absence of a subsidy, that subsidy is considered potentially trade distorting.

Trade distorting subsidies are potentially problematic because instead of farmers looking at market prices and producing accordingly, they may instead produce whatever the subsidy encourages them to, in volumes beyond market demand. This can lead to over-production, pricing farmers in countries without subsidies out of their markets and threatening their livelihoods.

Under the WTO Agreement on Agriculture, governments agreed to limit subsidy spending in the categories they agreed at the time were most trade distorting. WTO Members are also obliged to annually report their agricultural subsidies to the WTO through Domestic Support Notifications.

Further Reading:
WTO Agreement on Agriculture - Article VI - Domestic Support
Sample Domestic Support Notification - USA 2015

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Agriculture Subsidies - Green Box

A class of government support for farming which the WTO Agreement on Agriculture classifies as less trade distorting than other types, and allows in unlimited amounts.

This includes funding for agricultural research and disaster relief funding. Controversially, it also includes direct payments made to farmers which are 'decoupled' from their production. In other words, the amount of money you receive from the government is not dependent on what or how much you grow.

Example: A research grant to a university to study climate change resilient seeds.
Example: A flat government payment to anyone in the country who owns and operates a farm, regardless of what or how much they grow. The theory is that this type of payment doesn't distort trade as much as other types, because it doesn't encourage greater or even different production.

Further Reading:
Annex II of the Agreement on Agriculture, which lists Green Box eligible program types
ICTSD Short Paper on the future of the Green Box

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Agriculture Subsidies - Blue Box

A class of government support for farming which is contingent on farmers limiting their production to a fixed level. Support of this kind is unlimited under the WTO Agreement on Agriculture but only a handful of economies make use of it, most notably the European Union, Japan and Norway.

The concept behind this category is that it allows a government to keep a farming sector competitive using subsidies, but without encouraging the sector to produce more than it has historically.

Example: A payment to a farmer for every tonne of potatoes they produce up to 85% of what they produced in 2016, with no payments for potatoes grown beyond that level.

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Agriculture Subsidies - Amber Box

This is the class of government support for farming on which the WTO Agreement on Agriculture places limits. It contains the types of subsidies which are directly linked to how much a farmer produces or fix the price they receive.

Governments have committed not to spend beyond a small fraction of their annual value of production of a product in support for that product, and no more than a fraction of their total value of agricultural production on support not tied to one particular product. This fraction is called the De Minimis and the size of the fraction varies between Developed and Developing Country Members.

When the WTO Agreement on Agriculture was being negotiated, a number of primarily Developed Countries were spending far more on these kind of subsidies than de minimis would allow. To get their support, the agreement provided them with a kind of 'overflow allowance' called 'AMS.' They could use this AMS allowance every year to spend beyond their de minimis limit as long as they stayed within the allowance.

The AMS limits available to the EU, US and Japan are very large, in the tens of billions, and are an ongoing source of controversy within the WTO agriculture negotiations.

Example: The government will pay a farmer $15 per tonne of potatoes they produce.
Example: The government will offer to buy any potatoes produced domestically at a fixed price, regardless of the market rate. This effectively creates a price floor for potatoes and encourages farmers to produce as much as they can, regardless of demand.

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WTO Member Category

There are three officially recognized categories of Members within the WTO: Developed Member, Developing Member and Least Developed Country Member.

Some WTO rules and agreements apply differently depending on which category a Member is in, with developing countries enjoying additional flexibilities, reduced commitments or longer adjustment and implementation periods. This is called Special and Differential Treatment.

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WTO Member Category - Developed Country

One of the three official categories in the WTO, this includes all Members which have declared themselves to be 'Developed' for the purposes of the WTO rules. In the overwhelming majority of cases, this means they receive less flexibilities under WTO rules which contain a Special and Differential Treatment component than WTO Members in other categories.

There are generally held to be forty one Developed Members in the World Trade Organization including Australia, Canada, the United States of America, all EU Members, the non-EU Nordic States, Japan, Switzerland and New Zealand.

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WTO Member Category - Developing Country

One of the three official categories in the WTO, this includes all Members which do not consider themselves to be 'Developed' but are not included on the United Nations list of Least Developed Countries. It is a self-designated category.

Some WTO rules and agreements apply differently depending on which category a Member is in, with developing countries enjoying additional flexibilities, reduced commitments or adjustment periods. This is called Special and Differential Treatment.

This category is controversial because it includes Members with high GDP per capita (eg. Qatar), Members accounting for a significant percentage of world trade (eg. China) and Members that do both (eg. South Korea).

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WTO Member Category - Least Developed Country

One of the three official categories in the WTO, this includes those 36 WTO Members officially designated by the United Nations as being Least Developed Countries (LDCs). They are designated based on a set of development criteria and can "graduate" from this status by consistently exceeding them.

WTO agreements which include Special and Differential Treatment generally reserve the greatest flexibilities for Members in this category. In many WTO negotiations on new rules, it is agreed almost from the start that LDCs will not have to make any additional commitments.

Further Reading:
WTO List of Least Developed Country Members
Full UN List of Least Developed Countries
UN Criteria for Least Developed Country Status

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Chapeau

In a legal text like a WTO Agreement or a Free Trade Agreement, this is an introductory paragraph at the top of a section which sets the general rule which subsequent sub-paragraphs expand on. Sometimes, sub paragraphs provide greater detail on what the chapeau refers to, and sometimes they list exceptions where it doesn't apply.

For example, the chapeau to Article XX of the General Agreement on Tariffs and Trade (GATT) reads like this:
> Subject to the requirement that such measures are not applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures:

It sets out what Article XX is about, which is a list of policy areas where a government can still take action without violating this agreement, provided it doesn't use those actions as disguised trade barriers.

The specific policy areas are then listed in sub-paragraphs under the chapeau, like this one:
> (b) necessary to protect human, animal or plant life or health;

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Most Favoured Nation (MFN)

A bedrock rule of the World Trade Organization, this requires WTO Members to extend equal treatment in terms of tariffs, regulations and procedures to all other Members. The two specific primary exceptions to this rule are trade agreements and preferences.

What MFN means in practice is that, except when an exception applies, a WTO Member has to charge imports from all WTO Members the same tariff rate and apply the same regulations to determine if they can enter the country. This means a WTO Member cannot decide to unilaterally offer improved market access to just one Member. The principle tries to ensure an equal playing field for trade globally, one that is not distorted by short-term political alliances and shifts.

It’s also important to understand that applying the same regulation to all WTO Members does not necessarily mean applying it the same way. WTO Members are free to apply different levels of scrutiny and varying tests, provided the underlying regulation is the same. In simplistic terms, if a country has a regulation preventing the import of koalas, it is not a breach of MFN to test shipments from Australia more thoroughly than those from Iceland.

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Preferences

These are exceptions to the WTO Most Favoured Nation rule under which one WTO Member can't grant another improved access to its market (through lower tariffs) unless they sign a reciprocal trade agreement or the improved access is offered to all WTO Members. Preferences allow WTO Members to charge lower tariffs on imports from Developing Country Members and Least Developed Country Members, without a trade agreement and without lowering the tariffs they charge on imports from richer, Developed Countries or Developing Countries they choose not to extend preferences to.

Preferences allow countries to use trade as a tool to support the economic development of developing countries. By charging lower tariffs on imports from developing countries, the importing WTO Member provides a competitive advantage for them.

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Duty Free Quota Free (DFQF)

This is a type of preferential arrangement where WTO Members eliminate all tariffs and quotas on imports from a Developing Country Member or Least Developed Country Member. Depending on how high the tariff is ordinarily, or how restrictive the quota is, this could be a considerable leg up for a developing country industry exporting to this market.

At the 2005 6th World Trade Organization Ministerial Conference in Hong Kong, Members agreed to try and provide Least Developed Country Members with duty free quota free access on either 100% or failing that 97% of all tariff lines.

Examples of DFQF Programs:
European Union's Everything But Arms Program - Factsheet
US African Growth and Opportunity Act - About

Further Reading:
2016 WTO Report on DFQF
DFQF What's in it for African LDCs?

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Regulations

In the trade context, these are requirements an import has to meet in order to be sold within a country. Regulations can be explicitly written into a law, or come from a body like a government agency which a law has invested with authority to make or change regulations.

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Rules of Origin (ROOs)

When one WTO Member grants the exports of another better than Most Favoured Nation tariff rates through either a trade agreement or through preferences, it generally wants to limit the benefits to goods fully or largely made in that country. Rules of Origin are the conditions written into the trade agreement or preference which an import has to meet to qualify for the lower tariff rate.

Rules of Origin are intended to stop a third country shipping a virtually completed product to one trade agreement partner, doing some minor final work on it, (like packaging) and then shipping it to the other trade agreement partner using the lower tariff.

Rules of Origin are among the most complex concepts in trade. There are no common, universally accepted Rules of Origin. Every trade agreement and preferential access arrangement can have its own. However, generally speaking to determine if a good qualifies as coming from a country, they look at two things:
1. Was the product transformed so much from its imported components that the final product is in a different tariff line?
2. What percentage of the products total value was added through work done or inputs added in the country?

Example: If you import an unpainted car, paint it blue and then try to export it under a Free Trade Agreement, it probably won’t meet the Rules of Origin. A blue car is in the same tariff line as an unpainted car, so it doesn’t meet condition one and painting a car only adds a small fraction to its total value so it doesn’t meet condition two.

Further Reading:
World Customs Organization’s explanation of Rules of Origin

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Cumulation

To meet Rules of Origin, a substantive amount of work on or inputs into a final export have to happen in the country looking to export something using the lower tariffs in a trade agreement or preferential access arrangement. Cumulation refers to the extent and circumstances under which one can count work done or inputs sourced from another country against its own domestic total.

The most common form of accepted cumulation is bilateral. This is when inputs or work done in the importing country itself count against the exporting countries domestic total.

Example: Gondor and Rohan sign a Free Trade Agreement, which includes reducing tariffs on saddles to 0%, provided those saddles meet a 70% value added Rules of Origin threshold. The fine painters of Gondor want to buy plain saddles from Rohan, paint them beautifully and then sell them back to the riders of Rohan at a nice profit.

Without cumulation, the painted saddles would not meet the Rules of Origin threshold of the Free Trade Agreement, because painting doesn’t constitute 70% of the saddles total value. However, because the Rohan-Gondor FTA includes bilateral cumulation, the Gondor painters are allowed to count work done in Rohan (making the saddles) against their own total, and thus meet the Rules of Origin requirement.

A less common form of accepted cumulation is diagonal. This occurs where three or more countries have trade agreements connecting them individually, but aren’t all under a single regional or plurilateral agreement. Diagonal cumulation is the extent to which they can all pool inputs and work without counting against the Rules of Origin of any of their individual trade agreements.

Example: In addition to their bilateral free trade agreement, Gondor and Rohan also both independently have their own free trade agreement with The Shire. Instead of producing the leather for their saddles domestically, Rohan instead imports it tariff free from The Shire.

If the Gondor-Rohan trade agreement allows diagonal cumulation, Rohan can count the value of The Shire’s leather as if it were Rohani to export the unpainted saddle tariff free to Gondor. Then, Gondor doesn’t have to count the value of The Shire’s leather as foreign for the purposes of exporting the painted saddle back to Rohan.

Further Reading:
Explaining Cumulative Rules of Origin – Samuel Lowe in Medium

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Schedules

These are documents outlining the specific commitments a WTO Member has made regarding its maximum bound tariffs for goods and and where it reserves the right to deny others access to or equitable treatment in its services market.

If a Member wants to change its schedule in a way which reduces the openness of its market, it is obliged under WTO rules to follow a procedure set in the relevant agreement. This will generally involve formally notifying all WTO Members of the change, entering into consultations with those who believe they will be negatively impacted by the change and potentially even finding a way to compensate them for the impact the change will have.

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Schedule - Goods

This document outlines a WTO Member's Most Favoured Nation bound tariff commitments. The schedule contains a long list of tariff lines and the maximum tariff the WTO Member has agreed it will charge on goods in that category.

The easiest way to look up the bound tariffs of any Member or group of Members on any product is to use the WTO Secretariat's Tariff Download Facility.

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Schedule - Services

Far more complex than a Goods Schedule, this document outlines the Most Favoured Nation comitments and reservations a WTO Member has made regarding trade in services. These schedules are notoriously difficult to read and impenetrable to non-experts.

The most important concepts to understand in reading a Services Schedule are commitments and reservations. Commitments are where a WTO Member has agreed not to implement policies which limit the ability of foreigners to access a domestic services market, or to treat them differently to domestic firms when they do so.

A reservation is the opposite, where a WTO Member specifically reserves the right to implement restrictive or discrimintory policies. The two important words to know here are 'None' and 'Unbound' as they frequently appear throughout a Services Schedule. These both refer to reservations.

None - This means the Member is taking no reservations. If this appears in a sectoral section (see below) then the reservations in the horizontal section still apply, but there are no others.

Unbound - This means the Member is making no commitments whatsoever and reserves for itself full rights to legislate in a protectionist manner where this type of service is concerned.

The first section of a Services Schedule is the 'Horizontal' portion. This contains the commitments and reservations a WTO Member offers across all services imports. These are divided into commitments and reservations on 'market access' - in other words whether foreign firms are allowed to export services to the Member and 'national treatment' - the extent to which the government commits to treating foreign firms identically to domestic ones under its rules and regulations. Under both these categories, you may find commitments and reservations listed under Mode 1, Mode 2, Mode 3 and Mode 4.

The subsequent sections of the schedule are the 'sectorals.' These list commitments and reservations the Member is making in a specific sector like retail or higher education. They are set out identically to the horizontal commitments, with four modes in the market access and national treatment columns.

Further Reading:
WTO Guide to Services Schedules - Warning: Long
Australian Original 1994 Services Schedule

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Services

This is the sale, across borders, of intangible products. Any transaction between two parties, where no physical goods change ownership can be considered a services transaction. In order for such a transaction to be considered trade, those involved have to ordinarily be based in different countries. This includes if one of the parties travelled to the other to either purchase or deliver the service.

Unlike goods, which can be charged tariffs and are divided into tariff lines, services are never charged a tariff and are divided into four Modes within each service type.

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Services - Market Access

Market access in services refers to whether foreigners are allowed to sell the service in question, and how. When negotiators talk about increasing market access for a specific service, they mean the government lifting regulations which prevent or limit their citizens from purchasing the service from foreigners, or foreigners traveling to their country to deliver the service.

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Services - National Treatment

This refers to how foreign services providers are treated by the regulations and rules of the importing country. The importing country is considered to be providing full national treatment when its regulations don't differentiate between foreign and domestic service providers in a given sector.

Example: A regulation which requires the local branches of foreign insurance providers to maintain larger capital reserves than domestic firms would be providing less than national treatment.

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Services - Mode 1

This refers to services which are delivered without either the buyer or the seller leaving their respective countries. If it's not a tangible good and you can purchase and receive it from overseas without getting off the coach, it's probably a Mode 1 Service.

Example: A buyer in New York going online to purchase the translation of a page into German from a firm in Berlin.

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Services - Mode 2

This refers to services where the buyer must travel to the seller's country in order to receive the service.

Example: A patient in Myanmar travelling to Singapore to undertake a delicate medical procedure.

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Services - Mode 3

This refers to services provided by firms from one country through branch offices they have opened in the buyer's country. This includes branch offices entirely staffed by locals.

Example: An international legal firm headquartered in London opens a branch in Australia to provide Australians with advice on Australian law.

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Services - Mode 4

This refers to the seller, a national of one country, travelling to the country of the buyer temporarily to provide them the service.

Example: A professor from one country travelling to another to spend a year as a paid visiting fellow and lecturer.

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Standstill and Ratchet

This is a concept in international trade agreements where reaching agreement on additional liberalisation or market openness in a sector proves impossible. Instead of committing to greater openess in the sector, a government commits to two things:

A standstill - To never reduce the openness of the sector beyond its current level. In other words, not to introduce new rules or policies which make it harder to sell it this good or service than it is currently.

A ratchet - Building on the standstill, this means any new rules introduced which make it easier to sell it this good or service become the new standstill.

Important to note that a standstill and ratchet doesn't mean rules and regulations can't change. In fact, they can be completely revised. What the commitment does mean however is that the new, revised regulations can't be more restrictive to trade in the covered area than what they're replacing.

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Special and Differential Treatment

A term commonly used in the WTO, this refers to additional flexibilities the rules provide for Developing Countries. There is a general consensus that the rules should be more lenient for poorer countries to provide them with an easier on-ramp to the more open markets the WTO tries to create.

Special and differential treatment provisions can provide Developing Countries with:
1. Additional time to implement commitments, before those commitments become legally binding and a dispute can be taken against them for non-compliance.
2. Additional flexibilities, wherein some of the rules in the agreement do not apply to them.
3. Commitments regarding technical assistance. These generally take the form of non-legally binding agreements by Developed Countries to provide aid to help them implement their commitments or manage the transition to a more open economy.

Further Reading:
WTO Page on Special and Differential Treatment

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Tariff

These are taxes on imported goods, charged by the government of the territory the goods are entering and payable by the importer. In most cases, they are ultimately passed on to the consumer in the form of higher prices. Importantly, tariffs only ever apply to goods. There is no such thing as a tariff on services.

A government generally imposes tariffs for one of three reasons:
1. To support their domestic producers by making imports prohibitively expensive;
2. To support their domestic producers by making imports more competitive but still viable;
3. To raise government revenue.

Further reading:
The WTO's Tariff Lookup Facility

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Tariff - Line

This refers to a specific tariff, and a definition. Any goods imported into the country which meets that definition will be charged that specific tariff.

To make tariffs administratively manageable and comparable, governments agreed through the World Customs Organization on a common way to classify them. This is called the Harmonized Commodity Description and Coding System or the HS System. The HS System classifies all types of goods into categories using a numbering system. The longer the number, the more specific the goods it refers to. This allows governments to set tariffs on as broad or specific a category of goods as they want to.

Example:
Two digit: 09 - Coffee, tea, mate and spices
Four digit: 0902 - Tea, whether or not flavoured.
Six digit: 090210 - Green tea (not fermented) in immediate packings of a content not exceeding 3 kg

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Tariff - Ad Valorem

This is the most common type of tariff, charged based on a percentage of the imported goods value.

Example: An importer bringing a $100 watch into a country with a 15% ad valorem tariff on watches would need to pay a $15 tax. The most common form of ad valorem charge you likely encounter is a VAT or sales tax.

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Tariff - Specific

Sometimes called 'weight based,' this is a volume based tariff which doesn't change based on the price of the good. It's most commonly found in agriculture.

Example: An importer bringing 10 tonnes of pork into a country with a $10/tonne specific tariff on pork would need to pay $100 in tax, regardless of how much the pork is worth.

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Tariff - Applied

This is the actual tariff charged by the customs authorities of a country on imports of a specific good. In many cases, this will be lower than the countries bound tariff rate on the item under the WTO.

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Tariff - Bound

This is the maximum a WTO Member has committed in its WTO Goods Schedule to charging in tariffs on a specific type of goods. It could also refer to the most a country has agreed it will charge in tariffs on a specific good from one of their Free Trade Agreement partners.

At any time, government can raise their applied tariffs up to this level without consulting or compensating other WTO Members or breaching the terms of their Free Trade Agreements.

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Trade Facilitation

This refers to measures governments take to make the bureaucracy of trade more predictable, less time consuming and less expensive for importers and exporters. Trade facilitation involves addressing impediments to trade which aren't deliberate (like tariffs or regulations) but instead arise from procedures and processes which aren't intended to make trader harder, less predictable or more expensive, but do so anyway.

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Trade Facilitation Agreement (TFA)

The TFA, which entered into force in February of 2017, is a new set of trade rules to which all WTO Members signed up. These rules cover a variety of trade bureaucracy processes and practices, such as publishing information online and having clear procedures to appeal an unfavourable customs decision.

It contains a mixture of obligations to do (the Member SHALL), and obligations to try (the Member SHALL ENDEAVOUR). The former are considered far more binding, because it's very difficult to prove in a WTO Dispute that a Member didn't try.

When the TFA entered into force in February, all Developed Country WTO Members were automatically bound by all of its provisions. However, Developing Country were allowed to designate which rules they would be bound by immediately, which they would need time to implement and which they would need technical assistance to meet.

While the TFA's provisions can be read as encouraging the use of new technologies and the internet to facilitate trade, they are in no way a legally binding obligation to do so. All references which can be read to suggest such an obligation are couched in legal language which makes them very difficult to enforce through the WTO Dispute Settlement System, such as "as appropriate" or "to the extent possible."

Further Reading:
Text of the Trade Facilitation Agreement
WTO's Trade Facilitation Agreement Facility - What's in the TFA?
Blog: How does the TFA really affect Brexit - Peter Ungphakorn

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Trade Agreement

This is an umbrella term for deals between two or more countries which make it easier, cheaper or less risky for trade to occur between them. They can vary in scope from very narrow technical agreements about trade in dangerous chemicals to a Single Market arrangement covering almost all aspects of trade.

Even the World Trade Organization is technically a trade agreement, or rather a series of trade agreements, applying to all its 164 Members, and overseen by its own dedicated Secretariat.

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Free Trade Agreement (FTA)

The most common and well known form of trade agreement, this is a deal between two or more countries which lowers a range of trade barriers below what each country is bound to provide others under the Most Favoured Nation rule of the WTO. Free Trade Agreements are permitted under the WTO, provided they cover 'substantially all trade'. This is to prevent countries avoiding the Most Favoured Nation rule by signing hundreds of FTAs which only cover one or a handful of sectors.

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Customs Union

An agreement where neighbouring countries eliminate tariffs between them. This not only makes it easier to sell goods to one another, but allows a region to pool its production power and specialize in different areas to more efficiently produce a product, by eliminating the tariff cost of moving components back and forth across internal borders.

To make this work smoothly, the Customs Union members set a common set of external tariffs for all imports from outside their group. This means once a product enters the territory of any Customs Union Member and is charged a tariff, it can move around internally without customs checks. This common external tariff is necessary because without it, importers could exploit differences in comparative tariffs to import goods into the higher tariff economy by bringing them into the customs union through a border with the lower tariff economy.

Importantly, a Customs Union only applies to tariffs, and therefore to goods. On its own, a Customs Union does not include any commitments on services, regulations, investment, intellectual property or immigration.

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Single Market

The most advanced form of trade agreement, this is in fact a series of multiple agreements, treaties and other legal instruments. Collectively, these build on a Customs Union by also eliminating internal barriers to trade in services, the free movement of labor and the free movement of capital. To the extent possible, regulations are harmonized or set collectively or harmonized within a Single Market.

The European Union is the go-to example of a Single Market.

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Mutual Recognition Agreement (MRA)

These are a very specific type of deal between countries, generally limited to a list of specific sectors like automotive or pharmaceutical. For products in these sectors which require testing or certification to be imported, the parties to an MRA agree to accept test results and certificates issued by one another's laboratories or inspectors.

This is useful because for some tests and certifications, countries require that tests be conducted only by their own domestic laboratories. An MRA waives this requirement for the parties, allowing them to save time and money by having their products tested at home.

Importantly, two countries can have an MRA even if they don't align their regulations, or even accept them. Under an MRA, the laboratories in one country can test and certify against the regulations of the other. This facilitates trade between them, but leaves both free to independently set their own regulations.

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Water

In a trade negotiation, this refers to the gap which remains when a government has liberalized its trade policy to a greater extent than had it committed to under its WTO Agreements or Free Trade Agreements. It is called water because it refers to what a Member can cut without changing its actual policies (applied tariffs or subsidy levels). Cuts to these actual policies are called 'Blood'.

Water in tariffs is the gap between applied tariffs and bound tariffs, it is sometimes called the "tariff overhang".

Example: If a Member has an applied tariff of 10% on cars but has bound their car tariff rate at 20%, then they have 10% worth of 'water' in their car tariff. They could commit to a 10% reduction in their bound tariff rate on cars without impacting on the tariff they actually charge importers at the border.

Water in subsidies refers to the gap between how much a Member is spending on a capped form of subsidy and how much they are allowed to spend under WTO rules.

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