Tariffs as an Instrument of Trade Policy: The Unique Case of Kosovo

Abstract

Although all sovereign nations use import tariffs as an instrument of trade policy, most nations today are restricted by tariff bindings in trade agreements. Kosovo, a nation that has been independent for only five years, is an exception. Kosovo's only current restrictions regarding tariff increases are its tariff binding obligation in the eight nation Central European Free Trade Area (CEFTA) agreement. This gives Kosovo unusual power to vary tariff levels to carry out its economic and trade policy objectives, power that it to date has not utilized. During Kosovo's administration by the United Nations (UN), a uniform tariff of 10% ad valorem was adopted to collect revenue for the state and for ease of administration. Trade policy concerns were not taken into consideration. This uniform 10% tariff on imports, with few exceptions, is still applied by Kosovo today in 2013. In contrast to Kosovo, other CEFTA nations and the European Union (EU) impose a widely variegated tariff structure to carry out their trade policy objectives and frequently have a higher average applied tariff rate than Kosovo's. This article briefly reviews Kosovo's current trade regime and policy regarding trade in goods and argues that Kosovo should revise its uniform tariff of 10% on imports to carry out a trade policy based upon sound economic analysis. Four options for a new tariff policy - maintenance of the current 10% tariff with a phasing out of tariffs through the use of exemptions and new regional and bilateral free trade agreements; adoption of unilateral free trade; maintenance of the current average applied tariff rate of approximately 5.3% with adjustments to individual tariff rates to benefit consumers and local producers; and adoption of an industrialization strategy scheme - are evaluated.