Tariff valuation bases and trade among developing countries : do developing countries discriminate against their own trade?

In establishing the value of imports for tariff assessment, most countries apply duties either to the cost-insurance-freight (c.i.f.) or the free-on-board (f.o.b.) value of the traded good. One effect of using the far more common c.i.f. base is to place a disproportinate burden on countries that have higher freight and insurance costs. Distant countries often not only pay higher transport costs, but are further penalized by disproportionate tariff costs that worsen their competitive disadvantage. The f.o.b. valuation procedure does not penalize exporters for their location, but applies a nominal tariff rate directly to the export costs of each country. Using cost information for six Latin American countries, this paper examines the influence of the two procedures on the level and incidence of tariff protection. It concludes that transport and insurance costs generally put developing countries at a disadvantage (compared to developed countries) on interregional trade and that the relatively high Latin American tariffs on c.i.f. prices further worsen their competitive position. To correct the bias against trade between developing countries, it is recommended that f.o.b. valuation procedures used by developed countries be adopted. This change would also reduce tariff barriers considerably.