Mar 12, 2016
Contributors to South Asian Studies, Vol. II
Shahid Javed Burki has
served as vice-president of the
World Bank and as finance
minister in the Pakistan
government.
Dilli Prakash Ghimire is a
customs consultant based in
Nepal.
Douglas Jayasekera is senior
visiting fellow at the Institute of
Policy Studies in Colombo, Sri
Lanka.
Sujata Jhamb is assistant
professor of economics at the
Narsee Monjee Institute of
Management Sciences in India.
Amir Ullah Khan is deputy
secretary general of the PHD
Chamber of Commerce and
Industry (PHDCC), New Delhi,
India.
South Asian StudiesVolume: II
:
Trade, Tariffs, and Customs in
South Asia
M Sulaiman Khan is a
former customs commissioner
of Pakistan, and currently heads
Sulaiman Associates, a
consultancy firm.
S K Mohanty is a researcher
at Research and Information
System for Developing
Countries (RIS), New Delhi,
India.
Nisha Taneja works at the
Indian Council for Research on
International Economic
Relations (ICRIER), New Delhi,
India.
Dr S Akbar Zaidi is a leading
Pakistani social scientist based
in Karachi.
Volume II“Trade, Tariffs, and
Customs in South Asia” of the South Asian Studies series was
prepared by members of one of the
14 research groups established under
the South Asian Policy Analysis
(SAPANA) Network, and assigned to
examine the problems of
standardising customs laws,
improving trade facilities, and
encouraging regional cooperation in
trade. The volume also contains
articles previously published in the
South Asian Journal to supplement
this analysis.
© 2006 Free Media FoundationAll rights reserved.
First printing June 2006
Editorial collective: Imtiaz Alam (series
editor); Dr Akbar S Zaidi (series
coordinator); Zebunnisa Burki, Mateen
Kaul, Maheen Pracha, and Huma Sadaf
(copy editors); Muhammad Adeel
(publication designer).
Produced and designed at the Free Media
Foundation and South Asian Free Media
Association (SAFMA), Lahore, Pakistan
The findings, interpretations, and
conclusions expressed in this book are
those of the authors and do not necessarily
reflect the views of the South Asian
Journal or the South Asian Policy Analysis
(SAPANA) Network.
The South Asian Journal and Free Media
Foundation encourage use of the material
presented herein, with appropriate credit.
ISBN 969-9060-04-2
South Asian Policy Analysis Network(SAPANA)
9 Lower Ground FloorEden Heights, Jail Road
Lahore, Pakistanwww.southasianmedia.net
iiiii
About SAPANA
ogether with the South Asian Free Media Association
(SAFMA), the South Asian Journal conceived a research
programme in 2005 to develop a “virtual” think-tank Tcomprising an interactive network of scholars from across South
Asia. From this initiative emerged the South Asian Policy Analysis
(SAPANA) Network - an autonomous, independent, and cross-
disciplinary research and analysis platform for initiating informed
policy debates, undertaking fresh research, critically evaluating
existing research and public policy, and proposing alternative policy
measures in South Asia.
As a first step, 14 working groups were set up under SAPANA to
carry out research and propose policy alternatives on issues crucial to
the region. The groups presented more than 80 draft research papers
at a conference organised by the South Asian Journal, titled
“Envisioning South Asia”, which was held in Islamabad (Pakistan) on
29-30 April 2006, and attended by more than 150 eminent scholars
from across the region. After incorporating the feedback generated
by the conference, these papers have been collated for publication as
a 14-volume series titled South Asian Studies. The series is intended
for public perusal, media review, public debate, and the
consideration of policymakers.
When SAPANA was formed, the need for “yet another think-tank”
was questioned, given that there are already numerous institutions
involved in similar work. We, at SAFMA and SAPANA, have found
that most current research in South Asia is either too
departmentalised or too technical for it to be accessible by a non-
academic audience; and that it is greatly influenced by official and
dominant technocratic paradigms.
SAPANA will endeavour to undertake critical, independent,
objective, practical, and pro-people research to pursue an alternative
policy agenda for sustainable development and the empowerment of
people. It will also engage the public and policymakers along with
other major stakeholders in order to sustain informed and
constructive dialogue between the state and civil society. In
collaboration with SAFMA, SAPANA will bring its research-based
findings within the domain of public discourse, rather than leave it to
the mercy of dust or termites.
The next phase will begin with formally establishing a board of
advisors comprising prominent and able academics and researchers
from across South Asia. It is hoped that SAPANA will establish itself
as a leading think-tank in South Asia within the first five years of its
inception. The major tasks that lie ahead are: (i) building a
comprehensive database of scholars and researchers who are either
based in South Asia or based overseas but specialise in the region;
(ii) planning research themes for subsequent years, arranging
workshops on these themes, and publishing the findings that
emerge; and (iii) organising a larger conference every two years to
bring together new themes, new research, and emerging scholars.
Apart from these tasks, SAPANA will design projects and
commission research that is of public and policy interest, and will
liaise with policymakers and governments through the media. As a
“virtual” institution, it will engage scholars and researchers on
specific undertakings, and thus set a new direction for the South Asia
of our hopes.
viv
Preface: Trade Liberalisation in South Asia ixImtiaz Alam
Recommendations of SAPANA Research Group xiv
Executive Summary xviiiAmir Ullah Khan
Customs Tariff: Standardisation and Harmonisation 25Amir Ullah Khan
Trade Facilitation in WTO 47Nisha Taneja
Warehousing Facilities in South Asian Customs Laws 70Dilli Prakash Ghimire
Valuation of Goods in Customs 91M Sulaiman Khan
Documentation Requirements for Imports and Exports 112Douglas Jayasekera
South Asia as a Global Force in Trade 119S K Mohanty
Contents
Informal and Free Trade Arrangements 177Nisha Taneja
Pakistan, India, and Regional Cooperation 187Shahid Javed Burki
India-Pakistan Trade 206Dr S Akbar Zaidi
India's Regional Trading Arrangements 217Sujata Jhamb
SAPANA Conference Declaration 227(Islamabad, April 2006)
viivi
Preface
Acknowledgements
The South Asian Policy Analysis (SAPANA)
Network would like to thank all the contributors
to this volume - their insight into and
understanding of a tumultuous region and the
challenges it faces provides a myriad of insights
that could help define new options for and
approaches to tackling South Asia's most
pressing issues. Contributors to the volume
include (in alphabetical order): Amir Ullah
Khan, Sujata Jhamb, S K Mohanty, and Nisha
Taneja from India; Dilli Prakash Ghimire from
Nepal; Shahid Javed Burki, M Sulaiman Khan,
and Dr S Akbar Zaidi from Pakistan; and
Douglas Jayasekera from Sri Lanka. SAPANA
would also like to acknowledge the contribution
of the series coordinator, Dr Akbar S Zaidi; the
research group coordinator, Amir Ullah Khan;
and the editorial and design collective at the
South Asian Journal, Lahore - Zebunnisa Burki,
Mateen Kaul, and Maheen Pracha for their hard
work and editing, and Muhammad Adeel for
designing the volume - without which this
volume could not have been published. Finally,
SAPANA is immensely grateful to the Royal
Netherlands Embassy and Royal Norwegian
Embassy for their generous support, without
which the production of this series would not
have been possible.
ixviii
Trade Liberalization in South Asia
Almost all the South Asian economies have undertaken the process
of deregulation, liberalization and privatization with or without the
full-fledged macro-economic reforms program under the tutelage of
the World Bank (WB) and International Monetary Fund (IMF). Their
external trade regime is now much more liberal and they are all more
or less open to foreign direct investment. Most of these economies
are also growing at over 6/7 per cent of their GDPs for the last few
years. Yet, despite being a contiguous region, trade within the region
has not been able to benefit from the relative advantages.
Intra-regional trade in South Asia, at 6 percent of the region's
worldwide exports, is abysmally low compared to trade in other
regional blocs (23 percent in ASEAN, 56 percent in NAFTA, 61
percent in EU, 12 percent in MERCOSUR). It shows that the
advantage of proximity in cost efficiencies is not being optimally
utilized. It is not for economic reasons, but political conflicts that the
region is not making maximum use of its closeness. Coincidence of
relative advantage in similar goods, inadequate logistics, inefficient
communications links, poor connectivity and restriction on travel
between India, Bangladesh and Pakistan are also important factors
that have not helped increase intra-regional trade. Not only that,
tariff regimes are yet to be fully brought down, many non-tariff
barriers still exist, and customs procedures and standards have not
been harmonized.
Indeed, multiple bilateral and multilateral initiatives have been taken
towards free trade agreements. These are all positive steps, but not
enough to promote trade in the region. The agreement reached on
the creation of the South Asian Free Trade Area (SAFTA) at the 12th
Summit of the South Asian Association for Regional Cooperation
(SAARC) and its ratification by all member countries has rekindled
some hope in regional trade, if not a whole range of regional
cooperation measures. Most remarkable was the compromise
reached between Least Developed Countries (LDCs), on the one
hand, and India and Pakistan, on the other, on some of the crucial
terms of SAFTA. Yet the agreement on SAFTA fell short of the most
crucial imperatives since it deviated from a more consistent report
on the subject, 'SAARC vision beyond the year 2000', prepared by
the Group of Eminent Persons (GEP).
Given the failure of four rounds of the South Asian Preferential
Trading Arrangement (SAPTA) in promoting trade, there are doubts
that a flawed SAFTA may not deliver as expeditiously as required
without separating trade from the politics of bilateral conflict and
overcoming a tendency to dominate, with fears about the hegemony
of one over the others. However, SAFTA could not be postponed,
especially by Pakistan and India who wanted to engage each other.
Faced with the challenges of irreversible globalisation, growing
engagement with numerous bilateral and multilateral Free Trade
Areas (FTAs) within and beyond the region, and a radical reduction
in tariffs under the IMF's structural adjustment programme
undertaken by most South Asian nations, it is essential that member
countries of SAARC take a big stride.
But the agreement on SAFTA has left more open than it has
addressed. Whereas rules of origin, areas of technical assistance and
the crucial issue of a negative list have, without setting a time frame,
been left to future negotiations, it has avoided covering the
liberalisation of services and far broader areas of economic
cooperation. Evading the trade-investment nexus that takes care of
trade deficits between trading partners through investment flows or
capital accounts, SAFTA neglects the vertical and horizontal
integration of industries that benefits from the respective relative
advantages and is crucial to global competitiveness. Although not all-
embracing in terms of trade, if the negative list that is yet to be
negotiated became larger, the agreement will come into conflict with
Article 24 of GATT. Even trade, however limited it may be, will not
take place without lifting non-tariff and para-tariff barriers,
liberalising the visa regime, allowing free flow of information,
xix
relaxing custom procedures and removing double-taxation.
SAFTA is clueless about how to make adjustment or reconcile the
already existing bilateral and multilateral treaties, such as the Indo-
Lanka Bilateral Free Trade Area (BFTA), Indo-Bangladesh BFTA,
Indo-Nepal BFTA, Pak-SL BFTA, BIMSTEC-FTA, (including India,
Bangladesh, Sri Lanka and others), growth quadrangle (India, Nepal,
Bangladesh, Bhutan) and triangle (South India, Sri Lanka, Maldives).
SAFTA is even further behind than the Indo-Lanka BFTA that covers
both services and investment, and BIMSTEC which promotes
cooperation among sectors, or the Indian Ocean Rim Association for
Regional Cooperation (IOR-ARC) which is premised on unilateral
trade liberalisation in an open region. BFTAs, in some ways, render
greater regional cooperation of little use. Even if certain bilateral
trade agreements, such as between India and Sri Lanka, provide a
good precedent to follow, they cannot substitute for a more balancing
regional economic arrangement that would simultaneously address
the interests of more and less developed or big and small countries in
maximising the benefits from economies of scale and relative
advantages while facing the brunt of and benefiting from
globalisation.
No doubt there is limited complementarity among the economies of
South Asia and they find greater comparative advantage in trading
with developed countries. Similar was the case with ASEAN in the
early 1970s when trade within South East Asia was less than six per
cent, but as preferential trading increased and countries attracted
intra-regional foreign investment (FDI), it rose to 23 per cent of their
total trade. Given the increasing pressures of globalisation and amid
growing regional economic groupings, 60 per cent of the world trade
is preferential and South Asia can gain more than lose from such an
arrangement. Despite trade barriers and bilateral disputes, informal
trade has flourished across the South Asian frontiers to the tune of
US$ 3 billion (2004) - benefiting neither consumer nor adding up to
revenues - even though formal trade remained abysmally low (US$
1641 million in 2004). More than trade, South Asian economies,
irrespective of their size, stand to gain from deeper and broader
regional cooperation.
There is, however, a deep-rooted fear among the least developed and
smaller or medium-size countries that trade with India and
liberalisation of tariff will always be a business of loss for them.
Holding more than 70 per cent of the region's resources and as an
emerging economic power with greater stakes in the region and
beyond, India has 'to ensure that smaller members of the region have
a growing stake in regionalism... This responsibility, India has not
taken seriously. (Economic and Political Weekly, New Delhi).
However, by adopting the model of the ASEAN Free Trade Area,
SAFTA can become meaningful and the member countries of SAARC
can reap more equitable benefits. Since India has already entered
into bilateral and multilateral trade arrangements with all five of its
neighbours with whom it has contiguous borders, SAFTA is seen by
the five member countries of SAARC as an economic window,
essentially with Pakistan, or trade between the two bigger economies
of South Asia. This being the case, Pakistan cannot have any
meaningful trade either with India or other countries of South Asia,
with whom it doesn't share borders, without granting Most Favoured
Nation (MFN) status to India.
To overcome widespread poverty and backwardness, resolve
conflicts, benefit from extended regional cooperation and economies
of scale, become more competitive and achieve higher growth, South
Asia needs to overcome the time lag to jump-start an untapped
regional cooperation beyond the narrow scope of SAFTA. While
establishing a South Asian Development Bank, South Asian
Development Fund, South Asian Energy Grid, SAARC must fully
exploit the trade-investment nexus, liberalise trade and promote
investment, withdraw restrictions on travel and free flow of
information across frontiers, create South Asian Investment Areas
and undertake vertical and horizontal industrial integration.
There are great opportunities for cooperation in communication,
information, tourism, energy, education, health, water and power,
modern technologies, research and development (R&D). Along with
a Free Trade Area, steps need to be taken for a Customs Union, Tariff
Union, and extended macroeconomic coordination among the
central banks leading to a Monetary Union, which is already under
SAARC-FINANCE consideration. Meanwhile, South Asia can look to
tap the energy resources of Central Asia and interact with South East
Asia and China to emerge as a vibrant economic entity in what is
being seen as an Asian Century.
Volume II of the South Asian Studies series, produced by SAPANA,
includes a range of well-researched papers by leading experts on
trade, tariffs, and customs. It also includes several informative and
analytical articles published earlier in the South Asian Journal. The
volume will help even a layperson understand a number of intricate
economic and technical issues that arise in efforts to facilitate and
promote trade in the region.
Imtiaz Alam
xiiixii
Recommendations of SAPANA Research Group
he SAPANA research groups assigned to examine issues of
trade, tariffs, and customs laws in South Asia comprised the
following people:T1. Amir Ullah Khan (group coordinator), India;2. Dilli Prakash Ghimire, Nepal;3. Douglas Jayasekera, Sri Lanka;4. M Sulaiman Khan, Pakistan;5. S J Mohanty, India;6. Nisha Taneja, India.
The group's recommendations are summarised below.
The agreement on South Asian Free Trade Area (SAFTA) requires
effective implementation, expanding the space for trade and, more
importantly, economic collaboration, investment and development.
If South Asia's economies are to be integrated, it presupposes
development of transnational communication networks and physical
infrastructure and monetary cooperation involving greater
coordination among the governments and the central banks. Despite
limited complementarities in tradeable items, due to similar
comparative advantages, expansion of trade warrants vertical and
horizontal integration of industries and investment in joint ventures
by public and private sectors. However, trade and investment will
not move ahead unless tariffs are lowered, the negative list kept to
the minimum, para- and non-tariff barriers removed and standards
harmonized.
Streamlining borders transactions through trade facilitation at sub-
regional junctions, special attention needs to be focused on
promoting border trade. Increase in efficiency within the sub-region
often spills over into trade outside the region as well, because
improving customs or improving efficiency of ports helps both
intraregional trade and international trade.
Recommendations on tariffs and harmonisation include the
following:
1. The average rate of tariffs has gone down in all the South Asian
countries, but some of them impose para-tariffs, including
regulatory duties, anti-dumping duties, and specific duties and
non-tariff barriers. Transparency in the tariffs structure needs to
be ensured. While the average duties are not all that high there is
a need to remove tariff peaks. Further reduction in duties should
ensure that the industries where the country has dynamic
comparative advantage are not closed down. The group also
recommends trade facilitation because various procedural
requirements discourages growth of trade;2. Containing fiscal deficit policy should be pursued by making
judicious choices between growth and stability;3. The prudential regulations for the banks should be effectively
implemented and it needs to be ensured that the efficiency gains
result in higher deposit rates and/or lower rates on the advances.
The pursuit of prudential regulations should not be applied on
the small and micro enterprises who cannot meet the collateral
requirements; 4. South Asian countries may continue to have floating exchange
rates and the central banks may only intervene to keep the
currency near the equilibrium value; 5. The South Asian countries may further deregulate the economy
and may continue privatization policies as long as the private
sector monopolies are properly regulated; 6. Whereas South Asian countries are struggling to promote trade
within the region, the ultimate objective should be the economic
union and common currency. Whereas political agreement
would be necessary to make SAFTA effective, formulate the
custom union and economic union, various steps will have to be
taken before economic union is formed. The countries will have
xvxiv
to coordinate the exchange rate, fiscal and monetary policies;7. The coordination of policies would imply that the countries are
willing to increase interdependencies and the commitment of the
union to help the country suffering from any problem and a
South Asian Fund may be created for this purpose. Various
studies need to be conducted to examine the problems by way of
policy coordination and the lack of economic policy options when
the economic union is formed;8. The group also feels that the South Asian countries have
achieved growth rates exceeding 8 percent in recent years and
they expect the growth rate to continue. However, the
investment rates and other prerequisite to the high growth rates
are missing and they must try to overcome the stumbling blocs to
growth.
Intra-regional trade and investment will, subsequently and
gradually, translate into a South Asian Customs and Tariffs Union
which may lead to a common exchange rate policy that will,
eventually, necessitate the creation of a South Asian Monetary Union
underwritten by macro-economic management and harmonization of
trade, fiscal and monetary policies at the regional level.
No less important is the cooperation in the transport and
communication sectors envisaging an integrated transport
infrastructure that allows uninterrupted travel across and beyond
our region and communication highways, facilitating free movement
of people, goods and unhindered flow of information across the
region and beyond, connecting South Asia with Central, South
Western and South East Asia. Not only do rail and road links
between Pakistan, India, Nepal and Bangladesh need to be
rehabilitated, a system of connectivity will have to be constructed
especially for the railways and the truckers will have to be issued
special permits.
Nevertheless, the Indian and Pakistani governments must agree to
transit of trade between Pakistan, Bangladesh, Nepal, India and
Central Asia. For promotion of trade the countries will have to
facilitate cross border movement of people and goods. Visa and
custom facilities will have to be simplified, and for special categories
of people and goods waived, across the board.
Recommendations on customs laws and issues include the following:1. Trade is growing in the region the mindset of protectionism is
changing. Trade barriers still exist, with high tariff barriers and a
large number of non tariff barriers. The economies are booming
and clearly need to be integrated.2. Customs laws need simplification and harmonization;3. Dry ports need to be set up and transit rights be given freely;4. Valuation procedures need to be harmonized;5. Warehousing infrastructure, charges and fees needs
improvement;6. Common formats need to be developed for declaration forms;7. These forms be made available in electronic form, and available
in all major languages in the region;8. Information and data be exchanged freely;9. Countries to do away with secretive sensitive lists;10. A common software be used that would simplify declaration and
valuation;11. Mutual recognition of certification;12. Common standards and testing procedures to be followed;13. Capacity building and technology transfer be speeded up;14. Pakistan to take a lead in trade facilitation efforts, Sri Lanka to
lead the efforts towards breaking down non tariff barriers;15. Allow and encourage trade in services by recognizing university
and college degrees across the region.
xviixvi
Executive SummaryAmir Ullah Khan
he expansion of the South Asian economy is continuing
persistently on the high growth trajectory for the last few
years. Most of the regional countries have maintained their Tgrowth profile between 5.5 to 8 per cent during the period 2004-05.
The continuation of region's high growth performance is due to
robustness of the macroeconomic and external sector performances.
It seems that macroeconomic fundamentals of the region are strong,
which can be assessed from region's high growth rate, low
inflationary pressure, high investment rate, etc. This is a positive
development for the success of regional cooperation in South Asia.
The dynamic performance of the external sector has been the most
important factor for the sustenance of high growth in the region. The
expansion of exports was sturdy, but imports expanded more swiftly
than exports during the early 2000s. Foreign exchange reserve
position was strong for large economies, and India's Forex reserve
alone exceeded US$ 140 billion in early 2006. Exports of the region
were mostly spurred by surge in manufacturing exports, and the
region is rapidly integrating itself with the global economy.
The intra-regional trade has made steady progress during the last
decade, reaching almost 5 percent of region's total trade with the
world during the period 2000-04 as compared to 3.6 percent during
the period 1990-94. Though significant progress has been made in
ameliorating the level of intra-regional trade, it is at the cost of high
degree of volatility. Instability in the intra-regional trade has not only
affected regional exports but also their balance of trade. Towards the
latter part of the 1990s, the region's trade situation became sour on
account of the 'Asian Crisis'. Since the inception of SAARC, there
was considerable degree of divergence between intra-regional import
and intra-regional export, and the gap between them narrowed down
gradually over a period of time. The gap between the two was almost
disappeared in the late 1990s, but reappeared again in the new
millennium with lesser intensity. Trade imbalance is one of the most
widely discussed issues in the region where India is often dragged
into the controversy as it maintains favourable trade balance with
South Asia. Traditionally, a number of small regional countries used
India's large competitive production base to meet their short term
requirements for 'basic and essential' imports. In the past, there were
instances of cessation of essential supplies from India on technical
reasons, and that caused turmoil in those importing countries.
Supply constraints in these importing economies have been the
underlying factor for not accessing the large Indian market, despite
having large export potentials. India provides MFN status to all the
WTO Member countries, and does not discriminate against any
South Asian country in accessing its large market. There is a need to
devise radical strategies to arrest supply inadequacies in some of the
regional countries to access market in large countries. The tariff
regimes of the region show that the level of tariffs is not similar
across countries; and protection of sectors differs significantly
among them during the last decade.
The region has large resource endowments, and each South Asian
county has distinct advantage in having access to some of these
resources. This is the reason for not having uniform level of sectoral
protection across countries. The regional countries have as many as
30 tariff bands, ranging from zero to 250 percent in 2004. Though
each country maintains large number of tariff bands, most of their
tariff lines are concentrated in a few tariff bands. Some of the
countries maintain very high tariffs to protect their sensitive sectors.
While the average level of tariff is low in Sri Lanka and Nepal, it is
high in India and Bhutan. Invariably, the region maintains high
protection against certain sectors such as plastics, textiles, footwear,
plaster and cement, vehicles, etc; and low protection against
minerals, chemicals, leather, wood pulp, base metal, etc. The
liberalisation of trade under SAPTA has benefited regional countries
as evident from the experience of India. India's imports, under first
three Rounds of SAPTA, registered a six-fold increase between
1994/95 and 2000/01. The coverage of imports has been
xixxviii
comprehensive, linking almost all the broad sectors of trade except
for sectors like gems and jewelleries, vehicles, arms and
ammunitions, etc. The LDCs have gained more market access in
India than non-LDCS of the region under SAPTA. The list of trade
concessions under SAPTA covered both agricultural and
manufacturing sectors; and trade in agricultural products constituted
almost one-third of the total trade. India's exports to the region have
been restricted to a few sectors. India has benefited very little from
the concession under SAPTA, and substantial market access is
realised through the non-concessional route.
However the SAPTA process was slow, and could have taken a few
decades to reach full trade liberalisation in the region, considering
the progress made under different rounds of SAPTA in the past.
SAFTA is likely to accommodate most of the shortcomings of the
SAPTA Agreement. Implementation of SAFTA is a positive step
towards aggressive trade liberalisation in the region. Taking into
account the global trend in the post-WTO period, particularly the
manner in which regionalism has taken an edge over the
multilateralism, long term trade policy of the regional countries
would be guided by the potential gains from regionalism. The South
Asian region is likely to benefit the maximum from the SAFTA
process as evidenced from the CGE results. It is alleged that large
countries are likely to benefit more from the SAFTA process, and
therefore, there is lukewarm response from other regional partners
for the effective implementation of SAFTA. If SAFTA does not take
off appropriately, regional countries may engage themselves in
forming other RTAs to enhance their domestic welfare.
Customs Laws and Issues in South AsiaThe recent past in South Asia's development and trade history is a
picture of similarity and heterogeneity. The British had followed
existing models of decentralized governance for this subcontinent,
incorporating Mughal institutions and Anglo-Saxon institutions of
administration, politics and law. Overtime, the South Asian countries
moved away in various degrees from this model that evolved.
However the essential basics remained and today there is more than
a fair bit of commonality in markets, institutions and systems.
Colonial-era governance institutions also provided a backdrop for the
much broader course of economic development. India, Pakistan and
Sri Lanka's independence in 1947-48 marked the beginning of a set
of different ways by many ex-colonies embarked on their economic
journeys. In South Asia, each country pursued a somewhat different
development strategy, and not surprisingly met with mixed results.
In trade policy too, the various hues of protectionism adopted met
with varying degrees of success. However, one conclusion on trade
that remains unquestionable is that the region as a whole suffered
enormously and till a few years ago, simply dropped off the trade
atlas of the world. Riddled with a complicated set of rules, set in a
mindset that encouraged self reliance and trade pessimism, trade
within the region came close to naught.
There have been some welcome moves in the last decade or so.
However, the degree of openness of the SAARC region to external
trade and economic relationships is still relatively low. Exports as a
percentage of GDP are 36 per cent for Sri Lanka, 12 per cent for
India, 16 per cent for Pakistan, 26 per cent for Nepal, 31 per cent for
Bhutan and 12 per cent for Bangladesh. Imports as a percentage of
GDP are also low with figures of 44 per cent for Sri Lanka, 16 per
cent for India, 21 per cent for Pakistan, 38 per cent for Nepal, 42 per
cent for Bhutan and 18 per cent for Bangladesh. For the larger
countries, Sri Lanka, India, Pakistan and Bangladesh, this was a
function of import-substitution policies adopted earlier. Sri Lanka
was the first among the lot to have introduced economic reforms in
the 1970s and it is not surprising that its exports in relative terms are
the highest percentage of GDP.
A strategic error was the attempt at being self-sufficient without
comprehending the role of international trade in development. This
prevented us from accessing bigger markets for our products or from
using quality inputs. We wanted to produce everything in the
production chain, regardless of whether we had the expertise,
technology or market. Consequently, whenever a process was less
efficient than what was available internationally, the entire
production chain was affected adversely. For instance, by forcing the
fertilizer industry to use only locally designed catalysts, the entire
fertilizer industry's productivity suffered. The same was the case for
the electronics sector where the software industry took time to take
off because of the insistence on the use of domestic computer
hardware. Thankfully, there has been a major departure from the
original model.
xxixx
The region has opened up to trade and to foreign investment.
Custom duties have been reduced, quantitative restrictions on
imports have gone and foreign investment can now come in more
freely in most sectors. We still have a long way to go but have
certainly embarked on the road to globalisation. And in this context
it becomes important to look at laws and procedures related to
Customs and trade that differ considerably. Apart from production
and quality issues which have had an impact on limiting trade in
South Asia, it is the free movement of goods and capital between
countries, and harmonious laws and procedures related to Customs
that are required to increase trading opportunities.
The point that needs to be forcefully made here is that integration is
more than the trade and investment on which we tend to
concentrate. At one level, the forces of world integration are much
stronger and more varied than the simple economic variables on
which we focus. At another level, and more importantly, the forces of
globalisation make economic isolation irrelevant, or contrived. It is
impossible to remain insulated against global events even if one tries
to follow a policy of relatively closed economic borders.
Consequently, one needs to accept globalisation as given and try to
make the best of it, rather than wishing it away.
The South Asian region can have a strong global presence by
integrating its economy within itself and with the rest of the world.
Interdependence and common standards among economies adds to
the strength of each one of them. The collective strength is often
more than the sum of each of their military might. China's
importance in today's world is because it is seen as a business
destination by the rest of the world. It has a huge domestic market
and cheap labour where foreigners rush to do business. The South
Asian region can be in a similar situation only if it can make the
world perceive it the same way they perceive China.
It was with this in mind that the group of experts from Pakistan,
India, Sri Lanka and Nepal contributed their papers for this section
on harmonising Customs laws and practices. The papers in this
section came from Mohammad Sulaiman, Nisha Taneja, Amir Ullah
Khan, Dilli Ghimire and Douglas Jayasekera. Mohammad Sulaiman
in his paper makes a very concerted argument on the issue of
valuation of goods. The paper examines the evolution of the
agreement on valuation and concludes that by and large the
aftermath has been satisfactory. However some countries are getting
away with murder. And the deluge of anti dumping cases proves this
point.
Nisha Taneja examines the trade facilitation issue in its various
contours. She contends that any country that is unable to adopt
effective and appropriate trade facilitation measures would be
uncompetitive in the global trading environment on account of high
transaction costs. South Asian countries incur high transaction costs
in trading. Adopting appropriate trade measures would reduce costs
for intra-SAARC trade and for trade with the rest of the world. The
South Asian Free Trade Agreement (SAFTA) signed in Islamabad in
January 2004 has made provisions for trade facilitation under
Article 8. If implemented, these measures will enhance the pace of
economic integration in South Asia.
Dilli Ghimire looks at the very critical issue of warehousing.
Customs warehousing is an integral part of customs Act of any
country. Customs warehouses are such places where dutiable goods
are stored without the payment of duty. To facilitate trade in the, it is
important to have a well defined customs co-operations
arrangement. Agreement on regional customs co-operation can
address the problems in customs procedures including warehousing.
It would also help the process towards uniform customs procedures
and harmonize the laws relating to warehouses of the member
countries. An umbrella organization needs work as the expert group
of customs matters including customs warehouses and supply
technical assistance to the members. The warehousing facilities in
South Asia should be developed in line with the EU countries.
Douglas Jayasekera argues that documentation is an issue that raises
transaction costs considerably. Excessive documentation has come
about as a result of various complicated and intricate mechanisms
set up by various countries in their attempt towards selective trade
encouragement and protectionism in a larger context. However, as in
the case of Sri Lanka, the move towards a single standard document
of declaration in 1994, the CUSDEC, has assisted trade immensely.
The time taken for processing of documents has also improved with
the introduction of Automation and Selectivity criteria for the
examination of cargo on a risk assessment basis. The Risk
xxiiixxii
declaration statement declares that a company has committed an
offence, or contravened a customs ordinance. This is promptly
verified against the computer data base of offenders.
All the papers make a clear case for harmonization and
simplification. While all South Asian countries strive towards
lowering transaction costs, it is important to reconcile provisions
under SAFTA with the ongoing negotiations on trade facilitation in
the WTO. A beginning can be made through adoption of measures
such as harmonization of standards, mutual recognition agreements,
harmonization of customs procedures and customs classification and
simplification of procedures. At the same time the South Asian
countries could collectively work towards a common agenda in the
ongoing negotiations in the interest of developing and least
developed countries. The vast potential in a large region like South
Asia will only be tapped to its fullest when there is quick movement
towards simplification and harmonization. It will not take long for
negotiating teams to sit together and work out a mechanism that is
uniform, especially since the European experiment and its lessons
are well known. In this particular area, with benefits for all
concerned, the old bogey of vested interests and entrenched lobbies
also does not hold water. There is really no reason for us not to have
a common set of principles and laws governing customs procedures
across South Asia immediately. All governments swear by the reform
agenda and therefore none can argue against the need to simplify
rules, and in quick time.
Customs Tariff: Standardisation and Harmonisation
Amir Ullah Khan
ndia's economy is one of the most closed in the world. Thus,
India's tariffs remain among the highest in the world. Over the
last thirteen years, beginning with its economic reform Iprogramme initiated in 1991, India has taken noteworthy steps to
open its markets. A progressively more open and transparent trade
regime stimulated a strong increase in India's trade and investment
in the first half of the 1990s.
In January 2004, the Indian government announced a reduction of
the basic 25 percent ceiling tariff rate to 20 percent (with several
notable exceptions). In addition to the basic customs duty, regardless
of the rate, the Government of India (GOI) assesses a 1 percent
customs-handling fee. The Government of India also eliminated a 4
percent Special Additional Duty (SAD) which had been levied on
virtually all imports since the 1998-99 budget. The Government of
India includes tariffs in calculating the base value upon which to
assess additional levies. The Government of India has made
substantial progress to simplify its applied tariff structure to two
tiers (10 percent on inputs and 20 percent on finished products) by
March 2004.
In 2003, the average duty rate in India was 29 percent, down from
32 percent in 2002. While the average duty was again reduced in
January 2004, India's tariffs remain among the worlds highest.
Applied duties were reduced in 2004 on certain selected products.
These include: coal; nickel and nickel articles; power transmission
25xxiv
and distribution project equipment; electricity meters; certain raw
materials and inputs for optical fibres and cables; capital goods for
manufacturing electronic goods; certain telecommunication
infrastructure equipment; cellular telephones; VCDs and DVDs;
lifesaving bulk drugs, formulations, and medical equipment; parts of
artificial limbs and certain rehabilitation aids; medical, surgical,
dental, and veterinary furniture; mosquito nets treated with
pesticide; aviation turbine fuel; and equipment for industrial and
agricultural water supply projects. The reduction in the customs duty
for textile products from 25 percent to 20 percent could be negated
for goods where the alternate specific rate of customs duty is greater
than the ad valorem rate. Numerous textile trade barriers still exist,
and India remains one of the most heavily protected textile markets
in the world.
In the World Trade Organisation (WTO), India has bound tariffs on
68 percent of its industrial goods imports. The majority of these
bindings exceed current Indian applied rates of duty. In agriculture,
India's Uruguay Round tariff bindings, ranging from 100 percent to
300 percent, are also higher than applied rates in many product
areas. The Indian government publishes tariffs and import tax rates,
but they are not transparent. There is no single official publication
that includes all necessary information. Importers must consult
separate tariff and excise tax schedules as well as any applicable
additional public notifications and notices to determine current tariff
and tax rates. Furthermore, different classification nomenclatures for
tariffs and excise taxes cause confusion.
Import LicensingAs a result of a WTO ruling, India has eliminated import licensing on
most consumer goods. In February 2002 the Government of India
eliminated its licensing requirements for imported motion pictures.
The Government of India requires special licences for importing
motorcycles. These are virtually unobtainable. The Government of
India prescribes the requirements and conditions for allowing
imported vehicles of any type into India. These special licences are
granted only to foreign nationals permanently settling in India, to
foreign nationals working in India for foreign firms holding greater
than 30 percent equity, or to embassies located in India.
Certain importers are eligible to import vehicles without a licence,
but only if offset by exports attributable to that importer. India
continues to maintain a negative import list. The negative list is
currently divided into three categories: (1) banned or prohibited
items (e.g., tallow, fat, and oils of animal origin); (2) restricted items
which require an import licence (e.g., livestock products); and (3) 1"canalised" items importable only by government trading
monopolies subject to cabinet approval regarding timing and
quantity. India has liberalised many restrictions on the importation
of capital goods. The government allows imports of all second-hand
capital goods by actual users without licence, provided the goods
have a residual life of five years.
Customs Act in IndiaThe two customs acts passed by Government of India are Customs
Act 1962 and Customs Tariff Act 1975. The Customs Act 1962 is the
basic Statute, effective since 1.2.1963, which empowers, under
Section 12, duties to be levied on goods imported into or exported
from India. The categories of items and the rates of duties which are
leviable have been specified in two schedules to the Customs Tariff
Act 1975. The first Schedule to the said Act specifies the various
categories of import items in a systematic and well considered
manner, in accordance with an international scheme of classification
of internationally traded goods termed 'harmonised system of
commodity classification'. Different rates of duties are prescribed by
the legislature on different commodities/group of commodities
mentioned in the first Schedule. The duties are levied both on
specific and ad valorem basis, while there are few cases where at
times specific-cum-ad valorem duties are also collected on imported
items. The second Schedule to Customs Tariff Act, the 1975
incorporates items subject to exports duties and rates thereof.
Modes of TradeThe different modes of transportation in international trade include
(i) by sea, (ii) by air, (iii) by rail, (iii) by road, (iv) by post parcel, and
(v) by registered courier service. The legal procedures to export or
import through air, sea, rail and road modes are the same, but their
administrative procedures are different. Postal and courier have
separate legislative rules apart from other modes. Eg: Under
registered courier the parcel should not weigh more than 70 kg.
These acts are applicable for customs valuation they remain similar
for all modes of transport.
2726
Customs Procedures and ValuationThe Government of India applies discretionary customs valuation
criteria to import transactions. Pursuant to amendments to its
valuation procedures issued on 7 September, 2001, these criteria
appear to allow Customs to reject the declared transaction value of
an import because a particular sale (a) was not undertaken "in the
ordinary course of trade under fully competitive conditions;" or (b)
involved a "reduction from the ordinary competitive price." US
exporters have reported that India's customs valuation
methodologies do not reflect actual transaction values and effectively
raise tariff rates. The United States is using the WTO Committee on
Customs Valuation to obtain further information from India on the
operation of these amendments, and will continue to examine the
customs valuation procedures for consistency with India's
obligations under the WTO Agreement on Customs Valuation. Indian
Customs requires extensive documentation. Processing delays often
occur. In large part the delays are a consequence of India's complex
tariff structure and multiple exemptions, which may vary according
to product, user, or specific Indian export promotion programme.
The Government of India fixes minimum import prices for certain
imported steel products, including hot-rolled steel coils, cold rolled
steel coils, hot rolled sheets, tin plates, electrical sheets, and alloy
steel bars and rods. Whether to impose or withdraw the minimum
import price for these products is the subject of a legal confrontation
between the government and the Indian courts. The Indian
government's appeal is pending in the Indian Supreme Court and the
minimum price regime remains in place.
On average, documents required for importing or exporting one
consignment in/out of India includes:Type of documents 29No. of copies 118No. of Signatures 256Labour Required 7Cost of procedures 10 percent of consignment value
Source: UNESCAP estimate.
India introduced a reference price system for soybean oil in
September 2002 to address alleged under invoicing. The reference
price is the basis upon which India assesses its 45 percent customs
duty. When the Government of India reference price for soybean oil
rises above the transaction price, the effective rate of duty may also
increase above India's 45 percent WTO-bound tariff. The
Government of India states that the reference price is adjusted on a
weekly basis if published world prices differ by either a 10 percent
increase or decrease. India has not formally defined this procedure,
making it non-transparent and unpredictable. (For instance: Exports
of US crude soybean oil to India were negligible in 2003 after
accounting for $25 million in 2002. India has not been responsive to
United States requests for relief from this practice.)
In 2002, Indian Customs began to value imported movies according
to net profits rather than the printing price of the film copy. The
motion picture industry appealed the change in past practice,
arguing that the new practice amounted to double taxation of film
screening revenue. In March 2003, Indian Customs reversed itself,
issuing notification that henceforth imported films would be valued
based on the cost of the print alone.
Customs Valuation on ImportImport duty is charged on the accessible C I F (Cost, Insurance and
Freight) - this type of contract includes the Free on Board price plus
cost of freight and insurance up to the port of destination. In this
term, the exporter has to obtain insurance at his cost against the
risks of loss or damage to the goods during the carriage. Under the
CIF and C and F contract, the risk of goods is transferred to the buyer
once they have been loaded on board. But the exporter has to pay the
expense of transportation for the goods up to the port of destination.
The exporter often prefers these items because he can channel all his
exports and send them by a vessel of his choice. For the importer,
these terms mean fewer responsibilities, because it is the exporter
who has to gamble on fluctuations in the freight and insurance rates
to value up to the place of import. CIF plus 1 percent on CIF value is
the accessible CIF value. Duty will be charged on accessible CIF value
and not on the CIF value.
Customs Valuation for Export2FOB (Free on Board) price is inclusive of Ex-Works price, packing
charges, transportation charges up to the place of shipment, postage,
custom dues, export duties, cost of checking of quality measure,
weight or quantity, if any, which an exporter incurs while delivering
2928
the export goods to the foreign buyers on board. In this type of term
the Bill of Lading must carry the wording 'Shipped on Board' and it
must bear the signature of the carrier or his authorised
representative together with the date on which goods were 'boarded'.
FOB price should be incurred by the exporter up to the nation of
export.
Since the exporter is incurring a huge expense when trading with
another nation, it is ideal for the exporters to have a second or third
buyer in hand (at the same destination). If the first buyer rejects the
consignment the same can be sold to the next buyer at the same
destination. Otherwise he has to forgo the shipment or get the
consignment back, which involves huge loss. The customs valuation
is based on the commercial value of the commodity and not on the
actual payment made against the commodity, e.g., if a family friend
exports a shrimp consignment at a lower cost (for INR 1,000) than
the market value (i.e., INR 2,000) then the cost which the exporter
has to pay will be market value (INR 2,000) plus freight and
insurance charges. This is nothing but the CIF. Then add to it 1
percent of CIF value, to get the CIF accessible value, which have to be
paid by the contractor.
Customs Valuation and Procedure across Commodity and
CountryDifferent commodities (like perishable, precious, electronics) have
different customs procedures. For example: The Airport Authority of
India checks all commodities in aerodrome and then sends it to
different sections like marine containment for cold storage in the
Containers Corporation of India, and a high level of security is
involved. But logistics and customs law are similar for all
commodities. Country specific procedures do not exist except for
certification procedures. A certain country needs specific
certification, like from institutional agency recognised by the buyer
nation, e.g., a Canada Invoice Stamp is needed for customs valuation
in Canada which can be gotten after certifying the commodity by
their embassy. The legalised invoice issued by the specific importing
country is certified by their embassy. This is the major difference
between nations on customs procedures. Such specific documents
may be necessary for each nation along with other similar customs
procedures which is common for all nations.
Difference between Anti-Dumping Duties and Customs
Duties3Although anti-dumping duty is levied and collected by the Customs
Authorities, it is entirely different from customs duties not only in
concept and substance, but also in purpose and operation. The
following are the main differences between the two:lConceptually, anti-dumping and similar measures are linked to
the notion of fair trade. The object of these duties is to guard
against the situation arising out of unfair trade practices while
customs duties are there as a means of raising revenue and for
overall development of the economy. lCustoms duties fall in the realm of trade and fiscal policies of the
Government while anti-dumping and anti-subsidy measures are
there as trade remedial measures. lThe object of anti-dumping and allied duties is to offset the
injurious effect of international price discrimination while
customs duties have implications for the government revenue
and for overall development of the economy. lAnti-dumping duties are not necessarily in the nature of a tax
measure in as much as the authority is empowered to suspend
these duties in case of an exporter offering a price undertaking.
Thus such measures are not always in the form of duties/tax. lAnti-dumping and anti-subsidy duties are levied against
exporter country in as much as they are country specific and
exporter specific as against the customs duties which are general
and universally applicable to all imports irrespective of the
country of origin and the exporter.
Thus, there are basic conceptual and operational differences between
customs duty and anti-dumping duty. Anti-dumping duty is levied
over and above the normal customs duty chargeable on the import of
goods.
Anti-Dumping Investigations Initiated against Imports in
IndiaTwo fundamental parameters are used for determination of
4 5dumping, namely, the normal value and the export price . Both these
elements have to be compared at the same level of trade, generally at
ex-factory level, for assessment of dumping. The first anti-dumping
investigation in India was initiated in 1992. During the period from 61992-93 to 2003-04, the DGAD received a large number of
3130
applications for initiating anti-dumping investigations. After
examination of these applications, anti-dumping investigations were
initiated in 167 cases. In between 1997-2004, 31 applications were
not accepted by the DGAD for various reasons. Major product
categories for which anti-dumping applications have been filed by
domestic industry pertain to chemicals and petrochemicals followed
by pharmaceuticals, steel and other metals and fibres/yarns. The
countries involved are mainly China, the EU, Republic of Korea and
Chinese Taipei. While the total number of cases investigated is 167,
the number of countries involved in these investigations is 39 7 (including EU member countries).
Anti-Dumping Investigations Initiated against Exports
from India Indian exports are facing a number of anti-dumping and anti-
subsidy cases against them from other members of the WTO. Annex I
gives a picture of the AD (Anti-Dumping) cases registered against
India. It has been compiled from various sources namely, Directorate
General of Foreign Trade (DGFT), Export Promotion Councils
(EPCs) and Administrative Ministries, as the DGAD is not the nodal
agency for cases initiated against Indian exporters. The list, however,
does not contain all cases initiated against India
The EU, USA, Canada and South Africa account for almost 60
percent of the anti-dumping cases initiated against Indian exports.
The European Union tops the list with 26 initiations out of a total of
101 initiations against India. The USA comes next with 18 initiations
followed by South Africa with 16 initiations. Indonesia accounts for
10 percent of the cases with 10 initiations. China, which has become
an active user of AD measures has also initiated two cases against
India out of which one has already resulted in definitive measures.
Against a total initiation of 101 cases since 1995, 50 definitive
measures have been imposed by other member countries against
Indian exports. The country-wise distribution of measures against
India also shows a similar pattern. The EU tops the list with 15
measures followed by South Africa with 10 definitive measures
imposed against Indian exports.
A product wise analysis of cases against Indian exporters indicates
that the highest number of anti-dumping cases is on base metals
including steel products and engineering products, which account for
32 percent of the total cases. This follows the global trend as far as
products most targeted by AD measures are concerned. This is
followed by chemicals and allied products, including drugs and
pharmaceuticals, which account for about 25 percent of all AD
measures against India.
During the period 1995-2004, four initiations and two measures on
average have been imposed against Indian exports every year. The
most anti-subsidy cases was initiated between 1998 and 2004.
Around 90 percent of the anti-subsidy cases were initiated after
financial year 1997-98. A product wise analysis of cases against
Indian exports indicates that the highest number of anti-subsidy
cases is on engineering including steel products, which account for
38 percent of the total cases. This is followed by chemicals and allied
products including drugs and pharmaceuticals and rubber and
plastic products which account for about 18 percent each of anti-
subsidy initiations against India. The EU, USA, and South Africa
account for 82 percent of the anti-subsidy cases initiated against
Indian exports. The European Union are at the top of the list with 14
initiations out of a total 39 initiations against India. The USA and
South Africa come next with nine initiations each followed by Canada
with five initiations. Brazil accounts for 5 percent of the cases with
two initiations.
Measures in Force against Exports from IndiaAgainst the total initiation of 39 cases since 1995, 19 definitive
measures have been imposed by countries against Indian exports.
The EU tops the list with nine measures followed by the USA with
four definitive measures imposed against Indian exports. South
Africa and Canada have three measures each. Brazil has not imposed
any measure out of two cases initiated so far.
Other Remedial Measures in Addition to Anti-DumpingApart from dumping, some of the countries also resort to
subsidisation of their exports to other countries. Export subsidies,
under the WTO agreement, are treated as unfair trade practices and
such subsidies are actionable by way of levy of anti-subsidy
countervailing duty. There is one more trade remedial measure
called "safeguards" which are applied as an emergency measure in
response to a surge in imports of a particular item.
3332
An anti-subsidy countervailing measure is in the form of
countervailing duty which is to be imposed only after the
determination that: lthe subsidy is a specific subsidy; lthe subsidy relates to export performance; lthe subsidy relates to the use of domestic goods over imported
goods in the export article; lthe subsidy has been conferred on a limited number of persons
engaged in manufacturing, producing or exporting the article.
Safeguards are applied in the form of either safeguard duty or in the
form of safeguard QRs (import licences). These measures are
administered in India by an authority called Director General
(Safeguards) who functions in the jurisdiction of the Department of
Revenue, Ministry of Finance.
South Asian Preferential Trade Agreement (SAPTA)The South Asian Association for Regional Co-operation (SAARC)
consists of seven countries, namely, Bangladesh, Bhutan, India,
Maldives, Nepal, Pakistan and Sri Lanka. A regional trade block
among these members was formed when SAPTA was signed in April
1993 for giving preferential market access to exports from the
member countries in a limited way. Four rounds of negotiations are
now contemplated following the signing of the Agreement on SAFTA.
The operationalisation of SAPTA in December 1995 and the
subsequent three rounds of negotiations entailing tariff liberalisation
have been major developments in the regional trade liberalisation. A
modest beginning was made in the First Round when 226 products
were conceded at the HS 6-digit level. The number of products
offered concessions accelerated to 1,868 and 345 items during the
Second and Third Rounds, making a total of 5,550 items of which
3,449 items were exclusively for LDCs: Bangladesh, Bhutan,
Maldives and Nepal. The largest number of concessions was offered
by India: 2,927 products of which as many as 2,450 products were in
favour of LDCs. Bilaterally, the largest number of non-reciprocal
concessions was offered in favour of Bangladesh (later
multilateralised in favour of all LDCs).
The tariff concessions offered has varied in depth from 5-100
percent. The tariff cuts offered by India have been the deepest,
varying from 25-100 percent for LDCs and 10-90 percent for all
countries. The other countries offered much milder tariff cuts
ranging from 7.5-10-15-20 percent for all countries (except Sri
Lanka, which offered cuts of up to 75 percent). The Rules of Origin,
as in the case of the Bangkok Agreement, is one-dimensional under
which Non-LDCs are required to input at least 40 percent local
material content while Non-LDCs are required to input at least 30 8percent.
Agreement on South Asian Free Trade Area (SAFTA)At the 9th SAARC Summit held in May 1997, the Heads of State or
Government recognised the importance of achieving a free trade area
by the year 2001 and reiterated that steps towards trade
liberalisation must take into account the special needs of the smaller
countries and the LDCs and that benefits must accrue equitably. The
mandate of the Tenth SAARC Summit held at Colombo in July 1998
reiterated the importance of achieving SAFTA as mandated by the
Ninth SAARC Summit. To this end, they decided that a Committee of
Experts (CoE), in consultation with Member States, be constituted
with specific Terms of Reference (TOR) to work on drafting a
comprehensive treaty regime for creating a free trade area.
Recognising the need to move quickly towards SAFTA, the Heads of
State or Government directed the Council of Ministers to finalise the
text of a Draft Treaty Framework by the end of 2002 at the 11th
SARC Summit held at Kathmandu, Nepal in January 2002. They also
directed that in moving towards the goal of SAFTA, the Member
States expedite action to remove tariff and non-tariff barriers and
structural impediments to free trade. The CoE held several meetings
during 2002 and 2003 in Kathmandu to finalise the text of the
agreement. Some of the contentious issues were finally resolved in
the Council of Ministers (Foreign Ministers) Meeting on 2-3 January
2004 and the Agreement was signed during the 12th SAARC Summit
held in Islamabad on 4-6 January 2004.
The agreement provides for free trade in goods among SAARC
member countries and lays down a Trade Liberalisation Programme.
Each country will maintain a Sensitive List to protect the interests of
domestic stakeholders. This will be subject to a maximum ceiling and
shall be finalised after the negotiations among the Contracting States
(CS) with flexibility to the Least Developed Contracting States to seek
3534
derogation in respect of the product of their export interest. This in
effect means that the Non-LDC Member States would maintain a
smaller sensitive list for the LDC Member States. The sensitive lists
are subject to review after every four years or earlier with a view to
reducing the number of items, which are to be traded freely among
the SAARC countries. The agreement also provides for an
institutional mechanism of the SAFTA Ministerial Council (SMC);
Safeguard Measures in case of a surge in imports of product(s)
covered under SAFTA concessions; and a detailed Dispute
Settlement Mechanism.
Apart from provisions for longer phase-out schedules and longer
Sensitive Lists to be maintained by the LDCs, it provides technical
assistance in trade-related areas and some relaxations for imposing
safeguard measures against LDCs. The agreement also provides, as
mandated in the 10th SAARC Summit, for compensation of revenue
to LDCs who suffer from loss of customs revenue due to the
implementation of the Trade Liberalisation Programme, the
operational modalities of which are to be worked out through further
negotiations.
The SAFTA agreement will enter into force on 1 January 2006 upon
completion of negotiations on Sensitive Lists, Rules of Origin and
Revenue Loss Compensation Mechanism for LDCs. These
negotiations will be carried out by the existing Committee of Experts
and are expected to be completed by the end of June 2005. This 9agreement shall supersede the SAPTA. The following sections give a
short description of India's trade agreement with SAARC countries.
India-Afghanistan Trade AgreementThe Government of the Republic of India and the Transitional
Islamic State of Afghanistan decided for a progressive reductions and
elimination of obstacles to bilateral trade through a bilateral
preferential trading arrangement in 2003. The objectives of this
agreement are:lTo promote through the expansion of trade the harmonious
development of economic relations between India and
Afghanistan. lTo provide fair conditions of competition for trade between
India and Afghanistan. lIn the implementation of this Agreement the Contracting Parties
shall pay due regard to the principle of reciprocity. lTo contribute in this way, by the removal of barriers to trade, to
the harmonious development and expansion of world trade.
The Contracting Parties hereby agree to establish a Preferential
Trading Arrangement for the purpose of free movement of goods
between their countries through reduction of tariffs on the 10 movement of goods.
India-Bangladesh Trade AgreementIn 1980, the Government of the Republic of India and the
Government of the People's Republic of Bangladesh decided to
strengthen economic relations between the two countries on the
basis of equality and mutual benefit. According to the agreement,
imports and exports of commodities and goods produced or
manufactured in India or Bangladesh, as the case may be shall be
permitted in accordance with the import, export and foreign
exchange laws, regulations and procedures in force in either country
from time to time. Customs and cross-boarder procedures are
complex. Access for transit cargo to or from north-east India through
Bangladesh may reduce distance by about 60 percent but this road
route is not open under the current trade protocol.
India-Bhutan Trade AgreementThe Government of the Republic of India and the Government of the
11Kingdom of Bhutan in 1995 entered into free trade and commerce
between the two countries, through expansion of bilateral trade and
collaboration in economic development. Both nations apart from the
preferential treatment can maintain or introduce measures or
restrictions which are necessary for the purpose of: lProtecting public morals;lProtecting human, animal and plant life;lImplementing laws relating to import and export of gold and
silver bullion;lSafeguarding national treasures;lSafeguarding such other interests as may be mutually agreed
upon.
India-China Trade AgreementThe Government of the Republic of India and the Government of the
People's Republic of China in 1984 entered into an agreement of
Most-Favoured Nation Treatment. There is no intention on the part
3736
of DGAD or the Government of India to specifically target China for
application of anti-dumping measures. The principles and
procedures prescribed under the law are fully complied with in the
cases involving China as in the cases involving other countries. The
number of cases against China has nothing to do with it not being a
member of WTO. The anti-dumping action initiated by the authority
is governed by our national law and rules framed there under. India
has extended Most Favoured Nation (MFN) treatment to China,
which enjoins upon India the obligation of non-discriminatory
treatment of China vis-à-vis other trading partners including WTO
members. Thus the question of discriminating against China does
not arise so far as anti-dumping measures are concerned.
India-Maldives Trade AgreementIn 1981 the Government of the Republic of India and the
Government of the Republic of Maldives, decided to come into
agreement for developing and strengthening trade and economic
relations between their respective countries in accordance with their
development and trade needs and objectives on a mutually beneficial
basis. Specified quota allocations for each calendar year shall be
made by the Government of the Republic of India by the end of
December with due regard to the supply, availability and the overall
need of the Government of the Republic of Maldives.
India-Sri Lanka FTAThe Government of the Republic of India and the Government of the
Democratic Socialist Republic of Sri Lanka signed a Free Trade
Agreement (FTA) on 28 December 1998. A meeting between the
Commerce Secretary, Government of India and the Secretary,
Treasury, Government of Sri Lanka was held on 2 February 2000 in
New Delhi to operationalise the FTA. According to the minutes
signed on 2 February 2000, it was decided "both sides agreed that
the Tea Boards of India and Sri Lanka should meet and finalise
issues such as method for allocation of quota, monitoring
mechanism, authorised signatories for issue of Certificate of Origin
and other related procedural matters.”
Pursuant to the above decisions, delegations from the Government of
the Republic of India and the Government of the Democratic
Socialist Republic of Sri Lanka met in New Delhi on 18-19 April
2000. During the meeting, two sub-committees were formed to
finalise the arrangements for operationalisation of Tariff Rate Quota
(TRQ) exports of tea and garments under the FTA. Both sides agreed
to implement steps to bring these arrangements into effect at the
earliest.
India-Nepal Trade AgreementThe Government of India and His Majesty's Government of Nepal
entered into the trade agreement to grant maximum facilities and to
undertake all necessary measures for the free and unhampered flow
of goods, needed by one country from the other, to and from their
respective territories. The specific route and commodities for free
trade is given in Annex 1. Nepal is land-locked and most of its trade
has to transit through India. Indo-Nepal trade is free and Nepal has
much lower tariff on imports of third country goods than India.
Nepalese goods are allowed preferential entry into India on meeting
a minimum material content requirement (value addition norm)
defined under the treaty. India tried to remove this norm and for
some time all the products manufactured in Nepal were eligible for
duty free export to India. But this led to a flooding in of Chinese-
made goods through Nepal. In later renewals of the treaty, the
provisions relating to value addition and certificate of origin, were
incorporated. Imports are now allowed on the basis of a certificate of
origin issued by the Government of Nepal.
India has agreements with Bhutan and Nepal that it allow trucks to
move across the boarder, though not inland. Indian trucks/vehicles
are allowed free entry into Nepal whereas Nepalese trucks/transport
vehicles are not provided similar facilities in India. The Nepal
Government has advocated free entry. India also shares broad-gauge
railways with Pakistan and Bangladesh - a historical legacy. India has
bilateral rail interchange agreements with these neighbours. But the
conditions are stringent and the performance not good.
India's Experience with the WTO Dispute Settlement
SystemIndia was first in South Asia to invoke the WTO dispute settlement
procedures, on 28 September 1995, when India requested
consultations with Poland's preferential treatment of the EC in its 12tariff scheme on automobiles. Also a founder member of the WTO,
India has been the most active South Asian member and the sixth
biggest participant in the WTO dispute settlement system, following
3938
the US, the EC, Canada, Japan and Brazil. It has been a complainant 13 in just as many disputes as it has been a respondent.
Amir Ullah Khan is deputy secretary general of the PHD Chamber
of Commerce and Industry (PHDCC), New Delhi, India.
Endnotes1 Canalisation: Some commodity imports must be channelled
("canalised") through public sector companies, although many such
items have been decontrolled. The remaining canalised items are
primarily petroleum products (although canalisation of crude oil was
eliminated in April 2002), some pharmaceuticals, and bulk grains
(wheat, rice, and maize).2 Ex-Works: When such a price is quoted, it is stipulated that the foreign
buyer should take the delivery of the goods at the exporter's premises
and all the risks and expenses therefore should be borne by him i.e., the
exporter is responsible for the delivery of the goods at his works or
factory. 3 Anti dumping is an instrument for ensuring fair trade and is not a
measure of protection per se for the domestic industry. It provides relief
to the domestic industry against the injury caused by dumping.4 Normal value is the comparable price at which the goods under
complaint are sold, in the ordinary course of trade, in the domestic
market of the exporting country. If the normal value can not be
determined by means of the domestic sales, the following two alternative
methods may be employed to determine the normal value: - (i)
Comparable representative export price to an appropriate third country;
(ii) Constructed normal value, i.e. the cost of production in the country
of origin with reasonable addition for administrative, selling and general
costs and reasonable profits.5 The Export price of the goods allegedly dumped into India means the
price at which it is exported to India. It is generally the CIF value minus
the adjustments on account of ocean freight, insurance, commission, etc.
so as to arrive at the value at ex-factory level.6 Directorate General of Anti dumping and Allied Duties (DGAD)
functioning in the Dept. of Commerce in the Ministry of Commerce and
Industry and the same is headed by the "Designated Authority".7 Refer Annex for the details of Anti-Dumping Cases registered by India8 Indra Nath Mukerji, 'Towards a Free Trade Area in South Asia: Charting
a Feasible Course for Trade Liberalization with Reference to India's
Role', RIS Discussion Paper 86, 2004, Research and Information System
for Non-Aligned and Other Developing Countries, New Delhi, 4-6.9 However, all products negotiated under four rounds of negotiations
would continue to be operative.10 Refer Annex for the list of preferential trade items/commodities. 11 Refer Annex for the list of free entry/exit route for trade
12 Poland-Import Regime for Automobiles, WT/DS19/2 (11 September
1996).13 See generally, Ravindra Pratap, India at the WTO Dispute Settlement
(Delhi: Manak Publications 2004).
Anti-Dumping Investigations Initiated against Imports in India by Country
4140
Anti-Dumping Investigations Initiated against Imports in India by Product
Anti-Dumping Investigations Initiated against Exports from India
AD Measures: Reporting Member vsExporting Country From: 01/01/95 To:
31/12/03
Argentina
Brazil
Canada
China, P_R_
European Community
Indonesia
Mexico
South Africa
Thailand
Trinidad and Tobago
Turkey
United States
Total
MeasuresImposed by
ExportingCountry
India
2
2
3
1
15
3
1
10
1
1
4
7
50
AD Measures: By Exporting Country From:01/01/95 To: 31/12/03
1995
1996
1997
1998
1999
2000
2001
2002
2003
Total
4
1
5
6
9
7
6
6
50
6
119
90
124
162
183
235
166
212
220
1511
Country wise initiations of anti-subside casse against india
EU
South Africa
USA
Canada
Brazil
Total
14
9
9
5
2
39
36%
23%
23%
13%
5%
100%
ExportingCountry
India Total for01/01/95/31/12/03
Country Anti SubsidyCases
Percentage
1995-96
1996-07
1997-98
1998-99
1999-00
2000-01
2001-02
2002-03
2003-04
Total
1
-
3
6
5
7
8
2
7
39
3
-
8
15
13
18
21
5
18
100
Year Anti Subsidy Cases % share
7.11 Particulars of a few Authorities responsible for invoking Anti-Dumping action
Engineering including Steel Product
Drugs & Pharmaceutical
Rubber, Plastics, Glassware and Articles thereof
Textiles and Articles Thereof
Footwear Products
Electronics
Product Anti subsidy Cases Percentage
15
7
7
6
3
1
38%
18%
18%
15%
8%
3%
Country
Argentina
Name of the investigeating Authority Address
Subsecretaria de Politica Y Gestion comercialMinisterio de Economia Y Produccion
Julio A. Roca 651, Buenos AiresCodigo Postal : C 1067ABBARGENTINATel: 00 54 11 4349 3935/3949Fax: 00 54 11 4349 3930
4342
Annex 1Anti-Dumping Investigations Initiated against Imports in India by
YearImports into India of the above four commodities for quantities in
excess of the fixed quota mentioned above will be permitted under
normal MFN rates of duty, notwithstanding any concession in any
other preferential arrangement.
Imports into India of the above commodities will be permitted
through the land Customs Stations (LCS) at Kakarbhitta/Naxalbari,
Biratnagar/Jogbani, Birganj/Raxaul, Bhairahawa/Nautanwa,
Nepalgunj/Nepalgunj Road and Mahendranagar/Banbasa.
The detailed administrative arrangements for operationalisation of
List of Items Granted Preferential Tariff by Afghanistan
No. HS Code
Product Description
MFN Duty (%)
MOP (%)*
1 090230 Black tea (fermented) Temporar ily exempted 100
2 090240 Other black tea Temporar ily exempted 100
3 300210
Antisera and
other BLD Frctn; Mdfd Imunlgcl products
7
100
4 300390
Other Ayurvedic, homeopathic medicine
7
100
5 300490
Other medicine for retail sale
7
100
6 170199
Sugar refined
Temporar ily exempted 100
7 252310 Cement clinkers 25 100
8 252321 White cement 25 100
* Margin of preference
List of Items Granted Preferential Tariff by India
No. HS Code Product Description MFN Duty (%) MOP (%)*
1 080620 Green Raisins 105 50%
2 080620 Green Large 105 50%
3 080620 Black Raisins 105 50%
4 080620 Red Raisins 105 50%
5 081310 Dried Apricots Nuts 30 50%
6 081310 Dried Apricots 30 50%
7 080420 Fig Dried 30 100%
8 080250 Pistachios closed Shell 30 100%
9
080250
Pistachios Open Shell
30 100%
10
080250
Pistachios Shelled (Kernel)
30 100%
11
080231
Walnuts Unshelled
30 50%
12
080232
Walnuts shelled
30 50%
13
081340
Plums Dried
30 50%
14
080212
Almond Thin Shelled
Rs65/kg 50%
15
080212
Almond Hard Shelled
Rs65/kg 50%
16
080212
Almond Shelled
Rs65/kg 50%
17
081340
Mulberries Dried
30 100%
18
081340
Pine Nuts Toasted
30 100%
19
080620
Raisins Golden
105 50%
20
081310
Apricots Nuts, Bitter Unshelled
30 50%
21
081310
Apricots Nuts, Bitter Shelled
30 50%
22
080620
Green Raisins except Large
105 50%
23
081340
Cherries Sour Dried
30 50%
24
080610
Grapes fresh, All types
40 50%
25
080719
Melon fresh
30 100%
26 080810 Apples fresh 50 50%
27 080910 Apricots fresh 30 50%
28
081090
Pomegranates
30 50%
29
090910
Anise Seeds
30 50%
30
090940
Caraway Seeds, White, Black Kajak
30 50%
31
120400
Linseeds
30 50%
32
120740
Sesame Seeds etc.
30 50%
33
121110
Liquorice Roots plants for Pharmacy etc.
30 50%
34
121410
Alfalfa Seeds
30 50%
35
130190
Asafeotida
30 100%
36 710310 Lapis Lazuli, Ruby, Emerald etc.(Unworked) 30 100%
37 710391 Emeralds (Otherwise worked) 30 100%
38 710399 Lapis Lazuli, Ruby (Otherwise worked) 30 100%
* Margin of preference
List of Entry/Exit points for India-Bhutan Trade
1. Jaigaon (road route)
2.
Chamurchi
(road route)
3.
Ulta Pani
(road route)
4.
Hathisar (Gaylephug)
(road route)
5.
Darranga
(road route)
6.
Calcutta
(air and sea port)
7.
Haldia
(sea port)
8.
Dhubri
(riverine route)
9.
Raxaul
(road/rail route)
10.
Panitanki
(road route)
11.
Changrabandh
(road route)
12.
New Delhi
(air route)
Nepalese manufactured articles allowed entry into India: free of customs duties on a fixed quota basis.
No. Nepalese Article Quantity in MT per year
1 Vegetable fats (Vanaspati) 100, 000
2 Acrylic Yarn 10, 000
3 Copper products under Chapters 74 and Heading 85.44 of the HS Code 10,000
4 Zinc Oxide 2,500
4544
the fixed quota, i.e., identifying the agencies for allocation and
monitoring of exports and imports of fixed quota will be finalised by
both Governments.MFN List of Articles not Allowed Preferential Entry from
Nepal to IndialAlcoholic liquors/beverages and their concentrates except
industrial spirits (Nepalese beers can be imported into India on
payment of the applicable liquor excise duty equal to the
effective excise duty as levied in India on Indian beers under the
relevant rules and regulations of India. (Nepalese beer has been
exempted from the whole of the additional duty vide customs
notification No. 178/2003-customs date 17.12.2003)lPerfumes and cosmetics with non-Nepalese/non-Indian brand
names,lCigarettes and tobacco
Note: The Government of India may, in consultation with HMGN,
modify the above list.
Agreed Routes for Mutual Indo-Nepal TradelPashupatinagar/ Sukhia PokharilKakarbhitta/ NaxalbarilBhadrapur/ GalgalialBiratnagar/ JogbanilSetobandha/ BhimnagarlRajbiraj/ KunaulilSiraha, Janakpur/ JayanagarlJaleswar/ Bhitamore (Sursand)lMalangawa/ SonabarsalGaur/ BairganialBirgunj/ RaxaullBhairahawa/ NautanwalTaulihawa/ KhunwalKrishnanagar/ BarhnilKoilabas/ JarwalNepalgunj/ Nepalgunj RoadlRajapur/ KaterniyaghatlPrithvipur/ Sati (Kailali)/ TikonialDhangadhi/ GauriphantalMahendranagar/ BanbasalMahakali/ Jhulaghat (Pithoragarh)lDarchula/ Dharchula
Trade Facilitation in WTONisha Taneja
rade facilitation was first included in the WTO as one of the
Singapore issues (investment, competition, transparency in
government procurement, trade facilitation) at the 1996 WTO TMinisterial Conference following which the Council for Trade in
Goods was directed to carry out exploratory and analytical work on
the simplification of trade procedures. In December 1996, the
Singapore Ministerial Declaration directed the Council for Trade in
Goods “to undertake exploratory and analytical work, drawing on the
work of other relevant organisations, on the simplification of trade
procedures in order to assess the scope for WTO rules in this area.”
Until the launch of the Doha Development Agenda (DDA) in
November 2001, work at the Council for Trade in Goods (CTG) had
focused mainly on customs and border-crossing procedures. A
Symposium on Trade Facilitation was held in 1998 to explore the
main concerns of traders when moving goods across borders. The
key problems identified included excessive documentation
requirements; insufficient use of information-technology; lack of
transparency; unclear import and export requirements; and lack of
co-operation among customs authorities. Other issues discussed
included import and export procedures and requirements, transport
and transit of consignments and payments, electronic facilities and
technical co-operation and development issues. In November 2001,
the Doha Ministerial Conference called for negotiations on trade
facilitation after the 2003 WTO Ministerial and subject to agreement
on the modalities of negotiation. Until then, “... the Council for Trade
in Goods shall review and as appropriate, clarify and improve
relevant aspects of Articles V (freedom of transit), Article VIII (fees
4746
and formalities connected with importation and exportation) and
Article X (publication and administration of trade regulations) of the
GATT 1994 and identify the trade facilitation needs and priorities of
members, in particular developing and least-developed countries.”
The Cancun Ministerial in September 2003 failed to launch
negotiations on the Singapore Issues. Talks were suspended due to
divergent positions taken by developed and developing countries.
While Japan and Korea supported the inclusion of all the four
Singapore issues, the coalition of the African Union, LDC, ACP
countries, Malaysia (and initially India), opposed negotiation on any
of the four. Following Cancun, during the Green Room consultations,
the EU suggested the inclusion of only two Singapore issues namely
transparency in government procurement and trade facilitation.
During further discussions in the Green Room meeting, it became
clear that there was no consensus on the need for any multilateral
disciplines on transparency in government procurement, and hence
there was a suggestion that further work on this issue be dropped. In
December 2003 several developing countries including India
submitted a communication on the Singapore issues requesting that
investment, competition and transparency in government
procurement be dropped. The debate remained largely unchanged
until April 2004, when a 'core-group' of developing countries and
LDCs said they were prepared to discuss trade facilitation, but only
to clarify substantive modalities for negotiations. In addition to
insisting that negotiations must be based on 'explicit consensus', they
called for the remaining Singapore issues to be dropped altogether
from the WTO work programme, and expressed a desire to see prior
movement in issues such as agriculture before starting discussions
on trade facilitation.
Finally, in the July Package, the WTO members agreed on the basis
of 'explicit consensus' in the General Council to formally launch
negotiations on trade facilitation, while dropping the more
contentious issues of investment, competition policy and
transparency in government procurement from the Doha work
programme. The mandate for these negotiations is set out in Annex
D of the July Package. members agreed that the negotiations “shall
aim to clarify and improve relevant aspects of Articles V, VIII and X
of the GATT 1994 with a view to further expediting the movement,
release and clearance of goods, including goods in transit.”
Negotiations also aim at “enhancing technical assistance and support
for capacity building in this area,” and at developing “provisions for
effective cooperation between customs or any other appropriate
authorities on trade facilitation and customs compliance issues.” The
results “shall take fully into account the principle of special and
differential treatment for developing and least-developed countries.”
It was further agreed that these countries would not be obliged “to
undertake investments in infrastructure projects beyond their
means.”
The WTO's Trade Negotiations Committee established a negotiating
group on trade facilitation, to oversee the negotiations.
Subsequently, several countries have put in their proposals. A
noteworthy development in the WTO is that India, China, Pakistan
and Sri Lanka have submitted a joint communication on the process
of trade facilitation in the Negotiating Group on Trade Facilitation in
March 2006. For the first time, the three South Asian countries have
come together to put forward proposals on three key issues, namely-
arrangement of commitment for developing countries, technical
assistance and capacity building support mechanism and the
application of a dispute settlement mechanism. The communication
suggests that a possible mode of commitment arrangement for
members might be that the rules to be established are divided into
different modules, depending upon the degree of difficulty and the
extent of resources and capability required for implementation.
On the issue of technical assistance and capacity building support
mechanism the proposal suggests that members should ensure (i) a
coordination/collaborative mechanism between various partners
engaged in trade facilitation, (ii) that technical assistance is adapted
to the needs of the recipients. The proposal further suggests that
given the nature of implementation of a Trade Facilitation
Agreement and that thousands of transactions everyday could be
subject to this Agreement, there is need for members to establish
dedicated bodies such as a Committee on Trade Facilitation, where
disputes could be discussed and mediated. The dispute settlement
mechanism should only be the last resort when there is no hope of
settling the dispute within the Committee.
Focusing on the content of the significant proposals made by
members following the Doha Mandate and taking into account
4948
proposals that have been made by members in the Negotiating
Group on Trade Facilitation, this paper focuses on three key
questions: (i) what clarifications do these proposals seek on Articles
V, VIII and X, (ii) what is the current status for India with respect to
each of these proposals, and (iii) what implications do these
clarifications have for India. Based on the analysis for India, issues
and concerns for South Asia have been examined.
There is no widely agreed upon definition for trade facilitation. The
WTO defines trade facilitation as “the simplification and
harmonisation of international trade procedures”, “where
international trade procedures” are defined as the “activities,
practices, and formalities involved in collecting, presenting,
communicating, and processing data required for the movement of
goods in international trade.” In the end, the objective of trade
facilitation is to reduce the cost of doing business for all parties by
eliminating unnecessary administrative burdens associated with
bringing goods and services across borders.
The definition makes it clear that trade facilitation relates to a variety
of activities such as import and export procedures (customs or
licensing procedures), customs valuation, technical standards, health
and safety standards, among others) including administrative
procedures, transportation and shipping; insurance, payment and
mechanisms and other financial requirements.
As a result of a large number of participants, as well as the wide
range of trade facilitation instruments, several organisations -
private, public, regional and multilateral - are involved in discussion
and implementation of trade facilitation. The most important
multilateral public organisation dealing with trade facilitation is the
World customs Organisation that provides principles for simple,
effective and modern procedures that are compatible with and
complementary to the three GATT Articles referred to in the context
of trade facilitation in the Doha Ministerial Declaration. The WCO
offers solutions that allow countries to meet their legitimate goals of
revenue collection and protection to society, while at the same time
delivering practical trade facilitation dividends. The uniform,
predictable, and transparent application of these instruments
facilitates international trade, while also ensuring compliance with
national laws and regulations. These modern principles for
simplification of procedures to provide trade facilitation were later
incorporated in a single instrument as “The convention on the
Simplification and Harmonisation of customs Procedures”, or the
“Kyoto Convention” adopted in 1973.
As a result of years of deliberation among members, the revised
Kyoto Convention of 1999 contains international standards that
provide the predictability and efficiency that modern trade and
commerce require. The revised Kyoto Convention through its legal
provisions and implementation guidelines provides the basis for
principles set out in GATT Articles V, VIII, and X. It addresses a
major failing of the Kyoto Convention of 1973, namely the
widespread use of reservations and the small number of parties that
contracted to individual annexes. The structure of the Revised Kyoto
Convention ensures, through its General Annex, harmonisation of
the procedures in all countries that will become contracting parties,
while at the same time it allows flexibility to its members in choosing
the specific annexes that it wants to adopt.
Proposals and Implications for IndiaThis section identifies the key proposals relating to GATT Article X
and VIII. The current status in India regarding each of these
proposals has been examined and suggestions have been made on
what stand India can take in the ongoing negotiations.
Article X: Publication and Administration of Trade
RegulationsArticle X requires members to publish all laws, regulations, judicial
decisions and administrative rulings relevant to importing and
exporting in a manner as to enable governments and traders to
become acquainted with them. The text of Article X further
elaborates the laws, regulations, judicial decisions and
administrative rulings could pertain to. These include classification
or valuation of products, rates of duty, taxes or other charges;
requirements, restrictions or prohibitions on import or export; and
on transfer of payments related to imports or exports and on sale,
distribution, transportation, insurance, warehousing, inspection,
exhibition, processing, mixing and others related to export or import.
Article X also requires members to publish all trade agreements
affecting international trade policy. In addition Article X requires
members to publish all trade related measures that impose a new or
5150
more burdensome requirement, restriction or prohibition on imports
or the transfer of payments before enforcement. Article X requires
members to maintain or institute judicial, arbitral or administrative
tribunals or procedures for review and correction of administrative
action relating to customs matters.
It is important to first examine if India is publishing all trade related
information as is required by the existing Article X. All trade related
information is published by the relevant official authorities. The
three key institutions involved are the Central Board of Excise and
customs, the Director General of Foreign Trade under the Ministry of
Commerce, and the Reserve Bank of India. Information is made
available both in print and through the electronic media.
Interestingly, the private sector is playing an important role in
making information more accessible to traders both through
published material and through hosting of websites. Traders in India
tend to use private sources as they disseminate information faster.
The Central Board of Excise and customs (CBEC) under the Ministry
of Commerce publishes all the relevant acts, tariffs, rules,
regulations, forms, notifications and circulars relating to customs,
central excise and service tax both on the website and in print form
as well. The main acts are the customs Act of 1962 and the customs
Tariff Act 1975. All regulations and rules come into effect through a
notification, which is published in the official Gazette of India. The
notifications are published under two broad subject headings,
namely tariff and non-tariff related. All requirements, restrictions or
prohibitions on import and export are regulated through the Foreign
Trade Development and Regulation Act 1992, which falls under the
purview of DGFT. The act provides the Government with the
authority to put restrictions or prohibitions on import or export.
Under Section 5 of the act, the EXIM Policy is issued which is valid
for a period of 5 years, but, amendments are made in the policy every
year. All regulations related to payments are published by the
Reserve Bank of India.
Decisions passed by the tribunal, Supreme Court and High Court are
public documents and can be obtained at a nominal fee. Several
private publishers have collated such information to make it easily
available to customers. Countries that have given proposals on
Article X include the European Communities, Japan, Korea and
Canada. Other countries that have submitted proposals in the
Negotiating Group include Mongolia, Pakistan, Peru, Chinese Taipei,
Hong Kong, China, Turkey, United States, Australia, New Zealand,
Singapore, and Dominican Republic. The key issues in the proposals
are relate to advance rulings, use of electronic media, enquiry points,
consultative mechanism, code of conduct for officials and appeals.
Advance RulingsCountries have suggested the inclusion of binding advance rulings.
This provision enables traders to get advance information on tariff
classification, valuation and applicable duties. A notable
development in India that aims to increase transparency and
predictability in trade is the setting up of the Authority for Advance
Ruling by the Finance Act 1999, which is a statutory quasi-judicial
body under the customs Act 1962 and the Central Excise Act 1944.
The scheme of advance ruling became fully operational only from 4
February 2004. The ruling by the authority can be on classification,
valuation and applicability of duty exemption in respect of export,
import, production and manufacture. However, only foreign firms
which want to invest in India through joint ventures or wholly owned
subsidiaries, or Indians who are getting into joint ventures with
foreign firms can ask for advance ruling. Thus the scope of the
Authority for Advance Ruling is quite limited as such a provision is
not made available to a solely Indian - owned company. In view of
the rigid eligibility criteria it is not surprising that the number of
cases admitted so far is very limited. India should expand the scope
of the current system to include solely Indian-owned companies.
Use of Electronic MediaA new dimension in the proposals relates to how information
relating to exports and imports can be made available. This assumes
considerable significance in light of the changes that have been made
in the use of the electronic media. Clearly this aspect did not appear
in the GATT Article X at the time of its inception. However, it is
important to note that some members do not lay any emphasis on
making the use of the electronic media mandatory, but simply
recommend its usage. In India the electronic media is being used
very widely for dissemination of information by the CBEC, the DGFT
and the Reserve Bank of India. The electronic media is also being
used by several private companies/individuals.
5352
Enquiry PointsSeveral members have suggested the establishment of a single
national focal point to respond to inquiries related to information
directly related to the customs procedures, importation and
exportation. As of now, in India, there is no officially designated
inquiry point for traders. India should consider it as it would make it
easier for member countries to access information. But a single
national focal point is not recommended by the Kyoto convention
and need not be adopted by India.
Consultative Mechanism Another important submission made by members is that all
stakeholders/interested parties i.e., government and private sector
bodies including importers and exporters, carriers, chambers of
commerce, should get an opportunity to comment on prospective
rules and procedures through a consultative mechanism before they
are implemented. An additional element proposed is that members
should publish reasoned motivations for a proposed measure.
In India, currently there is no provision for consultation between
interested groups. However, the recent Kelkar Committee,
recognising the importance of regulatory transparency, has
recommended that “An institutional mechanism, namely Standing
Committee on Procedures chaired by Chairman CBEC and including
trade and industry representatives, should be established to identify
and resolve the problem areas in present procedures and evolve new
procedures on a need basis.” Such a consultative and feedback
mechanism between the regulator and the other participants in
trade, if implemented, would help in evolving more efficient and cost
reducing procedures.
AppealWhile Article X requires the establishment of an administrative or
legal review procedure, submissions have been made on making the
provisions of Article X more concrete. Member countries have
suggested that in cases where the initial appeal is not satisfactory,
traders should have recourse to an appeal by a separate judicial or
administrative body to ensure fairness.
In India the rights of appeal procedures are published in the customs
Act 1962. Under the Foreign Trade Development and Regulation Act
1992, an appeal can be made by any party against the decision of the
DGFT. Any party can make an appeal first before the Commissioner
(appeals). Appeals against the Commissioner's orders go the
Appellate Tribunal (CEGAT) which is constituted of judicial and
technical members. An appeal in the Supreme Court can be filed
(Section 130F, customs Act 1962) against the orders passed by
CEGAT on matters relating, among other things, to the rate of duty
or to the value of goods for purposes of assessment. The Foreign
Trade (Development and Regulation) Act, 1992, allows for an appeal
procedure whereby an appeal can be made against the decision of the
director general, to the central Government. In case the decision or
order has been made by an officer sub-ordinate to the director
general, an appeal can be made to the Director General or to any 1officer superior to the adjudicating authority authorised by the
director general. The order made in appeal by the appellate authority
(Central Government or director general or officer superior to the
adjudicating authority) is final. (Act 15, Customs Act 1962). Relevance of Revised Kyoto Convention to Article XThe WCO addresses the requirements of Article X in the Kyoto
Convention. Chapter 9 of the General Annex to the Kyoto Convention
relates to information, decisions, and rulings supplied by customs.
All the requirements of Article X and the proposals made by
members, including binding rulings are provided for in the
convention. The guidelines to Chapter 9 provide detailed information
for administrations to set up their procedure for publication of
information. The guidelines also contain information on provision of
information through electronic media and recommend its usage
where possible. Interestingly, the convention also has provisions for
a consultative mechanism between traders and customs, binding
advance rulings and enquiry points. There is no recommendation for
a single national focal point. Chapter 10 of the General Annex sets
out principles for appeals in customs matters. The provisions provide
for a transparent and multi-staged appeal process with the
availability of an independent judicial review as a final avenue of
appeal. It needs to be pointed out that the Revised Kyoto Convention
relates to information, decisions and rulings supplied by customs. In
India, publication of information is related to other agencies as well.
5554
Article VIII: Fees and Formalities Connected with
Importation and ExportationArticle VIII is the primary article of GATT dealing with
administrative aspects of trade, and is perhaps the most technical,
wide-ranging and difficult of the three articles under examination.
Article VIII basically requires contracting parties to impose fees and
charges in relation to import and export in a manner that it is limited
to the cost of service provided. It also requires its members to
recognise the need for reducing the number and diversity of fees and
charges and the incidence and complexity of import and export
formalities. In addition it requires members to review its operations,
upon request by others, not to impose substantial penalties for minor
breaches of customs regulations or procedural requirements. Article
VIII also provides an illustrative list of the types of fees and charges,
formalities and requirements relating to consular transactions,
statistical services, analysis and inspection, and licensing which are
imposed by governmental authorities beyond customs.
Indian exports and import procedures continue to be quite
cumbersome. In order to export, an exporter needs to obtain 258
signatures, make 118 copies of the required information,
keypunching of which take 22 hours (Roy 2003). Transaction costs
related to imports are equally high. Even though there has been a
reduction in the number of tariff lines since the onset of the reform
process, there continues to be a multiplicity of tariff rates leading to
ambiguities about classification and hence valuation (Mukhopadhya
2002). Further, on the export front, the multiplicity of export
promotion schemes leads to additional procedural requirements.
Also, there is duplication of work between the customs and the
Ministry of Commerce, which needs to be addressed. The Kelkar
Committee has pointed out sources of such transaction costs and has
also suggested remedial measures.
Proposals regarding fees and formalities have been made by Canada,
Colombia, the European Communities, Hong Kong, China, Japan,
Korea, Mongolia, Pakistan, Peru, Chinese Taipei, United States,
Australia, China, New Zealand, China, Korea, New Zealand, Peru,
Norway, Switzerland, Turkey, Canada, Thailand, Uganda and
Guatemala. The key proposals relate to the levy of fees and charges,
injecting GATT principles, provisions to reduce documentation
requirements, standard processing times and the use of international
standards. Levy of Fees and ChargesIn their submissions members have suggested that fees and charges
levied must refer to the approximate cost of service rendered and
should therefore not be charged on an ad valorem basis. Members
have also suggested that specific criteria/parameters should be
established for the application of fees and charges.
In India, while some fees and charges appear to be nominal, for
instance, a fee of Rs1,000 is charged in the case of application for an
importer-exporter code number, in other cases, such as, the case of
applications for an import license, the amount of fees is based on the
CIF value of goods. For instance, for a CIF value of greater than
Rs50,000 the fee charged is Rs2 per thousand subject to a minimum
of Rs200 and a maximum of Rs150,000 (Ministry of Commerce
2002). This also raises the issue of what a 'reasonable' fee would be.
As this practice is clearly a violation of the existing GATT Article
VIII, it is important to correct this anomaly.
In India there are a plethora of fees and charges the criteria for which
are not clearly defined. There are several issues that are of concern
when considering the issue of fees and charges. Thus, it is difficult to
ascertain whether fees and charges are reasonable and whether such
charges are commensurate with the cost of service provided. The
issue becomes even more complex as some charges e.g., port charges,
vary from port to port and are provided both by the public and
private sector.
Injecting GATT PrinciplesMembers have pointed out that provisions of Article VIII require
members to simply 'recognise' but undertake no explicit obligations
with respect to the need to reduce the number and diversity of the
fees and charges and the need to minimise the incidence and
complexity of import and export formalities. Suggestions have been
made on making Article VIII more operational by imposing GATT
principles of non-discrimination, transparency and predictability in
the design, application and effect of export and import procedures
and formalities on all members. Other important GATT principles to
be considered are principles like least trade restrictiveness and
review whereby members should ensure that import and export
5756
formalities and documentation requirements are not more trade
restrictive than necessary to meet a legitimate objective. In this
context the EC has suggested that members should specify an
illustrative list of such requirements. Review is a concept closely
linked to the principle of necessity/least trade restrictiveness which
suggests that members should not maintain measures if the
circumstance or the objective giving rise to its adoption no longer
exists.
The proposals regarding injecting GATT principles to make Article
VIII more operational are very valid. India is already following such
principles in the context of the Agreement on Technical Barriers to
Trade (TBT), the Agreement on Sanitary and Phytosanitary
Measures (SPS) and the Import Licensing (IL) Agreement. India
should have no objections to extending the same level of
commitment to all trade related activities.
Provisions to Reduce Documentation RequirementsSuggestions to reduce documentation requirements, include using a
single administrative data set for export and import, introduction of
a single one-time presentation to one agency, acceptance of
commercially available information and of copies, elimination of pre-
shipment inspection, phasing out of mandatory use of customs
brokers, co-ordination of activities of all border agencies and the
adoption of a uniform domestic customs code.
Members have suggested the use of risk assessment methods based
on international standards and practices. Other measures suggested
for the release and clearance of goods include pre-arrival clearance,
expedited procedures for express shipments, post-clearance audit
and the introduction of a system of authorised traders. Such systems
would grant to compliant traders simplified or other premium
procedures for their import and export activities. Members have
suggested automation of customs and other agency procedures for
simplifying export and import. India should accept the proposals
related to reduction of documentation requirements on a 'best
endeavour basis'.
At present India does not have a single administrative data set for
export and import, or a single one-time presentation to one agency.
Perhaps the most significant step that has been taken is on the
harmonisation of the customs code. Since February, 2003,
classification codes at the eight-digit level used by the Central Board
of Excise and customs (for purposes of tariff), the Directorate
General of Foreign Trade (for purposes of determining
importability/exportability) and DGCIandS (for statistical purposes)
have been unified to evolve a Combined Nomenclature based on the
HS classification.
Standard Processing TimesMembers have suggested that members should establish, notify and,
within reasonable targets, progressively reduce standard processing
times which should be published. Efforts should be made by
members to reduce the standard processing times progressively. In
India standard processing times are laid out by the CBEC and the
DGFT. The CBEC lays out standard processing times in its Citizen's
Charter, which is a declaration of the CBEC's mission, values and
standards and commitment to achieve excellence in the formulation
and implementation of policies and procedures for the benefit of
trade and industry. Similarly the DGFT lays out in its Exim Policy, a
time schedule to be followed to dispose of the applications regarding
Import-Export Code number, advance license etc. However, such
standards are only an intent. It may be kept in mind that India has
several customs stations and the level of infrastructure varies
considerably between them. It may therefore be difficult to have a
unique processing time for all customs locations. Nevertheless, India
should accept the proposal on a 'best endeavour basis'.
Use of International StandardsPerhaps the most important suggestion by members relates to the
use of agreed international standards by members for (i) simplifying
and reducing documentation and data requirements and (ii)
streamlining import and export procedures. This would in turn
improve transparency and predictability, and lower costs for traders.
The standards and instruments suggested are those developed by the
WCO such as the revised Kyoto Convention as well as other WCO
initiatives and instruments provided by UNCTAD, the UN regional
economic commissions, the IMO, and ICAO.
To simplify and reduce procedures in India, two notable changes
have been made in the automation of customs through the use of the
Electronic Data Interchange (EDI) and the use of risk assessment
5958
methods. The EDI became operational in 1996. Since then, the EDI
has been introduced in 23 locations, but only in 11 of them are EDI
declarations more then 80% of the total declarations (2002-03).
There continues to be a large proportion of manual declarations. In
some stations only a part of the data has been computerised, leaving
ample room for unscrupulous parties to take advantage of the
loopholes (Sengupta and Bhagabati 2003). Another problem with the
EDI is that at present it is operative only at the customs. A major
drawback with the current EDI system is that it has a distributed
architecture and is modular in nature. Thus each EDI location is a
standalone structure. Each time the EDI facility has to be extended to
a new customs location, additional costs are incurred. The customs
are gradually moving to a centralised architecture through the
implementation of the EDI Gateway. The ongoing customs Gateway
Project is expected to facilitate connectivity between EDI centres and
with trading partners. The gateway will also enable remote filing of
customs declarations. The project is expected to be completed by end
2005 when it would connect all customs locations with all trading
partners. It will also make it possible for traders to make Regulatory
agencies such as DGFT and RBI will also be able to exchange online
information with major customs houses.
Indian customs authorities are gradually progressing towards the
usage of modern risk assessment methods. A codified risk
management module was tested recently in 2003 for import
consignments at ICD Tughlakabad. The computerised module
assesses import consignments through 21 risk factors and analyses
11,640 items, identifying sensitive consignments and indicating the
rest for immediate release. This model will be gradually applied to all
customs houses. The use of risk management techniques through a
trust based system has been strongly recommended by the Kelkar
Committee.
Relevance of Revised Kyoto Convention to Article VIIISeveral elements of Article VIII are dealt with in the Revised Kyoto
Convention. The issue of fees and charges being limited to the
approximate cost of service rendered has not been specifically
addressed in either the Revised Kyoto Convention or other WCO
instruments as no single standard could be agreed on this issue. The 2requirements of Article VIII:I (c) are addressed through principles
laid out in the Annex. Standards are laid out for simplification of
procedures at - common border crossings, for goods declaration and
supporting documents, for release of goods, for authorised persons,
and for co-ordination of customs inspections with other competent 3authorities. The Revised Kyoto Convention has recognised the
importance of the use of risk management techniques by setting out
the standards for application of risk management, which comprises a
series of technical processes intended to identify and quantify 4individual risks. The convention also recognises the use of
information technology and sets standards for application of 5information and communication technology in customs. The
Convention specifies that information technology should be used
where it is cost effective and efficient for the customs and for trade.
Further it specifies that members should use relevant internationally
accepted standards. The convention also contains legal provisions 6relating to security. Most notable of the other WCO initiatives
includes the development of the WCO customs Data model, which
will establish a standard, international harmonised data set that will
meet governments' requirements for international trade. This model
will also be used to develop the concept of a single window.
The current situation reveals that the Indian customs is committed
to modernisation of customs based on international standards. While
several changes being carried out are based on the revised Kyoto
Convention, only an exact mapping of the existing procedures with
those recommended in the revised Kyoto Convention would reveal
the extent of deviation, if any, from those mentioned in the
convention.
Relevance of TBT Agreement, SPS Agreement and IL
AgreementMost of the suggestions made on improvements in Article VIII
emanate from the existing WTO Agreements like Technical Barriers
to Trade, the Agreement on Sanitary and Phytosanitary Measures
and the Agreement on Import Licensing Procedures. In fact the EC
and Hong Kong have suggested that it is important to consider the
applicability of these agreements to import and export
documentation requirements. For instance in the TBT Agreement
Article 2.1 refers to non-discrimination, Article 2.2 refers to least
trade restrictiveness, Article 2.3 requires review of procedures and
Article 2.4 requires members to use international standards as a
basis for their technical regulations.
6160
Article V: Freedom of TransitArticle V of the GATT sets out the basic requirement of freedom of
transit through the most convenient route and further requires that
no discrimination be made on the basis of flag of vessel, place of
origin, departure, entry, exit or destination. It also calls on parties
not to discriminate on the basis of ownership of goods or means of
transport. Further, Article V stipulates the obligation not to impose
any unnecessary delays or restrictions on transit. It also requires
members to impose reasonable fees and charges that would be non-
discriminatory and limited to the cost of service provided.
In the Indian context, India requires transit facilities from
Bangladesh for transporting goods to the north-eastern region while
Nepal, being a land-locked country, requires transit facilities from
India for trading with the rest of the world. It is important to note
that goods to the north-eastern region are transported along the
circuitous route around Bangladesh. Movement of cargo through
Bangladesh would reduce the distance significantly. Also, there are
considerable delays in the cross-border processing at the two
borders. In fact, it has been estimated that such costs would offset
any potential benefits from the reduced distance (Subramanian and
Arnold 2001). If border-crossing procedures are significantly
reduced and if transit access for Indian vehicles is allowed, (which
under the current transit arrangement is not), there will be
significant savings in time and cost. India has preferred to deal with
transit issues at a bilateral level. Not much headway has been made
on this issue with Bangladesh. However, with Nepal the issue of
transit has always been a key feature of the bilateral protocols and
agreements.
Proposals on Article V have been made by Canada, the European
Communities, Korea, Bolivia, Japan, Kyrgyz Republic, Mongolia,
Paraguay, Cuba, Rwanda, Switzerland, and Singapore. The proposals
relate to simplification of procedures for transit, exceptions to the
principle of non-discrimination for sensitive items, regional trade
arrangements and use of international standards.
Simplification of Procedures for TransitMembers have made suggestions on facilitating transit through
simplification of documentary requirements and procedures
required for transit. members have suggested that as fees,
simplification of procedures for transit purposes bears a close
resemblance to provisions of Article VIII the submissions made by
members to the council on Article VIII automatically apply to transit.
In this context, members have suggested that specific guidelines are
needed on how unnecessary procedures can be reduced/simplified.
In addition, requirements and procedures for transit should be less
onerous than those for importation. Other suggestions include
introduction of mechanisms that would institutionalise cooperation
among member countries, harmonising transit policies between
members and sharing of information among custom authorities
could further facilitate transit.
Recognising the need for simplification of transit procedures, the
'Indo-Nepal Treaties of Trade, of Transit, and Agreement for Co-
operation to Control Unauthorised Trade' were revised in 1996 in
which new procedures were to be applied in the clearance of
Nepalese containerised traffic in transit to and from Nepal. India
should accept the suggestion of simplified procedures for transit. As
India is already adopting measures under Article VIII to simplify
procedures for trade, it could accept the proposal to adopt similar
measures for transit purposes
Exceptions to the Principle of Non-discrimination for
Sensitive Items and Goods Requiring Trans-shipmentMembers have pointed out that it may not always be possible to
apply the principle of non-discrimination to all types of
consignments. Certain goods may be subject to special provisions.
However, members should consider the publication of the list of such
'sensitive items'. Similarly it has been pointed out that in cases where
there is a possibility of illegal release of transit goods (as in the case
of land-locked countries), more sophisticated risk management
techniques may be required. Also, goods in transit that require trans-
shipment may need additional inspection (in relation to those that do
not require trans-shipment) to prevent the smuggling of goods in
transit into the transit country.
While India allows Nepal transit facilities, it has faced the problem of
leakage of third country goods into its markets. This issue has come
up time and again with the Indian authorities. In fact the issue of
unauthorised trade has been addressed in the bilateral agreements
between India and Nepal signed since 1961. The Indian customs
6362
maintain a list of sensitive items so that such goods are under closer
scrutiny during transit from Indian soils. However, such a list,
though circulated within customs, is not made publicly available.
Similarly, goods requiring trans-shipment require additional
inspection to prevent smuggling of goods. A large proportion of
goods in transit from India to Nepal first arrive by sea and the Indian
port of Calcutta and are then trans-shipped by road to Nepal. India
could accept the proposal that goods in transit requiring trans-
shipment may need additional inspection.
Regional Transit ArrangementsThe existing Article V requires members to operate national transit
schemes but does not recognise the issue of transit at a regional level.
members have pointed out that the solution to transit can be found
through regional-cooperation, as can be witnessed in some existing
international and regional transit instruments, such as, the TIR
convention, the European Convention on common transit, the
ASEAN Framework agreement on the facilitation of goods in Transit,
and UN instruments relating to transit. Thus, members could
consider the establishment of regional transit regimes within the
framework of Article V.
India plays a dual role in transit, both as a provider of transit
facilities to Nepal and as a seeker of transit facilities from
Bangladesh. Currently India has a bilateral treaty on transit with
Nepal. It is in India's interest to enter into a similar bilateral transit
arrangement with Bangladesh so that it can access the remote areas
of the north-eastern region. However, Bangladesh has been reluctant
to offer transit facilities to India as it fears leakage of Indian goods
into Bangladesh. As the proposals on transit address the issue of
leakage of goods by allowing members to implement additional
inspection on such goods and requesting members to publish a list of
sensitive items, India and Bangladesh could take into account the
suggested measures in framing a bilateral treaty on transit.
Use of International Standards Members have suggested the use of international standards for
transit. Members could consider the possibility of accession to
various instruments relating to transit such as the customs
convention on the International Transport of Goods under cover of
TIR Carnets (TIR convention), Geneva, 14 November 1975; and The
customs convention on the ATA Carnet for the Temporary Admission
of Goods (ATA convention), Brussels, 6 December 1961.The
convention on Temporary Admission (done at Istanbul, 26 June
1990) (as per Annex A as it relates to ATA Carnets).
The TIR Carnet is a road transport document which allows
containerised and in some cases bulk cargo to move through
simplified and harmonised administrative formalities. The ATA
Carnet is designed to facilitate the importation, irrespective of the
means of transport, of goods, which are granted temporary duty-free
admission (including transit, importation for home use and
temporary admission).
The TIR Carnet protocol has four basic requirements: (i) goods
should travel in secure vehicles or containers, (ii) duties and taxes "at
risk" during the journey should be covered by an internationally valid
guarantee, (iii) goods should be accompanied by an internationally
accepted carnet taken into use in the country of departure serving as
a control document in the countries of departure, transit, and
destination; and (iv) customs control measures taken in the country
of departure should be accepted by the countries of transit and
destination.
The TIR Carnets simplifies transit considerably. The TIR Carnets are
issued by the International Road Transport Union (IRU) of Geneva
to associations in participating countries who act as guarantors for
the duties and taxes “at risk” during the journey. Each association
issues TIR Carnets to approved national carriers who meet the
requirements set by the IRU. For instance, every road vehicle as
regards to its construction, equipment and customs sealing device
have to conform to the specifications laid out in the convention. The
association also notifies the IRU with names of approved TIR
carriers and provides a TIR plate, which is placed on each authorised
vehicle. Because the TIR Carnet provides customs with a means to
collect charges not paid by the consignee, TIR Carnet cargo is subject
to fewer delays.
The use of international standards such as the ATA Carnets or the
TIR Carnets, is absent in the South Asian countries. India,
Bangladesh and Nepal do not accede to the TIR convention or the
ATA convention. India uses the ATA Carnet, for a very limited
6564
purpose, mostly for duty free temporary admission of imports. The
requirements of the TIR convention (in terms of specifications for
vehicles and procedures) would be extremely difficult to adhere to
for countries like India, Nepal and Bangladesh. Also, it is difficult to
envisage at present the possibility of the IRU recognising an
association in a Member country that would accept the obligations
and conditions set out by the IRU. At this stage these countries
would be unable to meet the rigorous requirements of the convention
as it would require enormous resources and a fairly large timespan.
India could however accept these international standards on a 'best
endeavour basis'.
Relevance of the Revised Kyoto ConventionThe principles of the customs Transit Procedures are covered in
detail in Specific Annex E, Chapter EI of the Revised Kyoto
Convention and provide for a safe, secure and standard transit
procedure. The WCO encourages its members to accede to
international conventions relating to transit such as the TIR
convention and instruments provided by the WCO on customs
transit that facilitate transit procedures for temporary admission of
goods. They suggest further that if members are not in a position to
accede to these conventions, while drawing up multilateral/bilateral
agreements they should take into account customs transit, standards
and recommended practices mentioned in the Revised Kyoto
Convention. In the South Asian context the issue of transit should be
dealt with under SAFTA. Currently, Article 8 relates to trade
facilitation but it does not explicitly address the issue of transit.
Issues and Concerns of South Asian CountriesSouth Asian countries unanimously agree that pursuing trade
facilitation by itself is advantageous. There is no doubt that any
country that is unable to adopt effective and appropriate trade
facilitation measures would be uncompetitive in the global trading
environment on account of high transaction costs. South Asian
countries incur high transaction costs in trading. Adopting
appropriate trade measures would reduce costs for intra-SAARC
trade and for trading with the rest of the world. The South Asian Free
Trade Agreement (SAFTA) signed in Islamabad in January 2004 has
made provisions for trade facilitation under Article 8. If
implemented, these measures will enhance the pace of economic
integration in South Asia.
South Asian countries have been autonomously pursuing most of the
recommendations made as part of its reform agenda
(Wickramsinghe 2005). For instance, Bangladesh has adopted
measures such as introduction of a self assessment and rapid
clearance procedure, simplification of tariff structure, customs
modernisation and simplification of documentation procedures. In
addition Bangladesh has introduced the SPEED system for customs
assessment and ASYCUDA for customs document processing. Nepal
has introduced ASYCUDA with technical assistance from UNCTAD
and is also working on an Advance Cargo Information System with
technical assistance from the World Bank. Similarly in Pakistan, an
Electronic Assessment System has been introduced to speed up
assessment and customs clearance and to reduce the interface
between taxpayers and tax collectors. Pakistan has initiated a
number of projects with assistance from the World Bank, IMF and
the ADB with the objective of facilitating trade.
A major concern of South Asian countries is the enormous costs that
some of the trade facilitation measures can entail. The July package
addresses some of these concerns. The agreement on modalities
emphasises that negotiations on trade facilitation shall aim to
enhance technical assistance and support for capacity building.
South Asian countries (as all other members) are faced with the task
of identifying their trade facilitation needs and priorities. Trade
facilitation needs can be address through (i) increased efficiency
where no additional costs need to be incurred, (ii) costs required for
automation, (iii) infrastructure related costs. Prioritising costs in this
manner would help South Asian countries in obtaining targeted
technical assistance. It is important to point out that Article 9.2 of
the SPS Agreement states that where substantial investments are
required by developing countries to meet SPS requirements of
importing countries, the latter shall consider providing such
technical assistance. However, this provision has not been effective
because the clause “shall consider providing” instead of the more
mandatory “shall provide” has proved to be ineffective. For instance
in the case of India, to meet SPS and TBT requirements, technical
assistance has been sought from multilateral agencies such as the
World Bank rather than from developed countries. In the ongoing
negotiations the South Asian countries should make an effort to
make the provision of technical assistance from the developed
countries more effective.
6766
While all South Asian countries strive towards lowering transaction
costs, it is important to reconcile provisions under SAFTA with the
ongoing negotiations on trade facilitation in the WTO. A beginning
can be made through adoption of measures such as harmonisation of
standards, mutual recognition agreements, harmonisation of
customs procedures and customs classification and simplification of
procedures. Article V relating to transit could be most effectively
dealt with under the SAFTA mandate. At the same time South Asian
countries could collectively work towards a common agenda in the
ongoing negotiations in the interest of developing and least
developed countries.
Nisha Taneja works at the Indian Council for Research on
International Economic Relations (ICRIER), New Delhi, India.
Author's note: I am grateful to Rohan Kaul for valuable inputs. This
paper is based on ICRIER Working Paper No. 128, Trade
Facilitation in the WTO: Implications for India, April 2004.
Endnotes1 Any penalty may be imposed or any confiscation may be adjudged under
this Act by the Director General or, subject to such limits as may be
specified, by such other officer as the Central Government may by
notification in the official Gazette, authorise in this behalf. (Section 13,
Customs Act, 1962)2 See Annex.3 General Annex, Chapter 3.4 General Annex, Chapter 6 accompanied by extensive implementation
Guidelines.5 General Annex, Chapter 7 accompanied by extensive implementation
guidelines.6 General Annex, Chapter 5.
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6968
Warehousing Facilities in South Asian Customs Laws
Dilli Prakash Ghimire
here are two basic reasons to engage in international trade.
The first is that countries are different to each other, like
individuals, and try to gain benefit from such differences Tthrough trading arrangements, just like a person does. The second is
that countries can achieve economies of scale by specialisation and
large scale production to sale in other country too. International
trade helps increase global output and allows every country to
specialise in goods and services in which it has comparative
advantages. Based on this theory it has been concluded that trade
between two countries can benefit both countries if each country
exports the goods in which it has a comparative advantage. In
practice there is no authority to decide what each country should
produce and export. The production and distribution of goods and
services in international trade is determined by the rule of demand
and supply of the market. Trade between two or more countries
depends upon the mutual gain from trading activities. Countries that
are producing goods at a large scale with low costs of production
maximise their competitive advantage.
After the end of the Second World War, the countries of Western
Europe began to integrate in trade matters. The European Economic
Cooperation organisation was formed to facilitate the regional trade.
Later the European Common (EC) market was formulated. The
Customs Union has conducted an experiment on the effects of trade
integration. It found that roughly US$804 billion extra trade in EC
import and export was created and $1.1 billion trade was diverted.
This success inspired other trade groupings like NAFTA and ASEAN.
Most of these groupings have succeeded in creating trade. The
creation of trade has led to greater demand for transportation and
warehousing facilities, especially in border areas.
The South Asian Preferential Trade Arrangement (SAPTA), which
recently became the South Asian Free Trade Area (SAFTA), is an
immature trade group with a population of more than a billion in a
poor region with high growth potential. The economic growth of the
countries of the region is given in Table 1.
The above table shows that Nepal is the poorest country in the
region, followed by Bangladesh. Cooperation in trade integration and
maximum use of regional opportunities may be the best measures to
wipe out the economic backwardness of the region. Economic
development depends upon the common uses of opportunities,
whether they are natural resources or regional markets. A recent
study shows that the global per capita income is US$700, whereas
the average per capita income in South Asia was only $460 in 2002.
Foreign trade at the regional level could play a vital role in increasing
the per capita income of the region. The South Asia Association for
Regional Cooperation (SAARC) is a poorly functioning regional
association because of the absence of economic inter-dependence
and free trade within the region. The volume of import and export
trade between South Asian countries is shown in Table 2.
Table 2 reveals that intra-regional trade is surprisingly low, i.e.,
intra-regional trade ranges from 4.5 percent to 5 percent of total
exports and from 4.4 percent to 4.6 percent of total imports.
Table 1: Economic Growth in South Asia
Countries
Population in Millions 2002
GNP (US$ billion)
Per capita Income ($)
GDP Growth (%) 2000/01/02/
Bangladesh
136
48.5
356.6
5.9, 5.3, 4.4
Bhutan
0.859
0.5
587.6
5.3, 6.6, 7.7
India
1048
501.5
478.5
4.4, 5.6, 4.4
Maldives
0.28
0.59
2107.1
4.8, 3.5, 4.3
Nepal
24
5.6
233.3
6.0, 4.6, -0.6
Pakistan
145
59.2
408.3
3.9, 2.5, 3.6
Sri Lanka 19 15.9 836.8 6.0, -1.4, 3.0
Total 1393 631.79 460.15
Source: World Development Report 2004.
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Likewise, the income of all countries in the region is also low by
international standards, therefore there is need for faster
development of economies to reduce poverty. Trade creation has
been thought to be the most appropriate means of increasing
production and thereby economic growth. There are many
commodities being imported from outside the region at a price
higher than could be imported from within the region. This may be
because of the absence of information or the more expensive trading
procedures which increase the cost of doing business among SAARC
countries.
Regional trade in the context of globalisation has a vital role for
regional economic development. Economies adopting free trade have
gained faster growth than those reluctant to open up to global
markets. Keeping this fact in mind, SAARC member countries are
trying to open their markets to each other through SAFTA.
It is assumed that harmonisation of trade policies, customs laws and
procedures, and documentation needs could result in the reduction
of cost of doing business. Some of the major reasons for the
differences in the customs laws of regional countries are differences
in revenue need, political systems, trade policy, trade structure,
geographical situations, language, work cultures, organisational
structure, and working days and working hours. These factors are
not very serious bottlenecks in the harmonisation of customs laws,
but can increase the cost of doing business.
Development of Customs Laws in South Asia.Before British colonial rule, the Indian subcontinent was divided into
many states, some small and some big. Historical period are named
after the ruling classes, like the Maurya era and Mughal era.
(Sometimes the word empire is also used). Customs laws in the
Maurya and Mughal periods were affected by the theories
propounded by Koutilya (The Chanakya), who was a renowned
economist in those eras. His theory of economics is well known as
Koutiliya Arthasastra. Chapter 31 of the Kautilya Arthasastra gives
examples of customs laws and procedures, which consist of trade and
customs policies and procedures for goods and passenger clearance.
According to Koutilya, “The government office that collects fees,
duties, and octori is known as Sulkashala (tariff office) and the
person holding this office is known as Sulkadhakshya (hairperson of
duties).” Such offices were generally located in or near the borders of
cities and markets. The provisions of control were similar to modern
customs laws. After the Maurya era, the Indian subcontinent, except
Nepal, Bhutan and Burma, was ruled by the Mughals. During the
latter part of the Mughal period, western traders started visiting the
subcontinent with goods for trading purposes. The goods sold by the
visitors were taxed by the subedar (English translation) concerned of
the Mughal ruler. The ruler of a coastal state also had the
opportunity to collect protection money from the traders, which later
become customs duty.
After the colonialisation of most of the region, the British rulers
enacted the Sea Customs Act 1878, which is the first formal customs
act in this region. After this enactment, goods were checked and
cleared under the relevant sections of that act within the colonies. In
Nepal, rulers promulgated orders having the force of customs acts,
like Ijara or Sanad. They were different for different parts of the
country. Only the understanding with British India some uniformity
in tariff rates was more in the import of Indian goods. The duties
were collected under the Ijara (mutual agreement or contract)
system and also in Amanat (official collection of duties). In the
colonies the basis of clearance of goods was the above-mentioned act.
In those days international trade by air (was there any?) was not
significant as compared to sea cargo. Therefore there was no
provision for air transport at that time. After the end of the Second
World War and colonial era, land and air routes were developed.
Colonial countries formed an most favoured nation (MFN) type of
Table 2: Share of Intra-Regional Export and Import of SAARC Countries in Total Trade (1996-2003) ($ million)
percent of Total Exports
percent of Total Imports
Country
1996
2001
2003
1996
2001
2003
Bangladesh
60.89(1.8)
92.09(1.9)
109.20(2.1)
1129.74(12.0)
1299.11(10.6)
1608.05(11.6)
Bhutan 97.10(98.2)
106.65((98.6)
116.88(99.1)
80.61(79.0)
152.37(85.7)
193.37(92.5)
India 1650.00(5.0) 2051.00(4.7) 2785.00(4.9) 198.00(2.6) 504.00(2.7) 754.00(2.8)
Maldives 10.99(18.6) 16.99(22.3) 15.69(13.9) 60.60(19.8) 93.16(23.5) 114.18(22.3)
Nepal 74.10(19.) 243.80(33.1) 335.18(50.18) 457.00(29.8) 178.53(19.1) 238.05(23.7)
Pakistan 240.00(2.6)
264.00(2.9)
342.00(2.9)
293.00(2.5)
295.00(2.9)
314.00(2.6)
Sri Lanka
109.00(2.7)
157.72(3.3)
350.07(6.8)
647.00(7.9)
712.47(8.1)
1175.4312.9)
Total 2242.08(4.5)
2931.72(4.6)
4054.02(5.0
2865.95(4.5
3234.64(4.4)
4397.08(4.6)
Source: Economic integration in South Asia NRB Research department figures based on IMF publications.
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trade relationship with the UK The association of former British
colonies is known as the Commonwealth. The former members of the
Soviet Union have also formed a trade block. The theory of colonial
exploitation by the mechanism of trade compelled the new nations to
adopt the policy of protection. Different free nations enacted
different customs acts. The customs act of one country differs from
another because of differences in social, political and economic
conditions. The customs laws and rules introduced at that time
underwent various reforms and modifications as demanded by
political and social needs over time. Some countries in South Asia
have well defined customs acts and some are still in the process of
changes and reform.
Provisions of law, procedure and regulation differ because of the
differences in constitutions, trade policy and in the level of economic
development. Some common provisions may be regarded as
exceptions. The customs acts of all nations in the region lay down
common functions, like customs clearance procedures, duties and
responsibilities of customs officials, and traders' responsibilities.
However, there are still some procedural hassles that are time
consuming and increase the cost of regional trade. The development
of the concept of customs warehousing facilities started in the period
of establishment of customs points. It started developing with the
development of trade and customs administrations.
Issues of HarmonisationCustoms warehousing is an integral part of the customs act of any
country. Customs warehouses are such places where dutiable goods
are stored without the payment of duty. Customs warehouses can be
defines as warehouses where goods are deposited without duty
payment at a customs point, place of export or import. or any inland
depot paying warehouse rent on goods deposited. The customs acts
of all countries have provisions for warehouse facilities and define
the term “warehouse” in their own manner. Such facilities are part of
trade and transit facilitation.
As mentioned above, a customs warehouse is a place approved under
a customs act to store dutiable goods in the supervision of customs
officials under the conditions prescribed in law. We can divide
warehouses into two main categories: (i) public warehouses,
including transit warehouses, and (ii) private warehouses including
bonded and duty free shops.
A public warehouse is a common customs warehouse available to any
person to store dutiable goods, while a private warehouse is reserved
for the goods of the warehouse owner. Public warehouses may be for
general use. But in some countries licensed non-public warehouses
are also used to store the goods of importers. Private companies
manage such warehouse. Sometimes the government appoints a
public warehouse keeper and the warehousing function is contracted
out. Such warehouses are open to all importers and exporters. The
goods stored in such warehouse are the responsibility of the manager
of the warehouses. The government may appoint a public warehouse
operator. There are different provisions for customs warehouses in
different countries.
Warehousing is a vast topic. The process of harmonisation of
customs laws is related to legal provisions of customs warehouses.
The customs acts of all countries have provisions for providing
licences to operators of inland customs depots. The terms and
conditions are given in the licence. The importer deposits dutiable
goods in customs warehouse at the time of the imported goods'
arrival at the customs point. In the United States, imported
merchandise is not subject to duty unless officially entered for home
consumption. The owner of the goods or his agent pays warehouse
rent and charges, as per US regulations. The warehouse operator
gives a warehouse deposit receipt. The management aspect of
customs warehouse may differ from country to country. However,
the trade facilitation aspect can be harmonised in this region. A high
cost of warehousing means an increase in cost of production of
exportable goods.
Private warehouses are reserved for the storage of the goods of the
warehouse owner. Such warehouses may exist in numbers and in
different location near an industry, export promotion zone (EPZ) or
SEZ. A private warehouse may be for the use of specified persons.
Duty free shops are also treated as private warehouses. Bonded
warehouse facilities are provided to that importation which is
concerned with re-exportation or as equal to exportation (duty free
sale). The customs administration may grant a licence to a private
warehouse operator. The conditions are specified in the licence. No
goods are released for home consumption from such warehouses. If
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such goods are released for home consumption, customs duty is
levied assuming that such goods have been imported. If the time this
takes is longer than specified in the rules, the licence holder must
provide detailed explanations to customs and request a time
extension. Under Japanese customs laws, goods can be kept in
bonded warehouses for a long time and cleared later on. An industry
wishing to operate private warehouse must apply for bonded
facilities. Such an application must be accompanied by (i) a drawing
of proposed warehouse premises, (ii) documents relating to an
export-oriented industry, (iii) safety measures, and (iii) the
agreement paper If the premises is on rent.
Bonded warehouse facilities are also known as duty deferral
programmes. In industrial estates and export promotion zones, duty
free warehouse facilities are provided where industries are engaged
in producing articles for export. A duty free shop keeps imported
goods free of duty and domestic goods free of internal taxes. It is a
shop under customs control located in specified places, generally at
seaports, international airport terminals and land border crossings at
which travellers proceeding abroad may acquire goods free of duty.
For some specific purposes, duty free shops may also be located in
cities and town under customs control.
Customs acts generally make provision for duty free replacement of
goods. (Annex 7 of the revised Kyoto Convention) The operator of a
duty free shop must get bonded warehouse certificates. A person
wishing to get permission must submit bank guarantee papers to
clear the goods from customs at the time of import. The bank
guarantee is released after submission of sale accounts. Duty free
sale is considered equivalent to export because passport holders and
diplomats purchase goods from such bonded duty free shops. Duty
free shops are of two types, outwards and inwards. Outwards duty
free shops are allowed to sell tax-free goods to individuals departing
from the country. Inwards duty free shops are located in
international terminals between disembarkation gates and customs
processing zones. Such shops can sell duty-free goods to arriving
passengers. The range of purchases is limited.
In Nepal, export-oriented industries are allowed to import their
necessary raw materials under bonded warehouse facilities. To get
such facilities the industry must submit an application with the
necessary documents including schemes of production. The customs
department gives bonded certificates. The bonded certificate holder
can import raw material and capital goods for the industry under a
bank guarantee or pass book (revolving cash deposit) scheme
without payment of duty in cash. The goods produced there must be
exported. After export of such goods the exporter submits export
documents, the bank certificate of payment received for exports in
the customs office concerned, and get the bank guarantee released.
The bonded warehouse user declares goods in customs points and
submits bank guarantees and get clearance under these facilities. He
stores the goods in his own warehouse in the premises of the
industry. The customs official supervises the bonded warehouse of
such industry. There is the provision of duty free shops too.
Customs acts and regulations of each country have provisions for
customs warehouses. The provisions of customs acts of some
countries are given in Table 3.
Table 3 shows that the provisions for customs warehouses in
customs acts of India, Bangladesh and Pakistan are clearer than in
the others. There is a difference in the structure of law in customs
acts. Nepal has provisions for warehouses in rules, especially in
financial ordinances.
Customs Warehousing Procedures Customs warehousing procedures are governed by customs act and
rules. Customs warehousing procedures are those procedures under
which imported goods are stored under customs control in a
designed place (a customs warehouse) without payment of duties or
taxes. (Annex 3 to revised Kyoto convention) It is common practice
that the customs warehousing procedure provides the storage
facilities in the customs warehouse to the dutiable goods with certain
charges specified in notifications. To enter into the warehousing
process, description of all goods intended for deposit is required. The
description of all goods should be submitted at the point of import.
Customs official may provide permission to store the dutiable goods
in the customs warehouse. The warehouse keeper checks the packet
or container that is to be deposited in the customs warehouse, enters
it in the stock record and places it in an appropriate location. Such
stock records must contain all the necessary information for
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warehouse management. The stock record system and location
arrangement system must be approved by the customs
administration. Such systems should be designed to ensure stock
movement, enable stock checking, and facilitate duty assessment.
In India, the superintendent of customs gives permission to deposit
goods in customs warehouses for specified periods and customs
commissioners allow time extensions. Customs inspectors or
preventive officers control customs warehouses. Assistant
commissioners give permission to enter warehouses and to remove
goods from there. The same officer has the power to lock private or
public warehouses and unlock them as and when necessary. When
rent and charges are not paid within 10 days by the importer, the
assistant commissioner allows the sale of goods deposited in
warehouses by that importer. The same officer gives permission to
the owner to deal with goods in warehouses. The assistant
commissioner may permit the transfer of goods from one warehouse
to another. The assistant commissioner has the power of clearance of
warehoused goods for export. He has the power to ask for a deposit
guarantee for the payment of duties.
The person or authority may differ from country to country but the
processes are similar. The manner of handling goods in warehouse
should ensure preservation of the quality of the goods. The
warehoused commodities can be removed temporarily with the
written permission of the appropriate officer of the customs house.Bonded warehouses are private warehouses. There are different
terms and conditions in the bond and licence of such warehouses.
Private warehouses are also under the control of customs. Generally,
such facilities are given to export-oriented industries. Industrial raw
materials imported under this facility are cheaper and ultimately
make the product for export more competitive in the international
market. Industries entitled to bonded warehouse facilities require a
security bond (bank guarantee) for the specified period. Bonded
warehouse facilities can be extended or terminated
Bonded Warehouses in NepalNepal has two types of warehouses: public warehouses in customs
premises (public warehouses that are contracted out by the authority
concerned) and private warehouses licensed as bonded warehouses.
Private warehouse store the goods of the owner. Public warehouse
Table 3: A Brief Comparison of Major Provisions for Warehouses in Customs Acts of 5 Countries in this Region.
Bhutan Bangladesh India Pakistan Nepal
*Department of Customs may approve customs warehouse
*All goods in customs warehouse are under customs control
*Owner right to ware housed goods
*Procedures of clearance of warehoused goods
*Transfer of goods from one warehouse to another
*Warehouse operation
*Storage period for goods in warehouses
*Disposal of warehoused goods
*Application to keep any dutiable goods in warehouse
*Application form
*Warehousing bond
*Warehousing bank guarantee
*Goods forwarding in warehouse
*Receipt of goods by warehouse operator
*Goods shall be warehoused in the container as imported
*Warrant shall be issued by operator
*Control by appropriate officer
*Appropriate officer has the power to open and check
*Access of owner of goods after payment of charges and permission of officer
*Manufacturing operation in relation to warehoused goods
*Payment of rent and charges
*Goods not to be taken out
*Period for which good may remain in warehouse
*Power to remove from one to other
*Clearance of bonded goods for home consumption
*Clearance for export
*Need of application for clearance
*Reassessment when damaged
*Allowances in case of volatile goods
*Duties on goods improperly removed from warehouse
*Procedure on failure to pay bonded duty
*Bond will be registered
*Power to remit of goods if lost
*Responsibility of warehouse operator
*Power to decide where to deposit on what terms.
*Appointing of public warehouses
*Licensing of private warehouses
*Warehousing bond
*Permission for deposits of goods in warehouses
*Control over warehoused goods
*Payment of rent and warehoused charges
*Owner’s right to deal with warehoused goods
*Manufacture and other operations in relation to goods in a warehouse
*Power to exempt imported materials used in the manufacture of the goods in warehouse
*Removal of goods from one warehouse to another
* Clearance of warehoused goods for home consumption
*Clearance of warehoused goods for export
*Allowances in case of volatile goods
*Goods not to be taken out of warehouse except as per law
*Goods improperly removed from warehouse
*Power to declare warehouse station. Board may declare place or station where alone public warehouse maybe appointed and private warehouse may be licensed
*Appointment or licensing of public warehouse wherein dutiable goods may be deposited. The collector may appoint and license the public warehouse.
*Licensing private warehouse wherein dutiable goods may be deposited. The customs collector may license it
*The Customs Act 1962 has no provisions for warehouses. However, the Customs Rule 1970 has provisions for customs warehouses.
*The rule has provisions for private warehouses and public warehouses.
*There is the provision for storing goods either in public warehouses or in private warehouses
*The rate of demurrage and charges are given in the rule
Souces: Websites of Bangladesh and Pakistan, Customs Act of India (1962 Commercial Law Publishers India Pvt. Ltd.), Bhutan (2000 Ministry of Finance Royal Government of Bhutan) and Nepal (Ministry of Law and Parliamentary Affairs)
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procedures are similar in each country. However, the process for
bonded warehouses differs from country to country.
The history of bonded warehouse facilities in Nepal dates back to
1987, when the government decided to give garment exporters
facilities to import raw materials free of customs duty and sale tax.
Later the facilities were extended to raw materials imported from
India. These provisions were incorporated in fiscal acts in 1998.
Current provisions are given below:lBonded warehouse facilities are given to the garment industries
intending to export readymade garments to India and overseas.
Industries exporting more than 80 percent of their production to
India are legible to get such facilities.lIndustries entitled to bonded warehouse facilities must submit
bank guarantees for 6 to 12 months covering normal duty plus 25
percent more than normal duty.lThe registration fee for bonded warehouses is NRs5,000 and the
annual renewal fee is NRs2,000.Those failing to renew their
registration within the specified time are charged an additional
NRs1,000 every year.lThere must be a 20 percent value addition on raw material and
auxiliary raw materials at the time of export of the finished
product.lThe product must be exported within 11 months of the import of
raw materials.lThe industry must submit an export declaration form, foreign
currency earning certificates, and raw material consumption
ratio certified by the specified agency to get the bank guarantee
released.lAn additional 25 percent duty is charged on top of normal duty
in case the export related documents are not submitted within 11
months of raw material import. In case of partial export, an
additional 25 percent duty is charged on the raw materials.lBanks and financial institutions are obliged to inform the
customs office concerned one month before the expiry of the
bank guarantee.lBonded warehouse facilities can be extended to the domestic
cloth industry for the import of thread/yarn provided such
industry supplies its cloth to export-oriented garment industries.
Procedures for Licensing of Bonded WarehousesThe Department of Customs has specified procedures relating to
certificate issuance, storage of raw material and auxiliary raw
materials in bonded warehouse, processing and exports. Requests for
bonded warehouse licences must be submitted along with the
following documents:lIndustry registration certificate.lCertificates of permanent account number.lParticulars of goods to be produced and export ratio of previous
year if the industry has been operating from the last year.lName of raw material and, if possible, the quantity required.lCopy of the previous bonded certificates for renewal.lRatio of export at least 80 percent or above for other industries
except garments.
Bonded warehouse licences need to be renewed every year. Customs
asks for tax clearance certificates, a statement of imported or
exported quantity and the consumption ratio. The warehouse
operator is the owner of the industry he follows the direction of
department of customs to operate it. Procedures for operating
bonded warehouse are:lRaw materials and auxiliary raw materials are stored in the
factory warehouse at the owner's risk.lThe owner must maintain a register in a clear way according to
the format approved by the department of customs.lThe bonded warehouse owner is responsible for showing all
details at any time to a customs office.lDuty will be recovered from the bank guarantee if the goods
stored are stolen or damaged. In the same manner, customs will
recover duty from the bank guarantee if the statement is found
incorrect.lIndustries except garments that fail to export at least 80 percent
of production are deemed non-exporting and duty will be
recovered as per the rules.
Nepal is still behind in the industrialisation process. It has small and
medium sized industries. Recent statistics shows that the department
of customs has issued bonded warehouse certificates to 1,119
industries since its inception. Procedures specified in the rules for
bonded warehouses are control oriented. Even so, the government is
facing problems in recovering duties from bank guarantees of non-
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performers.
Need for Harmonisation and ConstraintsThe vast Indian subcontinent is geographically diverse. There are
differences in geographical conditions and patterns of production
between countries and also within countries. Nepal and Bhutan have
no access to the high sea and are land locked. Differences in working
cultures are apparent in public holidays and working hours. Saturday
is the weekly holiday in Nepal, as Sunday is in India . Friday is a half-
day in Pakistan and Bangladesh. The customs administration is
under the Central Revenue Board in India, Pakistan and Bangladesh,
where as it is a department in Nepal. Customs and excise are
integrated in India, Pakistan and Bangladesh. In Nepal, excise was
integrated with the Internal Revenue Department until a recent
finance ordinance established it as a separate department. Culture
and religion are no barriers to trade because all the countries in the
region are trading with America and Europe, which are more
different in culture and religion. Therefore these differences are not
significant barriers to forming a homogeneous trade block. To get the
greatest possible benefit from an open market economy, regional
cooperation should be the starting point for globalisation. In any
international trade, cross border movement of goods and services is
the most important element. The presence of customs at border
points is essential to control and facilitate trade. Customs clearance
is common to each customs point but there are some differences in
procedures.
Following are some reasons to harmonise procedures of customs
operations:
lTraders can be easily familiarised with systems of warehousing
procedures. An understanding of the systems helps to reduce the
handling cost at each customs pointlTo make customs laws in SAARC countries more transparent
and predictable to all in relation to warehousing facilities.lTo create more regional trade for the benefit of the people of the
region.lTo maximise the benefit to each member state through intra-
regional trade.lTo provide cheaper and easier warehousing facilities
Each country has its own customs laws and practices. Harmonising
customs warehousing facilities depends on the availability of open
space and reform programmes in customs administrations. The land
crossing points of most of the countries in the region are very
congested. Land customs do not have big warehouses. Some ICDs
have big warehouses but they are not well managed. A recent study
conducted by the SAARC Secretariat on harmonisation of customs in
the region states that the international airport customs houses in the
region are well developed.
The customs facilities available in each airport differ. The
international airport cargo complex in the more developed countries
(India, Pakistan and Sri Lanka) are comparatively better equipped
with modern facilities than the airport customs in the least developed
countries (LDCs). The international airport customs houses are
limited in numbers and the trade through them is not huge. There
are many land customs points, especially between India and
Pakistan, India and Nepal, India and Bangladesh, and India and
Bhutan.
Bangladesh has seaports and developed warehouses there long ago.
But land customs do not have similar warehouses. The Bangladesh
Observer edition of 3 March 2005 reported that customs facilities in,
Hilly Dinajpur, Sona Masjed, Chapinawabganj, Burimai and
Lalmanighat are unsatisfactory. The same situation can be observed
in Nepal. Many customs houses lack customs warehouse facilities.
One ICD recently came into operation and two other customs houses
contracted out their management to private parties. Other customs
houses lack warehousing facilities. Nepal has no seaport but manages
public warehouses in Kolkota for the storage of transit goods.
Phuentsholing is the main land customs house in Bhutan. It is an
important gateway to Thimpu. A recent study stated that Bhutan
does not have sufficient warehousing facilities. India has seaports
and developed warehouses there. The warehouses of ICDs in India
are well managed. Land border customs houses like Raxual Jogbani,
Kakarvita, Sunouli, Baharaich (Nepal), Jaigaon(Bhutan), Petrapole
Burimari (Bangladesh), and points bordering Pakistan near Lahore
do not have sufficient customs warehousing facilities to promote
regional trade. Pakistan has seaports with warehousing facilities.
Land customs houses do not have sufficient warehouse facilities to
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promote regional trade. Pakistan has major land border customs like
in Lahore. Sri Lanka and the Maldives are island countries, and thus
have no problems with congestion at land borders. They have
seaports and airport cargo complexes. Warehouses facilities are
directly related to seaport and airport development there.
In Nepal, international business activities are conducted through
land customs that are poorly equipped with customs warehouses.
Customs wards are congested. Customs points have traditional
designs unable to meet the modern demand for trade, transit and
transport. Thus there is inadequacy of open space in customs point
with limited warehouse facilities. For example, look at the facilities at
border crossing points between India and Nepal or India and
Bangladesh. There is a narrow road at the crossing point at Raxul in
India and Birjung in Nepal. There we can see congestion and
environmental degradation. In land customs there is poor
infrastructure and customs warehouses facilities are also poor. Cheap
warehouse facilities are necessary to facilitate trade.
Under the boot scheme, public warehouses are handed over to
private contractors to manage. The warehousing charges levied by
the private operator results in increasing the costs of import. If the
charges are high in raw material or other merchandise, the cost of
import/export increases. This ultimately acts like a non-tariff
barriers to importers. High storage costs for raw material hampers
the exports of the country by increasing the cost of production.
Therefore, harmonising the procedures of operation of warehouses is
needed for the development of regional trade.
Customs unions have been developed to create free trade areas
among countries, whereby tariffs are lowered within the union and a
joint tariff wall established against countries outside the union. Laws
must be enacted to address this problem, because in the SAARC
region there are special trade arrangements, like the “fixed
favouritism” arrangement. Customs laws cannot be harmonised
without taking trade policy into account. Such 'fixed favouritism'
arrangements for certain goods exist between Nepal and India, Nepal
and China, India and Bhutan and India and Sri Lanka. There is
competition within the region in export to developed countries of
goods like garments, carpets and handicraft products. But some
countries in the region are more advanced than others. For example,
India, Pakistan and Sri Lanka are more advanced than Nepal,
Bhutan and Bangladesh in production of capital and consumer
goods, as well as agriculture products.
Recent studies have shown that the customs act in Nepal is complex
and needs reform. There is no provision for customs warehouses in
the Customs Act 1962. The government is trying to bring in a revised
customs act. The draft customs act has tried to collect public opinion
and is likely to incorporate the appropriate provisions of revised
Kyoto conventions. The draft customs act is still under consideration
of the Government of Nepal. Naturally, there are many differences in
customs procedures, formats and formalities in the customs laws of
the countries in the region, but they can be harmonised. A regional
customs cooperation initiative could contribute a lot in this direction.
The customs acts of India, Pakistan and Bangladesh have provisions
for customs warehouses. They also have provisions for transit cargo,
but Nepal's customs act does not have such provisions. In the context
of the 'Asian highway' and declared policy of developing Nepal as a
transit trade route for India and China, it seems appropriate to
incorporate transit and warehousing provisions in the proposed
amendment of the customs act of Nepal. Major constraints on the
harmonisation of customs warehousing are given below:
Lack of customs cooperation. Trade facilitation and customs control
are the main elements of customs cooperation. There are basic legal
as well as socio-political differences. These factors are more artificial
because these differences are not as deep as the differences between
Japan and India or Pakistan and Portugal. The mental attitude of
limiting trade among countries in the region is political. This is the
major barrier to the free flow of goods and passengers in the region.
Non-transparent and unpredictable procedures. International trade
generally faces warehouse difficulties in four areas: (a) Non-
transparent and unpredictable warehousing procedures, (b)
burdensome handling charges, (c) inefficiency in the use of modern
technology in customs warehouse management, and (d) complex
customs formalities.
Lack of infrastructure. Such problems are directly or indirectly
related with customs and trade laws. Without understanding general
guidelines and defined administrative rules, officials can make
8584
different interpretations in implementing customs laws. Physical
examinations may be burdensome and time consuming. Automation
in customs processes has been promoted in recent years. But the
space availability for warehousing purpose is very limited. Even after
automation in other customs processes, sometime customs officials
insist on the submission of documents and formalities which were
necessary before automation. All countries in the region have
established tariff repayment schemes to promote investment in
export-oriented industries but there is inadequate use of automation
in warehouses. The warehousing process is traditional and cannot
meet the demand of current regional trade. The congestion in land
border customs and limited open space are major hurdles in the
development of warehouses.
Rent and charges as non-tariff barriers. The trade flow between the
countries in the region is not smooth. Import and export procedures
permits and licences and high rent and charges of warehouses are
acting like non-tariff barriers to regional trade. For the development
of regional trade, all non-tariff barriers like transit control, permits,
quotas and licences, should be removed. Import and export
procedures must be harmonised, simplified and automated to
regionalise trade . Customs warehousing procedures should promote
regional trade. The high rent and service charges of warehouses also
impede regional trade.
ConclusionSAARC as a regional association has the main objective of mutual
economic cooperation between member nations. There are various
problems which need to be solved. Some of the problems and their
suggested solutions are as follows:Harmonisation in warehousing facilities through customs
cooperation. A customs cooperation arrangement is needed to
facilitate trade in the region. An agreement on regional customs
cooperation could address the hassles in customs procedures
including warehousing. It could help to make customs procedures
uniform and harmonise laws relating to warehouses in member
countries. An umbrella organisation could be established under the
agreement and work as an expert group on customs matters,
including customs warehouses, and supply technical assistance to
members. Warehousing facilities could be developed in the line of EC
countries.
Harmonisation and standardisation of laws including customs
warehousing. In most South Asian countries, customs duty is one of
the oldest and most important sources of revenue. In the latter part
of the 20th century, international trade increased in volume
throughout the world. South Asia was also affected positively with
the increasing international trade. International trade became a
revenue motivator in many economies. The trade globalisation
process expanded rapidly and business competition pushed the
region towards further development .The new situation in
international trade demands a free and smooth flow of goods and
services .For this reason customs services are under pressure to
simplify and harmonise their facilities and procedural laws. The
rapid growth in international trading activities has found many
customs administrations in this region unprepared to cope with the
demand for change in laws. Many countries whose governments
depend on customs revenues are unready to change their style of
operation. Modernising an old and traditional system of operation is
a very difficult task. However, the customs administrations in this
region cannot avoid globalisation of trade and the corresponding
need for standardisation and harmonisation of customs laws. We
should learn to use globalisation in the mutual interest of the people
of this region. The WCO has introduced a number of standard
instruments to maintain a balance between customs control and
trade facilitation by harmonising laws, facilities and procedures.
Harmonising customs laws and rules will provide mutual benefit in
low cost.
Transparent and predictable warehousing procedures. The need for
transparency in all areas of governance is common in developing
countries. Traders complain that customs warehousing procedures
are non-transparent and unpredictable. The following reform
measures are recommended: (a) Regional harmonisation of customs
warehousing laws and procedures, (b) publication and regional
distribution of customs rules and procedures manuals, (c)
development of cheap and secured modern warehousing facilities at
custom points, and (d) automation of warehousing records and
processes.
Warehousing charges. Traders have always complained about the
many non-tariff barriers to regional trade in South Asia. Non-tariff
barriers of any form are impediments to the free flow of goods. Trade
8786
facilitation at the regional level is a major issue to be addressed at
high-level meetings of regional leaders. High costs of warehousing
facilities increase the cost of import/export. High warehousing
charges on inputs in manufacturing ultimately affect exports.
Harmonising warehousing charges will ease this problem.
The South Asian region is vast in size, having one fifth of the world's
population, and is developing faster than before. Since 1990, all the
nations of the region have started economic reforms leading to
globalisation, liberalisation and simplification of trade. Regional
cooperation between these countries would help to bring down tariff
rates between member countries and bring in common rates for the
rest of the world. This would result in the enhancement of trade
among SAARC countries. Since 1990, many changes have taken place
in the trade policies of the region. Many reforms have taken place in
customs laws in the recent past but more is still to be done.
Harmonising laws governing trade transit and warehousing will to
increase intra-regional trade.
There are many areas that need harmonisation, such as storage and
warehousing operation procedures. Uniform functions, processes
and warehousing facilities in juxtaposed customs houses can
facilitate trade and minimise cost. Providing systematic and
transparent transit facilities to countries that don't have access to the
sea can lower trading costs. If transit and warehousing facilities are
allowed between western Nepal and Pakistan or from Bangladesh to
Eastern Nepal through the proposed 'Asian highway', trading costs
will decrease. Trade between India and China is expected to increase
by using Nepal as a transit point. Such developments may demand
new and well-designed warehousing facilities.
European trade integration started in 1948 and began to function
well within a decade of the formation of the EC in 1958 by the Treaty
of Rome (1957-1958). Since the formation of the EC, more and more
countries are joining the trade block. But SAARC has not made any
kind of progress towards trade integration among member countries
and others. It seems that SAARC countries have a habit of
quarrelling with their neighbours by cultivating friendships with
more distant countries.
Political dislikes and economic needs are two different aspects of
relationships between countries. This is not happening in the case of
SAARC countries. The idea of establishing an Asian monetary unit
was mooted along time ago but the idea has now faded. The US
dollar has remained the only means of settlement of payment of
trade. Harmonisation of customs laws is directly affected by trade
policies. Forming a trade block means allowing comparatively free
flow of goods among member countries of the block and
comparatively restricted trade with the rest of the world.
Customs laws including warehousing facilities need to be
harmonised as mentioned in this paper. Recommendations
mentioned in this paper are not absolute. These recommendations
are made to float ideas with the hope that more knowledgeable and
constructive suggestions will come from scholars in related fields.
There must be willingness to trade among member countries for the
mutual benefit of the people of the region. The harmonisation of
trade policy and customs laws will then be easier to formulate. The
will to trade needs to be converted into policy mechanisms and other
instruments, which include harmonisation of customs acts.
Dilli Prakash Ghimire is a customs consultant based in Nepal.
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(CPPD). A study on legislative reform on Customs valuations 2005
KathmandulFNCCI/ADB Vidya Nath Nepal CPPD A study on export tax policy on
Nepal 2005 KathmandulADB Simplification of Customs procedures towards close co-operations
and trade expansions 2003 Manila.lIMF Publications Edited by Michael Keen Changing Customs 2003
Washington DC USA.lWorld Bank and International Finance Cooperation's Foreign
Investment Advisory Services SOUTH ASIA ROUNTABLE Richard
Filmer 2003 Maldives.lCustoms Acts Bangladesh, India, Nepal and Pakistan.lSAARC/GEC o4/10 Y.S. Sharawat Role and scope of customs in trade
facilitations 2004 Kathmandu.lNEPAL RASTRA BANK Economic integration in South Asia 2005
Kathmandu NepallPaul R. Krugman and M.Obstfeld International economicsA.W.
Longman pvt ltd.India Branch New Delhi 2000.
8988
lS. Dutt .Majumder Customs Valuations Law and practices Centax
Publications Pvt. Ltd. New Delhi 1998.lKautilya. (The Chanakya) Kautiliya Arthsastra. Editor Pandit Somnath
Sharma a Publication of Royal Nepal academy Kathmandu Nepal.lBosodersten, International Economics Second edition 1980 Macmillan
Publishers Ltd. lKindleberger International Ecomonic 8th edition 2002 Publisher
Richard D. Irwin Inc.Revised by Pitter H Linderd.lMahesh Chandra Regmi. History of Nepal Nath Publishing Housing
Varansi 1988
Valuation of Goods in CustomsM Sulaiman Khan
he value of any product is the cost of its inputs plus the cost of
its production, but more importantly a measure of its
availability or scarcity and the relative demand. Generally Tspeaking, the fewer the goods and greater the demand, the more
expensive a product, and vice versa. But who and how does anybody
assess the value of anything? In this age of the market economy, we
say that the market determines the value of goods. This of course is
in turn dependent upon the other forces working within the market
and those influencing it from outside. This takes us to the market
phenomena of hoarding, monopolies, ease of transportation of goods
to markets where these are to be bought and sold, and the access of
buyers to markets. It is further complicated by the addition of costs
such as freight, insurance, advertisement, cost of patents and
designs, and of course the fees and charges recovered by
governments and public sector agencies at various levels, e.g., ports.
The valuation of goods has always been a point of dispute and very
contentious throughout history. People commonly talk of goods
being very expensive or very cheap, prices being exorbitant or
extortionate. In modern times even governments have clashed over
goods being undervalued and dumped and poor countries being
deprived of good treatment because of expensive patented
medicines. The two latest examples of these are HIV medication and
Tami Flu, the only treatment available for bird flu. When the
valuation of goods is discussed, many poor countries still talk of loss
of revenue from import duty and other import levies. This has led to
a large number of disputes among the various countries of the world
9190
under anti-dumping, safeguards, subsidies and countervailing
measures in Article VII of the Valuation Agreement of the World
Trade Organisation (WTO) and the Agreement on Preshipment
Inspection.
GATT 1994 and Agreements of the Uruguay Round There have been a large number of cases under the dispute
settlement mechanism. For this reason, various articles were
introduced under GATT 1947 to take care of different aspects of
valuation and related matters. These articles were:lArticle VI Anti-dumping and Countervailing DutieslArticle VII Valuation for Customs Purposes
Article XVI SubsidieslArticle XVII State Trading Enterprises.
All these articles and deliberations over the issues resulted in full-
fledged agreements during the Uruguay Round negotiations. Article
VII, however, did not permit the customs administration to reject the
declared value (the transaction value) except according to strict
conditions and clear-cut evidence. Even before the start of the
Uruguay Round, many developing countries objected to this and it
was agreed at the end of the Tokyo Round that customs should have
some authority to object to values if it doubted the accuracy or
truthfulness of the declared values. The decision was as under:
“Decision Regarding Cases Where Customs Administrations
Have Reasons to Doubt the Truth or Accuracy of the
Declared Value.
Reaffirming that the transaction value is the primary basis
of valuation under the agreement on Implementation of
Article VII of GATT 1994 (hereinafter referred to as the
“Agreement)”;
Recognising that the customs administration may have to
address cases where it has reason to doubt the truth or
accuracy of the particulars or of documents produced by
traders in support of a declared value it was decided as
under:
“When a declaration has been presented and where the
customs administration has reason to doubt the truth or
accuracy of the particulars or of documents produced in
support of this declaration, the customs administration may
ask the importer to provide further explanation, including
documents or other evidence, that the declared value
represents the total amount actually paid or payable for the
imported goods, adjusted in accordance with the provisions
of Article 8 of GATT. If, after receiving further information,
or in the absence of a response, the customs administration
still has reasonable doubts about the truth or accuracy of the
declared value, it may, bearing in mind the provisions of
Article 11, be deemed that the customs value of the imported
goods cannot be determined under the provisions of Article
1. Before taking a final decision, the customs administration
shall communicate to the importer, in writing if requested,
its grounds for doubting the truth or accuracy of the
particulars or documents produced and the importer shall
be given a reasonable opportunity to respond. When a final
decision is made, the customs administration shall
communicate to the importer in writing its decision and the
grounds therefore.”
Even after the final decision there is always a forum for appeal and in
many cases, e.g. Pakistan, there are two or three stages of appeal.
The agreements resulting from the Uruguay Round which one way or
the other related to the value or price of goods were:lAgreement on Implementation of Article VI of the General
Agreement on Tariffs and Trade 1994 (Anti dumping), lAgreement on Implementation of Article VII of the General
Agreement on Tariffs and Trade 1994 (Valuation), lAgreement on Preshipment Inspection, lAgreement on Subsidies and Countervailing Measures, lAgreement on Safeguards lAgreement on Preshipment Inspection.
These agreements are binding on all countries who are signatories to
the WTO Marakesh Declaration of 15 April 1994, and those who
joined the WTO later. Their number has now touched 150 and
continues to grow.
Definition of ValueValue is defined in the Black's Law Dictionary as “The monetary
9392
worth or price of something; the amount of goods, services, or money
that something will command in an exchange.” The same dictionary
defines fair market value as “the price that a seller is willing to accept
and a buyer is willing to pay on the open market and in an arm's-
length transaction. It is also termed as fair cash value and fair market
price etc.” The value for customs purposes was defined in the Sea
Customs Act 1878 and the Customs Act 1969, in almost identical
manner:Sea Customs Act 187830. Value of imported goods. (1) The value of any imported
goods shall be taken to be the normal price, that is to say,
the price which they would fetch, at the time the bill of entry
is delivered to the customs Collector under section 86, on a
sale in the open market between buyer and seller
independent of each other.”
Customs Act 196925. (1) The value of any imported goods shall be taken to be
the normal price, that is to say, the price which they would
fetch, on the date referred to in section 30 on a sale in open
market between a buyer and a seller independent of each
other.”
The problem with these broad definitions was that the relationship of
the buyer and seller and the circumstances of the sale, e.g., quantity,
supply period, discounts, costs of services and assists, provided by
the seller after the sale, e.g., advertisements, were not provided in the
main statute. These were later corrected through the Valuation Rules
and rulings of the Customs Cooperation Council (CCO) under the
Brussels Definition of Value (BDV) system.
Evolution of MoneyIn the prehistoric period, commodity or cattle were used as money,
but there were difficulties in measurement of value. The first stage in
evolution of money was 'commodity and barter', including animal
skins, arrows, grains, stones, tools and cowries. Commodities were
followed as money by coins and then paper notes. Different societies
used different commodities. The rule of demand and supply was used
for exchange of goods and services. This was managed by the
adoption of various metals like iron, copper, bronze and nickel for
such transactions by weight. These metals were also used as
standards of value. Next came the use of precious metals, i.e., silver
and gold. The ratio of one metal to another was determined by the
organised authorities, e.g., the kings and later the
governments/states. Thereafter coins replaced metals. In the early
stages cheap metals (copper, bronze and nickel) were used. However,
later on coins were minted with silver and gold. In modern societies,
now only cheap metals are used as coins. The fifth stage in the
evolution of money was the use of paper money, which includes
government notes and bank notes. Nowadays, 'credit money' is
becoming very popular. This includes promissory notes, bills of
exchange, traveller's cheques, credit cards and debit cards. In
common parlance, credit cards and debit cards are called plastic
money. The use of plastic money is now very common in the
developed world. The developing world is following the trend and
trying to catch up. Today even supermarkets have their own credit or
debit cards. The only problem with plastic money or credit money is
the exorbitant rates of mark-up or interest charged on money paid
after a certain “free” period. These in some cases exceed 100% per
annum.
Purpose of ValuationValuation for imports and exports is used by governments as a tool to
control prices; to fix values to control under-invoicing or over-
invoicing; to fix values to control dumping; in use of the concept of
“notional values” to check loss of revenue by the National Exchequer
(Section 25-B of the Pakistan customs Act, 1969); to ensure fair
prices, especially for agricultural products, to safeguard ordinary
farmers who do not have holding power; to subsidise consumer
goods through state trading enterprises to protect vulnerable classes
of society; and to control and predetermine prices in local markets to
protect the general public from overcharging, e.g., the practice in
Pakistan to fix meat and milk prices at the local government level.
Historical BackgroundA short historical perspective of the concept and law of valuation in
Pakistan would provide a clearer picture of the how the valuation law
has evolved in Pakistan. Value under the Sea Customs Act 1878 was
based on “real value”. Real value was defined as the wholesale price
for which goods are capable of being sold at the time and place of
importation (excluding duties payable). The Sea Customs Act also
9594
contained provisions allowing the government to take over the
imported goods on payment of an amount equal to the declared real
value if there was suspicion or evidence of gross under-invoicing.
Value under the Customs Act 1969 talked of “normal value”. This
concept was very close to the real value of the Sea Customs Act 1878
and most of its provisions were the same or quite similar.
Brussels Definition of Value After the Second World War, some countries in Europe formed the
Customs Cooperation Council (CCO) in 1952 with its headquarters at
Brussels. The council has now grown into a full-fledged international
organisation, the World Customs Organisation, with 150 country
members. Among the various aspects of customs and international
trade, such as a harmonised coding system for classification of goods,
a uniform valuation code was one of the major concerns. The council
developed a valuation system commonly called the Brussels
Definition of Value (BDV). BDV is based on a notional concept,
which treats customs value as the price at which goods would be sold
(the price which goods would fetch) in the course of international
trade, the essential elements being price, time, place, quantity and
commercial level. The emphasis is on the intrinsic value of the goods.
By the beginning of 1970, over 100 countries were applying BDV.
However the USA, Canada, Australia and New Zealand refused to
join the BDV and advocated a “positive concept” requiring customs
to determine the value on the basis of actual price paid for the goods.
In their view the positive concept considerably reduced the
discretion available to customs and thus facilitated trade. However,
in practice, the perceived difference between the notional concept
(BDV) and positive concept were was significant, as explanatory
notes to BDV had already considerably reduced the discretion of
customs administrations.
In 1969 Pakistan repealed the Sea Customs Act 1878 and the Land
Customs Act 1934 and promulgated the new Customs Act 1969 (IV of
1969). The new act came into force on 1 January 1970. Earlier,
Pakistan had acceded to the Convention on the Valuation of Goods
for Customs in the Customs Cooperation Council, Brussels, on 14
October 1957. This convention was initially signed by a large number
of countries on 15 December 1950, and entered into force on 28 July
1953. This convention established the Customs Cooperation Council
as the focal institution to supervise the operation of the convention
with a view to securing uniformity in its interpretation and
application. With that end in mind, a valuation committee was
established, on which each member of the council had the right to be
represented. This convention established the BDV with the object of
providing an equitable system for determining the CIF value of
imported goods. The Definition of Value, which constituted
Annexure I to the Convention on the Valuation of Goods for Customs
Purposes, provided the basis for determining the value of exported
and imported goods for appraisement of customs duty. The said
Definition of Value was actually incorporated into Section 25 of the
Customs Act 1969, with slight modifications. The definition of value
in BDV is designed to (i) provide for the establishment of customs
values by reference to a formula to be uniformly applied to all classes
of importations, thus ensuring equitable treatment as between all
imported goods; (ii) conform as closely as possible to commercial
practice in open market conditions; (iii) ensure that customs
administrations are safeguarded against evasion of duties and taxes;
(iv) ensure that honest traders are protected against unfair
competition and arbitrary administration; and (v) meet the needs for
commercial simplicity and administrative convenience.
These requirements are met by:lselecting the standard of the price made under a contract of sale
concluded in respect of the imported goods, and in the open
market between a buyer and a seller independent of each other;lgiving precision to this standard by specifying the contract of
sale to be a contract concluded at a price appropriate to the time
when the duty becomes payable, and giving delivery to the buyer
at the port.
Setting up this standard in the Definition as a notional concept
expressed in terms of the price which the goods “would fetch” on a
sale conforming, inter alia, to the conditions envisaged at (a)(i),
(a)(ii), (b)(i) and (b)(ii) above.” [The above sections are not marked
as (a)(i), (a)(ii), etc]
These recommendations were not incorporated into the Customs Act
1969. However these were incorporated in the rules framed there
under, issued by the Central Board of Revenue under Section 219 of
the said act (CGO 1 of 1981). In fact the concept of timeframe and
9796
quantities was also introduced in the same CGO 1 of 1981. Through
this, e.g., it was established that quantity discounts were permissible
and at the date of contract of sale, if the sale was made within the
timeframe of the contract, the original price was acceptable.
The scourge of under invoicing in high tariff items and over-
invoicing in items which were zero rated or exempted or where the
duties were reduced, to say 5%, was endemic in Pakistan's imports
and exports. Over-invoicing was also a problem in exports where
duty drawback rates were high. The Government of Pakistan
therefore decided in December 1988 to introduce a new provision in
the Customs Act to fix values based on certain rules, to curb under-
and over-invoicing. These values were by and large fixed in
consultation with representatives of trade and industry. This new
section reads:
“25B Fixation of Value for Imports and Exports. (1)
notwithstanding anything contained in section 25, the
Board or such officer as is authorised by…………. (2)
Different values may be fixed for different classes or
descriptions of the same type of goods.”
This led to notifications fixing values for a large number of imported
items where under- or over-invoicing was suspected. This system
continued for many years and was officially stopped in the year
2000. These values were fixed on the basis of printed prices, e.g., the
Metal Bulletin, the Japan Textile News; the information provided by
the representatives of trade and industry; and in some cases by
collecting market intelligence or by computing the value.
Tokyo Round and Uruguay Round (WTO Agreement on Valuation)Efforts to limit the discretion available to customs were made during
the preparatory and the first phase of the Tokyo Round of
negotiations (1970-1977) by developing in GATT “draft principles
and interpretative notes” to BDV. It was expected that the resulting
precise criteria would induce the USA, Canada, Australia and New
Zealand to change their systems and join the BDV. The elaboration of
these texts, however, had no effect on these countries' negotiating
stance.
In November 1977, the European Union (EU) suddenly and
unexpectedly announced a dramatic change in its position. It
declared that EU countries had agreed to make a fundamental
change in the valuation system by opting for a positive approach and
that the proposals it was making were based on what it “believed to
be good features of the United States Valuation System”. The draft
agreement which it presented provided that in almost all cases,
customs should determine dutiable value on the basis of “price paid
or payable” for imported goods in the particular transaction.
Customs could reject the transaction value only in exceptional cases
by providing precise reasons for doing so. In all such cases however,
customs was expected to determine value by using the five prescribed
methods, applying them in the hierarchical order in which they were
listed.
In international negotiations, countries often change their positions
by redefining their objectives. But in this case, the decision of the
European Union amounted to agreeing with the adversary, in the
middle of negotiations, that the position the adversary was taking
was right and its own stand was wrong. The reaction of developing
countries to the EU proposal was of surprise and disbelief. Many of
them were only recently persuaded by the CCC to join BDV or to
apply it on a de facto basis. The CCC, while working towards BDV,
considered itself badly let down by the EU on whose support it had
relied till then.
One of the major concerns of developing countries was that the
system proposed by the EU, which required customs to accept the
transaction value declared by the importers, would not enable them
to deal with the practices resorted to by traders of under valuation of
goods and with other customs related malpractices. They therefore
wanted a degree of flexibility in the rules to enable their customs
authorities to reject the transaction value when they had reasons to
doubt its truth or accuracy. This the EU and USA refused to concede
once they were able to secure support for the basic ideas in the
proposal from the other developed countries. In the Tokyo Round
the only concession which developing countries were able to achieve,
despite the arduous efforts they made, was the acceptance that a
developing country acceding to the agreement could delay its
implementation by five years.
The Tokyo Round ended in 1979. The developing countries had to
9998
wait till the beginning of the Uruguay Round to get acceptance of
their contention that the difference in economic situation and
trading realities would require provision in the rules that would
enable them to reject the transaction value when had have sufficient
reasons to believe that goods had been deliberately under- or over-
valued by importers in collusion with exporters. The “decision
regarding cases where customs administration have reasons to doubt
the truth or accuracy of the declared value”, which was adopted in
the Uruguay Round, provided under certain conditions the right to
customs administrations to reject the transaction value in cases, inter
alia, of deliberate under-valuation and proceed to determine value on
the basis of other methods provided in the agreement.
Transaction ValueIn GATT (1994) it is the value or price agreed between the buyer and
seller in an individual transaction which has been protected, unless
evidence can substantiate a fraudulent transaction. In GATT (1994),
post-import investigation is more important than passing a value
judgment at the time of import. A transactional value cannot be
rejected simply because there are some imports made at the same
time at higher prices. It has to be shown that invoice price is not
genuine and does not show the real price paid for the goods in
question. An invoice price cannot be routinely discarded except on
the strength of clear evidence that the invoice is not genuine and
does not show the real price settled between the importer and foreign
exporter and that some other underhand transaction has also taken
place between the importer and exporter. Simultaneously the plea of
enhancement is not tenable where no evidence has been produced to
justify any enhancement of the value of imported goods. Customs
cannot simply depend or rely upon another transactional value
having no relationship with the changed scenario between the
imports and exports in a particular case. If there is no evidence then
it is not permissible to reject a commercial deal based on the concept
of transaction value.
In Pakistan, implementation of the new system of valuation based on
transaction value started with effect from 1 January 2000. Pakistan
was one of the countries that availed the 5-year transition period
allowed under the Agreement on implementation of Article VII of
GATT 1994. The ITP based system of valuation ceased to operate
with effect from 1 January 2000. Many steps were taken to ensure a
smooth changeover to the new system. These included:lA notification SRO 1375(I)/99, dated 28 December 1999, to give
effect to the revised sections 25 and 30 of the Customs Act, 1969,
was issued by the Federal Government.lCustoms Rules to regulate the valuation of imported goods in
accordance with the new system were issued by the Board vide
SRO 1369(I)/99, dated 24 December 1999, later SRO.
450(I)/2001.lIn order to assist the customs staff and trade, a valuation
database was developed. The database of major items of imports
was prepared jointly by the customs administration in
collaboration with the trading community taking into account
(a), the evidence of physical imports over the last three months,
(b) the latest ITP valuation manual, and (c) valuation advice
issued in the recent past by the Valuation Department.
The database was intended to facilitate the acceptance of the
declared values and to bring about transparency in those cases where
customs values needed to be enhanced. Certain guidelines were also
issued to impart transparency and predictability to the system.
A valuation committee and an appellate forum were also created
through the same orders to enable importers to settle complicated
cases and to seek redressal of their grievances immediately. The
committee consisted of:lthe additional controller of valuation in Karachi/Lahore as the
chairman (In case of dry ports, the collector of customs or
additional collector was to chair such committees); la representative of the collector concerned; la representative of the relevant association; and l(any other person or expert, on the invitation of the chairman of
the committee, whose presence may be considered useful for
resolving the issue under consideration.
The appellate forum, in case of disagreement was referred to as the
valuation committee of appeals consisting of the controller of
customs valuation as chairman; a nominee of the relevant
collectorate; a nominee of the Federation of Pakistan Chambers of
Commerce and Industry (FPCCI); and a nominee of the chamber of
commerce and industry concerned.
101100
In the following cases, transaction values as declared in the bill of
entry were accepted without objection: lCommodities where the incidence of taxes was less than 10%,
except such commodities which were excluded from the system; lgoods imported by the federalor provincial governments,
government or semi-government organisations and diplomatic
missions; and lgoods of such individuals or companies which were being
cleared under the immediate clearance system.
Under-developed countries have often expressed concerns that the
WTO valuation system results in a loss of revenues for them. These
countries continue to express their fears, including in many cases
where multinational companies overvalue their goods because of
their monopolistic positions (e.g. where they have long term patents
for medicine or software).
The major objection to the WTO valuation agreement relates to the
fear that its provisions encourage gross under-invoicing and over-
invoicing. Such an apprehension stems from a misperception that
Article 1 of the agreement invariably requires customs to accept the
transaction value and that customs has no jurisdiction to reject “tag
prices", even if these are wrong. A typical example is India, which
reported a loss of revenue of 5 to 10% percent in its formative years
and pleaded that this loss had been occasioned since they could not
challenge transaction values, even if these were misdeclared or
under-declared. India was, however, advised by the WCO that it was
wrong in assuming that it could not reject the transaction value and
it could clearly initiate actions in terms of Article VII and XVII of the
agreement if it found that importers were mis-declaring their prices.
The above view was further confirmed by the Ruling No. 2.1 issued
by the WCO under the title: "Acceptability of a price below prevailing
market prices for identical goods". The WCO was asked to advise
"whether a price lower than prevailing market prices for identical
goods can be accepted for the purposes of Article 1 of the Agreement
on implementation of Article VII of the General Agreement on Tariffs
and Trade 1994". The Committee on Valuation considered the
question and advised that the "mere fact that a price is lower than
prevailing market prices for identical goods should not cause it to be
rejected for the purposes of Article I, subject of course to the
provisions of Article XVII of the Agreement". Article XVII reads as
follows:
"Nothing contained in this section or the rules, shall be
construed as restricting or calling into question the rights of
the appropriate officer of customs to satisfy himself as to the
truth or accuracy of any statement, information, document
or declaration presented for customs valuation purposes ".
The position was made further clear by the Valuation Committee of
the WTO, which by its decision No. 6.1, taken on 12 May 1995,
decided as follows:
"When a declaration has been presented and where the
customs administration has reason to doubt the truth or
accuracy of the particulars or of documents produced in
support of this declaration, the customs administration may
ask the importer to provide further explanation, including
documents or other evidence, that the declared value
represents the total amount actually paid or payable for the
imported goods, adjusted in accordance with the provisions
of Article VIII. If, after receiving further information, or in
the absence of a response, the customs administration still
has reasonable doubts about the truth or accuracy of the
declared value, it may, bearing in mind the provisions of
Article XIX, be deemed that the customs value of the
imported goods cannot be determined under the provisions
of Article I:
“Before taking a final decision, the customs administration
shall communicate to the importer, in writing if requested,
its grounds for doubting the truth or accuracy of the
particulars or documents produced and the importer shall
be given a reasonable opportunity to respond. When a final
decision is made, the customs administration shall
communicate to the importer in writing its decision and the
grounds therefore.
It is entirely appropriate in applying the Agreement for one
member to assist another member on mutually agreed
terms.”
103102
The above two rulings were followed by WCO Advisory Opinion 10.1,
which ruled that customs administrations cannot be required to rely
on fraudulent documentation. Should any customs document prove
to be fraudulent, subsequent to the determination of a customs
value, invalidation of that value would be a matter for national
legislation.
Section 25 (11) of the Customs Act of Pakistan empowers customs
officers to question the truth or accuracy of any statement,
information, document or declaration presented for customs
valuation. These powers are also incorporated in the provisions of
Section 26, which authorise the appropriate officers to seek any
information specific to the importation. These powers are almost the
same as were applicable under the BDV System. The legal effect of
these powers is that the customs authorities are not helpless to check
the flow of the misdeclared values or that any evidence in the form of
evidential invoices or printed values of identical goods or similar
goods is still available to the Customs Department. There is also the
power of the Government to apply provisions of antidumping law
and/or safeguards law, if such imports cause injury to domestic
industry or are even feared to do so, if such undervalued imports
continue.
Acceptance of the Lower of the Two Values of Identical or
Similar GoodsThe agreement provides:
2 (3) - If, in applying this Article [Article 2 relating to
identical goods] more than one transaction value of
identical goods is found, the lowest of such value shall be
used to determine the customs value of the imported
goods".3 (3) - If, in applying this Article [Article 3 relating to similar
goods] more than one transaction value of similar goods is
found, the lowest such value shall be used to determine the
customs value of the imported goods ".
The provisions regarding the acceptance of the value of the lower of
the two transaction values applies only when the declared
transaction value has been rejected and the transaction value on the
basis of identical or similar goods methods is undertaken. Obviously,
in that case, more than one transaction value may become available
on account of different circumstances of the sale. The valuation
agreement requires the member countries, when such a situation
arises, to take the lowest of the transaction values into account and
not the highest. Pakistan, however, is not following this in most
cases. India, which was the stronger critic of the GATT valuation
system, has incorporated these provisions of Article 2(3) and 3(3) of
GATT in Rule 5(3) and 6(2) of the Indian Customs Valuation Rules
1988. Pakistan has yet to incorporate these in its valuation rules.
However, having said that, India has adopted some very effective
preventive steps, by requiring importers to give detailed information
regarding valuation factors (Rule 9) and conditions under sub-rule 4
2) of the Customs Valuation Rules 1988. The factors (Rule 9) to be
added to the value are, if not already added, are lcommissions and brokerage, except buying commissions;lthe cost of containers, which are treated as being one for
customs purposes with the goods in question; lthe cost of packing, whether for labour or materials; lthe value, apportioned as appropriate, of the following goods
and services where supplied directly or indirectly by the buyer
free of charge or at reduced cost for use in connection with the
production and sale for export of the imported goods, to the
extent that such value has not been included in the price
actually paid or payable lmaterial, components, parts and similar items incorporated in
the imported goods; ltools, dies, moulds and similar items used in the production of
the imported goods; lmaterials consumed in the imported goods; lengineering, developing, artwork, design work, and plans and
sketches undertaken elsewhere than in the importing country
and necessary for the production of imported goods; lroyalties and licence fees related to goods being valued that the
buyer must pay either directly or indirectly, as a condition of
sale of the goods being valued, to the extent that such royalties
and fees are not included in the price actually paid or payable; lthe value of any part of the proceeds of any subsequent resale,
disposal or use of the goods that accrues directly or indirectly to
the seller; ladvance payments; lfreight charges up to the place of importation; andlloading, unloading and handling charges associated with
105104
transporting the goods.
Insurance Similarly the following conditions are to be satisfied to apply the
transaction value:lThe sale is in the ordinary course of trade under fully
competitive conditions.lThe sale does not involve any abnormal discount or reduction
from the ordinary competitive price;lThe sale does not involve special discounts limited to exclusive
agents;lObjective and quantifiable data exist with regard to the
adjustments to be made under Rule 9;lThere are no restrictions concerning the disposition or use of the
goods by the buyer (subject to certain exceptions);lThe sale or price is not subject to some condition or
consideration;lNo part of the proceeds of the goods (by resale, disposal or use)
after importation accrues to the seller; and lBuyer and seller are not related, and if related, the relationship
should not have influenced the price.
Indian customs also has the power to fix tariff values, e.g., tariff
values have been fixed for Crude Palm Oil, RBD Palm Oil, others
Palm Oil, Crude Palmolein, RBD Palmolein, Others Palmolein,
Crude Soyabean Oil and Brass Scrap (all grades).
In India, the transaction value method also does not apply to
situations where valuation fraud (under-valuation, wrong
description, misdeclaration of quantity, grade, specifications, etc) are
shown to have taken place. These are cases where customs has
adequate evidence to establish the fraud. In cases of suspected fraud,
Rule 10 A could be applied to reject the declared value and the
transaction value method (see below).
Related Party TransactionsThe transaction value method cannot be applied in cases where the
buyer and seller are related and the relationship has influenced the
price. The scope of relationship is defined in Sub-Rule 2 (2) of the
Customs Valuation Rules (India). In such cases the burden of proof
shifts to the importer, who should satisfy customs that the declared
price closely approximates the test values prescribed in sub-Rule
4(4). If the importer fails to discharge this responsibility, the
declared value could be rejected and valuation done under any of the
subsequent methods applied in hierarchical order.
Other Valuation MethodsThe transaction value method cannot be applied for determination of
customs value in several situations. These include cases where there
is no sale for export, restrictions under Sub-Rule 4 (2) apply, the
relationship between buyer and seller has influenced the value, cases
where valuation fraud has taken place and cases of suspected
valuation fraud (see rule 10 A). In all such cases, the valuation is to
be done under the following five methods, to be applied in sequential
order, unless otherwise permitted under the valuation rules:lTransaction Value of Identical goods (Rule 5). This is based on
the previously determined transaction value of identical goods,
as defined in the Valuation Rules (see Sub-Rule 2.1), imported at
or about the same time;lTransaction Value of Similar goods (Rule 6). This is again based
on the transaction value of similar goods (defined in Su-Rule
2.1) imported at or about the same time; lDeductive Value Method (Rule 7). This is calculated based on
the selling price of imported goods or identical/similar goods in
India after deducting selling expenses, margin of profit, duties
and taxes; lComputed Value Method (Rule 7 A). The computed value is
arrived at from the cost of materials used in production of
imported goods, cost of fabrication or other processing charges
at the country of production, profit and general expenses, and
other dutiable factors as may be applicable under Rule 9; lFallback Method (Rule 8). These include a flexible application of
previous valuation methods in a manner consistent with the
provisions of Section 14(1) of the Customs Act.
Rule 10 ARule 10 A provides a unique procedure for rejection of transaction
value method in cases of suspected valuation fraud. The authority for
this rule is not from the Customs Valuation Agreement itself, but
from a separate decision by the WTO Valuation Committee (Decision
6.1). This applies to cases where there is reason to doubt the truth or
accuracy of the value declared by the importer, but there is no
107106
evidence with the customs to establish fraud. It was one of the results
of the Uruguay Round negotiations (which led to the establishment
of the World Trade Organisation in 1994) based on an Indian
proposal. The Indian proposal was to provide adequate flexibility in
the Valuation Agreement to deal with cases of suspected fraud,
particularly those where the declared value was far below a series of
contemporaneous transactions. In such cases the customs could ask
the importer to produce additional information and evidence to
justify the declared value. If the information/documents produced
were not adequate to dispel the doubt regarding the truth or accuracy
of the declaration or if the importer fails to produce any supporting
evidence, the customs could reject the declared value. An appealable
order should be issued in such cases after giving the importer a
reasonable opportunity to be heard. The goods are then to be valued
by applying any of the subsequent methods as laid down in the
valuation rules. In short, Rule 10 A provides only an authority to
reject the declared value and is not a method of valuation by itself.
The National Import Data Base (NIDB) provides a reliable tool for
comparison of declared values with contemporaneous import prices.
It is an electronic database in which previous importations have been
analysed by special software. The NIDB is made available on a
weekly basis to all customs stations. This is almost identical to the
database used by Pakistan Customs.
It is sometimes argued that the WTO confers unfair advantage to
multinational companies. As noted in the report by the Secretary
General of UNCTAD: "In general, developing countries argue, that
the Agreement would favour the transactions between the related
parties and that trans-national companies, which handle a
considerable part of the imports of developing countries, might take
advantage of those rules to manipulate transaction values to their
own advantage, with the resulting losses of customs revenue for the
importing country.”
This statement is confirmed in the case of associated companies.
These are actually subsidiaries enjoying a commercial advantage over
completely independent buyers or subsidiaries whose roles are, at
best, comparable to those of sole concessionaires. Likewise, transfer
pricing is known to be used for under- or over-invoicing targeted
goods, and the loss or gain in value transferred to other goods.
Obviously this is done to beat competition and to damage domestic
industries.
However, the valuation of goods imported by multinational
companies or their subsidiaries has presented the same problems in
the valuation system operating under the umbrella of BDV as in the
WTO. WTO provisions do not stop the valuation departments of
customs from evaluating the relationship and loading the transaction
value, if it has influenced the price. The real problem stems from the
sheer weight, size and the economic power wielded by multinational
companies, who dominate the world price structure, since they
control most of the world's trade. Provisions have however been
made in Section 25 (3) of the Pakistan Customs Act, 1969 read with
Rule 2 (I) which provides that in case of related persons, the burden
of proof to prove the correctness of the transaction value is upon the
importer. According to Rule 11 of the Valuation Rules of India, where
the buyer and seller are related, the circumstances surrounding the
sale are examined and the transaction value is accepted as the
customs value of the imported goods, provided the relationship did
not influence the price.
As far as the question of burden of proof is concerned, the WCO also
accepted that Article XVII of GATT does provide adequate
safeguards on the question of burden of proof. Courts in Pakistan
have, however, repeatedly ruled under the BDV regime that the
burden of proof to prove that a declared value was wrong was upon
the customs, even though there was no provision in Section 25 then
in force. Article XVII is more strongly worded in favour of customs.
However, the legal burden continues to be on customs, as ruled in
several judgments of the superior courts, including the Supreme
Court of Pakistan.
Goods and services supplied by the seller to the buyer free of cost or
at a reduced cost are called "assists". Similarly, royalties and licence
fees may also be offered to the buyers free of cost. To the
disappointment of developing countries, the value of certain "assists"
or goods and services cannot be loaded in the transaction value and
hence cannot be made dutiable. Instances of such goods and services
are engineering, development and artwork designs and plans
prepared in the country of importation. However, such charges have
been expressly made dutiable in Pakistan under the provisions of
108 109
Section 25 (2) (c) (iv) if such "assists" are undertaken outside
Pakistan. This remains a disputed area which has so far defied
resolution. One of the greatest objections of under-developed countries is that
member countries following the WTO Valuation Agreement are
prohibited from laying down minimum prices for the purpose of
valuation. The WTO considers these minimum prices to be fictitious.
The fact, however, remains that the ITP system, notwithstanding
some problems, served under-developed countries well, being wholly
transparent. Certainly, the ITP system did not always take the
circumstances of the individual sale into consideration, but by and
large the system operated very well in Pakistan and reduced, and in
many cases, eliminated controversies, for several years in a row and
also did away with a lot of litigation with the full participation of all
stakeholders.
ConclusionThe system of valuation introduced through the WTO Agreement on
Valuation has by and large been found to be satisfactory. However,
some of the apprehensions of the developing countries have proved
to be correct. For example, under invoicing of goods is again endemic
and reportedly trade between partner countries of China shows this
aspect very clearly. A sample comparison would clearly bring this
out. The result has been a plethora of anti-dumping cases against
China in various parts of the world, especially India, the EU and the
United States. The following chart shows mirror image statistics of
imports and exports of China to India, the USA and Pakistan. This
clearly brings out the serious problem with the values declared in the
importing and exporting countries.
This clearly shows that all is not well after the implementation of the
WTO Agreement on Valuation. Some countries are getting away with
murder through under invoicing/dumping, and some countries are
being treated very badly by the imposition of anti-dumping duties
and safeguard measures. This does not bode well for the industries
and even agriculture of the poor and vulnerable countries of the
world like Pakistan.
RecommendationslThe countries of the South Asia Association for Regional
Cooperation (SAARC) region should harmonise their valuation
laws, rules and regulations.lThe countries in question should also provide assistance to each
other with regard to under-invoicing, over-invoicing and transfer
pricing in cases of valuation fraud.lThere should be a continuous and sustained exchange of
information in the SAARC region.lThe SAARC countries should also assist each other in
investigations relating to dumping and safeguards.lProcedures relating to the clearance of imports and exports
should also be harmonised, based on the best international
practices.
These recommendations are based on the experience of the
European Union, where over two dozen countries of Europe are now
acting in unison in all these matters without loss of revenue or
damage to their industry. There is no reason why this cannot be
achieved for the collective good of the 1.35 billion people of South
Asia. The implementation of these recommendations will not only
help improve the region's revenues, but also help protect domestic
industries and agriculture. These measures in no way go against the
interests of any of the countries of the region and will in fact provide
a level playing field. Without this, trade in this region will remain
suspect and subject to serious disputes.
M Sulaiman Khan is a former customs commissioner of Pakistan,
and currently heads Sulaiman Associates, a consultancy firm.
(Value in US$ million) (All figures pertain to 2003)
CHINAS IMPORTS FROM Import
Statistics Mirror
Estimates CHINAS EXPORTS TO Export
Statistics Mirror
estimates
USA 33,761 25,982 USA 92,617 161,429
India 4,242 2,902 India 3,342 3,996
Pakistan
- - Pakistan 1,577 1,149
USAS IMPORTS FROM USAS EXPORTS TO
China 161,429 92,618 China 25,983 33,761
India
13,595 11,317 India 4,162 4,876
INDIAS IMPORTS FROM INDIAS EXPORTS TO
USA 4,876 4,162 USA 11,317 13,595
China
3,996 3,342 China 2,909 4,242
PAKISTANS IMPORTS FROM PAKISTANS EXPORTS TO
USA 1,323 748 USA 2,935 2,727
India 381 283 India 93 57
China 1,149 1,577 China 287 575
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Documentation Requirements for
Imports and ExportsDouglas Jayasekera
rom ancient times, it has been customary to impose a tax or
toll at seaports when merchandise is imported or exported
from one country to another. There are references to customs Fduties being imposed in a Syrian oasis city, in the second century AD.
In the 'Artha Sastra' of Kautilya, in the third century BC, there is
reference to a similar levy being imposed in ancient India. The
renowned 18th century economist Adam Smith, in his 'Wealth of
Nations' (1776), stated that 'customs', meaning the levying of duties,
had existed from time immemorial. The term 'customs' is regarded
as a derivative from this customary practice.
The Customs Goods Declaration (CUSDEC) adopted in 1994 is
imperative for every importer/exporter or authorised agent. The
declaration form, designed for imports and exports and bonded
cargo, is called the Single Administrative Document (SAD) in
international usage . For imports, there are five copies of the
CUSDEC to be submitted: the warrant copy, delivery copy, statistics
copy, parties copy, and the exchange control copy. In addition, in
terms of the amendments consequent to Sri Lanka's adoption of the
World Trade Organisation (WTO) Valuation Agreement in January
2003, it is mandatory for every importer/agent to submit a value
declaration form. The value is based on the transaction value of the
imported goods, i.e., the price actually paid or payable when sold for
export to Sri Lanka. It eliminates the arbitrary valuation of imported
goods on a notional concept called the normal price. Two copies of
the value declaration must be submitted, one copy attached to the
warrant copy, and the other to the delivery copy of the CUSDEC.
Customs allows imports to be cleared on a bank or corporate
guarantee, to provide for any payment of duty for which the goods
may later be found to be liable under post clearance audits. If there
are any problems in accepting the transaction value, customs checks
the transaction value of similar goods sold for export to Sri Lanka at
or about the same time as the goods being valued. In certain cases,
however, customs checks the value of imports before the goods are
cleared. This happens in cases where the authorities are not familiar
with or have doubts about the credentials of an importer. In such
cases, customs will continue with a modified form of the previous
arrangement. Customs will meet importers up front at the time of
import.
One copy of the Bill of Lading and the pro forma invoice must also be
submitted. Sri Lanka has a quarantine system in place to ensure that
exotic diseases are not introduced through imported livestock and
livestock products. A pre-export permit is required. Food imports
require an export certificate from the country of origin. Sri Lanka
also has an import quarantine system in place for plants. These
imports must be accompanied by a permit.
In the case of exports, five copies of the CUSDEC must be submitted,
the only change from imports being a security copy in place of the
delivery copy. An export licence is required for certain commodities.
For example, exports of tea and coconuts require a licence. Tea
exporters are subject to pre-shipment sampling to ensure quality.
These licences are provided by the relevant regulatory bodies, such
as the Tea Board and the Coconut Development Authority. Exports
of animals, live fish, coral chanks, conch shells, cashew kernels,
certain flora and fauna, ivory and ebony products, and
antiquities/cultural property also require a licence issued by the
relevant authority.
Goods imported or exported under certain preferential arrangements
are eligible for preferential rates of duty when exported or imported.
These preferential rates of duty are with countries which are
members of the Bangkok Agreement, the Global System of Trade
Preferences (GSTP), The SAARC Preferential Trading Arrangement
(SAPTA), the India-Sri Lanka Free Trade Agreement (FTA), and the
113112
Pakistan-Sri Lanka FTA. All South Asian countries are members of
SAPTA, and some are members of the Bangkok Agreement and the
GSTP. To qualify for such preferences, the necessary certificate of
origin must be attached to the documents submitted for import or
export of goods. For instance, the importer must claim the
preferential rate of duty at the time of entry.
Promoting Imports and ExportsSri Lanka implements a number of incentive schemes aimed at
promoting exports. At present there are three main schemes in
operation: a drawback scheme, a temporary import for export
processing scheme (TIEP), and a manufacture in bond scheme.
Under the duty rebate or drawback scheme, duties paid on imported
materials used to manufacture or process goods in Sri Lanka may be
partially refunded or rebated once the final goods are exported. The
TIEP scheme allows direct or indirect exporters to import inputs
without payment of fiscal levies. Manufacturers or exporters
producing under TIEP may not participate in any other export
incentive schemes. The TIEP scheme has two sub schemes. One
allows the import of inputs such as raw materials, components, parts
and packaging materials exempt from duties. The other covers the
import of capital goods, appliances and spare parts which are eligible
for whole or partial exemption from customs duties. Any
manufacturer who exports may, with the approval of customs,
establish a manufacturing in bond in a warehouse. They can avoid
duties at the time of import. Any kind of production process,
including mixing and assembling, may be undertaken in bond
warehouses. Imported goods may be stored for up to six months,
without payment of duties and taxes, and for 'valid reasons', this
period may be extended for up to two years.
Is Documentation Excessive or Discriminatory?In recent years, with the rapid movement towards an era of globally
liberalised trade, the role of customs has shifted dramatically from
that of an enforcer and collector to a facilitator. There are a set of
globally accepted customs practices which all contracting parties to
the World Customs Organisation (WCO) must adhere to. Sri Lanka
has also adopted these standards and practices.
Sri Lanka has adopted the following conventions:lHarmonised commodity description and coding system
lTemporary importation of professional equipmentlFacilities for the importation of goods for display or use at
exhibitions, fairs, meetings or similar eventslATA carnet for temporary admission of goodslTemporary importation of scientific equipment
Kyoto Convention-Simplification and Harmonisation of
Customs Procedures The adoption of a single standard document of declaration in 1994
CUSDEC has assisted trade immensely. The time taken to process
documents has also improved tremendously with the introduction of
automation and selectivity criteria for the examination of cargo on a
risk assessment basis. Risk declaration is a statement by a company
that it has committed an offence, or contravened the customs
ordinance. This is promptly verified against the computer database
of offenders.
CUSDEC is processed under an automatic system for customs data
(ASYCUDA), which is fully equipped in all customs offices in
Colombo, where 99 percent of the cargo is discharged. All imports
and exports (sea and air), temporary imports and bonded cargo are
automated for customs declaration processing using the ASYCUDA
system. An electronic data interchange (EDI), which has also been in
operation since 2004, will lead to faster dispatch of vessels and avoid
time consuming physical clearance by shipping agents and freight
clearing houses.
Sri Lanka handles more than a million containers per year. Colombo
Port has installed the necessary instruments to scan all outbound or
inbound containers for, in particular, weapons of mass destruction
and radioactive items. Colombo Port is one of the most secure ports
in the world, and the first in the region to install such scanning
instruments. Sri Lanka provides for advance rulings. This is a
reorientation of certain customs administrative decision-making
away from the border. This, however, involves costs in training
personnel, and technical assistance in the setting up of the advance
binding ruling regime, drafting legislation and regulations. The
worldwide liberalisation of trade has brought about increased
competition. Cutting costs has become a matter of survival for
enterprises competing in the global economy. Customs
administrations have not escaped this trend. A fair measure of
115114
modernisation and elimination of paper work has taken place, but
according to a survey of trade, there are still problems.
Here are some problems common to most customs administrations: i) Customs laws are replete with penal provisions and appear to
violate the fundamental rights of importers and exporters.
ii) In the conduct of inquiries, customs laws give considerable
authority to even the most junior grade officers. The fees and
charges are large and unreasonable, the penalties for minor
breaches of regulations are excessive, and the appeal procedure
is costly. The salaries paid to customs officers are not
commensurate with their responsibilities. Though there is a
rewards scheme in place, this can be misused to harass and even
lead to corruption.
iii) In Sri Lanka, customs officials are responsible for administering
other taxes and levies besides customs duties. These include
value added tax (VAT) on imported goods, ports and airports
development levy, cesses on various products ranging from tea
and coconut products to gems, and export levies on quartz,
chanks and tuskers. The collection of excise (special provisions)
duty is also the responsibility of customs. These functions are
performed by customs officers in other countries too, though
maybe to a lesser extent. In any case, customs officers are by
now familiar with these functions, and this may not be a problem
anymore.
1Comparative Positions of South Asian CountriesBangladeshThere are delays in clearing imported cargo. Such delays lead to port
congestion, paralysing an important part of the country's
infrastructure. Import and export procedures are quite cumbersome.
However, a programme to simplify documentation is under way. In
the publication of trade regulations, there are measures to use the
electronic media with SPEED and ASYCUDA. There are a plethora of
taxes and levies, as in the case of Sri Lanka described earlier. There
has been no progress in advance rulings and advance points. There is
also no record of an appeal process.
IndiaIndian export and import procedures continue to be quite
cumbersome. The existence of multiple export promotion schemes,
which require additional procedures, makes the process very
complicated. Some fees and charges seem to reflect the cost of
service, while others are calculated on an ad valorem basis. The
automation of customs through EDI and the use of risk assessment
methods has simplified procedures. However, though the use of EDI
has spread to new locations, it is still not widespread, and many
declarations are still done manually. India is said to have 425
customs points. Information on trade regulations are made available
both in the print and electronic media. The scheme of advance
rulings became operational from February 2004. However, the scope
of advance rulings is limited, in that solely Indian-owned companies
are excluded from the scheme. There is no officially designated
enquiry point. For traders, India has an elaborate appeals procedure,
and appeals can be made to an appellate tribunal, which is the
highest body.
MaldivesAll tariff lines are ad valorem, based on the CIF value of imports.
However, the extensive use of duty concessions, aimed at attracting
foreign investment, has undermined transparency. The Maldives
uses an EDI system, enabling registered users to submit import and
export documents electronically. Customs clearance is
straightforward, and risk assessment methods are also used. They do
not have specific levies and charges. The Maldives has been a
member of the WCO since 1995, and though not a member of the
ATA Carnet system, follows similar procedures. There is no system of
advance rulings, but there is provision for an appeal process. The
Maldives has started computerising customs operations.
Nepal Customs clearance is said to be cumbersome, since a large number of
documents have to be filled. Nepal charges a large number of fees
and levies. Nepal does not use a single administrative document, or a
single agency for imports and exports. ASYCUDA is beginning to be
implemented. In the publication of trade regulations, Nepal mostly
uses the print media, but intends to establish a website. There is no
provision for advance rulings, and moves are underway to establish
an enquiry point. There is a right of appeal and the Department of
117116
Commerce coordinates with the agencies concerned.
PakistanImport and export procedures are quite cumbersome in Pakistan. As
with imported goods, all goods to be exported require customs
inspection. However, efforts are underway to computerise import
and export procedures. Trade in certain sensitive items remains
subject to many procedures. Pakistan's import policy is quite
complex, though there are no licensing requirements. Registration
and documentation requirements abound, and the list of documents
needed can be quite long. An electronic assessment system (EASY)
has been introduced to speed up assessment and customs clearance.
All trade related rulings are available in the Gazette, and some on
websites as well. There is no known procedure for advance ruling.
Douglas Jayasekera is senior visiting fellow at the Institute of
Policy Studies in Colombo, Sri Lanka.
Endnotes1 I am indebted to a study made in 2004 by South Asia Watch on Trade,
Economics and Environment (SAWTEE) for this section of the paper.
This relates to fees and formalities, publication, and administration of
trade.
South Asia as a Global Force in TradeS K Mohanty
AARC is gradually emerging as a resilient regional trading bloc
in Asia despite having sharp political differences between
regional partners during the last several decades. The growing Spressure from the general public of the region has contributed to
capping political differences among member states. Moreover, the
regional countries have realised that solutions to outstanding
political issues could be the essence of good governance. Moreover,
the possibility of enduring and guaranteed prosperity, as a
consequence of steady progress in economic cooperation between
regional partners, could bring enduring solutions to the existing
political differences in due course. There is steady progress in this
direction, and member countries are committed to establishing on
strong economic ties among themselves. Following the 1 December
2005 meeting in Kathmandu, the first phase of the South Asian Free
Trade Area (SAFTA) was pressed into action from January 1, 2006.
Besides SAFTA, four South Asian Preferential Trade Area (SAPTA)
rounds of trade liberalisation have successfully been concluded since
1995, and the final round will soon attain the concurrence from the
respective member states for implementation. The level of
liberalisation in the earlier rounds of SAPTA was slow, but the depth
and coverage of trade liberalisation picked up in the subsequent
rounds. Various studies indicate that the region has large trade
potential, and speedy trade liberalisation can harness such potential.
Some recent studies such as Mohanty (2005) and Bandara and Yu
(2001), based on the CGE model, have reaffirmed the validly of such
findings. They demonstrate that fast implementation of SAFTA
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would be the best alternative strategy for South Asian countries to
improve their economic performances. In this regard, regional
initiates would be more beneficial than individual efforts to achieve
high levels of economic success. This implies that the process of
liberalisation under SAFTA is credible. It calls for speedy
implementation of the agreement within the stipulated time frame.
Economic cooperation between South Asian countries has been
consolidating rapidly over a period of time, and the region has
entered into a new phase of economic cooperation following the
signing of SAFTA in January 2004. However, there has been
scepticism regarding the sustainability of regional caucus, citing the
internal contradictions in the political sphere and poor economic
performances of the regional partners. In this context, the debate on
the significance of South-South (S-S) over North-South (N-S)
Regional Trading Arrangements (RTAs) is relevant. The existing
literature highlights that South-South RTAs have a higher degree of
mortality rate than North-North and North-South RTAs. In this
context, the reservations with regard to the sustainability of SAFTA
need to be examined.
It may be noted that intra-regional trade in South Asia has picked up
substantially the implementation of SAPTA in 1995. Under the
SAPTA process, the initial rounds were more populist whereas the
latter rounds were more credible in eliciting a higher level of intra-
regional trade flows within the region. If the changing perception of
the regional partners is an index of a shifting economic and political
climate in the region, further trade liberalisation under SAPTA and
SAFTA processes would result in further enhancement of regional
welfare. To achieve speedy progress through regional initiatives,
substantial benefits of the trade liberalisation under SAFTA must be
realised in the early phases of trade liberalisation, and less important
sectors back loaded in the process of further opening of the region.
This paper attempts to examine the structure of alternative strategies
which would bring substantial benefits to the region in the early
rounds of SAFTA negotiations. Although complete liberalisation of
the goods sectors could be achieved in a few rounds of SAFTA
negotiations, the order of sectoral liberalisation needs to be designed
in accordance with the performance of the regional economies. We
postulate that a credible negotiation strategy, based on liberalising
the most important sectors first, may yield better welfare effects than
a populist approach of choosing less important sectors first, and
keeping the most important sectors for liberalisation at the end.
There is a need to identify the order of sectors for trade liberalisation
in different rounds of SAFTA negotiations to optimise welfare effects
on the region.
Most of the regional countries are slowly getting into the regional
process and attempting to form close economic cooperation though a
number of RTAs/BTAs within and outside South Asia. India is very
much active in the regional process. If the SAFTA process does not
pick up within the stipulated time frame, there are possibilities that
regional countries may negotiate with other extra-regional groupings
for reciprocal trade liberalisation. In this era of regionalism, the
implications of not siding with the SAFTA Agreement, and aligning
with other extra-regional RTAs need to be examined.
Considering the recent developments in the South Asian region,
several issues may be raised in order to understand the prospects of
forming comprehensive economic cooperation in the region. How
credible is SAFTA in enhancing global welfare? How intensely will
the engagement of regional member countries with extra-regional
arrangements affect the SAFTA process? What could be the possible
impact on India, if SAFTA is implemented after completion of her
bilateral engagement with other regional arrangements? How would
the implementation of SAFTA affect the trade pattern of the region?
How would other regional members of South Asia likely to be
affected if implementation of SAFTA is delayed? How effective is the
sequencing of sectoral liberalisation in achieving faster gains from
the SAPTA process? The backdrop of these questions, an attempt has
been made to examine some of these issues in this paper. In order to
examine the efficacy of various rounds of SAPTA and SAFTA, this
study analyses the implication of the present level of trade
liberalisation on regional economies and the prospects of the region
in the future.
Recent Trends in Macroeconomic Performance Most of the South Asian region went through a transition in their
economic policy regime during the 1990s, following the success of
export-led growth in some Asian countries (World Bank, 1990). In
South Asia, Sri Lanka was the first country to initiate the process of
121120
liberalisation in the Seventies, and the others in the region joined the
process around the early 1990s. The region as a whole has benefited
from undertaking unilateral liberalisation and has integrated itself
with the global economy. As a result of a change in the policy regime,
countries in the region have persistently pursued external-oriented
trade strategies, which are almost irreversible in nature.
Despite commonality in policy regimes, regional countries differ
significantly in terms of their accomplishments in economic and
social sector development in South Asia. These countries have
diverse resource endowments, and complementarities do exist that
can be effectively harnessed to strengthen economic cooperation in
the region. Since the member countries are distinguished by well-
defined areas of specialisation, each one of them can serve as a
unique hub of a specific field for the region. For example, Bangladesh
can act as the energy hub, Bhutan and Nepal can serve as the forest
resources hub, India as the technology and human resources hub,
Maldives as the marine and fishery resources hub, Pakistan as the
textiles hub, and Sri Lanka as the rubber and plantations hub for the
region. Trade focus by individual countries commensurate with to
their specialisation would ensure them wider access to the regional
market without much competition from regional partners.
However, the strength of economic cooperation is largely dependent
on the performance of individual countries in the region. The region
has shown steady economic progress in the 1990s and early part of
the new millennium. ESCAP (2005) attributed the cause for recent
high growth in the region to the surge in farm income supported by
good weather conditions. The farm sector, in turn, has contributed
much to the growth of the manufacturing and services sectors. There
has been considerable progress in the external sector, manifest in an
improvement in the current account, surge in foreign exchange
reserves, and the consequent stability in exchange rate movements.
The present trend could be more profound once the regional
countries integrate themselves in various economic activities
including trade, investment and services. However, the global
experience suggests that robustness of regional integration is largely
contingent upon performance of individual countries, and the
sustainability of economic conquest of the region. It is in this context
that the macroeconomic performance of the region is analysed.
A Brief Overview of Economic FundamentalsThe macroeconomic performance of South Asia was robust at the
beginning of the new millennium, despite variations in the level of
economic development among regional economies. The gross output
of the region was nearly US$ 700 billion in 2000, and the region
expanded at the rate of 5.5 percent per annum on average during the
period 2001-03 as shown in Table 1. The average annual growth rate
of four economies exceeded 5 percent, and these economies
constitute nearly 85 percent of the region's total income. The average
real per capita income of the region exceeded US$ 500 per annum
and countries like Bhutan, Pakistan, Maldives and Sri Lanka have
already crossed this bottom line.
The average economic growth of the region is much lower than some
of the economies in South East and East Asia, particularly China. In
the case of China, the savings ratio surpassed 50 percent, and this
has contributed substantially to its overall growth performance. The
Table 1: Macroeconomic Performance of South Asian Countries: Average of 2001-03
Macroeconomic Indicator Bangladesh Bhutan India Pakistan Maldives Nepal Sri Lanka
GDP (constant 2000 Billion US$) 52.0 0.6 508.4 77.6 0.7 5.8 16.8
GDP growth (annual %) 5.0 6.8 6.0 3.4 6.2 2.7 2.8
GDP per capita (constant 2000 US$) 383.4
654.5
484.8
535.4 2411.0 241.8 886.2
GDP per capita growth (annual %)
3.2
3.9
4.3
0.9 3.8 0.4 1.4
Gross domestic savings (% of GDP)
17.6
29.9
22.1
14.7 47.6 14.1 15.3
Gross domestic savings (current
Billion US$)
8.6
0.2
116.9
12.6 0.3 0.8 2.6
Gross capital formation (% of GDP)
23.2
52.6
23.0
15.2 28.6 24.7 21.9
Gross capital formation (annual % growth)
7.3
7.7
3.5 17.8 1.9
Trade (% of GDP)
34.8
68.7
29.6
38.6 153.4 48.7 79.3
Trade in goods (% of GDP)
30.6
48.4
20.5
29.0 77.3 38.9 66.2
Exports of goods and services (constant
billion US$)
7.6
0.0
79.8
13.1 0.6 0.0 6.4
Exports of goods and services (% of GDP) 14.6 23.0 14.4 19.0 86.2 19.1 36.4
Exports of goods and services (annual % growth)
6.5
12.0
18.3 7.5 1.9
Imports of goods and services (constant billion US$)
9.6
0.0
76.2
11.7 0.5 0.0 8.2
Imports of goods and services (% of GDP)
20.2
45.7
15.2
19.6 67.2 29.7 43.0
Imports of goods and services (annual % growth)
2.5
7.7
6.6 6.9 4.2
Total reserves (incl. gold, current billion US$)
1.9
0.3
74.8
8.3 0.1 1.1 1.7
Total reserves minus gold (current US$ B)
1.8
0.3
70.8
7.6 0.1 1.1 1.7
Total reserves in months of imports 2.2 15.2 9.5 6.2 2.9 7.5 2.7
FDI, net inflows (BoP, current million US$) 77.8 0.3 3912.4 580.0 12.6 2.9 199.0
FDI, net inflows (% of GDP) 0.2 0.0 0.7 0.8 1.9 0.0 1.2
Source: World Development Indicators 2005, World Bank.
123122
experiences of some of the fast growing countries in the region are
almost similar. In contrast, the average savings rate of South Asia
was close to 21 percent during the period 2001-03. However, the
selected regional countries like Bhutan, India and Maldives have
registered savings rates higher than the average rate of the region.
The region has maintained a higher investment rate as compared to
its savings rate in order to gear up its level of economic growth. On
an average, the investment ratio remained higher than the savings
ratio, by 1.5 percent per annum. The gross capital formation
expanded at an average rate of 7 percent per annum during the
period 2001-03. A high investment rate in South Asia has
contributed to brisk growth in the region, especially in the early half
of the new millennium. One of the reasons for maintaining a higher
investment rate over the savings rate was the persistent policies of
the regional economies to maintain reasonably low levels of foreign
savings to maintain high economic growth. It may be noted that most
of the regional countries keep provisions for foreign savings in their 1medium term plan to complement their low savings ratio.
Rapid growth in the region has sustained itself for a number of years,
and the level of inflation has remained reasonably low. With the
improvement in the regional economic and policy environment,
Foreign Direct Investment (FDI) is slowly but steadily flowing into
the region. Although 79 percent of the region's total FDI is flowing
into India, other countries in the region including Maldives, Sri
Lanka and Pakistan introduced impressive policy initiatives to attract
FDI into their economies during 2001-03. With the change in the
policy regime, there has been a persistent tilt towards an export-
oriented growth strategy, moving away from Import-Substitution
Industrialisation (ISI) policies in the region. The shift in policy
strategy is felt in the form of increasing openness in a number of
economies. Maldives is turning out to be the most outward-oriented
economy, and the openness of the regional countries ranges between
29.6 percent and 153.4 percent during 2001-03.
Most of the regional countries suffer from perennial trade deficits
with the rest of the world. The trade deficit in their current trade
account is adjusted by surplus generated in trade in services. Among
the regional economies, only in the case of Maldives did the ratio of
exports of goods and services to GDP exceed that of imports. With
sustained economic reforms, the credibility of the regional
economies has improved, resulting in a significant rise in the level of
foreign reserves. India has built up a large foreign exchange reserve
during the reform period. According to the latest release of the
Reserve Bank of India, the foreign exchange reserve has crossed US$
140 billion. Pakistan has also improved its reserve position from time
to time. Repeated exogenous shocks such as natural calamities, hike
in international oil prices and instability of the US$, have adversely
affected the reserve positions of the regional economies.
Despite the structural weaknesses, the region has emerged strongly
with its macroeconomic fundamentals in the new millennium.
Persistence of the current trend over a couple of years may have a
lasting impact on the process of trade liberalisation in the region,
and this may contribute to strengthening regional cooperation.
Trade Performance of the Region: Global Trend AnalysisTrends in Region's Trade with Broad Global Destinations South Asia has witnessed rapid economic expansion during the last
decade following comprehensive economic reforms in a number of
regional countries. The region's high-growth performance is mostly
supported by expansion in the manufacturing and services sectors.
Industrialisation in these countries was mostly spurred by the robust
external sector performance. A surge in exports in these countries
has generated large employment in the domestic economies. With
deeper levels of economic liberalisation, industrial sectors are
thrown open to competition with domestic as well as foreign firms.
With the growing demand both in export and domestic markets,
firms at home have gradually streamlined their import requirements.
As a result, large economies in the region including India have
restructured their sources of imports and exports destinations over a
period of time. While some of them continue to focus on developed
countries as their export destinations, their dependence on
developing countries for imports have increased many fold. As large
economies in the region open up their markets for imports of
intermediates, demand for these products has grown persistently
over a period of time. It is imperative that the regional countries in
South Asia take full advantage of such opportunities, as large
regional economies are shifting to the developing Asia for their
import requirements.
The regional countries have comparative advantages in the
125124
production and trade of Environmentally Sensitive Products (ESGs),
but they face strong barriers from industrialised countries in
accessing their markets. Mohanty and Chaturvedi (2005) found that
the region has large potential to trade within the region. Over 10
percent of the region's exports is covered by ESGs, and a
considerable amount of such trade is in vogue among regional
countries. The intra-regional trade in ESGs has remained very high
during the 1990s and in the new millennium. There has been a
steady progress in liberalising trade in ESGs in different rounds of
SAFTA. The region has enormous scope to focus on sectoral products
for further tariff liberalisation.
There has been significant change in the trade pattern of the region
with different parts of the world. Between 1985-94 and 1995-2004,
the share of South Asian exports to the developed economies
declined from 60.3 percent to 56.8 percent, while the export share to
the developing countries increased from 38.1 percent to 41 percent as
presented in Table 2. The average decadal growth rates of the
region's exports to developed countries have declined from 13.8
percent during 1985-94 to 8.2 percent during 1995-2004, whereas
the rates have surged from 9.1 percent to 14.4 percent in the case of
developing countries, during the corresponding periods. In 2004,
total regional exports were almost equally shared between developed
and developing countries because of the sustainability of high growth
of exports with the latter group of countries.
As the region relies more on imports for its exports, it has also shown
increased import dependence on developing countries by switching
its sources of imports from developed to developing countries. The
region's changing trade relationships with developed and developing
countries are more pronounced in the case of imports than exports.
Between the periods 1985-94 and 1995-2004, the share of South
Asia's imports from the developed countries declined significantly
from 53.4 percent to 39.6 percent, whereas it increased from 43.8
percent to 49.5 percent in the case of developing countries, during
the same periods.
The region's trade has been gradually becoming 'Asia-centric' during
the last two decades. Almost one-sixth of South Asia's exports were
destined to developing Asia during the period 1985-94, and it
increased to one-fifth during the period 1995-2004. There has been
considerable improvement with regard to imports too. Developing
Asia continued to be the most attractive source for the region's
imports, increasing from 17.8 percent during 1985-94 to 26.3 percent
during the period 1995-2004. Excepting for developing Europe,
South Asia has made substantial progress in stepping up its exports
growth performance with most of the broad grouping of developing
countries in the world. Apart from developing Asia, the Middle East
has emerged as a major export destination in the new millennium.
Among the developing countries, import share of the region picked
up in Asia and Africa, but declined in other regions such as Europe,
Middle East and Western Hemisphere.
Persistence in the improvement of the region's trade relationship
with Asia is partly because of its presence in the continent and also
because of trade liberalisation under multilateral and regional
processes. A number of new regional and bilateral trading
arrangements have been established, including BIMSTEC, India-
Singapore Comprehensive Economic Cooperation (CEC), India-
Table 2: Trends in South Asia’s Trade with Major Trade Destinations
South Asia
Actual
Share (%)
Growth (%)
Share (%) Growth (%)
Destination
1980
2004
1985-94
1995-04
1985-94
1995-04
2004
World
12888
102959
100.0
100.0
11.2
10.8
100.0 20.8
Industrialised Countries
5805
50944
60.3
56.8
13.8
8.2
49.5 17.0
Developing Countries
6855
50478
38.1
41.0
9.1
14.4
49.0 26.4
Africa
668
5325
2.7
4.1
13.0
17.5
5.2 36.6
Asia
2080
25170
15.4
20.5
14.3
17.1
24.4 25.6
Europe
1957
3222
9.3
3.5
30.8
10.7
3.1 14.8
Middle East
2024
14564
9.9
11.0
6.4
15.4
14.1 24.3
Exports
Western Hemisphere
126
2197
0.8
1.9
33.8
18.0
2.1 49.3
World
24811
139980
100.0
100.0
5.8
12.8
100.0 12.8
Industrialised Countries
11765
46918
53.4
39.6
9.0
5.6
33.5 9.0
Developing Countries
12595
64032
43.8
49.5
7.2
12.3
45.7 12.3
Africa
348
4158
2.8
4.6
13.0
14.5
3.0 14.5
Asia
3001
38719
17.8
26.3
10.9
15.1
27.7 15.1
Europe 1904 3230 5.1 2.4 13.4 3.0 2.3 13.4
Middle East 6796 15716 16.4 14.7 9.4 7.2 11.2 9.4
Imports
Western Hemisphere 545 2210 1.8 1.6 10.8 7.8 1.6 10.8
Source: Direction of Trade, IMF, 2005, CD-ROM
Note: Developing countries columns do not add up to 100 since transitional economies are represented separately.
127126
Thailand CEC, India-Sri Lanka CEC, India-ASEAN FTA, Bangkok
Agreement, and Pakistan-Sri Lanka FTA in Asia. These
developments have contributed to improvement in trade with other
regional economies. There are also strong initiatives to form an Asian
Economic Community, which would further consolidate the
economic strength of the region (Mohanty, 2006, Mohanty, Pohit
Roy, 2005).
Is SAARC a Non-Starter?Often, South Asia is characterised as a non-starter as intra-regional
trade (IRT) is very poor among regional countries. On the other
hand, intra-regional trade in the enlarged European Union and
NAFTA has been very high compared with South Asian region. Some
of the leading South-South RTAs like MERCOSURE, ASEAN, etc
have also shown better performance over the South Asia in this
regard. Though SAARC has been in operation for over two decades,
the IRT has not crossed over the magical quotient of 5 percent of its
total trade. Some critics predict that the situation is unlikely to
improve in the future, considering the fact that political factors
override economic factors.
However, the definition of a 'non-starter' of an RTA is not precisely
articulated in the literature. To make a regional grouping more
vibrant and useful for expansion, a threshold point for the IRT needs
to be settled based on experiences of different RTAs. Besides, both
political and economic environments should be congenial enough to
spur economic activities, particularly with private entrepreneur
initiatives. In regional groupings like SAARC, supply constraints
have been a major issue where small countries have a small export
basket to trade within the region, coupled with inelastic supply
capabilities. There is a need to develop capabilities to maintain a
supply-demand balance in trade.
Among the regional economies, the trade basket has been small, and
competition takes place for a smaller number of products. For a large
number of tradable products, there is either limited or no
competition among regional partners. The supply constraint has
been a major impediment for promoting regional trade. For example,
Bangladesh's export of urea to India is a specific point in case. India
is a major importer of urea, with a domestic market for fertiliser that
is large and expanding. India's entry/exit into/from the global
market for urea determines the world prices. Some time in the 1990s,
India imported substantial amounts of urea from Bangladesh, and
this contributed to substantial reduction in trade imbalances with the
latter. However, substantial decline in Bangladeshi exports of urea to
India in later years has adversely affected their bilateral trade
imbalance with India. This shows that there is a need to improve
supply capabilities among the regional countries, and also to take
advantage of the expansion of regional economies.
It may be argued emphatically that SAARC is no more a non-starter
as a regional grouping. Regional integration takes place through the
external sector, and as along as regional trade grows slower than the
region's overall trade with the world, the region may be labelled as a
'non-starter'. South Asia has this criterion. In Figures 1a and 1b, a
comparison is made to highlight the relative movement of intra-
regional trade with the rest of the world. The figures show that the
intra-regional export and import curves of the region were below the
region's trade with the rest of the world prior to the early years of the
new millennium. This shows that IRT was growing less rapidly than
Figure 1a: Is South Asia a Non-Starter? Examining Region's Intra & World Exports
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Figure 1b: Is South Asia a Non-Starter? Examining Region's Intra & World Imports
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129128
their trade with the rest of the world. This tendency may be
accredited as making the region 'non-starter'. However, this trend
has been reversed in since, and the region may no longer be ascribed
as a 'non-starter'.
It is clear from Figure 1a and 1b that trade flows within the region
have passed through various stages, which is hardly discussed in the
literature. The idea about the formation of a regional caucus started
in 1980 and the regional grouping took formal shape in 1985. This
may be considered the pre-formation period (Period I: 1980-85).
During this period, the exports and imports of the region almost
stagnant. The intra-regional trade picked up following the formation
of SAARC, and trade expansion took place during 1985-92 (i.e.,
Period of trade expansion - II), although the imports of the region
responded to the SAARC formation after a certain time lag. In the
early 1990s, most South Asian countries initiated economic reforms
on a unilateral basis. During this period (i.e., Period of volatility III,
1993-94), regional trade passed through a phase of high degree of
fluctuations. The region recovered from its erratic trade behaviour
during the period 2000-02, and the region's IRT remained
consistent and robust (i.e., Period of expansion - IV). Until this
phase, the rate of IRT expansion (both exports and imports) was
much lower than the region's overall trade within the region. The
region ultimately took shape after 2003, when the rate of expansion
of regional trade has been either higher or at par with the growth rate
of the region's trade with the rest of the world. This is a positive sign
for the expansion of the region through mutual cooperation. The
region's exports increased much faster than that imports, implying,
thereby, the imports take more time adjust with the regional trade
liberalisation than exports. If the current trend in period-V (i.e.
2003-04) persists for longer, there will be large polarisation of trade
within the region than with the rest of the world.
To sum up, regional economies have performed well during the early
phase of the this decade. In 2005-06, India is poised to achieve
growth rate of 8.1 percent, surpassing its growth rate during 2004-
05. Other major economies are also showing robust growth
performance in the region (ADB Outlook, 2005). As the regional
economies are booming and so also their intra-regional trade, there
is good prospect for the region to grow if appropriate measures are
taken by the regional countries. Strong and self-restraint measures
need to be taken to achieve a higher level of economic
accomplishment in the region, as nothing moves automatically. The
success of SAFTA will determine the pace of regional progress
through regional cooperation in South Asia.
Intra-Regional TradeThe present level of intra-regional trade is low, although it has
increased significantly since the 1990s. As shown in Figure 1a and 1b,
there has been a structural transformation of intra-regional trade
during the current decade. Trade within the region increased faster
than that of the world during this period. Further, intra-regional
imports have been growing more rapidly than exports. However, the
growth of regional trade has been accompanied by a high degree of
instability (RIS, 2002).
The overall performance of the region in intra-regional trade
indicates that both exports and imports have grown significantly
during the last decade as shown in Table 3. Regional trade has
witnessed a more than seven-fold increase during the period 1990-
2004, and imports expanded more rapidly than exports. Though the
regional trade increased during the period 1991-99, it was highly
volatile, which may be attributed to economic reforms in the earlier
part, and the 'East Asian Economic Crisis' during the latter part of
the 1990s. The instability in regional trade has not only affected
regional trade flows, but also the trade balances of regional
countries. Prior to the commencement of reforms during the early
1990s, the region witnessed favourable trade within the region, but it
became obnoxious during the reforms, particularly during the period
of 'Asian Crisis'. The pressure on the regional trade imbalance started
declining after 1998, and it turned out to be favourable in 2002.
Table 3: Intra-Regional Trade in South Asia: 1980-2004
Intra-Regional Trade 1985-89 1990-94 1995-99 2000-04 1985-94 1995-2004
Exports (Mill. US$)
684
1148
2198
3872
916
3035
Imports (Mill. US$)
555
1134
2648
3864
844
3256
Growth of Exports (%)
7.7
11.2
10.1
21.7
9.5
15.9
Growth of Imports (%)
0.1
23.4
14.4
18.1
11.8
16.3
Region’s Share in World Exports (%)
3.8
3.6
4.3
5.0
3.7
4.7
Region’s Share in World Imports (%)
1.9
2.9
4.0
3.9
2.5
4.0
IRT as % of Region’s World Trade (%)
2.9
3.2
4.2
4.4
3.1
4.3
Source: Direction of Trade Statistics 2005, International Monetary Fund, Washington DC.
Note: Statistics estimated for a period is based on taking average of the annual figures of each period.
131130
The movement of intra-regional trade over the last two and half
decades is presented in Figure 2. The experience of the region
indicates that there was a wide gap between the intra-regional export
ratio (IRTX) and intra-regional import ratio (IRTM) prior to the
formation of SAARC. As the process of SAARC formation started in
1980 and the regional caucus was finally formed in 1985, the
divergence between IRTX and IRTM narrowed during the second
half of the 1990s. After a brief spell of trade deceleration, regional
trade once again picked up in 2000, but the gap between IRTX and
IRTM increased further during the period 2003-04.
Since the inception of SAARC, both the exports and imports of the
region grew consistently during 1985-2004, except for the brief
period of 1995-99. In overall trade performance, the region's imports
increased more rapidly than exports during the 1980s and the 1990s.
The trend was reversed in the new millennium where growth rates of
exports exceeded that of imports. The experience of the region
indicates that intra-regional imports fluctuated more than exports
during the period 1985-1999. Moreover, the level of volatility in
different sub-periods was higher in the case of imports than exports.
During 1985-99, export growth was ranged between 8 percent and 11
percent, whereas it was between zero and 23 percent in the case of
imports. Regional trade was affected, to some extent, during the
period of reforms. The results show that regional trade picked up in
the early phase of reforms, but slowed down during 1995-99. Exports
and imports surged in the 2000, and exports grew much faster than
imports. In the two decades of SAARC's existence, the IRT
performance of the regional caucus was more profound in the recent
decade than in the earlier one. The achievement of the region in this
regard may be attributed to comprehensive trade liberalisation in the
form of SAPTA since 1995. A detailed analysis of the impact of
SAPTA on regional countries is presented in the subsequent part of
this paper.
Association of individual countries with the region provides an
interesting insight. India continues to maintain favourable trade
balance with the region. Pakistan was also as a trade surplus country
vis-à-vis the region, except for a few years during the second half of
the 1990s. The nature of trade deficit differs significantly among the
regional countries. For example, Bangladesh, Maldives, Nepal and
Sri Lanka had significant level of trade deficit with the region. In the
case of Maldives and Nepal, the trade deficit with the region
increased significantly during 1990-2000, but their trade base was
very low. During the second half of the 1990s, Sri Lanka's trade
imbalance with the region was high and fluctuated significantly.
Furthermore, its trade imbalance was significantly large with India,
but Sri Lanka was satisfied with the emerging trade equation with
India in the process of reducing its overall trade deficit (Kelegama,
2001). Sri Lanka could source some of its critical imports from India
at a cheaper rate than other competing suppliers. For example, Sri
Lanka's import of Hero Honda motorcycles was 30 percent cheaper
than Suzuki motorcycles. Similarly, Sri Lanka was importing a large
number of motor vehicles for war preparation from Mitsubishi, but
later similar products were sourced from Tata and Ashok Layland,
for almost half the rate with comparable level of product quality. As
many products are unavoidable for imports, the choice of
appropriate suppliers could reduce the overall trade imbalance of a
country. The implementation of Indo-Sri Lanka FTA (ILFTA) had
brought more dynamism into bilateral trade in 2000.
The trade deficit of Bangladesh with the region was more than one-
third during the latter half of the 1990s. Exports from Bangladesh to
the region constitute about 2 to 3 percent of its global exports, and
the corresponding figure for imports ranges between 7 and 17
percent. The bilateral trade performances of regional partners
indicate that Bangladesh maintained bilateral trade imbalances with
most of the regional partners during the last decade. During the mid-
90s, it had favourable trade with Nepal, but the trend was reversed in
later years. So far as Bangladesh's trade balance with Sri Lanka is
concerned, it was almost even during the 1990s.
Figure 2: Trends in Intra-Regional Trade in South Asia
0.0
1.0
2.0
3.0
4.0
5.0
6.0
Y80
Y82
Y84
Y86
Y88
Y90
Y92
Y94
Y96
Y98
Y00
Y02
Y04
IRT
/Wo
rld
(%)
IRTX
IRTM
Average IRT
133132
South Asia has become an important trade destination for India.
Exports to the region constituted between 3 to 6 percent of global
exports, whereas imports from the region was relatively lower than
exports. India maintained favourable trade balance with South Asia
over a long period of time. The level of trade balance with
Bangladesh and Sri Lanka was significant; and moderate with Nepal
and Maldives. The trade surplus with Bangladesh was subject to a
high degree of fluctuations whereas it was rising with Nepal.
However, India's bilateral trade balance with Bhutan remained
adverse. Up to 1994, India registered a positive trade balance with
Bhutan, but the trend was reversed in subsequent years due to a
significant rise in Bhutanese exports to India.
Pakistan exported 3 to 5 percent of its total exports to South Asia and
imported between 2 to 4 percent of the total imports from the region
during the last decade. Pakistan's most important export
destinations in the South Asian region are Bangladesh, Sri Lanka and
India. These three countries constituted nearly 95 percent of
country's exports to the region during the 1990s. India's share in the
total imports of Pakistan from the region reached 72.4 percent in
1996, and declined to 42.8 percent in 2000. The declining share of
Pakistan's imports from India resulted in a surge in Sri Lanka's
exports to Pakistan in a significant manner. Pakistan continued to
maintain favourable trade with the region, except for the period
1996-99. Pakistan's adverse trade balance with the region increased
to more than 7 percent of its total trade deficit with the world in
2000.
Sri Lanka's dependence on the South Asian region has been more on
imports than exports. The regional exports of Sri Lanka were
between 2 to 4 percent of its global exports. Though Sri Lanka
imports more from the region, its dependence on the region has
declined gradually in recent years. Sri Lanka's largest trading partner
in the region is India, and other important partners are Maldives,
Pakistan, Bangladesh and Nepal. With the gradual reduction of
imports from the region in relative terms, the trade imbalances with
the region have declined significantly. However, it maintains a
favourable balance of trade with Maldives and Bangladesh and also
with some other South Asian countries. Maldives is critically
dependent on the region for trade. Its exports depended on the
region to the extent of 13 to 25 percent of its global exports whereas
dependence for imports varied between 10 and 21 percent in the
1990s. The trade imbalance of the country is almost proportionate to
its regional trade. Sri Lanka has emerged as the most important
trading partner of Maldives, and the bilateral trade deficit with Sri
Lanka increase significantly in recent years. It has relied
considerably on India for its imports but exported very little to India,
thus incurring a large trade imbalance with India in the 1990s.
Maldives' trade with Pakistan showed no significant improvement in
the 1990s, though the latter enjoys a favourable trade balance with
the former.
The Indo-Nepal Trade and Transit Treaty of 1996 had a lasting
impact on Nepal's strong association with the region. The share of
Nepal's regional exports to total exports increased from 9.3 percent
in 1995 to 36.5 percent in 1998. Similarly, the share of imports from
the region jumped from 17.5 percent in 1995 to 33.1 percent in 2000.
India has been Nepal's largest regional trading partner, and other
important trade partners are Bangladesh and Sri Lanka in the region.
The strengthening of economic ties with the region has widened its
trade imbalances with the region. It has the largest bilateral trade
deficit with India in the region.
How Critical is the Bilateral Trade Imbalance Issue?The trade imbalance among the regional trade partners has been one
of the most contentious issues in the regional process. The trade
imbalance issue is mostly hovering around India. It may be noted
that India's export and import baskets are highly diversified as
compared to the smaller countries of the region. Moreover, scale of
production of India is high, partly due to large domestic demand and
growing export demand in the post-reform period. India's
production and export bases are also larger than other regional trade
partners. Some of these countries very often import from India to
overcome short term problems concerning supply inadequacies in
their economies. It may be recalled that the Nepalese economy
suffered from high inflation and shortage of essential products for a
brief period, when Indo-Nepal transit points were temporarily closed
following expiry of the Indo-Nepal Trade and Transit Treaty in the
1990s.
A similar situation also occurred in other neighbouring countries.
Therefore, in supply-constraint economies, occurrence of trade
135134
imbalances is a natural phenomenon, and an importing country has
the option of choosing neighbouring countries or other suppliers to
meet its domestic requirement based on various considerations,
including assured and cheap supply of products. The dependence of
smaller countries on larger ones is not a situation unique to South
Asia, rather, several such instances are found in other parts of the
world. For example, South Africa is a large country in the southern
tip of Africa surrounded by several member countries in SACU and
SADC. Supply constraints in these countries have prompted them to
depend on South Africa as long as supply constraints are not
resolved. In an interdependent world, domestic demand cannot be
contained due to lack of production, rather, 'basic and essential
imports' must be made available in the domestic economy through
imports either from a neighbouring country or from the rest of the
world. In a completely free trade regime, production-deficient
countries are likely to face trade imbalances. Attempts are required
to augment exports to trade-surplus countries to reverse the trend in
trade imbalances in the medium term. The trade-surplus countries
also need to devise suitable instruments to compensate the trade-
deficit countries and to support them in augmenting their production
and export capabilities.
However, a large country like India has domestic compulsions. It is
primarily a trade deficit country with respect to the rest of the world.
Considering the level and varieties of import requirements, the
regional partners can take advantage of the large market in India,
particularly in commodity trade. Even the demand for certain types
of specialised services is very much required in India. India's total
global import was US$ 106 billion in 2004-05. It will be to the
benefit of the regional partners, particularly the trade-deficit regional
partners, to tap such opportunities.
The India-Bhutan trade relationship may be taken as a model for
regional cooperation in South Asia. Bhutan was chronically a trade-
deficit country with India, where bilateral trade takes place primarily
in goods. Bhutan's export basket was not only small, but also lacked
supply capabilities. With the support from India, Bhutan developed a
hydro-electricity project, and exported surplus energy to India on a
commercial basis. Consequently, the India-Bhutan trade imbalance
problem has been effectively addressed, and Bhutan has favourable
trade balance with India.
Very often the trade imbalance problem at the regional level remains
unresolved because of political interventions. For a long period,
Bangladesh continued to have an adverse bilateral trade balance with
India. In the 1990s, it declined substantially on account of a surge in
urea export to India. India is a major global player so far as import of
urea is concerned. India's domestic demand for urea is so vast that it
can consume Bangladesh's entire exports of urea can be absorbed by
India. However, the political decision to hike the gas tariff in
Bangladesh led to an increase in the cost of production of urea, and
consequently it became uncompetitive vis-à-vis other international
supplies. India switched to another source of supply, and
Bangladesh's bilateral trade deficit with India went up again. A large
gas reserve is found in the eastern coast of India, which can meet
India's large domestic demand for gas. India has made a buy-back
arrangement with Oman for purchase of urea on a long term basis.
In this changed situation, Bangladesh may have to look for new
products to gain wider market access in India.
The overall trade deficit in the region indicates that the region
maintained a low level of trade deficit until 1989, and the trade
deficit widened slowly up to 1994, as presented in Figure 3. During
1995-2000, the period of trade volatility in the region, trade gap
widened in an unprecedented manner. This led to a critical phase for
the trade regime in the region. However, the trade gap completely
narrowed by 2001, but resurfaced again in 2003 through 2004.
Though the region witnessed serious debate on trade imbalances,
there is very little scope to contain trade deficit in a consistent
manner unless there are substantial changes in restructuring
production.
Figure 3: Trade Imbalance in South Asia
-800
-600
-400
-200
0
200
400
600
Y80
Y81
Y82
Y83
Y84
Y85
Y86
Y87
Y88
Y89
Y90
Y91
Y92
Y93
Y94
Y95
Y96
Y97
Y98
Y99
Y00
Y01
Y02
Y03
Y04
Mill
ion
US
$
-40000
-35000
-30000
-25000
-20000
-15000
-10000
-5000
0
Intra region
World
137136
Is there any Trade Diversion in the Region? Examining the
case of BangladeshIndia has maintained trade balance with many countries, and this
has been discussed widely in the region. Bangladesh raised this issue
at different forums, and at various occasions. The intensity of such
discussion varies in different political regimes. It is very often argued
that Bangladesh's large trade deficit with India has been the main
contributing factor to its overall trade deficit. We have examined the
structure of Bangladesh's trade deficit since 1980. In the early 1980s,
Bangladesh's trade deficit with India was very small, and many other
countries such as Japan and China had a higher trade deficit with it,
as shown in Figure 4. Between 1980 and 1989, India's bilateral trade
deficit increased, but slowly. In an unprecedented manner,
Bangladesh's bilateral trade deficit with India increased rapidly and
persistently during 1990-1994. However, it became highly volatile
between 1995 and 1999. Following a surge in bilateral trade deficit
again during 2000 to 2002, it declined in the subsequent period.
Bangladesh has not only had large trade deficits with India, but also
with extra-regional countries like China and Singapore in the new
millennium. While Bangladesh's bilateral trade deficit with India has
declined, but has grown with China during 2004. Interestingly,
Bangladesh's trade deficit with India and China is almost converging.
Bangladesh also has bilateral trade deficit with Hong Kong. It must
be noted that Bangladesh's combined trade deficit with China-Hong
Kong is much higher than that with India. We have also tried to
approach the issue in a different manner. The bilateral exports-trade
deficit ratio is presented in Figure 5. The higher the ratio, the more
critical is the bilateral trade relationship with a country. The figure
shows that the ratio for India has been declining; showing, thereby,
Bangladesh's vulnerability to India is slowly declining whereas it is
compounding with China. Moreover Bangladesh's bilateral trade
deficit has also been growing very fast with Kuwait in new
millennium. There is a need to examine the wider issues, such as
structure of imports from these countries (i.e., intermediate products
or anything else), the impact of having a large bilateral trade deficit
with selected countries on the overall trade deficit, and measures to
reverse the order of Bangladesh's bilateral trade deficit
Analysis of Tariff and Non-Tariff BarriersThe level of tariff protection in the region is not only high compared
with other regions of the world, but also highly diversified among
regional countries in South Asia. The region has witnessed two
parallel trends in its tariff structure: (a) the level of tariffs is not
uniform among regional economies, and (b) there is no
harmonisation among the regional economies so far as level of
protection across broad trade sectors is concerned. Until the 1970s
the regional economies were protected against external competition
and pursued Import Substitution Industrialisation (ISI) as the thrust
area of economic policy. Trade liberalisation started gradually in the
region after seeing the growth of the Asian Tigers in the East. It took
almost two decades for South Asia to switch over to the alternative
policy paradigm. As countries initiated reform at different points of
time, their level of tariff liberalisation differ significantly.
South Asia has large resource endowments, and it differs
significantly among the regional countries. Though most of the
countries are at a similar level of economic development, their tariff
structure differs significantly because of the differences in their
resource endowments. As trade policies are mostly guided by
domestic compulsions, a country prefers to lower its level of tariff
protection where it is more competitive. This disharmony in tariff
Figure 4: Bangladesh's Bilateral Trade Imbalance with
Selected Countries
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
%ofT
ota
lTra
de
Defic
it
India China Singapore Kuwait Japan Hong Kong Korea
Figure 5: Changing Distribution of Bangladesh's
Source of Imports
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
Y1980
Y1982
Y1984
Y1986
Y1988
Y1990
Y1992
Y1994
Y1996
Y1998
Y2000
Y2002
Y2004
Import
Share
(%)
India China Hong Kong Japan Kuwait Singapore
)
139138
structures among regional countries highlights the dimension of
trade protection. In this context the structure of tariff bands is
important to understand the strategic character of each country's
tariff policy.
Structure of Tariff in South AsiaManagement of tariff band is an important aspect of fiscal policy for
managing tariff administration. The relevance of tariff bands has
been much greater in the context of multilateral trade negotiations in
the WTO. A comparative analysis of the tariff bands indicates that a
number of tariff bands used by the regional countries are highly
diversified. In the early phase of the new millennium, the region had
as many as 30 tariff bands, ranging between zero and 250 percent.
These countries do not follow any pattern so far as the number and
range of tariff bands are concerned. As shown in Table 4, countries
like Bangladesh, Bhutan and Nepal have maintained much fewer of
tariff bands than others countries in the region.
Most of the countries have assigned zero tariffs to a number of tariff
lines. In the case of Bangladesh and Sri Lanka, 8 to 10 percent of
their tariff lines are subject to zero tariffs. Individual countries in
South Asia have used a large number of tariff bands, but the major
chunk of their tariff lines are concentrated around a few tariff bands.
Such tariff bands are three for Bangladesh, Bhutan and Sri Lankan,
and four for Nepal and Pakistan.
Discussions in the WTO focus on the composition of tariff peaks in
the total number of national tariff lines, in each country. Countries
having more products falling under the category of less than peak
tariff may have less adjustment cost under further trade
liberalisation than others. If tariff rates of 12 percent and above are
considered as peak tariff, the experiences of South Asian countries
have been diverse with regard to administration of tariff rates in
addressing peak tariff in their customs duty structure. The number of
products below peak tariff has been substantial in the case of Sri
Lanka, Nepal and Pakistan; and moderate for Bangladesh and
Bhutan. A substantial number of product lines lie above the peak
tariff in the case of India. The tariff structure of regional countries
indicates that most of their product lines are subject to either 30
percent tariffs or less. Between 91 to 100 percent of their product
lines are subject to this tariff range. While all the product lines of
Bangladesh are covered within the tariff range of 0-30 percent, 91.18
percent of Bhutan's products fall within this tariff range.
As a strategic trade policy management, the developed countries
usually maintain very high tariff for certain key products, although
their average tariff rates have been very low compared with other
developing countries. By and large, developing countries are
adversely affected by such tariff policies. Peak tariffs generally exist
for both agricultural and manufacturing products. In South Asia,
some countries follow this policy while others do not. India, Pakistan
and Sri Lanka maintain very high peak tariffs as a strategic tariff
policy, while Bangladesh and Nepal do not follow this principle. For
India, Pakistan and Sri Lanka, the highest peak rates are 182, 200
Table 4: Tariff Structure of South Asian Countries in 2004 (in perc entage)
Band Bangladesh Bhutan India Nepal Pakistan Sri Lanka 0 7.97 3.77 0.78 1.63 0.67 10.71 3 0.06 35.08 5 1.15 22.16 24.08 6
7.33
7.5
20.41
10
30.28
0.89 31.30
23.26
12
24.87 15
19.39
2.23
3.12
28.22
16
0.82 20
23.06
2.91
14.55
0.25
22.5
16.52
25
17.67
11.21
34.55
27.5
20.67
30
35.71
31.84
66.41
0.21
35
0.04
1.41
40
4.26
4.86
45
0.10
0.03
50
8.13
0.08
0.10
0.02
55
0.01
0.02
60
0.04
0.31
70
0.40
0.13
75
0.11
0.06
80
0.05
0.62
0.06
90
0.21
100
0.70
1.10
0.35
0.08
105
0.53
150
0.03
160
0.12
182
0.17
200
0.03
250
0.11
Total 100.00 100.00 100.00 100.00 100.00 100.00
Data Source: Trains Wits 2006, ITC, UNCTAD, WTO and World Bank, Geneva.Note: Figures in each cell denote share of product lines (HS National Lines) in the corresponding tariff band
141140
and 250, respectively, in the early 2000s. As the magnitude of the
highest peak differs from one country to another, we have examined
a number of products subject to peak tariff of 100 and above. The
results show that the share of such products constitutes a very small
proportion of the total product lines in each country, having very
high peak tariff rates. The share of high peak tariff products (i.e.
tariff rate equal to 100 or more) to total number of products is 1.92
percent in India, and the corresponding figures are far less in the
case of Pakistan and Sri Lanka. To protect the very sensitive and
strategic products, there is a need to maintain very high tariff in a
selective manner. This may have very little impact on the overall 2tariff of a country.
It is evident from the literature that sectoral tariff structure differs
among the regional countries, depending upon their domestic
resource endowments. There are also some common sectors that are
critically sensitive to most of the economies, which are protected in
the entire region. The sectoral profile of countries with regard to
tariffs is presented in Table 5. South Asian countries differ
significantly in terms of their level of customs tariff at the beginning
of the new millennium. If the average tariff is considered as the index
of domestic protection, excluding specific tariff, regional countries
can be broadly categorised into three broad groups. While Nepal and
Sri Lanka have maintained a low level of average tariffs, India and
Bhutan maintained very high average tariffs. Bangladesh and
Pakistan may be considered middle level countries so far as their
trade protection is concerned.
It is apparent from the behaviour of the regional countries that the
average level of protection to agriculture is much higher than the
manufacturing sector. The only exception is Nepal, where the
average import-weighted tariff in manufacturing is much higher than
that of agriculture. Regional countries are also divided on the basis of
level of protection to agriculture. In countries like Nepal, Pakistan
and Sri Lanka, the level of average tariff in agriculture is much lower
than other countries in the region. However, the processed food
sector is protected in most of the region.
The nature of protection in the manufacturing sector is different
from agriculture. There are some sectors which are subject to higher
tariff than others in the region. For example, within the
manufacturing sector plastic products, textiles, footwear, plaster and
cement, vehicles, arms and ammunitions are protected with high
tariff rates. The manufacturing sectors which attract very low tariffs
are minerals, chemical products, leather, wood, pulp, gems and
jewelleries, base metals, machinery and cinematography. India has
very high tariff rates as compared with other countries of the region.
In the past, the level of tariff in India was very high and this has
come down significantly in recent years on a unilateral basis. In
principle, India has committed to bring down the level of tariff to the
ASEAN level within a few years from now. A brief overview of India's
tariff regimes is presented in the following section.
Table 5: Structure of Tariffs in SAARC Countries: By HS Section (in percent)
HS Section Description Bangladesh Bhutan India Nepal Pakistan Sri Lanka
I
Live Animals and Animal Products
25.9
33.0
30.9
10.3 13.6 17.7
II
Vegetable Products
19.7
44.5
39.4
10.7 15.9 21.3
III
Animal or Vegetable Fats and Oils
21.2
47.0
61.1
12.5 4.6 19.6
IV
Prepared Foodstuff, Beverages, etc.
24.3
46.3
45.9
21.4 29.0 28.9
V
Mineral Products
15.1
26.4
19.9
11.1 12.6 6.7
VI
Products of Chemicals
13.9
12.9
29.4
11.6 12.0 5.1
VII
Plastics and Articles thereof
19.9
23.6
30.0
18.9 18.7 13.4
VIII
Raw Hides and Skins, Leather, etc.
13.7
30.3
22.3
12.4 13.6 18.1
IX
Wood and Articles of Wood
18.6
16.9
25.7
9.3 18.1 11.1
X
Pulp of wood or of other Fibres
19.4
18.8
26.8
14.9 18.4 12.8
XI
Textile and Textile Articles
25.6
26.1
27.8
15.6 21.3 5.5
XII
Footwear, Headgear and Umbrella
28.9
30.0
30.0
25.3 23.1 24.0
XIII
Articles of Stone, Plaster, Cement
21.8
28.7
29.4
18.0 21.5 19.1
XIV
Natural or cultured pearls, Jewellery
15.9
30.0
30.0
10.6 6.5 2.0
XV
Base Metals and Articles of Base Metal
19.1
18.3
31.5
12.7 15.8 10.0
XVI
Machinery and Mechanical Appliances
13.2
11.1
24.9
10.1 13.5 6.7
XVII
Vehicles, Aircraft and Vessels
18.7
16.5
45.3
21.2 38.8 12.3
XVIII
Optical, Photography and Cinematography
13.0
14.5
25.5
9.3 10.7 6.7
XIX
Arms and Ammunition
17.9
50.0
30.0
80.0 25.0 7.7
XX
Miscellaneous Manufactured Articles
24.9
26.8
29.2
17.9 21.2 19.2
XXI Works of Art Collectors' Pieces 21.4 38.8 24.7 22.1 8.6 12.0
Agriculture 22.8 42.0 41.0 13.7 18.1 22.2
Manufacture 18.7 19.8 29.3 14.2 17.1 9.1
Overall 18.9 22.3 29.9 13.7 16.7 10.8
Data Source: Trains Wits 2005, ITC, UNCTAD, WTO and World Bank, Geneva.
143142
Has Tariff Declined in India?Analysis of Tariff BandsIndia made steady progress in liberalising its tariff policies in the
31990s. The structure of tariff bands is analysed here to throw some
light on the speed of tariff liberalisation in the country. Though
economic liberalisation started in the latter half of the 1980s, the
economy was highly protected as shown in Table 6. In 1986-87 the
tariff rate ranged between 0 to 300 percent in terms of ad valorem
duties. As many as 62 National Lines (NL) were subject to zero
tariffs, and about 72.6 percent of the total number of products was
subject to a tariff rate of either 100 percent or more. During the
period 1986/87-1991/92, there was very little change in the tariff
structure. Moreover, there has been high concentration of products
in a select number of tariff bands.
There has been a perceptible change in the tariff structure of India
following implementation of economic reforms in the country. While
the highest peak tariff declined steadily, the number of products with
tariff rates equal to 200 percent or more declined over the years. In
1991-92, highest peak tariff was 355 percent which declined to 290
percent in 1995-96 and further to 182 percent in 2002-03. Similarly,
the number of products (6-digit HS) subject to the tariff rate of 200
percent or more was 419 items in 1986-87, 288 in 1991-92, 13 in
1995-96 and zero items in 2002-03. During the reform period, the
mode tariff band declined significantly. Between 1986-87 and 1991-492, the mode tariff rate was 100 percent, but the rate declined to 50
percent in 1995-96. Since 1999-2000, a sizable number of products
concentrated on a group of tariff bands rather than on a single tariff
band. Three tariff bands (viz. 25, 35 and 40) covered about 88.67
percent of total tariff lines in 1999-2000 and 84.6 percent of total
tariff lines (viz. 25 and 30) in 2002-03.
Though tariff liberalisation took place during the 1990s, the number
of tariff bands did not decline, rather, they increased during the
period. For example, in 1986-87 there were 12 tariff bands, which
increased to 15 in 1991-92 and further to 21 in 2002-03. Thus, the
number of tariff bands increased substantially to above 40 percent,
despite the decline in the level of peak tariffs at the upper layer
during the second generation of reforms.
Structure of Tariff India was one of the most highly protected economies in the world
during the 1980s. The process of liberalisation started in the mid-
1980s and this process continued with a higher order of
restructuring, followed by the implementation of a structural
adjustment programme in the 1990s. For a comparative analysis of
the liberalised periods in the 1980s and the 1990s, we have taken the
ad valorem tariff at the 6-digit HS level for all sectors, including
agriculture and manufacturing. The trend in the overall tariff rate
indicates that there was a significant decline in the ad valorem tariff
rates between 1986-87 and 2002-03. It should be noted that we have
considered only the basic ad valorem duties for this analysis, and
other forms of tariffs such as specific tariff, para-tariff and other ad
hoc duties are not included in the tariff analysis.
It is interesting to note that tariff rates declined slowly between the
Table 6: Number of Tariff Bands in India during 1986/87-2002/03
No. of Bands
1986-87 1990-91
1991-92
1995-96
1999-00 2002-03
Rate
NL
Rate
NL
Rate
NL
Rate
NL
Rate NL Rate NL
1
0
62
0
68
0
68
0
29
0 48 0 57
2
47
287
40
288
30
1
3
7
3 7 3 6
3
50
214
50
213
40
288
5
4
5 107 5 75
4
60
758
60
744
50
213
10
302
10 11 10 35
5
70
85
70
85
60
744
15
3
15 354 15 181
6
100
2998
81
89
70
85
20
5
20 19 20 159
7
110
62
100
2292
81
89
25
79
25 1036 25 977
8
150
113
110
62
100
2283
30
99
30 14 30 3348
9
200
221
150
20
110
62
35
13
35 1544 35 8
10
250
61
200
114
150
20
40
155
40 1953 40 158
11
270
13
250
61
200
113
45
7
100 8 45 6
12
300
124
270
5
250
61
50
4383
120 1 50 4
13
..
..
300
101
270
5
105
1
180 2 55 1
14
..
..
355
8
300
101
135
1
230 8 60 3
15
..
..
..
..
355
8
145
3
.. .. 70 13
16
..
..
..
..
..
..
290
13
.. .. 75 2
17
..
..
..
..
..
..
..
..
.. .. 80 4
18 .. .. .. .. .. .. .. .. .. .. 100 49
19 .. .. .. .. .. .. .. .. .. .. 105 16
20 .. .. .. .. .. .. .. .. .. .. 160 2
21 .. .. .. .. .. .. .. .. .. .. 182 8
Source: Based on author’s calculations.
145144
years 1986-87 to 1993-94, and a significant reduction took place 5between 1994-95 and 2002-03. We have not included recent years'
tariff data in our analysis as they are reported with different trade 6classification (HS 2002). During the years 2000-01 and 2001-02,
the average tariff rate for the manufacturing sector remained more or
less constant, but the average tariff for the agricultural sector
increased significantly compared with previous years. This was
primarily due to an adjustment in the tariff structure to protect the
agricultural sector in response to the removal of quantitative
restrictions.
The average ad valorem tariff rates of India and the sectoral averages
including agriculture and manufacturing have shown a high degree
of fluctuation in some years. Other studies like WTO (2002) and
Goldar and Mehta (2001) point out that those corresponding rates
are quite consistent without much fluctuation. These studies have
made adjustments to compute the applied tariff rates using
additional duties. In the present study, no such adjustment is made
to accommodate additional duties which have been imposed by the
Government of India from time to time. Since basic duties are
important for negotiations in the WTO, and the primary objective of
the present study is to examine the trend in India's average tariff
rates since the mid-1980s, we have concentrated on basic ad valorem
duties.
Some studies have made appropriate adjustments to include
additional tariffs imposed by the Government of India along with the
basic duties while estimating average tariffs for the manufacturing
and agricultural sectors. It should be noted that these additional
duties were purely ad hoc in nature, and also for a specific time
period. For example, in 1996-97, the Government of India imposed
Special Custom Duties (SCD) of 2 percent, which increased to 5
percent during 1997-98 and 1998-99. The SCD was abolished in
1999-00, but a surcharge of 10 percent was imposed along with Basic
Customs Duty (BCD) for the years 1999-00 and 2000-01. When
these additional duties are included in the basic customs duties, the
average rate of ad valorem duties shows a gradual decline without
much fluctuation from year to year as shown in Table 7. During the
period 1993-94/1996-97, the average tariff rates reported in the
present analysis and Mehta (2002) are almost similar. However, a
discrepancy was noticed during the period 1997-98 to 2001-02. The
results of the present analysis show that there was a significant
decline in the basic duty from 32.4 percent in 2001-02 to 27.5
percent in 2002-03.
Although there has been a persistent decline in the average ad
valorem customs tariff during the period of reforms, certain sectors
continued to have very high average ad valorem tariff. The
agricultural sector has continued to have a high average tariff in
recent years, and within the sector animal or vegetable fat and oil has
been subjected to very high level of protection. The average tariff for
prepared foodstuffs, beverages. in the agricultural sector also
remains very high as compared with the other HS sections in
agriculture.
The average tariff for the manufacturing sector is much lower than
Table 7: Average Tariff Rate by HS -Section (in percentage)
Section Description 1991-92 1994-95 1996-97 1999-00 2002-03 I Live Animals and Animals Products
75.5
16.6
15.8
19.5
30.9
II Vegetable products
99.7
36.6
28.6
26.6
34.6
III Animal or Vegetable Fats and Oils
200
65
37.8
33.9
65.1
IV Prepared Foodstuff, Beverages, etc.
107.5
87.7
66.1
50.6
42.5
V Mineral Products
81
47.3
23.9
21.7
19.9
VI Products of Chemicals
103.6
64.5
38.6
33.7
28.9
VII Plastics and Articles thereof
124
65
39.7
36.3
30.1
VIII Raw Hides and Skins, Leather, etc
71.9
61.8
24.9
23.6
20.2
IX Wood and Articles of Wood
64
65
28.5
30
25.5
X Pulp of wood or of other Fibres
86.5
62.4
26.8
29.9
25.1
XI Textile and Textile Articles
100.4
64.6
48.3
38.6
17.8
XII Footwear, Headgear and Umbrella
100.0
65.0
50.0
40.0
30.0
XIII Articles of Stone, Plaster, cement
92.1
65
49.2
39.3
29.7
XIV Natural or cultured pearls, jewellery
79.2
65
50
40
30
XV Base Metals and Articles of Base Metal
127.1
49.1
30.7
32.8
30.3
XVI Machinery and Mechanical Appliances
89.9
64.9
32
28.1
24.9
XVII Vehicles, Aircraft and Vessels
70.2
63.9
45.5
36.7
36.3
XVIII Optical, Photograph and Cinematography
78.2
60.9
38.4
31.2
26
XIX Arms and Ammunition 100 65 50 40 30
XX Miscellaneous Manufactured Articles 106.6 65 43.4 35 29.2
XXI Works of Art Collectors' Pieces 66.7 58.3 40 33.3 25
Source: Various budget documents, Government of India.
147146
Figure 7: Structure of India's NTBs
in 2003
Canalized
0%
Prohibited
0%
SIL
0%
Restricted
4%
Free
96%
the agricultural sector. In 2000-01, the average ad valorem duties in
agriculture were 40.4 percent as against 30.8 percent in the
manufacturing sector; and in 2002-03, they were. In certain sub-
sectors in the manufacturing sector, the average ad valorem tariffs
remain very high. These sectors include products of chemicals,
plastics and articles, footwear, headgear, articles of plaster and
cement, gems and jewellery, base metals, vehicles. On the other
hand, some broad sub-sectors such as prepared foodstuff, beverages,
raw skins and leather, articles of wood, textiles and machinery,
witnessed a sharp decline in average tariff rates. In the
manufacturing sector, the highest level of average tariff was reported
in the broad product group dealing with vehicles, aircrafts and
vessels.
India has been importing various quantities of technology intensive
products from the global economy. The proportion of high
technology intensive products to total imports has been quite
significant in recent years as compared with earlier years. India's
high technology intensive imports are mostly concentrated in three
major product groups: chemical products, machinery and
mechanical and appliances, photography and cinematography.
In 2002-03, the overall average tariff declined substantially, mostly
due to a decline in the average tariff rates in the agricultural and
manufacturing sectors as shown in Figure 6. The relative movement
of average tariff rate overtime in the manufacturing and the
agricultural sectors is quite interesting. During the period 1987-
88/1992-97, the average tariff in agriculture was higher than
manufacturing, and this trend was reversed during the period 1993-
94 to 1999-2000. However, the average ad valorem tariff of the
agricultural sector continues to be higher than that of the
manufacturing sector since 2000-01.
The Government of India is committed to reducing the level of tariff
further to the ASEAN level within a couple of years. Since India is a
part of the WTO process and desires an FTA with ASEAN by 2012, it
is necessary to have a lower level of tariff for both the WTO
negotiations and to enter into close economic cooperation with fast
growing countries. Looking at the tariff structure, it may be observed
that there is ample scope to reduce the average level of tariff. Except
for the sensitive products, tariff can be reduced for a sizable number
of products. The preparation of list of sensitive products is crucial to
reduce protection non-sensitive products.
Analysing NTBs in India as a Barrier to Regional TradeAs in the case of tariffs, India has made substantial progress in
liberalising its NTBs over a period of time. In 2003, the level of
quantitative restriction had come down to nearly 4 percent of its total
number of tradable products at the 10-digit HS level as shown in
Figure 7. Under the provision of Article XX, and XXI of GATT, such
restrictions are permitted under various grounds such as health,
safety and essential security (Batra, 2005). The number of national
lines subject to forms of quantitative restriction includes 568 of
11,671 lines in 2003 at 10-digit HS. As the reform process is in
progress, there is a possibility of further decline in the level of
quantitative restrictions in the future.
The level of NTBs remained very high during the pre-reform period,
and the trend continued in the 1990s. Among the total number of
Manufacturing
Overall
Agriculture
0 20 40 60 80 100 120
Tariff Rates
1991-2
1994-5
1996-7
1999-00
2002-3
Figure 6: Tariff Liberalisation in India During Reforms
Overall Agriculture Manufacturing
149148
tradable items, the share of hard core NTBs was more than 30
percent in 1996, which declined significantly in the latter part of the
1990s as shown in Table 8 and Figure 8. The hard core NTBs consist
of prohibited and restricted items in India. The proportion of the
prohibited items to the total number of national lines was very small
in 2000. The share of restricted and SIL remained very large in the
mid-1990, but declined sharply towards the late1990.
Because of the reduction in NTBs, the share of national lines in the
free category rose significantly in the early part of the 2000. Though
regulatory control was very strong on account of domestic
compulsions, comprehensive economic reforms have brought down
NTBs to a significant level. This has contributed to the surge in
India's import along with its exports. In 2004/05, India's total
import bill accounted for US$ 106 billion, and thus India provides
enormous scope for regional countries to take advantage of the large
Indian market.
Regional Trade Liberalisation in South Asia: What Have
We Learnt from SAPTA?The trade agenda was not accorded high priority in the first SAARC
meeting, held in 1985. It almost took a decade to launch SAPTA to
foster trade within the South Asian region. Between 1995 and 2003,
four rounds of SAPTA were signed and three of them were
successfully implemented. The implementation of the Fourth round
is awaits for concurrence from the member states. The SAPTA
process has raised expectation among peoples of the region for a
deeper level of cooperation and a higher trajectory of economic
progress.
Simultaneous initiatives were taken to formalise SAFTA along with
the SAPTA at the early phase of the new millennium. In the Male
Summit in May 1997, an ambitious target was set to implement
SAFTA by 2001. Considering the geo-political realities in the region,
the adoption of SAFTA was deferred to 2003. In the Colombo
Summit in 1998, a decision was taken to set up a committee of
experts to prepare a draft treaty for SAFTA. Finally, the SAFTA
Agreement was signed in January 2004, which allowed regional
economies to benefit from the earlier rounds of SAPTA along with
the other provisions of the new agreement.
Several studies have indicated that the SAPTA process is not very
effective as compared with other RTAs like ASEAN, MERCOSUR,
ANDEAN and CARICOM, in augmenting intra-regional trade to a
respectable level (Wadhva, 1996 and Bhuyan, 1996, RIS, 2002). The
impact of each round of SAPTA has been different for individual
member countries. For a number of small countries in the region,
bilateral concessional trade is much higher than non-concessional
trade. There are various reasons for the poor performance of the
SAPTA process. It may be noted that the regional countries
underwent trade liberalisation as part of their multilateral
commitments along with their domestic economic reforms in the
1990s. With trade liberalisation sweeping across the world on
account of multilateral trade negotiations, concessions offered under
SAPTA became very meagre and less attractive. The series of global
economic shocks in the form of the East Asian crisis, surge in global
crude oil prices, and volatility of the US dollar, etc. have adversely
affected the stability of regional currencies. The depreciation of
regional currencies has outweighed the concessions provided under
Figure 8: Decline of NTBs in India
RestrictedSIL
Free
-2000
0
2000
4000
6000
8000
10000
12000
1996 1997 1998 1999 2000 2001 2002 2003
No
.o
fH
SN
ati
on
al
Lin
es
Prohibited Restricted Canalized /STE SIL Free
Table 8: Decline of Non-tariff Barriers in India (No. of National Lines at 10-digit HSb)
NTBs
1996
1997
1998
1999
2000
2001 2002 2003
Prohibited
59
59
59
59
59
59 52 52
Restricted
2,984
2,322
2,314
1,183
968
479 554 484
Canalised /state trading enterprises
127
129
129
37
34
29 33 32
Special import license (SIL)
765
1,043
919
886
226
0 0 0
Free
6,161
6,649
6,781
8,055
8,854
9,582 11,032c 11,103
Total
10,096
10,202
10,202
10,220
10,141
10,149 11,671 11,671
SOURCE: Report on Currency and Finance, 2002/2003, Reserve Bank of India.
a As of April
b As per Harmonised System of India Trade Classification of export and imports
c Includes 148 items with conditions.
151150
rounds of SAPTA. Besides, political factors played a critical role in
diluting the relevance of SAPTA in the region.
However, strong positive developments in the region strengthened
the process of rebuilding economic ties between the member
countries. The countries initiated various approaches to liberalise the
regional trade including regional, sub-regional and bilateral trade
initiatives. Despite apprehensions from various quarters, the
regional countries pursued the SAFTA process, and the Agreement
came into effect on January 1, 2006 as per schedule. After a
prolonged phase of negotiations, India and Pakistan opened up their
markets to their regional counterparts by lowing trade barriers in
specific sectors.
Moreover, the regional countries are slowly getting in to bilateral free
trade agreements (BTAs) after seeing certain successful BTAs in the
region. India's bilateral engagement with Nepal, Bhutan and Sri
Lanka proved successful, and other regional partners have also
begun to move in the same direction. Pakistan and Sri Lanka signed
and FTA in 2005. Bangladesh is also actively engaged with both
Pakistan and Sri Lanka to form bilateral FTAs in the near future. The
political rapprochement between India and Pakistan has begun to
move towards initiating a bilateral FTA on a reciprocal basis. Several
other initiatives are in the process to make the South Asian region a
free trade zone. The urgency for promoting regionalism in South Asia
has been the outcome of the economic and political compulsions of
the region. While the entire world economy is thriving on
regionalism, South Asia can not be a mute spectator to this
development around them. The region has large trade potential to
drive the regional economy with both intra-regional and intra-
industry trade. The region has the capabilities to initiate efficiency -
seeking restructuring of its industrial base to access the global
market, in a number of sectors (Das, 2004). Combining both, the
growing interest among the regional economies for mutual
cooperation, and the existing trade potentials, there are prospects for
the region to grow in the future.
Brief Overview of LiteratureSo far as the efficacy of the preferential trade regime in South Asia is
concerned, the existing literature provides mixed responses. Some
studies have found that the SAPTA process started with a very low
profile. Wadhva (1996) observed that a very small number of
products were considered for tariff concessions in SAPTA I for
regional trade liberalisation. Considering the nature of concessions
offered, the size of gains in terms of additional regional trade was
very minimal. In another study, Bhuyan (1996) observed that the
effectiveness of SAPTA I could have been improved with the
inclusion of tariffs and para-tariffs in the concessions of national
schedules. The SAPTA process could have been more effective with
deeper cuts in the rates of concessions.
Several studies have attempted to examine the implication of SAPTA
on intra-regional trade. Some of these studies suffer from various
limitations, including the choice of appropriate methodology to
examine impact analysis. Srinivasan and Canonero (1993) attempted
to examine the consequences of tariff liberalisation at the regional
level using the gravity model approach. They used various criteria to
categorise the regionally traded commodities into nine broad
commodity groups. Such an exercise, obviously, is self defeating, for
the commodity groups will consist of aggregates. Moreover, the
nature of the products is so divergent within each group that
application of similar tariff elasticities for non-homogeneous
products may be inappropriate in simulating the implications of
tariff removal on bilateral trade flows. Thus, from the point of view of
policy making, simulation exercise based on these elasticities may
not lead us an appropriate policy conclusion.
Mehta and Bhattacharya (2000) examined the implications of the
first three rounds of SAPTA on the four largest economies of the
region, namely India, Bangladesh, Pakistan and Sri Lanka. For the
simulation exercise, they used the gravity model estimates of
Srinivasan and Canonero (1993) on the data for year 1993/94 and
1994. Obviously, the choice of the year pre-empts the efficacy of their
study to investigate the implications of SAPTA on the four countries.
Such a study may not be appropriate to predict the actual effects of
SAPTA I, II and III on regional trade. However, their study
concluded that the SAPTA process would mostly promote intra-
regional manufacturing trade.
Bhattacharya (2001) analysed the effects of the first three rounds of
SAPTA on the region as a whole. It was found that the net increase in
the regional trade after the conclusion of the third round was very
153152
small. It was suggested that deeper tariff cuts and selection of highly
traded products for trade liberalisation within the region could
improve the trade prospects of the region.
The implication of the three rounds of SAPTA on the Indian economy
was also examined by Mukherjee (2002). Using time series bilateral
trade flow data, it examined the implications of SAPTA on India's
exports and imports. The study tried to examine the combined
effects of SAPTA I, II and III to understand the impact of regional
tariff liberalisation on India's external sector. However, as pointed
out earlier, different rounds of SAPTA were launched at different
points of time in the latter half of the 1990s. In order to study the
efficacy of each round, there is a need to examine their effects
separately. The study observed that the second and third round were
effective in boosting intra-regional trade.
Kemal et al (2000) examined the trade complementarities between
regional countries for the period 1985-95. The study found that India
has large potential to export a wide range of products to several
South Asian countries. It also highlighted the existence of large trade
complementarities between India and Bangladesh during the study
period. It was found that the level of such bilateral
complementarities not only increased, but also remained significant
compared with other countries in the region. It was also pointed out
that the largest regional countries such as India and Pakistan enjoy
strong trade complementarities.
The existing literature presents a mixed response with regard to the
future of the South Asian region, so far as success of the trade
liberalisation process in the region is concerned. It emerges from the
review of literature that the region has substantial trade potential,
which is not harnessed in an effective manner on account of several
reasons, most of them being non economic in nature. There is
tremendous pressure from the people of the region on their
respective Governments to realise the trade potentials. The gain from
the SAPTA process has been picking up in the later rounds, and
initiation of SAFTA is a step forward in this direction. Among the
regional partners, India has been the largest partner in the region,
and has contributed substantially to the trade liberalisation process
in the region. The impact of different rounds of SAPTA on the Indian
economy is discussed below.
India's Sectoral Trade with the RegionSAARC took almost a decade to enforce its most desired trade
agenda in 1995 in the form of SAPTA. Within a short duration, the
region approved four rounds of negotiations, and three of them were
implemented in earnest. The implications of these agreements are
felt in India's trade. India's imports under the first three rounds of
SAPTA made a six-fold increase between 1994/95 and 2000/01.
Except for a few broad product groups like gems and jewelleries,
vehicles, and arms and ammunitions, India imported a sizable
number of products from the region covering all sectors. Agricultural
imports constituted about one-third of India's total imports from the
region under the SAPTA process in 2000-01. Traditionally, import of
vegetable products is the most important sector for the country. The
bulk of import demand also involves fats and oils. In addition, India's
import demand also includes the manufacturing sector. Some of the
important manufacturing import sectors are chemicals, textiles,
plastic products, wood products, base metal and mechanical
appliances. Thus, the SAPTA process augmented India's imports of
both manufactured and agricultural products from the region. While
concessions under SAPTA are narrowly focused on agriculture, it is
rather more diversified in manufactured product groups.
India's exports to the region under the SAPTA process have been
heavily concentrated in a few sectors. The agricultural sector played
an important role in India's exports to the region under the regional
PTA. Exports of oils and fats and processed food products constitute
a large proportion of the country's exports of agricultural products to
the region. The bulk of India's manufacturing exports are dominated
by sectors like chemicals, textile products, and base metals. India
also exports vegetable products, minerals, plastics, leather products,
mechanical appliances, optical products and other manufactured
items, but at a low scale. India has consistently improved its market
presence in certain important product segments such as processed
food products, chemicals, textile products and base metals,. It must
be noted that India's exports, particularly those products which
attract concessions under SAPTA, have been subject to a high degree
of fluctuations.
Implication of Different Rounds of SAPTA for IndiaThe existing literature suggests that the first three rounds of trade
liberalisation were not equally efficient in liberalising regional trade.
155154
It may be because that there was no compulsion on member
countries to liberalise their trade for regional partners in a definite
manner. The contracting states have adopted a product-by-product
approach to promote regional trade. It was left to the individual
contracting States to open up their economies to the region
depending on their priorities. For this reason there has been no
uniformity in the liberalisation of products under the SAPTA process.
India's trade with the south Asian region in concessional group of
products is estimated for different rounds of SAPTA. The volume of
trade in three different SAPTA rounds is presented in Table 9. The
shaded regions indicate the years in which the agreements were
implemented. If the volume of trade was substantial and the trade
flow was growing or remained at a level without substantial decline,
it can be concluded that the specific SAPTA round was effective for
the concerned member country.
It is evident from the empirical analysis that SAPTA-I was less
effective in accelerating India's imports from regional partners. The
volume of trade under round I was much lower than that under the
other two rounds. Except for Nepal, other LDCs failed to access the
Indian market under the concessional route. In the round II, the
volume of Indian regional imports increased substantially as
compared to the earlier round. The LDCs of the region gained more
market access than non-LDCs in this round. Among the non-LDCs,
Table 9: Profile of India’s Trade with the Region under various rounds of SAPTA (in lakh (’0,000) rupees)*
A. Imports
Exporting Country
SAPTA Round
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00 2000-01
I
-
-
-
-
13.57
26.56
203.31
II
9.08
6.56
6.49
35.90
26.91
26.34
65.47
III
5959.24
6739.92
9203.63
12024.00
20868.79
22546.51 24086.08
Bangladesh
NCT
897.76
516.48
388.98
1520.46
1222.91
942.27 3155.92
I
-
-
-
-
-
-
1.20
II
-
-
-
21.95
-
60.83
13.56
III
1571.63
2651.16
3739.88
1454.58
1957.06
1043.46 1052.94
Bhutan
NCT
424.26
1011.57
515.84
366.61
242.25
365.48 432.40
I
107.80
239.66
485.70
524.74
2353.29
2519.35 2119.47
II
210.19
536.10
307.79
244.44
63.20
182.52 208.07
III
12.37
38.76
18.70
118.99
150.83
142.68 63.95
Sri Lanka
NCT
6711.08
7651.31
9324.20
7269.00
9536.14
10966.04 13709.19
III
4.93
2.24
6.23
24.65
7.75
61.94
17.52Maldives
NCT
24.00
59.24
44.62
38.89
10.67
95.85
20.43
I
462.48
302.05
612.15
541.44
612.35
644.71 1077.24
II
129.54
460.03
102.65
206.75
891.67
1576.37 1232.42
III
3457.11
7402.13
11601.48
23314.90
43605.77
54552.47 71653.79
Nepal
NCT
3497.20
3866.79
4212.32
5140.60
5919.46
7987.94 18813.78
I 60.24 70.29 211.28 115.23 287.68 379.10 208.42
II 1961.00 2161.73 841.48 634.21 583.62 983.05 3657.64
III 5932.59 4286.06 8403.92 7809.43 8315.35 9606.31 11199.12
Pakistan
NCT 5679.01 1509.01 965.96 6325.79 78338.00 11019.59 11558.94
B. Exports
Importing Country
SAPTA Round
1994-95
1995-96
1996-97
1997-98
1998-99
1999-00 2000-01
NCT
165722.2
299735.59
238244.16
225025.19
359620.71
196849.52 305369.96
I
629.75
991.63
1426.91
1237.55
1326.14
3220.15 2723.38
II
524.35
747.91
2263.99
6002.01
5268.59
6507.98 14279.7
Bangladesh
III
261.32
499.4
1191.67
562.04
454.07
907.89 1468.58
NCT
3008.82
4879.82
6562.21
3496.21
2710.96
2222.06 306.75
I
-
-
3.59
2.58
2.05
-
2.6
II
-
-
41.11
3.94
2.07
3.75 0.28
Bhutan
III
-
-
4.88
4.8
3.34
-
-
NCT
76910.03
90523.22
117795.27
116488.19
114750.25
137742.75 174787.73
I
6841.35
9027.69
8588.59
7546.64
8333.84
6846.51 8851.79
II
5698.7
5828.02
8371.64
10163.86
6059.29
14387.14
Sri Lanka
III
223.99
323.07
1447.07
1268.39
832.94
1317.94 1402.67
NCT
3539.36
3777.65
2834.27
2829.08
3004.3
2469.76 8615.94
I
2.85
15.15
7.14
4.43
8.38
6.15 13.96
II
-
-
-
-
0.11
-
2.93
Maldives
III
0.46
0.42
5.62
3.18
2.27
3.16 31.13
NCT
26445.88
37870.15
37622.28
42556.4
33341.93
43985.74 37631.37
I
180.04
649.94
807.3
681.68
535.27
666.04 290.47
II
5603.94
7302.56
9390.05
10230.26
9880.02
12575.82 14919.73
Nepal
III
19.29
48.28
30.33
47.57
89.79
43.01 89.55
NCT
5388.44
7558.92
34536.98
28880.11
18572.95
19126.94 49781.68
I 332.31 920.52 542.36 531.69 1268.13 1149.74 563.36
II 8712.49 14741.11 14992.15 17339.37 18187.41 14066.27 15692.5
Pakistan
III 391.23 74.82 46.84 103.17 556.21 117.15 274.81
Source: India Trades, CMIE, India and SAARC Secretariat, Kathmandu.
Note: The actual implementation of different Rounds of SAPTA is indicated by the shaded region
NCT denotes bilateral trade out side SAPTA.
* 1,000,000 rupees = 10 lakh rupees
157156
the depth of Pakistan's market access in India was much deeper than
that of Sri Lanka in the round II. The SAPTA process received the
maximum gain in the third round. India's imports volume from
Bangladesh, Nepal and Pakistan increased significantly in this round.
Both Bhutan and Maldives also benefited significantly from this
round in accessing Indian market.
A comparison between trade flows of concessional and non-
concessional groups of commodities may present the effectiveness of
SAPTA to the member country. The results indicate that the volume
of India's import under the first three rounds of SAPTA much higher
than the volume of trade outside SAPTA in the case of Bangladesh,
Bhutan, Nepal and Pakistan, as shown in Table 9. India's imports are
greatly influenced by the concessions offered by Maldives to India,
where almost 50 percent of its imports from the country were
covered under SAPTA in 2001.
The trade concessions offered by regional countries to India has been
very small as compared with India's total trade in the region. The
implications of trade concessions offered to India in three rounds of
SAPTA are different for India's exports to the region. One can
examine the nature of commodities traded in each round over a
period of time with each Member country separately.
The empirical results indicate that the first two rounds of SAPTA are,
rather, more important than the third round in terms of the volume
of commodity exports. Among the first three rounds, the second
round became important for India in terms of better market access in
the region. The use of the 'before-after approach' on the
implementation of different episodes of SAPTA indicates that the
trade liberalisation process in the region was not very conducive for
India's exports to the region. A comparative analysis of India's
exports growth before and after the commencement of each round of
SAPTA in specific SMCs indicates that it improved significantly in
the case of Bangladesh, Sri Lanka and Nepal, but remained slow
among the other regional partners.
Trade offers through various rounds of SAPTA have not provided
substantial advantage to India in terms of greater market access in
the region. On the contrary, India benefited from the expansion of
trade under the non-concessional route. The benefit from the SAPTA
process is greater for the LDCs than the non-LDCs in the region.
While the volume of exports is important for regional trade, the
quality of trade is also equally important to understand the welfare
gains from regional trade cooperation. UNCTAD (2002) observed
that analysis of trade should focus on both the volume of exports as
well as the net value addition to the exports, simultaneously. As net
exports earning increases along with total volume of exports, the
country stands to gain from external sector activity. A country is
likely to gain from exports when it moves up in the value added chain
of exports, and that is possible when the composition of exports
starts increasing in favour of more technology-intensive products.
Technology Intensive Products in SAPTA TradeIt is generally believed that South Asian countries generally trade in
primary and low technology products. India's specific imports from
the regional partners, with SAPTA concessions, are further classified
in terms of technology intensities. The study by Lall (2001) classified
the tradable products into primary, resource intensive, low tech,
medium tech and high tech products, depending upon the type of
technologies involved in the process of production. India offered
concessions to regional member countries in almost all broad areas
of products as shown in Table 10. The majority of India's
concessional imports from the region fall under the category of
primary and resource based agro-manufactured products. Other
priority imports under SAPTA are low-tech textile and footwear
products, and medium technology processed products.
A. Exports
Sl No Product Description 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
1 Primary products 7560.88 13406.37 16521.46 19768.38 20543.53 21133.55 27273.68
2 Resource based Mnf (agro-based) 479.22 631.42 639.72 464.22 656.54 837.33 824.93
3 Resource based Mnf (other) 4224.82 6830.56 7122.39 8981.57 8973.16 5981.96 8630.17
4 Low technology Mnf (textile and footwear) 2010.91 2438.89 4104.71 5818.27 3991.22 4510.76 6471.21
5 Low technology Mnf (Other products) 3348.51 1735.75 2840.11 4036.08 3083.29 3587.4 4374.34
6 Medium technology Mnf: Automotive
Table 10: Structure of India’s Technology Intensive Imports from
2663.32 5657.34 4080.9
South Asian Countries under SAPTA I, II and III (in lakh rupees)
3091.01 3846.88 2610.98 4833.3
7
Medium technology Mnf (process)
3427.64
3552.05
4599.51
3695.58 1702.83 1933.49 7462.41
8
Medium technology Mnf (engineering)
856.65
747.66
1144.03
1068.88 1133.87 1852.08 1559.78
9
High technology Mnf (Electronic and Electrical)
261.59
202.97
390.37
207.66
239.3 225.09 179.36
10
High technology Mnf (Other)
4588.53
5967.51
7718.04
8601.51 8639.3 11078.81 13385.4
Total
29422.07
41170.52
49161.24
55733.16 52809.92 53751.45 74994.58
159158
The composition of India's imports indicates that the quality of
India's imports from the region is improving under the SAPTA
process. The share of primary and resource based agro-
manufactured products constituted nearly 87 percent of India's
imports in 1994-95, which was reduced to more than half during
2000-01. It is interesting to note that the composition of India's
import basket has shifted in favour of products which are higher in
the technological hierarchy.
From the point of view of technology intensity of the products
covered under SAPTA, India's exports are more diversified than its
imports. Indian exports range from primary products to high
technology products. The major chunk of India's exports falls under
the group of primary products, resource based agro-manufactures,
medium technology process-manufactures and high technology
manufactures. These broad groups of products constitute more than
three fourths of India's exports to the region under SAPTA. India
also exports a significant amount of low and medium tech
manufactures, particularly automotive products, to the region.
India's exports have consistently increased over the years in some
product groups such as high-tech manufactures, low-tech
manufactures (textiles and footwear) and primary products. In the
case of some medium-tech products, the volume of exports was very
high in 1994/95, but declined significantly during 1995/96-1999-00,
and again picked up in 2000-01. The performance of some product
groups over the years has been very impressive. Some of these broad
product groups are primary products, resource based non-agro
manufactures, low tech manufactured products, medium tech
processed manufactures and high tech manufactures.
In the era of globalisation, domestic consumers require low to high
technology-intensive products. As the reform process continues in a
number of countries in the region, the percentage of population in
the middle income group is increasing very fast in most of the
regional countries. With the rise in population in this group, coupled
with a surge in their per capita income, the demand for technology
intensive products will rise in the near future. Several countries have
already started the process of restructuring their export basket to
include the technology-intensity product category. Regional
countries can make use of India's vast market and liberal economic
policies to improve their trade performances. During 2004-05,
India's imports from the rest of the world exceed $ 106 billion.
Several small economies like Myanmar have strengthened their
presence in India's imports during the last few years. Therefore,
regional countries can benefit from India's fast rising import
requirements.
How Critical is SAFTA for the Region? SAFTA was launched at a time when the region was moving rapidly
towards economic and political normalcy among partner countries. It
also coincided with a situation where most of the regional economies
witnessed rapid economic expansion in a significant manner (ADB,
2005). The global trading situation is also turning out to be
favourable to the region, particularly as a consequence of the phasing
out of the MFA regime. As a part of regional trade liberalisation,
various rounds of SAPTA have brought substantial gains to the
regional economies. Political normalisation has steadily improved
during the last few years. There is high expectation from SAFTA,
which may accelerate the pace of economic progress in the region.
Despite the fact that the region is progressing fast, regional countries
have not yet utilised the growth potentials of the region to their
mutual advantage. Now, is the most appropriate time to initiate
industrial restructuring within the region based on their natural
competitiveness using the regional process. SAARC could learn from
the experience of the EU, where small markets were integrated on
the basis of competitiveness of individual countries to create large
markets for each of them. The same model could be emulated in the
South Asian region. Countries of the region are perceptibly
B. Imports
Sl No Product Description 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01
1 Primary products 8776.5 10015.0 12117.2 13385.7 17777.7 16928.9 20313.2
2 Resource based Mnf (agro-based) 8456.3 8302.6 12471.7 14148.9 31468.9 34308.3 36913.0
3
Resource based Mnf (other)
129.7
249.7
286.4
464.7 1056.6 2070.1 2016.8
4
Low technology Mnf (textile and footwear)
1580.3
2721.7
3625.6
7855.4 15589.9 13924.3 22254.0
5
Low technology Mnf (Other products)
24.1
58.6
412.6
378.5 920.2 3485.8 5378.5
7
Medium technology Mnf: Automotive
872.8
2628.0
3755.5
8021.6 10651.9 19590.2 24715.0
8
Medium technology Mnf (process)
-
3.0
0.0
79.0 122.0 792.5 1028.8
9
Medium technology Mnf (engineering)
25.0
1.0
9.0
20.0 65.5 19.0 80.8
10
High technology Mnf (Electronic and Electrical)
13.5
917.1
2863.4
2717.5 2085.1 3233.1 4160.1
Total 19878.2 24896.7 35541.4 47071.2 79737.8 94352.2 116860.2
Data Source: India Trades, CMIE, India
Note: The classification of products is made by the author based on Lall (2001).
161160
distinguished by their competitive strength. Each county can become
a hub for specific product segments in the region, and use its
competitive advantage in enhancing the strength of the region while
also strengthening itself through mutual support. For example,
Bangladesh could emerge as the energy hub of the region, and other
countries could represent other specialised areas such as Nepal for
natural resources, Maldives for fisheries resources, and Sri Lanka for
plantation resources. But this depends on the political vision of the
regional partners.
The phase of 'full political reconciliation' has not yet begun. The
continuing of political discontent among the regional partners has
adversely affected bilateral relationships, leading to slow progress in
regional economic cooperation. As such individual countries are
driven mostly by their domestic requirements, and regional countries
may not remain mute spectators when the entire global economy is
on a high growth trajectory. Most regional countries look for avenues
to engage themselves in hassle-free regional initiatives. As time and
opportunities are limited, individual countries may associate
themselves with other viable RTAs, without wasting much energy
and resources with the SAFTA process. As a matter of principle,
many countries in South Asia have already joined a number of RTAs
outside the region, showing the possibility of moving out of the South
Asian process if SAFTA fails to deliver the desired results.
In such a situation, regional partners are left with limited options to
associate themselves with the South Asian regional process. This
implies that liberalisation under the SAFTA process should be given
high priority, so that liberalisation of sectors can be undertaken in
the most desirable manner. The alternative approach could be to
disassociate from the SAFTA process, and join other fast growing
extra-regional RTAs to optimise domestic welfare.
Considering the various developments in the region, three alternative
scenarios can be conceptualised to analyse the response of the region
if member countries prefer to choose alternative approaches as their
regional policies. To conceptualise the situation, we have formed
three scenarios. Scenario I relates to situation of three free trade
area, where complete trade liberalisation is envisaged covering both
tariff and non-tariff barriers in South Asia. In Scenario II, the South
Asian countries choose to pursue alternative regional approaches
and opt out of the SAFTA process. In Scenario III, a situation is
conceptualised where a country has simultaneously pursued FTAs
with other RTAs and with South Asian countries to pursue trade
liberalisation. In these three scenarios, we are trying to examine how
member countries are likely to benefit from regional economic
liberalisation and assess the relevance of SAFTA for the regional
countries.
Regional Welfare Gains from SAFTAThe efficacies of these three alternative scenarios are empirically
examined using the Computable General Equilibrium (CGE) model
to estimate the possible economic gains for the South Asian region,
and also for global economy as a whole. Very often, the relevance of
RTAs is discarded in favour of multilateralism because of the likely
effects of the overall losses to the global economic welfare on account
of trade diversion. As the region is confronted with supply
constraints, the impact of an FTA within the region may result in
either trade creation or trade diversion, and therefore requires
empirical examination.
The welfare gains as a result of economic liberalisation may be due to
various policy initiatives. Welfare gain reflects the combined effects
of number of macro-economic policies as a consequence of trade
liberalisation in the region. The trade liberalisation policies affect
reallocation of productive factors across sectors owing to surge in
demand for tradable sectors within the region. In the process, the
allocative efficiency of the existing factor endowments alters and so
also their relative prices. Moreover, these changes are also seen in
various production sectors. A surge in exports as a result of regional
trade liberalisation may generate additional pressure on certain
tradable sectors. There are possibilities of a reduction in demand for
certain non-tradable sectors in each economy because of a change in
economic policy at the regional level. The implications of policy
restructuring are captured in the calculation of welfare gains. Trade
liberalisation is mostly reflected in expansion of trade, investment,
etc. within the region. Due to various factors, production conditions
in each country undergos significant changes, leading to efficiency
seeking restructuring at the firm level. Such structural changes may
have an impact on competitiveness of each country's exports.
The welfare implications of SAFTA on regional countries and other
163162
regions are presented in Table 11. The results indicate that SAFTA is
likely to enhance welfare gains in each member country, and also to
improve the overall welfare position of the South Asian region. It is
important to note that SAFTA is not only enhancing welfare gains in
the region, but the whole world economy. In case SAFTA is
implemented fully as under Scenario I, the size of welfare gains
would be more than US$ 436 million annually. The results show that
gains from SAFTA are likely to be asymmetrical in nature. In terms
of absolute gains from trade liberalisation in the region, India is
likely to gain the most followed by Sri Lanka and Bangladesh.
Despite the fact that some extra-regional groups are likely to be
affected adversely, absolute gains for the global economy may be
positive, thus suggesting trade-creating nature.
In a situation where SAFTA does not take off, India may choose to
continue with its liberalisation commitments with other extra-
regional RTAs/BTAs, and the implication of such a situation is
presented in Scenario-II. As the Indian economy has expanded
rapidly in recent years, surpassing the 'Hindu rate' of growth of 3.5
percent per annum, it has been negotiating with a number of RTAs to
undertake comprehensive economic liberalisation. In a situation of
political stalemate, where SAFTA does not move and India chooses
to move ahead with other RTAs, the economic implication for
regional economies is assessed in Scenario II. The results show that
India is likely to benefit substantially more in the second scenario as
compared with the first one (i.e. with SAFTA alone). In the process,
Sri Lanka is likely to benefit more from the alternative liberalisation
process as an India-Sri Lanka FTA is already in operation. However,
Bangladesh and the rest of South Asia are not likely to gain from the
alternative trade liberalisation approach of India. In addition, other
regional groupings/bilateral arrangements are likely to gain along
with India.
If the SAFTA process is not moving in the desired direction, India
may undertake liberalisation with other extra-regional RTAs and
SAFTA simultaneously, and this situation is modelled in Scenario III.
The magnitude of India's gain from Scenario III is likely to be
substantially higher than in Scenario II. However, in a situation like
this, the economic interest of the South Asian region is likely to be
adversely affected. Simultaneous trade liberalisation of India with
ASEAN plus three, SAFTA and a few other RTAs/BTAs may reduce
the magnitude of gains for some South Asian countries as compared
with Scenario-I. This provides a clear indication that credible
liberalisation in RTA may give an advantage to the early birds, i.e.
those who join early in regional arrangement. If SAFTA is
implemented within its stipulated time frame with effective trade
liberalisation (i.e., in its sectoral liberalisation programme), the
region is likely to gain significantly from the regional process. In that
case, sectoral liberalisation under SAFTA should be implemented
based on the merit of the sectors in the regional context.
Effects of Liberalisation on Prices of Factors of ProductionThe implications of regional trade liberalisation are likely to be felt in
several sectors of the economy. The results of the model indicate that
the likely restructuring of the regional economies has significant
Table 11: Welfare Effect of SAFTA on Regional Partners (Million US$)
Country/Region Scenario I: SAFTA Scenario II: Without SAFTA, liberalisation with other RTAs
Scenario III: Simultaneous liberalisation with other RTAs and SAFTA
Bangladesh 8.34 -2.99 10.92
India 344.64 2749.67 3045.04
Sri Lanka 51.47 26.71 51.37
Other SA 31.43 -49.54 16.93
China -10.53 262.42 250.51
Korea -12.26 213.68 202.17
Singapore -14.90 264.41 252.04
Thailand -8.00 109.41 102.36
ASEAN-5 -12.50 539.73 528.57
ANDEAN 1.12 151.75 152.95
MECOSUR -5.82 152.13 146.68
SACU -0.63 337.08 337.12
NAFTA -19.94 -323.74 -334.4
EEA -38.15 -486.24 -515.46
ROW -92.39 -698.7 -776.37
Source: Author’s estimation based on GTAP V.6 database
165164
implications for prices of different factors of production, including
capital and labour in individual member countries. The overall
effects of free trade on various types of factors of production have
been favourable in ameliorating their real factor prices in the post-
regional arrangement period.
The implication of regional restructuring on different forms of labour
is examined in partner countries. The simulation results indicate that
the real wage rate of unskilled labour is likely to go up in a number of
South Asian countries following implementation of SAFTA. The
impact on the real wage rate of unskilled labour is likely to decline if
SAFTA does not take off, and India chooses to go with other extra-
regional partners. In a situation where simultaneous liberalisation is
likely to take place (i.e. SAFTA along with other RTAs), the
possibility of improvement in the wage rate of unskilled labour is
favourable, but it would be much lower than with full liberalisation
under SAFTA.
So far as the implication for the wage rate is concerned, the prospect
for skilled labour is different from that of unskilled labour. Under the
full implementation of SAFTA as in Scenario I, the wages of skilled
labourers are likely to rise in most of South Asian countries. In case
India liberalises its trade under PTA with other extra-regional
agreements in Scenario II, wage rate of skilled labour is likely to
increase in India and Sri Lanka, whereas it is likely to decline in
Bangladesh and other countries in South Asia. In the third scenario,
the upward trend in real the wage is likely in most SAARC countries,
but the magnitude of the hike in wage is likely to be lower in Scenario
III than in Scenario I.
Trade liberalisation in the SAARC region may improve the rate of
return of investment in the region. In a situation like SAFTA under
Scenario I, regional countries are likely to witness a surge in the
efficiency in their domestic investment due to improvement in the
allocative efficiency of capital. The level of increase in the rate of
return of investment may vary from one country to the other. For
example in SAARC region, most countries are likely to benefit from
trade liberalisation but the impact will be more robust in case of Sri
Lanka and India. As such South Asian countries are passing through
a phase of economic reforms, and efficiency of capital is likely to go
up in these countries. Implementation of SAFTA would give more
dynamism to this trend. If India does not participate under the
SAFTA process as in Scenario II, the efficiency of capital for other
South Asian countries may rise but lower than that under Scenario I.
In Scenario III, most South Asian countries are likely to gain in terms
of increase in the real interest rate following trade liberalisation
under SAFTA and extra-regional liberalisation.
Effects on Exports The results of export performances of the South Asian region
indicate that the trade sector performance is likely to improve if
SAFTA is implemented earlier than other RTAs participating in
regional trade liberalisation. Trade liberalisation under SAFTA is
expected to be a positive sum game, where all regional partners are
likely to improve their regional exports performances without facing
any adverse effect on their total exports.
The SAFTA process offers a distinct advantage to member countries
in terms of improving export performance of individual countries.
When SAFTA is fully implemented, some countries in South Asia,
including Bangladesh, are likely to register a significant increase in
their export performance. However, SAFTA is likely to offer very
little to countries like India and Sri Lanka in improving their exports
performances. Trade liberalisation as under Scenario II may have
significant advantage for India. Its exports may increase by 9.5
percent per annum following implementation of trade liberalisation
with the extra regional groupings in real terms. Under the
overarching trade liberalisation in Scenario III, participating
countries/regions will see a positive impact on their trade
performances. However, gains for the individual South Asian
countries in exports may be more in Scenario I than in Scenario III.
The sectoral results indicate that early implementation of SAFTA
may have a more enduring effect on the regional economies than
slowing down the process. In that situation, exports are likely to
increase in a sizable number of sectors. Exports in Bangladesh are
likely to increase in most of the broad trade sectors. It may witness a
surge in exports in sectors like cereals, minerals, petroleum and
chemicals, metal products and machinery. India is likely to improve
its export performance in sectors like fruits and vegetables, mining,
prepared food, and motor and transport items. Sri Lanka is likely to
compete strongly in a number of products. Scenario II indicates that
167166
India is likely to improve its export performances in several sectors if
it liberalises along with other extra-regional partners on a reciprocal
basis. But such trade liberalisation initiatives may adversely affect
the export prospects of a number of South Asian countries. In
Scenario III, India is likely to have an edge over alternative scenarios
in improving its export performance in a number of sectors.
However, South Asian countries may be adversely affected if the
SAFTA process is delayed and other regional groupings take
advantage of the liberalisation process in South Asia.
A 'second wave of regionalism' has reached its peak in recent years.
Countries around the globe are realigning themselves to take
advantage of the current global trading environment. In a gradual
process, trade barriers across the world are declining on account of
multilateral trade negotiations and unilateral trade liberalisation.
But the present level of trade barriers in a number of countries is so
high that benefits under regionalism could be substantial from
perfect regional arrangements. The possibility of reaping benefits
from regionalism exists as long as the average level of tariff remains
relatively high, and thus is limited to a short period. Individual
countries are keen to align themselves with the regional process, but
the issue is to choose the best option available to them. If the best
option is not heeded, the second best option may be considered to
give priority to national interest.
ConclusionThe South Asian economy has expanded rapidly over on the last few
years. Most regional countries have maintained growth rates
between 5.5 to 8 percent during the period 2004-05. According to
forecast of the Government of India and the IMF, India is expected to
grow between 7.5 and 8.1 percent during the period 2005-06. The
continuation of the region's high growth performance is due to
robust the macroeconomic and external sector performances. ADO
(2005) observes that macroeconomic fundamentals of the region are
strong, which can be assessed from the region's high growth rate, low
inflationary pressure, high investment rate, etc. This is a positive
development for the success of regional cooperation in South Asia.
The dynamic performance of the external sector has been the most
important factor for the sustenance of high growth in the region. The
expansion of exports was sturdy, but imports expanded more swiftly
than exports during the early 2000s. The foreign exchange reserve
position was strong for large economies, and India's Forex reserves
alone exceeded US$ 140 billion in early 2006. Exports from the
region were mostly spurred by a surge in manufacturing exports, and
the region is rapidly integrating itself with the global economy.
Intra-regional trade has made steady progress during the last decade,
reaching almost 5 percent of the region's total trade with the world
during the period 2000-04 as compared to 3.6 percent during the
period 1990-94. Though significant progress has been made in
ameliorating the level of intra-regional trade, it is at the cost of a high
degree of volatility. Instability in intra-regional trade has not only
affected regional exports but also their balance of trade. Towards the
latter part of the 1990s, the region's trade situation became soured
on account of the 'Asian Crisis'. After the inception of SAARC, there
was considerable divergence between intra-regional import and
intra-regional export, and the gap between them narrowed gradually
over a period of time. The gap between the two almost disappeared
in the late 1990s, but reappeared again in the new millennium with
lesser intensity.
Trade imbalance is one of the most widely discussed issues in the
region India is often dragged into the controversy as it maintains a
favourable trade balance with the rest of South Asia. Traditionally, a
number of small regional countries used India's large competitive
production base to meet their short term requirements for 'basic and
essential' imports. In the past, there were instances of cessation of
essential supplies from India for technical reasons, and that caused
turmoil in those importing countries. Supply constraints in these
importing economies have been the underlying factor in their
inability to access the large Indian market, despite having large
export potentials. India provides MFN status to all the WTO member
countries, and does not discriminate against any South Asian country
in providing access to its large market. There is a need to devise
radical strategies to arrest supply inadequacies in some regional
countries access market in large countries.
The tariff regimes of the region show that the level of tariffs is not
similar across countries; and protection of sectors differ significantly
among them during the last decade. The region has large resource
endowments, and each South Asian county has distinct advantage in
169168
having access to some of these resources. This is why there is no
uniform level of sectoral protection across countries. The regional
countries had as many as 30 tariff bands, ranging from zero to 250
percent in 2004. Though each country maintains a large number of
tariff bands, most of their tariff lines are concentrated in a few tariff
bands. Some of the countries maintain very high tariffs to protect
their sensitive sectors. While the average level of tariff is low in Sri
Lanka and Nepal, it is high in India and Bhutan. Invariably, the
region maintains high protection against certain sectors such as
plastics, textiles, footwear, plaster and cement and vehicles; and low
protection against minerals, chemicals, leather, wood pulp and base
metal.
From one of the most highly protected economies in the world
during the 1980s, India significantly lowered its average tariff rate
from 101 percent in 1991-92 to 27.5 percent in 2002-03. It has
further declined in recent years, and is likely to reach the ASEAN
level within a few years from now. Till the mid-1990s, the NTB
regime in India was very strong, but liberalised drastically in the
early 2000s. In 1996, nearly 39 percent of India's national tariff lines
were subject to NTBs, but declined sweepingly to around 4 percent in
2003. Harmonisation of the level of tariff among South Asian
countries may boost intra-regional trade, mostly in the non-
concessional trade segment.
The liberalisation of trade under SAPTA has benefited regional
countries as evident from the experience of India. India's imports,
under the first three rounds of SAPTA, registered a six-fold increase
between 1994/95 and 2000/01. The coverage of imports has been
comprehensive, linking almost all the broad sectors of trade except
for sectors like gems and jewelleries, vehicles, and arms and
ammunitions. The LDCs have gained more market access in India
than non-LDCS of the region under SAPTA. The list of trade
concessions under SAPTA covered both agricultural and
manufacturing sectors; and trade in agricultural products constituted
almost one third of the total trade. India's exports to the region have
been restricted to a few sectors. India has benefited very little from
the concession under SAPTA, and substantial market access is
realised through the non-concessional route. However, the SAPTA
process was slow, and could have taken a few decades to reach full
trade liberalisation in the region, considering the progress made
under different rounds of SAPTA in the past. SAFTA is likely to
accommodate most of the shortcomings of the SAPTA Agreement.
Implementation of SAFTA is a positive step towards aggressive trade
liberalisation in the region. Taking into account the global trend in
the post-WTO period, particularly the manner in which regionalism
has taken an edge over multilateralism, the long term trade policies
of the regional countries will be guided by the potential gains from
regionalism. The South Asian region is likely to benefit the maximum
from the SAFTA process, as evidenced from the CGE results. It is
alleged that large countries are likely to benefit more from the
SAFTA process, and therefore, there is lukewarm response from
other regional partners for the effective implementation of SAFTA. If
SAFTA does not take off appropriately, regional countries may
engage themselves in forming other RTAs to enhance their domestic
welfare. In a hypothetical situation, if India joins other extra-regional
RTAs, in the event of a failure of the SAFTA process, India's welfare
would be much higher than what it could have gained from SAFTA.
Instead, if India implements SAFTA, India-Brazil-South Africa
initiatives, GCC, BIMSTEC, etc., simultaneously, the possible gains
are likely be the largest for India, and others RTAs including SAFTA
are also likely to gain from the arrangement. But the gains for other
South Asian regional countries under this scenario would be lesser
than that of SAFTA. Therefore, there is distinct advantage for South
Asian countries in implementing SAFTA in the most effective
manner.
S K Mohanty is a researcher at Research and Information System
for Developing Countries (RIS), New Delhi, India.
Endnotes1 See details of the Tenth plan document of India, highlighting the role of
foreign savings2 When tariff rates are very high to restrict importation effectively, the
import weight for these commodities would be close to zero and the net
contribution of these products to the overall calculation of tariff might
be almost zero. 3 The results of WTO (2002), Goldar and Mehta (2001) and Mehta (2000)
show that average tariffs of India and also broad sectors have declined
persistently in the 1990s.4 In this case we have used individual series to calculate mode tariff.5 Further decline in average tariff rate might have taken place after 2002-
03, but we have not analysed the tariff policy after 2002-03. The Indian
171170
Government has taken a consensus view that India's average tariff may
be at par with that of ASEAN soon. For achieving this end, the tariff
rates might have declined further.6 The tariff data used in our analysis are almost with similar trade
classification (Harmonised System). Even in HS trade classification,
there are various variants of classifications; they are different at a micro
level. Since aggregation in the present analysis is undertaken at a macro
level (at HS Section), the variations in the product classification under
various HS classification (such as HS88, HS92, HS96) may not affect
results while we compare results from one year to another.
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Geneva.
Informal and Free Trade Arrangements
Nisha Taneja
he importance of studying informal trade in South Asia can be
best understood if it is placed in the context of formal trade.
The South Asian countries have made several attempts at Tenhancing trade in the region. As early as 1985, the South Asian
countries of Bhutan, Bangladesh, India, Maldives, Sri Lanka,
Pakistan and Nepal formed the South Asian Association for Regional
Co-operation (SAARC). In 1991, a South Asian Preferential Trading
Arrangement (SAPTA) amongst the SAARC member countries was
set up with the ultimate goal of achieving a South Asian Free Trade
Area (SAFTA). The signing of the SAFTA at the 12th SAARC Summit
held in Islamabad is now a reality. In addition, there have been
several bilateral free trade agreements within the region. India has
free trade agreements with Bhutan and Nepal and has recently
signed one with Sri Lanka. Similarly, Free Trade Arrangements are
being negotiated between Pakistan and Sri Lanka and between
Bangladesh and Pakistan. Despite such efforts by the South Asian
countries, trade within the countries continues to be abysmally low.
Clearly there would be other mechanisms that would inject vitality
into trade flows in the region. One way would be to focus on the
large and vibrant informal trade in the region. It is in this context
that the present focus is on informal trade flows in the South Asian
region. Available evidence suggests that informal trade is rampant
and if such trade is brought within the ambit of official trade, a
significant increase could be witnessed. However, this will largely
depend on the nature of informal trade, which is discussed later.
175174
There are two key issues that are at the forefront of studying informal
trade in the South Asian region- the magnitude of such trade and the
factors underlying such trade flows. Quantitative estimates are
important since they would reflect the extent of potential trade that
exists in the region. If recorded trade statistics give a misleading
picture of the actual amount of trade taking place, poor regional
trade policies may be formulated. In the latter issue it is important to
understand the institutional mechanism that drives informal trade,
how it differs from formal trade and why such trade takes place. To
the extent that high tariffs and non-tariff barriers in the South Asian
region encourage the use of informal channels, bilateral/regional
Free Trade Arrangements would induce a shift of informal trade
flows to formal trade channel. However, if there are factors other
than trade policy distortions that determine informal trade, then a
deeper understanding is needed. Thus, as long as the transacting
environment for informal trading is more efficient than that of
formal trading, informal trade may continue to co-exist with formal
trade. It is useful to classify factors determining informal trade flows
into two broad categories: (i) those that are related to trade policy
barriers and (ii) institutional and other factors. Since India is the only country which shares its borders with almost
all the South Asian countries and at the same time no country shares
its border with countries other than India within South Asia, the
central actor in informal trade has been India. India shares a long
and porous border with Bangladesh, Nepal and Pakistan. Informal
trade with these countries largely takes place across the land borders.
Informal trade with Sri Lanka takes place largely through air
passengers, with a small proportion being carried out by sea through
country boats. A crucial aspect to be kept in mind while analysing
issues related to informal trade is the definition of such trade flows.
Informal or unrecorded trade is broadly defined to include all trading
activities between any two countries which should be included in the
national income according to national income conventions but are
presently not captured by official national income statistics.
I. Magnitude of Informal TradeThe only method to estimate informal trade flows is through primary
surveys. The Delphi technique is the most robust methodology used
so far. It is essentially used for gathering and processing the opinions
of informed individuals. The iterations are repeated till broadly
converging responses are received. Reasonably good estimates are
available for Bangladesh, Nepal and Sri Lanka that are based on the
Delphi technique. Estimates for Bhutan are based on primary
surveys, but the methodology is not clear. Information on estimates
for Pakistan is quite scanty, though its informal trade is believed to
be the largest in the South Asian region.
It is worth noting some interesting features. Total informal trade in
the South Asian region exceeds US$ 3 billion which is almost double
the formal trade in the region for corresponding years for which
informal trade estimates are available. India's informal trade with
Pakistan is almost ten times that of formal trade in the region, that
with Nepal and Bangladesh is almost as large as formal trade, with
Sri Lanka it is almost one-third of formal trade and that with Bhutan
is three times as much as formal trade. (see Table1 and Table 2)
Another noticeable feature is the fact that India has a trade surplus
with Bangladesh, Pakistan, Sri Lanka and Bhutan on the unofficial
trade account, while with Nepal it has a trade deficit. Interestingly, a
similar pattern can be observed on the official trade account. (See
Table 1 and Table 2)
One also needs to examine the extent to which the composition of
formal and informal trade differs. Of the US$ 2 billion informal trade
with Pakistan, almost half is traded through third countries
(technically official trade) such as Dubai, CIS countries and
Afghanistan, while the remainder is cross-border informal trade.
Unofficial exports through both routes comprise machinery, cement,
tyres, tea, medicines, videotapes, alcoholic beverages, chemical
products, steel utensils etc.- the range covering low cost mass scale
produced goods to Indian branded items such as Tata's Tetley tea
and products made by Dabur and Pioma Industries. Informal
imports from Pakistan consist of food items, synthetic fibers and
some chemical products.
India's official exports to Pakistan consist largely of food items- the
main item being animal feed stuff; primary products mainly iron ore
and crude vegetable materials, and manufactured goods- the chief
item being building material. Official imports comprise of food items,
mainly sugar and dry fruits.
177176
As Bangladesh is sandwiched between the north-eastern region of
India and the West Bengal borders of India, informal trade between
India and Bangladesh takes place both along the borders between
West Bengal and Bangladesh and between the north-eastern regions
and Bangladesh. Commodities exported informally from India to
Bangladesh through West Bengal comprise of cattle, sugar, kerosene
oil, sarees, bicycles, automobile components and parts and other
consumer goods like plastic items, razor blades, medicines etc. Items
imported from Bangladesh into India through West Bengal comprise
of synthetic fabrics, spices and Hilsa fish. Informal exports from the
North East Region to Bangladesh comprise fruits, fish, sugar, cattle,
raw cotton, spices, medicines, sarees and coal. Imports on the other
hand consist of polythene, palm oil, plastic shoes and a range of
miscellaneous consumer items. The formal exports are dominated by
industrial manufactures among which textile products is the largest
item. India's formal imports from Bangladesh comprise largely of
crude raw materials- chiefly jute, and Chemical related products-
mainly fertilisers.
India exports informally sarees, electrical and mechanical items,
textiles and utensils to Sri Lanka while informal imports consist of
spices, electronic items, cosmetics and liquor and cigarettes. India's
formal exports to Sri Lanka comprise a wide range of goods, the bulk
of which are a variety of manufactured goods, dominated by textile
fabric, machinery and transport equipment and a variety of food
items. India's formal imports from Sri Lanka consist overwhelmingly
of primary products and raw materials.
Indo-Nepal informal trade includes a very wide variety of items.
India exports textiles, processed and unprocessed food, cement,
hardware, automobiles and parts, electrical goods, utensils, plastic,
live animals, fuel, sanitary items, medicines, fertilizer, machinery
and parts, coconut oil, spices, dry fruits, electronics, tobacco etc.
Informal imports from Nepal are electronics, bags/suitcases, spices,
electrical goods, footwear, betel nut, medicinal powder, glass
crockery items, cosmetics, beverages, processed food, toys, lighter,
lock, fuel etc. While formally, India exports transport equipment and
machinery- mainly motor vehicles, medicines and other
manufactured goods, official imports consist largely of edible and
other essential oils, man-made filaments and copper.
Commodities exported informally from India to Bhutan consist of
rice, sugar, flour, yarn, garments and aluminium. Major
commodities imported by India from Bhutan are liquor, and
electronic items and footwear. Formal exports consisted of products
including spirit and beverages, residual chemical products etc.
Informal imports from Bhutan consisted mainly of wood products
and inorganic chemicals
It can be surmised that commodity baskets being traded formally
and informally are different. Also important is the fact that while a
large part of informal imports into India comprise third country
goods, informal exports to the South Asian countries consist of
essential goods (both food and non-food) and mass scale consumer
items.
II. Why Informal Trade Takes PlaceBy their very definition, SAFTA and the bilateral trade agreements
imply removal of trade barriers. Considering the extent to which
such barriers restrict official trade flows, a removal would lead to a
Table 1: India's Informal Trade with South Asia
Exports(X)
Imports(M)
Trade Balance (X -M)
Total Trade(X+M)
Bangladesh 1
299.0
14.0
285.0
313.0
Sri Lanka 2
185.5
21.8
163.7
207.3
Pakistan3
n.a.
n.a.
Positive
2000
Nepal 4
180.0
228.0
-48.0
408.0
Bhutan 5
31.3
1.2
30.1
32.6
Total South Asia
-
-
-
2960.9
Table 2: India's Formal Trade with South Asia
Exports (X)
Imports(M)
Trade Balance (X -M)
Total Trade(X+M)
Bangladesh1
349.1
7.8
341.2
356.9Sri Lanka 2
640.2
45.0
595.2
685.2Pakistan 3
157.2
36.1
121.1
193.3Nepal 4
141.0
255.0
-114.0
396.0Bhutan 5 7.0 3.0 4.0 10.0Total South Asia - - - 1641.4
Sources: Chaudhary (1995) for Bangladesh; Taneja et. al. (2002) for Sri Lanka
and Nepal; Economist (1996) for Pakistan; Rao et. al. (1997) for Bhutan. Notes : X denotes exports while M denotes imports.1. (1992-93), 2. (2000-01), 3. (1996), 4. (2000-01), 5. (1993-94)
Sources: Chaudhary (1995) for Bangladesh; Taneja et. al.(2002) for Sri Lanka
and Nepal; Commodity Trade Statistics for Pakistan, Nepal and Bhutan.Notes: X denotes exports while M denotes imports.1. (1992-93), 2. (2000-01), 3. (1994), 4. (2000-01), 5. (1994).
179178
shift in trade flows from informal to formal trade channels. By the
same logic, if informal trade is driven by factors that do not fall
under the purview of free trade agreements, then informal trade will
persist in the region.
(a) Trade policy distortionsHigh tariffs within the SAARC region encourage informal trade
across borders. High tariff rates create a strong incentive to avoid the
formal channel in order to evade tariffs. It can be seen that tariffs in
India, Bangladesh and Pakistan have been high through the 1990s.
The informal channel is particularly attractive for exports of mass
consumer goods that are being exported informally from India to the
other South Asian countries. Such products are not being produced
by very large firms. Tariffs form a significant proportion of final
prices for such firms and evading them makes informal trade
profitable. It needs to be mentioned that a movement from SAPTA to
SAFTA would mean gradually moving to zero tariffs and informal
trade occurring due to high tariffs will automatically shift to formal
channels. At the same time tariffs are continuously falling under the
free trade agreements that India has with Nepal, Bhutan and Sri
Lanka. With these developments a large part of informal trade is
likely to shift to formal channels.
The presence of non-tariff barriers, (NTBs) in the form of
quantitative and other restrictions has, in the 1990s, encouraged
informal trade in the region. In the early 1990s, India and
Bangladesh had the highest non-tariff barrier coverage ratio for
primary and manufactured goods. In fact, India had an NTB
coverage ratio of 66 per cent and Bangladesh had an NTB coverage
ratio of 52 per cent. In recent years, quantitative restrictions have
come down considerably in the region and, to the extent that trade in
the region is obstructed by NTBs, a shift to formal channels is likely
to occur.
While Free Trade Arrangements require abandoning both tariff and
non-tariff barriers, they also require rules of origin to ensure that
goods from third countries do not enter a low tariff country through
official channels to be traded informally into the country with higher
tariffs. Thus goods from third countries passing through another
member country of the FTA before arriving at the final market for
consumption need to meet minimum processing requirements to
benefit from duty free entry. Even though SAPTA lays out such rules
clearly, as long as tariff rates differ across countries, there is a strong
incentive for traders to flout the rules of origin principles and trade
informally. In the early 1990s, the unweighted tariff average was
highest for Bangladesh at 79 per cent followed by Pakistan 59 per
cent and India 51 per cent. Tariffs were relatively lower for Sri Lanka 127 per cent and Nepal 14 per cent . In 2000, the average tariffs were
highest in India at 39 per cent, followed by Pakistan (25 per cent), 2Bangladesh (20 per cent) and Sri Lanka (15 per cent) . In several
years, through the decade of the 1990s, India had higher tariffs than
its neighbouring countries. Clearly there is an incentive for countries
to import goods at lower tariffs from third countries and export them
to India through informal channels.
Rules of origin are also known to be complex and sometimes provide
the excuse to block trade, operating in effect as a non-tariff barrier.
For instance, products eligible for preferential concessions have to be
certified by a certificate of origin, which is to be issued by an
authority designated by the Government of the exporting member
state and notified to the other state in accordance with certification
procedures. However the importing member state can refute the
certificate and the settlement could be very time consuming, thereby
affecting trade adversely.
(b) Institutional and other factorsIn order to go beyond the conventional role of trade policy barriers in
influencing informal trade flows, it is useful to understand the
functioning of informal trading and formal trading markets. Under
formal trading arrangements, the recourse to law defines contracts
between two contracting parties. This ensures that goods move
across borders and payments are guaranteed. On the other hand,
contracting parties in informal trade cannot resort to the law for
violation of terms of contract. Consequently, it is reasonable to
assume that individuals trading through the informal channel have
developed parallel institutional mechanisms for contract
enforcement and dispute settlement. Also, the smooth functioning
of such markets shows that traders have developed efficient
mechanisms for obtaining information on quantities and
commodities to be traded and for mitigating risk that arise from the
transacting environment. On the other hand, it is important to
understand the institutional structure that supports formal trade
181180
where exchange is affected by factors which are not related to the
physical process of production, such as administrative processes,
government rules and regulations, infrastructure bottlenecks, etc.
Thus, if the institutional arrangement under informal trading is more
efficient than that supporting formal trade, traders may prefer to
trade informally.
The inadequate transport and transit systems that have been in
existence between India and her neighbouring countries have led to
high transportation costs in the region. One major hurdle in road
transport between India and Bhutan is the temporary blockages due
to landslides. In the case of trade between India and Nepal, the
terrain in Nepal makes building and maintaining roads not only
difficult but expensive as well. Even with respect to transit modalities
several bottlenecks have been identified: port congestion, excessive 3documentation, delays , slow movement of goods, non availability of
equipment and railway wagons, transhipment and other indirect
costs. A large part of trade therefore takes place informally. Thus
traders use the informal channel in order to save on transportation
costs. Particularly in the case of perishable commodities it is more
cost effective to trade informally. Thus, as long as transport costs are
higher in the formal channel than in the informal channel, informal
trade will continue to take place.
There are other transaction costs that emanate from the transacting
environment of formal and informal trading. While informal trading
markets function smoothly, there are costs that have to be incurred
to mitigate the risk associated with such transactions. Risk in such
trading has been found to be extremely low. For instance in Indo-
Bangladesh informal trading, the probability of goods being seized
was less than 0.1 while that in Indo-Nepal and Indo-Sri Lanka 4informal trading was still lower at 0.03 . In fact, studies have shown
that even when goods are seized, they can be released on nominal 5payments . On the other hand, formal trading procedures are
extremely complex in the South Asian region. For instance the
number of documents that need to be filled up for trading is 29 for 6India, 83 for Nepal and 15 for Pakistan . Also clearances have to be
obtained from multiple agencies at various stages of trading that
include obtaining licences and getting clearances from banks. Such
procedures not only involve incurring costs in terms of time taken
but also lead to rent seeking activities. Traders are known to pay
hefty bribes at various stages of trading before their goods can finally
reach their destination.
Intrinsic to the activity of trading is the issue of payments. Formal
banking facilities are not only inadequate in the region but also very
time consuming. Traders have to wait for several days before their
payments can be realised. The informal banking system, on the other
hand, is very organised and payments are not only ensured but are
also very quick. The uniqueness of the informal banking system is
that there is no physical transfer of currency. This mechanism,
referred to as Hawala in India, Hundi in Bangladesh and Undiyal in
Sri Lanka, operates on the same principles. Partner country
currencies are easily convertible in the informal money market
making it possible for traders to trade in different currencies. In fact,
the informal banking is so efficient that payments can be received
within a day. Traders may therefore prefer to use the informal
channel as it has a better payments mechanism than the formal
channel.
Perhaps what lies at the core of informal trading markets is the close
ethnic ties between trading markets. A common language, religion,
culture etc., play a crucial role in facilitating trading across the
border. This is particularly so where the same ethnic community is
divided into two national boundaries; for example in the case of
India, Bangladesh, Pakistan and Nepal. There are strong ethnic links
between the Tamils in South India and those in Sri Lanka. Ethnic ties
amongst trading partner countries in the informal channel not only
ensure that payments are made but also go towards reducing risk
and other transaction costs in carrying trade across borders. It has
been observed that in Indo-Nepal, Indo-Bangladesh and Indo-Sri
Lanka informal trading ethnic ties are stronger in the informal 7channel than in the formal channel .
In some cases, traders trade informally not because they are
unwilling to abide by laws and regulations but rather because they
lack the necessary resources to do so. A large number of informal
traders have low levels of education. The lack of education deters
traders from using the formal channel. Also, lack of education would
preclude traders from having information on trade policy. Most
informal traders are not aware of the details of different trading
arrangements. In fact informal traders in Sri Lanka have pointed out
183182
that the terms and conditions of trade agreements are available only 8in English and not in any local language spoken in the two countries .
Under such conditions, traders would prefer to use the informal
channel. It has been found in various studies that in Indo-Nepal,
Indo-Bangladesh and Indo-Sri Lanka trading, levels of education for
formal traders are significantly higher than those of informal 9traders .
III. Concluding RemarksIt is evident that informal trade in the region is quite large and
cannot be ignored in any policy dialogue. The Framework Agreement
for SAFTA signed at the 12th SAARC Summit does not address this
issue. Informal trade between India and Pakistan, believed to be the
largest is a subject area where not much information exists. As the
two countries move closer to improved trade relations, it is
important to understand the functioning of such markets and the
inadequacies of the formal trading channel. The Indo-Sri Lanka
Comprehensive Economic Partnership Agreement Framework signed
recently includes trade services, corrects the anomalies of the
currently operational Indo-Sri Lanka Free Trade Agreement but
makes no attempt to look into the issues of informal trade. India and
Nepal have a long history of bilateral FTAs signed since 1961, but
these agreements have focused only on unauthorised trade in third
country goods, with clear reference to flow of goods informally from
Nepal to India. It is not widely known that informal trade from India
to Nepal in locally produced goods is of equal magnitude and cannot
be ignored in bilateral talks. The bilateral Free Trade Agreement
between India and Nepal was renewed in 2002 but did not recognise
the importance of the two-way informal trade flow.
There is no doubt that the implementation of SAFTA and other
bilateral trading arrangements would lead to a reduction in informal
trade flows. It may be stated here that the incidence of informal
trade, particularly in goods from third countries into India has come
down with lowering of tariffs in the region. For instance, in 1991,
informal trade in third country goods from Sri Lanka to India was
almost as large as informal trade from India to Sri Lanka. Further, in
1990, informal trade in third country goods from Nepal to India was 10almost 10 times of formal trade . Recent estimates of informal trade
in third country goods show that such trade has come down
considerably and further reduction and harmonisation of tariffs
would reduce the incidence of informal trade.
It is evident that the institutional mechanism in the informal trading
market facilitates informal trade. The channels through which
informal trade takes place are rooted in the strong ethnic ties among
the traders and in the historical linkages in these societies. Ethnic
trading networks that operate on trust and honesty mitigate risks
associated with such trading. The involvement of law enforcement
agencies to collect rents (thereby mitigating informal trading risks)
makes the transacting and transporting processes smooth and acts
as an added incentive to carry on informal trade. It is easily
perceived that informal trade under these circumstances would be
difficult to eliminate. While it can well be argued that if the
transacting environment for informal trading is more efficient than
for formal trading, why not let it continue- the danger is that the
associated money laundering to finance such trade deals might prove
to be a threat to the smooth functioning of formal capital markets. A
focus on law enforcement agencies to detect and obstruct informal
transit of goods across borders is not a viable solution as increase in
enforcement mechanisms could only lead to increase in rent
collections. What would be more effective would be to reduce the
impediments to trade in the formal channels. Time delays due to
unnecessarily long and complicated procedures need to be reduced
by simplifying procedures. Clearly, the reform process in the South
Asian countries should undertake institutional reforms so that
transaction costs can be lowered. This would also have a much larger
impact in the form of trade expansion from and within the South
Asian region. Information is another important aspect, which has to
be looked into. It is true that a major proportion of informal traders
are locals who do not have high levels of education or are only
conversant with local languages. Such gaps have to be filled by
suitable dissemination of information and creation of awareness
among traders of the various norms.
In sum, while informal trade is unlikely to be totally eliminated
because ethnic trading networks between trading partners would
continue to facilitate informal trade by reducing transaction costs
through minimisation of risk costs, market information and search
costs; further reduction of tariffs, improvements in the transacting
environment of formal trade, improving awareness and education
levels and improving information dissemination would lead to a
185184
decline in informal trade flows.
Nisha Taneja works at the Indian Council for Research on
International Economic Relations (ICRIER), New Delhi, India.
Endnotes1 World Bank (1997)2 World Bank (2003)3 Trucks have to wait for 8-10 days before documents are endorsed and
checked at the customs before crossing the border. The concerned
transit authorities at Petrpole-Bongaon transit point are closed three
days in a week resulting in no trade on these three days.4 Pohit and Taneja (2000) and Taneja et.al. (2002)5 Taneja et. al. (2002)6 ESCAP (2000)7 Pohit and Taneja(2000); Taneja et. al. (2002)8 Taneja et. al. (2002)9 Pohit and Taneja (2000); Taneja et. al. (2002)10 Taneja (1999)
ReferenceslS.K. Chaudhari, 'Cross Border Trade Between India and Bangladesh',
NCAER, Working Paper 58, New Delhi, 1995.lESCAP, 'Alignment of Trade Documents and Procedures of India, Nepal
and Pakistan', Paper presented at the National Workshop on Facilitating
Intra- and Intra-sub-regional Trade in the SAARC sub-region, 2000.lS. Pohit and Nisha Taneja, 'India's Informal Trade with Bangladesh and
Nepal: A Qualitative Assessment', Working Paper No. 58, Indian
Council for Research on International Economic Relations, Delhi, 2000.lV.L. Rao, S. Baruah and R.U. Das, India's Border Trade with select
Neighbouring Countries, (New Delhi: RIS, 1997).lTaneja, 'Informal Trade in the SAARC Region', Working Paper No. 47,
Indian Council for Research on International Economic Relations,
Delhi, 1999.lNisha Taneja, M. Sarvananthan, B.K. Karmacharya and S. Pohit,
'Informal Trade in the SAARC Region: A Case Study of India, Sri Lanka
and Nepal', Paper prepared for South Asia Network of Economic
research Institutes (SANEI), 2002.l'Pakistan's Least Favoured Nation', The Economist, January 1996.lWorld Bank, 'South Asia's Integration into the World Economy',
Washington, 1997.lWorld Bank, 'Trade Policies of the South Asian Countries', Paper
presented by Garry Pursell at a Workshop held in New Delhi, October
16-17, 2003.
Pakistan, India, and Regional Cooperation
Shahid Javed Burki
he main conclusion reached in this essay is that the full and
unconstrained resumption of trade on the basis of MFN T(most favoured nation) status granted by India and Pakistan
to each other, as required by the World Trade Organisation, holds
great promise. It has been seen in many parts of the globe that deep
animosities among nations can be overcome by trade which
produces a dynamic of interdependence between people and the
owners of production systems. It has often been claimed that
democracies don't go to war with one another. That may be true to
some extent. It can also be maintained that countries that have tied
their economic systems with bilateral and regional trade agreements
find it difficult to use military force to settle differences. The main
line of thought to be advanced in this article is that the peace process
between India and Pakistan would succeed if it is supported
vigorously by trade. However, to make sure that the two countries
don't use 'trade wars' as they did in the 1940s and 1950s to make
political points against one another, it would be a good strategic
move to fix Pakistan and India into a regional trading arrangement.
This thesis is developed in four sections in addition to the
introduction and conclusion.
?Section 1 looks at regionalism in trade and how the lessons
learnt from the experience of other regions in the world could be applied to South Asia.
187186
?The second section examines Pakistan's recent economic
situation and explains why a leap frog strategy of growth, adopted within the context of a South Asian regional trading arrangement could help the country improve on its recent growth performance.
?The third section analyses the Indian situation and focuses on
how trade in 'knowledge-intensive' goods and services is helping India turn its population into an economic asset.
?The fourth section provides in rough form the contour of the
regional trading arrangement that could emerge in the region for the next one decade, say by the year 2015.
I. Why Regional Trade?Economic theory is ambivalent about regionalism- an arrangement
that provides the members of a regional association preferential
access to each others' markets. The purists have no time for such an 1approach . They maintain that the only way to promote trade for
individual countries is not to worry about how their partners
reciprocate if they themselves open their borders. Borders not only
in the developing countries but all across the world are blocked with
all manner of barriers. They cover the entire gamut of restrictions
governments place in the free flow of goods across their frontiers.
These restrictions include tariffs, quantitative restrictions, and a vast
variety of non-tariff barriers. The last category encompasses
practices such as health, labour and environmental standards
importers impose on the exporters. Sometimes importers also
include the requirement that the products imported by them contain
a certain amount of raw material that originates with them. How to
dismantle these barriers? According to pure economic theory,
unilateralism is the only way to proceed since the advantages of free
trade are far greater than the damages they may cause.
However, since that is not the way the world functions, purists are
prepared to make room for global trading arrangements such as the
one that led to the creation of the World Trade Organisation. The
WTO is the second best route towards free trade. This is about as far
as pure theory is prepared to go in terms of promoting global trade.
It has no patience with regional trading arrangements (RTAs).
But there are pragmatists who argue that in an imperfect world,
regional trading arrangements (RTAs) play an important and
productive role. But, argue the proponents, such arrangements must
be open, they must not discriminate too much against those who are
not included within their purview. Open regionalism of this type is
useful for a number of reasons. To begin with, it locks in a
government's commitment to lower tariffs and to the removal of
other constraints against a relatively free movement of goods.
Countries operating on their own can- and often do- change trade
regulations in response to pressures by vested interests or to meet
resource shortfalls. This has been sdone very frequently in Pakistan
by a device called the SRO, issued from time to time by the Central
Board of Revenue, usually in response to pressure from vested
interests. Such unilateral actions are difficult to take when countries
surrender some of their rights and a bit of their sovereignty to
regional trading arrangements.
RTAs also lead to greater foreign direct investment. Foreign
investors operating within RTAs have the comfort that government
policies will not change suddenly. They can also access much larger
markets. They can locate their investments in one place and expect
to sell their goods in a wider market. Some RTAs also tie their
member countries to follow certain rules in the areas of politics,
human rights, governance and the like. Mercosur- an arrangement
between Argentina, Brazil, Paraguay and Uruguay- makes it
incumbent upon the member countries to design their political
systems in line with the basic principles of liberal, representative
democracies. Any sharp deviation from this type of governance can
lead to expulsion from the arrangement. It was this requirement in
the treaty that originally set up Mercosur that prevented a military
take-over in the perpetually troubled Paraguay in the late 1990s.
When we talk about regional cooperation from Pakistan's
perspective, should we talk only about South Asia or should we also
look at other possibilities including regional alliances with the non-
Arab countries of the Middle East, the Muslim countries of Central
Asia, even bilateral trading and economic arrangements with China,
Asia's largest and most dynamic economy? We should certainly look
at all these possibilities. We will for the moment concentrate on the
subject of regional cooperation in South Asia.
Three of South Asia's largest economies, Bangladesh, India and
189188
Pakistan, were once part of a single political entity- British India. It
was, therefore, inevitable that even after partition, there would be
considerable inter-country flow of goods and commodities. This
happened, but only for a while. In 1948-49, the first full year after
partition, 32 per cent of Pakistani imports came from India while
India bought 56 per cent of Pakistan's exports. Fifty two years later,
the situation was dramatically different. In 2000-01, India imported
only 0.42 per cent of Pakistan's exports and provided only 0.13 per
cent of the latter country's imports.
In absolute terms, Indian exports to Pakistan in 2000-01 were
valued at only US$ 186 million out of a total of US$ 44 billion. In
the same year India imported only US$ 65 million worth of goods
and commodities from its northern neighbour while its total imports
were US$ 50 billion. While politics have obviously interfered in the
conduct of trade between India and Pakistan, other countries have
not done well either. South Asian intra-regional trade declined from
19 per cent in 1948-49 to 12 per cent in the early 1950s to only 2-5
per cent in recent years.
These official numbers, however, underestimate the real volume of
trade between the countries in the region, particularly between India
and Pakistan. Estimates of illegal trade between these two countries
through smuggling or through third countries (for example
Singapore and Dubai) put its value at one billion dollars a year.
From being major trading partners at the time of their birth, India
and Pakistan now exchange very little of the goods, commodities and
services they produce.
While political quarrels between India and Pakistan have caused
many problems, they are not the only reason why intra-regional
trade did so poorly in South Asia. There were several other causes as
well, among them the autarkic economic policies followed by all
countries in the region, poor communication links among the
countries and lack of complementarity in the products produced by
the regional economies. Let me deal with each of these three factors.
The South Asians, under the influence of Fabian socialism bought to
the region by Jawaharlal Nehru, India's first prime minister, and
later adopted by Prime Minister Zulfikar Ali Bhutto in Pakistan and
Mujibur Rahman, Bangladesh's first president for his country, gave a
large role to the South Asian state. In turn, the governments of the
region pursued import substituting policies in both industry and
agriculture, de-emphasising export led growth that brought
economic miracles to East Asia.
The South Asians, having taken the decision to delink their
economies, made no effort to improve intra-regional
communications. This was an incredibly short sighted and
economically self-defeating policy to adopt. The British had left a
fairly well developed road and railways network that linked all parts
of their large empire in India. The North Western Railway linked
Karachi with Delhi and the fabled Grand Trunk Road connected
Peshawar through Delhi with Calcutta. The railway and road
network that was built with the NWR and the GT Road as their
backbones could have been of considerable economic value had the
two countries continued to develop them. That, of course, did not
happen.
And in so far as the complementarities among the regional
economies are concerned, these were not sufficiently pronounced for
several decades to warrant the development of strong regional
trading ties. It is only in recent years, with the IT sector becoming a
leading player in the Indian economy, that Bangladesh, Sri Lanka
and Pakistan can begin to take advantage of what India has already
achieved.
Even if Pakistan and India have the political will to open their
presently closed borders to inter-country trade, it would be better to
do it initially in the context of a regional arrangement. Using such
an arrangement will reduce the temptation for either country to use
trade as a weapon of diplomacy. The time has come to build these
relations on a more robust foundation.
II. Growth Strategy for PakistanOnce Pakistani policymakers begin to factor in international trade as
an important determinant of development, they could adopt an
entirely new strategy of growth. This strategy, as we will suggest
below, would not necessarily follow those that propelled the region
of East Asia and China towards relative prosperity. It would also not
seek to build the knowledge-intensive export sector to the extent
India has done. Instead, it could follow a strategy of its own- a kind
191190
of hybrid based on the experiences of other Asian nations.
Pakistan could follow one of the three models that have been tried
successfully by various Asian countries. The first of these is the
model that produced the 'miracle economies' of East Asia. Also
called 'tigers' and 'cubs,' these economies essentially tapped the large
export markets available in the industrial world. This strategy
essentially duplicated what Japan had done in the 1950s and 1960s.
In following export led strategies, the industrial sectors in the
miracle countries were guided by the state which identified areas for
them to expand into. The industries that were being helped were
almost always privately owned.
Nonetheless, the state not only helped industries identify markets
abroad, it also got the financial sector to lend large amounts of
money to the chosen industries at below market rates. In the
parlance of economics this was called 'directed credit'- credit
provided by banks to industries at the direction of the state. This
connection between industry and finance proved remarkably
successful but it also led to the financial crisis of 1997-98. What
came to be called 'crony capitalism'- that is how directed credit
evolved- worked for a while but had to be adjusted once the financial
crisis exposed its weaknesses. This has been done successfully and
the East Asians are back on the high growth trajectory- something
few analysts expected at the peak of the crisis.
The other model that Pakistan could adopt was pursued by China. It
focused on developing the human resource by providing all people-
boys and girls, men and women, and residents in all parts of the
country- with free education and health. China's human resource
development occurred in an environment of authoritarian
management of the economy and of the political system. Either by
design or purely because of pragmatism, the Chinese, starting in the
1970s, released the enormous energies of this well educated and
healthy labour by gradually loosening the political and social
controls they had placed on them. First agriculture and then small
scale and privately owned industries responded to these incentives.
The rest, as they say, is history.
Then there is the Indian model, one aspect of which we will discuss
below in some detail. What is today known as the 'Indian way' was
not a well thought-out strategy initially. In fact, the explicit Indian
strategy for development adopted by the country's first generation of
leaders achieved a result exactly the opposite of that intended. It
constrained growth rather than accelerating it. In the period
between the mid 1950s and the mid 1980s, the Indian economy
chugged along at what came to be called the 'Hindu rate of growth' a
growth rate of some 3-3.5 per cent a year. The model being followed
now is the product of a series of accidents and ad hoc decisions.
It has as its foundation Prime Minister Jawaharlal Nehru's decision
taken in the 1950s to set up half a dozen institutes of technology.
When these institutes began to produce thousands of engineers and
science graduates, there were very few employment opportunities
available within the state dominated, moribund, highly inefficient
and stagnant industries. A large number of graduates of the now
famous IITs had to look outside India for jobs and they found
thousands of them in the telecommunications, information and
communication technology (ICT) industry in the West. When, in the
late 1990s and the era of dotcom explosion, the U.S. industry ran
into serious skill shortages, a significant part of this was met by
labour imports from India. Thus the Indian Diaspora was created
which in the 1980s and 1990s not only acquired great wealth but also
considerable experience and expertise. Once the non-resident
Indian community had become viable in terms of size, wealth,
income, and expertise, it was able to help with the development of
the ICT industry back in the homeland. Consequently, India's IT
sector became one of the most vibrant in the world.
What we see in India today is an economy that is being pushed
forward by a growth rate which has relied very heavily on knowledge
accumulation as an important contributor to growth. India's
policymakers are now confident that, based on the recent
transformation of the economy, they will be able to get their country
to climb on to the same growth trajectory on which China is
proceeding. This, in sum, is the much applauded Indian model of
economic success.
Looking at the future, but also looking back at the experience of the
various successful Asian countries, what strategy should Pakistan
193192
follow? Islamabad has a menu of options available. It could use
private industry to aggressively enter the export sector, exploiting
the abundant financial resources now available within the reformed
financial sector. This would mean following the track previously
travelled by the miracle economies of East Asia. But, unfortunately
for Pakistan, there is not much synergy between the structure of
Pakistan's industrial sector and the nature of demand in the world's
large markets. Pakistan will not be able to duplicate the experience
of East Asia.
Or, alternatively, Pakistan could invest massively in developing its
large human resource by providing it with education, health and
opportunities for skill development and knowledge accumulation.
Such a strategy could work if Pakistan had the resources but more
importantly the political will. When China went on that track it
saved about 42 per cent of its gross national income, a proportion
more than three times Pakistan's abysmally low saving rate of today.
China's human resource oriented strategy produced results after two
generations, or at least a generation and a half, had been sacrificed
for the sake of the future. Pakistan neither has the luxury of time
nor the political will on the part of its leaders to take the country
through such a grind.
Finally, Pakistan could follow the Indian approach of concentrating
on the accumulation of skills and knowledge by one segment of the
population. A small (small relatively to the size of the population
but still numbering in the millions) highly skilled workforce could
enter the growth niches available in the global markets. This is the
strategy adopted by the first administration of President Pervez
Musharraf. It was championed with great energy by the then
Minister of Science and Technology, Dr. Atta-ur-Rahman.
Unfortunately, it did not produce the promised results.
I would advocate, instead, an approach that draws a bit on the
Indian experience but then moves on an altogether different track.
This two pronged approach would still emphasise knowledge and
skill development as India has done so successfully. Based on a well
equipped workforce, Pakistan could either export its abundant
workforce or take part in the rapidly evolving 'outsourcing'
opportunities that are changing the global production system. On
the other track, Pakistan could become the hub of north-south and
east-west commerce. The north-south track could link Central Asia,
including Afghanistan, with India and points beyond. The east-west
track could connect the western parts of China with the Arabian Sea
through the ports of Karachi and Gwadar. These two tracks will
cross in Pakistan and bring enormous benefits to the country.
For Pakistan to follow such a strategy, it will have to undertake large
investments in improving the physical infrastructure- roads,
railways, ports and airports. It will also need to develop its economy
to supply this transit trade with the services it needs including
insurance, finance, warehousing, processing, transhipment, etc.
Modernisation of the service sector to facilitate such a strategy would
mean focusing on creating appropriate levels of skills within the
country in a number of diverse areas.
What I have spelt out above is a strategy for sustained growth and
development suitable for a country in Pakistan's situation. Pakistan
could successfully exploit its young people to work for the skill-short
sectors in the western economies. It could, at the same time, use its
geography as a point of transit for two routes- new versions of the
old Silk Route- that would allow commerce to flow from different
parts of the world. Following this two-pronged approach, Pakistan
could leap frog into the future without going through the paces of
development followed by other Asian countries. But a great deal of
thought and planning will need to be done to develop and implement
this novel strategy. And, most important of all, for this strategy to
succeed Pakistan will need to draw strength from its neighbours,
particularly India, and work within the frameworks of regional
trading arrangements. In the section that follows, I will examine
how India has fared in the last few years after analysing how
Pakistan could benefit from its neighbour's experience.
III. A Resurgent IndiaPakistan's rapidly improving relations with India should produce
economic opportunities that could be successfully employed. One of
them is in the sector of information and communications
technology, or ICT, where India has begun to experience shortages of
skilled workers. There are reports of reverse migrations of Indians
from the United States back to their homeland. There are also
195194
reports of Indian companies entering into strategic alliances with
firms in Asia in order to enter the rapidly expanding markets of the
region. Could Pakistan take advantage of these developments? To
answer this question, let us first look at the IT sector.
The global economy, in spite of some recent hiccups, has begun to
respond to some extraordinary developments in information and
communication technologies. Rapid progress in electronics,
telecommunications, and satellite technologies over the last two
decades permit high-capacity data transmissions at a very low cost.
This has brought about a quasi-neutralisation of physical distance as
a barrier to communication and as a factor in economic
competitiveness. As Andrew S. Grove, founder and CEO of Intel
Corporation, said at a software conference in October 2003, 'from a
technical and productivity standpoint, the engineer sitting 6,000
miles away might as well be in the next cubicle and on the local area
network.'
It is the enormous reduction in the cost of communicating with
distant places and the ease with which enormous amount of data and
information can flow instantaneously that has brought about the
shrinking of physical space. For instance, in 1985 the cost of sending
45 million bits of information per second over one kilometre of
optical fibre was close to one hundred dollars; in 1997 it was possible
to send 45,000 million bits per second at a cost of just 0.05 cents.
This has led to the redefinition of the work place. Even those
working on a single project, such as the architectural design of a new
building, don't have to sit together or be located in adjacent offices.
They can easily communicate with one another over the internet.
All change is unsettling; rapid change such as the one brought about
by the revolution in ICT has had the same effect in many different
ways. Initially the fear was that this extraordinary development will
produce an unbridgeable digital divide between the rich and the poor
across the globe as well as within countries. This fear led the UNDP
to devote the better part of its Human Development Report,
published in 2001, to this subject. The authors of the report warned
that unless full cognizance was taken of the adverse consequences of
the spread of information technology, there was a real possibility
that a couple of billion of world citizens will be condemned to live for
generations within impoverished ghettos scattered all around the
globe.
However, as with most technological changes, the benefits that
accrued to both individuals and countries that were quick to
participate in this change far outweigh the associated costs. That
notwithstanding, there is now the opposite fear, expressed by many
in the United States. This concerns the possible loss of jobs to places
such as India, a country that has shown the ability to turn their large
and young populations into economic assets rather than
burdensome liabilities. There is no doubt that under the influence of
the IT revolution, the global economic system is going through a
fundamental transformation. One manifestation of this is the way
corporate America is linking itself with the high-technology sector of
India. But those who are adversely affected initially by this link see
it as a 'zero-sum' development, in which India's gain comes at the
cost of America's loss. There is greater likelihood that this will prove
to be a 'plus-sum' game in which both sides, India and the United
States, will gain.
Why is India the most prominent beneficiary in the developing world
of the ICT revolution? This question has many answers; of which
two provide a clue to what is happening in that country. One, India's
great success in the ICT sector, particularly as an exporter, is owed in
part to a decision taken half a century ago by Jawaharlal Nehru, the
country's first prime minister. When Washington decided that the
imperatives of the cold war required it to provide large amounts of
economic and technical assistance to South Asia, Nehru asked for
the establishment of institutions patterned after the MIT. This
initiative led to the founding of the Indian Institutes of Technology
at six different locations. The IITs now have the well-earned
reputation of producing world class engineers and scientists.
However, these institutions served only a small segment of the
country's vast population. Last year, for instance, they accepted only
3,500 of 178,000 persons who applied for admission. Very wisely,
the Indian government, drawing a lesson from the success of the
IITs, replicated them within the large public sector.
While the IITs became institutions of excellence, the entire public
sector geared itself to train tens of thousands of scientists and
197196
engineers. Consequently, India now produces 3.1 million college
graduates a year, a number that is expected to double by 2010. The
number of engineering colleges is expected to grow 50 per cent, to
nearly 1,600 in four years. Not all the graduates are qualified to do
world class work which is the reason why there is a movement to
improve the quality of teaching by offering much higher salaries.
Indians living abroad are also helping. The non-resident Indians
(NRIs) in the United States have teamed with Wharton School and
Northwestern University's Kellog Graduate School to found a new
Indian School of Business at Hyderabad.
The second reason for India's attraction as a destination for
corporate back-office work is the play on what economists call 'wage-
arbitrage.' This is the difference in the cost of labor in the developed
and developing countries for doing the same kind of work. To take
one example: it is estimated that this year the tax returns of some
20,000 were prepared in India, a number set to increase tenfold, to
200,000 next year. An Indian accountant charges US$ 500 a month
for this work which is equal to the amount paid for a single day by an
American preparing the same tax return.
The Indians have been able to forge alliances with corporate America
that have brought enough employment opportunities to the country
to accommodate a significant number of graduates from technology
institutions. By some estimates, at least one-third of new IT
development work for big U.S. companies is done overseas, with
India the biggest site. By 2008, forecasts McKinsey, the consulting
firm, IT services and back-office work in India will increase five-fold,
to a US$ 57 billion annual export industry employing four million
people and accounting for 7 per cent of the country's gross domestic
product.
While India has succeeded, is there place for other countries with
young populations for obtaining similar benefits from the rapidly
changing structure of the global economy? A large part of the
increment to global output will be in the knowledge-intensive service
sector. Manufacturing in developed countries accounts for just 14
per cent of output and 11 per cent of jobs. It is in this part of the
economy that initial outsourcing occurred and East Asia and China
were the main beneficiaries of that development. The service sector
accounts for 60 per cent of the output of developed economies and
more than two-thirds of employment. It is in this part of the
economy that the Indians have taken a share. But the sector is large
and there is space for other developing countries. Consider one
developed country and one part of the knowledge-intensive service
sector. The output of America's IT sector is estimated at US$ 240
billion. It is growing at a rate of more than 8 per cent a year.
Indians, with exports to the U.S. of about US$ 7 billion, still have
less than three per cent share in the market.
What are the lessons available to other developing countries from
the Indian experience? There are at least four and the most
important of these is to rapidly develop tertiary education. Second,
to boost government spending on research and development, which
is quite properly the province of government. Third, provide public
funding for graduate science and engineering students. Fourth,
develop financial markets so that new technology can be financed by
institutions such as Venture Capital Firms or through instruments
such as high-yield bonds and initial public offerings. These lessons
would be transmitted more readily within the context of a regional
trading arrangement in which the Indian IT sector becomes a major
player.
IV. A South Asian Regional ArrangementOne way of promoting trade relations with India is to do it within the
context of a regional arrangement. That could be one way of
overcoming the enormous suspicion that exists on both sides of the
border. This suspicion cannot be suddenly willed away in a season.
Working with India within the regional context may be a good way to
start.
South Asia has already paid a heavy price for not taking the regional
route. In the late 1950s, when economic development was adopted
as a major goal by all developing countries, South Asia and East Asia
were at about the same stage of development. In the early years of
the 21st century, the latter region has left the former behind by a
very wide margin. In terms of average incomes of the citizens of the
two regions, East Asia is about ten times richer than South Asia.
Even if we assume that better regional cooperation would have
added, on average, one percentage point of growth to the South
199198
Asian regional output, the combined GDP of South Asia today would
be at least 70 per cent higher. This would have translated into an
equivalent increase in per capita income and a considerable decline
in the number of people living in poverty. It would not be an
exaggeration to say that a significant part of the persistence of
poverty in South Asia can be attributed to the lack of economic
cooperation among the countries of the region.
Another way of assessing the benefits of closer economic cooperation
among the countries in the area is to look at the impact of open trade
between India and Pakistan, the region's two largest economies. A
study prepared for the World Bank in 1993 estimated that free
exchange of goods and commodities between India and Pakistan
would have resulted in a nine-fold increase in the flow of trade
between them over a period of five to ten years. Simply removing
the import bans the two countries have placed on their exports to
one another could bring enormous gain to both sides. For instance,
granting each other the 'most favoured nation' status but still
maintaining a 50 per cent tariff would increase the volume of trade
between the two countries by a factor of three.
As a member of the World Trade Organisation, Pakistan is supposed
to grant the 'most favoured nation' treatment to India. This has not
been done while India has extended this benefit to Pakistan. An
MFN status would help to remove some of the distortions that exist
in the flow of trade between the two countries. But such a move
would still be within the context of bilateral relations. To go beyond
that and cast relations within a regional context, policymakers in
Islamabad may begin to focus their attention on the areas in which
such an arrangement could work.
There are four areas in particular in which regional economic
cooperation holds considerable promise. They are information
technology, energy, water, and research and development. Let us
look at each of these in turn.
India, along with Israel and Ireland- the three 'Is'- are now major
players in the global IT sector. As discussed in a previous section,
India has already carved out a significant place for itself in the world
in this sector. There are many ways smaller countries of South Asia
could benefit from the enormous advances India has made.
Institutions providing training in IT could get affiliated with the
well-known and highly developed science and technology centre in
India. Fledging IT companies in Bangladesh, Pakistan and Sri Lanka
could form strategic alliances with the larger companies in India.
Even though India has a very large population and thousands of IT
graduates are produced by the training centres in the country, there
are some labour shortages that could be met by the skilled
workforces from other countries. There are many other
opportunities in the IT sector that could be exploited.
There are even more opportunities available in the sector of energy.
Of all the major economies on the mainland of South Asia, India is
the most deficient in energy and the existing gap between demand
and supply will expand as the economy continues to grow. What are
the options available to India for closing the gap? Currently, oil and
gas constitute 63 per cent of India's primary energy consumption.
According to one estimate, oil demand will increase from 1.9 million
barrels per day to 4.9 million by 2020, an annual rate of growth of
4.6 per cent a year, slightly less than the expected rate of increase in
GDP. Two thirds of oil and consumption is now met from imports.
This places a very heavy burden on the Indian economy which could
be lessened somewhat by importing cheaper electric power and
natural gas from a number of countries in the neighbourhood that
have deliverable surpluses.
Pakistan is one source of energy India could tap. Both the structure
of supply and demand for energy are very different in Pakistan
compared to that in India. Gas is by far the most important source
of energy supply in the country; 32 per cent of electricity is generated
by this fuel. An additional 25 per cent of electricity comes from
hydel power.
Pakistan has the potential to increase both the supply of gas and
hydel power well beyond even the more optimistic projections of
increase in domestic demand. Some 100 undeveloped dam sites
have been identified by various groups of experts which could
generate an additional 35,000 MW of electricity. The country also
has coal reserves of 185 billion tons, the second largest deposit in
South Asia. China, which produces a significant amount of
201200
electricity from coal and where coal still accounts for 80 per cent of
electric power generation, is helping Pakistan to develop coal-
powered electric generation. Once developed, this would add to the
surplus of power Pakistan will have available for sale.
Pakistan, in other words, could become a major supplier of energy to
the north-western states of India. This won't happen unless India
and Pakistan shed mutual suspicion. This is more likely to occur in
the context of formal agreements for regional cooperation. Such an
arrangement could also facilitate the supply of the Bangladeshi
natural gas to India's north eastern states and hydel power produced
by Nepal to the same parts of India.
It is as a transit country for the gas flowing either from Iran or from
Turkmenistan to India that Pakistan could draw the most benefit
from a regional arrangement in South Asia. Take the proposed
pipeline between Iran and India as an example of the benefits that
could accrue to the two countries. A study by Reliance Industries,
India's largest private sector corporation, has concluded that such a
pipeline would halve natural gas prices in India while Pakistan could
collect as much as $500 million annual fees for allowing and
managing the transit of this fuel.
If the countries in the South Asian region mustered enough political
will and dispensed with some of the suspicions that have marked the
relations among them- in particular between India and Pakistan- it
is not beyond the realm of possibility to foresee the development of
various kinds of energy grids in the area. Bangladesh, India, Nepal
and Pakistan in South Asia along with Afghanistan and the Central
Asian states could be connected with one another by a network of
electric, gas and oil grids that would bring enormous benefits to all
of them.
Water is the third area in which regional cooperation among the
countries in South Asia would be enormously beneficial. This is
particularly true for Pakistan which receives 40 per cent of its water
from outside the country, the highest figure in the region after
Bangladesh. Per capita consumption of water in Pakistan is also
much more than the regional average. This is because of the
extensive use of irrigation for agriculture- Pakistan has the world's
largest contiguous irrigated area in the world. For this reason, the
country is the 14th highest consumer of water in per capita terms in
the world and the consumption is likely to increase as population
continues to grow, as cities continue to expand and the economy
continues to modernise. On the supply side there are now severe
limitations on tapping domestic resources. Ground water
development is reaching its limit. Tube wells are being dug deeper
and deeper, mining the underground reservoir. If this continues for
long, the impact on the economy and the environment could be
severe.
A new water-sharing arrangement with India could help to alleviate
some of the problems since Pakistan's neighbour is also running into
the same kinds of shortages and is tempted to exploit the water
available in the disputed state of Kashmir.
It is now recognised that without technological growth, economies
cannot become efficient and worker productivity cannot increase.
Without a significant increase in productivity the incomes earned by
the working poor would not grow at a rate significantly high to pull
them out of poverty. Are there opportunities available in the various
countries of South Asia that could be exploited in order to benefit the
entire regional population?
The answer is yes. India has the most developed educational and
technological base in the region which could serve other countries in
the area. Its science and technology schools have attained world
status. But Pakistan also has the capacity to develop institutions
specialising in irrigation, engineering, textiles, food preparation, and
health sciences that could benefit India and other countries in the
region. Models for such cooperation already exist in other parts of
the world. There are other areas in which collaboration could occur
among the South Asian countries other than the four we have
mentioned above.
V. ConclusionAt the time of the Islamabad summit, the seven SAARC nations
agreed to work towards the creation of a Free Trade Area in South
Asia. They set themselves the target of 2007 by which time the
South Asian Free Trade Area, or SAFTA, will come into force,
allowing goods and commodities to move freely among the countries
203202
in the region. This is a good move since the trade track holds the
greatest promise for bringing about peace in the South Asian
subcontinent. There are plenty of examples around the world to
suggest that deep animosities among nations can be dissolved once
trade begins to move freely.This happened, of course, in Europe which, after two catastrophic
wars in the twentieth century, is now a zone of peace. This also
happened in the Mercosur, a trading arrangement among the
nations in the southern cone of South America. The countries in this
area had fought several wars and they continued to view one another
with deep suspicion for a very long time. The birth of Mercosur
helped to change this mind set. In fact, the warming of relations
between Argentina and Brazil, the area's two largest economies,
ultimately led to both sides giving up their nuclear ambitions. The
same can be said to be true for the North American Free Trade Area
that has brought Mexico closer to the United States and is likely to
stay that way in spite of the uneven progress made by the trading
arrangement during its first ten years.
In what way should SAFTA evolve? In working out a plan for its
development and evolution, how carefully should the founding
countries look at the experience of other successful regional trading
arrangements? What are the lessons that could be drawn from what
has happened in other parts of the world? How much focus should
be placed on moving beyond trade to other issues that have stood in
the way of regional integration in South Asia?
Historians of deep conflicts between nations tell us that
accommodation can be reached once the motives for doing so begin
to coincide. The resolution of the sharp animosity between Germany
and France occurred when the two countries recognised that they
would gain enormously if they lifted their sights beyond narrow
national interests and started to focus, instead, on the economic
future of continental Europe. Once that happened, the rest was easy.
Unfortunately, India's and Pakistan's motives are different in
seeking come kind of accommodation. Of the many different
motives that are propelling the two countries to seek rapprochement,
two are compelling. On the Indian side, the ongoing conflict with
Pakistan is a major distraction in its quest for global play. The
Bharatiya Janata Party (BJP) leaders have begun to recognise that
they cannot place India on the global map as a world player for as
long as it remains entangled with Pakistan. On the other side of the
border, President Musharraf has begun to appreciate how big a
menace the rise of Islamic fundamentalism and jihadi groups has
become. The two assassination attempts on him in December 2003
seem to have convinced him to focus on eliminating one of the
reasons that provides these groups their raison d'etre. Peace with
India would accomplish that.
Could these two motives be aligned in some way that they begin to be
seen as a part of a plus-sum game in which neither side loses and
both sides gain? That could happen if the building of trade between
the countries- rather than solving the Kashmir problem- is placed at
the centre of the evolving détente.
Shahid Javed Burki has served as vice-president of the World Bank and
as finance minister in the Pakistan government.
Endnotes1 The most articulate exponent is the Indian economist Jagdish Bhagwati,
who has written extensively on the subject of regional trade and why it
would hinder the development of true multilateralism in trade. See
Bhagwati, 1998.
205204
India-Pakistan Trade Dr S. Akbar Zaidi
ndia and Pakistan are both low income countries and are amongst
the poorest and least developed nations of the world. They are also Itwo of the seven countries which have openly undertaken nuclear
testing and consider themselves to be nuclear powers. Add to this the
fact that the two neighbours have fought at least two full-fledged wars-
with Pakistan losing its more populous wing as a consequence- and
numerous other battles and skirmishes from as early as a year after
independence and as recently as less than five years ago in 1999. They
have a history wrought with difficulties and distrust and a future which
threatens far worse. The worst fear, not just of residents of the two
countries but of the region and the world, is that irresponsible
governments in both, or either country, could resort to the extreme
measure of using nuclear weapons against one another.
This article proposes a different path to normalisation of ties between
India and Pakistan keeping in mind that different and conflicting
stands and claims on Kashmir are the biggest, or perhaps the only,
stumbling block to normalisation of ties between the two countries.
Since it is unlikely that the Kashmir issue is going to be resolved to
anyone's liking in the near future, the argument is that, rather than
Kashmir hold the 1.4 billion people of India and Pakistan hostage, it is
perhaps important to make headway in other directions, which may
eventually also have a positive impact on the impasse over Kashmir.
Partial normalisation in other areas can still take place despite the
continuing disagreements and conflicts over Kashmir.
The route towards better relations between India and Pakistan is open
trade between the two countries. The paper argues that there is no
economic rationale and justification for either of the two countries not
to trade with each other, especially in an era of globalisation and
liberalisation and after the setting up of the World Trade Organisation,
of which both countries are members. Not only are there large trade-
related advantages to governments and consumers in both countries,
but positive exogenous factors are also likely to emerge as a result. The
most important argument in this paper is that, given Pakistan's
relatively weaker economy, especially compared to India's, it is in
Pakistan's interest far more than it is India's, to have normal trade
relations with each other.
1Trade Logic with IndiaPakistan and India have been trading with each other since 1947 and,
in the last 57 years, trade has come to a complete halt for only nine
years- between 1965-74. However, despite a largely uninterrupted
trade regime since 1974, the extent of trade between India and Pakistan
is limited and almost negligible as Table 1 shows. Rajesh Chadha and
Devender Pratap- using figures only for legal trade- show that:
While about 4.5 per cent of India's total exports are directed to South 2Asia, the figure is 3 per cent in the case of Pakistan . Exports to Pakistan
constitute about 8 per cent of India's total exports to South Asia.
Pakistan's exports to India have a higher average share of about 40 per
cent, during 1998-2000, of Pakistan's total exports to South Asia
compared with an average share of about 17 per cent during 1995-1997.
In the case of imports, 0.8 per cent of India's imports originate from
South Asia and the figure is 0.5 per cent for Pakistan. Within India's
imports from South Asia, 36 per cent originate from Pakistan. Pakistan
sources 69 per cent of its total South Asian imports from India. Clearly,
India and Pakistan are two major trading partners among the South 3Asian countries despite all hurdles .
However, there is no India-Pakistan trade agreement and Pakistan
allows only a handful of commodities to be imported from India, which
have, nevertheless, increased over the years. In 1996, 615 items were
permissible for trade, although 90 per cent of the trade took place in 4only 42 items ; in April 2003, following the peace initiative by the
Indian Prime Minister, the Pakistani Prime Minister increased the 5number of tradable items . While the South Asian Free Trade Area
207206
(SAFTA) agreement will, by 2006, open doors to further trade between
the two countries, India-Pakistan trade should take place before the
agreement comes into effect, and should go well beyond the guidelines
set by the agreement.
There are some curious facts about trade between India and Pakistan
which need to be highlighted (see Tables 1 and 2). Firstly, open, formal
(legal) trade between the two countries is very small, and in the last
decade has varied between a low of US$ 106 million in 1994-95 which
was a mere 0.6 percent of Pakistan's total trade that year, to a high of
US$ 321 million in 1998-99 or 1.9 percent of Pakistan's total trade.
Clearly the volume and scale of trade between the two countries is very
small in absolute terms and as a percentage of the total trade of both
countries. However, given the political history of the two countries-
with many wars and consistently poor diplomatic relations affecting
trade and economic cooperation- it is believed that third-country trade
and smuggling increase the volume of trade from anywhere between
US$ 1-1.5 billion, still a small number, but of somewhat more
significance, particularly for Pakistan's smaller economy.
Although much is made of the rather limited volume of trade between
India and Pakistan, a number of points, especially from the Pakistani
angle, have been overlooked. Firstly, the quantum of official trade
between the two countries of between US$ 200-300 million needs to be
supplemented with illicit trade between the two countries and the trade
of goods which originate in either country but are imported through a
third country. This recalculation increases the total trade between the
countries by a factor of four or five. This is a significant increase,
especially when one considers the fact that already, for Pakistan at least
and using the official bilateral trade figures alone, India is the main
trading partner in the SAARC region. A new set of figures would further
enhance that dominance. Compared to Pakistan's neighbours-
Afghanistan, Iran, and China- trade with India is far greater than the
former two, and with the new set of figures, India comes a close second
to China. Clearly, despite an unfavourable trade, economic and
political environment, there is already substantial trade between
Pakistan and India which has even greater economic possibilities.
Perhaps the most curious fact about Pakistan's trade with India is this
assumption that it is so low. Certainly official figures, as we show in
Table 2 above, do enforce that perception, but even if we limit ourselves
to these official figures, some rather interesting observations emerge.
For example, in recent years, when imports from India have ranged
from US$ 145 million in 1998-99 to US$ 235 million in 2000-01 and to
US$ 187 million in 2001-02, India emerges as Pakistan's 16th biggest
trading partner in terms of imports. This figure is more interesting
since the four largest importers into Pakistan are oil-exporting
countries (Saudi Arabia, UAE and Kuwait) and Malaysia which exports
mainly palm oil to Pakistan. Despite hostilities, wars and diplomatic
breakdown, Pakistan imports (based only on official figures, which are
perhaps a third of actual volume) more from India than it does from
France, Canada, Switzerland, the Netherlands, Turkey, Iran or even
Thailand!- most interesting given the political relations between the
two countries. In terms of total trade, exports and imports based on the
under-reported 'official' trade between the two countries, India ranks
21st as Pakistan's trading partner. Clearly the possibilities of gains from
opening trade are tremendous, especially if we look at the nature of
trade between the two countries.
In the decade 1990-2000, Pakistan has had a trade surplus with India
Table: 1
Table: 2
Share of India's total Exports, 1990-2000: to South Asia: 2.7-5.1
to Pakistan: 0.2-0.4 Share of India's total Imports, 1990-2000: from South Asia: 0.4-0.8
Pakistan: 0.2-0.6from
Share of Pakistan's total Exports, 1990-2000:
to South Asia: 2.6-4.9
to India: 0.4-2.4
Share of Pakistan’s total Imports, 1990-2000:
from South Asia: 0.4-1.7
India: 0.2-0.6from
Source: Chadha, Rajesh and Devender Pratap, 'New Era of India-Pakistan Trade Relations: More
Butter and Less Guns', unpublished mimeograph, New Delhi, 2003.
1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02
Total
6819
6812
8141
8707
8323
8627
7779
8568 9201 9134Export
Import
Export
Import
9963
8561
10401
11804
11894
10118
9431
10309 10728 10339
India
83 42 42 41 36 89 175 54 55 49
67 70 64 95 197 153 146 127 235 187
Source: State Bank of Pakistan, Annual Report, various years, Karachi.
209208
in only three of these ten years, importing far more than it exports.
Most of Pakistan's exports to India have been in the 'food and related'
category, rather than in raw materials, manufactured goods or
intermediate products. India's exports to Pakistan (Pakistan's imports)
have been distributed over the categories 'agricultural and allied
products', manufactured goods, and chemical and chemical related 6products (see Tables 3 and 4). Pakistan's and India's imports have both
been heavily influenced by single commodity (usually food), items as
the tables show, although Pakistan does import chemicals and tyre
related products. Moreover, the tables also show considerable
inconsistency and annual variability between the types of commodities
imported by both countries, and other than food items, there is no
consistent pattern of traded commodities. This shows that both
countries, despite having had poor political and diplomatic relations,
do turn to each other in times of need.
Some observations give India-Pakistan trade a rather ironic twist. It
was in 1977-78, when Pakistan was under General Zia-ul-Haq's martial
law, that trade between the two countries got an impetus following the
1974 protocol for the restoration of commercial relations on a
government to government basis, signed by the two countries after the
1971 war. Again, still under a military government in 1987, Pakistan
increased the number of permitted traded goods with India nearly six-
fold, from 42 to 249, a measure which led to a three-fold increase in the 7following three years . Although both countries avoid improving their
mutual trading status, they turn to each other at times of crises and
shortfalls of eatables. In 1990, India helped Pakistan tide over an onion
and potato crisis, and again Pakistan imported 50,000 tons of sugar
from India on an emergency basis in 1997. Likewise, India has also
depended on Pakistan for sugar, potatoes, onions and chillies, at a time
of a shortage. The fact that the largest amount of trade between the two
countries ever- of US$ 320 million- was during Pakistan's fiscal year
1998-99 is extremely interesting. Pakistan's fiscal year runs from July
to June, which means that this was the fiscal year which followed the
May 1998 nuclear tests by both countries, included the Lahore
Declaration of February 1999 as well as the Kargil war of May and June,
1999. By any measure, this was a rather eventful year in South Asia, and
yet, registered the largest volume of trade. Moreover, in 2000-01-
General Musharraf's first full year- imports from India were US$ 235
million, the highest ever. This suggests two things: India and Pakistan,
despite huge differences, trade with each other at times of shortfalls
and crises; and, if need be, even a military ruler can improve (trade)
relations with India.
E. Sridharan argues that 'India does not import any of Pakistan's major 8exports. Nor does Pakistan import any of India's major exports' - as
shown in the tables above. He explains this fact in terms of trade-
related and economic (rather than political) arguments, and says that
this is because of the competitive, rather than complementary, nature
of the two economies exporting similar products, and argues, that there
is the 'general tendency for poor countries to trade with developed ones
2001-02 2000-01
Total Imports Rs 11,471,155 Rs 13,928,480
%
%
Agri culture and Food
(Sugar)
16
(10)
53
(39)
Iron and manganese ore
9
6
Chemicals
(Pure Xylenes)
38
(17)
21
(1)
Medicinal inputs
4
2
Plastics
8
4
Tyres and Rubber 7 4
2001-02
2000-01
Total Exports
Rs 3,246,436
Rs 2,777,405
%
%
Agriculture and Food
(Dates)
(Rice)
66
(42)
66
(35)
(23)
Asafoetida
5
-
Crude Petroleum - 8
Cotton staple - 10
Cotton yarn and related
(Cotton tents)
18
(12)
5
( - )
Table 3: Pakistan's Imports from India: 2000-02 (thousands of rupees)
Note: Agriculture and food includes 'residue of soybeans oil-cake', and Chemicals includes
dyes, paint and ink.Source: Federal Bureau of Statistics, Annual Trade Statistics 2001-02, Government of
Pakistan, Islamabad, 2003.
Table 4: Pakistan's Exports to India 2000-02 (in thousands of rupees)
Source: Federal Bureau of Statistics, Annual Trade Statistics 2001-02, Government of
Pakistan, Islamabad, 2003.
211210
rather than with their neighbours until a certain level of development 9has been achieved'. This explains the reasons why trade did not take
place between the two countries, and he thinks that 'the real scope for 10trade and investment is in the future and begins now.' For Sridharan,
however, rather than the trade of goods and commodities, 'the real
potential for economic cooperation today is in energy, for example, a 11gas pipeline and the export of electricity ...'. Not denying the fact that
past and existing patterns and trade between the two neighbours have
been rather limited, we still see far greater opportunities than does
Sridharan.
This point of view is also propagated by the Ministry of Commerce of
the Government of Pakistan, which conducted an extensive study on
the prospects and implications of trade with India. The study published
by the Ministry had, as part of its team, a number of very prominent
businessmen, all who advocated increased and fair trade with India. It
is worth looking at some of the ideas which form this report.
The Ministry of Commerce study argues that there are numerous
advantages of trade between neighbour, as there are low transportation
costs, cultural similarities which influence taste and cause profitable
complementaries to emerge. In addition, transaction costs are also
lowered and such trade 'facilitates the flow of ideas and knowledge that 12strengthen international competitiveness'. The study looks at a
number of sectors in the Pakistan economy and concludes that 'the 13economic benefits of liberalising trade with India outweigh costs'.
Consumers in Pakistan will benefit 'unambiguously' because of lower
prices, and the government will get far greater revenue from legalising
the existing illicit border trade. Moreover, 'important segments of
producers would also benefit because of increased competitiveness and 14market access to a much larger Indian economy'.
A study by the Karachi Chamber of Commerce and Industry endorses
the idea of trade with India on the grounds that now, having signed the
agreements which have led to the setting up of the World Trade
Organisation, all signatory members have to be treated equally, and
understands that giving the Most Favoured Nation (MFN) status to
India 'is not a special favour to India, but an obligation under WTO and 15an economic and geopolitical imperative'. In this new world order,
Pakistan has to face competition from all countries, including India,
and hence 'instead of shying away, we should be well prepared to face
the eventuality. In any case, salvation lies in streamlining of operations 16and upgrading of technology which was long overdue'. This study
presents a sector-wise analysis of trade with India and shows the
impact on each sector, looking at numerous aspects including what it
calls 'silver linings'. For example, it feels that while the opening up of
trade with India is likely to affect the engineering sector, cheaper steel
and iron ore imports from India, will have a positive impact overall and
'will result in the reduction of very high inventory costs of the 17 engineering sector'. However, the main argument which this report
seems to be making is that Pakistan trades with almost every country in
the world, so why not with India?
There is also the important issue of the impact of globalisation. All
countries of the world are affected by it, some favourably and others not
so favourably. To take further advantages or to protect themselves from
the negative impacts of globalisation, many neighbouring countries
have established trading blocs and currently around 60 per cent of
world trade takes place through regional trading arrangements. There
are huge advantages and benefits to such regional trading
arrangements, yet, 'South Asia is the only major world region not to 18move towards regional cooperation and integration'. Clearly,
normalisation of trading ties between India and Pakistan should be
seen as a first step to such trading arrangements. As Burki argues, 'our
policy-makers must be cognisant of the fact that the world is organising
itself into a number of regional arrangements and we in Pakistan 19cannot afford to be left out of them'.
All discussion on trade between India and Pakistan is limited by a host
of factors which makes conclusive analysis difficult. Firstly, no one
really knows how much of unofficial (smuggled) and third-country
trade actually takes place, so even figures of US$ 1-1.5 billion are open
to debate; we really don't know. Secondly, and perhaps more
importantly, much of the analysis on improving trade relations
between the two countries is based on a static analysis which is based
on the very limited existing trade patterns. No one really knows the true
potential of trade between India and Pakistan because so far most of
the trade takes place in a very small handful of commodities. Free
'normal' trade between India and Pakistan allows thousands of goods,
which have so far not been traded, to come into the market of both
213212
countries. For example, the talk about two pipe and gas lines from
Turkmenistan and Iran to India resulting in gains to both Pakistan and
India, may materialise once talks resume and political conditions
improve. Although it is difficult to say how much Pakistan will gain
from royalties and by laying the pipelines- royalty figures, though
unreliable, are being quoted at US$ 500 million each year for each of
the pipelines- if true, they could eventually be equivalent to as much as
5 percent of Pakistan's export earnings, no mean figure to scoff at.
Moreover, with lower transportation costs, there is likely to be some
import 'switching' as well, where goods previously imported from other
countries may now be imported from India. Trade between India and
Pakistan will bring down the cost of business (particularly for
Pakistan), enhance the purchasing power of consumers and increase
government revenue. The volume and variety of tradable goods, given a
period of time, can be extraordinary.
Trade with India might not radically alter Pakistan's economy for the
better (and the fears that Pakistan's India will be swamped by cheap
Indian goods are also unwarranted), but there are likely to be
numerous positive externalities which can accrue from opening up
trade by Pakistan with India.
Numerous small industries are likely to benefit from cheaper raw
materials from India and may help address the problem of some of our
sick industries. This is likely to have an employment-enhancing effect.
Moreover, many of Pakistan's industries will benefit from increased
competitiveness and will have to become more efficient in light of
international and Indian imports. Also, greater market access of
Pakistani exports should be beneficial. As we have argued above,
consumers in Pakistan are going to benefit by cheaper Indian imports
as well. As the Ministry of Commerce study argues, 'exposure to
competition from a neighbour would encourage policy makers as well
as the private sector in Pakistan to focus more sharply on the
investments needed to strengthen Pakistan's international 20competitiveness' . Moreover, the report continues, 'the fear of a deluge
of Indian products in the Pakistan market after liberalising trade is
much exaggerated. This has not happened in the past when trade has
been liberalised and is unlikely to happen in the future, given Pakistan's
global orientation in trade and the quality conscious Pakistani 21consumers' . Also, the arguments by E. Sridharan and by the
Government of Pakistan that 'it is unrealistic to visualise either
country, particularly India, having a large impact on the total trade of 22the other' , do not examine the possibilities for presently non-
tradables coming into the trade orbit.
While trade can be a component of broader Confidence Building
Measures (CBMs) and an improvement in the overall atmosphere
between these two neighbours, micro level linkages and opportunities,
particularly in Pakistan's Punjab and the NWFP, may pay higher
dividends. In terms of the broader political economy factors, trade
normalisation is likely to improve the overall atmosphere in which
India and Pakistan address all contentious issues. Even if there are no
substantive improvements in Confidence Building Measures between
the two countries on account of trade, improved trade is unlikely to
make matters much worse. Trade with India, in this regard, is a win-
win situation.
Dr S Akbar Zaidi is a leading Pakistani social scientist based in
Karachi.
Endnotes1 Much of this paper draws from the following sources: E. Sridharan,
'Economic Cooperation and Security Spill-Overs: The Case of India and
Pakistan', in Michael Krepon and Chris Gagne (eds.), Economic
Confidence-Building and Regional Security, The Henry L Stimson
Centre, Report No 36, Washington, October 2000; S. Akbar Zaidi,
'Economic Confidence Building measures in South Asia: Trade as a
Precursor to Peace with India', in Moonis Ahmar, (ed.), The Challenge of
Confidence Building in South Asia, (New Delhi: Haranand Publications,
2001); Rajesh Chadha and Devender Pratap, 'New Era of India-Pakistan
Trade Relations: More Butter and Less Guns', unpublished mimeograph,
New Delhi, 2003, and S. Akbar Zaidi, 'Pakistan's Development Options:
Does India Matter At All?', Paper presented at the Deterrence Theory and
South Asia workshop, as part of the University of Pennsylvania Institute
for the Advanced Study of India project International Relations Theory
and South Asia: Towards Long-range Research on Conflict Resolution and
Cooperation-building, New Delhi, August 26-27, 2003, to be published in
a collection of essays shortly.2 Average for three years, viz. 1998-2000.3 Chadha and Pratap, op. cit., 2003.4 Government of Pakistan, Ministry of Commerce, Pakistan-India Trade:
Transition to the GATT Regime, Islamabad, September 1996. 5 Some countries have a negative list for traded goods, i.e., they import all
215214
commodities except those which are on this negative list, as does Pakistan
when it imports from most countries. In the case of India, however,
Pakistan only allows import of items on this 'positive' list.6 E. Sridharan, op. cit., p. 97.7 Government of Pakistan, op. cit., p. 3.8 Sridharan, op. cit., p. 68.9 Ibid., p. 70.10 Ibid., p. 89.11 Ibid., p. 89.12 Government of Pakistan, Ministry of Commerce, Pakistan-India Trade:
Transition to the GATT Regime, Islamabad, September 1996, p. 1.13 Ibid., p. 2, emphasis added.14 Ibid., p. 2.15 Karachi Chamber of Commerce and Industry (KCCI), Freer Trade With
India: Its Raison d'etre and Impact, Research and Development Cell,
KCCI, Karachi, March 1996, p. 1.16 Ibid., p. 3.17 Ibid., p. 5.18 Shahid Javed Burki, 'The Themes to be Explored', Dawn, Karachi, January
23, 2001.19 Ibid.20 Government of Pakistan, op. cit., p. 16.21 Ibid., p. 16.22 E. Sridharan, op. cit., p. 76.
India's Regional Trading ArrangementsSujata Jhamb
ndia adopted inward orientation and self-reliance after
Independence. Restrictive measures turned the country into a
virtual 'closed' economy or state of 'autarky'. Domestic Isubstitution of the imports shifted focus away from exports and
export promotion. Taking the 'inward looking approach', the
planners assumed India would focus export promotion only after
self-sufficiency.
However, after 1991 India opened up by liberalizing trade, foreign
investment, and financial and industrial sector. The reforms helped
the country experience a steady growth of 6-7 percent improving
standard of living, availability of consumer goods, foreign trade and
employment opportunities.
This paper covers the Indian experience with Regional Trading
Arrangements (RTA) and preferential trading taken up after 1991 as
a part of the trade liberalization strategy, and draws lessons from
them to promote more effective RTAs. It describes India's trade
arrangements with South Asian countries such as South Asian Free
Trade Agreement (SAFTA) and Bay of Bengal Initiative for Multi-
Sectoral Technical and Economic Cooperation (BIMSTEC), and
analyzes their success or failure. The last part of the paper carries
recommendations for India.
India's Preferential Trade Areas (PTAs) post 1991The period following Cancun has seen signing of several agreements
in South Asia, especially by India. The South Asia Association for
217216
Regional Cooperation (SAARC) member countries have signed
SAFTA replacing the ineffective South Asian Preferential Trade
Agreement (SAPTA). India also has a framework agreement called
BIMSTEC, and is engaging in Free Trade Area (FTA) negotiations
with Association of South East Asian Nations, and has worked out a
Comprehensive Economic Cooperation Agreement (CECA) with
Singapore. A partial scope agreement has been signed between India
and Mercosur, a trading zone between Brazil, Argentina, Uruguay,
Paraguay and Venezuela formed to promote free trade and the fluid
movement of goods, peoples, and currency. Mercosur has more than
220 million consumers and a combined Gross Domestic Product of
more than one trillion dollars a year. India is also exploring the
option of FTAs with Chile, Gulf Corporation Council and the
Southern African Customs Union of South Africa, Botswana,
Lesotho, Namibia and Swaziland. FTA agreements with Sri Lanka
and Thailand are operational.
Review of PTAs in IndiaIndia has signed the maximum number of bilateral trade
agreements. However, as seen in South Asia, the RTAs have not been
effective in integrating the region or making a mark globally. In the
face of successful trading blocs like North Atlantic Free Trade Area,
European Union, ASEAN, Indian FTAs have witnessed a lackluster
performance. So, the agreements merit a review to learn from the
mistakes for maximum benefit.
(i) SAARC, SAPTA, and SAFTAFor a number of South Asian nations the 1990s marked liberalizing
of trade and investment regimes to intensify their integration with
the world economy.
The regional cooperation body SAARC, including India, Pakistan,
Bangladesh, Sri Lanka, The Maldives, Nepal and Bhutan, has not
achieved much since its initiation in 1985, primarily due to the
tenuous political relations between India and Pakistan and a general
environment of mistrust among member countries. Political
economy considerations are important. At the time of its inception,
each country of the group was pursuing autarkic economic policies
and had almost no integration with the international and the
regional economy.
Compared to other regional blocs, the SAARC performance is dismal.
With a total population over one-fifths of the world population and a
combined gross national income of $3 trillion, SAARC only provides
about one percent of world production. Despite geographic
proximity, trade and weak transit links, infrastructure difficulties,
high tariff and non-tariff barriers hamper investment.
Intra-SAARC trade has remained low at a mere 3 percent since the
organization's inception and it still remains small because of high
tariffs and a variety of non-tariff barriers such as quantitative
restrictions, fiscal charges and discriminatory practices and outright
ban on imports. It has been viewed that SAARC must deal with the
world's major trading blocks as a composite unit to maximize the
gains of trade for both sides. Although the intra-region trade is not
impressive, the South Asian nations have been maintaining strong
links with the outside world with the advanced countries.
Indo-SAARC Trade RelationsThe SAARC, despite several attempts to encourage regional trade
under the regulation of SAARC and the SAPTA, has not taken an
effective shape as a regional trade body because of political problems
between Pakistan and India hampering regional interests. Despite
official declarations to transform the SAPTA into an FTA in this
region by 2001, the idea seems unrealistic. India has had problems
with RTAs for its neighbours do not want free trade with a giant
neighbour they do not trust or like. Hence, multilateralism will
remain India's only choice. (Sarita,A & Tanvi,P 2000). During the 10
years before SAARC (1975-1985), India's exports increased from US$
160 million in 1975 to US $ 315 million in 1984 registering a
compound growth rate of 7.8 percent. During the 10 years after
SAARC inception, India's exports increased from US $ 277 million in
1986 to US $ 1532 million in 1995, i.e. from eight percent to 30
percent constituting an additional growth of 22 percent. So, the
SAARC has encouraged India's exports to its member countries.
Since 1991, liberalization too has increased India's exports to SAARC
countries. From US $ 622 million in 1991, the exports have touched a
peak level of US $ 2005 million in the year 2000, upping the decadal
growth from five percent during the 1980-90 liberalisation to nine
percent. Similarly, India's exports to the world during the pre- and
post- liberalisation periods have witnessed an upward trend. On the
other hand, India's import from the SAARC countries is quite low. It
219218
was just US $ 56 million in 1975 and rose to only US $ 105 million in
1984 and further to only US $ 182 in 1995. The immediate reform
period has shown a decline in India's imports from the SAARC
registering a low level of US $ 96 in the year 1993 and later picking
up only to US $ 363 million in 2000. They have grown at a constant
rate of 7 percent before and after liberalisation. This shows that India
is not a good importer for its neighbouring countries. While the
turnover of India's trade with SAARC members was US $ 382 million
in 1985, it increased to US $ 1714 million in 1995 and further to US
$2368 million in 2000. So, the increase in India's trade with SAARC
members outclasses the rise in its trade globally, from US $ 24594
million in 1985 to only US $ 94018 million in 2000.
The tables show that before liberalization India exported mostly to
Pakistan followed by Bangladesh and Maldives. But after the
liberalization Nepal and Maldives became the major export
destinations. The growth rate of exports to Pakistan had fallen
considerably until the substantial boost of 2005. The tremendous
decline in the previous years may be attributed to the tensions
between the two nations. But the growth in India's export to the
entire bloc has increased from 8.61 percent before liberalization to
12.43 percent after, showing an increase of 3.82 percent. The growth
rate of India's imports from all the SAARC nations has been negative
before and after liberalisation. Nepal is a major exporter of Indian
products with a high growth rate of about 27.5 percent followed by
Sri Lanka (15.4 percent) and Bangladesh (14.7 percent). Though the
volume of trade with the bloc has increased, India does not have a
good trading partner within the bloc. Except Nepal, all other nations
have registered a very low growth rate. Overall, the growth of India's
exports and imports show a growing trade imbalance between India
and its neighbouring South Asian countries.
Steps towards formal economic cooperation were made with the
signing of the SAPTA in 1993. SAPTA did not achieve much in
increasing intra-regional trade either. Intra-SAARC trade, as a
percentage of South Asia's world trade, increased from 2.42 percent
($1.59billion) in 1990 to 4.56 percent ($6.53 billion) in 2001 and
marginally to 4.7 percent by 2003, mostly attributed to rapid
liberalisation under bilateral trade agreements and WTO regimes,
rather than to SAPTA. The SAPTA failure is also reflected in the
skewed pattern of trade in the region. Since India has not fully
integrated into South Asia, this purely regional agreement did not
expand trade much and failed to address high transport and
transaction costs. The idea of a SAFTA was mooted in 2002, and
culminated into an agreement in January 2004. The SAFTA
agreement is expected to come into force from January 1, 2006 on
completion of all formalities. (New date is now July1). SAFTA lists
additional measures not included in the SAPTA such as
harmonization of standards, reciprocal recognition of tests and
accreditation of testing laboratories, simplification and
harmonization of customs clearance, import licensing, registration
and banking procedures; removal of barriers to intra-SAARC
investment etc.
An expansion of intra-regional trade by 1.6 times the current level as
proposed by SAFTA is not possible in the absence of concomitant
moves towards investment and trade liberalization. If this
arrangement is to be successful, the political tensions will have to be
kept at bay and India's role as a leader would have to be enhanced, as
Roy (2004) points out that India needs to take the lead in greater
regional integration since it accounts for 80 percent of the total
South Asia GDP.
(ii) BIMSTECThis agreement includes Bangladesh, India, Sri Lanka, Thailand,
Myanmar, Bhutan and Thailand. The idea of this regional
cooperation was first mooted by Bangladesh, India, Sri Lanka and
Thailand at a meeting in Bangkok in June 1997. The aim, purpose
and principles are contained in Bangkok Declaration of June 6, 1997
on the establishment of the Bangladesh-India-Sri Lanka-Thailand
Table 1: India’s Linear Growth of Exports, Imports and Volume of Trade With Saarc Countries.(In per cent)
Item Bangladesh Maldives Nepal Pakistan SrilankaTotalSAARCBloc
Exports
(1980-1990)(1991-2000)
Imports
16.310.67
8.3718.86
4.7921.13
24.9714.49
1.8510.63
8.6112.43
Source: Linear growth rate computed from the data taken from Direction of trade statistics Year Book(IMF) (Various Issues)
(1980-1990)
(1991-2000)
Trade volume
(1980-1990)
(1991-2000)
-2.0
14.72
0
0
-1.6
27.58
-7.05
3.82
-12.03
15.46
-5.51
15.11
13.55
10.89
8.37
18.86
2.96
22.96
1.38
9.91
-0.91
11.03
4.49
12.81
221220
Economic Cooperation (BISTEC).
At a special ministerial meeting convened in Bangkok on 22
December 1997 the Union of Myanmar was admitted to the grouping
renaming it as BIMST-EC (Bangladesh-India-Myanmar-Sri Lanka-
Thailand Economic Co-operation). This is known as Declaration of
22 December 1997. A ministerial meeting in February 2004
welcomed Bhutan and Nepal as new members.
The inter-regional grouping will serve as a bridge between the five
SAARC countries and two ASEAN countries. BIMSTEC will have a
greater potential to increase the trade among member countries by
taking advantage of their geographical location in the region of the
Bay of Bengal and the eastern coast of the Indian Ocean. Discussions
have already been held on building a TransAsia Highway linking the
five countries and also setting up a BIMST-EC Airline connecting the
capitals and important cities of the member countries.
Held in Bangkok on 7 August 1998, the first BIMSTEC economic and
trade ministers' meeting termed as the Retreat, decided that BIMST-
EC would initially begin cooperation efforts in six areas. It was
agreed that each country would play a lead role in planning and
implementing programmes in each of the areas. The sectors and lead
countries at the inception were:
Trade & Investment BangladeshTechnology India Transportation and Communication ThailandEnergy Myanmar
Tourism Sri Lanka Fisheries Sri Lanka
Recognising that sub-regional cooperation can progress only in inter-
governmental cooperation and coordination, and that the private
sector is an engine of growth for enhancing interaction between
government bodies and the private sector representatives of the five
BIMST-EC countries, the BIMST-EC Economic Forum was
conceptualized at a meeting in Dhaka in 1999. The BIMST-EC
Economic Forum is a representative group of both the public and
private sectors, formed to discuss ways for achieving the objectives of
BIMST-EC and making recommendations for the ministerial
meetings each year.
BIMSTEC covers a population of approximately 1.3 billion and the
trade value between Thailand and other countries in the group
exceeded US$3 billion in 2003. The forum is unique as the only link
between South Asia and Southeast Asia, bridging South Asia's Look
East policy with Thailand's Look West policy. BIMSTEC can also be
considered as a mechanism to promote opportunities for trade,
investment and tourism between Thailand and South Asia.
BIMSTEC's objectives stretch from creation of economic and social
prosperity based on equality, to enhancement of mutual benefits in
economic, social and technological aspects. They also involve intra-
regional assistance in training, research and development as well as
beneficial cooperation in agriculture, industry, expansion of trade
and investment, improvement in communication and transport, for
improving living standards and cooperation with other international
organisations.
RESULTS: India's trade with the Bimstec countries rose by eight
percent in dollar terms and six percent in rupee terms to reach more
than $6.6 billion during 2004-05, according to the findings of the PHD
Chambers of Commerce and Industry.
Reflecting good performance of India's “New Age Sector”, drugs and
pharmaceuticals, there has been appreciable increase in the country's
exports of such products to the Bimstec countries. The growing thaw
in Indo-Myanmar relations has increased pharma exports to
Myanmar by over 36 percent. Export of pharmaceutical products to
India's total trade, exports and imports with
Bangladesh
0
500
1000
1500
2000
1999-
2000
2000-
2001
2001-
2002
2002-
2003
2003-
2004
Years
Valu
es
inm
illio
ns
EXPORT
IMPORT
TOTAL TRADE
223222
Bangladesh that stood at $50 million registered a 19 percent growth.
While India's exports to these countries have grown faster, imports
have remained almost stagnant.
Having proved its information technology worth to the world with
aggregate software and services exports of over $ 22 billion, Indian
software industry is making steady inroads into the Bimstec
countries. Though starting from a very low base, Indian software
exports to Sri-Lanka stood at $1.2 million. Similar trends have also
been observed for Bangladesh, Thailand, and Nepal.
Member countries should work towards greater air transport
liberalization, short-sea shipping, and trilateral highway linkages
among India, Myanmar and Thailand and between Bangladesh,
Myanmar and Thailand, including linkages with other BIMSTEC
countries. Implementation of transport linkages and physical
connectivity among the member countries would generate huge
benefits and expedite the trading process.
ConclusionFrom an economic standpoint, FTAs could spell potential trouble for
India. Any move toward preferential trading without further
liberalisation is unlikely to work. India having high trade barriers
makes the scope for trade diversion and the accompanying losses
considerable. Being relatively powerful in most countries in the
region, business lobbies are likely to exploit the rules of origin and
sectoral exceptions in these arrangements in such a way as will
maximize trade diversion and minimize trade creation.
According to economist Arvind Panagariya, countries within the
SAARC region trade "too little" with one another compared to what
one would expect on the basis of their proximity and income levels.
There could be various reasons for this. First, the low level of trade
has been essentially the result of autarkic policies in the region. The
reason for the low level of intra-regional trade until recently was not
the absence of trade preferences but the absence of liberal trade
policies in general. Pitigala, Pursell and Baysen (2000) show that
once the countries in the region began to liberalize, their intra-
regional trade expanded rapidly. The effect of trade liberalization by
India, which is by far the largest country in the region, is especially
pronounced. Second, there has been a considerable amount of
"informal" trade among member countries of the region. This was
not only to evade the high tariffs that must be paid on official trade,
but also to carry out some trade that would not have been permitted
at all.
Since South Asia accounts for less than one percent of the world
production and tariffs in the region are high, the risk of trade
diversion from preferential trade liberalization is high. With 99
percent of the world production outside the region, the likelihood
that the most efficient and competitive producers of the large
majority of products are within the region is very low. This means the
scope for trade diversion is substantial. Clearly, the country with
higher tariffs loses while the country with lower tariff benefits from
FTA.
Sujata Jhamb is assistant professor of economics at the Narsee
Monjee Institute of Management Sciences in India. ReferenceslBhagwati, Jagdish and Arvind Panagariya. 1996. "Preferential Trading
Areas andlMultilateralism: Strangers, Friends or Foes?" in The Economics of
PreferentiallTrade Agreements. Jagdish Bhagwati and Arvind Panagariya, eds.
Washington,lD.C: AEI Press, pp. 1-78.lDuttagupta, Rupa and Arvind Panagariya. 2001. “Free Trade Areas and
Rules of Origin: Economics and Politics, ” University of Maryland at
College Park, mimeo.lFrankel, J., Stein, E. and Wei, S., 1995, "Trading Blocs and the
Americas: The Natural, the Unnatural and the Supernatural," Journal of
Development Economics 47, 61-96.lMattoo, A. and C. Fink. 2002. “Regional Agreements and Trade in
Services: Policy Issues.”lPolicy Research Working Paper #2852. The World Bank. Washington,
DC.lNarayan, S. 2005. “On leveraging opportunities from CECA” Financial
Express. June 8.lNewfarmer, R. 2004. “SAFTA: Promises and Pitfalls of Preferential
Trade Arrangements” The World Bank. Washington, DC.lPanagariya, A. 2005. “An India-China Free Trade Area.” Economic
Times. April 20.lRoy, J. 2002. “Towards International Norms for Indirect Taxes and
Trade Facilitation in India”
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lPrepared for the Task Force on Indirect Taxes, Government of India.lRoy, J. and P. Banerjee. 2004. “US-India Free Trade Agreement in
Services: An Analysis oflIssues for Discussion.” Confederation of Indian Industry Discussion
Paper. India.lRoy, J. 2004. “Regional Integration in South Asia” Financial Express.
September 28.lRoy, J. 2004 “Have a Free Trade Agreement in Services”. Financial
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March 10.
SAPANA Conference Declaration
eading experts, academics, and scholars from the member
countries of SAARC, representing different disciplines and
sectors, having met at the South Asian Journal conference L“Envisioning South Asia”, facilitated by SAFMA, on 29-30 April
2006 in Islamabad, Pakistan, have deliberated upon and initiated a
process of evolving a holistic and integrated South Asian vision by
and for South Asians and a strategic understanding on meeting the
challenges of the 21st century and globalisation and ushering in a
new era of fraternal, equitable, and collective partnership:
1. South Asia is at a historic moment of unprecedented potential
for transforming its economic and social conditions and,
together with China, emerging as two large economies in the
next two decades, playing a key role not only in the global
economy, but also in the development of human civilisation in
the 21st century. Yet the world cannot be sustained by economic
growth alone. Human life is threatened with environmental
crises, conflicts, endemic poverty, natural calamities and an
arms race. 2. Our societies have a rich cultural tradition of unity in diversity,
creative growth through human solidarity and harmony with
nature. In bringing these aspects of their culture in facing
contemporary challenges, the people of this region could bring
new consciousness and institutions to the global market
mechanism that can take the world on to a new trajectory of
cooperative, sustainable development and human security.
Global cooperation in environmental protection, poverty
reduction and defusing the flash points of social conflict and an
227226
end to violence, terrorism and repression will become the
essential underpinning of sustainable development and human
security in this century. Thus it is not the military muscle of a
state/region that will be the emblem of status, but its
contribution to meeting the challenge of peace, overcoming
global poverty, protecting the planet from environmental
disaster and contributing to humanizing the world and
advancement of its people.3. The global environment provides a historically unprecedented
scale of capital flows, trade opportunities, information and
technologies, which, if utilized, can dramatically transform the
material and social conditions of life of the peoples of South
Asia. A vision is efficacious to the extent that it can be
concretized. This requires bringing to bear the new
consciousness of South Asian cooperative and equitable
partnership to undertake specific policy actions. Apart from
implementing the decision at the Islamabad SAARC Summit to
establish a South Asian Free Trade Area, SAARC Social Charter,
ISACPA Report on Poverty Alleviation, three broad areas for
deepening economic cooperation can be identified for the
purposes of specific policy action: (1) energy cooperation and
water management and conservation within South Asia; (2)
Increased investment for accelerating economic growth,
especially in physical and social infrastructures; (3)
Restructuring growth for faster poverty eradication and human
resource development. 4. With the most contiguous region of the world, a common history
to share and similarities of cultures, South Asia has less baggage
to shed than Europe or the Far East. It is now booming with the
ideas of regional cooperation that take a wholist approach
towards the collective good of the region as they increasingly
find state-centric and security-centred approaches inconsistent
with the interests of our 1.4 billion people and the imperatives of
our times. 5. India and Pakistan are at a crucial moment in history when
economic cooperation between the two is necessary for
sustaining their respective economic growth rates. a) India will
require rapidly rising imports of oil and gas from the Middle
East and Central Asia to fuel its economic growth. Pakistan is
the natural conduit through which these oil and gas supplies can
be transported into India and the rest of South Asia. b) India's
growth in the past has been based essentially on the home
market. In the future, sustaining growth will requite export
markets in Pakistan and other South Asian countries. c)
Similarly, the sustainability of Pakistan's GDP growth requires a
large increase in investment, particularly in infrastructure, and
the Indian private sector, along with direct foreign investment,
can fill this gap for Pakistan. d) The oil and gas pipeline from
Iran through Pakistan to India alone can generate over $700
million a year and with similar lines from Central Asia,
Afghanistan through Pakistan another $500 million. This could
add 1.5 percentage points to Pakistan's GDP growth. e) The gains
from trade between India and Pakistan will be greater for
Pakistan than India, and can accelerate GDP growth in both
countries. Thus opening up trade and investment is vital for
growth sustainability in South Asia.6. Energy and Water are two vital resource inputs into economic
growth. South Asia requires integrated gas and electricity grids
for the welfare of each South Asian country. Similarly, South
Asian regional agreements among upper and lower riparian
states on the model of the Indus Basin Treaty need to be made
between Nepal, India, Bangladesh. Similar protocols need to be
developed for upper and lower riparian districts/ provinces
within each country. These are necessary to avid inter and
intrastate tensions in the future.7. Governments in South Asia need to realize that in the next two
decades, South Asia will become the second largest economy in
the world after China. This means that the centre of gravity will
shift for the first time in 300 years, to this part of the world from
the West. This presents a new challenge to South Asian citizens
to develop new paradigms of economic policy, governance and
international relations. a) At the level of economic policy we
need to restructure our GDP growth so as to achieve growth with
equity which requires making the poor not into victims but the
subjects of the growth process, from being marginal to becoming
the mainstream of economic growth. b) At the level of
governance we need to give up the 18th century notion that
economic gains must be translated into increased military
power. In an inter-dependent world the emblem of the status of
a country will be based not on its ability to destruct but its ability
to save the planet from ecological disaster and to build a more
humane world. c) At the level of international relations we need
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to replace the competitive and hegemonic model of interstate
relations with a cooperative model. We can start with South
Asian cooperation to demonstrate to the world that the
maximization of national welfare lies not in conflict but
cooperation, not through aggression but through human
solidarity.8. The remarkable concurrence of views expressed by the experts at
South Asian Journal's conference reflect the immense urge of
our peoples to outgrow the past and take a leap into a future that
is free from want and conflict. Certain stages of history can be
skipped, so can various evolutionary stages through which, for
example, the European Union had to pass in the 20th century.
The intrastate conflicts and interstate disputes must move from
management to resolution in a result-oriented process that must
at the same time allow, rather than hinder, regional cooperation
to address the demands of our peoples. The lines of conflicts
must change into the bridges of friendship and the fenced-
borders must gradually soften before the urge of South Asians to
become a fraternal and indivisible community of people with
nation states, while keeping their sovereign equality, joining
hands in submitting before the will of their real sovereigns - the
people. 9. With a step-by-step approach, and simultaneously, all sided
measures can be taken through an integrated and well calibrated
sequencing and realistic stages, towards South Asian Free Trade
Area, South Asian Union, (tourism/environment/water/energy/
communication /information/economic), South Asian Tariffs
and Customs Union, South Asian Monetary Union, South Asian
Bank and Development Fund, South Asian Cooperative Security
and South Asian Parliament. However, to take a leap forward,
there will have to be no hegemony, or ganging up by the small
against the big. A new paradigm of equitable, if not equal,
partnership must evolve to reshape our all-sided relations. 10. Welcoming the current peace process between India and
Pakistan with its two-fold objectives: the exploration of all
options for a final settlement of the J&K question in an
atmosphere free of violence, terrorism and normalization of
bilateral relations while implementing their joint statements of
January 6, 2004, September 24, 2004 and April 18, 2005 in
their letter and spirit. Appreciating the efforts by India and
Pakistan to undertake nuclear and conventional military
confidence-building measures, we urge them to put in place a
comprehensive regime of CBMs that will ensure a nuclear-
tension free subcontinent. We endorse the demands of India and
Pakistan for negotiations with the other nuclear weapons powers
to promote global non-proliferation and effective nuclear
disarmament. Appeal to all countries in the region to put in
place comprehensive sustainable dialogue mechanisms for
resolving all bilateral disputes. While India and Pakistan today
have a composite dialogue in place which needs to be given
further impetus and momentum, similar exercises are needed,
for example between India and Bangladesh.11. Concerned about various intrastate conflicts, such as in Sri
Lanka, Nepal and elsewhere, we call upon the concerned parties
to hold fire, take necessary confidence building measures and
allow peace process to address their relevant genuine concerns
and propose alternative solutions on which the parties could
mutually agree to resolve their disputes. 12. Welcoming the victory of democratic struggle in Nepal, a
broader consensus on convening a Constituent Assembly,
without any conditions, the urge of all segments of civil society
to find an amicable peaceful solution to the causes that gave
birth to the Maoist upsurge and to set a democratic path of free
and fair elections, we hope that the people of Nepal will realize
the dream of a republic and set a laudable example for those
other peoples who are still struggling to achieve their democratic
aspirations against the remnants of authoritarianism and
extremism. 13. Facing the challenges of globalization and taking a collective
stand in the ongoing trade negotiations on WTO, South Asia
should set its own house in order to pursue its collective goal of
creating an even playing filed both within the region and in the
world.
In view of the above, the individual working groups set up under
SAPANA put forward recommendations in the following areas:
South Asian Free Trade Area The agreement on South Asian Free Trade Area (SAFTA) requires
effective implementation, expanding the space for trade and, more
importantly, economic collaboration, investment and development.
If South Asia's economies are to be integrated, it presupposes
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development of transnational communication networks and physical
infrastructure and monetary cooperation involving greater
coordination among the governments and the central banks. Despite
limited complementarities in trade-able items, due to similar
comparative advantages, expansion of trade warrants vertical and
horizontal integration of industries and investment in joint ventures
by public and private sectors. However, trade and investment will
not move ahead unless tariffs are lowered, the negative list kept to
the minimum, para- and non-tariff barriers removed and standards
harmonized.
Streamlining borders transactions through trade facilitation at sub-
regional junctions, special attention needs to be focused on
promoting border trade. Increase in efficiency within the sub-region
often spills over into trade outside the region as well, because
improving customs or improving efficiency of ports helps both
intraregional trade and international trade.
The Group on Tariff and Macroeconomic Harmonisation
recommends:14. The average rate of tariffs has gone down in all the South Asian
countries, but some of them impose para-tariffs, including
regulatory duties, anti-dumping duties, and specific duties and
non-tariff barriers. Transparency in the tariffs structure needs to
be ensured. While the average duties are not all that high there is
a need to remove tariff peaks. Further reduction in duties should
ensure that the industries where the country has dynamic
comparative advantage are not closed down. The group also
recommends trade facilitation because various procedural
requirements discourages growth of trade;15. Containing fiscal deficit policy should be pursued by making
judicious choices between growth and stability;16. The prudential regulations for the banks should be effectively
implemented and it needs to be ensured that the efficiency gains
result in higher deposit rates and/or lower rates on the
advances. The pursuit of prudential regulations should not be
applied on the small and micro enterprises who cannot meet the
collateral requirements; 17. South Asian countries may continue to have floating exchange
rates and the central banks may only intervene to keep the
currency near the equilibrium value;
18. The South Asian countries may further deregulate the economy
and may continue privatization policies as long as the private
sector monopolies are properly regulated; 19. Whereas South Asian countries are struggling to promote trade
within the region, the ultimate objective should be the economic
union and common currency. Whereas political agreement
would be necessary to make SAFTA effective, formulate the
custom union and economic union, various steps will have to be
taken before economic union is formed. The countries will have
to coordinate the exchange rate, fiscal and monetary policies;20. The coordination of policies would imply that the countries are
willing to increase interdependencies and the commitment of
the union to help the country suffering from any problem and a
South Asian Fund may be created for this purpose. Various
studies need to be conducted to examine the problems by way of
policy coordination and the lack of economic policy options
when the economic union is formed; and21. The group also feels that the South Asian countries have
achieved growth rates exceeding 8 per cent in recent years and
they expect the growth rate to continue. However, the
investment rates and other prerequisite to the high growth rates
are missing and they must try to overcome the stumbling blocs
to growth.
InvestmentsIntra-regional investment plays an important role in transferring
surplus capital from capital endowed countries of a region to capital
deficit ones and along with it technical, managerial and marketing
skills. It also plays a vital role in industrial restructuring within the
region and helps in moderating trade imbalances among the member
countries.
In view of the crucial role of investments, it is desirable that member
countries of SAARC evolve a common investment policy so that
instead of competing with each other in terms of offering fiscal
incentives, they facilitate freer flow of capital among them that
extend beyond their respective countries. The elements of such an
investment policy include capital flows to mitigate the trade deficit
and capital scarcity, avoidance of double taxation, protection of
investment and conditions governing the management of foreign
exchange, differentiating between the requirement s of least and
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non-least developing countries.
The 13th SAARC Summit held in December 2005 adopted three
treaties for promoting investment facilitation. These are related to
customs cooperation, limited double tax agreement and setting up of
an Arbitration Council. The scope of these agreements needs to be
extended so that the goal of a SAARC investment area is realized.
South Asian Customs, Tariffs, and Monetary UnionIntra-regional trade and Investment will, subsequently and
gradually, translate into a South Asian Customs and Tariffs Union
which may lead to a common exchange rate policy that will,
eventually, necessitate the creation of a South Asian Monetary Union
underwritten by macro-economic management and harmonization of
trade, fiscal and monetary policies at the regional level.
No less important is the cooperation in the transport and
communication sectors envisaging an integrated transport
infrastructure that allows uninterrupted travel across and beyond
our region and communication highways, facilitating free movement
of people, goods and unhindered flow of information across the
region and beyond, connecting South Asia with Central, South
Western and South East Asia. Not only do rail and road links
between Pakistan, India, Nepal and Bangladesh need to be
rehabilitated, a system of connectivity will have to be constructed
especially for the railways and the truckers will have to be issued
special permits.
Nevertheless, the Indian and Pakistani governments must agree to
transit of trade between Pakistan, Bangladesh, Nepal, India and
Central Asia. For promotion of trade the countries will have to
facilitate cross border movement of people and goods. Visa and
custom facilities will have to be simplified, and for special categories
of people and goods waived, across the board.
The Group on Custom Laws and Issues recommends: 1. Trade is growing in the region the mindset of protectionism is
changing. Trade barriers still exist, with high tariff barriers and a
large number of non tariff barriers. The economies are booming
and clearly need to be integrated.2. Customs laws need simplification and harmonization;
3. Dry ports need to be set up and transit rights be given freely;4. Valuation procedures need to be harmonized;5. Warehousing infrastructure, charges and fees needs
improvement;6. Common formats need to be developed for declaration forms;7. These forms be made available in electronic form, and available
in all major languages in the region;8. Information and data be exchanged freely;9. Countries to do away with secretive sensitive lists;10. A common software be used that would simplify declaration and
valuation;11. Mutual recognition of certification;12. Common standards and testing procedures to be followed;13. Capacity building and technology transfer be speeded up;14. Pakistan to take a lead in trade facilitation efforts, Sri Lanka to
lead the efforts towards breaking down non tariff barriers;15. Allow and encourage trade in services by recognizing University
and college degrees across the region.
Water Sharing and ManagementIncreasingly, the governments and concerned institutions are
realizing the need to address acute shortage of energy and water,
incidence of drought and floods that often bring miseries to the
people and, at times, states into conflict. The distribution and
management of water resources, though quite a divisive issue among
the upper and lower riparian regions across states, needs to be
undertaken amicably without depriving the lower and upper riparian
regions of their due to avoid a conflict over water issues which must
not be politicized.
Bilateral treaties, such as Indus Water Treaty between India and
Pakistan and the Treaty over Ganges between Bangladesh and India
must be respected and upheld in letter and spirit. The Mahakali
Treaty between Nepal and India may be implemented by removing
reservations of either side. The quadrangle of Bangladesh, Bhutan,
India and Nepal may take up an integrated approach to manage
water resources while keeping the interests of upper and lower
riparian, on the one hand, and India and Pakistan must overcome
their differences over Tulbul, Baglihar and Kishanganga projects
within the framework of the IWT, on the other.
There are other major water related problems that need to be
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addressed on a priority basis with water cooperation among the
member countries of SAARC to enhance water and food security.
There is a great hydro-power potential in Bhutan and Nepal that can
be utilized by other countries of the region. However, that would
involve the need for a common or bilateral grid, on which all
concerned countries would have to agree.
Recommendations of the Water Group1. The regional water scenario of South Asia is predominated by
increasing gap between increasing water demand and
insufficient supply, high allocation to agriculture and growing
new commercial demands, trans-boundary and regional
conflicts generated from upper versus lower riparian water
needs/interests, increasing interest in hydropower and new
management experiences. Policy challenges are linked to the
socio-economic approaches, selection of technical solutions and
institutional capacity. The following general and specific
recommendations could be made, based on the group
discussion:2. The trans-boundary conflicts are based on concerns of the lower
riparian countries to secure river flows (Pakistan and
Bangladesh versus India) on one hand and development
interests of the upper riparian especially for the hydropower
(Nepal versus India, India vs. Pakistan). The multi-purpose and
multi-country planning for the Himalayan water resources and
the South Asian water basins is the proposed future option.
(proposed NIBB-C Water Ways is an example)3. All South Asian countries are going through the experiences of
decentralization and local management. Different models have
been tried the success so far indicates involvement of local civil
society, political acceptance and local institutional
implementation capacity as the key elements. The national
experiences needs to be impartially evaluated and put in the
proper context. 4. The efficiency and productivity of water use in agriculture must
be enhanced along with sustainable use of water in agriculture.
The physical water stress and growing urban needs of Pakistan
and India suggest a slow transfer of water from the sector. 5. All infrastructure developments should consider long term
conservation of the natural water resources (all water bodies,
including lakes, river sections and groundwater) and
regenerative use of water. The central and top-bottom
engineering approaches are not able to move forward due to
political as well as hydrological reasons, hence, the technical
options must be formulated across the appropriate local
hydrological and political boundaries.6. The human access to water resources, on the one hand, and
increased commercial value of water, on the other, are the
growing challenges for the planning and development. The
secure allocations for the domestic and drinking water, equitable
distribution and fair water pricing in different sectors and
regions are the essential regulatory measures. The public sector
as a service provider has the responsibility to define guidelines.7. The water related sectors have the great opportunity for the
knowledge sharing in the technical and managerial fields.
South Asian Energy GridSimilarly, the energy cooperation should evolve into a South Asian
Energy Grid with integrated electricity and gas systems. As India and
Pakistan now agree, and they must move forward, the gas and oil
pipelines can run from Central Asia, Gulf, Iran and Myanmar
through Pakistan, Afghanistan and Bangladesh to whole of South
Asia and beyond. In this context of developing energy markets,
power trading in the region calls for establishment of high voltage
interconnections between the national grids of the countries. India,
Pakistan, Nepal and Bangladesh should cooperate in transportation
of gas and jointly developing, trading and sharing of energy.
The Energy Group recommends: 1. South Asia is home to 22% of the world's population and
occupies only 4% of the world land mass. All the countries in the
region are developing economies and heavily dependent on
energy imports despite being bestowed by nature with large
energy resources including hydro, solar, wind and, to some
extent, natural gas resources. However, they have not been able
to exploit their energy resources to meet the demand. Energy
imports constitute 27% to 87% of their commercial energy
needs. Price fluctuations in the international oil market have
been adversely impacting the economies of the region. Projected
energy consumption to sustain the current economic growth
levels would call for a more than 300% increase in their energy
consumption by 2020. Energy security, therefore, assumes
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greater significance for the socio-economic development of
South Asia. The major causes of concern from the regional
energy security perspective are:(i) Short-term supply risks due to threat of war and military action
that may impact Middle East or Iran, the primary source of
commercial energy supply to South Asia;(ii) Difficulty to pay for oil imports, when the prices shoot up
sharply;(iii) Prospect of obtaining to long term gas and oil supply contracts at
affordable prices, which can also ensure greater price stability;(iv) Availability of electricity to all households within a reasonable
time span to enhance the socio-economics development and
improve quality of life.2. The following steps need to be taken urgently to address the
above concern:3. Expedite development of indigenous energy resources including
hydropower while taking into account issues of resettlement and
socio economic crisis. Non-conventional energy resources, such
as, the wind and solar energy resources, such as, the wind and
solar energy to meet the long term energy demand;4. Establishment of a South Asian regional power grid to facilitate
exchanges and trading of power to meet the electricity demand
in the region;5. Development of a South Asia Gas Grid with pipelines from Iran.
Turkmenistan, to facilitate natural gas surplus countries in the
neighborhood of South Asia to facilitate natural gas imports into
the region and its distribution among the countries of South
Asia;6. Establish South Asia Energy Research Programs for
development of new technologies that would facilitate
harnessing the benefits of solar and other energy resources on a
more sustainable basis;7. Establish regional energy cooperation on a long-term basis;8. Undertake evaluation to examine the appropriateness and
impact of power sector reform initiatives undertaken by the
countries in South Asia to identify the need for any course
correction or policy change.
South Asian Development Bank Given a low rate of investment to GDP ratio, South Asia must create
attractive environment for investment in high value-added
manufacturing lines and trans-regional projects. Enhanced
investment flows, both from within and outside the region, would
culminate in production facilities located across the region through
integrated production systems. Shares of both national and regional
companies would be quoted on our stock exchanges as capital moves
without hindrance across national boundaries to underwrite
investment in joint ventures and projects in any part of our region
through a South Asian Development Bank.
Addressing LDCs' ConcernsHowever, economic cooperation and trade would not produce
tangible results unless the concerns of Least Developed Countries
(LDCs) are genuinely addressed, the negative-list is minimized,
tariffs are substantially brought down and non-tariff and para-tariff
barriers lifted, the economies are gradually opened up with a
recourse to investment-trade linkage that takes care of trade deficits
between partners through investment flows and capital account,
vertical and horizontal integration of industries that benefits from
relative advantages and economies of scale. The time frame
envisaged in the agreement on SAFTA must be strictly adhered to.
South Asian Cooperative SecurityWe resolve to get out of the straitjacket of enmity, overcome
obsession with over-demanding militaristic security paradigms and
look beyond the traditional notions of security and focus on an
integrated South Asian Cooperative Security that recognizes
interdependence and mutuality of interests. The states ought to act
in their enlightened self-interest to resolve their conflicts and
differences through peaceful means and to the mutual benefit of our
peoples. The choice is often, erroneously, posed between regional
cooperation and conflict resolution. We urge all our states to
simultaneously move forward to address long-standing political
disputes through peaceful means. The main obstacle to regional
cooperation and economic integration remains political and
strategic. Therefore, we vow to be courageous, flexible and consistent
to help resolve interstate and intrastate conflicts and dismantle
political barriers to regional economic takeoff.
Countering the widespread threat of terrorism, the SAARC countries
must implement the current protocol for cooperation against
terrorism and bring it in line with the international norms. The
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regional efforts against terrorism must also include measures to
combat the spread of small arms and light weapons, narcotics
trafficking, smuggling, organized crimes and criminal mafias. This
will require exchanges and interaction between the national
intelligence and security agencies with their counterparts across the
border and greater interaction between the armed forces and
military establishments in the region.
The conference strongly emphasizes the principle that there can be
no intervention in the internal affairs of any nation in the
subcontinent. Yet, given the implications of internal conflicts for
regional security as a whole, the SAARC must pay greater attention
to the relationship between internal and regional security. It calls on
both parties to the ethnic conflict in Sri Lanka to take immediate
steps towards a revival of the stalled peace process and creation of an
interim administration in the Tamil-dominated regions while
securing integrity of the country and the rights of minorities there.
Without prejudice to the current positions of the SAARC
governments on amending the SAARC charter, the conference calls
upon the SAARC to initiate a study on mechanisms for cooperative
security in the region. Advancing the SAARC charter, the conference welcomes the
decision, in principle, of the Islamabad SAARC summit to establish
procedures for cooperation with other countries and organizations.
Given the increasing interdependence among regions, cooperation
with neighboring countries, such as China, Afghanistan and
Myanmar and Central Asia, and other regional organizations, it is an
essential future activity for SAARC.
The Group on Nuclear Stabilization recommendsThe existence of nuclear weapons in South Asia remains an issue of
major concern for the peoples and region's security analysts. Given
Indo-Pak history of constant tensions and intermittent crises, we are
concerned about the likelihood of a crisis spiralling out of control
and eventually leading to a nuclear conflict. While we find the South
Asian nuclear regime to be relatively stable in peace time, there is
indeed nuclear instability induced into the nuclear equation in time
of crises. This is borne out of an analysis of the 1999 and 2002 crises
between India and Pakistan. Moreover, since one of the adversaries,
Pakistan, inherently links nuclear escalation to conventional
asymmetry, the growing asymmetry in conventional arms between
Pakistan and India could also lead to a lowering of the nuclear
thresholds in terms of South Asian crises. Finally, while the mutual
ambiguity of the nuclear regime in South Asia contributes to stability
on some counts, it does not allow the adversaries to make informed
decisions in times of crises and can thus lead to instability.
Given the above, the recommendations of the group
include:1. Recognizing that much of the tensions are a result of outstanding
disputes, we recommend that Pakistan and India must continue
dialogue on these issues and continue on the overall drive
towards CBMs through the existing normalization process. With
regard to nuclear weapons, Pakistan and India should mutually
initiate a global drive towards disarmament. The starting point
should be a declaration that transforms South Asia into a nuclear
weapons free zone. More specifically, the two sides could focus
on the following:2. Declaring a bilateral ban on nuclear testing through an
agreement;3. Ceasing the production of all fissile material (agreement);4. Signing a non-deployment agreement, agreeing that weapon
systems will not be mated or deployed (agreement);5. Signing an agreement no to pre-empt nuclear installations of the
adversary;6. Establishing of NRRCs but with a legally binding agreement that
such channels will remain open during crises;7. Enhancing command and control structures to eliminate the
likelihood of an accidental or unauthorized nuclear conflict.
The Group on Conflict Resolution Mechanism Proposes: Conflicts in South Asia are passing through a critical phase of
transformation which requires a proper understanding,
interpretation and information about issues which cause conflicts.
For a long period of time, South Asia has perceived conflicts through
a zero-sum perspective but the process of gradual conflict
transformation is taking place in the region which may help the
formulation of conflict resolution mechanism.
Recommendations:1. Need for proper conceptualization and understanding of
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conflicts and their interpretations in a rational manner.
Therefore, it is recommended to establish conflict resolution
centers and institutes at the governmental and non-
governmental levels so as to unleash the process of meaningful
research in the field of conflict resolution. It is also
recommended to design academic curricula on conflict
resolution so as to create a better awareness among the people of
South Asia about the need for a conflict resolution process. Both
print and electronic media of South Asia can play a plausible role
for creating proper conditions for conflict resolution process; 2. Involvement of stake holders and allow them the space to craft
out alternative conflict resolution mechanism. Stakeholders
must have political will for conflict resolution and women should
be made an integral part of this mechanism. The composite
dialogue going on between India and Pakistan should also focus
on the practicable conflict resolution strategy as far as
contentious issues are concerned;3. State structures and their proponents should also be influenced
because states are often the creators, promoters and sustainers
of conflict;4. There should be SAARC conventions on minority and water
rights' charters and the existing human rights' charter of SAARC
needs to be strengthened and properly implemented.
South Asian Human Security Beyond cooperative security, South Asian nations must ultimately
move towards South Asian Human Security by placing people -- their
wellbeing and rights to peaceful life and development -- at the centre
of security concerns, rather than intensifying the arms race. To
include the excluded, governments of South Asia should take
concrete steps to implement the SAARC Social Charter and give
priority to poverty eradication by implementing ISACPA Report on
Poverty Alleviation and meeting the Millennium Development Goals.
This can be done by increased investment, enhanced economic
growth and development, which do not necessarily translate into
poverty alleviation unless structured to address the root-causes of
poverty and give priority to human resource development,
employment generation and empowerment of the dispossessed,
women and the poor, in particular.
South Asian Parliament The South Asian region emerged out of decolonization as a result of
the drawing of political boundaries with sovereignty attributes
forming new states. The political boundaries have further been
reinforced through divergent strategies of state and nation building,
reinterpretations of history and religion, and due to the Cold-War
strategic divides. In the context of these reinforced boundaries and
divisions, it may sound imprudent and even unrealistic to talk of
political integration in the region. However, over the past decades,
the imperatives of globalization, end of the cold war and rising
popular aspirations in each of the South Asian states have brought
about qualitative changes in the regional perceptions. Processes like
SAARC have created institutions and generated impulses under
which people are visualizing the prospects of establishing a South
Asian community. Regional integration should and will take place
within the framework of community building, not by conceiving or
attempting erosion of state sovereignties or identities. The examples
of SAFMA's initiative towards South Asian parliament and the
collective and individual attempts in India and Pakistan to re-write
history text books are indicative of growing popular pressure in
favour of community building.
The SAPANA Group decided to mobilise country-based but
comparative studies, that address the question of state building
strategies, nationalism, status of minorities within and otherwise in
the context of human rights and democratic polices. Studies will also
take note of the professional engagements like that of Chamber of
Commerce and industries, media, lawyers, academics, doctors and
human rights activists across the board initiated and
institutionalised within or outside the SAARC framework. The basic
strategy to be adopted towards community building through
integration will be to encourage institution building and
engagements. Patterns of sub-regional cooperation amongst the
parts of the states and societies in South Asian, linkages among
parliamentarian, political parties, scholars and analysts, as well as
transport and communication networks across the borders driven by
popular pressures present concrete examples of such strategy. The
conclusions of the studies will then be put in a perspective to map
out the properties of community building through integration.
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The Group on South Asian Political Integration
recommends:The participants overwhelmingly endorsed the view to initiate a
process of moving towards the creation of an institutional interactive
mechanism for parliamentarians of South Asia keeping in mind the
concept of a South Asian Parliament. A full fledged SAP may take a
decade or two, but it is time to initiate moves in that direction. To
begin with, the conference proposes: a) Creation of an Intra-
Parliamentary Union in South Asia; b) SAARC may in principle agree
to create a South Asian Parliament and appoint a group of experts,
responsible before the SAARC Speakers Forum, to prepare a
comprehensive report and a timeframe to establish it in stages and
through an evolutionary process; c) The SAARC Speakers Forum
should be activated and; d) To begin with, SAP may be set up as a
deliberative and consultative body, not as a legislative body, so as to
create regional opinion on and build regional pressures on the issues
pending for implementation at the SAARC level. This deliberative
body may work within the SAARC agenda. By ultimately creating a
South Asian Parliament, the evolution of a regional South Asian
identity, without in any sense compromising on or conflicting with
respective national identities and sovereignty of nation-states of the
region.
The Group on Rewriting History recommends: There is very little shared knowledge of how history is researched,
written and taught in each of the countries of South Asia.
Furthermore, there is inadequate recognition or appreciation of the
shared past of this region. Despite this lack of knowledge about the
past, references to and the use of history as a resource in a variety of
political debates has only increased, particularly for the promotion of
communalism, fundamentalism, casteism, regional and linguistic
chauvinism. This makes it more difficult to produce trans-national
historical perspectives.The close link between the state and historical research and textbook
production has had ambiguous and conflicting consequences for
developing a sense of the past. Historical research and analysis is still
dependent on Western categories and tools of analysis. There is need
to develop more indigenous categories.
Recommendations:1. The efforts at working out a common history of South Asia are
viable. Even though there may be fundamental differences in
perspective, it is possible to identify and work on common
themes. Rather than focusing on national histories, themes that
are shared by all the countries of South Asian countries should
be identified and worked upon. 2. Furthermore, a perspective on history that emphasizes the
people, and neither fights shy of acknowledging historical
injustices of caste, region, religion, gender, (to take some
examples) nor glorifies them is an urgent imperative. 3. We believe that such histories can help evolve a broader
framework through stronger institutional linkages between
groups of professional historians in South Asia. Such an
engagement with the past will make a richer, fuller sense of the
past possible, and have a great impact on society and the polity
today and in the future.
The Group on Religious Extremism and Minorities
recommends:Both minority persecution and ghettoisation have to be countered.
There is still a major deficit in terms of information and
understanding about events across the region even among those
actively engaged with various human rights causes.
Recommendations: 1. A standing body charged with responsibility to study and
compose the institutional frameworks that seek to empower
minorities across the region. Where institutional support is
absent it should be highlighted.2. The political position, strategies and rhetoric employed by the
participants in the political process be monitored in order to
identify issues that may impact minorities. 3. Intellectual tendencies and debates within discourses generated
by the minorities about their situation those that promote
minority empowerment be highlighted.
South Asian Human Rights CodeIt is imperative for the South Asian countries to agree to and set up
institutions under the Paris Principles and purposefully set about
creating the required mechanisms to implement all internationally
recognized fundamental human, civil and democratic rights. The
Proposed Draft on Human Rights Code for South Asia presented
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before the South Asian Parliament's Conference, convened by
SAFMA, will be circulated among the human rights bodies of the
region and Human Rights Commission of Pakistan and other human
rights bodies in the region will be requested to develop broader
understanding among the major stakeholders to develop a regional
framework at the level of SAARC and its member countries.
People to People ContactThe prevailing barriers to cross-border movements make neither
commercial nor logistical sense and originate in the pathologies of
interstate, as well as domestic, politics. There is an urgent need to
allow greater interaction among the policy-makers,
parliamentarians, businessmen, media practitioners, professionals,
youth and the leaders of civil society. To enable it to happen, it is
necessary that India, Pakistan and Bangladesh, who have the most
restrictive visa regimes, drastically revise their visa policy and
remove impediments to free movement of people. All-country visas
may be granted at separate South Asian counters on arrival at the
airports and on all border-crossings.
South Asian Information Society To overcome information deficit in the region, it is essential that all
restrictions on access to and free flow of information are removed
forthwith and media persons and products are allowed free
movement across frontiers. In this regard, SAFMA's Protocols on
'Free Movement of Media Persons and Media Products' and
'Freedom of Information' must be adopted by the national
legislatures/governments and the SAARC. To ensure the citizens'
right to know, we support SAFMA's Protocol on Freedom of
Information. The media, on their part, should rise above national
divides, avoid demonization and give special attention to the
coverage of the countries of South Asia that remain under-reported.
Given the rising numbers of South Asian Cyber citizenry, there is an
urgent need to upgrade, integrate and facilitate cyber connectivity
and accessibility.
Culture and TourismThe scope of collaboration in the sphere of culture, tourism, sports,
education, health, research, human resource development and
environment is infinite. At the level of SAARC, measures should be
taken to promote cultural exchanges, tourism, health and education
services and research in all fields.
Promotion of HumanitiesPrivate initiatives and those of universities should be encouraged by
the authorities to introduce country studies, invite faculties from the
neighbourhood, exchange students, promote humanities and
physical sciences through South Asian congresses and undertake a
non-discriminatory portrayal of history. Visa restrictions and tedious
process for academics, experts and scholars must be dispensed with.
Women's ConcernsAcknowledging the inadequate attention to and focus on redressing
the marginalization and invisibility of women at all levels of national
and regional policy-making; and the disproportionately high burden
of poverty that women face in South Asia; SAPANA resolves to work
towards gender equality and gender justice in all aspects of our work
in the process as well as the substance; and exhort all the South
Asian governments to acknowledge and rectify the glaring gender
inequalities especially the feminization of poverty.
South Asian Policy Analysis (SAPANA) NetworkThe participants of South Asian Journal conference have agreed to
form South Asian Policy Analysis (SAPANA) Network that will
pursue virtual research and develop networking among various
independent research groups and scholars across the region to
promote free and pro-people thinking and a course of development
that addresses the concerns of the people, in a wholist and
sustainable framework.
The objective and purpose of SAPANA will be to redress the
shortcomings found in existing Think Tanks and research
organisations. Firstly, it is proposed that the main purpose and
objective of SAPANA will be to liaise with policy makers and with
governments in separate countries and in South Asia as a whole. The
research undertaken by SAPANA, while following all the principles of
objectivity and rigour, will serve as a platform for policy dialogue and
intervention.
SAPANA has a great advantage over all existing think tanks and
similar institutions, in that it is part of the Free Media Foundation
and will work closely with the South Asian Free Media Association
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(SAFMA). This proximity will allow SAPANA's research output to be
available in the public arena through the media. This ability to
disseminate extensively will be one of the major advantages SAPANA
will have over other institutions.
SAPANA will focus on multidimensional and multi-thematic
interventions rather than specialise in one particular area. Because of
the already existing network of the Free Media Foundation and
SAFMA, SAPANA is being perceived as a sort of a 'virtual' institution.
Unlike most research organisations and think tanks, for the first few
years, it will not employ scholars and academics, but will out-source
research. Because of its 'virtual' nature, not constrained by the
abilities of an in-house research staff, SAPANA will have access to
the best scholars working on South Asia who will be hired on short
term contracts for specific purposes. Moreover, SAPANA will also be
able to design research themes of a more topical and immediate
nature requesting scholars to respond quickly. Its flexibility will be
one of its strengths. The participants appreciated South Asian
Journal and SAFMA for taking this timely initiative. The participants
of the First SAPANA Conference agreed to meet again within two
years to pursue their objectives and shared goals.