Trade by South Asian Media Net

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.

M Sulaiman Khan is a former customs commissioner of Pakistan, and currently heads Sulaiman Associates, a consultancy firm.

o u t h i a n t u d i e s s A S S Volume: II

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.

Trade, Tariffs, and Customs in South Asia

iii

© 2006 Free Media Foundation All 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 Floor Eden Heights, Jail Road Lahore, Pakistan www.southasianmedia.net

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.

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 comprising an interactive network of scholars from across South Asia. From this initiative emerged the South Asian Policy Analysis (SAPANA) Network - an autonomous, independent, and crossdisciplinary 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 nonacademic 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.

vii

Contents Preface: Trade Liberalisation in South Asia Imtiaz Alam

Recommendations of SAPANA Research Group

xiv

Executive Summary Amir Ullah Khan

Informal and Free Trade Arrangements Nisha Taneja

177

Pakistan, India, and Regional Cooperation Shahid Javed Burki

187

xviii

India-Pakistan Trade Dr S Akbar Zaidi

206

Customs Tariff: Standardisation and Harmonisation Amir Ullah Khan

India's Regional Trading Arrangements Sujata Jhamb

217

Trade Facilitation in WTO Nisha Taneja

SAPANA Conference Declaration (Islamabad, April 2006)

227

Warehousing Facilities in South Asian Customs Laws 70 Dilli Prakash Ghimire Valuation of Goods in Customs M Sulaiman Khan Documentation Requirements for Imports and Exports Douglas Jayasekera South Asia as a Global Force in Trade S K Mohanty

112

119

viii

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.

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 allembracing 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,

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 IndoLanka 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

xii

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.

xiii

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

xiv

Streamlining borders transactions through trade facilitation at subregional 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:

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:

1. 2. 3. 4. 5. 6.

Amir Ullah Khan (group coordinator), India; Dilli Prakash Ghimire, Nepal; Douglas Jayasekera, Sri Lanka; M Sulaiman Khan, Pakistan; S J Mohanty, India; Nisha Taneja, India.

2. 3.

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.

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; Containing fiscal deficit policy should be pursued by making judicious choices between growth and stability; 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; 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; The South Asian countries may further deregulate the economy and may continue privatization policies as long as the private sector monopolies are properly regulated; 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

xvi

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.

xvii

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.

xviii

xix

Executive Summary Amir 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 growth 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

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 Asia The 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

xxi

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.

xxii

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

xxiii

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

xxiv

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 programme 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

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 Licensing As 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) "canalised"1 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 India The 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 Trade The 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.

Customs Procedures and Valuation The 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 29 No. of copies 118 No. of Signatures 256 Labour Required 7 Cost 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 Import Import 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 Export FOB (Free on Board) price is inclusive of Ex-Works price,2 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

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 Country Different 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 Duties Although anti-dumping3 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: l Conceptually, 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. l Customs 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. l The 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. l Anti-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. l Anti-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 India Two fundamental parameters are used for determination of dumping, namely, the normal value4 and the export price5. 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 1992-93 to 2003-04, the DGAD6 received a large number of

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 (including EU member countries).7 Anti-Dumping Investigations Initiated against Exports from India Indian exports are facing a number of anti-dumping and antisubsidy 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 antisubsidy 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 India Against 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-Dumping Apart 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.

An anti-subsidy countervailing measure is in the form of countervailing duty which is to be imposed only after the determination that: l the subsidy is a specific subsidy; l the subsidy relates to export performance; l the subsidy relates to the use of domestic goods over imported goods in the export article; l the 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 percent.8 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

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 agreement shall supersede the SAPTA.9 The following sections give a short description of India's trade agreement with SAARC countries. India-Afghanistan Trade Agreement The 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: l To promote through the expansion of trade the harmonious development of economic relations between India and Afghanistan. l To provide fair conditions of competition for trade between India and Afghanistan. l In the implementation of this Agreement the Contracting Parties

shall pay due regard to the principle of reciprocity. l To 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 movement of goods.10 India-Bangladesh Trade Agreement In 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 Agreement The Government of the Republic of India and the Government of the Kingdom of Bhutan in 1995 entered into free trade11 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: l Protecting public morals; l Protecting human, animal and plant life; l Implementing laws relating to import and export of gold and silver bullion; l Safeguarding national treasures; l Safeguarding such other interests as may be mutually agreed upon. India-China Trade Agreement The 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

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-Ă -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 Agreement In 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 FTA The 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.â&#x20AC;? 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 Agreement The 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 Chinesemade 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 System India 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 tariff scheme on automobiles.12 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

the US, the EC, Canada, Japan and Brazil. It has been a complainant in just as many disputes as it has been a respondent.13 Amir Ullah Khan is deputy secretary general of the PHD Chamber of Commerce and Industry (PHDCC), New Delhi, India. Endnotes 1 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 India 8 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

41 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

AD Measures: Reporting Member vs Exporting Country From: 01/01/95 To: 31/12/03 Exporting Country

Measures Imposed by

India

Argentina

Brazil

Canada

China, P_R_

India

1995

1996

1997

124

Total for 01/01/95/31/12/03 119

1998

162

1999

183

2000

235

Indonesia

2001

166

Mexico

2002

212

2003

220

Thailand

Total

1511

Trinidad and Tobago

Turkey

United States

Total

Country wise initiations of antisubside casse against india Country

Anti Subsidy Cases

Percentage

Year

Anti Subsidy Cases

% share 3

1995-96

1996-07

1997-98

1998-99

1999-00

36%

South Africa

23%

2000-01

USA

23%

2001-02

Canada

13%

2002-03

Brazil

2003-04

Total

100%

Total

100

Anti subsidy Cases Percentage

Product

Anti-Dumping Investigations Initiated against Exports from India

Exporting Country

European Community

South Africa

Anti-Dumping Investigations Initiated against Imports in India by Product

AD Measures: By Exporting Country From: 01/01/95 To: 31/12/03

Engineering including Steel Product

38%

Drugs & Pharmaceutical

18%

Rubber, Plastics, Glassware and Articles thereof

18%

Electronics

15%

Textiles and Articles Thereof

Footwear Products

7.11 Particulars of a few Authorities responsible for invoking Anti-Dumping action Authority Address Country Name of the investigeating Argentina

Subsecretaria de Politica Y Gestion comercial Ministerio de Economia Y Produccion

Julio A. Roca 651, Buenos Aires Codigo Postal : C 1067ABB ARGENTINA Tel: 00 54 11 4349 3935/3949 Fax: 00 54 11 4349 3930

45 List of Entry/Exit points for India-Bhutan Trade

List of Items Granted Preferential Tariff by Afghanistan No. HS Code Product Description

MFN Duty (%)

MOP (%)*

090230

Black tea (fermented)

Temporarily exempted

100

090240

Other black tea

Temporarily exempted

100

300210

Antisera and other BLD Frctn; Mdfd Imunlgcl products

300390

Other Ayurvedic, homeopathic medicine

300490

Other medicine for retail sale

170199

7 8

Jaigaon

(road route)

Chamurchi

(road route)

100

Ulta Pani

(road route)

100

Hathisar (Gaylephug)

(road route)

100

Darranga

(road route)

Sugar refined

Temporarily exempted

100

252310

Cement clinkers

100

Calcutta

(air and sea port)

252321

White cement

100

Haldia

(sea port)

Dhubri

(riverine route)

Raxaul

(road/rail route)

10.

Panitanki

(road route)

11.

Changrabandh

(road route)

12.

New Delhi

(air route)

* Margin of preference List of Items Granted Preferential Tariff by India No.

HS Code

Product Description

MFN Duty (%) MOP (%)*

080620

Green Raisins

105

50%

080620

Green Large

105

50%

080620

Black Raisins

105

50%

080620

Red Raisins

105

50%

081310

Dried Apricots Nuts

50%

081310

Dried Apricots

50%

080420

Fig Dried

100%

080250

Pistachios closed Shell

100%

080250

Pistachios Open Shell

100%

080250

Pistachios Shelled (Kernel)

100%

080231

Walnuts Unshelled

50%

080232

Walnuts shelled

50%

081340

Plums Dried

50%

080212

Almond Thin Shelled

Rs65/kg

50%

080212

Almond Hard Shelled

Rs65/kg

50%

080212

Almond Shelled

Rs65/kg

50%

081340

Mulberries Dried

100%

081340

Pine Nuts Toasted

100%

080620

Raisins Golden

105

50%

081310

Apricots Nuts, Bitter Unshelled

50%

081310

Apricots Nuts, Bitter Shelled

50%

080620

Green Raisins except Large

105

50%

081340

Cherries Sour Dried

50%

080610

Grapes fresh, All types

50%

080719

Melon fresh

100%

080810

Apples fresh

50%

080910

Apricots fresh

50%

081090

Pomegranates

50%

090910

Anise Seeds

50%

090940

Caraway Seeds, White, Black Kajak

50%

120400

Linseeds

50%

120740

Sesame Seeds etc.

50%

121110

Liquorice Roots plants for Pharmacy etc.

50%

121410

Alfalfa Seeds

50%

130190

Asafeotida

100%

710310

Lapis Lazuli, Ruby, Emerald etc.(Unworked)

100%

710391

Emeralds (Otherwise worked)

100%

710399 Lapis Lazuli, Ruby (Otherwise worked) * Margin of preference

Nepalese manufactured articles allowed entry into India: free of customs duties on a fixed quota basis. No. Nepalese Article

Quantity in MT per year

Vegetable fats (Vanaspati)

100, 000

Acrylic Yarn

10, 000

Copper products under Chapters 74 and Heading 85.44 of the HS Code

10,000

Zinc Oxide

2,500

Annex 1 Anti-Dumping Investigations Initiated against Imports in India by Year Imports 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

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 India l Alcoholic 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) l Perfumes and cosmetics with non-Nepalese/non-Indian brand names, l Cigarettes and tobacco Note: The Government of India may, in consultation with HMGN, modify the above list. Agreed Routes for Mutual Indo-Nepal Trade l Pashupatinagar/ Sukhia Pokhari l Kakarbhitta/ Naxalbari l Bhadrapur/ Galgalia l Biratnagar/ Jogbani l Setobandha/ Bhimnagar l Rajbiraj/ Kunauli l Siraha, Janakpur/ Jayanagar l Jaleswar/ Bhitamore (Sursand) l Malangawa/ Sonabarsa l Gaur/ Bairgania l Birgunj/ Raxaul l Bhairahawa/ Nautanwa l Taulihawa/ Khunwa l Krishnanagar/ Barhni l Koilabas/ Jarwa l Nepalgunj/ Nepalgunj Road l Rajapur/ Katerniyaghat l Prithvipur/ Sati (Kailali)/ Tikonia l Dhangadhi/ Gauriphanta l Mahendranagar/ Banbasa l Mahakali/ Jhulaghat (Pithoragarh) l Darchula/ Dharchula

Trade Facilitation in WTO Nisha 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 Ministerial 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

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, namelyarrangement 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

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 India This 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 Regulations Article 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

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 Rulings Countries 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 Media A 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.

Enquiry Points Several 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 â&#x20AC;&#x153;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.â&#x20AC;? 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. Appeal While 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 officer superior to the adjudicating authority1 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 X The 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.

Article VIII: Fees and Formalities Connected with Importation and Exportation Article 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 Charges In 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 Principles Members 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

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 Requirements Suggestions 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 preshipment 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.

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 Times Members 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'.

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'.

Use of International Standards Perhaps 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.

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

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

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 VIII Several 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 requirements of Article VIII:I (c)2 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 authorities.3 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 individual risks.4 The convention also recognises the use of information technology and sets standards for application of information and communication technology in customs.5 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 relating to security.6 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 Agreement Most 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.

Article V: Freedom of Transit Article 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 nondiscriminatory 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 Transit Members 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 Cooperation 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-shipment Members 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 transshipment 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

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 transshipment may need additional inspection. Regional Transit Arrangements The 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 â&#x20AC;&#x153;at riskâ&#x20AC;? 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

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 Convention The 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 Countries South 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.

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. Endnotes 1 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. References l Bodergraven, H. V. (1999) “The Role of the World Trade Organisation”

in Simplification of customs Procedures: Reducing Transaction Costs for Efficiency, Integrity, and Trade Facilitation edited by S. SalvatoreCampo, ADB. l Cattaui, M. L. (2002) "The Importance of Trade Facilitation to Business", Paper presented at the UNECE International Forum on Trade Facilitation, 29 May. http://www.wto.org/english /tratop _e/tradfa_e/tradfa_e.htm l Ministry of Commerce (2002) Export Import Policy, Handbook of Procedures, 1st April 2002-31st March 2007, Volume 1.

69 l Nanda, Nitya (20030 'WTO and Trade Facilitation', Economic and

Political Weekly, June 28. l OECD (2002a) 'Transparency and Simplification Approaches to Border

Procedures: Reflections on the Implementation of Article X- Related Proposals in Selected Countries' TD/TC/WP 36/Final, Paris. l OECD (2002b) Transportation and Simplification Approaches to Border Procedures: Reflections on the Implementation of GATT Article VIIIRelated Proposals in Selected Countries' TD/TC/WP 50/Final, Paris l OECD (2002c) 'Transportation and Simplification Approaches to Border Procedures: Reflections on the Implementation of GATT Article VRelated Proposals in Selected Countries' TD/TC/WP 51/Final l Roy, Jayanta (2003), 'Feeling Good, but Vision Still Needed', The Financial Express, October 20. l Mukhopadhya (2002) 'Task Force Report on Indirect Taxes: A Critique' Economic and Political weekly, November 16. l Satpathy, C. (2002) " Trade Facilitation: A Singapore Issue Knocking at WTO's Door" Economic and Political Weekly, April, 27. l Satpathy, C (2004) 'Trade Facilitation: Commencing Negotiations at WTO' Economic and Political Weekly l Sengupta, N. and M. Bhagabati (2003) “A Study of Trade Facilitation measures” Interim Report, Madras Institute of Development Studies”, Chennai. l Sohn, C. and J. Yang (2003) 'Trade Facilitation in the WTO: Implications for developing Countries and a Roadmap to Cancun', Korea Institute for International Economic Policy, Discussion Paper 03-04, July. l Subramanian U., and Arnold, J. (2001) Forging Sub regional Links in Transportation and Logistics in South Asia, The World Bank, Washington. l Taneja, Nisha (2004) 'Trade Facilitation in the WTO', Working Paper No. 128, Indian Council for Research on International Economic Relations, New Delhi. l Wickramsinghe Upali (2005) Discussion Paper South Asia Watch on Trade Economics and Environment, Nepal.

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.

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 through 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.

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

5.6

233.3

6.0, 4.6, -0.6

Pakistan

145

59.2

408.3

3.9, 2.5, 3.6

Sri Lanka

15.9

836.8

6.0, -1.4, 3.0

Total

1393

631.79

460.15

Source: World Development Report 2004

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 2: Share of Intra-Regional Export and Import of SAARC Countries in Total Trade (1996-2003) ($ million) Country

percent of Total Exports

percent of Total Imports

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

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, â&#x20AC;&#x153;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).â&#x20AC;? 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

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 Harmonisation Customs 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 â&#x20AC;&#x153;warehouseâ&#x20AC;? 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

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

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

*Application to keep any dutiable goods in warehouse

*Appointing of public warehouses

*Application form

*Licensing of private warehouses

*All goods in customs warehouse are under customs control

*Warehousing bond

*Power to declare warehouse station. Board may declare place or station where alone public warehouse maybe appointed and private warehouse may be licensed

*The Customs Act 1962 has no provisions for warehouses. However, the Customs Rule 1970 has provisions for customs warehouses.

*Warehousing bank guarantee

*Permission for deposits of goods in warehouses

*The rule has provisions for private warehouses and public warehouses.

*Goods forwarding in warehouse

*Control over warehoused goods

*Appointment or licensing of public warehouse wherein dutiable goods may be deposited. The collector may appoint and license the public warehouse.

*Owner right to ware housed goods *Receipt of goods by warehouse operator *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

*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

*Payment of rent and warehoused charges *Ownerâ&#x20AC;&#x2122;s right to deal with warehoused goods

*Licensing private warehouse wherein dutiable goods may be deposited. The customs collector may license it

*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

*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 *Manufacturing operation home consumption in relation to warehoused *Clearance of goods warehoused goods for export *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

*Allowances in case of volatile goods *Goods not to be taken out of warehouse except as per law *Goods improperly removed from warehouse

*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.

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)

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 Nepal Nepal 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

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: l Bonded 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. l Industries entitled to bonded warehouse facilities must submit bank guarantees for 6 to 12 months covering normal duty plus 25 percent more than normal duty. l The 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. l There must be a 20 percent value addition on raw material and auxiliary raw materials at the time of export of the finished product. l The product must be exported within 11 months of the import of raw materials. l The 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. l An 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. l Banks and financial institutions are obliged to inform the customs office concerned one month before the expiry of the bank guarantee. l Bonded 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 Warehouses The 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: l Industry registration certificate. l Certificates of permanent account number. l Particulars of goods to be produced and export ratio of previous year if the industry has been operating from the last year. l Name of raw material and, if possible, the quantity required. l Copy of the previous bonded certificates for renewal. l Ratio 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: l Raw materials and auxiliary raw materials are stored in the factory warehouse at the owner's risk. l The owner must maintain a register in a clear way according to the format approved by the department of customs. l The bonded warehouse owner is responsible for showing all details at any time to a customs office. l Duty 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. l Industries 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-

performers. Need for Harmonisation and Constraints The 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 halfday 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:

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.

l Traders can be easily familiarised with systems of warehousing

procedures. An understanding of the systems helps to reduce the handling cost at each customs point l To make customs laws in SAARC countries more transparent and predictable to all in relation to warehousing facilities. l To create more regional trade for the benefit of the people of the region. l To maximise the benefit to each member state through intraregional trade. l To provide cheaper and easier warehousing facilities

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

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 â&#x20AC;&#x153;fixed favouritismâ&#x20AC;? 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) Nontransparent 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

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. Conclusion SAARC 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

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. References l UN Publications World development reports 2004 l WCO Publications Kyoto Conventions Annex General guidelines. l FNCCI/DFID/ACP Banshidhar Ghimire and Dilli Prakash Ghimire (CPPD). A study on legislative reform on Customs valuations 2005 Kathmandu l FNCCI/ADB Vidya Nath Nepal CPPD A study on export tax policy on Nepal 2005 Kathmandu l ADB Simplification of Customs procedures towards close co-operations and trade expansions 2003 Manila. l IMF Publications Edited by Michael Keen Changing Customs 2003 Washington DC USA. l World Bank and International Finance Cooperation's Foreign Investment Advisory Services SOUTH ASIA ROUNTABLE Richard Filmer 2003 Maldives. l Customs Acts Bangladesh, India, Nepal and Pakistan. l SAARC/GEC o4/10 Y.S. Sharawat Role and scope of customs in trade facilitations 2004 Kathmandu. l NEPAL RASTRA BANK Economic integration in South Asia 2005 Kathmandu Nepal l Paul R. Krugman and M.Obstfeld International economicsA.W. Longman pvt ltd.India Branch New Delhi 2000.

l S. Dutt .Majumder Customs Valuations Law and practices Centax

Publications Pvt. Ltd. New Delhi 1998. l Kautilya. (The Chanakya) Kautiliya Arthsastra. Editor Pandit Somnath

Sharma a Publication of Royal Nepal academy Kathmandu Nepal. l Bosodersten, International Economics Second edition 1980 Macmillan

Publishers Ltd. l Kindleberger International Ecomonic 8th edition 2002 Publisher

Richard D. Irwin Inc.Revised by Pitter H Linderd. l Mahesh Chandra Regmi. History of Nepal Nath Publishing Housing

Varansi 1988

Valuation of Goods in Customs M 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 speaking, 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

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: l Article VI Anti-dumping and Countervailing Duties l Article VII Valuation for Customs Purposes Article XVI Subsidies l Article XVII State Trading Enterprises. All these articles and deliberations over the issues resulted in fullfledged 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)”;

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: l Agreement on Implementation of Article VI of the General Agreement on Tariffs and Trade 1994 (Anti dumping), l Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (Valuation), l Agreement on Preshipment Inspection, l Agreement on Subsidies and Countervailing Measures, l Agreement on Safeguards l Agreement on Preshipment Inspection.

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:

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.

“When a declaration has been presented and where the customs administration has reason to doubt the truth or

Definition of Value Value is defined in the Black's Law Dictionary as “The monetary

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'slength 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 1878 30. 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 1969 25. (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 Money In 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 Valuation Valuation for imports and exports is used by governments as a tool to control prices; to fix values to control under-invoicing or overinvoicing; 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 Background A 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

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: l selecting 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; l giving 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

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 overinvoicing 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 underand 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.

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.

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.

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.

In November 1977, the European Union (EU) suddenly and

The Tokyo Round ended in 1979. The developing countries had to

100

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 overvalued by importers in collusion with exporters. The â&#x20AC;&#x153;decision regarding cases where customs administration have reasons to doubt the truth or accuracy of the declared valueâ&#x20AC;?, 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 Value In 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

101

smooth changeover to the new system. These included: l A 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. l Customs 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. l In 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: l the 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); l a representative of the collector concerned; l a 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.

102

In the following cases, transaction values as declared in the bill of entry were accepted without objection: l Commodities where the incidence of taxes was less than 10%, except such commodities which were excluded from the system; l goods imported by the federalor provincial governments, government or semi-government organisations and diplomatic missions; and l goods 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 overinvoicing. 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 â&#x20AC;&#x153;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

103

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: â&#x20AC;&#x153;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.â&#x20AC;?

104

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 Goods The 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

105

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 l commissions and brokerage, except buying commissions; l the cost of containers, which are treated as being one for customs purposes with the goods in question; l the cost of packing, whether for labour or materials; l the 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 l material, components, parts and similar items incorporated in the imported goods; l tools, dies, moulds and similar items used in the production of the imported goods; l materials consumed in the imported goods; l engineering, developing, artwork, design work, and plans and sketches undertaken elsewhere than in the importing country and necessary for the production of imported goods; l royalties 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; l the 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; l advance payments; l freight charges up to the place of importation; and l loading, unloading and handling charges associated with

106

107

transporting the goods. Insurance Similarly the following conditions are to be satisfied to apply the transaction value: l The sale is in the ordinary course of trade under fully competitive conditions. l The sale does not involve any abnormal discount or reduction from the ordinary competitive price; l The sale does not involve special discounts limited to exclusive agents; l Objective and quantifiable data exist with regard to the adjustments to be made under Rule 9; l There are no restrictions concerning the disposition or use of the goods by the buyer (subject to certain exceptions); l The sale or price is not subject to some condition or consideration; l No part of the proceeds of the goods (by resale, disposal or use) after importation accrues to the seller; and l Buyer 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 Transactions The 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 Methods The 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: l Transaction 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; l Transaction 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; l Deductive 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; l Computed 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; l Fallback 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 A Rule 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

108

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.â&#x20AC;? 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.

109

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

110

111

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. Conclusion The 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 (Value in US$ million) (All figures pertain to 2003) CHINAS IMPORTS FROM USA India Pakistan

Import Statistics 33,761 4,242 -

Mirror Estimates 25,982 2,902 -

USAS IMPORTS FROM China India

161,429 13,595

INDIAS IMPORTS FROM USA China PAKISTANS IMPORTS FROM USA India China

CHINAS EXPORTS TO USA India Pakistan

Export Statistics 92,617 3,342 1,577

Mirror estimates 161,429 3,996 1,149

92,618 11,317

USAS EXPORTS TO China India

25,983 4,162

33,761 4,876

4,876 3,996

4,162 3,342

INDIAS EXPORTS TO USA China

11,317 2,909

13,595 4,242

1,323 381 1,149

748 283 1,577

PAKISTANS EXPORTS TO USA India China

2,935 93 287

2,727 57 575

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. Recommendations l The countries of the South Asia Association for Regional

Cooperation (SAARC) region should harmonise their valuation laws, rules and regulations. l The 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. l There should be a continuous and sustained exchange of information in the SAARC region. l The SAARC countries should also assist each other in investigations relating to dumping and safeguards. l Procedures 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.

112

113

warrant copy, and the other to the delivery copy of the CUSDEC.

Documentation Requirements for Imports and Exports Douglas 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 duties 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

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

114

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 Exports Sri 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: l Harmonised commodity description and coding system

115 l Temporary importation of professional equipment l Facilities for the importation of goods for display or use at

exhibitions, fairs, meetings or similar events l ATA carnet for temporary admission of goods l Temporary 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

116

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. Comparative Positions of South Asian Countries1 Bangladesh There 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.

117

India Indian 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. Maldives All 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

118

119

Commerce coordinates with the agencies concerned. Pakistan Import 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. Endnotes 1 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 Trade S 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 pressure 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

120

121

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.

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.

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.

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.

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 intraregional 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

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

122

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 welldefined 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.

123

A Brief Overview of Economic Fundamentals The 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. Table 1: Macroeconomic Performance of South Asian Countries: Average of 2001-03 Macroeconomic Indicator

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

383.4

654.5

484.8

535.4

2411.0

241.8

886.2

GDP per capita (constant 2000 US$)

Bangladesh

Bhutan

India

Pakistan

Maldives

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

Trade (% of GDP)

34.8

68.7

29.6

38.6

153.4

48.7

79.3

1.9

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

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

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

1.9

4.2

Source: World Development Indicators 2005, World Bank.

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

124

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 medium term plan1 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 exportoriented 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

125

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 Analysis Trends 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

126

127

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.

Table 2: Trends in South Asiaâ&#x20AC;&#x2122;s Trade with Major Trade Destinations South Asia Destination

Actual 1980

Exports World

Share (%) 2004

Growth (%)

Share (%) Growth (%)

1985-94 1995-04 1985-94 1995-04

2004

12888 102959

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

Western Hemisphere

126

2197

0.8

1.9

33.8

18.0

2.1

49.3 12.8

Imports World

100.0

5.8

12.8

100.0

Industrialised Countries 11765

24811 139980 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

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.

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, IndiaSingapore Comprehensive Economic Cooperation (CEC), India-

128

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.

129

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 intraregional 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?

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.

Exports (Mill US$)

Examining Region's Intra & World Exports 6000

120000

5000

100000

4000

80000

3000

60000

2000

40000

1000

20000

IRTX World

0 Y04 Y03 Y02 Y01 Y00 Y99 Y98 Y97 Y96 Y95 Y94 Y93 Y92 Y91 Y90 Y89 Y88 Y87 Y86 Y85 Y84 Y83 Y82 Y81 Y80

Figure 1b: Is South Asia a Non-Starter?

Imports (Mill US$)

Examining Region's Intra & World Imports 7000

160000

6000

140000

5000

120000 100000

4000

80000 3000

60000

2000

40000

1000

20000

0 Y04 Y03 Y02 Y01 Y00 Y99 Y98 Y97 Y96 Y95 Y94 Y93 Y92 Y91 Y90 Y89 Y88 Y87 Y86 Y85 Y84 Y83 Y82 Y81 Y80

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

IRTM World

130

131

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'.

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.

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.

Intra-Regional Trade The 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).

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 200405. 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

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

Regionâ&#x20AC;&#x2122;s Share in World Exports (%)

3.8

3.6

4.3

5.0

3.7

4.7

Regionâ&#x20AC;&#x2122;s Share in World Imports (%)

1.9

2.9

4.0

3.9

2.5

4.0

IRT as % of Regionâ&#x20AC;&#x2122;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.

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 19902004, 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.

132

133

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. Figure 2: Trends in Intra-Regional Trade in South Asia 6.0

IRT/World (%)

5.0 4.0

IRTX IRTM

3.0

Average IRT 2.0 1.0 0.0 Y04

Y02

Y00

Y98

Y96

Y94

Y92

Y90

Y88

Y86

Y84

Y82

Y80

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-Ă -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 onethird 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 mid90s, 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.

134

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

135

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

136

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 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 600

400

-5000 -10000

200

-15000

0 -200

Y04 Y03 Y02 Y01 Y00 Y99 Y98 Y97 Y96 Y95 Y94 Y93 Y92 Y91 Y90 Y89 Y88 Y87 Y86 Y85 Y84 Y83 Y82 Y81 Y80

The India-Bhutan trade relationship may be taken as a model for regional cooperation in South Asia. Bhutan was chronically a tradedeficit 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-Ă -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.

Million US$

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 tradedeficit countries and to support them in augmenting their production and export capabilities.

137

-20000 -25000

-400

-30000

-600

-35000

-800

-40000

Intra region World

138

139

China

Hong Kong

Japan

Kuwait

Y2004

Import Share (%)

India

Y2002

% of Total Trade Deficit

0.0 Y2000

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

2.0 Y1998

Korea

)

4.0

Y1996

2004

Hong Kong

2002

2000

1998

Japan

1996

1994

Kuwait

1992

1990

Singapore

1988

1986

China

1984

1982

1980

India

6.0

Y1994

0.0 -10.0

8.0

Y1992

10.0

Y1990

20.0

12.0

Y1988

30.0

14.0

Y1986

40.0

16.0

Y1984

Figure 4: Bangladesh's Bilateral Trade Imbalance with Selected Countries

Figure 5: Changing Distribution of Bangladesh's Source of Imports

18.0

Y1982

50.0

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

Y1980

Is there any Trade Diversion in the Region? Examining the case of Bangladesh India 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.

Singapore

Analysis of Tariff and Non-Tariff Barriers The 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

140

141

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.

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.

Structure of Tariff in South Asia Management 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.

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.

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

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

142

143

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 tariff of a country.2 Table 5: Structure of Tariffs in SAARC Countries: By HS Section (in percent) HS Section Description

Bhutan

India

Nepal

Pakistan

Live Animals and Animal Products

Bangladesh 25.9

33.0

30.9

10.3

13.6

17.7

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

Prepared Foodstuff, Beverages, etc.

24.3

46.3

45.9

21.4

29.0

28.9

Mineral Products

15.1

26.4

19.9

11.1

12.6

6.7

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

Wood and Articles of Wood

18.6

16.9

25.7

9.3

18.1

11.1

Pulp of wood or of other Fibres

19.4

18.8

26.8

14.9

18.4

12.8

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

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

10.6

6.5

2.0

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

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.

Sri Lanka

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.

144

145

Has Tariff Declined in India? Analysis of Tariff Bands India made steady progress in liberalising its tariff policies in the 1990s.3 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. Table 6: Number of Tariff Bands in India during 1986/87-2002/03 No. of Bands 1986-87 Rate

1990-91 NL

Rate

1991-92 NL

Rate

287

288

214

213

758

100

2998

110

150

113

200

10 11

1995-96 NL

Rate

1999-00 NL

Rate

288

744

213

302

744

100

2292

110

100

2283

221

150

110

250

200

114

150

270

250

200

300

124

270

250

300

101

355

2002-03 NL

Rate

107

354

181

159

1036

977

3348

1544

155

1953

158

113

100

4383

120

270

105

180

300

101

135

230

355

145

290

100

105

160

182

Source: Based on authorâ&#x20AC;&#x2122;s calculations.

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 199192, the mode tariff rate4 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 mid1980s 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

146

147

years 1986-87 to 1993-94, and a significant reduction took place between 1994-95 and 2002-03.5 We have not included recent years' tariff data in our analysis as they are reported with different trade classification6 (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. Table 7: Average Tariff Rate by HS -Section (in percentage) Section Description

1991-92

1994-95

1996-97

1999-00

2002-03

Live Animals and Animals Products

75.5

16.6

15.8

19.5

30.9

Vegetable products

99.7

36.6

28.6

26.6

34.6

III

Animal or Vegetable Fats and Oils

Prepared Foodstuff, Beverages, etc.

Mineral Products

Products of Chemicals

VII

Plastics and Articles thereof

VIII

Raw Hides and Skins, Leather, etc

Wood and Articles of Wood

Pulp of wood or of other Fibres

Textile and Textile Articles

XII XIII XIV

Natural or cultured pearls, jewellery

79.2

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

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

XIX

Arms and Ammunition

100

Miscellaneous Manufactured Articles

106.6

43.4

29.2

XXI

Works of Art Collectors' Pieces

66.7

58.3

33.3

200

37.8

33.9

65.1

107.5

87.7

66.1

50.6

42.5

47.3

23.9

21.7

19.9

103.6

64.5

38.6

33.7

28.9

124

39.7

36.3

30.1

71.9

61.8

24.9

23.6

20.2

28.5

25.5

86.5

62.4

26.8

29.9

25.1

100.4

64.6

48.3

38.6

17.8

Footwear, Headgear and Umbrella

100.0

65.0

50.0

40.0

30.0

Articles of Stone, Plaster, cement

92.1

49.2

39.3

29.7

Source: Various budget documents, Government of India.

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

148

149

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 subsectors 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 198788/1992-97, 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 Trade As 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. Figure 7: Structure of India's NTBs in 2003 Free 96%

Figure 6: Tariff Liberalisation in India During Reforms Agriculture

2002-3

Restricted 4%

1999-00 1996-7

Prohibited 0%

Overall

Canalized 0%

1994-5 Manufacturing

SIL 0%

1991-2 0

100

120

Tariff Rates Overall

Agriculture

Manufacturing

The level of NTBs remained very high during the pre-reform period, and the trend continued in the 1990s. Among the total number of

150

151

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. Figure 8: Decline of NTBs in India No. of HS National Lines

12000

Free

10000 8000 6000 4000 2000

SIL

Restricted

0 -20001996

1997

Prohibited

1998

1999

Restricted

2000

2001

Canalized /STE

2002

SIL

2003

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

Prohibited

2003 52

Restricted

2,984

2,322

2,314

1,183

968

479

554

484

Canalised /state trading enterprises

127

129

Special import license (SIL)

765

1,043

919

886

226

Free

6,161

6,649

6,781

8,055

8,854

9,582

Total

10,096 10,202 10,202 10,220 10,141 10,149

11,032 c 11,103 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.

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

152

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 intraindustry 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 Literature So 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

153

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 intraregional 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

154

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.

155

India's Sectoral Trade with the Region SAARC 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 India The existing literature suggests that the first three rounds of trade liberalisation were not equally efficient in liberalising regional trade.

156

157

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.

B. Exports Importing Country

SAPTA Round

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

Bangladesh

NCT

165722.2

299735.59

238244.16

225025.19

359620.71

196849.52

305369.96

629.75

991.63

1426.91

1237.55

1326.14

3220.15

2723.38

524.35

747.91

2263.99

6002.01

5268.59

6507.98

14279.7

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

3.59

2.58

2.05

2.6

41.11

3.94

2.07

3.75

0.28

III

4.88

4.8

3.34

NCT

76910.03

90523.22

117795.27

116488.19

114750.25

137742.75

174787.73

6841.35

9027.69

8588.59

7546.64

8333.84

6846.51

8851.79

5698.7

5828.02

8371.64

10163.86

6059.29

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

2.85

15.15

7.14

4.43

8.38

6.15

13.96

0.11

2.93

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

180.04

649.94

807.3

681.68

535.27

666.04

290.47

5603.94

7302.56

9390.05

10230.26

9880.02

12575.82

14919.73

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

332.31

920.52

542.36

531.69

1268.13

1149.74

563.36

Bhutan

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,

Sri Lanka

Table 9: Profile of Indiaâ&#x20AC;&#x2122;s Trade with the Region under various rounds of SAPTA (in lakh (â&#x20AC;&#x2122;0,000) rupees)*

Maldives

A. Imports Exporting Country SAPTA Round 1994-95 1995-96 1996-97 Bangladesh

I II III

Bhutan

Sri Lanka

Maldives

Nepal

Pakistan

9.08

6.56

6.49

5959.24 6739.92 9203.63

1997-98 35.90

1998-99 13.57 26.91

1999-00 26.56 26.34

2000-01 203.31 65.47

Nepal

12024.00 20868.79 22546.51 24086.08

14387.14

NCT

897.76

516.48

388.98

1520.46

1222.91

942.27

3155.92

1.20

21.95

60.83

13.56

III

1571.63 2651.16 3739.88

1454.58

1957.06

1043.46

1052.94

8712.49

14741.11

14992.15

17339.37

18187.41

14066.27

15692.5

NCT

424.26

1011.57 515.84

366.61

242.25

365.48

432.40

III

391.23

74.82

46.84

103.17

556.21

117.15

274.81

107.80

239.66

485.70

524.74

2353.29

2519.35

2119.47

Source: India Trades, CMIE, India and SAARC Secretariat, Kathmandu.

210.19

536.10

307.79

244.44

63.20

182.52

208.07

Note: The actual implementation of different Rounds of SAPTA is indicated by the shaded region

III

12.37

38.76

18.70

118.99

150.83

142.68

63.95

NCT denotes bilateral trade out side SAPTA.

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

17.52

NCT

24.00

59.24

44.62

38.89

10.67

95.85

20.43

462.48

302.05

612.15

541.44

612.35

644.71

1077.24

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

NCT

3497.20 3866.79 4212.32

5140.60

5919.46

7987.94

18813.78

60.24

211.28

115.23

287.68

379.10

208.42

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

11199.1 2

NCT

5679.01 1509.01 965.96

6325.79

78338.00 11019.59 11558.94

70.29

Pakistan

* 1,000,000 rupees = 10 lakh rupees

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,

158

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 nonconcessional 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

159

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 Trade It 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

Table 10: Structure of Indiaâ&#x20AC;&#x2122;s Technology Intensive Imports from South Asian Countries under SAPTA I, II and III (in lakh rupees)

Sl No Product Description

1994-95

1995-96

Primary products

7560.88

13406.37 16521.46 19768.38 20543.53 21133.55 27273.68

1996-97

1997-98

1998-99

1999-00

2000-01

Resource based Mnf (agro-based)

479.22

631.42

639.72

464.22

656.54

837.33

824.93

Resource based Mnf (other)

4224.82

6830.56

7122.39

8981.57

8973.16

5981.96

8630.17

Low technology Mnf (textile and footwear)

2010.91

2438.89

4104.71

5818.27

3991.22

4510.76

6471.21

Low technology Mnf (Other products)

3348.51

1735.75

2840.11

4036.08

3083.29

3587.4

4374.34

Medium technology Mnf: Automotive

2663.32

5657.34

4080.9

3091.01

3846.88

2610.98

4833.3

Medium technology Mnf (process)

3427.64

3552.05

4599.51

3695.58

1702.83

1933.49

7462.41

Medium technology Mnf (engineering)

856.65

747.66

1144.03

1068.88

1133.87

1852.08

1559.78

High technology Mnf (Electronic and Electrical) 261.59

202.97

390.37

207.66

239.3

225.09

179.36

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

160

161

B. Imports

processed manufactures and high tech manufactures.

Sl No Product Description

1994-95

1995-96 1996-97

1997-98

1998-99

1999-00

2000-01

Primary products

8776.5

10015.0 12117.2

13385.7

17777.7

16928.9

20313.2

Resource based Mnf (agro-based)

8456.3

8302.6

12471.7

14148.9

31468.9

34308.3

36913.0

Resource based Mnf (other)

129.7

249.7

286.4

464.7

1056.6

2070.1

2016.8

Low technology Mnf (textile and footwear)

1580.3

2721.7

3625.6

7855.4

15589.9

13924.3

22254.0

Low technology Mnf (Other products)

24.1

58.6

412.6

378.5

920.2

3485.8

5378.5

Medium technology Mnf: Automotive

872.8

2628.0

3755.5

8021.6

10651.9

19590.2

24715.0

Medium technology Mnf (process)

3.0

0.0

79.0

122.0

792.5

1028.8

Medium technology Mnf (engineering)

25.0

1.0

9.0

20.0

65.5

19.0

80.8

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).

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 agromanufactured 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.

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.

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.

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.

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

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

162

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

163

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 SAFTA The 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

164

165

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. 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: Authorâ&#x20AC;&#x2122;s estimation based on GTAP V.6 database

In a situation where SAFTA does not take off, India may choose to continue with its liberalisation commitments with other extraregional 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 Production The 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

166

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 postregional 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 extraregional 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

167

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

168

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. Conclusion The 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

169

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

170

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 nonconcessional 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

171

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. Endnotes 1 See details of the Tenth plan document of India, highlighting the role of foreign savings 2 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 200203, but we have not analysed the tariff policy after 2002-03. The Indian

172

173 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. 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.

References l Asian Development Bank (2005), ADB Outlook, Asian Development

Bank, Manila. l Bandara, J. S. and W. Yu, (2001), 'How Desirable is the South Asian

Free Trade Area?: a Quantitative Assessment, Danish Institute of Agricultural and Fishers Economics (SJFI), Working Paper no. 16 l Batra, Amita (2005), India: Country Paper, Background Paper for the International Conference on 'South-Asian Trade Area: Opportunities and Challenges, Conference Volume, Conference organised by the USAID, New Delhi, pp.57-94. l Bhattacharya, S.K. (2001), “Regional Trading Arrangements among SAARC Countries and India's Imports”, South Asia Economic Journal, Vol. 2(2), pp.281-312. l Bhuyan, A.R. (1996), “Regional Cooperation in South Asia: Outlook and Prospects under SAPTA”, South Asian Survey, Vol.3 (1 and 2), pp.197217. l Chaturvedi, Sachin and Gunjan Nagpal (2003), “WTO and Productrelated Environmental Standards: Emerging Issues and Policy Options”, January 4, Economic and Political Weekly, pp.66-74. l Das, Ram Upendra (2004), Industrial restructuring and export competitiveness of the textiles and clothing sector in SAARC in the context of MFA phase out, Discussion Paper No. 85, Research and Information System for developing countries, New Delhi. l ESCAP, (2005), ESCAP Survey: Dealing with Shocks, Bangkok. l Finger, J.M. and M.E. Kreinin (1979), “A Measure of 'Export Similarity' and Its Possible Uses”, Economic Journal, Vol.89, December, pp. 905912. l FNCCI (200), Nepal and the World: A Statistical Profile 2000, Kathmandu, Federation of Nepalese Chambers of Commerce and Industry. l Goldar, B and R. Mehta (2001), “The Budget and Customs Duty”, Economic and Political Weekly, Vol. 36 No. 12, pp. 989- 992. l Kelegama, Saman (2001) (Editor), Impediments to Regional Economic Cooperation in South Asia, Institute of Policy Studies of Sri Lanka and Coalition for Action on South Asian Cooperation, FES Publication

No.49, Friederich-Ebert-Stiftung Colombo. l Kemal et al (2000)Kemal, A R, Musleh-ud Din, Klbe Abbas and Usman

Kadir (2000), A Plan to Strengthen Regional Cooperation in South Asia, Study prepared for the SANEI-project, Institute of Development Economics, Quaid-e-Azam University campus, Islamabad. l Khan, M. S. (1990), “The Macroeconomic Effects of Fund-support Adjustment Programmes”, IMF Staff Papers, 37, June, pp. 195-231. l Kumar, Nagesh, S K Mohanty, K J Joseph, and SS Roy (2006), Towards an Employment Oriented Export Strategy: Some Preliminary Explanations, RIS study for the Ministry of Ministry of Commerce and Industries, RIS (in the press) l Lall, Sanjaya (2001), Indicators of the Relative Importance of IPRs in Developing Countries, UNCTAD/ICTSD Capacity Building Project on Intellectual Property Rights and Sustainable Development, November, UNCTAD/ICTSD l Mehta (2002), WTO and Indian Poultry sector: Lessons from State Support Measures in Selected Countries, RIS DP No 31, l Mehta, Rajesh and S.K. Bhattacharya (2000), “The South Asian Preferential Trading Arrangement- Impact on Intra-regional Trade”, Asia Pacific Journal of Economics and Business, June, Vol. 4(1), pp.92111. l Mohanty, S K (2005), Is South Asian Economic Cooperation Sustainable?: Strategy for Meaningful Transition from SAPTA to SAFTA, Presented in the Eight GTAP Conference held in Lubeck, 9-11 June, Germany. l Mohanty, S K (2005), Economics of an East Asian FTA, Paper presented in the Forth High-Level Conference on Asian Economic Integration Towards an Asian Economic Community, Research and Information System for developing Countries, New Delhi and Sasakawa Peace Foundation, 18-19 November, 2005, held at New Delhi. l Mohanty and Chaturvedi (2006), “Rising Tiger and Leaping Dragon: Emerging Global Dynamics”, IDS Bulletin, January, Vol. 37 No. 1, pp. 62-70. l Mohanty and Chaturvedi (2005) Prospects for Environmental Trade under the Regional Process in South Asia: Evidence from SAPTA and Proposal for SAFTA. RIS-DP # 102, New Delhi. l Mohanty, Pohit, Roy (2004), Implications of Economic Cooperation Among JACIK Countries: A CGC Modelling Approach, paper presented in an International Seminar on 'Building a New Asia: Towards an Asian Economy' in New Delhi,10-11 March, 2003 and the Annual Conference of the GTAP in the Hague in June 2003. The revised paper is published in Emerging Pattern of Economic Integration in Asia, Nagesh Kumar (ed.), published by Research and Information System for Developing Countries, New Delhi and the Institute of Southeast Asian Studies (ISEAS), Singapore. l Mohanty, S. K., Sanjib Pohit and Saikat Sinha Roy (2002), Implication

174 of Agricultural Trade Liberalisation in Selected Industrialised Countries on Trade Prospects of India: A CGE Modelling Analysis, Regional Conference on Globalisation and Agriculture- Challenge for South Asia, 4th-5t December, 2002, New Delhi. l Mohanty, S.K. and T.R. Manoharan (2002), Analysis of Environment related Non-Tariff Measures in the European Union: Implications of South Asian Exports, RIS Discussion Paper No.38, RIS, New Delhi. l Mukherjee, I.N. (2002), Towards a Free Trade Area in South Asia: Charting a Feasible Course for Trade Liberalisation with reference to India's Role, October. l Pagato, N., et al. (1997), South Asia's Integration into the World Economy, World Bank, Washington D.C. l RIS (2002), South Asia Development and Cooperation Report 2001/02, Research and Information System for the Non-Aligned and Other Developing Countries, New Delhi. l Srinivasan, T.N. (1994), Regional Trading Arrangements and Beyond Exploring Some Options for South Asia: Theory, Empirics and Policy, Report No.IDP-142, July, World Bank, Washington D.C. l Srinivasan, T.N. and C.Canonero (1993), Preferential Trading Arrangement: Estimating the Effects on South Asian Countries, World Bank Report, South Asia Region, World Bank, Washington D.C., September. l UNCTAD (2002), Trade and Development Report, UNCTAD, Geneva. l Wadhva, C.D. (1996), â&#x20AC;&#x153;Assessing SAARC Preferential Trading Arrangements (SAPTA)â&#x20AC;?, South Asian Survey, Vol.3 No.(1-2), pp.173195. l World Bank (1990), World Development Report 1990, World Bank, Washington DC. l WTO (2002), Trade Policy Review of India, World Trade Organisation, Geneva.

175

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 enhancing 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.

176

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 Trade The 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

177

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.

178

179 Table 1: India's Informal Trade with South Asia

Bangladesh 1 Sri Lanka 2 Pakistan 3 Nepal 4 Bhutan 5 Total South Asia

Exports (X) 299.0 185.5 n.a. 180.0 31.3 -

Imports (M) 14.0 21.8 n.a. 228.0 1.2 -

Trade Balance (X -M) 285.0 163.7 Positive -48.0 30.1 -

Total Trade (X+M) 313.0 207.3 2000 408.0 32.6 2960.9

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)

Bangladesh1 Sri Lanka 2 Pakistan 3 Nepal 4 Bhutan 5 Total South Asia

Table 2: India's Formal Trade with South Asia Imports Exports Trade Balance (X) (X -M) (M) 349.1 7.8 341.2 640.2 45.0 595.2 157.2 36.1 121.1 141.0 255.0 -114.0 7.0 3.0 4.0 -

Total Trade (X+M) 356.9 685.2 193.3 396.0 10.0 1641.4

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).

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 productsmainly 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 Place By 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

180

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 distortions High 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

181

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 27 per cent and Nepal 14 per cent1. In 2000, the average tariffs were highest in India at 39 per cent, followed by Pakistan (25 per cent), Bangladesh (20 per cent) and Sri Lanka (15 per cent)2. 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 factors In 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

182

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 documentation, delays3, 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 IndoBangladesh informal trading, the probability of goods being seized was less than 0.1 while that in Indo-Nepal and Indo-Sri Lanka informal trading was still lower at 0.034. In fact, studies have shown that even when goods are seized, they can be released on nominal payments5. 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 India, 83 for Nepal and 15 for Pakistan6. 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

183

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 channel than in the formal channel7. 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

184

that the terms and conditions of trade agreements are available only in English and not in any local language spoken in the two countries8. 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 traders9. III. Concluding Remarks It 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 almost 10 times of formal trade10. Recent estimates of informal trade in third country goods show that such trade has come down considerably and further reduction and harmonisation of tariffs

185

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

186

187

decline in informal trade flows. Nisha Taneja works at the Indian Council for Research on International Economic Relations (ICRIER), New Delhi, India. Endnotes 1 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) References l S.K. Chaudhari, 'Cross Border Trade Between India and Bangladesh', NCAER, Working Paper 58, New Delhi, 1995. l ESCAP, '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. l S. 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. l V.L. Rao, S. Baruah and R.U. Das, India's Border Trade with select Neighbouring Countries, (New Delhi: RIS, 1997). l Taneja, 'Informal Trade in the SAARC Region', Working Paper No. 47, Indian Council for Research on International Economic Relations, Delhi, 1999. l Nisha 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. l World Bank, 'South Asia's Integration into the World Economy', Washington, 1997. l World 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 (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.

188

? 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 approach1. 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.

189

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.

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).

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 nonArab 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.

But there are pragmatists who argue that in an imperfect world, regional trading arrangements (RTAs) play an important and

Three of South Asia's largest economies, Bangladesh, India and

190

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

191

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 Pakistan Once 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

192

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 peopleboys 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

193

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

194

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.

195

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.

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.

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.

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

III. A Resurgent India Pakistan'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

196

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

197

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

198

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 'wagearbitrage.' 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

199

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 Arrangement One 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

200

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

201

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

202

electricity from coal and where coal still accounts for 80 per cent of electric power generation, is helping Pakistan to develop coalpowered 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

203

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. Conclusion At 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

204

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

205

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 dĂŠtente. Shahid Javed Burki has served as vice-president of the World Bank and as finance minister in the Pakistan government. Endnotes 1 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.

206

207

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 two 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 warswith 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 traderelated 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. Trade Logic with India1 Pakistan 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 Asia, the figure is 3 per cent in the case of Pakistan2. 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 Asian countries despite all hurdles3. 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 only 42 items4; in April 2003, following the peace initiative by the Indian Prime Minister, the Pakistani Prime Minister increased the number of tradable items5. While the South Asian Free Trade Area

208

209

(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 countrieswith 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. Table: 1 Share of India's total Exports, 1990-2000:

to South Asia: 2.7-5.1 to Pakistan: 0.2-0.4 from South Asia: 0.4-0.8 from Pakistan: 0.2-0.6

Share of India's total Imports, 1990-2000:

Share of Pakistan's total Exports, 1990-2000:

to South Asia: 2.6-4.9 to India: 0.4-2.4 from South Asia: 0.4-1.7 from India: 0.2-0.6

Share of Pakistanâ&#x20AC;&#x2122;s total Imports, 1990-2000:

Source: Chadha, Rajesh and Devender Pratap, 'New Era of India-Pakistan Trade Relations: More Butter and Less Guns', unpublished mimeograph, New Delhi, 2003.

Table: 2 1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-2000

2000-01

2001-02

Export

6819

6812

8141

8707

8323

8627

7779

8568

9201

9134

Import

9963

8561

10401

11804

11894

10118

9431

10309

10728

10339

Export

175

Import

197

153

146

127

235

187

Total

India

Source: State Bank of Pakistan, Annual Report, various years, Karachi.

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 neighboursAfghanistan, 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

210

211

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 products6 (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

Table 3: Pakistan's Imports from India: 2000-02 (thousands of rupees) Total Imports

Agri culture and Food (Sugar)

2001- 02

2000- 01

Rs 11,471,155

Rs 13,928,480

53 (39)

(10)

Iron and manganese ore

Chemicals

(Pure Xylenes)

(17)

(1)

Medicinal inputs

Plastics

Tyres and Rubber

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) Total Exports

2001-02

2000-01

Rs 3,246,436

Rs 2,777,405

% Agriculture and Food (Dates) (Rice)

66 (42)

% 66 (35) (23) -

Asafoetida

Crude Petroleum

Cotton staple

Cotton yarn and related

(Cotton tents)

(12)

(-)

Source: Federal Bureau of Statistics, Annual Trade Statistics 2001-02, Government of Pakistan, Islamabad, 2003.

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 sixfold, from 42 to 249, a measure which led to a three-fold increase in the following three years7. 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 2000-01General 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 exports. Nor does Pakistan import any of India's major exports'8- as shown in the tables above. He explains this fact in terms of traderelated 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

212

rather than with their neighbours until a certain level of development has been achieved'.9 This explains the reasons why trade did not take place between the two countries, and he thinks that 'the real scope for trade and investment is in the future and begins now.'10 For Sridharan, however, rather than the trade of goods and commodities, 'the real potential for economic cooperation today is in energy, for example, a gas pipeline and the export of electricity ...'.11 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 strengthen international competitiveness'.12 The study looks at a number of sectors in the Pakistan economy and concludes that 'the economic benefits of liberalising trade with India outweigh costs'.13 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 market access to a much larger Indian economy'.14 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 an economic and geopolitical imperative'.15 In this new world order, Pakistan has to face competition from all countries, including India,

213

and hence 'instead of shying away, we should be well prepared to face the eventuality. In any case, salvation lies in streamlining of operations and upgrading of technology which was long overdue'.16 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 engineering sector'.17 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 move towards regional cooperation and integration'.18 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 cannot afford to be left out of them'.19 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

214

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 competitiveness'20. 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 consumers'21. Also, the arguments by E. Sridharan and by the

215

Government of Pakistan that 'it is unrealistic to visualise either country, particularly India, having a large impact on the total trade of the other'22, do not examine the possibilities for presently nontradables 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 winwin situation. Dr S Akbar Zaidi is a leading Pakistani social scientist based in Karachi. Endnotes 1 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

216 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.

217

India's Regional Trading Arrangements Sujata 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 substitution 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 MultiSectoral 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 1991 The period following Cancun has seen signing of several agreements in South Asia, especially by India. The South Asia Association for

218

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 India India 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 SAFTA For 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.

219

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 $3 trillion, SAARC only provides about one percent of world production. Despite geographic proximity, trade and weak transit links, infrastructure difficulties, high tariff and non-tariff barriers hamper investment. Intra-SAARC trade has remained low at a mere 3 percent since the organization's inception and it still remains small because of high tariffs and a variety of non-tariff barriers such as quantitative restrictions, fiscal charges and discriminatory practices and outright ban on imports. It has been viewed that SAARC must deal with the world's major trading blocks as a composite unit to maximize the gains of trade for both sides. Although the intra-region trade is not impressive, the South Asian nations have been maintaining strong links with the outside world with the advanced countries. Indo-SAARC Trade Relations The SAARC, despite several attempts to encourage regional trade under the regulation of SAARC and the SAPTA, has not taken an effective shape as a regional trade body because of political problems between Pakistan and India hampering regional interests. Despite official declarations to transform the SAPTA into an FTA in this region by 2001, the idea seems unrealistic. India has had problems with RTAs for its neighbours do not want free trade with a giant neighbour they do not trust or like. Hence, multilateralism will remain India's only choice. (Sarita,A & Tanvi,P 2000). During the 10 years before SAARC (1975-1985), India's exports increased from US$ 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

220

221

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. Table 1: Indiaâ&#x20AC;&#x2122;s Linear Growth of Exports, Imports and Volume of Trade With Saarc Countries. (In per cent) Item Exports (1980-1990) (1991-2000)

Total SAARC Bloc

Bangladesh

Maldives

Nepal

Pakistan

Srilanka

16.3 10.67

8.37 18.86

4.79 21.13

24.97 14.49

1.85 10.63

8.61 12.43

-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

Imports

(1980-1990) (1991-2000) Trade volume (1980-1990) (1991-2000)

Source: Linear growth rate computed from the data taken from Direction of trade statistics Year Book (IMF) (Various Issues)

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) BIMSTEC This 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

222

223

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 LankaThailand 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 BIMSTEC 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 Technology Transportation and Communication Energy Tourism Fisheries

Bangladesh India Thailand Myanmar Sri Lanka Sri Lanka

Recognising that sub-regional cooperation can progress only in intergovernmental 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 intraregional 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. India's total trade, exports and imports with Bangladesh 2000 Values in millions

Economic Cooperation (BISTEC).

1500

EXPORT

1000

IMPORT TOTAL TRADE

500 0 19992000

20002001

20012002

20022003

20032004

Years

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 â&#x20AC;&#x153;New Age Sectorâ&#x20AC;?, 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

224

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. Conclusion From 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 intraregional 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

225

"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. References l Bhagwati, Jagdish and Arvind Panagariya. 1996. "Preferential Trading Areas and l Multilateralism: Strangers, Friends or Foes?" in The Economics of Preferential l Trade Agreements. Jagdish Bhagwati and Arvind Panagariya, eds. Washington, l D.C: AEI Press, pp. 1-78. l Duttagupta, Rupa and Arvind Panagariya. 2001. “Free Trade Areas and Rules of Origin: Economics and Politics, ” University of Maryland at College Park, mimeo. l Frankel, 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. l Mattoo, A. and C. Fink. 2002. “Regional Agreements and Trade in Services: Policy Issues.” l Policy Research Working Paper #2852. The World Bank. Washington, DC. l Narayan, S. 2005. “On leveraging opportunities from CECA” Financial Express. June 8. l Newfarmer, R. 2004. “SAFTA: Promises and Pitfalls of Preferential Trade Arrangements” The World Bank. Washington, DC. l Panagariya, A. 2005. “An India-China Free Trade Area.” Economic Times. April 20. l Roy, J. 2002. “Towards International Norms for Indirect Taxes and Trade Facilitation in India”

226

227

l Prepared for the Task Force on Indirect Taxes, Government of India. l Roy, J. and P. Banerjee. 2004. “US-India Free Trade Agreement in

Services: An Analysis of l Issues for Discussion.” Confederation of Indian Industry Discussion

Paper. India. l Roy, J. 2004. “Regional Integration in South Asia” Financial Express.

September 28. l Roy, J. 2004 “Have a Free Trade Agreement in Services”. Financial

Express. October 21. l Roy, J. 2005 “ How can India lead South Asia”. Financial Express.

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 “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. 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

228

229

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. 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. 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. 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. 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. 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

230

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 fencedborders 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

231

confidence-building measures, we urge them to put in place a comprehensive regime of CBMs that will ensure a nucleartension 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

232

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 subregional 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;

233

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; and 21. 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. Investments Intra-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

234

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 Union 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. 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;

235

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Dry ports need to be set up and transit rights be given freely; Valuation procedures need to be harmonized; Warehousing infrastructure, charges and fees needs improvement; Common formats need to be developed for declaration forms; These forms be made available in electronic form, and available in all major languages in the region; Information and data be exchanged freely; Countries to do away with secretive sensitive lists; A common software be used that would simplify declaration and valuation; Mutual recognition of certification; Common standards and testing procedures to be followed; Capacity building and technology transfer be speeded up; Pakistan to take a lead in trade facilitation efforts, Sri Lanka to lead the efforts towards breaking down non tariff barriers; Allow and encourage trade in services by recognizing University and college degrees across the region.

Water Sharing and Management Increasingly, 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

236

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 Group 1. 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

237

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. 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. The water related sectors have the great opportunity for the knowledge sharing in the technical and managerial fields.

South Asian Energy Grid Similarly, 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

238

239

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.

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.

South Asian Cooperative Security We 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.

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

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

Addressing LDCs' Concerns However, 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.

240

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 recommends The 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

241

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

242

243

conflicts and their interpretations in a rational manner. Therefore, it is recommended to establish conflict resolution centers and institutes at the governmental and nongovernmental 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; 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; State structures and their proponents should also be influenced because states are often the creators, promoters and sustainers of conflict; 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.

244

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 IntraParliamentary 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

245

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. 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. 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 Code It 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

246

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 Contact The 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 Tourism The 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

247

services and research in all fields. Promotion of Humanities Private 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 Concerns Acknowledging 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) Network The 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

248

(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.