Preferential rates

Definition

Preferential rates refer to reduced or favourable tariff rates granted to certain goods when traded between countries that have established preferential trade agreements. 

What are preferential rates?

Preferential rates contribute to the facilitation of trade by reducing the cost of imported goods, promoting market access, and encouraging economic cooperation among participating countries.

Preferential rates are typically lower than the standard or most-favoured-nation (MFN) rates that would apply in the absence of such agreements.

Preferential trade agreements (PTAs) are agreements between two or more countries that involve the reduction or elimination of trade barriers such as tariffs for certain goods. 

To qualify for preferential rates, goods must meet specific origin criteria outlined in the trade agreement. These criteria ensure that the benefits of preferential treatment are extended only to goods originating from the countries that are parties to the agreement.

Some preferential trade agreements allow for cumulation, which means that inputs or components sourced from one or more participating countries can be considered as originating from the exporting country. This facilitates the use of inputs from different countries while still qualifying for preferential rates.

Example of preferential rates

Let’s consider an example of preferential rates between Country A and Country B. The trade agreement outlines that certain goods traded between these countries are eligible for preferential tariff rates. In this scenario:

• Standard tariff rate: The standard or most-favoured-nation (MFN) tariff rate for a specific product, let’s say bicycles, is 10%.
• Preferential tariff rate: Under the terms of the trade agreement, bicycles traded between Country A and Country B qualify for a reduced preferential tariff rate of 5%.
• Import of bicycles: If a shipment of bicycles from Country A arrives in Country B, the customs authorities will apply the preferential tariff rate of 5% instead of the standard MFN rate of 10%.
• Calculation: If the value of the bicycles is $100,000, the preferential tariff payable would be $5,000 (5% of $100,000), as opposed to $10,000 under the standard tariff rate.

In this example, the preferential rate of 5% serves as a motivation for increased trade between Country A and Country B by reducing the cost of importing bicycles.