Trade freedom is a composite measure of the absence of tariff and non-tariff barriers that affect imports and exports of goods and services. The trade freedom score is based on two inputs:
- The trade-weighted average tariff rate and
- Non-tariff barriers (NTBs).
Different imports entering a country can, and often do, face different tariffs. The weighted average tariff uses weights for each tariff based on the share of imports for each good. Weighted average tariffs are a purely quantitative measure and account for the basic calculation of the score using the following equation:
Trade Freedomi = (((Tariffmax–Tariffi )/(Tariffmax–Tariffmin )) * 100) – NTBi
where Trade Freedomi represents the trade freedom in country i; Tariffmax and Tariffmin represent the upper and lower bounds for tariff rates (%); and Tariffi represents the weighted average tariff rate (%) in country i. The minimum tariff is naturally zero percent, and the upper bound was set as 50 percent. An NTB penalty is then subtracted from the base score. The penalty of 5, 10, 15, or 20 points is assigned according to the following scale:
- 20—NTBs are used extensively across many goods and services and/or act to effectively impede a significant amount of international trade.
- 15—NTBs are widespread across many goods and services and/or act to impede a majority of potential international trade.
- 10—NTBs are used to protect certain goods and services and impede some international trade.
- 5—NTBs are uncommon, protecting few goods and services, and/or have very limited impact on international trade.
- 0—NTBs are not used to limit international trade.
We determine the extent of NTBs in a country’s trade policy regime using both qualitative and quantitative information. Restrictive rules that hinder trade vary widely, and their overlapping and shifting nature makes their complexity difficult to gauge. The categories of NTBs considered in our penalty include:
- Quantity restrictions—import quotas; export limitations; voluntary export restraints; import–export embargoes and bans; countertrade, etc.
- Price restrictions—antidumping duties; countervailing duties; border tax adjustments; variable levies/tariff rate quotas.
- Regulatory restrictions—licensing; domestic content and mixing requirements; sanitary and phytosanitary standards (SPSs); safety and industrial standards regulations; packaging, labeling, and trademark regulations; advertising and media regulations.
- Investment restrictions—exchange and other financial controls.
- Customs restrictions—advance deposit requirements; customs valuation procedures; customs classification procedures; customs clearance procedures.
- Direct government intervention—subsidies and other aid; government industrial policy and regional development measures; government-financed research and other technology policies; national taxes and social insurance; competition policies; immigration policies; government procurement policies; state trading, government monopolies, and exclusive franchises.
As an example, Botswana received a trade freedom score of 79.7. By itself, Botswana’s weighted average tariff of 5.2 percent would have yielded a score of 89.7, but the existence of NTBs in Botswana reduced the score by 10 points.
Gathering tariff statistics to make a consistent cross-country comparison is a challenging task. Unlike data on inflation, for instance, countries do not report their weighted average tariff rate or simple average tariff rate every year; in some cases, the most recent year for which a country reported its tariff data could be as far back as 2002. To preserve consistency in grading the trade policy component, the Index uses the most recently reported weighted average tariff rate for a country from our primary source. If another reliable source reports more updated information on the country’s tariff rate, this fact is noted, and the grading of this component may be reviewed if there is strong evidence that the most recently reported weighted average tariff rate is outdated.
The World Bank publishes the most comprehensive and consistent information on weighted average applied tariff rates. When the weighted average applied tariff rate is not available, the Index uses the country’s average applied tariff rate; and when the country’s average applied tariff rate is not available, the weighted average or the simple average of most favored nation (MFN) tariff rates is used. In the very few cases where data on duties and customs revenues are not available, data on international trade taxes or an estimated effective tariff rate are used instead. In all cases, an effort is made to clarify the type of data used and the different sources for those data in the corresponding write-up for the trade policy component.
Sources. Unless otherwise noted, the Index relies on the following sources to determine scores for trade policy, in order of priority: World Bank, World Development Indicators 2012; World Trade Organization, Trade Policy Review, 1995–2012; Office of the U.S. Trade Representative, 2012 National Trade Estimate Report on Foreign Trade Barriers; World Bank, Doing Business 2011 and 2012; U.S. Department of Commerce, Country Commercial Guide, 2008–2012; Economist Intelligence Unit, Country Commerce, 2009–2012; World Bank, Data on Trade and Import Barriers: Trends in Average Applied Tariff Rates in Developing and Industrial Countries, 1981–2010; and official government publications of each country.