Contributors to South Asian Studies, Vol. II

Shahid Javed Burki has

served as vice-president of the

World Bank and as finance

minister in the Pakistan

government.

Dilli Prakash Ghimire is a

customs consultant based in

Nepal.

Douglas Jayasekera is senior

visiting fellow at the Institute of

Policy Studies in Colombo, Sri

Lanka.

Sujata Jhamb is assistant

professor of economics at the

Narsee Monjee Institute of

Management Sciences in India.

Amir Ullah Khan is deputy

secretary general of the PHD

Chamber of Commerce and

Industry (PHDCC), New Delhi,

India.

South Asian StudiesVolume: II

:

Trade, Tariffs, and Customs in

South Asia

M Sulaiman Khan is a

former customs commissioner

of Pakistan, and currently heads

Sulaiman Associates, a

consultancy firm.

S K Mohanty is a researcher

at Research and Information

System for Developing

Countries (RIS), New Delhi,

India.

Nisha Taneja works at the

Indian Council for Research on

International Economic

Relations (ICRIER), New Delhi,

India.

Dr S Akbar Zaidi is a leading

Pakistani social scientist based

in Karachi.

Volume II“Trade, Tariffs, and

Customs in South Asia” of the South Asian Studies series was

prepared by members of one of the

14 research groups established under

the South Asian Policy Analysis

(SAPANA) Network, and assigned to

examine the problems of

standardising customs laws,

improving trade facilities, and

encouraging regional cooperation in

trade. The volume also contains

articles previously published in the

South Asian Journal to supplement

this analysis.

© 2006 Free Media FoundationAll rights reserved.

First printing June 2006

Editorial collective: Imtiaz Alam (series

editor); Dr Akbar S Zaidi (series

coordinator); Zebunnisa Burki, Mateen

Kaul, Maheen Pracha, and Huma Sadaf

(copy editors); Muhammad Adeel

(publication designer).

Produced and designed at the Free Media

Foundation and South Asian Free Media

Association (SAFMA), Lahore, Pakistan

The findings, interpretations, and

conclusions expressed in this book are

those of the authors and do not necessarily

reflect the views of the South Asian

Journal or the South Asian Policy Analysis

(SAPANA) Network.

The South Asian Journal and Free Media

Foundation encourage use of the material

presented herein, with appropriate credit.

ISBN 969-9060-04-2

South Asian Policy Analysis Network(SAPANA)

9 Lower Ground FloorEden Heights, Jail Road

Lahore, Pakistanwww.southasianmedia.net

iiiii

About SAPANA

ogether with the South Asian Free Media Association

(SAFMA), the South Asian Journal conceived a research

programme in 2005 to develop a “virtual” think-tank Tcomprising an interactive network of scholars from across South

Asia. From this initiative emerged the South Asian Policy Analysis

(SAPANA) Network - an autonomous, independent, and cross-

disciplinary research and analysis platform for initiating informed

policy debates, undertaking fresh research, critically evaluating

existing research and public policy, and proposing alternative policy

measures in South Asia.

As a first step, 14 working groups were set up under SAPANA to

carry out research and propose policy alternatives on issues crucial to

the region. The groups presented more than 80 draft research papers

at a conference organised by the South Asian Journal, titled

“Envisioning South Asia”, which was held in Islamabad (Pakistan) on

29-30 April 2006, and attended by more than 150 eminent scholars

from across the region. After incorporating the feedback generated

by the conference, these papers have been collated for publication as

a 14-volume series titled South Asian Studies. The series is intended

for public perusal, media review, public debate, and the

consideration of policymakers.

When SAPANA was formed, the need for “yet another think-tank”

was questioned, given that there are already numerous institutions

involved in similar work. We, at SAFMA and SAPANA, have found

that most current research in South Asia is either too

departmentalised or too technical for it to be accessible by a non-

academic audience; and that it is greatly influenced by official and

dominant technocratic paradigms.

SAPANA will endeavour to undertake critical, independent,

objective, practical, and pro-people research to pursue an alternative

policy agenda for sustainable development and the empowerment of

people. It will also engage the public and policymakers along with

other major stakeholders in order to sustain informed and

constructive dialogue between the state and civil society. In

collaboration with SAFMA, SAPANA will bring its research-based

findings within the domain of public discourse, rather than leave it to

the mercy of dust or termites.

The next phase will begin with formally establishing a board of

advisors comprising prominent and able academics and researchers

from across South Asia. It is hoped that SAPANA will establish itself

as a leading think-tank in South Asia within the first five years of its

inception. The major tasks that lie ahead are: (i) building a

comprehensive database of scholars and researchers who are either

based in South Asia or based overseas but specialise in the region;

(ii) planning research themes for subsequent years, arranging

workshops on these themes, and publishing the findings that

emerge; and (iii) organising a larger conference every two years to

bring together new themes, new research, and emerging scholars.

Apart from these tasks, SAPANA will design projects and

commission research that is of public and policy interest, and will

liaise with policymakers and governments through the media. As a

“virtual” institution, it will engage scholars and researchers on

specific undertakings, and thus set a new direction for the South Asia

of our hopes.

viv

Preface: Trade Liberalisation in South Asia ixImtiaz Alam

Recommendations of SAPANA Research Group xiv

Executive Summary xviiiAmir Ullah Khan

Customs Tariff: Standardisation and Harmonisation 25Amir Ullah Khan

Trade Facilitation in WTO 47Nisha Taneja

Warehousing Facilities in South Asian Customs Laws 70Dilli Prakash Ghimire

Valuation of Goods in Customs 91M Sulaiman Khan

Documentation Requirements for Imports and Exports 112Douglas Jayasekera

South Asia as a Global Force in Trade 119S K Mohanty

Contents

Informal and Free Trade Arrangements 177Nisha Taneja

Pakistan, India, and Regional Cooperation 187Shahid Javed Burki

India-Pakistan Trade 206Dr S Akbar Zaidi

India's Regional Trading Arrangements 217Sujata Jhamb

SAPANA Conference Declaration 227(Islamabad, April 2006)

viivi

Preface

Acknowledgements

The South Asian Policy Analysis (SAPANA)

Network would like to thank all the contributors

to this volume - their insight into and

understanding of a tumultuous region and the

challenges it faces provides a myriad of insights

that could help define new options for and

approaches to tackling South Asia's most

pressing issues. Contributors to the volume

include (in alphabetical order): Amir Ullah

Khan, Sujata Jhamb, S K Mohanty, and Nisha

Taneja from India; Dilli Prakash Ghimire from

Nepal; Shahid Javed Burki, M Sulaiman Khan,

and Dr S Akbar Zaidi from Pakistan; and

Douglas Jayasekera from Sri Lanka. SAPANA

would also like to acknowledge the contribution

of the series coordinator, Dr Akbar S Zaidi; the

research group coordinator, Amir Ullah Khan;

and the editorial and design collective at the

South Asian Journal, Lahore - Zebunnisa Burki,

Mateen Kaul, and Maheen Pracha for their hard

work and editing, and Muhammad Adeel for

designing the volume - without which this

volume could not have been published. Finally,

SAPANA is immensely grateful to the Royal

Netherlands Embassy and Royal Norwegian

Embassy for their generous support, without

which the production of this series would not

have been possible.

ixviii

Trade Liberalization in South Asia

Almost all the South Asian economies have undertaken the process

of deregulation, liberalization and privatization with or without the

full-fledged macro-economic reforms program under the tutelage of

the World Bank (WB) and International Monetary Fund (IMF). Their

external trade regime is now much more liberal and they are all more

or less open to foreign direct investment. Most of these economies

are also growing at over 6/7 per cent of their GDPs for the last few

years. Yet, despite being a contiguous region, trade within the region

has not been able to benefit from the relative advantages.

Intra-regional trade in South Asia, at 6 percent of the region's

worldwide exports, is abysmally low compared to trade in other

regional blocs (23 percent in ASEAN, 56 percent in NAFTA, 61

percent in EU, 12 percent in MERCOSUR). It shows that the

advantage of proximity in cost efficiencies is not being optimally

utilized. It is not for economic reasons, but political conflicts that the

region is not making maximum use of its closeness. Coincidence of

relative advantage in similar goods, inadequate logistics, inefficient

communications links, poor connectivity and restriction on travel

between India, Bangladesh and Pakistan are also important factors

that have not helped increase intra-regional trade. Not only that,

tariff regimes are yet to be fully brought down, many non-tariff

barriers still exist, and customs procedures and standards have not

been harmonized.

Indeed, multiple bilateral and multilateral initiatives have been taken

towards free trade agreements. These are all positive steps, but not

enough to promote trade in the region. The agreement reached on

the creation of the South Asian Free Trade Area (SAFTA) at the 12th

Summit of the South Asian Association for Regional Cooperation

(SAARC) and its ratification by all member countries has rekindled

some hope in regional trade, if not a whole range of regional

cooperation measures. Most remarkable was the compromise

reached between Least Developed Countries (LDCs), on the one

hand, and India and Pakistan, on the other, on some of the crucial

terms of SAFTA. Yet the agreement on SAFTA fell short of the most

crucial imperatives since it deviated from a more consistent report

on the subject, 'SAARC vision beyond the year 2000', prepared by

the Group of Eminent Persons (GEP).

Given the failure of four rounds of the South Asian Preferential

Trading Arrangement (SAPTA) in promoting trade, there are doubts

that a flawed SAFTA may not deliver as expeditiously as required

without separating trade from the politics of bilateral conflict and

overcoming a tendency to dominate, with fears about the hegemony

of one over the others. However, SAFTA could not be postponed,

especially by Pakistan and India who wanted to engage each other.

Faced with the challenges of irreversible globalisation, growing

engagement with numerous bilateral and multilateral Free Trade

Areas (FTAs) within and beyond the region, and a radical reduction

in tariffs under the IMF's structural adjustment programme

undertaken by most South Asian nations, it is essential that member

countries of SAARC take a big stride.

But the agreement on SAFTA has left more open than it has

addressed. Whereas rules of origin, areas of technical assistance and

the crucial issue of a negative list have, without setting a time frame,

been left to future negotiations, it has avoided covering the

liberalisation of services and far broader areas of economic

cooperation. Evading the trade-investment nexus that takes care of

trade deficits between trading partners through investment flows or

capital accounts, SAFTA neglects the vertical and horizontal

integration of industries that benefits from the respective relative

advantages and is crucial to global competitiveness. Although not all-

embracing in terms of trade, if the negative list that is yet to be

negotiated became larger, the agreement will come into conflict with

Article 24 of GATT. Even trade, however limited it may be, will not

take place without lifting non-tariff and para-tariff barriers,

liberalising the visa regime, allowing free flow of information,

xix

relaxing custom procedures and removing double-taxation.

SAFTA is clueless about how to make adjustment or reconcile the

already existing bilateral and multilateral treaties, such as the Indo-

Lanka Bilateral Free Trade Area (BFTA), Indo-Bangladesh BFTA,

Indo-Nepal BFTA, Pak-SL BFTA, BIMSTEC-FTA, (including India,

Bangladesh, Sri Lanka and others), growth quadrangle (India, Nepal,

Bangladesh, Bhutan) and triangle (South India, Sri Lanka, Maldives).

SAFTA is even further behind than the Indo-Lanka BFTA that covers

both services and investment, and BIMSTEC which promotes

cooperation among sectors, or the Indian Ocean Rim Association for

Regional Cooperation (IOR-ARC) which is premised on unilateral

trade liberalisation in an open region. BFTAs, in some ways, render

greater regional cooperation of little use. Even if certain bilateral

trade agreements, such as between India and Sri Lanka, provide a

good precedent to follow, they cannot substitute for a more balancing

regional economic arrangement that would simultaneously address

the interests of more and less developed or big and small countries in

maximising the benefits from economies of scale and relative

advantages while facing the brunt of and benefiting from

globalisation.

No doubt there is limited complementarity among the economies of

South Asia and they find greater comparative advantage in trading

with developed countries. Similar was the case with ASEAN in the

early 1970s when trade within South East Asia was less than six per

cent, but as preferential trading increased and countries attracted

intra-regional foreign investment (FDI), it rose to 23 per cent of their

total trade. Given the increasing pressures of globalisation and amid

growing regional economic groupings, 60 per cent of the world trade

is preferential and South Asia can gain more than lose from such an

arrangement. Despite trade barriers and bilateral disputes, informal

trade has flourished across the South Asian frontiers to the tune of

US$ 3 billion (2004) - benefiting neither consumer nor adding up to

revenues - even though formal trade remained abysmally low (US$

1641 million in 2004). More than trade, South Asian economies,

irrespective of their size, stand to gain from deeper and broader

regional cooperation.

There is, however, a deep-rooted fear among the least developed and

smaller or medium-size countries that trade with India and

liberalisation of tariff will always be a business of loss for them.

Holding more than 70 per cent of the region's resources and as an

emerging economic power with greater stakes in the region and

beyond, India has 'to ensure that smaller members of the region have

a growing stake in regionalism... This responsibility, India has not

taken seriously. (Economic and Political Weekly, New Delhi).

However, by adopting the model of the ASEAN Free Trade Area,

SAFTA can become meaningful and the member countries of SAARC

can reap more equitable benefits. Since India has already entered

into bilateral and multilateral trade arrangements with all five of its

neighbours with whom it has contiguous borders, SAFTA is seen by

the five member countries of SAARC as an economic window,

essentially with Pakistan, or trade between the two bigger economies

of South Asia. This being the case, Pakistan cannot have any

meaningful trade either with India or other countries of South Asia,

with whom it doesn't share borders, without granting Most Favoured

Nation (MFN) status to India.

To overcome widespread poverty and backwardness, resolve

conflicts, benefit from extended regional cooperation and economies

of scale, become more competitive and achieve higher growth, South

Asia needs to overcome the time lag to jump-start an untapped

regional cooperation beyond the narrow scope of SAFTA. While

establishing a South Asian Development Bank, South Asian

Development Fund, South Asian Energy Grid, SAARC must fully

exploit the trade-investment nexus, liberalise trade and promote

investment, withdraw restrictions on travel and free flow of

information across frontiers, create South Asian Investment Areas

and undertake vertical and horizontal industrial integration.

There are great opportunities for cooperation in communication,

information, tourism, energy, education, health, water and power,

modern technologies, research and development (R&D). Along with

a Free Trade Area, steps need to be taken for a Customs Union, Tariff

Union, and extended macroeconomic coordination among the

central banks leading to a Monetary Union, which is already under

SAARC-FINANCE consideration. Meanwhile, South Asia can look to

tap the energy resources of Central Asia and interact with South East

Asia and China to emerge as a vibrant economic entity in what is

being seen as an Asian Century.

Volume II of the South Asian Studies series, produced by SAPANA,

includes a range of well-researched papers by leading experts on

trade, tariffs, and customs. It also includes several informative and

analytical articles published earlier in the South Asian Journal. The

volume will help even a layperson understand a number of intricate

economic and technical issues that arise in efforts to facilitate and

promote trade in the region.

Imtiaz Alam

xiiixii

Recommendations of SAPANA Research Group

he SAPANA research groups assigned to examine issues of

trade, tariffs, and customs laws in South Asia comprised the

following people:T1. Amir Ullah Khan (group coordinator), India;2. Dilli Prakash Ghimire, Nepal;3. Douglas Jayasekera, Sri Lanka;4. M Sulaiman Khan, Pakistan;5. S J Mohanty, India;6. Nisha Taneja, India.

The group's recommendations are summarised below.

The agreement on South Asian Free Trade Area (SAFTA) requires

effective implementation, expanding the space for trade and, more

importantly, economic collaboration, investment and development.

If South Asia's economies are to be integrated, it presupposes

development of transnational communication networks and physical

infrastructure and monetary cooperation involving greater

coordination among the governments and the central banks. Despite

limited complementarities in tradeable items, due to similar

comparative advantages, expansion of trade warrants vertical and

horizontal integration of industries and investment in joint ventures

by public and private sectors. However, trade and investment will

not move ahead unless tariffs are lowered, the negative list kept to

the minimum, para- and non-tariff barriers removed and standards

harmonized.

Streamlining borders transactions through trade facilitation at sub-

regional junctions, special attention needs to be focused on

promoting border trade. Increase in efficiency within the sub-region

often spills over into trade outside the region as well, because

improving customs or improving efficiency of ports helps both

intraregional trade and international trade.

Recommendations on tariffs and harmonisation include the

following:

1. The average rate of tariffs has gone down in all the South Asian

countries, but some of them impose para-tariffs, including

regulatory duties, anti-dumping duties, and specific duties and

non-tariff barriers. Transparency in the tariffs structure needs to

be ensured. While the average duties are not all that high there is

a need to remove tariff peaks. Further reduction in duties should

ensure that the industries where the country has dynamic

comparative advantage are not closed down. The group also

recommends trade facilitation because various procedural

requirements discourages growth of trade;2. Containing fiscal deficit policy should be pursued by making

judicious choices between growth and stability;3. The prudential regulations for the banks should be effectively

implemented and it needs to be ensured that the efficiency gains

result in higher deposit rates and/or lower rates on the advances.

The pursuit of prudential regulations should not be applied on

the small and micro enterprises who cannot meet the collateral

requirements; 4. South Asian countries may continue to have floating exchange

rates and the central banks may only intervene to keep the

currency near the equilibrium value; 5. The South Asian countries may further deregulate the economy

and may continue privatization policies as long as the private

sector monopolies are properly regulated; 6. Whereas South Asian countries are struggling to promote trade

within the region, the ultimate objective should be the economic

union and common currency. Whereas political agreement

would be necessary to make SAFTA effective, formulate the

custom union and economic union, various steps will have to be

taken before economic union is formed. The countries will have

xvxiv

to coordinate the exchange rate, fiscal and monetary policies;7. The coordination of policies would imply that the countries are

willing to increase interdependencies and the commitment of the

union to help the country suffering from any problem and a

South Asian Fund may be created for this purpose. Various

studies need to be conducted to examine the problems by way of

policy coordination and the lack of economic policy options when

the economic union is formed;8. The group also feels that the South Asian countries have

achieved growth rates exceeding 8 percent in recent years and

they expect the growth rate to continue. However, the

investment rates and other prerequisite to the high growth rates

are missing and they must try to overcome the stumbling blocs to

growth.

Intra-regional trade and investment will, subsequently and

gradually, translate into a South Asian Customs and Tariffs Union

which may lead to a common exchange rate policy that will,

eventually, necessitate the creation of a South Asian Monetary Union

underwritten by macro-economic management and harmonization of

trade, fiscal and monetary policies at the regional level.

No less important is the cooperation in the transport and

communication sectors envisaging an integrated transport

infrastructure that allows uninterrupted travel across and beyond

our region and communication highways, facilitating free movement

of people, goods and unhindered flow of information across the

region and beyond, connecting South Asia with Central, South

Western and South East Asia. Not only do rail and road links

between Pakistan, India, Nepal and Bangladesh need to be

rehabilitated, a system of connectivity will have to be constructed

especially for the railways and the truckers will have to be issued

special permits.

Nevertheless, the Indian and Pakistani governments must agree to

transit of trade between Pakistan, Bangladesh, Nepal, India and

Central Asia. For promotion of trade the countries will have to

facilitate cross border movement of people and goods. Visa and

custom facilities will have to be simplified, and for special categories

of people and goods waived, across the board.

Recommendations on customs laws and issues include the following:1. Trade is growing in the region the mindset of protectionism is

changing. Trade barriers still exist, with high tariff barriers and a

large number of non tariff barriers. The economies are booming

and clearly need to be integrated.2. Customs laws need simplification and harmonization;3. Dry ports need to be set up and transit rights be given freely;4. Valuation procedures need to be harmonized;5. Warehousing infrastructure, charges and fees needs

improvement;6. Common formats need to be developed for declaration forms;7. These forms be made available in electronic form, and available

in all major languages in the region;8. Information and data be exchanged freely;9. Countries to do away with secretive sensitive lists;10. A common software be used that would simplify declaration and

valuation;11. Mutual recognition of certification;12. Common standards and testing procedures to be followed;13. Capacity building and technology transfer be speeded up;14. Pakistan to take a lead in trade facilitation efforts, Sri Lanka to

lead the efforts towards breaking down non tariff barriers;15. Allow and encourage trade in services by recognizing university

and college degrees across the region.

xviixvi

Executive SummaryAmir Ullah Khan

he expansion of the South Asian economy is continuing

persistently on the high growth trajectory for the last few

years. Most of the regional countries have maintained their Tgrowth profile between 5.5 to 8 per cent during the period 2004-05.

The continuation of region's high growth performance is due to

robustness of the macroeconomic and external sector performances.

It seems that macroeconomic fundamentals of the region are strong,

which can be assessed from region's high growth rate, low

inflationary pressure, high investment rate, etc. This is a positive

development for the success of regional cooperation in South Asia.

The dynamic performance of the external sector has been the most

important factor for the sustenance of high growth in the region. The

expansion of exports was sturdy, but imports expanded more swiftly

than exports during the early 2000s. Foreign exchange reserve

position was strong for large economies, and India's Forex reserve

alone exceeded US$ 140 billion in early 2006. Exports of the region

were mostly spurred by surge in manufacturing exports, and the

region is rapidly integrating itself with the global economy.

The intra-regional trade has made steady progress during the last

decade, reaching almost 5 percent of region's total trade with the

world during the period 2000-04 as compared to 3.6 percent during

the period 1990-94. Though significant progress has been made in

ameliorating the level of intra-regional trade, it is at the cost of high

degree of volatility. Instability in the intra-regional trade has not only

affected regional exports but also their balance of trade. Towards the

latter part of the 1990s, the region's trade situation became sour on

account of the 'Asian Crisis'. Since the inception of SAARC, there

was considerable degree of divergence between intra-regional import

and intra-regional export, and the gap between them narrowed down

gradually over a period of time. The gap between the two was almost

disappeared in the late 1990s, but reappeared again in the new

millennium with lesser intensity. Trade imbalance is one of the most

widely discussed issues in the region where India is often dragged

into the controversy as it maintains favourable trade balance with

South Asia. Traditionally, a number of small regional countries used

India's large competitive production base to meet their short term

requirements for 'basic and essential' imports. In the past, there were

instances of cessation of essential supplies from India on technical

reasons, and that caused turmoil in those importing countries.

Supply constraints in these importing economies have been the

underlying factor for not accessing the large Indian market, despite

having large export potentials. India provides MFN status to all the

WTO Member countries, and does not discriminate against any

South Asian country in accessing its large market. There is a need to

devise radical strategies to arrest supply inadequacies in some of the

regional countries to access market in large countries. The tariff

regimes of the region show that the level of tariffs is not similar

across countries; and protection of sectors differs significantly

among them during the last decade.

The region has large resource endowments, and each South Asian

county has distinct advantage in having access to some of these

resources. This is the reason for not having uniform level of sectoral

protection across countries. The regional countries have as many as

30 tariff bands, ranging from zero to 250 percent in 2004. Though

each country maintains large number of tariff bands, most of their

tariff lines are concentrated in a few tariff bands. Some of the

countries maintain very high tariffs to protect their sensitive sectors.

While the average level of tariff is low in Sri Lanka and Nepal, it is

high in India and Bhutan. Invariably, the region maintains high

protection against certain sectors such as plastics, textiles, footwear,

plaster and cement, vehicles, etc; and low protection against

minerals, chemicals, leather, wood pulp, base metal, etc. The

liberalisation of trade under SAPTA has benefited regional countries

as evident from the experience of India. India's imports, under first

three Rounds of SAPTA, registered a six-fold increase between

1994/95 and 2000/01. The coverage of imports has been

xixxviii

comprehensive, linking almost all the broad sectors of trade except

for sectors like gems and jewelleries, vehicles, arms and

ammunitions, etc. The LDCs have gained more market access in

India than non-LDCS of the region under SAPTA. The list of trade

concessions under SAPTA covered both agricultural and

manufacturing sectors; and trade in agricultural products constituted

almost one-third of the total trade. India's exports to the region have

been restricted to a few sectors. India has benefited very little from

the concession under SAPTA, and substantial market access is

realised through the non-concessional route.

However the SAPTA process was slow, and could have taken a few

decades to reach full trade liberalisation in the region, considering

the progress made under different rounds of SAPTA in the past.

SAFTA is likely to accommodate most of the shortcomings of the

SAPTA Agreement. Implementation of SAFTA is a positive step

towards aggressive trade liberalisation in the region. Taking into

account the global trend in the post-WTO period, particularly the

manner in which regionalism has taken an edge over the

multilateralism, long term trade policy of the regional countries

would be guided by the potential gains from regionalism. The South

Asian region is likely to benefit the maximum from the SAFTA

process as evidenced from the CGE results. It is alleged that large

countries are likely to benefit more from the SAFTA process, and

therefore, there is lukewarm response from other regional partners

for the effective implementation of SAFTA. If SAFTA does not take

off appropriately, regional countries may engage themselves in

forming other RTAs to enhance their domestic welfare.

Customs Laws and Issues in South AsiaThe recent past in South Asia's development and trade history is a

picture of similarity and heterogeneity. The British had followed

existing models of decentralized governance for this subcontinent,

incorporating Mughal institutions and Anglo-Saxon institutions of

administration, politics and law. Overtime, the South Asian countries

moved away in various degrees from this model that evolved.

However the essential basics remained and today there is more than

a fair bit of commonality in markets, institutions and systems.

Colonial-era governance institutions also provided a backdrop for the

much broader course of economic development. India, Pakistan and

Sri Lanka's independence in 1947-48 marked the beginning of a set

of different ways by many ex-colonies embarked on their economic

journeys. In South Asia, each country pursued a somewhat different

development strategy, and not surprisingly met with mixed results.

In trade policy too, the various hues of protectionism adopted met

with varying degrees of success. However, one conclusion on trade

that remains unquestionable is that the region as a whole suffered

enormously and till a few years ago, simply dropped off the trade

atlas of the world. Riddled with a complicated set of rules, set in a

mindset that encouraged self reliance and trade pessimism, trade

within the region came close to naught.

There have been some welcome moves in the last decade or so.

However, the degree of openness of the SAARC region to external

trade and economic relationships is still relatively low. Exports as a

percentage of GDP are 36 per cent for Sri Lanka, 12 per cent for

India, 16 per cent for Pakistan, 26 per cent for Nepal, 31 per cent for

Bhutan and 12 per cent for Bangladesh. Imports as a percentage of

GDP are also low with figures of 44 per cent for Sri Lanka, 16 per

cent for India, 21 per cent for Pakistan, 38 per cent for Nepal, 42 per

cent for Bhutan and 18 per cent for Bangladesh. For the larger

countries, Sri Lanka, India, Pakistan and Bangladesh, this was a

function of import-substitution policies adopted earlier. Sri Lanka

was the first among the lot to have introduced economic reforms in

the 1970s and it is not surprising that its exports in relative terms are

the highest percentage of GDP.

A strategic error was the attempt at being self-sufficient without

comprehending the role of international trade in development. This

prevented us from accessing bigger markets for our products or from

using quality inputs. We wanted to produce everything in the

production chain, regardless of whether we had the expertise,

technology or market. Consequently, whenever a process was less

efficient than what was available internationally, the entire

production chain was affected adversely. For instance, by forcing the

fertilizer industry to use only locally designed catalysts, the entire

fertilizer industry's productivity suffered. The same was the case for

the electronics sector where the software industry took time to take

off because of the insistence on the use of domestic computer

hardware. Thankfully, there has been a major departure from the

original model.

xxixx

The region has opened up to trade and to foreign investment.

Custom duties have been reduced, quantitative restrictions on

imports have gone and foreign investment can now come in more

freely in most sectors. We still have a long way to go but have

certainly embarked on the road to globalisation. And in this context

it becomes important to look at laws and procedures related to

Customs and trade that differ considerably. Apart from production

and quality issues which have had an impact on limiting trade in

South Asia, it is the free movement of goods and capital between

countries, and harmonious laws and procedures related to Customs

that are required to increase trading opportunities.

The point that needs to be forcefully made here is that integration is

more than the trade and investment on which we tend to

concentrate. At one level, the forces of world integration are much

stronger and more varied than the simple economic variables on

which we focus. At another level, and more importantly, the forces of

globalisation make economic isolation irrelevant, or contrived. It is

impossible to remain insulated against global events even if one tries

to follow a policy of relatively closed economic borders.

Consequently, one needs to accept globalisation as given and try to

make the best of it, rather than wishing it away.

The South Asian region can have a strong global presence by

integrating its economy within itself and with the rest of the world.

Interdependence and common standards among economies adds to

the strength of each one of them. The collective strength is often

more than the sum of each of their military might. China's

importance in today's world is because it is seen as a business

destination by the rest of the world. It has a huge domestic market

and cheap labour where foreigners rush to do business. The South

Asian region can be in a similar situation only if it can make the

world perceive it the same way they perceive China.

It was with this in mind that the group of experts from Pakistan,

India, Sri Lanka and Nepal contributed their papers for this section

on harmonising Customs laws and practices. The papers in this

section came from Mohammad Sulaiman, Nisha Taneja, Amir Ullah

Khan, Dilli Ghimire and Douglas Jayasekera. Mohammad Sulaiman

in his paper makes a very concerted argument on the issue of

valuation of goods. The paper examines the evolution of the

agreement on valuation and concludes that by and large the

aftermath has been satisfactory. However some countries are getting

away with murder. And the deluge of anti dumping cases proves this

point.

Nisha Taneja examines the trade facilitation issue in its various

contours. She contends that any country that is unable to adopt

effective and appropriate trade facilitation measures would be

uncompetitive in the global trading environment on account of high

transaction costs. South Asian countries incur high transaction costs

in trading. Adopting appropriate trade measures would reduce costs

for intra-SAARC trade and for trade with the rest of the world. The

South Asian Free Trade Agreement (SAFTA) signed in Islamabad in

January 2004 has made provisions for trade facilitation under

Article 8. If implemented, these measures will enhance the pace of

economic integration in South Asia.

Dilli Ghimire looks at the very critical issue of warehousing.

Customs warehousing is an integral part of customs Act of any

country. Customs warehouses are such places where dutiable goods

are stored without the payment of duty. To facilitate trade in the, it is

important to have a well defined customs co-operations

arrangement. Agreement on regional customs co-operation can

address the problems in customs procedures including warehousing.

It would also help the process towards uniform customs procedures

and harmonize the laws relating to warehouses of the member

countries. An umbrella organization needs work as the expert group

of customs matters including customs warehouses and supply

technical assistance to the members. The warehousing facilities in

South Asia should be developed in line with the EU countries.

Douglas Jayasekera argues that documentation is an issue that raises

transaction costs considerably. Excessive documentation has come

about as a result of various complicated and intricate mechanisms

set up by various countries in their attempt towards selective trade

encouragement and protectionism in a larger context. However, as in

the case of Sri Lanka, the move towards a single standard document

of declaration in 1994, the CUSDEC, has assisted trade immensely.

The time taken for processing of documents has also improved with

the introduction of Automation and Selectivity criteria for the

examination of cargo on a risk assessment basis. The Risk

xxiiixxii

declaration statement declares that a company has committed an

offence, or contravened a customs ordinance. This is promptly

verified against the computer data base of offenders.

All the papers make a clear case for harmonization and

simplification. While all South Asian countries strive towards

lowering transaction costs, it is important to reconcile provisions

under SAFTA with the ongoing negotiations on trade facilitation in

the WTO. A beginning can be made through adoption of measures

such as harmonization of standards, mutual recognition agreements,

harmonization of customs procedures and customs classification and

simplification of procedures. At the same time the South Asian

countries could collectively work towards a common agenda in the

ongoing negotiations in the interest of developing and least

developed countries. The vast potential in a large region like South

Asia will only be tapped to its fullest when there is quick movement

towards simplification and harmonization. It will not take long for

negotiating teams to sit together and work out a mechanism that is

uniform, especially since the European experiment and its lessons

are well known. In this particular area, with benefits for all

concerned, the old bogey of vested interests and entrenched lobbies

also does not hold water. There is really no reason for us not to have

a common set of principles and laws governing customs procedures

across South Asia immediately. All governments swear by the reform

agenda and therefore none can argue against the need to simplify

rules, and in quick time.

Customs Tariff: Standardisation and Harmonisation

Amir Ullah Khan

ndia's economy is one of the most closed in the world. Thus,

India's tariffs remain among the highest in the world. Over the

last thirteen years, beginning with its economic reform Iprogramme initiated in 1991, India has taken noteworthy steps to

open its markets. A progressively more open and transparent trade

regime stimulated a strong increase in India's trade and investment

in the first half of the 1990s.

In January 2004, the Indian government announced a reduction of

the basic 25 percent ceiling tariff rate to 20 percent (with several

notable exceptions). In addition to the basic customs duty, regardless

of the rate, the Government of India (GOI) assesses a 1 percent

customs-handling fee. The Government of India also eliminated a 4

percent Special Additional Duty (SAD) which had been levied on

virtually all imports since the 1998-99 budget. The Government of

India includes tariffs in calculating the base value upon which to

assess additional levies. The Government of India has made

substantial progress to simplify its applied tariff structure to two

tiers (10 percent on inputs and 20 percent on finished products) by

March 2004.

In 2003, the average duty rate in India was 29 percent, down from

32 percent in 2002. While the average duty was again reduced in

January 2004, India's tariffs remain among the worlds highest.

Applied duties were reduced in 2004 on certain selected products.

These include: coal; nickel and nickel articles; power transmission

25xxiv

and distribution project equipment; electricity meters; certain raw

materials and inputs for optical fibres and cables; capital goods for

manufacturing electronic goods; certain telecommunication

infrastructure equipment; cellular telephones; VCDs and DVDs;

lifesaving bulk drugs, formulations, and medical equipment; parts of

artificial limbs and certain rehabilitation aids; medical, surgical,

dental, and veterinary furniture; mosquito nets treated with

pesticide; aviation turbine fuel; and equipment for industrial and

agricultural water supply projects. The reduction in the customs duty

for textile products from 25 percent to 20 percent could be negated

for goods where the alternate specific rate of customs duty is greater

than the ad valorem rate. Numerous textile trade barriers still exist,

and India remains one of the most heavily protected textile markets

in the world.

In the World Trade Organisation (WTO), India has bound tariffs on

68 percent of its industrial goods imports. The majority of these

bindings exceed current Indian applied rates of duty. In agriculture,

India's Uruguay Round tariff bindings, ranging from 100 percent to

300 percent, are also higher than applied rates in many product

areas. The Indian government publishes tariffs and import tax rates,

but they are not transparent. There is no single official publication

that includes all necessary information. Importers must consult

separate tariff and excise tax schedules as well as any applicable

additional public notifications and notices to determine current tariff

and tax rates. Furthermore, different classification nomenclatures for

tariffs and excise taxes cause confusion.

Import LicensingAs a result of a WTO ruling, India has eliminated import licensing on

most consumer goods. In February 2002 the Government of India

eliminated its licensing requirements for imported motion pictures.

The Government of India requires special licences for importing

motorcycles. These are virtually unobtainable. The Government of

India prescribes the requirements and conditions for allowing

imported vehicles of any type into India. These special licences are

granted only to foreign nationals permanently settling in India, to

foreign nationals working in India for foreign firms holding greater

than 30 percent equity, or to embassies located in India.

Certain importers are eligible to import vehicles without a licence,

but only if offset by exports attributable to that importer. India

continues to maintain a negative import list. The negative list is

currently divided into three categories: (1) banned or prohibited

items (e.g., tallow, fat, and oils of animal origin); (2) restricted items

which require an import licence (e.g., livestock products); and (3) 1"canalised" items importable only by government trading

monopolies subject to cabinet approval regarding timing and

quantity. India has liberalised many restrictions on the importation

of capital goods. The government allows imports of all second-hand

capital goods by actual users without licence, provided the goods

have a residual life of five years.

Customs Act in IndiaThe two customs acts passed by Government of India are Customs

Act 1962 and Customs Tariff Act 1975. The Customs Act 1962 is the

basic Statute, effective since 1.2.1963, which empowers, under

Section 12, duties to be levied on goods imported into or exported

from India. The categories of items and the rates of duties which are

leviable have been specified in two schedules to the Customs Tariff

Act 1975. The first Schedule to the said Act specifies the various

categories of import items in a systematic and well considered

manner, in accordance with an international scheme of classification

of internationally traded goods termed 'harmonised system of

commodity classification'. Different rates of duties are prescribed by

the legislature on different commodities/group of commodities

mentioned in the first Schedule. The duties are levied both on

specific and ad valorem basis, while there are few cases where at

times specific-cum-ad valorem duties are also collected on imported

items. The second Schedule to Customs Tariff Act, the 1975

incorporates items subject to exports duties and rates thereof.

Modes of TradeThe different modes of transportation in international trade include

(i) by sea, (ii) by air, (iii) by rail, (iii) by road, (iv) by post parcel, and

(v) by registered courier service. The legal procedures to export or

import through air, sea, rail and road modes are the same, but their

administrative procedures are different. Postal and courier have

separate legislative rules apart from other modes. Eg: Under

registered courier the parcel should not weigh more than 70 kg.

These acts are applicable for customs valuation they remain similar

for all modes of transport.

2726

Customs Procedures and ValuationThe Government of India applies discretionary customs valuation

criteria to import transactions. Pursuant to amendments to its

valuation procedures issued on 7 September, 2001, these criteria

appear to allow Customs to reject the declared transaction value of

an import because a particular sale (a) was not undertaken "in the

ordinary course of trade under fully competitive conditions;" or (b)

involved a "reduction from the ordinary competitive price." US

exporters have reported that India's customs valuation

methodologies do not reflect actual transaction values and effectively

raise tariff rates. The United States is using the WTO Committee on

Customs Valuation to obtain further information from India on the

operation of these amendments, and will continue to examine the

customs valuation procedures for consistency with India's

obligations under the WTO Agreement on Customs Valuation. Indian

Customs requires extensive documentation. Processing delays often

occur. In large part the delays are a consequence of India's complex

tariff structure and multiple exemptions, which may vary according

to product, user, or specific Indian export promotion programme.

The Government of India fixes minimum import prices for certain

imported steel products, including hot-rolled steel coils, cold rolled

steel coils, hot rolled sheets, tin plates, electrical sheets, and alloy

steel bars and rods. Whether to impose or withdraw the minimum

import price for these products is the subject of a legal confrontation

between the government and the Indian courts. The Indian

government's appeal is pending in the Indian Supreme Court and the

minimum price regime remains in place.

On average, documents required for importing or exporting one

consignment in/out of India includes:Type of documents 29No. of copies 118No. of Signatures 256Labour Required 7Cost of procedures 10 percent of consignment value

Source: UNESCAP estimate.

India introduced a reference price system for soybean oil in

September 2002 to address alleged under invoicing. The reference

price is the basis upon which India assesses its 45 percent customs

duty. When the Government of India reference price for soybean oil

rises above the transaction price, the effective rate of duty may also

increase above India's 45 percent WTO-bound tariff. The

Government of India states that the reference price is adjusted on a

weekly basis if published world prices differ by either a 10 percent

increase or decrease. India has not formally defined this procedure,

making it non-transparent and unpredictable. (For instance: Exports

of US crude soybean oil to India were negligible in 2003 after

accounting for $25 million in 2002. India has not been responsive to

United States requests for relief from this practice.)

In 2002, Indian Customs began to value imported movies according

to net profits rather than the printing price of the film copy. The

motion picture industry appealed the change in past practice,

arguing that the new practice amounted to double taxation of film

screening revenue. In March 2003, Indian Customs reversed itself,

issuing notification that henceforth imported films would be valued

based on the cost of the print alone.

Customs Valuation on ImportImport duty is charged on the accessible C I F (Cost, Insurance and

Freight) - this type of contract includes the Free on Board price plus

cost of freight and insurance up to the port of destination. In this

term, the exporter has to obtain insurance at his cost against the

risks of loss or damage to the goods during the carriage. Under the

CIF and C and F contract, the risk of goods is transferred to the buyer

once they have been loaded on board. But the exporter has to pay the

expense of transportation for the goods up to the port of destination.

The exporter often prefers these items because he can channel all his

exports and send them by a vessel of his choice. For the importer,

these terms mean fewer responsibilities, because it is the exporter

who has to gamble on fluctuations in the freight and insurance rates

to value up to the place of import. CIF plus 1 percent on CIF value is

the accessible CIF value. Duty will be charged on accessible CIF value

and not on the CIF value.

Customs Valuation for Export2FOB (Free on Board) price is inclusive of Ex-Works price, packing

charges, transportation charges up to the place of shipment, postage,

custom dues, export duties, cost of checking of quality measure,

weight or quantity, if any, which an exporter incurs while delivering

2928

the export goods to the foreign buyers on board. In this type of term

the Bill of Lading must carry the wording 'Shipped on Board' and it

must bear the signature of the carrier or his authorised

representative together with the date on which goods were 'boarded'.

FOB price should be incurred by the exporter up to the nation of

export.

Since the exporter is incurring a huge expense when trading with

another nation, it is ideal for the exporters to have a second or third

buyer in hand (at the same destination). If the first buyer rejects the

consignment the same can be sold to the next buyer at the same

destination. Otherwise he has to forgo the shipment or get the

consignment back, which involves huge loss. The customs valuation

is based on the commercial value of the commodity and not on the

actual payment made against the commodity, e.g., if a family friend

exports a shrimp consignment at a lower cost (for INR 1,000) than

the market value (i.e., INR 2,000) then the cost which the exporter

has to pay will be market value (INR 2,000) plus freight and

insurance charges. This is nothing but the CIF. Then add to it 1

percent of CIF value, to get the CIF accessible value, which have to be

paid by the contractor.

Customs Valuation and Procedure across Commodity and

CountryDifferent commodities (like perishable, precious, electronics) have

different customs procedures. For example: The Airport Authority of

India checks all commodities in aerodrome and then sends it to

different sections like marine containment for cold storage in the

Containers Corporation of India, and a high level of security is

involved. But logistics and customs law are similar for all

commodities. Country specific procedures do not exist except for

certification procedures. A certain country needs specific

certification, like from institutional agency recognised by the buyer

nation, e.g., a Canada Invoice Stamp is needed for customs valuation

in Canada which can be gotten after certifying the commodity by

their embassy. The legalised invoice issued by the specific importing

country is certified by their embassy. This is the major difference

between nations on customs procedures. Such specific documents

may be necessary for each nation along with other similar customs

procedures which is common for all nations.

Difference between Anti-Dumping Duties and Customs

Duties3Although anti-dumping duty is levied and collected by the Customs

Authorities, it is entirely different from customs duties not only in

concept and substance, but also in purpose and operation. The

following are the main differences between the two:lConceptually, anti-dumping and similar measures are linked to

the notion of fair trade. The object of these duties is to guard

against the situation arising out of unfair trade practices while

customs duties are there as a means of raising revenue and for

overall development of the economy. lCustoms duties fall in the realm of trade and fiscal policies of the

Government while anti-dumping and anti-subsidy measures are

there as trade remedial measures. lThe object of anti-dumping and allied duties is to offset the

injurious effect of international price discrimination while

customs duties have implications for the government revenue

and for overall development of the economy. lAnti-dumping duties are not necessarily in the nature of a tax

measure in as much as the authority is empowered to suspend

these duties in case of an exporter offering a price undertaking.

Thus such measures are not always in the form of duties/tax. lAnti-dumping and anti-subsidy duties are levied against

exporter country in as much as they are country specific and

exporter specific as against the customs duties which are general

and universally applicable to all imports irrespective of the

country of origin and the exporter.

Thus, there are basic conceptual and operational differences between

customs duty and anti-dumping duty. Anti-dumping duty is levied

over and above the normal customs duty chargeable on the import of

goods.

Anti-Dumping Investigations Initiated against Imports in

IndiaTwo fundamental parameters are used for determination of

4 5dumping, namely, the normal value and the export price . Both these

elements have to be compared at the same level of trade, generally at

ex-factory level, for assessment of dumping. The first anti-dumping

investigation in India was initiated in 1992. During the period from 61992-93 to 2003-04, the DGAD received a large number of

3130

applications for initiating anti-dumping investigations. After

examination of these applications, anti-dumping investigations were

initiated in 167 cases. In between 1997-2004, 31 applications were

not accepted by the DGAD for various reasons. Major product

categories for which anti-dumping applications have been filed by

domestic industry pertain to chemicals and petrochemicals followed

by pharmaceuticals, steel and other metals and fibres/yarns. The

countries involved are mainly China, the EU, Republic of Korea and

Chinese Taipei. While the total number of cases investigated is 167,

the number of countries involved in these investigations is 39 7 (including EU member countries).

Anti-Dumping Investigations Initiated against Exports

from India Indian exports are facing a number of anti-dumping and anti-

subsidy cases against them from other members of the WTO. Annex I

gives a picture of the AD (Anti-Dumping) cases registered against

India. It has been compiled from various sources namely, Directorate

General of Foreign Trade (DGFT), Export Promotion Councils

(EPCs) and Administrative Ministries, as the DGAD is not the nodal

agency for cases initiated against Indian exporters. The list, however,

does not contain all cases initiated against India

The EU, USA, Canada and South Africa account for almost 60

percent of the anti-dumping cases initiated against Indian exports.

The European Union tops the list with 26 initiations out of a total of

101 initiations against India. The USA comes next with 18 initiations

followed by South Africa with 16 initiations. Indonesia accounts for

10 percent of the cases with 10 initiations. China, which has become

an active user of AD measures has also initiated two cases against

India out of which one has already resulted in definitive measures.

Against a total initiation of 101 cases since 1995, 50 definitive

measures have been imposed by other member countries against

Indian exports. The country-wise distribution of measures against

India also shows a similar pattern. The EU tops the list with 15

measures followed by South Africa with 10 definitive measures

imposed against Indian exports.

A product wise analysis of cases against Indian exporters indicates

that the highest number of anti-dumping cases is on base metals

including steel products and engineering products, which account for

32 percent of the total cases. This follows the global trend as far as

products most targeted by AD measures are concerned. This is

followed by chemicals and allied products, including drugs and

pharmaceuticals, which account for about 25 percent of all AD

measures against India.

During the period 1995-2004, four initiations and two measures on

average have been imposed against Indian exports every year. The

most anti-subsidy cases was initiated between 1998 and 2004.

Around 90 percent of the anti-subsidy cases were initiated after

financial year 1997-98. A product wise analysis of cases against

Indian exports indicates that the highest number of anti-subsidy

cases is on engineering including steel products, which account for

38 percent of the total cases. This is followed by chemicals and allied

products including drugs and pharmaceuticals and rubber and

plastic products which account for about 18 percent each of anti-

subsidy initiations against India. The EU, USA, and South Africa

account for 82 percent of the anti-subsidy cases initiated against

Indian exports. The European Union are at the top of the list with 14

initiations out of a total 39 initiations against India. The USA and

South Africa come next with nine initiations each followed by Canada

with five initiations. Brazil accounts for 5 percent of the cases with

two initiations.

Measures in Force against Exports from IndiaAgainst the total initiation of 39 cases since 1995, 19 definitive

measures have been imposed by countries against Indian exports.

The EU tops the list with nine measures followed by the USA with

four definitive measures imposed against Indian exports. South

Africa and Canada have three measures each. Brazil has not imposed

any measure out of two cases initiated so far.

Other Remedial Measures in Addition to Anti-DumpingApart from dumping, some of the countries also resort to

subsidisation of their exports to other countries. Export subsidies,

under the WTO agreement, are treated as unfair trade practices and

such subsidies are actionable by way of levy of anti-subsidy

countervailing duty. There is one more trade remedial measure

called "safeguards" which are applied as an emergency measure in

response to a surge in imports of a particular item.

3332

An anti-subsidy countervailing measure is in the form of

countervailing duty which is to be imposed only after the

determination that: lthe subsidy is a specific subsidy; lthe subsidy relates to export performance; lthe subsidy relates to the use of domestic goods over imported

goods in the export article; lthe subsidy has been conferred on a limited number of persons

engaged in manufacturing, producing or exporting the article.

Safeguards are applied in the form of either safeguard duty or in the

form of safeguard QRs (import licences). These measures are

administered in India by an authority called Director General

(Safeguards) who functions in the jurisdiction of the Department of

Revenue, Ministry of Finance.

South Asian Preferential Trade Agreement (SAPTA)The South Asian Association for Regional Co-operation (SAARC)

consists of seven countries, namely, Bangladesh, Bhutan, India,

Maldives, Nepal, Pakistan and Sri Lanka. A regional trade block

among these members was formed when SAPTA was signed in April

1993 for giving preferential market access to exports from the

member countries in a limited way. Four rounds of negotiations are

now contemplated following the signing of the Agreement on SAFTA.

The operationalisation of SAPTA in December 1995 and the

subsequent three rounds of negotiations entailing tariff liberalisation

have been major developments in the regional trade liberalisation. A

modest beginning was made in the First Round when 226 products

were conceded at the HS 6-digit level. The number of products

offered concessions accelerated to 1,868 and 345 items during the

Second and Third Rounds, making a total of 5,550 items of which

3,449 items were exclusively for LDCs: Bangladesh, Bhutan,

Maldives and Nepal. The largest number of concessions was offered

by India: 2,927 products of which as many as 2,450 products were in

favour of LDCs. Bilaterally, the largest number of non-reciprocal

concessions was offered in favour of Bangladesh (later

multilateralised in favour of all LDCs).

The tariff concessions offered has varied in depth from 5-100

percent. The tariff cuts offered by India have been the deepest,

varying from 25-100 percent for LDCs and 10-90 percent for all

countries. The other countries offered much milder tariff cuts

ranging from 7.5-10-15-20 percent for all countries (except Sri

Lanka, which offered cuts of up to 75 percent). The Rules of Origin,

as in the case of the Bangkok Agreement, is one-dimensional under

which Non-LDCs are required to input at least 40 percent local

material content while Non-LDCs are required to input at least 30 8percent.

Agreement on South Asian Free Trade Area (SAFTA)At the 9th SAARC Summit held in May 1997, the Heads of State or

Government recognised the importance of achieving a free trade area

by the year 2001 and reiterated that steps towards trade

liberalisation must take into account the special needs of the smaller

countries and the LDCs and that benefits must accrue equitably. The

mandate of the Tenth SAARC Summit held at Colombo in July 1998

reiterated the importance of achieving SAFTA as mandated by the

Ninth SAARC Summit. To this end, they decided that a Committee of

Experts (CoE), in consultation with Member States, be constituted

with specific Terms of Reference (TOR) to work on drafting a

comprehensive treaty regime for creating a free trade area.

Recognising the need to move quickly towards SAFTA, the Heads of

State or Government directed the Council of Ministers to finalise the

text of a Draft Treaty Framework by the end of 2002 at the 11th

SARC Summit held at Kathmandu, Nepal in January 2002. They also

directed that in moving towards the goal of SAFTA, the Member

States expedite action to remove tariff and non-tariff barriers and

structural impediments to free trade. The CoE held several meetings

during 2002 and 2003 in Kathmandu to finalise the text of the

agreement. Some of the contentious issues were finally resolved in

the Council of Ministers (Foreign Ministers) Meeting on 2-3 January

2004 and the Agreement was signed during the 12th SAARC Summit

held in Islamabad on 4-6 January 2004.

The agreement provides for free trade in goods among SAARC

member countries and lays down a Trade Liberalisation Programme.

Each country will maintain a Sensitive List to protect the interests of

domestic stakeholders. This will be subject to a maximum ceiling and

shall be finalised after the negotiations among the Contracting States

(CS) with flexibility to the Least Developed Contracting States to seek

3534

derogation in respect of the product of their export interest. This in

effect means that the Non-LDC Member States would maintain a

smaller sensitive list for the LDC Member States. The sensitive lists

are subject to review after every four years or earlier with a view to

reducing the number of items, which are to be traded freely among

the SAARC countries. The agreement also provides for an

institutional mechanism of the SAFTA Ministerial Council (SMC);

Safeguard Measures in case of a surge in imports of product(s)

covered under SAFTA concessions; and a detailed Dispute

Settlement Mechanism.

Apart from provisions for longer phase-out schedules and longer

Sensitive Lists to be maintained by the LDCs, it provides technical

assistance in trade-related areas and some relaxations for imposing

safeguard measures against LDCs. The agreement also provides, as

mandated in the 10th SAARC Summit, for compensation of revenue

to LDCs who suffer from loss of customs revenue due to the

implementation of the Trade Liberalisation Programme, the

operational modalities of which are to be worked out through further

negotiations.

The SAFTA agreement will enter into force on 1 January 2006 upon

completion of negotiations on Sensitive Lists, Rules of Origin and

Revenue Loss Compensation Mechanism for LDCs. These

negotiations will be carried out by the existing Committee of Experts

and are expected to be completed by the end of June 2005. This 9agreement shall supersede the SAPTA. The following sections give a

short description of India's trade agreement with SAARC countries.

India-Afghanistan Trade AgreementThe Government of the Republic of India and the Transitional

Islamic State of Afghanistan decided for a progressive reductions and

elimination of obstacles to bilateral trade through a bilateral

preferential trading arrangement in 2003. The objectives of this

agreement are:lTo promote through the expansion of trade the harmonious

development of economic relations between India and

Afghanistan. lTo provide fair conditions of competition for trade between

India and Afghanistan. lIn the implementation of this Agreement the Contracting Parties

shall pay due regard to the principle of reciprocity. lTo contribute in this way, by the removal of barriers to trade, to

the harmonious development and expansion of world trade.

The Contracting Parties hereby agree to establish a Preferential

Trading Arrangement for the purpose of free movement of goods

between their countries through reduction of tariffs on the 10 movement of goods.

India-Bangladesh Trade AgreementIn 1980, the Government of the Republic of India and the

Government of the People's Republic of Bangladesh decided to

strengthen economic relations between the two countries on the

basis of equality and mutual benefit. According to the agreement,

imports and exports of commodities and goods produced or

manufactured in India or Bangladesh, as the case may be shall be

permitted in accordance with the import, export and foreign

exchange laws, regulations and procedures in force in either country

from time to time. Customs and cross-boarder procedures are

complex. Access for transit cargo to or from north-east India through

Bangladesh may reduce distance by about 60 percent but this road

route is not open under the current trade protocol.

India-Bhutan Trade AgreementThe Government of the Republic of India and the Government of the

11Kingdom of Bhutan in 1995 entered into free trade and commerce

between the two countries, through expansion of bilateral trade and

collaboration in economic development. Both nations apart from the

preferential treatment can maintain or introduce measures or

restrictions which are necessary for the purpose of: lProtecting public morals;lProtecting human, animal and plant life;lImplementing laws relating to import and export of gold and

silver bullion;lSafeguarding national treasures;lSafeguarding such other interests as may be mutually agreed

upon.

India-China Trade AgreementThe Government of the Republic of India and the Government of the

People's Republic of China in 1984 entered into an agreement of

Most-Favoured Nation Treatment. There is no intention on the part

3736

of DGAD or the Government of India to specifically target China for

application of anti-dumping measures. The principles and

procedures prescribed under the law are fully complied with in the

cases involving China as in the cases involving other countries. The

number of cases against China has nothing to do with it not being a

member of WTO. The anti-dumping action initiated by the authority

is governed by our national law and rules framed there under. India

has extended Most Favoured Nation (MFN) treatment to China,

which enjoins upon India the obligation of non-discriminatory

treatment of China vis-à-vis other trading partners including WTO

members. Thus the question of discriminating against China does

not arise so far as anti-dumping measures are concerned.

India-Maldives Trade AgreementIn 1981 the Government of the Republic of India and the

Government of the Republic of Maldives, decided to come into

agreement for developing and strengthening trade and economic

relations between their respective countries in accordance with their

development and trade needs and objectives on a mutually beneficial

basis. Specified quota allocations for each calendar year shall be

made by the Government of the Republic of India by the end of

December with due regard to the supply, availability and the overall

need of the Government of the Republic of Maldives.

India-Sri Lanka FTAThe Government of the Republic of India and the Government of the

Democratic Socialist Republic of Sri Lanka signed a Free Trade

Agreement (FTA) on 28 December 1998. A meeting between the

Commerce Secretary, Government of India and the Secretary,

Treasury, Government of Sri Lanka was held on 2 February 2000 in

New Delhi to operationalise the FTA. According to the minutes

signed on 2 February 2000, it was decided "both sides agreed that

the Tea Boards of India and Sri Lanka should meet and finalise

issues such as method for allocation of quota, monitoring

mechanism, authorised signatories for issue of Certificate of Origin

and other related procedural matters.”

Pursuant to the above decisions, delegations from the Government of

the Republic of India and the Government of the Democratic

Socialist Republic of Sri Lanka met in New Delhi on 18-19 April

2000. During the meeting, two sub-committees were formed to

finalise the arrangements for operationalisation of Tariff Rate Quota

(TRQ) exports of tea and garments under the FTA. Both sides agreed

to implement steps to bring these arrangements into effect at the

earliest.

India-Nepal Trade AgreementThe Government of India and His Majesty's Government of Nepal

entered into the trade agreement to grant maximum facilities and to

undertake all necessary measures for the free and unhampered flow

of goods, needed by one country from the other, to and from their

respective territories. The specific route and commodities for free

trade is given in Annex 1. Nepal is land-locked and most of its trade

has to transit through India. Indo-Nepal trade is free and Nepal has

much lower tariff on imports of third country goods than India.

Nepalese goods are allowed preferential entry into India on meeting

a minimum material content requirement (value addition norm)

defined under the treaty. India tried to remove this norm and for

some time all the products manufactured in Nepal were eligible for

duty free export to India. But this led to a flooding in of Chinese-

made goods through Nepal. In later renewals of the treaty, the

provisions relating to value addition and certificate of origin, were

incorporated. Imports are now allowed on the basis of a certificate of

origin issued by the Government of Nepal.

India has agreements with Bhutan and Nepal that it allow trucks to

move across the boarder, though not inland. Indian trucks/vehicles

are allowed free entry into Nepal whereas Nepalese trucks/transport

vehicles are not provided similar facilities in India. The Nepal

Government has advocated free entry. India also shares broad-gauge

railways with Pakistan and Bangladesh - a historical legacy. India has

bilateral rail interchange agreements with these neighbours. But the

conditions are stringent and the performance not good.

India's Experience with the WTO Dispute Settlement

SystemIndia was first in South Asia to invoke the WTO dispute settlement

procedures, on 28 September 1995, when India requested

consultations with Poland's preferential treatment of the EC in its 12tariff scheme on automobiles. Also a founder member of the WTO,

India has been the most active South Asian member and the sixth

biggest participant in the WTO dispute settlement system, following

3938

the US, the EC, Canada, Japan and Brazil. It has been a complainant 13 in just as many disputes as it has been a respondent.

Amir Ullah Khan is deputy secretary general of the PHD Chamber

of Commerce and Industry (PHDCC), New Delhi, India.

Endnotes1 Canalisation: Some commodity imports must be channelled

("canalised") through public sector companies, although many such

items have been decontrolled. The remaining canalised items are

primarily petroleum products (although canalisation of crude oil was

eliminated in April 2002), some pharmaceuticals, and bulk grains

(wheat, rice, and maize).2 Ex-Works: When such a price is quoted, it is stipulated that the foreign

buyer should take the delivery of the goods at the exporter's premises

and all the risks and expenses therefore should be borne by him i.e., the

exporter is responsible for the delivery of the goods at his works or

factory. 3 Anti dumping is an instrument for ensuring fair trade and is not a

measure of protection per se for the domestic industry. It provides relief

to the domestic industry against the injury caused by dumping.4 Normal value is the comparable price at which the goods under

complaint are sold, in the ordinary course of trade, in the domestic

market of the exporting country. If the normal value can not be

determined by means of the domestic sales, the following two alternative

methods may be employed to determine the normal value: - (i)

Comparable representative export price to an appropriate third country;

(ii) Constructed normal value, i.e. the cost of production in the country

of origin with reasonable addition for administrative, selling and general

costs and reasonable profits.5 The Export price of the goods allegedly dumped into India means the

price at which it is exported to India. It is generally the CIF value minus

the adjustments on account of ocean freight, insurance, commission, etc.

so as to arrive at the value at ex-factory level.6 Directorate General of Anti dumping and Allied Duties (DGAD)

functioning in the Dept. of Commerce in the Ministry of Commerce and

Industry and the same is headed by the "Designated Authority".7 Refer Annex for the details of Anti-Dumping Cases registered by India8 Indra Nath Mukerji, 'Towards a Free Trade Area in South Asia: Charting

a Feasible Course for Trade Liberalization with Reference to India's

Role', RIS Discussion Paper 86, 2004, Research and Information System

for Non-Aligned and Other Developing Countries, New Delhi, 4-6.9 However, all products negotiated under four rounds of negotiations

would continue to be operative.10 Refer Annex for the list of preferential trade items/commodities. 11 Refer Annex for the list of free entry/exit route for trade

12 Poland-Import Regime for Automobiles, WT/DS19/2 (11 September

1996).13 See generally, Ravindra Pratap, India at the WTO Dispute Settlement

(Delhi: Manak Publications 2004).

Anti-Dumping Investigations Initiated against Imports in India by Country

4140

Anti-Dumping Investigations Initiated against Imports in India by Product

Anti-Dumping Investigations Initiated against Exports from India

AD Measures: Reporting Member vsExporting Country From: 01/01/95 To:

31/12/03

Argentina

Brazil

Canada

China, P_R_

European Community

Indonesia

Mexico

South Africa

Thailand

Trinidad and Tobago

Turkey

United States

Total

MeasuresImposed by

ExportingCountry

India

2

2

3

1

15

3

1

10

1

1

4

7

50

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

1995

1996

1997

1998

1999

2000

2001

2002

2003

Total

4

1

5

6

9

7

6

6

50

6

119

90

124

162

183

235

166

212

220

1511

Country wise initiations of anti-subside casse against india

EU

South Africa

USA

Canada

Brazil

Total

14

9

9

5

2

39

36%

23%

23%

13%

5%

100%

ExportingCountry

India Total for01/01/95/31/12/03

Country Anti SubsidyCases

Percentage

1995-96

1996-07

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

Total

1

-

3

6

5

7

8

2

7

39

3

-

8

15

13

18

21

5

18

100

Year Anti Subsidy Cases % share

7.11 Particulars of a few Authorities responsible for invoking Anti-Dumping action

Engineering including Steel Product

Drugs & Pharmaceutical

Rubber, Plastics, Glassware and Articles thereof

Textiles and Articles Thereof

Footwear Products

Electronics

Product Anti subsidy Cases Percentage

15

7

7

6

3

1

38%

18%

18%

15%

8%

3%

Country

Argentina

Name of the investigeating Authority Address

Subsecretaria de Politica Y Gestion comercialMinisterio de Economia Y Produccion

Julio A. Roca 651, Buenos AiresCodigo Postal : C 1067ABBARGENTINATel: 00 54 11 4349 3935/3949Fax: 00 54 11 4349 3930

4342

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

YearImports into India of the above four commodities for quantities in

excess of the fixed quota mentioned above will be permitted under

normal MFN rates of duty, notwithstanding any concession in any

other preferential arrangement.

Imports into India of the above commodities will be permitted

through the land Customs Stations (LCS) at Kakarbhitta/Naxalbari,

Biratnagar/Jogbani, Birganj/Raxaul, Bhairahawa/Nautanwa,

Nepalgunj/Nepalgunj Road and Mahendranagar/Banbasa.

The detailed administrative arrangements for operationalisation of

List of Items Granted Preferential Tariff by Afghanistan

No. HS Code

Product Description

MFN Duty (%)

MOP (%)*

1 090230 Black tea (fermented) Temporar ily exempted 100

2 090240 Other black tea Temporar ily exempted 100

3 300210

Antisera and

other BLD Frctn; Mdfd Imunlgcl products

7

100

4 300390

Other Ayurvedic, homeopathic medicine

7

100

5 300490

Other medicine for retail sale

7

100

6 170199

Sugar refined

Temporar ily exempted 100

7 252310 Cement clinkers 25 100

8 252321 White cement 25 100

* Margin of preference

List of Items Granted Preferential Tariff by India

No. HS Code Product Description MFN Duty (%) MOP (%)*

1 080620 Green Raisins 105 50%

2 080620 Green Large 105 50%

3 080620 Black Raisins 105 50%

4 080620 Red Raisins 105 50%

5 081310 Dried Apricots Nuts 30 50%

6 081310 Dried Apricots 30 50%

7 080420 Fig Dried 30 100%

8 080250 Pistachios closed Shell 30 100%

9

080250

Pistachios Open Shell

30 100%

10

080250

Pistachios Shelled (Kernel)

30 100%

11

080231

Walnuts Unshelled

30 50%

12

080232

Walnuts shelled

30 50%

13

081340

Plums Dried

30 50%

14

080212

Almond Thin Shelled

Rs65/kg 50%

15

080212

Almond Hard Shelled

Rs65/kg 50%

16

080212

Almond Shelled

Rs65/kg 50%

17

081340

Mulberries Dried

30 100%

18

081340

Pine Nuts Toasted

30 100%

19

080620

Raisins Golden

105 50%

20

081310

Apricots Nuts, Bitter Unshelled

30 50%

21

081310

Apricots Nuts, Bitter Shelled

30 50%

22

080620

Green Raisins except Large

105 50%

23

081340

Cherries Sour Dried

30 50%

24

080610

Grapes fresh, All types

40 50%

25

080719

Melon fresh

30 100%

26 080810 Apples fresh 50 50%

27 080910 Apricots fresh 30 50%

28

081090

Pomegranates

30 50%

29

090910

Anise Seeds

30 50%

30

090940

Caraway Seeds, White, Black Kajak

30 50%

31

120400

Linseeds

30 50%

32

120740

Sesame Seeds etc.

30 50%

33

121110

Liquorice Roots plants for Pharmacy etc.

30 50%

34

121410

Alfalfa Seeds

30 50%

35

130190

Asafeotida

30 100%

36 710310 Lapis Lazuli, Ruby, Emerald etc.(Unworked) 30 100%

37 710391 Emeralds (Otherwise worked) 30 100%

38 710399 Lapis Lazuli, Ruby (Otherwise worked) 30 100%

* Margin of preference

List of Entry/Exit points for India-Bhutan Trade

1. Jaigaon (road route)

2.

Chamurchi

(road route)

3.

Ulta Pani

(road route)

4.

Hathisar (Gaylephug)

(road route)

5.

Darranga

(road route)

6.

Calcutta

(air and sea port)

7.

Haldia

(sea port)

8.

Dhubri

(riverine route)

9.

Raxaul

(road/rail route)

10.

Panitanki

(road route)

11.

Changrabandh

(road route)

12.

New Delhi

(air route)

Nepalese manufactured articles allowed entry into India: free of customs duties on a fixed quota basis.

No. Nepalese Article Quantity in MT per year

1 Vegetable fats (Vanaspati) 100, 000

2 Acrylic Yarn 10, 000

3 Copper products under Chapters 74 and Heading 85.44 of the HS Code 10,000

4 Zinc Oxide 2,500

4544

the fixed quota, i.e., identifying the agencies for allocation and

monitoring of exports and imports of fixed quota will be finalised by

both Governments.MFN List of Articles not Allowed Preferential Entry from

Nepal to IndialAlcoholic liquors/beverages and their concentrates except

industrial spirits (Nepalese beers can be imported into India on

payment of the applicable liquor excise duty equal to the

effective excise duty as levied in India on Indian beers under the

relevant rules and regulations of India. (Nepalese beer has been

exempted from the whole of the additional duty vide customs

notification No. 178/2003-customs date 17.12.2003)lPerfumes and cosmetics with non-Nepalese/non-Indian brand

names,lCigarettes and tobacco

Note: The Government of India may, in consultation with HMGN,

modify the above list.

Agreed Routes for Mutual Indo-Nepal TradelPashupatinagar/ Sukhia PokharilKakarbhitta/ NaxalbarilBhadrapur/ GalgalialBiratnagar/ JogbanilSetobandha/ BhimnagarlRajbiraj/ KunaulilSiraha, Janakpur/ JayanagarlJaleswar/ Bhitamore (Sursand)lMalangawa/ SonabarsalGaur/ BairganialBirgunj/ RaxaullBhairahawa/ NautanwalTaulihawa/ KhunwalKrishnanagar/ BarhnilKoilabas/ JarwalNepalgunj/ Nepalgunj RoadlRajapur/ KaterniyaghatlPrithvipur/ Sati (Kailali)/ TikonialDhangadhi/ GauriphantalMahendranagar/ BanbasalMahakali/ Jhulaghat (Pithoragarh)lDarchula/ Dharchula

Trade Facilitation in WTONisha Taneja

rade facilitation was first included in the WTO as one of the

Singapore issues (investment, competition, transparency in

government procurement, trade facilitation) at the 1996 WTO TMinisterial Conference following which the Council for Trade in

Goods was directed to carry out exploratory and analytical work on

the simplification of trade procedures. In December 1996, the

Singapore Ministerial Declaration directed the Council for Trade in

Goods “to undertake exploratory and analytical work, drawing on the

work of other relevant organisations, on the simplification of trade

procedures in order to assess the scope for WTO rules in this area.”

Until the launch of the Doha Development Agenda (DDA) in

November 2001, work at the Council for Trade in Goods (CTG) had

focused mainly on customs and border-crossing procedures. A

Symposium on Trade Facilitation was held in 1998 to explore the

main concerns of traders when moving goods across borders. The

key problems identified included excessive documentation

requirements; insufficient use of information-technology; lack of

transparency; unclear import and export requirements; and lack of

co-operation among customs authorities. Other issues discussed

included import and export procedures and requirements, transport

and transit of consignments and payments, electronic facilities and

technical co-operation and development issues. In November 2001,

the Doha Ministerial Conference called for negotiations on trade

facilitation after the 2003 WTO Ministerial and subject to agreement

on the modalities of negotiation. Until then, “... the Council for Trade

in Goods shall review and as appropriate, clarify and improve

relevant aspects of Articles V (freedom of transit), Article VIII (fees

4746

and formalities connected with importation and exportation) and

Article X (publication and administration of trade regulations) of the

GATT 1994 and identify the trade facilitation needs and priorities of

members, in particular developing and least-developed countries.”

The Cancun Ministerial in September 2003 failed to launch

negotiations on the Singapore Issues. Talks were suspended due to

divergent positions taken by developed and developing countries.

While Japan and Korea supported the inclusion of all the four

Singapore issues, the coalition of the African Union, LDC, ACP

countries, Malaysia (and initially India), opposed negotiation on any

of the four. Following Cancun, during the Green Room consultations,

the EU suggested the inclusion of only two Singapore issues namely

transparency in government procurement and trade facilitation.

During further discussions in the Green Room meeting, it became

clear that there was no consensus on the need for any multilateral

disciplines on transparency in government procurement, and hence

there was a suggestion that further work on this issue be dropped. In

December 2003 several developing countries including India

submitted a communication on the Singapore issues requesting that

investment, competition and transparency in government

procurement be dropped. The debate remained largely unchanged

until April 2004, when a 'core-group' of developing countries and

LDCs said they were prepared to discuss trade facilitation, but only

to clarify substantive modalities for negotiations. In addition to

insisting that negotiations must be based on 'explicit consensus', they

called for the remaining Singapore issues to be dropped altogether

from the WTO work programme, and expressed a desire to see prior

movement in issues such as agriculture before starting discussions

on trade facilitation.

Finally, in the July Package, the WTO members agreed on the basis

of 'explicit consensus' in the General Council to formally launch

negotiations on trade facilitation, while dropping the more

contentious issues of investment, competition policy and

transparency in government procurement from the Doha work

programme. The mandate for these negotiations is set out in Annex

D of the July Package. members agreed that the negotiations “shall

aim to clarify and improve relevant aspects of Articles V, VIII and X

of the GATT 1994 with a view to further expediting the movement,

release and clearance of goods, including goods in transit.”

Negotiations also aim at “enhancing technical assistance and support

for capacity building in this area,” and at developing “provisions for

effective cooperation between customs or any other appropriate

authorities on trade facilitation and customs compliance issues.” The

results “shall take fully into account the principle of special and

differential treatment for developing and least-developed countries.”

It was further agreed that these countries would not be obliged “to

undertake investments in infrastructure projects beyond their

means.”

The WTO's Trade Negotiations Committee established a negotiating

group on trade facilitation, to oversee the negotiations.

Subsequently, several countries have put in their proposals. A

noteworthy development in the WTO is that India, China, Pakistan

and Sri Lanka have submitted a joint communication on the process

of trade facilitation in the Negotiating Group on Trade Facilitation in

March 2006. For the first time, the three South Asian countries have

come together to put forward proposals on three key issues, namely-

arrangement of commitment for developing countries, technical

assistance and capacity building support mechanism and the

application of a dispute settlement mechanism. The communication

suggests that a possible mode of commitment arrangement for

members might be that the rules to be established are divided into

different modules, depending upon the degree of difficulty and the

extent of resources and capability required for implementation.

On the issue of technical assistance and capacity building support

mechanism the proposal suggests that members should ensure (i) a

coordination/collaborative mechanism between various partners

engaged in trade facilitation, (ii) that technical assistance is adapted

to the needs of the recipients. The proposal further suggests that

given the nature of implementation of a Trade Facilitation

Agreement and that thousands of transactions everyday could be

subject to this Agreement, there is need for members to establish

dedicated bodies such as a Committee on Trade Facilitation, where

disputes could be discussed and mediated. The dispute settlement

mechanism should only be the last resort when there is no hope of

settling the dispute within the Committee.

Focusing on the content of the significant proposals made by

members following the Doha Mandate and taking into account

4948

proposals that have been made by members in the Negotiating

Group on Trade Facilitation, this paper focuses on three key

questions: (i) what clarifications do these proposals seek on Articles

V, VIII and X, (ii) what is the current status for India with respect to

each of these proposals, and (iii) what implications do these

clarifications have for India. Based on the analysis for India, issues

and concerns for South Asia have been examined.

There is no widely agreed upon definition for trade facilitation. The

WTO defines trade facilitation as “the simplification and

harmonisation of international trade procedures”, “where

international trade procedures” are defined as the “activities,

practices, and formalities involved in collecting, presenting,

communicating, and processing data required for the movement of

goods in international trade.” In the end, the objective of trade

facilitation is to reduce the cost of doing business for all parties by

eliminating unnecessary administrative burdens associated with

bringing goods and services across borders.

The definition makes it clear that trade facilitation relates to a variety

of activities such as import and export procedures (customs or

licensing procedures), customs valuation, technical standards, health

and safety standards, among others) including administrative

procedures, transportation and shipping; insurance, payment and

mechanisms and other financial requirements.

As a result of a large number of participants, as well as the wide

range of trade facilitation instruments, several organisations -

private, public, regional and multilateral - are involved in discussion

and implementation of trade facilitation. The most important

multilateral public organisation dealing with trade facilitation is the

World customs Organisation that provides principles for simple,

effective and modern procedures that are compatible with and

complementary to the three GATT Articles referred to in the context

of trade facilitation in the Doha Ministerial Declaration. The WCO

offers solutions that allow countries to meet their legitimate goals of

revenue collection and protection to society, while at the same time

delivering practical trade facilitation dividends. The uniform,

predictable, and transparent application of these instruments

facilitates international trade, while also ensuring compliance with

national laws and regulations. These modern principles for

simplification of procedures to provide trade facilitation were later

incorporated in a single instrument as “The convention on the

Simplification and Harmonisation of customs Procedures”, or the

“Kyoto Convention” adopted in 1973.

As a result of years of deliberation among members, the revised

Kyoto Convention of 1999 contains international standards that

provide the predictability and efficiency that modern trade and

commerce require. The revised Kyoto Convention through its legal

provisions and implementation guidelines provides the basis for

principles set out in GATT Articles V, VIII, and X. It addresses a

major failing of the Kyoto Convention of 1973, namely the

widespread use of reservations and the small number of parties that

contracted to individual annexes. The structure of the Revised Kyoto

Convention ensures, through its General Annex, harmonisation of

the procedures in all countries that will become contracting parties,

while at the same time it allows flexibility to its members in choosing

the specific annexes that it wants to adopt.

Proposals and Implications for IndiaThis section identifies the key proposals relating to GATT Article X

and VIII. The current status in India regarding each of these

proposals has been examined and suggestions have been made on

what stand India can take in the ongoing negotiations.

Article X: Publication and Administration of Trade

RegulationsArticle X requires members to publish all laws, regulations, judicial

decisions and administrative rulings relevant to importing and

exporting in a manner as to enable governments and traders to

become acquainted with them. The text of Article X further

elaborates the laws, regulations, judicial decisions and

administrative rulings could pertain to. These include classification

or valuation of products, rates of duty, taxes or other charges;

requirements, restrictions or prohibitions on import or export; and

on transfer of payments related to imports or exports and on sale,

distribution, transportation, insurance, warehousing, inspection,

exhibition, processing, mixing and others related to export or import.

Article X also requires members to publish all trade agreements

affecting international trade policy. In addition Article X requires

members to publish all trade related measures that impose a new or

5150

more burdensome requirement, restriction or prohibition on imports

or the transfer of payments before enforcement. Article X requires

members to maintain or institute judicial, arbitral or administrative

tribunals or procedures for review and correction of administrative

action relating to customs matters.

It is important to first examine if India is publishing all trade related

information as is required by the existing Article X. All trade related

information is published by the relevant official authorities. The

three key institutions involved are the Central Board of Excise and

customs, the Director General of Foreign Trade under the Ministry of

Commerce, and the Reserve Bank of India. Information is made

available both in print and through the electronic media.

Interestingly, the private sector is playing an important role in

making information more accessible to traders both through

published material and through hosting of websites. Traders in India

tend to use private sources as they disseminate information faster.

The Central Board of Excise and customs (CBEC) under the Ministry

of Commerce publishes all the relevant acts, tariffs, rules,

regulations, forms, notifications and circulars relating to customs,

central excise and service tax both on the website and in print form

as well. The main acts are the customs Act of 1962 and the customs

Tariff Act 1975. All regulations and rules come into effect through a

notification, which is published in the official Gazette of India. The

notifications are published under two broad subject headings,

namely tariff and non-tariff related. All requirements, restrictions or

prohibitions on import and export are regulated through the Foreign

Trade Development and Regulation Act 1992, which falls under the

purview of DGFT. The act provides the Government with the

authority to put restrictions or prohibitions on import or export.

Under Section 5 of the act, the EXIM Policy is issued which is valid

for a period of 5 years, but, amendments are made in the policy every

year. All regulations related to payments are published by the

Reserve Bank of India.

Decisions passed by the tribunal, Supreme Court and High Court are

public documents and can be obtained at a nominal fee. Several

private publishers have collated such information to make it easily

available to customers. Countries that have given proposals on

Article X include the European Communities, Japan, Korea and

Canada. Other countries that have submitted proposals in the

Negotiating Group include Mongolia, Pakistan, Peru, Chinese Taipei,

Hong Kong, China, Turkey, United States, Australia, New Zealand,

Singapore, and Dominican Republic. The key issues in the proposals

are relate to advance rulings, use of electronic media, enquiry points,

consultative mechanism, code of conduct for officials and appeals.

Advance RulingsCountries have suggested the inclusion of binding advance rulings.

This provision enables traders to get advance information on tariff

classification, valuation and applicable duties. A notable

development in India that aims to increase transparency and

predictability in trade is the setting up of the Authority for Advance

Ruling by the Finance Act 1999, which is a statutory quasi-judicial

body under the customs Act 1962 and the Central Excise Act 1944.

The scheme of advance ruling became fully operational only from 4

February 2004. The ruling by the authority can be on classification,

valuation and applicability of duty exemption in respect of export,

import, production and manufacture. However, only foreign firms

which want to invest in India through joint ventures or wholly owned

subsidiaries, or Indians who are getting into joint ventures with

foreign firms can ask for advance ruling. Thus the scope of the

Authority for Advance Ruling is quite limited as such a provision is

not made available to a solely Indian - owned company. In view of

the rigid eligibility criteria it is not surprising that the number of

cases admitted so far is very limited. India should expand the scope

of the current system to include solely Indian-owned companies.

Use of Electronic MediaA new dimension in the proposals relates to how information

relating to exports and imports can be made available. This assumes

considerable significance in light of the changes that have been made

in the use of the electronic media. Clearly this aspect did not appear

in the GATT Article X at the time of its inception. However, it is

important to note that some members do not lay any emphasis on

making the use of the electronic media mandatory, but simply

recommend its usage. In India the electronic media is being used

very widely for dissemination of information by the CBEC, the DGFT

and the Reserve Bank of India. The electronic media is also being

used by several private companies/individuals.

5352

Enquiry PointsSeveral members have suggested the establishment of a single

national focal point to respond to inquiries related to information

directly related to the customs procedures, importation and

exportation. As of now, in India, there is no officially designated

inquiry point for traders. India should consider it as it would make it

easier for member countries to access information. But a single

national focal point is not recommended by the Kyoto convention

and need not be adopted by India.

Consultative Mechanism Another important submission made by members is that all

stakeholders/interested parties i.e., government and private sector

bodies including importers and exporters, carriers, chambers of

commerce, should get an opportunity to comment on prospective

rules and procedures through a consultative mechanism before they

are implemented. An additional element proposed is that members

should publish reasoned motivations for a proposed measure.

In India, currently there is no provision for consultation between

interested groups. However, the recent Kelkar Committee,

recognising the importance of regulatory transparency, has

recommended that “An institutional mechanism, namely Standing

Committee on Procedures chaired by Chairman CBEC and including

trade and industry representatives, should be established to identify

and resolve the problem areas in present procedures and evolve new

procedures on a need basis.” Such a consultative and feedback

mechanism between the regulator and the other participants in

trade, if implemented, would help in evolving more efficient and cost

reducing procedures.

AppealWhile Article X requires the establishment of an administrative or

legal review procedure, submissions have been made on making the

provisions of Article X more concrete. Member countries have

suggested that in cases where the initial appeal is not satisfactory,

traders should have recourse to an appeal by a separate judicial or

administrative body to ensure fairness.

In India the rights of appeal procedures are published in the customs

Act 1962. Under the Foreign Trade Development and Regulation Act

1992, an appeal can be made by any party against the decision of the

DGFT. Any party can make an appeal first before the Commissioner

(appeals). Appeals against the Commissioner's orders go the

Appellate Tribunal (CEGAT) which is constituted of judicial and

technical members. An appeal in the Supreme Court can be filed

(Section 130F, customs Act 1962) against the orders passed by

CEGAT on matters relating, among other things, to the rate of duty

or to the value of goods for purposes of assessment. The Foreign

Trade (Development and Regulation) Act, 1992, allows for an appeal

procedure whereby an appeal can be made against the decision of the

director general, to the central Government. In case the decision or

order has been made by an officer sub-ordinate to the director

general, an appeal can be made to the Director General or to any 1officer superior to the adjudicating authority authorised by the

director general. The order made in appeal by the appellate authority

(Central Government or director general or officer superior to the

adjudicating authority) is final. (Act 15, Customs Act 1962). Relevance of Revised Kyoto Convention to Article XThe WCO addresses the requirements of Article X in the Kyoto

Convention. Chapter 9 of the General Annex to the Kyoto Convention

relates to information, decisions, and rulings supplied by customs.

All the requirements of Article X and the proposals made by

members, including binding rulings are provided for in the

convention. The guidelines to Chapter 9 provide detailed information

for administrations to set up their procedure for publication of

information. The guidelines also contain information on provision of

information through electronic media and recommend its usage

where possible. Interestingly, the convention also has provisions for

a consultative mechanism between traders and customs, binding

advance rulings and enquiry points. There is no recommendation for

a single national focal point. Chapter 10 of the General Annex sets

out principles for appeals in customs matters. The provisions provide

for a transparent and multi-staged appeal process with the

availability of an independent judicial review as a final avenue of

appeal. It needs to be pointed out that the Revised Kyoto Convention

relates to information, decisions and rulings supplied by customs. In

India, publication of information is related to other agencies as well.

5554

Article VIII: Fees and Formalities Connected with

Importation and ExportationArticle VIII is the primary article of GATT dealing with

administrative aspects of trade, and is perhaps the most technical,

wide-ranging and difficult of the three articles under examination.

Article VIII basically requires contracting parties to impose fees and

charges in relation to import and export in a manner that it is limited

to the cost of service provided. It also requires its members to

recognise the need for reducing the number and diversity of fees and

charges and the incidence and complexity of import and export

formalities. In addition it requires members to review its operations,

upon request by others, not to impose substantial penalties for minor

breaches of customs regulations or procedural requirements. Article

VIII also provides an illustrative list of the types of fees and charges,

formalities and requirements relating to consular transactions,

statistical services, analysis and inspection, and licensing which are

imposed by governmental authorities beyond customs.

Indian exports and import procedures continue to be quite

cumbersome. In order to export, an exporter needs to obtain 258

signatures, make 118 copies of the required information,

keypunching of which take 22 hours (Roy 2003). Transaction costs

related to imports are equally high. Even though there has been a

reduction in the number of tariff lines since the onset of the reform

process, there continues to be a multiplicity of tariff rates leading to

ambiguities about classification and hence valuation (Mukhopadhya

2002). Further, on the export front, the multiplicity of export

promotion schemes leads to additional procedural requirements.

Also, there is duplication of work between the customs and the

Ministry of Commerce, which needs to be addressed. The Kelkar

Committee has pointed out sources of such transaction costs and has

also suggested remedial measures.

Proposals regarding fees and formalities have been made by Canada,

Colombia, the European Communities, Hong Kong, China, Japan,

Korea, Mongolia, Pakistan, Peru, Chinese Taipei, United States,

Australia, China, New Zealand, China, Korea, New Zealand, Peru,

Norway, Switzerland, Turkey, Canada, Thailand, Uganda and

Guatemala. The key proposals relate to the levy of fees and charges,

injecting GATT principles, provisions to reduce documentation

requirements, standard processing times and the use of international

standards. Levy of Fees and ChargesIn their submissions members have suggested that fees and charges

levied must refer to the approximate cost of service rendered and

should therefore not be charged on an ad valorem basis. Members

have also suggested that specific criteria/parameters should be

established for the application of fees and charges.

In India, while some fees and charges appear to be nominal, for

instance, a fee of Rs1,000 is charged in the case of application for an

importer-exporter code number, in other cases, such as, the case of

applications for an import license, the amount of fees is based on the

CIF value of goods. For instance, for a CIF value of greater than

Rs50,000 the fee charged is Rs2 per thousand subject to a minimum

of Rs200 and a maximum of Rs150,000 (Ministry of Commerce

2002). This also raises the issue of what a 'reasonable' fee would be.

As this practice is clearly a violation of the existing GATT Article

VIII, it is important to correct this anomaly.

In India there are a plethora of fees and charges the criteria for which

are not clearly defined. There are several issues that are of concern

when considering the issue of fees and charges. Thus, it is difficult to

ascertain whether fees and charges are reasonable and whether such

charges are commensurate with the cost of service provided. The

issue becomes even more complex as some charges e.g., port charges,

vary from port to port and are provided both by the public and

private sector.

Injecting GATT PrinciplesMembers have pointed out that provisions of Article VIII require

members to simply 'recognise' but undertake no explicit obligations

with respect to the need to reduce the number and diversity of the

fees and charges and the need to minimise the incidence and

complexity of import and export formalities. Suggestions have been

made on making Article VIII more operational by imposing GATT

principles of non-discrimination, transparency and predictability in

the design, application and effect of export and import procedures

and formalities on all members. Other important GATT principles to

be considered are principles like least trade restrictiveness and

review whereby members should ensure that import and export

5756

formalities and documentation requirements are not more trade

restrictive than necessary to meet a legitimate objective. In this

context the EC has suggested that members should specify an

illustrative list of such requirements. Review is a concept closely

linked to the principle of necessity/least trade restrictiveness which

suggests that members should not maintain measures if the

circumstance or the objective giving rise to its adoption no longer

exists.

The proposals regarding injecting GATT principles to make Article

VIII more operational are very valid. India is already following such

principles in the context of the Agreement on Technical Barriers to

Trade (TBT), the Agreement on Sanitary and Phytosanitary

Measures (SPS) and the Import Licensing (IL) Agreement. India

should have no objections to extending the same level of

commitment to all trade related activities.

Provisions to Reduce Documentation RequirementsSuggestions to reduce documentation requirements, include using a

single administrative data set for export and import, introduction of

a single one-time presentation to one agency, acceptance of

commercially available information and of copies, elimination of pre-

shipment inspection, phasing out of mandatory use of customs

brokers, co-ordination of activities of all border agencies and the

adoption of a uniform domestic customs code.

Members have suggested the use of risk assessment methods based

on international standards and practices. Other measures suggested

for the release and clearance of goods include pre-arrival clearance,

expedited procedures for express shipments, post-clearance audit

and the introduction of a system of authorised traders. Such systems

would grant to compliant traders simplified or other premium

procedures for their import and export activities. Members have

suggested automation of customs and other agency procedures for

simplifying export and import. India should accept the proposals

related to reduction of documentation requirements on a 'best

endeavour basis'.

At present India does not have a single administrative data set for

export and import, or a single one-time presentation to one agency.

Perhaps the most significant step that has been taken is on the

harmonisation of the customs code. Since February, 2003,

classification codes at the eight-digit level used by the Central Board

of Excise and customs (for purposes of tariff), the Directorate

General of Foreign Trade (for purposes of determining

importability/exportability) and DGCIandS (for statistical purposes)

have been unified to evolve a Combined Nomenclature based on the

HS classification.

Standard Processing TimesMembers have suggested that members should establish, notify and,

within reasonable targets, progressively reduce standard processing

times which should be published. Efforts should be made by

members to reduce the standard processing times progressively. In

India standard processing times are laid out by the CBEC and the

DGFT. The CBEC lays out standard processing times in its Citizen's

Charter, which is a declaration of the CBEC's mission, values and

standards and commitment to achieve excellence in the formulation

and implementation of policies and procedures for the benefit of

trade and industry. Similarly the DGFT lays out in its Exim Policy, a

time schedule to be followed to dispose of the applications regarding

Import-Export Code number, advance license etc. However, such

standards are only an intent. It may be kept in mind that India has

several customs stations and the level of infrastructure varies

considerably between them. It may therefore be difficult to have a

unique processing time for all customs locations. Nevertheless, India

should accept the proposal on a 'best endeavour basis'.

Use of International StandardsPerhaps the most important suggestion by members relates to the

use of agreed international standards by members for (i) simplifying

and reducing documentation and data requirements and (ii)

streamlining import and export procedures. This would in turn

improve transparency and predictability, and lower costs for traders.

The standards and instruments suggested are those developed by the

WCO such as the revised Kyoto Convention as well as other WCO

initiatives and instruments provided by UNCTAD, the UN regional

economic commissions, the IMO, and ICAO.

To simplify and reduce procedures in India, two notable changes

have been made in the automation of customs through the use of the

Electronic Data Interchange (EDI) and the use of risk assessment

5958

methods. The EDI became operational in 1996. Since then, the EDI

has been introduced in 23 locations, but only in 11 of them are EDI

declarations more then 80% of the total declarations (2002-03).

There continues to be a large proportion of manual declarations. In

some stations only a part of the data has been computerised, leaving

ample room for unscrupulous parties to take advantage of the

loopholes (Sengupta and Bhagabati 2003). Another problem with the

EDI is that at present it is operative only at the customs. A major

drawback with the current EDI system is that it has a distributed

architecture and is modular in nature. Thus each EDI location is a

standalone structure. Each time the EDI facility has to be extended to

a new customs location, additional costs are incurred. The customs

are gradually moving to a centralised architecture through the

implementation of the EDI Gateway. The ongoing customs Gateway

Project is expected to facilitate connectivity between EDI centres and

with trading partners. The gateway will also enable remote filing of

customs declarations. The project is expected to be completed by end

2005 when it would connect all customs locations with all trading

partners. It will also make it possible for traders to make Regulatory

agencies such as DGFT and RBI will also be able to exchange online

information with major customs houses.

Indian customs authorities are gradually progressing towards the

usage of modern risk assessment methods. A codified risk

management module was tested recently in 2003 for import

consignments at ICD Tughlakabad. The computerised module

assesses import consignments through 21 risk factors and analyses

11,640 items, identifying sensitive consignments and indicating the

rest for immediate release. This model will be gradually applied to all

customs houses. The use of risk management techniques through a

trust based system has been strongly recommended by the Kelkar

Committee.

Relevance of Revised Kyoto Convention to Article VIIISeveral elements of Article VIII are dealt with in the Revised Kyoto

Convention. The issue of fees and charges being limited to the

approximate cost of service rendered has not been specifically

addressed in either the Revised Kyoto Convention or other WCO

instruments as no single standard could be agreed on this issue. The 2requirements of Article VIII:I (c) are addressed through principles

laid out in the Annex. Standards are laid out for simplification of

procedures at - common border crossings, for goods declaration and

supporting documents, for release of goods, for authorised persons,

and for co-ordination of customs inspections with other competent 3authorities. The Revised Kyoto Convention has recognised the

importance of the use of risk management techniques by setting out

the standards for application of risk management, which comprises a

series of technical processes intended to identify and quantify 4individual risks. The convention also recognises the use of

information technology and sets standards for application of 5information and communication technology in customs. The

Convention specifies that information technology should be used

where it is cost effective and efficient for the customs and for trade.

Further it specifies that members should use relevant internationally

accepted standards. The convention also contains legal provisions 6relating to security. Most notable of the other WCO initiatives

includes the development of the WCO customs Data model, which

will establish a standard, international harmonised data set that will

meet governments' requirements for international trade. This model

will also be used to develop the concept of a single window.

The current situation reveals that the Indian customs is committed

to modernisation of customs based on international standards. While

several changes being carried out are based on the revised Kyoto

Convention, only an exact mapping of the existing procedures with

those recommended in the revised Kyoto Convention would reveal

the extent of deviation, if any, from those mentioned in the

convention.

Relevance of TBT Agreement, SPS Agreement and IL

AgreementMost of the suggestions made on improvements in Article VIII

emanate from the existing WTO Agreements like Technical Barriers

to Trade, the Agreement on Sanitary and Phytosanitary Measures

and the Agreement on Import Licensing Procedures. In fact the EC

and Hong Kong have suggested that it is important to consider the

applicability of these agreements to import and export

documentation requirements. For instance in the TBT Agreement

Article 2.1 refers to non-discrimination, Article 2.2 refers to least

trade restrictiveness, Article 2.3 requires review of procedures and

Article 2.4 requires members to use international standards as a

basis for their technical regulations.

6160

Article V: Freedom of TransitArticle V of the GATT sets out the basic requirement of freedom of

transit through the most convenient route and further requires that

no discrimination be made on the basis of flag of vessel, place of

origin, departure, entry, exit or destination. It also calls on parties

not to discriminate on the basis of ownership of goods or means of

transport. Further, Article V stipulates the obligation not to impose

any unnecessary delays or restrictions on transit. It also requires

members to impose reasonable fees and charges that would be non-

discriminatory and limited to the cost of service provided.

In the Indian context, India requires transit facilities from

Bangladesh for transporting goods to the north-eastern region while

Nepal, being a land-locked country, requires transit facilities from

India for trading with the rest of the world. It is important to note

that goods to the north-eastern region are transported along the

circuitous route around Bangladesh. Movement of cargo through

Bangladesh would reduce the distance significantly. Also, there are

considerable delays in the cross-border processing at the two

borders. In fact, it has been estimated that such costs would offset

any potential benefits from the reduced distance (Subramanian and

Arnold 2001). If border-crossing procedures are significantly

reduced and if transit access for Indian vehicles is allowed, (which

under the current transit arrangement is not), there will be

significant savings in time and cost. India has preferred to deal with

transit issues at a bilateral level. Not much headway has been made

on this issue with Bangladesh. However, with Nepal the issue of

transit has always been a key feature of the bilateral protocols and

agreements.

Proposals on Article V have been made by Canada, the European

Communities, Korea, Bolivia, Japan, Kyrgyz Republic, Mongolia,

Paraguay, Cuba, Rwanda, Switzerland, and Singapore. The proposals

relate to simplification of procedures for transit, exceptions to the

principle of non-discrimination for sensitive items, regional trade

arrangements and use of international standards.

Simplification of Procedures for TransitMembers have made suggestions on facilitating transit through

simplification of documentary requirements and procedures

required for transit. members have suggested that as fees,

simplification of procedures for transit purposes bears a close

resemblance to provisions of Article VIII the submissions made by

members to the council on Article VIII automatically apply to transit.

In this context, members have suggested that specific guidelines are

needed on how unnecessary procedures can be reduced/simplified.

In addition, requirements and procedures for transit should be less

onerous than those for importation. Other suggestions include

introduction of mechanisms that would institutionalise cooperation

among member countries, harmonising transit policies between

members and sharing of information among custom authorities

could further facilitate transit.

Recognising the need for simplification of transit procedures, the

'Indo-Nepal Treaties of Trade, of Transit, and Agreement for Co-

operation to Control Unauthorised Trade' were revised in 1996 in

which new procedures were to be applied in the clearance of

Nepalese containerised traffic in transit to and from Nepal. India

should accept the suggestion of simplified procedures for transit. As

India is already adopting measures under Article VIII to simplify

procedures for trade, it could accept the proposal to adopt similar

measures for transit purposes

Exceptions to the Principle of Non-discrimination for

Sensitive Items and Goods Requiring Trans-shipmentMembers have pointed out that it may not always be possible to

apply the principle of non-discrimination to all types of

consignments. Certain goods may be subject to special provisions.

However, members should consider the publication of the list of such

'sensitive items'. Similarly it has been pointed out that in cases where

there is a possibility of illegal release of transit goods (as in the case

of land-locked countries), more sophisticated risk management

techniques may be required. Also, goods in transit that require trans-

shipment may need additional inspection (in relation to those that do

not require trans-shipment) to prevent the smuggling of goods in

transit into the transit country.

While India allows Nepal transit facilities, it has faced the problem of

leakage of third country goods into its markets. This issue has come

up time and again with the Indian authorities. In fact the issue of

unauthorised trade has been addressed in the bilateral agreements

between India and Nepal signed since 1961. The Indian customs

6362

maintain a list of sensitive items so that such goods are under closer

scrutiny during transit from Indian soils. However, such a list,

though circulated within customs, is not made publicly available.

Similarly, goods requiring trans-shipment require additional

inspection to prevent smuggling of goods. A large proportion of

goods in transit from India to Nepal first arrive by sea and the Indian

port of Calcutta and are then trans-shipped by road to Nepal. India

could accept the proposal that goods in transit requiring trans-

shipment may need additional inspection.

Regional Transit ArrangementsThe existing Article V requires members to operate national transit

schemes but does not recognise the issue of transit at a regional level.

members have pointed out that the solution to transit can be found

through regional-cooperation, as can be witnessed in some existing

international and regional transit instruments, such as, the TIR

convention, the European Convention on common transit, the

ASEAN Framework agreement on the facilitation of goods in Transit,

and UN instruments relating to transit. Thus, members could

consider the establishment of regional transit regimes within the

framework of Article V.

India plays a dual role in transit, both as a provider of transit

facilities to Nepal and as a seeker of transit facilities from

Bangladesh. Currently India has a bilateral treaty on transit with

Nepal. It is in India's interest to enter into a similar bilateral transit

arrangement with Bangladesh so that it can access the remote areas

of the north-eastern region. However, Bangladesh has been reluctant

to offer transit facilities to India as it fears leakage of Indian goods

into Bangladesh. As the proposals on transit address the issue of

leakage of goods by allowing members to implement additional

inspection on such goods and requesting members to publish a list of

sensitive items, India and Bangladesh could take into account the

suggested measures in framing a bilateral treaty on transit.

Use of International Standards Members have suggested the use of international standards for

transit. Members could consider the possibility of accession to

various instruments relating to transit such as the customs

convention on the International Transport of Goods under cover of

TIR Carnets (TIR convention), Geneva, 14 November 1975; and The

customs convention on the ATA Carnet for the Temporary Admission

of Goods (ATA convention), Brussels, 6 December 1961.The

convention on Temporary Admission (done at Istanbul, 26 June

1990) (as per Annex A as it relates to ATA Carnets).

The TIR Carnet is a road transport document which allows

containerised and in some cases bulk cargo to move through

simplified and harmonised administrative formalities. The ATA

Carnet is designed to facilitate the importation, irrespective of the

means of transport, of goods, which are granted temporary duty-free

admission (including transit, importation for home use and

temporary admission).

The TIR Carnet protocol has four basic requirements: (i) goods

should travel in secure vehicles or containers, (ii) duties and taxes "at

risk" during the journey should be covered by an internationally valid

guarantee, (iii) goods should be accompanied by an internationally

accepted carnet taken into use in the country of departure serving as

a control document in the countries of departure, transit, and

destination; and (iv) customs control measures taken in the country

of departure should be accepted by the countries of transit and

destination.

The TIR Carnets simplifies transit considerably. The TIR Carnets are

issued by the International Road Transport Union (IRU) of Geneva

to associations in participating countries who act as guarantors for

the duties and taxes “at risk” during the journey. Each association

issues TIR Carnets to approved national carriers who meet the

requirements set by the IRU. For instance, every road vehicle as

regards to its construction, equipment and customs sealing device

have to conform to the specifications laid out in the convention. The

association also notifies the IRU with names of approved TIR

carriers and provides a TIR plate, which is placed on each authorised

vehicle. Because the TIR Carnet provides customs with a means to

collect charges not paid by the consignee, TIR Carnet cargo is subject

to fewer delays.

The use of international standards such as the ATA Carnets or the

TIR Carnets, is absent in the South Asian countries. India,

Bangladesh and Nepal do not accede to the TIR convention or the

ATA convention. India uses the ATA Carnet, for a very limited

6564

purpose, mostly for duty free temporary admission of imports. The

requirements of the TIR convention (in terms of specifications for

vehicles and procedures) would be extremely difficult to adhere to

for countries like India, Nepal and Bangladesh. Also, it is difficult to

envisage at present the possibility of the IRU recognising an

association in a Member country that would accept the obligations

and conditions set out by the IRU. At this stage these countries

would be unable to meet the rigorous requirements of the convention

as it would require enormous resources and a fairly large timespan.

India could however accept these international standards on a 'best

endeavour basis'.

Relevance of the Revised Kyoto ConventionThe principles of the customs Transit Procedures are covered in

detail in Specific Annex E, Chapter EI of the Revised Kyoto

Convention and provide for a safe, secure and standard transit

procedure. The WCO encourages its members to accede to

international conventions relating to transit such as the TIR

convention and instruments provided by the WCO on customs

transit that facilitate transit procedures for temporary admission of

goods. They suggest further that if members are not in a position to

accede to these conventions, while drawing up multilateral/bilateral

agreements they should take into account customs transit, standards

and recommended practices mentioned in the Revised Kyoto

Convention. In the South Asian context the issue of transit should be

dealt with under SAFTA. Currently, Article 8 relates to trade

facilitation but it does not explicitly address the issue of transit.

Issues and Concerns of South Asian CountriesSouth Asian countries unanimously agree that pursuing trade

facilitation by itself is advantageous. There is no doubt that any

country that is unable to adopt effective and appropriate trade

facilitation measures would be uncompetitive in the global trading

environment on account of high transaction costs. South Asian

countries incur high transaction costs in trading. Adopting

appropriate trade measures would reduce costs for intra-SAARC

trade and for trading with the rest of the world. The South Asian Free

Trade Agreement (SAFTA) signed in Islamabad in January 2004 has

made provisions for trade facilitation under Article 8. If

implemented, these measures will enhance the pace of economic

integration in South Asia.

South Asian countries have been autonomously pursuing most of the

recommendations made as part of its reform agenda

(Wickramsinghe 2005). For instance, Bangladesh has adopted

measures such as introduction of a self assessment and rapid

clearance procedure, simplification of tariff structure, customs

modernisation and simplification of documentation procedures. In

addition Bangladesh has introduced the SPEED system for customs

assessment and ASYCUDA for customs document processing. Nepal

has introduced ASYCUDA with technical assistance from UNCTAD

and is also working on an Advance Cargo Information System with

technical assistance from the World Bank. Similarly in Pakistan, an

Electronic Assessment System has been introduced to speed up

assessment and customs clearance and to reduce the interface

between taxpayers and tax collectors. Pakistan has initiated a

number of projects with assistance from the World Bank, IMF and

the ADB with the objective of facilitating trade.

A major concern of South Asian countries is the enormous costs that

some of the trade facilitation measures can entail. The July package

addresses some of these concerns. The agreement on modalities

emphasises that negotiations on trade facilitation shall aim to

enhance technical assistance and support for capacity building.

South Asian countries (as all other members) are faced with the task

of identifying their trade facilitation needs and priorities. Trade

facilitation needs can be address through (i) increased efficiency

where no additional costs need to be incurred, (ii) costs required for

automation, (iii) infrastructure related costs. Prioritising costs in this

manner would help South Asian countries in obtaining targeted

technical assistance. It is important to point out that Article 9.2 of

the SPS Agreement states that where substantial investments are

required by developing countries to meet SPS requirements of

importing countries, the latter shall consider providing such

technical assistance. However, this provision has not been effective

because the clause “shall consider providing” instead of the more

mandatory “shall provide” has proved to be ineffective. For instance

in the case of India, to meet SPS and TBT requirements, technical

assistance has been sought from multilateral agencies such as the

World Bank rather than from developed countries. In the ongoing

negotiations the South Asian countries should make an effort to

make the provision of technical assistance from the developed

countries more effective.

6766

While all South Asian countries strive towards lowering transaction

costs, it is important to reconcile provisions under SAFTA with the

ongoing negotiations on trade facilitation in the WTO. A beginning

can be made through adoption of measures such as harmonisation of

standards, mutual recognition agreements, harmonisation of

customs procedures and customs classification and simplification of

procedures. Article V relating to transit could be most effectively

dealt with under the SAFTA mandate. At the same time South Asian

countries could collectively work towards a common agenda in the

ongoing negotiations in the interest of developing and least

developed countries.

Nisha Taneja works at the Indian Council for Research on

International Economic Relations (ICRIER), New Delhi, India.

Author's note: I am grateful to Rohan Kaul for valuable inputs. This

paper is based on ICRIER Working Paper No. 128, Trade

Facilitation in the WTO: Implications for India, April 2004.

Endnotes1 Any penalty may be imposed or any confiscation may be adjudged under

this Act by the Director General or, subject to such limits as may be

specified, by such other officer as the Central Government may by

notification in the official Gazette, authorise in this behalf. (Section 13,

Customs Act, 1962)2 See Annex.3 General Annex, Chapter 3.4 General Annex, Chapter 6 accompanied by extensive implementation

Guidelines.5 General Annex, Chapter 7 accompanied by extensive implementation

guidelines.6 General Annex, Chapter 5.

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6968

Warehousing Facilities in South Asian Customs Laws

Dilli Prakash Ghimire

here are two basic reasons to engage in international trade.

The first is that countries are different to each other, like

individuals, and try to gain benefit from such differences Tthrough trading arrangements, just like a person does. The second is

that countries can achieve economies of scale by specialisation and

large scale production to sale in other country too. International

trade helps increase global output and allows every country to

specialise in goods and services in which it has comparative

advantages. Based on this theory it has been concluded that trade

between two countries can benefit both countries if each country

exports the goods in which it has a comparative advantage. In

practice there is no authority to decide what each country should

produce and export. The production and distribution of goods and

services in international trade is determined by the rule of demand

and supply of the market. Trade between two or more countries

depends upon the mutual gain from trading activities. Countries that

are producing goods at a large scale with low costs of production

maximise their competitive advantage.

After the end of the Second World War, the countries of Western

Europe began to integrate in trade matters. The European Economic

Cooperation organisation was formed to facilitate the regional trade.

Later the European Common (EC) market was formulated. The

Customs Union has conducted an experiment on the effects of trade

integration. It found that roughly US$804 billion extra trade in EC

import and export was created and $1.1 billion trade was diverted.

This success inspired other trade groupings like NAFTA and ASEAN.

Most of these groupings have succeeded in creating trade. The

creation of trade has led to greater demand for transportation and

warehousing facilities, especially in border areas.

The South Asian Preferential Trade Arrangement (SAPTA), which

recently became the South Asian Free Trade Area (SAFTA), is an

immature trade group with a population of more than a billion in a

poor region with high growth potential. The economic growth of the

countries of the region is given in Table 1.

The above table shows that Nepal is the poorest country in the

region, followed by Bangladesh. Cooperation in trade integration and

maximum use of regional opportunities may be the best measures to

wipe out the economic backwardness of the region. Economic

development depends upon the common uses of opportunities,

whether they are natural resources or regional markets. A recent

study shows that the global per capita income is US$700, whereas

the average per capita income in South Asia was only $460 in 2002.

Foreign trade at the regional level could play a vital role in increasing

the per capita income of the region. The South Asia Association for

Regional Cooperation (SAARC) is a poorly functioning regional

association because of the absence of economic inter-dependence

and free trade within the region. The volume of import and export

trade between South Asian countries is shown in Table 2.

Table 2 reveals that intra-regional trade is surprisingly low, i.e.,

intra-regional trade ranges from 4.5 percent to 5 percent of total

exports and from 4.4 percent to 4.6 percent of total imports.

Table 1: Economic Growth in South Asia

Countries

Population in Millions 2002

GNP (US$ billion)

Per capita Income ($)

GDP Growth (%) 2000/01/02/

Bangladesh

136

48.5

356.6

5.9, 5.3, 4.4

Bhutan

0.859

0.5

587.6

5.3, 6.6, 7.7

India

1048

501.5

478.5

4.4, 5.6, 4.4

Maldives

0.28

0.59

2107.1

4.8, 3.5, 4.3

Nepal

24

5.6

233.3

6.0, 4.6, -0.6

Pakistan

145

59.2

408.3

3.9, 2.5, 3.6

Sri Lanka 19 15.9 836.8 6.0, -1.4, 3.0

Total 1393 631.79 460.15

Source: World Development Report 2004.

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Likewise, the income of all countries in the region is also low by

international standards, therefore there is need for faster

development of economies to reduce poverty. Trade creation has

been thought to be the most appropriate means of increasing

production and thereby economic growth. There are many

commodities being imported from outside the region at a price

higher than could be imported from within the region. This may be

because of the absence of information or the more expensive trading

procedures which increase the cost of doing business among SAARC

countries.

Regional trade in the context of globalisation has a vital role for

regional economic development. Economies adopting free trade have

gained faster growth than those reluctant to open up to global

markets. Keeping this fact in mind, SAARC member countries are

trying to open their markets to each other through SAFTA.

It is assumed that harmonisation of trade policies, customs laws and

procedures, and documentation needs could result in the reduction

of cost of doing business. Some of the major reasons for the

differences in the customs laws of regional countries are differences

in revenue need, political systems, trade policy, trade structure,

geographical situations, language, work cultures, organisational

structure, and working days and working hours. These factors are

not very serious bottlenecks in the harmonisation of customs laws,

but can increase the cost of doing business.

Development of Customs Laws in South Asia.Before British colonial rule, the Indian subcontinent was divided into

many states, some small and some big. Historical period are named

after the ruling classes, like the Maurya era and Mughal era.

(Sometimes the word empire is also used). Customs laws in the

Maurya and Mughal periods were affected by the theories

propounded by Koutilya (The Chanakya), who was a renowned

economist in those eras. His theory of economics is well known as

Koutiliya Arthasastra. Chapter 31 of the Kautilya Arthasastra gives

examples of customs laws and procedures, which consist of trade and

customs policies and procedures for goods and passenger clearance.

According to Koutilya, “The government office that collects fees,

duties, and octori is known as Sulkashala (tariff office) and the

person holding this office is known as Sulkadhakshya (hairperson of

duties).” Such offices were generally located in or near the borders of

cities and markets. The provisions of control were similar to modern

customs laws. After the Maurya era, the Indian subcontinent, except

Nepal, Bhutan and Burma, was ruled by the Mughals. During the

latter part of the Mughal period, western traders started visiting the

subcontinent with goods for trading purposes. The goods sold by the

visitors were taxed by the subedar (English translation) concerned of

the Mughal ruler. The ruler of a coastal state also had the

opportunity to collect protection money from the traders, which later

become customs duty.

After the colonialisation of most of the region, the British rulers

enacted the Sea Customs Act 1878, which is the first formal customs

act in this region. After this enactment, goods were checked and

cleared under the relevant sections of that act within the colonies. In

Nepal, rulers promulgated orders having the force of customs acts,

like Ijara or Sanad. They were different for different parts of the

country. Only the understanding with British India some uniformity

in tariff rates was more in the import of Indian goods. The duties

were collected under the Ijara (mutual agreement or contract)

system and also in Amanat (official collection of duties). In the

colonies the basis of clearance of goods was the above-mentioned act.

In those days international trade by air (was there any?) was not

significant as compared to sea cargo. Therefore there was no

provision for air transport at that time. After the end of the Second

World War and colonial era, land and air routes were developed.

Colonial countries formed an most favoured nation (MFN) type of

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

percent of Total Exports

percent of Total Imports

Country

1996

2001

2003

1996

2001

2003

Bangladesh

60.89(1.8)

92.09(1.9)

109.20(2.1)

1129.74(12.0)

1299.11(10.6)

1608.05(11.6)

Bhutan 97.10(98.2)

106.65((98.6)

116.88(99.1)

80.61(79.0)

152.37(85.7)

193.37(92.5)

India 1650.00(5.0) 2051.00(4.7) 2785.00(4.9) 198.00(2.6) 504.00(2.7) 754.00(2.8)

Maldives 10.99(18.6) 16.99(22.3) 15.69(13.9) 60.60(19.8) 93.16(23.5) 114.18(22.3)

Nepal 74.10(19.) 243.80(33.1) 335.18(50.18) 457.00(29.8) 178.53(19.1) 238.05(23.7)

Pakistan 240.00(2.6)

264.00(2.9)

342.00(2.9)

293.00(2.5)

295.00(2.9)

314.00(2.6)

Sri Lanka

109.00(2.7)

157.72(3.3)

350.07(6.8)

647.00(7.9)

712.47(8.1)

1175.4312.9)

Total 2242.08(4.5)

2931.72(4.6)

4054.02(5.0

2865.95(4.5

3234.64(4.4)

4397.08(4.6)

Source: Economic integration in South Asia NRB Research department figures based on IMF publications.

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trade relationship with the UK The association of former British

colonies is known as the Commonwealth. The former members of the

Soviet Union have also formed a trade block. The theory of colonial

exploitation by the mechanism of trade compelled the new nations to

adopt the policy of protection. Different free nations enacted

different customs acts. The customs act of one country differs from

another because of differences in social, political and economic

conditions. The customs laws and rules introduced at that time

underwent various reforms and modifications as demanded by

political and social needs over time. Some countries in South Asia

have well defined customs acts and some are still in the process of

changes and reform.

Provisions of law, procedure and regulation differ because of the

differences in constitutions, trade policy and in the level of economic

development. Some common provisions may be regarded as

exceptions. The customs acts of all nations in the region lay down

common functions, like customs clearance procedures, duties and

responsibilities of customs officials, and traders' responsibilities.

However, there are still some procedural hassles that are time

consuming and increase the cost of regional trade. The development

of the concept of customs warehousing facilities started in the period

of establishment of customs points. It started developing with the

development of trade and customs administrations.

Issues of HarmonisationCustoms warehousing is an integral part of the customs act of any

country. Customs warehouses are such places where dutiable goods

are stored without the payment of duty. Customs warehouses can be

defines as warehouses where goods are deposited without duty

payment at a customs point, place of export or import. or any inland

depot paying warehouse rent on goods deposited. The customs acts

of all countries have provisions for warehouse facilities and define

the term “warehouse” in their own manner. Such facilities are part of

trade and transit facilitation.

As mentioned above, a customs warehouse is a place approved under

a customs act to store dutiable goods in the supervision of customs

officials under the conditions prescribed in law. We can divide

warehouses into two main categories: (i) public warehouses,

including transit warehouses, and (ii) private warehouses including

bonded and duty free shops.

A public warehouse is a common customs warehouse available to any

person to store dutiable goods, while a private warehouse is reserved

for the goods of the warehouse owner. Public warehouses may be for

general use. But in some countries licensed non-public warehouses

are also used to store the goods of importers. Private companies

manage such warehouse. Sometimes the government appoints a

public warehouse keeper and the warehousing function is contracted

out. Such warehouses are open to all importers and exporters. The

goods stored in such warehouse are the responsibility of the manager

of the warehouses. The government may appoint a public warehouse

operator. There are different provisions for customs warehouses in

different countries.

Warehousing is a vast topic. The process of harmonisation of

customs laws is related to legal provisions of customs warehouses.

The customs acts of all countries have provisions for providing

licences to operators of inland customs depots. The terms and

conditions are given in the licence. The importer deposits dutiable

goods in customs warehouse at the time of the imported goods'

arrival at the customs point. In the United States, imported

merchandise is not subject to duty unless officially entered for home

consumption. The owner of the goods or his agent pays warehouse

rent and charges, as per US regulations. The warehouse operator

gives a warehouse deposit receipt. The management aspect of

customs warehouse may differ from country to country. However,

the trade facilitation aspect can be harmonised in this region. A high

cost of warehousing means an increase in cost of production of

exportable goods.

Private warehouses are reserved for the storage of the goods of the

warehouse owner. Such warehouses may exist in numbers and in

different location near an industry, export promotion zone (EPZ) or

SEZ. A private warehouse may be for the use of specified persons.

Duty free shops are also treated as private warehouses. Bonded

warehouse facilities are provided to that importation which is

concerned with re-exportation or as equal to exportation (duty free

sale). The customs administration may grant a licence to a private

warehouse operator. The conditions are specified in the licence. No

goods are released for home consumption from such warehouses. If

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such goods are released for home consumption, customs duty is

levied assuming that such goods have been imported. If the time this

takes is longer than specified in the rules, the licence holder must

provide detailed explanations to customs and request a time

extension. Under Japanese customs laws, goods can be kept in

bonded warehouses for a long time and cleared later on. An industry

wishing to operate private warehouse must apply for bonded

facilities. Such an application must be accompanied by (i) a drawing

of proposed warehouse premises, (ii) documents relating to an

export-oriented industry, (iii) safety measures, and (iii) the

agreement paper If the premises is on rent.

Bonded warehouse facilities are also known as duty deferral

programmes. In industrial estates and export promotion zones, duty

free warehouse facilities are provided where industries are engaged

in producing articles for export. A duty free shop keeps imported

goods free of duty and domestic goods free of internal taxes. It is a

shop under customs control located in specified places, generally at

seaports, international airport terminals and land border crossings at

which travellers proceeding abroad may acquire goods free of duty.

For some specific purposes, duty free shops may also be located in

cities and town under customs control.

Customs acts generally make provision for duty free replacement of

goods. (Annex 7 of the revised Kyoto Convention) The operator of a

duty free shop must get bonded warehouse certificates. A person

wishing to get permission must submit bank guarantee papers to

clear the goods from customs at the time of import. The bank

guarantee is released after submission of sale accounts. Duty free

sale is considered equivalent to export because passport holders and

diplomats purchase goods from such bonded duty free shops. Duty

free shops are of two types, outwards and inwards. Outwards duty

free shops are allowed to sell tax-free goods to individuals departing

from the country. Inwards duty free shops are located in

international terminals between disembarkation gates and customs

processing zones. Such shops can sell duty-free goods to arriving

passengers. The range of purchases is limited.

In Nepal, export-oriented industries are allowed to import their

necessary raw materials under bonded warehouse facilities. To get

such facilities the industry must submit an application with the

necessary documents including schemes of production. The customs

department gives bonded certificates. The bonded certificate holder

can import raw material and capital goods for the industry under a

bank guarantee or pass book (revolving cash deposit) scheme

without payment of duty in cash. The goods produced there must be

exported. After export of such goods the exporter submits export

documents, the bank certificate of payment received for exports in

the customs office concerned, and get the bank guarantee released.

The bonded warehouse user declares goods in customs points and

submits bank guarantees and get clearance under these facilities. He

stores the goods in his own warehouse in the premises of the

industry. The customs official supervises the bonded warehouse of

such industry. There is the provision of duty free shops too.

Customs acts and regulations of each country have provisions for

customs warehouses. The provisions of customs acts of some

countries are given in Table 3.

Table 3 shows that the provisions for customs warehouses in

customs acts of India, Bangladesh and Pakistan are clearer than in

the others. There is a difference in the structure of law in customs

acts. Nepal has provisions for warehouses in rules, especially in

financial ordinances.

Customs Warehousing Procedures Customs warehousing procedures are governed by customs act and

rules. Customs warehousing procedures are those procedures under

which imported goods are stored under customs control in a

designed place (a customs warehouse) without payment of duties or

taxes. (Annex 3 to revised Kyoto convention) It is common practice

that the customs warehousing procedure provides the storage

facilities in the customs warehouse to the dutiable goods with certain

charges specified in notifications. To enter into the warehousing

process, description of all goods intended for deposit is required. The

description of all goods should be submitted at the point of import.

Customs official may provide permission to store the dutiable goods

in the customs warehouse. The warehouse keeper checks the packet

or container that is to be deposited in the customs warehouse, enters

it in the stock record and places it in an appropriate location. Such

stock records must contain all the necessary information for

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warehouse management. The stock record system and location

arrangement system must be approved by the customs

administration. Such systems should be designed to ensure stock

movement, enable stock checking, and facilitate duty assessment.

In India, the superintendent of customs gives permission to deposit

goods in customs warehouses for specified periods and customs

commissioners allow time extensions. Customs inspectors or

preventive officers control customs warehouses. Assistant

commissioners give permission to enter warehouses and to remove

goods from there. The same officer has the power to lock private or

public warehouses and unlock them as and when necessary. When

rent and charges are not paid within 10 days by the importer, the

assistant commissioner allows the sale of goods deposited in

warehouses by that importer. The same officer gives permission to

the owner to deal with goods in warehouses. The assistant

commissioner may permit the transfer of goods from one warehouse

to another. The assistant commissioner has the power of clearance of

warehoused goods for export. He has the power to ask for a deposit

guarantee for the payment of duties.

The person or authority may differ from country to country but the

processes are similar. The manner of handling goods in warehouse

should ensure preservation of the quality of the goods. The

warehoused commodities can be removed temporarily with the

written permission of the appropriate officer of the customs house.Bonded warehouses are private warehouses. There are different

terms and conditions in the bond and licence of such warehouses.

Private warehouses are also under the control of customs. Generally,

such facilities are given to export-oriented industries. Industrial raw

materials imported under this facility are cheaper and ultimately

make the product for export more competitive in the international

market. Industries entitled to bonded warehouse facilities require a

security bond (bank guarantee) for the specified period. Bonded

warehouse facilities can be extended or terminated

Bonded Warehouses in NepalNepal has two types of warehouses: public warehouses in customs

premises (public warehouses that are contracted out by the authority

concerned) and private warehouses licensed as bonded warehouses.

Private warehouse store the goods of the owner. Public warehouse

Table 3: A Brief Comparison of Major Provisions for Warehouses in Customs Acts of 5 Countries in this Region.

Bhutan Bangladesh India Pakistan Nepal

*Department of Customs may approve customs warehouse

*All goods in customs warehouse are under customs control

*Owner right to ware housed goods

*Procedures of clearance of warehoused goods

*Transfer of goods from one warehouse to another

*Warehouse operation

*Storage period for goods in warehouses

*Disposal of warehoused goods

*Application to keep any dutiable goods in warehouse

*Application form

*Warehousing bond

*Warehousing bank guarantee

*Goods forwarding in warehouse

*Receipt of goods by warehouse operator

*Goods shall be warehoused in the container as imported

*Warrant shall be issued by operator

*Control by appropriate officer

*Appropriate officer has the power to open and check

*Access of owner of goods after payment of charges and permission of officer

*Manufacturing operation in relation to warehoused goods

*Payment of rent and charges

*Goods not to be taken out

*Period for which good may remain in warehouse

*Power to remove from one to other

*Clearance of bonded goods for home consumption

*Clearance for export

*Need of application for clearance

*Reassessment when damaged

*Allowances in case of volatile goods

*Duties on goods improperly removed from warehouse

*Procedure on failure to pay bonded duty

*Bond will be registered

*Power to remit of goods if lost

*Responsibility of warehouse operator

*Power to decide where to deposit on what terms.

*Appointing of public warehouses

*Licensing of private warehouses

*Warehousing bond

*Permission for deposits of goods in warehouses

*Control over warehoused goods

*Payment of rent and warehoused charges

*Owner’s right to deal with warehoused goods

*Manufacture and other operations in relation to goods in a warehouse

*Power to exempt imported materials used in the manufacture of the goods in warehouse

*Removal of goods from one warehouse to another

* Clearance of warehoused goods for home consumption

*Clearance of warehoused goods for export

*Allowances in case of volatile goods

*Goods not to be taken out of warehouse except as per law

*Goods improperly removed from warehouse

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

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

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

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

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

*There is the provision for storing goods either in public warehouses or in private warehouses

*The rate of demurrage and charges are given in the rule

Souces: Websites of Bangladesh and Pakistan, Customs Act of India (1962 Commercial Law Publishers India Pvt. Ltd.), Bhutan (2000 Ministry of Finance Royal Government of Bhutan) and Nepal (Ministry of Law and Parliamentary Affairs)

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procedures are similar in each country. However, the process for

bonded warehouses differs from country to country.

The history of bonded warehouse facilities in Nepal dates back to

1987, when the government decided to give garment exporters

facilities to import raw materials free of customs duty and sale tax.

Later the facilities were extended to raw materials imported from

India. These provisions were incorporated in fiscal acts in 1998.

Current provisions are given below:lBonded warehouse facilities are given to the garment industries

intending to export readymade garments to India and overseas.

Industries exporting more than 80 percent of their production to

India are legible to get such facilities.lIndustries entitled to bonded warehouse facilities must submit

bank guarantees for 6 to 12 months covering normal duty plus 25

percent more than normal duty.lThe registration fee for bonded warehouses is NRs5,000 and the

annual renewal fee is NRs2,000.Those failing to renew their

registration within the specified time are charged an additional

NRs1,000 every year.lThere must be a 20 percent value addition on raw material and

auxiliary raw materials at the time of export of the finished

product.lThe product must be exported within 11 months of the import of

raw materials.lThe industry must submit an export declaration form, foreign

currency earning certificates, and raw material consumption

ratio certified by the specified agency to get the bank guarantee

released.lAn additional 25 percent duty is charged on top of normal duty

in case the export related documents are not submitted within 11

months of raw material import. In case of partial export, an

additional 25 percent duty is charged on the raw materials.lBanks and financial institutions are obliged to inform the

customs office concerned one month before the expiry of the

bank guarantee.lBonded warehouse facilities can be extended to the domestic

cloth industry for the import of thread/yarn provided such

industry supplies its cloth to export-oriented garment industries.

Procedures for Licensing of Bonded WarehousesThe Department of Customs has specified procedures relating to

certificate issuance, storage of raw material and auxiliary raw

materials in bonded warehouse, processing and exports. Requests for

bonded warehouse licences must be submitted along with the

following documents:lIndustry registration certificate.lCertificates of permanent account number.lParticulars of goods to be produced and export ratio of previous

year if the industry has been operating from the last year.lName of raw material and, if possible, the quantity required.lCopy of the previous bonded certificates for renewal.lRatio of export at least 80 percent or above for other industries

except garments.

Bonded warehouse licences need to be renewed every year. Customs

asks for tax clearance certificates, a statement of imported or

exported quantity and the consumption ratio. The warehouse

operator is the owner of the industry he follows the direction of

department of customs to operate it. Procedures for operating

bonded warehouse are:lRaw materials and auxiliary raw materials are stored in the

factory warehouse at the owner's risk.lThe owner must maintain a register in a clear way according to

the format approved by the department of customs.lThe bonded warehouse owner is responsible for showing all

details at any time to a customs office.lDuty will be recovered from the bank guarantee if the goods

stored are stolen or damaged. In the same manner, customs will

recover duty from the bank guarantee if the statement is found

incorrect.lIndustries except garments that fail to export at least 80 percent

of production are deemed non-exporting and duty will be

recovered as per the rules.

Nepal is still behind in the industrialisation process. It has small and

medium sized industries. Recent statistics shows that the department

of customs has issued bonded warehouse certificates to 1,119

industries since its inception. Procedures specified in the rules for

bonded warehouses are control oriented. Even so, the government is

facing problems in recovering duties from bank guarantees of non-

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performers.

Need for Harmonisation and ConstraintsThe vast Indian subcontinent is geographically diverse. There are

differences in geographical conditions and patterns of production

between countries and also within countries. Nepal and Bhutan have

no access to the high sea and are land locked. Differences in working

cultures are apparent in public holidays and working hours. Saturday

is the weekly holiday in Nepal, as Sunday is in India . Friday is a half-

day in Pakistan and Bangladesh. The customs administration is

under the Central Revenue Board in India, Pakistan and Bangladesh,

where as it is a department in Nepal. Customs and excise are

integrated in India, Pakistan and Bangladesh. In Nepal, excise was

integrated with the Internal Revenue Department until a recent

finance ordinance established it as a separate department. Culture

and religion are no barriers to trade because all the countries in the

region are trading with America and Europe, which are more

different in culture and religion. Therefore these differences are not

significant barriers to forming a homogeneous trade block. To get the

greatest possible benefit from an open market economy, regional

cooperation should be the starting point for globalisation. In any

international trade, cross border movement of goods and services is

the most important element. The presence of customs at border

points is essential to control and facilitate trade. Customs clearance

is common to each customs point but there are some differences in

procedures.

Following are some reasons to harmonise procedures of customs

operations:

lTraders can be easily familiarised with systems of warehousing

procedures. An understanding of the systems helps to reduce the

handling cost at each customs pointlTo make customs laws in SAARC countries more transparent

and predictable to all in relation to warehousing facilities.lTo create more regional trade for the benefit of the people of the

region.lTo maximise the benefit to each member state through intra-

regional trade.lTo provide cheaper and easier warehousing facilities

Each country has its own customs laws and practices. Harmonising

customs warehousing facilities depends on the availability of open

space and reform programmes in customs administrations. The land

crossing points of most of the countries in the region are very

congested. Land customs do not have big warehouses. Some ICDs

have big warehouses but they are not well managed. A recent study

conducted by the SAARC Secretariat on harmonisation of customs in

the region states that the international airport customs houses in the

region are well developed.

The customs facilities available in each airport differ. The

international airport cargo complex in the more developed countries

(India, Pakistan and Sri Lanka) are comparatively better equipped

with modern facilities than the airport customs in the least developed

countries (LDCs). The international airport customs houses are

limited in numbers and the trade through them is not huge. There

are many land customs points, especially between India and

Pakistan, India and Nepal, India and Bangladesh, and India and

Bhutan.

Bangladesh has seaports and developed warehouses there long ago.

But land customs do not have similar warehouses. The Bangladesh

Observer edition of 3 March 2005 reported that customs facilities in,

Hilly Dinajpur, Sona Masjed, Chapinawabganj, Burimai and

Lalmanighat are unsatisfactory. The same situation can be observed

in Nepal. Many customs houses lack customs warehouse facilities.

One ICD recently came into operation and two other customs houses

contracted out their management to private parties. Other customs

houses lack warehousing facilities. Nepal has no seaport but manages

public warehouses in Kolkota for the storage of transit goods.

Phuentsholing is the main land customs house in Bhutan. It is an

important gateway to Thimpu. A recent study stated that Bhutan

does not have sufficient warehousing facilities. India has seaports

and developed warehouses there. The warehouses of ICDs in India

are well managed. Land border customs houses like Raxual Jogbani,

Kakarvita, Sunouli, Baharaich (Nepal), Jaigaon(Bhutan), Petrapole

Burimari (Bangladesh), and points bordering Pakistan near Lahore

do not have sufficient customs warehousing facilities to promote

regional trade. Pakistan has seaports with warehousing facilities.

Land customs houses do not have sufficient warehouse facilities to

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promote regional trade. Pakistan has major land border customs like

in Lahore. Sri Lanka and the Maldives are island countries, and thus

have no problems with congestion at land borders. They have

seaports and airport cargo complexes. Warehouses facilities are

directly related to seaport and airport development there.

In Nepal, international business activities are conducted through

land customs that are poorly equipped with customs warehouses.

Customs wards are congested. Customs points have traditional

designs unable to meet the modern demand for trade, transit and

transport. Thus there is inadequacy of open space in customs point

with limited warehouse facilities. For example, look at the facilities at

border crossing points between India and Nepal or India and

Bangladesh. There is a narrow road at the crossing point at Raxul in

India and Birjung in Nepal. There we can see congestion and

environmental degradation. In land customs there is poor

infrastructure and customs warehouses facilities are also poor. Cheap

warehouse facilities are necessary to facilitate trade.

Under the boot scheme, public warehouses are handed over to

private contractors to manage. The warehousing charges levied by

the private operator results in increasing the costs of import. If the

charges are high in raw material or other merchandise, the cost of

import/export increases. This ultimately acts like a non-tariff

barriers to importers. High storage costs for raw material hampers

the exports of the country by increasing the cost of production.

Therefore, harmonising the procedures of operation of warehouses is

needed for the development of regional trade.

Customs unions have been developed to create free trade areas

among countries, whereby tariffs are lowered within the union and a

joint tariff wall established against countries outside the union. Laws

must be enacted to address this problem, because in the SAARC

region there are special trade arrangements, like the “fixed

favouritism” arrangement. Customs laws cannot be harmonised

without taking trade policy into account. Such 'fixed favouritism'

arrangements for certain goods exist between Nepal and India, Nepal

and China, India and Bhutan and India and Sri Lanka. There is

competition within the region in export to developed countries of

goods like garments, carpets and handicraft products. But some

countries in the region are more advanced than others. For example,

India, Pakistan and Sri Lanka are more advanced than Nepal,

Bhutan and Bangladesh in production of capital and consumer

goods, as well as agriculture products.

Recent studies have shown that the customs act in Nepal is complex

and needs reform. There is no provision for customs warehouses in

the Customs Act 1962. The government is trying to bring in a revised

customs act. The draft customs act has tried to collect public opinion

and is likely to incorporate the appropriate provisions of revised

Kyoto conventions. The draft customs act is still under consideration

of the Government of Nepal. Naturally, there are many differences in

customs procedures, formats and formalities in the customs laws of

the countries in the region, but they can be harmonised. A regional

customs cooperation initiative could contribute a lot in this direction.

The customs acts of India, Pakistan and Bangladesh have provisions

for customs warehouses. They also have provisions for transit cargo,

but Nepal's customs act does not have such provisions. In the context

of the 'Asian highway' and declared policy of developing Nepal as a

transit trade route for India and China, it seems appropriate to

incorporate transit and warehousing provisions in the proposed

amendment of the customs act of Nepal. Major constraints on the

harmonisation of customs warehousing are given below:

Lack of customs cooperation. Trade facilitation and customs control

are the main elements of customs cooperation. There are basic legal

as well as socio-political differences. These factors are more artificial

because these differences are not as deep as the differences between

Japan and India or Pakistan and Portugal. The mental attitude of

limiting trade among countries in the region is political. This is the

major barrier to the free flow of goods and passengers in the region.

Non-transparent and unpredictable procedures. International trade

generally faces warehouse difficulties in four areas: (a) Non-

transparent and unpredictable warehousing procedures, (b)

burdensome handling charges, (c) inefficiency in the use of modern

technology in customs warehouse management, and (d) complex

customs formalities.

Lack of infrastructure. Such problems are directly or indirectly

related with customs and trade laws. Without understanding general

guidelines and defined administrative rules, officials can make

8584

different interpretations in implementing customs laws. Physical

examinations may be burdensome and time consuming. Automation

in customs processes has been promoted in recent years. But the

space availability for warehousing purpose is very limited. Even after

automation in other customs processes, sometime customs officials

insist on the submission of documents and formalities which were

necessary before automation. All countries in the region have

established tariff repayment schemes to promote investment in

export-oriented industries but there is inadequate use of automation

in warehouses. The warehousing process is traditional and cannot

meet the demand of current regional trade. The congestion in land

border customs and limited open space are major hurdles in the

development of warehouses.

Rent and charges as non-tariff barriers. The trade flow between the

countries in the region is not smooth. Import and export procedures

permits and licences and high rent and charges of warehouses are

acting like non-tariff barriers to regional trade. For the development

of regional trade, all non-tariff barriers like transit control, permits,

quotas and licences, should be removed. Import and export

procedures must be harmonised, simplified and automated to

regionalise trade . Customs warehousing procedures should promote

regional trade. The high rent and service charges of warehouses also

impede regional trade.

ConclusionSAARC as a regional association has the main objective of mutual

economic cooperation between member nations. There are various

problems which need to be solved. Some of the problems and their

suggested solutions are as follows:Harmonisation in warehousing facilities through customs

cooperation. A customs cooperation arrangement is needed to

facilitate trade in the region. An agreement on regional customs

cooperation could address the hassles in customs procedures

including warehousing. It could help to make customs procedures

uniform and harmonise laws relating to warehouses in member

countries. An umbrella organisation could be established under the

agreement and work as an expert group on customs matters,

including customs warehouses, and supply technical assistance to

members. Warehousing facilities could be developed in the line of EC

countries.

Harmonisation and standardisation of laws including customs

warehousing. In most South Asian countries, customs duty is one of

the oldest and most important sources of revenue. In the latter part

of the 20th century, international trade increased in volume

throughout the world. South Asia was also affected positively with

the increasing international trade. International trade became a

revenue motivator in many economies. The trade globalisation

process expanded rapidly and business competition pushed the

region towards further development .The new situation in

international trade demands a free and smooth flow of goods and

services .For this reason customs services are under pressure to

simplify and harmonise their facilities and procedural laws. The

rapid growth in international trading activities has found many

customs administrations in this region unprepared to cope with the

demand for change in laws. Many countries whose governments

depend on customs revenues are unready to change their style of

operation. Modernising an old and traditional system of operation is

a very difficult task. However, the customs administrations in this

region cannot avoid globalisation of trade and the corresponding

need for standardisation and harmonisation of customs laws. We

should learn to use globalisation in the mutual interest of the people

of this region. The WCO has introduced a number of standard

instruments to maintain a balance between customs control and

trade facilitation by harmonising laws, facilities and procedures.

Harmonising customs laws and rules will provide mutual benefit in

low cost.

Transparent and predictable warehousing procedures. The need for

transparency in all areas of governance is common in developing

countries. Traders complain that customs warehousing procedures

are non-transparent and unpredictable. The following reform

measures are recommended: (a) Regional harmonisation of customs

warehousing laws and procedures, (b) publication and regional

distribution of customs rules and procedures manuals, (c)

development of cheap and secured modern warehousing facilities at

custom points, and (d) automation of warehousing records and

processes.

Warehousing charges. Traders have always complained about the

many non-tariff barriers to regional trade in South Asia. Non-tariff

barriers of any form are impediments to the free flow of goods. Trade

8786

facilitation at the regional level is a major issue to be addressed at

high-level meetings of regional leaders. High costs of warehousing

facilities increase the cost of import/export. High warehousing

charges on inputs in manufacturing ultimately affect exports.

Harmonising warehousing charges will ease this problem.

The South Asian region is vast in size, having one fifth of the world's

population, and is developing faster than before. Since 1990, all the

nations of the region have started economic reforms leading to

globalisation, liberalisation and simplification of trade. Regional

cooperation between these countries would help to bring down tariff

rates between member countries and bring in common rates for the

rest of the world. This would result in the enhancement of trade

among SAARC countries. Since 1990, many changes have taken place

in the trade policies of the region. Many reforms have taken place in

customs laws in the recent past but more is still to be done.

Harmonising laws governing trade transit and warehousing will to

increase intra-regional trade.

There are many areas that need harmonisation, such as storage and

warehousing operation procedures. Uniform functions, processes

and warehousing facilities in juxtaposed customs houses can

facilitate trade and minimise cost. Providing systematic and

transparent transit facilities to countries that don't have access to the

sea can lower trading costs. If transit and warehousing facilities are

allowed between western Nepal and Pakistan or from Bangladesh to

Eastern Nepal through the proposed 'Asian highway', trading costs

will decrease. Trade between India and China is expected to increase

by using Nepal as a transit point. Such developments may demand

new and well-designed warehousing facilities.

European trade integration started in 1948 and began to function

well within a decade of the formation of the EC in 1958 by the Treaty

of Rome (1957-1958). Since the formation of the EC, more and more

countries are joining the trade block. But SAARC has not made any

kind of progress towards trade integration among member countries

and others. It seems that SAARC countries have a habit of

quarrelling with their neighbours by cultivating friendships with

more distant countries.

Political dislikes and economic needs are two different aspects of

relationships between countries. This is not happening in the case of

SAARC countries. The idea of establishing an Asian monetary unit

was mooted along time ago but the idea has now faded. The US

dollar has remained the only means of settlement of payment of

trade. Harmonisation of customs laws is directly affected by trade

policies. Forming a trade block means allowing comparatively free

flow of goods among member countries of the block and

comparatively restricted trade with the rest of the world.

Customs laws including warehousing facilities need to be

harmonised as mentioned in this paper. Recommendations

mentioned in this paper are not absolute. These recommendations

are made to float ideas with the hope that more knowledgeable and

constructive suggestions will come from scholars in related fields.

There must be willingness to trade among member countries for the

mutual benefit of the people of the region. The harmonisation of

trade policy and customs laws will then be easier to formulate. The

will to trade needs to be converted into policy mechanisms and other

instruments, which include harmonisation of customs acts.

Dilli Prakash Ghimire is a customs consultant based in Nepal.

ReferenceslUN Publications World development reports 2004lWCO Publications Kyoto Conventions Annex General guidelines.lFNCCI/DFID/ACP Banshidhar Ghimire and Dilli Prakash Ghimire

(CPPD). A study on legislative reform on Customs valuations 2005

KathmandulFNCCI/ADB Vidya Nath Nepal CPPD A study on export tax policy on

Nepal 2005 KathmandulADB Simplification of Customs procedures towards close co-operations

and trade expansions 2003 Manila.lIMF Publications Edited by Michael Keen Changing Customs 2003

Washington DC USA.lWorld Bank and International Finance Cooperation's Foreign

Investment Advisory Services SOUTH ASIA ROUNTABLE Richard

Filmer 2003 Maldives.lCustoms Acts Bangladesh, India, Nepal and Pakistan.lSAARC/GEC o4/10 Y.S. Sharawat Role and scope of customs in trade

facilitations 2004 Kathmandu.lNEPAL RASTRA BANK Economic integration in South Asia 2005

Kathmandu NepallPaul R. Krugman and M.Obstfeld International economicsA.W.

Longman pvt ltd.India Branch New Delhi 2000.

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lS. Dutt .Majumder Customs Valuations Law and practices Centax

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

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

Publishers Ltd. lKindleberger International Ecomonic 8th edition 2002 Publisher

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

Varansi 1988

Valuation of Goods in CustomsM Sulaiman Khan

he value of any product is the cost of its inputs plus the cost of

its production, but more importantly a measure of its

availability or scarcity and the relative demand. Generally Tspeaking, the fewer the goods and greater the demand, the more

expensive a product, and vice versa. But who and how does anybody

assess the value of anything? In this age of the market economy, we

say that the market determines the value of goods. This of course is

in turn dependent upon the other forces working within the market

and those influencing it from outside. This takes us to the market

phenomena of hoarding, monopolies, ease of transportation of goods

to markets where these are to be bought and sold, and the access of

buyers to markets. It is further complicated by the addition of costs

such as freight, insurance, advertisement, cost of patents and

designs, and of course the fees and charges recovered by

governments and public sector agencies at various levels, e.g., ports.

The valuation of goods has always been a point of dispute and very

contentious throughout history. People commonly talk of goods

being very expensive or very cheap, prices being exorbitant or

extortionate. In modern times even governments have clashed over

goods being undervalued and dumped and poor countries being

deprived of good treatment because of expensive patented

medicines. The two latest examples of these are HIV medication and

Tami Flu, the only treatment available for bird flu. When the

valuation of goods is discussed, many poor countries still talk of loss

of revenue from import duty and other import levies. This has led to

a large number of disputes among the various countries of the world

9190

under anti-dumping, safeguards, subsidies and countervailing

measures in Article VII of the Valuation Agreement of the World

Trade Organisation (WTO) and the Agreement on Preshipment

Inspection.

GATT 1994 and Agreements of the Uruguay Round There have been a large number of cases under the dispute

settlement mechanism. For this reason, various articles were

introduced under GATT 1947 to take care of different aspects of

valuation and related matters. These articles were:lArticle VI Anti-dumping and Countervailing DutieslArticle VII Valuation for Customs Purposes

Article XVI SubsidieslArticle XVII State Trading Enterprises.

All these articles and deliberations over the issues resulted in full-

fledged agreements during the Uruguay Round negotiations. Article

VII, however, did not permit the customs administration to reject the

declared value (the transaction value) except according to strict

conditions and clear-cut evidence. Even before the start of the

Uruguay Round, many developing countries objected to this and it

was agreed at the end of the Tokyo Round that customs should have

some authority to object to values if it doubted the accuracy or

truthfulness of the declared values. The decision was as under:

“Decision Regarding Cases Where Customs Administrations

Have Reasons to Doubt the Truth or Accuracy of the

Declared Value.

Reaffirming that the transaction value is the primary basis

of valuation under the agreement on Implementation of

Article VII of GATT 1994 (hereinafter referred to as the

“Agreement)”;

Recognising that the customs administration may have to

address cases where it has reason to doubt the truth or

accuracy of the particulars or of documents produced by

traders in support of a declared value it was decided as

under:

“When a declaration has been presented and where the

customs administration has reason to doubt the truth or

accuracy of the particulars or of documents produced in

support of this declaration, the customs administration may

ask the importer to provide further explanation, including

documents or other evidence, that the declared value

represents the total amount actually paid or payable for the

imported goods, adjusted in accordance with the provisions

of Article 8 of GATT. If, after receiving further information,

or in the absence of a response, the customs administration

still has reasonable doubts about the truth or accuracy of the

declared value, it may, bearing in mind the provisions of

Article 11, be deemed that the customs value of the imported

goods cannot be determined under the provisions of Article

1. Before taking a final decision, the customs administration

shall communicate to the importer, in writing if requested,

its grounds for doubting the truth or accuracy of the

particulars or documents produced and the importer shall

be given a reasonable opportunity to respond. When a final

decision is made, the customs administration shall

communicate to the importer in writing its decision and the

grounds therefore.”

Even after the final decision there is always a forum for appeal and in

many cases, e.g. Pakistan, there are two or three stages of appeal.

The agreements resulting from the Uruguay Round which one way or

the other related to the value or price of goods were:lAgreement on Implementation of Article VI of the General

Agreement on Tariffs and Trade 1994 (Anti dumping), lAgreement on Implementation of Article VII of the General

Agreement on Tariffs and Trade 1994 (Valuation), lAgreement on Preshipment Inspection, lAgreement on Subsidies and Countervailing Measures, lAgreement on Safeguards lAgreement on Preshipment Inspection.

These agreements are binding on all countries who are signatories to

the WTO Marakesh Declaration of 15 April 1994, and those who

joined the WTO later. Their number has now touched 150 and

continues to grow.

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

9392

worth or price of something; the amount of goods, services, or money

that something will command in an exchange.” The same dictionary

defines fair market value as “the price that a seller is willing to accept

and a buyer is willing to pay on the open market and in an arm's-

length transaction. It is also termed as fair cash value and fair market

price etc.” The value for customs purposes was defined in the Sea

Customs Act 1878 and the Customs Act 1969, in almost identical

manner:Sea Customs Act 187830. Value of imported goods. (1) The value of any imported

goods shall be taken to be the normal price, that is to say,

the price which they would fetch, at the time the bill of entry

is delivered to the customs Collector under section 86, on a

sale in the open market between buyer and seller

independent of each other.”

Customs Act 196925. (1) The value of any imported goods shall be taken to be

the normal price, that is to say, the price which they would

fetch, on the date referred to in section 30 on a sale in open

market between a buyer and a seller independent of each

other.”

The problem with these broad definitions was that the relationship of

the buyer and seller and the circumstances of the sale, e.g., quantity,

supply period, discounts, costs of services and assists, provided by

the seller after the sale, e.g., advertisements, were not provided in the

main statute. These were later corrected through the Valuation Rules

and rulings of the Customs Cooperation Council (CCO) under the

Brussels Definition of Value (BDV) system.

Evolution of MoneyIn the prehistoric period, commodity or cattle were used as money,

but there were difficulties in measurement of value. The first stage in

evolution of money was 'commodity and barter', including animal

skins, arrows, grains, stones, tools and cowries. Commodities were

followed as money by coins and then paper notes. Different societies

used different commodities. The rule of demand and supply was used

for exchange of goods and services. This was managed by the

adoption of various metals like iron, copper, bronze and nickel for

such transactions by weight. These metals were also used as

standards of value. Next came the use of precious metals, i.e., silver

and gold. The ratio of one metal to another was determined by the

organised authorities, e.g., the kings and later the

governments/states. Thereafter coins replaced metals. In the early

stages cheap metals (copper, bronze and nickel) were used. However,

later on coins were minted with silver and gold. In modern societies,

now only cheap metals are used as coins. The fifth stage in the

evolution of money was the use of paper money, which includes

government notes and bank notes. Nowadays, 'credit money' is

becoming very popular. This includes promissory notes, bills of

exchange, traveller's cheques, credit cards and debit cards. In

common parlance, credit cards and debit cards are called plastic

money. The use of plastic money is now very common in the

developed world. The developing world is following the trend and

trying to catch up. Today even supermarkets have their own credit or

debit cards. The only problem with plastic money or credit money is

the exorbitant rates of mark-up or interest charged on money paid

after a certain “free” period. These in some cases exceed 100% per

annum.

Purpose of ValuationValuation for imports and exports is used by governments as a tool to

control prices; to fix values to control under-invoicing or over-

invoicing; to fix values to control dumping; in use of the concept of

“notional values” to check loss of revenue by the National Exchequer

(Section 25-B of the Pakistan customs Act, 1969); to ensure fair

prices, especially for agricultural products, to safeguard ordinary

farmers who do not have holding power; to subsidise consumer

goods through state trading enterprises to protect vulnerable classes

of society; and to control and predetermine prices in local markets to

protect the general public from overcharging, e.g., the practice in

Pakistan to fix meat and milk prices at the local government level.

Historical BackgroundA short historical perspective of the concept and law of valuation in

Pakistan would provide a clearer picture of the how the valuation law

has evolved in Pakistan. Value under the Sea Customs Act 1878 was

based on “real value”. Real value was defined as the wholesale price

for which goods are capable of being sold at the time and place of

importation (excluding duties payable). The Sea Customs Act also

9594

contained provisions allowing the government to take over the

imported goods on payment of an amount equal to the declared real

value if there was suspicion or evidence of gross under-invoicing.

Value under the Customs Act 1969 talked of “normal value”. This

concept was very close to the real value of the Sea Customs Act 1878

and most of its provisions were the same or quite similar.

Brussels Definition of Value After the Second World War, some countries in Europe formed the

Customs Cooperation Council (CCO) in 1952 with its headquarters at

Brussels. The council has now grown into a full-fledged international

organisation, the World Customs Organisation, with 150 country

members. Among the various aspects of customs and international

trade, such as a harmonised coding system for classification of goods,

a uniform valuation code was one of the major concerns. The council

developed a valuation system commonly called the Brussels

Definition of Value (BDV). BDV is based on a notional concept,

which treats customs value as the price at which goods would be sold

(the price which goods would fetch) in the course of international

trade, the essential elements being price, time, place, quantity and

commercial level. The emphasis is on the intrinsic value of the goods.

By the beginning of 1970, over 100 countries were applying BDV.

However the USA, Canada, Australia and New Zealand refused to

join the BDV and advocated a “positive concept” requiring customs

to determine the value on the basis of actual price paid for the goods.

In their view the positive concept considerably reduced the

discretion available to customs and thus facilitated trade. However,

in practice, the perceived difference between the notional concept

(BDV) and positive concept were was significant, as explanatory

notes to BDV had already considerably reduced the discretion of

customs administrations.

In 1969 Pakistan repealed the Sea Customs Act 1878 and the Land

Customs Act 1934 and promulgated the new Customs Act 1969 (IV of

1969). The new act came into force on 1 January 1970. Earlier,

Pakistan had acceded to the Convention on the Valuation of Goods

for Customs in the Customs Cooperation Council, Brussels, on 14

October 1957. This convention was initially signed by a large number

of countries on 15 December 1950, and entered into force on 28 July

1953. This convention established the Customs Cooperation Council

as the focal institution to supervise the operation of the convention

with a view to securing uniformity in its interpretation and

application. With that end in mind, a valuation committee was

established, on which each member of the council had the right to be

represented. This convention established the BDV with the object of

providing an equitable system for determining the CIF value of

imported goods. The Definition of Value, which constituted

Annexure I to the Convention on the Valuation of Goods for Customs

Purposes, provided the basis for determining the value of exported

and imported goods for appraisement of customs duty. The said

Definition of Value was actually incorporated into Section 25 of the

Customs Act 1969, with slight modifications. The definition of value

in BDV is designed to (i) provide for the establishment of customs

values by reference to a formula to be uniformly applied to all classes

of importations, thus ensuring equitable treatment as between all

imported goods; (ii) conform as closely as possible to commercial

practice in open market conditions; (iii) ensure that customs

administrations are safeguarded against evasion of duties and taxes;

(iv) ensure that honest traders are protected against unfair

competition and arbitrary administration; and (v) meet the needs for

commercial simplicity and administrative convenience.

These requirements are met by:lselecting the standard of the price made under a contract of sale

concluded in respect of the imported goods, and in the open

market between a buyer and a seller independent of each other;lgiving precision to this standard by specifying the contract of

sale to be a contract concluded at a price appropriate to the time

when the duty becomes payable, and giving delivery to the buyer

at the port.

Setting up this standard in the Definition as a notional concept

expressed in terms of the price which the goods “would fetch” on a

sale conforming, inter alia, to the conditions envisaged at (a)(i),

(a)(ii), (b)(i) and (b)(ii) above.” [The above sections are not marked

as (a)(i), (a)(ii), etc]

These recommendations were not incorporated into the Customs Act

1969. However these were incorporated in the rules framed there

under, issued by the Central Board of Revenue under Section 219 of

the said act (CGO 1 of 1981). In fact the concept of timeframe and

9796

quantities was also introduced in the same CGO 1 of 1981. Through

this, e.g., it was established that quantity discounts were permissible

and at the date of contract of sale, if the sale was made within the

timeframe of the contract, the original price was acceptable.

The scourge of under invoicing in high tariff items and over-

invoicing in items which were zero rated or exempted or where the

duties were reduced, to say 5%, was endemic in Pakistan's imports

and exports. Over-invoicing was also a problem in exports where

duty drawback rates were high. The Government of Pakistan

therefore decided in December 1988 to introduce a new provision in

the Customs Act to fix values based on certain rules, to curb under-

and over-invoicing. These values were by and large fixed in

consultation with representatives of trade and industry. This new

section reads:

“25B Fixation of Value for Imports and Exports. (1)

notwithstanding anything contained in section 25, the

Board or such officer as is authorised by…………. (2)

Different values may be fixed for different classes or

descriptions of the same type of goods.”

This led to notifications fixing values for a large number of imported

items where under- or over-invoicing was suspected. This system

continued for many years and was officially stopped in the year

2000. These values were fixed on the basis of printed prices, e.g., the

Metal Bulletin, the Japan Textile News; the information provided by

the representatives of trade and industry; and in some cases by

collecting market intelligence or by computing the value.

Tokyo Round and Uruguay Round (WTO Agreement on Valuation)Efforts to limit the discretion available to customs were made during

the preparatory and the first phase of the Tokyo Round of

negotiations (1970-1977) by developing in GATT “draft principles

and interpretative notes” to BDV. It was expected that the resulting

precise criteria would induce the USA, Canada, Australia and New

Zealand to change their systems and join the BDV. The elaboration of

these texts, however, had no effect on these countries' negotiating

stance.

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

unexpectedly announced a dramatic change in its position. It

declared that EU countries had agreed to make a fundamental

change in the valuation system by opting for a positive approach and

that the proposals it was making were based on what it “believed to

be good features of the United States Valuation System”. The draft

agreement which it presented provided that in almost all cases,

customs should determine dutiable value on the basis of “price paid

or payable” for imported goods in the particular transaction.

Customs could reject the transaction value only in exceptional cases

by providing precise reasons for doing so. In all such cases however,

customs was expected to determine value by using the five prescribed

methods, applying them in the hierarchical order in which they were

listed.

In international negotiations, countries often change their positions

by redefining their objectives. But in this case, the decision of the

European Union amounted to agreeing with the adversary, in the

middle of negotiations, that the position the adversary was taking

was right and its own stand was wrong. The reaction of developing

countries to the EU proposal was of surprise and disbelief. Many of

them were only recently persuaded by the CCC to join BDV or to

apply it on a de facto basis. The CCC, while working towards BDV,

considered itself badly let down by the EU on whose support it had

relied till then.

One of the major concerns of developing countries was that the

system proposed by the EU, which required customs to accept the

transaction value declared by the importers, would not enable them

to deal with the practices resorted to by traders of under valuation of

goods and with other customs related malpractices. They therefore

wanted a degree of flexibility in the rules to enable their customs

authorities to reject the transaction value when they had reasons to

doubt its truth or accuracy. This the EU and USA refused to concede

once they were able to secure support for the basic ideas in the

proposal from the other developed countries. In the Tokyo Round

the only concession which developing countries were able to achieve,

despite the arduous efforts they made, was the acceptance that a

developing country acceding to the agreement could delay its

implementation by five years.

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

9998

wait till the beginning of the Uruguay Round to get acceptance of

their contention that the difference in economic situation and

trading realities would require provision in the rules that would

enable them to reject the transaction value when had have sufficient

reasons to believe that goods had been deliberately under- or over-

valued by importers in collusion with exporters. The “decision

regarding cases where customs administration have reasons to doubt

the truth or accuracy of the declared value”, which was adopted in

the Uruguay Round, provided under certain conditions the right to

customs administrations to reject the transaction value in cases, inter

alia, of deliberate under-valuation and proceed to determine value on

the basis of other methods provided in the agreement.

Transaction ValueIn GATT (1994) it is the value or price agreed between the buyer and

seller in an individual transaction which has been protected, unless

evidence can substantiate a fraudulent transaction. In GATT (1994),

post-import investigation is more important than passing a value

judgment at the time of import. A transactional value cannot be

rejected simply because there are some imports made at the same

time at higher prices. It has to be shown that invoice price is not

genuine and does not show the real price paid for the goods in

question. An invoice price cannot be routinely discarded except on

the strength of clear evidence that the invoice is not genuine and

does not show the real price settled between the importer and foreign

exporter and that some other underhand transaction has also taken

place between the importer and exporter. Simultaneously the plea of

enhancement is not tenable where no evidence has been produced to

justify any enhancement of the value of imported goods. Customs

cannot simply depend or rely upon another transactional value

having no relationship with the changed scenario between the

imports and exports in a particular case. If there is no evidence then

it is not permissible to reject a commercial deal based on the concept

of transaction value.

In Pakistan, implementation of the new system of valuation based on

transaction value started with effect from 1 January 2000. Pakistan

was one of the countries that availed the 5-year transition period

allowed under the Agreement on implementation of Article VII of

GATT 1994. The ITP based system of valuation ceased to operate

with effect from 1 January 2000. Many steps were taken to ensure a

smooth changeover to the new system. These included:lA notification SRO 1375(I)/99, dated 28 December 1999, to give

effect to the revised sections 25 and 30 of the Customs Act, 1969,

was issued by the Federal Government.lCustoms Rules to regulate the valuation of imported goods in

accordance with the new system were issued by the Board vide

SRO 1369(I)/99, dated 24 December 1999, later SRO.

450(I)/2001.lIn order to assist the customs staff and trade, a valuation

database was developed. The database of major items of imports

was prepared jointly by the customs administration in

collaboration with the trading community taking into account

(a), the evidence of physical imports over the last three months,

(b) the latest ITP valuation manual, and (c) valuation advice

issued in the recent past by the Valuation Department.

The database was intended to facilitate the acceptance of the

declared values and to bring about transparency in those cases where

customs values needed to be enhanced. Certain guidelines were also

issued to impart transparency and predictability to the system.

A valuation committee and an appellate forum were also created

through the same orders to enable importers to settle complicated

cases and to seek redressal of their grievances immediately. The

committee consisted of:lthe additional controller of valuation in Karachi/Lahore as the

chairman (In case of dry ports, the collector of customs or

additional collector was to chair such committees); la representative of the collector concerned; la representative of the relevant association; and l(any other person or expert, on the invitation of the chairman of

the committee, whose presence may be considered useful for

resolving the issue under consideration.

The appellate forum, in case of disagreement was referred to as the

valuation committee of appeals consisting of the controller of

customs valuation as chairman; a nominee of the relevant

collectorate; a nominee of the Federation of Pakistan Chambers of

Commerce and Industry (FPCCI); and a nominee of the chamber of

commerce and industry concerned.

101100

In the following cases, transaction values as declared in the bill of

entry were accepted without objection: lCommodities where the incidence of taxes was less than 10%,

except such commodities which were excluded from the system; lgoods imported by the federalor provincial governments,

government or semi-government organisations and diplomatic

missions; and lgoods of such individuals or companies which were being

cleared under the immediate clearance system.

Under-developed countries have often expressed concerns that the

WTO valuation system results in a loss of revenues for them. These

countries continue to express their fears, including in many cases

where multinational companies overvalue their goods because of

their monopolistic positions (e.g. where they have long term patents

for medicine or software).

The major objection to the WTO valuation agreement relates to the

fear that its provisions encourage gross under-invoicing and over-

invoicing. Such an apprehension stems from a misperception that

Article 1 of the agreement invariably requires customs to accept the

transaction value and that customs has no jurisdiction to reject “tag

prices", even if these are wrong. A typical example is India, which

reported a loss of revenue of 5 to 10% percent in its formative years

and pleaded that this loss had been occasioned since they could not

challenge transaction values, even if these were misdeclared or

under-declared. India was, however, advised by the WCO that it was

wrong in assuming that it could not reject the transaction value and

it could clearly initiate actions in terms of Article VII and XVII of the

agreement if it found that importers were mis-declaring their prices.

The above view was further confirmed by the Ruling No. 2.1 issued

by the WCO under the title: "Acceptability of a price below prevailing

market prices for identical goods". The WCO was asked to advise

"whether a price lower than prevailing market prices for identical

goods can be accepted for the purposes of Article 1 of the Agreement

on implementation of Article VII of the General Agreement on Tariffs

and Trade 1994". The Committee on Valuation considered the

question and advised that the "mere fact that a price is lower than

prevailing market prices for identical goods should not cause it to be

rejected for the purposes of Article I, subject of course to the

provisions of Article XVII of the Agreement". Article XVII reads as

follows:

"Nothing contained in this section or the rules, shall be

construed as restricting or calling into question the rights of

the appropriate officer of customs to satisfy himself as to the

truth or accuracy of any statement, information, document

or declaration presented for customs valuation purposes ".

The position was made further clear by the Valuation Committee of

the WTO, which by its decision No. 6.1, taken on 12 May 1995,

decided as follows:

"When a declaration has been presented and where the

customs administration has reason to doubt the truth or

accuracy of the particulars or of documents produced in

support of this declaration, the customs administration may

ask the importer to provide further explanation, including

documents or other evidence, that the declared value

represents the total amount actually paid or payable for the

imported goods, adjusted in accordance with the provisions

of Article VIII. If, after receiving further information, or in

the absence of a response, the customs administration still

has reasonable doubts about the truth or accuracy of the

declared value, it may, bearing in mind the provisions of

Article XIX, be deemed that the customs value of the

imported goods cannot be determined under the provisions

of Article I:

“Before taking a final decision, the customs administration

shall communicate to the importer, in writing if requested,

its grounds for doubting the truth or accuracy of the

particulars or documents produced and the importer shall

be given a reasonable opportunity to respond. When a final

decision is made, the customs administration shall

communicate to the importer in writing its decision and the

grounds therefore.

It is entirely appropriate in applying the Agreement for one

member to assist another member on mutually agreed

terms.”

103102

The above two rulings were followed by WCO Advisory Opinion 10.1,

which ruled that customs administrations cannot be required to rely

on fraudulent documentation. Should any customs document prove

to be fraudulent, subsequent to the determination of a customs

value, invalidation of that value would be a matter for national

legislation.

Section 25 (11) of the Customs Act of Pakistan empowers customs

officers to question the truth or accuracy of any statement,

information, document or declaration presented for customs

valuation. These powers are also incorporated in the provisions of

Section 26, which authorise the appropriate officers to seek any

information specific to the importation. These powers are almost the

same as were applicable under the BDV System. The legal effect of

these powers is that the customs authorities are not helpless to check

the flow of the misdeclared values or that any evidence in the form of

evidential invoices or printed values of identical goods or similar

goods is still available to the Customs Department. There is also the

power of the Government to apply provisions of antidumping law

and/or safeguards law, if such imports cause injury to domestic

industry or are even feared to do so, if such undervalued imports

continue.

Acceptance of the Lower of the Two Values of Identical or

Similar GoodsThe agreement provides:

2 (3) - If, in applying this Article [Article 2 relating to

identical goods] more than one transaction value of

identical goods is found, the lowest of such value shall be

used to determine the customs value of the imported

goods".3 (3) - If, in applying this Article [Article 3 relating to similar

goods] more than one transaction value of similar goods is

found, the lowest such value shall be used to determine the

customs value of the imported goods ".

The provisions regarding the acceptance of the value of the lower of

the two transaction values applies only when the declared

transaction value has been rejected and the transaction value on the

basis of identical or similar goods methods is undertaken. Obviously,

in that case, more than one transaction value may become available

on account of different circumstances of the sale. The valuation

agreement requires the member countries, when such a situation

arises, to take the lowest of the transaction values into account and

not the highest. Pakistan, however, is not following this in most

cases. India, which was the stronger critic of the GATT valuation

system, has incorporated these provisions of Article 2(3) and 3(3) of

GATT in Rule 5(3) and 6(2) of the Indian Customs Valuation Rules

1988. Pakistan has yet to incorporate these in its valuation rules.

However, having said that, India has adopted some very effective

preventive steps, by requiring importers to give detailed information

regarding valuation factors (Rule 9) and conditions under sub-rule 4

2) of the Customs Valuation Rules 1988. The factors (Rule 9) to be

added to the value are, if not already added, are lcommissions and brokerage, except buying commissions;lthe cost of containers, which are treated as being one for

customs purposes with the goods in question; lthe cost of packing, whether for labour or materials; lthe value, apportioned as appropriate, of the following goods

and services where supplied directly or indirectly by the buyer

free of charge or at reduced cost for use in connection with the

production and sale for export of the imported goods, to the

extent that such value has not been included in the price

actually paid or payable lmaterial, components, parts and similar items incorporated in

the imported goods; ltools, dies, moulds and similar items used in the production of

the imported goods; lmaterials consumed in the imported goods; lengineering, developing, artwork, design work, and plans and

sketches undertaken elsewhere than in the importing country

and necessary for the production of imported goods; lroyalties and licence fees related to goods being valued that the

buyer must pay either directly or indirectly, as a condition of

sale of the goods being valued, to the extent that such royalties

and fees are not included in the price actually paid or payable; lthe value of any part of the proceeds of any subsequent resale,

disposal or use of the goods that accrues directly or indirectly to

the seller; ladvance payments; lfreight charges up to the place of importation; andlloading, unloading and handling charges associated with

105104

transporting the goods.

Insurance Similarly the following conditions are to be satisfied to apply the

transaction value:lThe sale is in the ordinary course of trade under fully

competitive conditions.lThe sale does not involve any abnormal discount or reduction

from the ordinary competitive price;lThe sale does not involve special discounts limited to exclusive

agents;lObjective and quantifiable data exist with regard to the

adjustments to be made under Rule 9;lThere are no restrictions concerning the disposition or use of the

goods by the buyer (subject to certain exceptions);lThe sale or price is not subject to some condition or

consideration;lNo part of the proceeds of the goods (by resale, disposal or use)

after importation accrues to the seller; and lBuyer and seller are not related, and if related, the relationship

should not have influenced the price.

Indian customs also has the power to fix tariff values, e.g., tariff

values have been fixed for Crude Palm Oil, RBD Palm Oil, others

Palm Oil, Crude Palmolein, RBD Palmolein, Others Palmolein,

Crude Soyabean Oil and Brass Scrap (all grades).

In India, the transaction value method also does not apply to

situations where valuation fraud (under-valuation, wrong

description, misdeclaration of quantity, grade, specifications, etc) are

shown to have taken place. These are cases where customs has

adequate evidence to establish the fraud. In cases of suspected fraud,

Rule 10 A could be applied to reject the declared value and the

transaction value method (see below).

Related Party TransactionsThe transaction value method cannot be applied in cases where the

buyer and seller are related and the relationship has influenced the

price. The scope of relationship is defined in Sub-Rule 2 (2) of the

Customs Valuation Rules (India). In such cases the burden of proof

shifts to the importer, who should satisfy customs that the declared

price closely approximates the test values prescribed in sub-Rule

4(4). If the importer fails to discharge this responsibility, the

declared value could be rejected and valuation done under any of the

subsequent methods applied in hierarchical order.

Other Valuation MethodsThe transaction value method cannot be applied for determination of

customs value in several situations. These include cases where there

is no sale for export, restrictions under Sub-Rule 4 (2) apply, the

relationship between buyer and seller has influenced the value, cases

where valuation fraud has taken place and cases of suspected

valuation fraud (see rule 10 A). In all such cases, the valuation is to

be done under the following five methods, to be applied in sequential

order, unless otherwise permitted under the valuation rules:lTransaction Value of Identical goods (Rule 5). This is based on

the previously determined transaction value of identical goods,

as defined in the Valuation Rules (see Sub-Rule 2.1), imported at

or about the same time;lTransaction Value of Similar goods (Rule 6). This is again based

on the transaction value of similar goods (defined in Su-Rule

2.1) imported at or about the same time; lDeductive Value Method (Rule 7). This is calculated based on

the selling price of imported goods or identical/similar goods in

India after deducting selling expenses, margin of profit, duties

and taxes; lComputed Value Method (Rule 7 A). The computed value is

arrived at from the cost of materials used in production of

imported goods, cost of fabrication or other processing charges

at the country of production, profit and general expenses, and

other dutiable factors as may be applicable under Rule 9; lFallback Method (Rule 8). These include a flexible application of

previous valuation methods in a manner consistent with the

provisions of Section 14(1) of the Customs Act.

Rule 10 ARule 10 A provides a unique procedure for rejection of transaction

value method in cases of suspected valuation fraud. The authority for

this rule is not from the Customs Valuation Agreement itself, but

from a separate decision by the WTO Valuation Committee (Decision

6.1). This applies to cases where there is reason to doubt the truth or

accuracy of the value declared by the importer, but there is no

107106

evidence with the customs to establish fraud. It was one of the results

of the Uruguay Round negotiations (which led to the establishment

of the World Trade Organisation in 1994) based on an Indian

proposal. The Indian proposal was to provide adequate flexibility in

the Valuation Agreement to deal with cases of suspected fraud,

particularly those where the declared value was far below a series of

contemporaneous transactions. In such cases the customs could ask

the importer to produce additional information and evidence to

justify the declared value. If the information/documents produced

were not adequate to dispel the doubt regarding the truth or accuracy

of the declaration or if the importer fails to produce any supporting

evidence, the customs could reject the declared value. An appealable

order should be issued in such cases after giving the importer a

reasonable opportunity to be heard. The goods are then to be valued

by applying any of the subsequent methods as laid down in the

valuation rules. In short, Rule 10 A provides only an authority to

reject the declared value and is not a method of valuation by itself.

The National Import Data Base (NIDB) provides a reliable tool for

comparison of declared values with contemporaneous import prices.

It is an electronic database in which previous importations have been

analysed by special software. The NIDB is made available on a

weekly basis to all customs stations. This is almost identical to the

database used by Pakistan Customs.

It is sometimes argued that the WTO confers unfair advantage to

multinational companies. As noted in the report by the Secretary

General of UNCTAD: "In general, developing countries argue, that

the Agreement would favour the transactions between the related

parties and that trans-national companies, which handle a

considerable part of the imports of developing countries, might take

advantage of those rules to manipulate transaction values to their

own advantage, with the resulting losses of customs revenue for the

importing country.”

This statement is confirmed in the case of associated companies.

These are actually subsidiaries enjoying a commercial advantage over

completely independent buyers or subsidiaries whose roles are, at

best, comparable to those of sole concessionaires. Likewise, transfer

pricing is known to be used for under- or over-invoicing targeted

goods, and the loss or gain in value transferred to other goods.

Obviously this is done to beat competition and to damage domestic

industries.

However, the valuation of goods imported by multinational

companies or their subsidiaries has presented the same problems in

the valuation system operating under the umbrella of BDV as in the

WTO. WTO provisions do not stop the valuation departments of

customs from evaluating the relationship and loading the transaction

value, if it has influenced the price. The real problem stems from the

sheer weight, size and the economic power wielded by multinational

companies, who dominate the world price structure, since they

control most of the world's trade. Provisions have however been

made in Section 25 (3) of the Pakistan Customs Act, 1969 read with

Rule 2 (I) which provides that in case of related persons, the burden

of proof to prove the correctness of the transaction value is upon the

importer. According to Rule 11 of the Valuation Rules of India, where

the buyer and seller are related, the circumstances surrounding the

sale are examined and the transaction value is accepted as the

customs value of the imported goods, provided the relationship did

not influence the price.

As far as the question of burden of proof is concerned, the WCO also

accepted that Article XVII of GATT does provide adequate

safeguards on the question of burden of proof. Courts in Pakistan

have, however, repeatedly ruled under the BDV regime that the

burden of proof to prove that a declared value was wrong was upon

the customs, even though there was no provision in Section 25 then

in force. Article XVII is more strongly worded in favour of customs.

However, the legal burden continues to be on customs, as ruled in

several judgments of the superior courts, including the Supreme

Court of Pakistan.

Goods and services supplied by the seller to the buyer free of cost or

at a reduced cost are called "assists". Similarly, royalties and licence

fees may also be offered to the buyers free of cost. To the

disappointment of developing countries, the value of certain "assists"

or goods and services cannot be loaded in the transaction value and

hence cannot be made dutiable. Instances of such goods and services

are engineering, development and artwork designs and plans

prepared in the country of importation. However, such charges have

been expressly made dutiable in Pakistan under the provisions of

108 109

Section 25 (2) (c) (iv) if such "assists" are undertaken outside

Pakistan. This remains a disputed area which has so far defied

resolution. One of the greatest objections of under-developed countries is that

member countries following the WTO Valuation Agreement are

prohibited from laying down minimum prices for the purpose of

valuation. The WTO considers these minimum prices to be fictitious.

The fact, however, remains that the ITP system, notwithstanding

some problems, served under-developed countries well, being wholly

transparent. Certainly, the ITP system did not always take the

circumstances of the individual sale into consideration, but by and

large the system operated very well in Pakistan and reduced, and in

many cases, eliminated controversies, for several years in a row and

also did away with a lot of litigation with the full participation of all

stakeholders.

ConclusionThe system of valuation introduced through the WTO Agreement on

Valuation has by and large been found to be satisfactory. However,

some of the apprehensions of the developing countries have proved

to be correct. For example, under invoicing of goods is again endemic

and reportedly trade between partner countries of China shows this

aspect very clearly. A sample comparison would clearly bring this

out. The result has been a plethora of anti-dumping cases against

China in various parts of the world, especially India, the EU and the

United States. The following chart shows mirror image statistics of

imports and exports of China to India, the USA and Pakistan. This

clearly brings out the serious problem with the values declared in the

importing and exporting countries.

This clearly shows that all is not well after the implementation of the

WTO Agreement on Valuation. Some countries are getting away with

murder through under invoicing/dumping, and some countries are

being treated very badly by the imposition of anti-dumping duties

and safeguard measures. This does not bode well for the industries

and even agriculture of the poor and vulnerable countries of the

world like Pakistan.

RecommendationslThe countries of the South Asia Association for Regional

Cooperation (SAARC) region should harmonise their valuation

laws, rules and regulations.lThe countries in question should also provide assistance to each

other with regard to under-invoicing, over-invoicing and transfer

pricing in cases of valuation fraud.lThere should be a continuous and sustained exchange of

information in the SAARC region.lThe SAARC countries should also assist each other in

investigations relating to dumping and safeguards.lProcedures relating to the clearance of imports and exports

should also be harmonised, based on the best international

practices.

These recommendations are based on the experience of the

European Union, where over two dozen countries of Europe are now

acting in unison in all these matters without loss of revenue or

damage to their industry. There is no reason why this cannot be

achieved for the collective good of the 1.35 billion people of South

Asia. The implementation of these recommendations will not only

help improve the region's revenues, but also help protect domestic

industries and agriculture. These measures in no way go against the

interests of any of the countries of the region and will in fact provide

a level playing field. Without this, trade in this region will remain

suspect and subject to serious disputes.

M Sulaiman Khan is a former customs commissioner of Pakistan,

and currently heads Sulaiman Associates, a consultancy firm.

(Value in US$ million) (All figures pertain to 2003)

CHINAS IMPORTS FROM Import

Statistics Mirror

Estimates CHINAS EXPORTS TO Export

Statistics Mirror

estimates

USA 33,761 25,982 USA 92,617 161,429

India 4,242 2,902 India 3,342 3,996

Pakistan

- - Pakistan 1,577 1,149

USAS IMPORTS FROM USAS EXPORTS TO

China 161,429 92,618 China 25,983 33,761

India

13,595 11,317 India 4,162 4,876

INDIAS IMPORTS FROM INDIAS EXPORTS TO

USA 4,876 4,162 USA 11,317 13,595

China

3,996 3,342 China 2,909 4,242

PAKISTANS IMPORTS FROM PAKISTANS EXPORTS TO

USA 1,323 748 USA 2,935 2,727

India 381 283 India 93 57

China 1,149 1,577 China 287 575

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Documentation Requirements for

Imports and ExportsDouglas Jayasekera

rom ancient times, it has been customary to impose a tax or

toll at seaports when merchandise is imported or exported

from one country to another. There are references to customs Fduties being imposed in a Syrian oasis city, in the second century AD.

In the 'Artha Sastra' of Kautilya, in the third century BC, there is

reference to a similar levy being imposed in ancient India. The

renowned 18th century economist Adam Smith, in his 'Wealth of

Nations' (1776), stated that 'customs', meaning the levying of duties,

had existed from time immemorial. The term 'customs' is regarded

as a derivative from this customary practice.

The Customs Goods Declaration (CUSDEC) adopted in 1994 is

imperative for every importer/exporter or authorised agent. The

declaration form, designed for imports and exports and bonded

cargo, is called the Single Administrative Document (SAD) in

international usage . For imports, there are five copies of the

CUSDEC to be submitted: the warrant copy, delivery copy, statistics

copy, parties copy, and the exchange control copy. In addition, in

terms of the amendments consequent to Sri Lanka's adoption of the

World Trade Organisation (WTO) Valuation Agreement in January

2003, it is mandatory for every importer/agent to submit a value

declaration form. The value is based on the transaction value of the

imported goods, i.e., the price actually paid or payable when sold for

export to Sri Lanka. It eliminates the arbitrary valuation of imported

goods on a notional concept called the normal price. Two copies of

the value declaration must be submitted, one copy attached to the

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

Customs allows imports to be cleared on a bank or corporate

guarantee, to provide for any payment of duty for which the goods

may later be found to be liable under post clearance audits. If there

are any problems in accepting the transaction value, customs checks

the transaction value of similar goods sold for export to Sri Lanka at

or about the same time as the goods being valued. In certain cases,

however, customs checks the value of imports before the goods are

cleared. This happens in cases where the authorities are not familiar

with or have doubts about the credentials of an importer. In such

cases, customs will continue with a modified form of the previous

arrangement. Customs will meet importers up front at the time of

import.

One copy of the Bill of Lading and the pro forma invoice must also be

submitted. Sri Lanka has a quarantine system in place to ensure that

exotic diseases are not introduced through imported livestock and

livestock products. A pre-export permit is required. Food imports

require an export certificate from the country of origin. Sri Lanka

also has an import quarantine system in place for plants. These

imports must be accompanied by a permit.

In the case of exports, five copies of the CUSDEC must be submitted,

the only change from imports being a security copy in place of the

delivery copy. An export licence is required for certain commodities.

For example, exports of tea and coconuts require a licence. Tea

exporters are subject to pre-shipment sampling to ensure quality.

These licences are provided by the relevant regulatory bodies, such

as the Tea Board and the Coconut Development Authority. Exports

of animals, live fish, coral chanks, conch shells, cashew kernels,

certain flora and fauna, ivory and ebony products, and

antiquities/cultural property also require a licence issued by the

relevant authority.

Goods imported or exported under certain preferential arrangements

are eligible for preferential rates of duty when exported or imported.

These preferential rates of duty are with countries which are

members of the Bangkok Agreement, the Global System of Trade

Preferences (GSTP), The SAARC Preferential Trading Arrangement

(SAPTA), the India-Sri Lanka Free Trade Agreement (FTA), and the

113112

Pakistan-Sri Lanka FTA. All South Asian countries are members of

SAPTA, and some are members of the Bangkok Agreement and the

GSTP. To qualify for such preferences, the necessary certificate of

origin must be attached to the documents submitted for import or

export of goods. For instance, the importer must claim the

preferential rate of duty at the time of entry.

Promoting Imports and ExportsSri Lanka implements a number of incentive schemes aimed at

promoting exports. At present there are three main schemes in

operation: a drawback scheme, a temporary import for export

processing scheme (TIEP), and a manufacture in bond scheme.

Under the duty rebate or drawback scheme, duties paid on imported

materials used to manufacture or process goods in Sri Lanka may be

partially refunded or rebated once the final goods are exported. The

TIEP scheme allows direct or indirect exporters to import inputs

without payment of fiscal levies. Manufacturers or exporters

producing under TIEP may not participate in any other export

incentive schemes. The TIEP scheme has two sub schemes. One

allows the import of inputs such as raw materials, components, parts

and packaging materials exempt from duties. The other covers the

import of capital goods, appliances and spare parts which are eligible

for whole or partial exemption from customs duties. Any

manufacturer who exports may, with the approval of customs,

establish a manufacturing in bond in a warehouse. They can avoid

duties at the time of import. Any kind of production process,

including mixing and assembling, may be undertaken in bond

warehouses. Imported goods may be stored for up to six months,

without payment of duties and taxes, and for 'valid reasons', this

period may be extended for up to two years.

Is Documentation Excessive or Discriminatory?In recent years, with the rapid movement towards an era of globally

liberalised trade, the role of customs has shifted dramatically from

that of an enforcer and collector to a facilitator. There are a set of

globally accepted customs practices which all contracting parties to

the World Customs Organisation (WCO) must adhere to. Sri Lanka

has also adopted these standards and practices.

Sri Lanka has adopted the following conventions:lHarmonised commodity description and coding system

lTemporary importation of professional equipmentlFacilities for the importation of goods for display or use at

exhibitions, fairs, meetings or similar eventslATA carnet for temporary admission of goodslTemporary importation of scientific equipment

Kyoto Convention-Simplification and Harmonisation of

Customs Procedures The adoption of a single standard document of declaration in 1994

CUSDEC has assisted trade immensely. The time taken to process

documents has also improved tremendously with the introduction of

automation and selectivity criteria for the examination of cargo on a

risk assessment basis. Risk declaration is a statement by a company

that it has committed an offence, or contravened the customs

ordinance. This is promptly verified against the computer database

of offenders.

CUSDEC is processed under an automatic system for customs data

(ASYCUDA), which is fully equipped in all customs offices in

Colombo, where 99 percent of the cargo is discharged. All imports

and exports (sea and air), temporary imports and bonded cargo are

automated for customs declaration processing using the ASYCUDA

system. An electronic data interchange (EDI), which has also been in

operation since 2004, will lead to faster dispatch of vessels and avoid

time consuming physical clearance by shipping agents and freight

clearing houses.

Sri Lanka handles more than a million containers per year. Colombo

Port has installed the necessary instruments to scan all outbound or

inbound containers for, in particular, weapons of mass destruction

and radioactive items. Colombo Port is one of the most secure ports

in the world, and the first in the region to install such scanning

instruments. Sri Lanka provides for advance rulings. This is a

reorientation of certain customs administrative decision-making

away from the border. This, however, involves costs in training

personnel, and technical assistance in the setting up of the advance

binding ruling regime, drafting legislation and regulations. The

worldwide liberalisation of trade has brought about increased

competition. Cutting costs has become a matter of survival for

enterprises competing in the global economy. Customs

administrations have not escaped this trend. A fair measure of

115114

modernisation and elimination of paper work has taken place, but

according to a survey of trade, there are still problems.

Here are some problems common to most customs administrations: i) Customs laws are replete with penal provisions and appear to

violate the fundamental rights of importers and exporters.

ii) In the conduct of inquiries, customs laws give considerable

authority to even the most junior grade officers. The fees and

charges are large and unreasonable, the penalties for minor

breaches of regulations are excessive, and the appeal procedure

is costly. The salaries paid to customs officers are not

commensurate with their responsibilities. Though there is a

rewards scheme in place, this can be misused to harass and even

lead to corruption.

iii) In Sri Lanka, customs officials are responsible for administering

other taxes and levies besides customs duties. These include

value added tax (VAT) on imported goods, ports and airports

development levy, cesses on various products ranging from tea

and coconut products to gems, and export levies on quartz,

chanks and tuskers. The collection of excise (special provisions)

duty is also the responsibility of customs. These functions are

performed by customs officers in other countries too, though

maybe to a lesser extent. In any case, customs officers are by

now familiar with these functions, and this may not be a problem

anymore.

1Comparative Positions of South Asian CountriesBangladeshThere are delays in clearing imported cargo. Such delays lead to port

congestion, paralysing an important part of the country's

infrastructure. Import and export procedures are quite cumbersome.

However, a programme to simplify documentation is under way. In

the publication of trade regulations, there are measures to use the

electronic media with SPEED and ASYCUDA. There are a plethora of

taxes and levies, as in the case of Sri Lanka described earlier. There

has been no progress in advance rulings and advance points. There is

also no record of an appeal process.

IndiaIndian export and import procedures continue to be quite

cumbersome. The existence of multiple export promotion schemes,

which require additional procedures, makes the process very

complicated. Some fees and charges seem to reflect the cost of

service, while others are calculated on an ad valorem basis. The

automation of customs through EDI and the use of risk assessment

methods has simplified procedures. However, though the use of EDI

has spread to new locations, it is still not widespread, and many

declarations are still done manually. India is said to have 425

customs points. Information on trade regulations are made available

both in the print and electronic media. The scheme of advance

rulings became operational from February 2004. However, the scope

of advance rulings is limited, in that solely Indian-owned companies

are excluded from the scheme. There is no officially designated

enquiry point. For traders, India has an elaborate appeals procedure,

and appeals can be made to an appellate tribunal, which is the

highest body.

MaldivesAll tariff lines are ad valorem, based on the CIF value of imports.

However, the extensive use of duty concessions, aimed at attracting

foreign investment, has undermined transparency. The Maldives

uses an EDI system, enabling registered users to submit import and

export documents electronically. Customs clearance is

straightforward, and risk assessment methods are also used. They do

not have specific levies and charges. The Maldives has been a

member of the WCO since 1995, and though not a member of the

ATA Carnet system, follows similar procedures. There is no system of

advance rulings, but there is provision for an appeal process. The

Maldives has started computerising customs operations.

Nepal Customs clearance is said to be cumbersome, since a large number of

documents have to be filled. Nepal charges a large number of fees

and levies. Nepal does not use a single administrative document, or a

single agency for imports and exports. ASYCUDA is beginning to be

implemented. In the publication of trade regulations, Nepal mostly

uses the print media, but intends to establish a website. There is no

provision for advance rulings, and moves are underway to establish

an enquiry point. There is a right of appeal and the Department of

117116

Commerce coordinates with the agencies concerned.

PakistanImport and export procedures are quite cumbersome in Pakistan. As

with imported goods, all goods to be exported require customs

inspection. However, efforts are underway to computerise import

and export procedures. Trade in certain sensitive items remains

subject to many procedures. Pakistan's import policy is quite

complex, though there are no licensing requirements. Registration

and documentation requirements abound, and the list of documents

needed can be quite long. An electronic assessment system (EASY)

has been introduced to speed up assessment and customs clearance.

All trade related rulings are available in the Gazette, and some on

websites as well. There is no known procedure for advance ruling.

Douglas Jayasekera is senior visiting fellow at the Institute of

Policy Studies in Colombo, Sri Lanka.

Endnotes1 I am indebted to a study made in 2004 by South Asia Watch on Trade,

Economics and Environment (SAWTEE) for this section of the paper.

This relates to fees and formalities, publication, and administration of

trade.

South Asia as a Global Force in TradeS K Mohanty

AARC is gradually emerging as a resilient regional trading bloc

in Asia despite having sharp political differences between

regional partners during the last several decades. The growing Spressure from the general public of the region has contributed to

capping political differences among member states. Moreover, the

regional countries have realised that solutions to outstanding

political issues could be the essence of good governance. Moreover,

the possibility of enduring and guaranteed prosperity, as a

consequence of steady progress in economic cooperation between

regional partners, could bring enduring solutions to the existing

political differences in due course. There is steady progress in this

direction, and member countries are committed to establishing on

strong economic ties among themselves. Following the 1 December

2005 meeting in Kathmandu, the first phase of the South Asian Free

Trade Area (SAFTA) was pressed into action from January 1, 2006.

Besides SAFTA, four South Asian Preferential Trade Area (SAPTA)

rounds of trade liberalisation have successfully been concluded since

1995, and the final round will soon attain the concurrence from the

respective member states for implementation. The level of

liberalisation in the earlier rounds of SAPTA was slow, but the depth

and coverage of trade liberalisation picked up in the subsequent

rounds. Various studies indicate that the region has large trade

potential, and speedy trade liberalisation can harness such potential.

Some recent studies such as Mohanty (2005) and Bandara and Yu

(2001), based on the CGE model, have reaffirmed the validly of such

findings. They demonstrate that fast implementation of SAFTA

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would be the best alternative strategy for South Asian countries to

improve their economic performances. In this regard, regional

initiates would be more beneficial than individual efforts to achieve

high levels of economic success. This implies that the process of

liberalisation under SAFTA is credible. It calls for speedy

implementation of the agreement within the stipulated time frame.

Economic cooperation between South Asian countries has been

consolidating rapidly over a period of time, and the region has

entered into a new phase of economic cooperation following the

signing of SAFTA in January 2004. However, there has been

scepticism regarding the sustainability of regional caucus, citing the

internal contradictions in the political sphere and poor economic

performances of the regional partners. In this context, the debate on

the significance of South-South (S-S) over North-South (N-S)

Regional Trading Arrangements (RTAs) is relevant. The existing

literature highlights that South-South RTAs have a higher degree of

mortality rate than North-North and North-South RTAs. In this

context, the reservations with regard to the sustainability of SAFTA

need to be examined.

It may be noted that intra-regional trade in South Asia has picked up

substantially the implementation of SAPTA in 1995. Under the

SAPTA process, the initial rounds were more populist whereas the

latter rounds were more credible in eliciting a higher level of intra-

regional trade flows within the region. If the changing perception of

the regional partners is an index of a shifting economic and political

climate in the region, further trade liberalisation under SAPTA and

SAFTA processes would result in further enhancement of regional

welfare. To achieve speedy progress through regional initiatives,

substantial benefits of the trade liberalisation under SAFTA must be

realised in the early phases of trade liberalisation, and less important

sectors back loaded in the process of further opening of the region.

This paper attempts to examine the structure of alternative strategies

which would bring substantial benefits to the region in the early

rounds of SAFTA negotiations. Although complete liberalisation of

the goods sectors could be achieved in a few rounds of SAFTA

negotiations, the order of sectoral liberalisation needs to be designed

in accordance with the performance of the regional economies. We

postulate that a credible negotiation strategy, based on liberalising

the most important sectors first, may yield better welfare effects than

a populist approach of choosing less important sectors first, and

keeping the most important sectors for liberalisation at the end.

There is a need to identify the order of sectors for trade liberalisation

in different rounds of SAFTA negotiations to optimise welfare effects

on the region.

Most of the regional countries are slowly getting into the regional

process and attempting to form close economic cooperation though a

number of RTAs/BTAs within and outside South Asia. India is very

much active in the regional process. If the SAFTA process does not

pick up within the stipulated time frame, there are possibilities that

regional countries may negotiate with other extra-regional groupings

for reciprocal trade liberalisation. In this era of regionalism, the

implications of not siding with the SAFTA Agreement, and aligning

with other extra-regional RTAs need to be examined.

Considering the recent developments in the South Asian region,

several issues may be raised in order to understand the prospects of

forming comprehensive economic cooperation in the region. How

credible is SAFTA in enhancing global welfare? How intensely will

the engagement of regional member countries with extra-regional

arrangements affect the SAFTA process? What could be the possible

impact on India, if SAFTA is implemented after completion of her

bilateral engagement with other regional arrangements? How would

the implementation of SAFTA affect the trade pattern of the region?

How would other regional members of South Asia likely to be

affected if implementation of SAFTA is delayed? How effective is the

sequencing of sectoral liberalisation in achieving faster gains from

the SAPTA process? The backdrop of these questions, an attempt has

been made to examine some of these issues in this paper. In order to

examine the efficacy of various rounds of SAPTA and SAFTA, this

study analyses the implication of the present level of trade

liberalisation on regional economies and the prospects of the region

in the future.

Recent Trends in Macroeconomic Performance Most of the South Asian region went through a transition in their

economic policy regime during the 1990s, following the success of

export-led growth in some Asian countries (World Bank, 1990). In

South Asia, Sri Lanka was the first country to initiate the process of

121120

liberalisation in the Seventies, and the others in the region joined the

process around the early 1990s. The region as a whole has benefited

from undertaking unilateral liberalisation and has integrated itself

with the global economy. As a result of a change in the policy regime,

countries in the region have persistently pursued external-oriented

trade strategies, which are almost irreversible in nature.

Despite commonality in policy regimes, regional countries differ

significantly in terms of their accomplishments in economic and

social sector development in South Asia. These countries have

diverse resource endowments, and complementarities do exist that

can be effectively harnessed to strengthen economic cooperation in

the region. Since the member countries are distinguished by well-

defined areas of specialisation, each one of them can serve as a

unique hub of a specific field for the region. For example, Bangladesh

can act as the energy hub, Bhutan and Nepal can serve as the forest

resources hub, India as the technology and human resources hub,

Maldives as the marine and fishery resources hub, Pakistan as the

textiles hub, and Sri Lanka as the rubber and plantations hub for the

region. Trade focus by individual countries commensurate with to

their specialisation would ensure them wider access to the regional

market without much competition from regional partners.

However, the strength of economic cooperation is largely dependent

on the performance of individual countries in the region. The region

has shown steady economic progress in the 1990s and early part of

the new millennium. ESCAP (2005) attributed the cause for recent

high growth in the region to the surge in farm income supported by

good weather conditions. The farm sector, in turn, has contributed

much to the growth of the manufacturing and services sectors. There

has been considerable progress in the external sector, manifest in an

improvement in the current account, surge in foreign exchange

reserves, and the consequent stability in exchange rate movements.

The present trend could be more profound once the regional

countries integrate themselves in various economic activities

including trade, investment and services. However, the global

experience suggests that robustness of regional integration is largely

contingent upon performance of individual countries, and the

sustainability of economic conquest of the region. It is in this context

that the macroeconomic performance of the region is analysed.

A Brief Overview of Economic FundamentalsThe macroeconomic performance of South Asia was robust at the

beginning of the new millennium, despite variations in the level of

economic development among regional economies. The gross output

of the region was nearly US$ 700 billion in 2000, and the region

expanded at the rate of 5.5 percent per annum on average during the

period 2001-03 as shown in Table 1. The average annual growth rate

of four economies exceeded 5 percent, and these economies

constitute nearly 85 percent of the region's total income. The average

real per capita income of the region exceeded US$ 500 per annum

and countries like Bhutan, Pakistan, Maldives and Sri Lanka have

already crossed this bottom line.

The average economic growth of the region is much lower than some

of the economies in South East and East Asia, particularly China. In

the case of China, the savings ratio surpassed 50 percent, and this

has contributed substantially to its overall growth performance. The

Table 1: Macroeconomic Performance of South Asian Countries: Average of 2001-03

Macroeconomic Indicator Bangladesh Bhutan India Pakistan Maldives Nepal Sri Lanka

GDP (constant 2000 Billion US$) 52.0 0.6 508.4 77.6 0.7 5.8 16.8

GDP growth (annual %) 5.0 6.8 6.0 3.4 6.2 2.7 2.8

GDP per capita (constant 2000 US$) 383.4

654.5

484.8

535.4 2411.0 241.8 886.2

GDP per capita growth (annual %)

3.2

3.9

4.3

0.9 3.8 0.4 1.4

Gross domestic savings (% of GDP)

17.6

29.9

22.1

14.7 47.6 14.1 15.3

Gross domestic savings (current

Billion US$)

8.6

0.2

116.9

12.6 0.3 0.8 2.6

Gross capital formation (% of GDP)

23.2

52.6

23.0

15.2 28.6 24.7 21.9

Gross capital formation (annual % growth)

7.3

7.7

3.5 17.8 1.9

Trade (% of GDP)

34.8

68.7

29.6

38.6 153.4 48.7 79.3

Trade in goods (% of GDP)

30.6

48.4

20.5

29.0 77.3 38.9 66.2

Exports of goods and services (constant

billion US$)

7.6

0.0

79.8

13.1 0.6 0.0 6.4

Exports of goods and services (% of GDP) 14.6 23.0 14.4 19.0 86.2 19.1 36.4

Exports of goods and services (annual % growth)

6.5

12.0

18.3 7.5 1.9

Imports of goods and services (constant billion US$)

9.6

0.0

76.2

11.7 0.5 0.0 8.2

Imports of goods and services (% of GDP)

20.2

45.7

15.2

19.6 67.2 29.7 43.0

Imports of goods and services (annual % growth)

2.5

7.7

6.6 6.9 4.2

Total reserves (incl. gold, current billion US$)

1.9

0.3

74.8

8.3 0.1 1.1 1.7

Total reserves minus gold (current US$ B)

1.8

0.3

70.8

7.6 0.1 1.1 1.7

Total reserves in months of imports 2.2 15.2 9.5 6.2 2.9 7.5 2.7

FDI, net inflows (BoP, current million US$) 77.8 0.3 3912.4 580.0 12.6 2.9 199.0

FDI, net inflows (% of GDP) 0.2 0.0 0.7 0.8 1.9 0.0 1.2

Source: World Development Indicators 2005, World Bank.

123122

experiences of some of the fast growing countries in the region are

almost similar. In contrast, the average savings rate of South Asia

was close to 21 percent during the period 2001-03. However, the

selected regional countries like Bhutan, India and Maldives have

registered savings rates higher than the average rate of the region.

The region has maintained a higher investment rate as compared to

its savings rate in order to gear up its level of economic growth. On

an average, the investment ratio remained higher than the savings

ratio, by 1.5 percent per annum. The gross capital formation

expanded at an average rate of 7 percent per annum during the

period 2001-03. A high investment rate in South Asia has

contributed to brisk growth in the region, especially in the early half

of the new millennium. One of the reasons for maintaining a higher

investment rate over the savings rate was the persistent policies of

the regional economies to maintain reasonably low levels of foreign

savings to maintain high economic growth. It may be noted that most

of the regional countries keep provisions for foreign savings in their 1medium term plan to complement their low savings ratio.

Rapid growth in the region has sustained itself for a number of years,

and the level of inflation has remained reasonably low. With the

improvement in the regional economic and policy environment,

Foreign Direct Investment (FDI) is slowly but steadily flowing into

the region. Although 79 percent of the region's total FDI is flowing

into India, other countries in the region including Maldives, Sri

Lanka and Pakistan introduced impressive policy initiatives to attract

FDI into their economies during 2001-03. With the change in the

policy regime, there has been a persistent tilt towards an export-

oriented growth strategy, moving away from Import-Substitution

Industrialisation (ISI) policies in the region. The shift in policy

strategy is felt in the form of increasing openness in a number of

economies. Maldives is turning out to be the most outward-oriented

economy, and the openness of the regional countries ranges between

29.6 percent and 153.4 percent during 2001-03.

Most of the regional countries suffer from perennial trade deficits

with the rest of the world. The trade deficit in their current trade

account is adjusted by surplus generated in trade in services. Among

the regional economies, only in the case of Maldives did the ratio of

exports of goods and services to GDP exceed that of imports. With

sustained economic reforms, the credibility of the regional

economies has improved, resulting in a significant rise in the level of

foreign reserves. India has built up a large foreign exchange reserve

during the reform period. According to the latest release of the

Reserve Bank of India, the foreign exchange reserve has crossed US$

140 billion. Pakistan has also improved its reserve position from time

to time. Repeated exogenous shocks such as natural calamities, hike

in international oil prices and instability of the US$, have adversely

affected the reserve positions of the regional economies.

Despite the structural weaknesses, the region has emerged strongly

with its macroeconomic fundamentals in the new millennium.

Persistence of the current trend over a couple of years may have a

lasting impact on the process of trade liberalisation in the region,

and this may contribute to strengthening regional cooperation.

Trade Performance of the Region: Global Trend AnalysisTrends in Region's Trade with Broad Global Destinations South Asia has witnessed rapid economic expansion during the last

decade following comprehensive economic reforms in a number of

regional countries. The region's high-growth performance is mostly

supported by expansion in the manufacturing and services sectors.

Industrialisation in these countries was mostly spurred by the robust

external sector performance. A surge in exports in these countries

has generated large employment in the domestic economies. With

deeper levels of economic liberalisation, industrial sectors are

thrown open to competition with domestic as well as foreign firms.

With the growing demand both in export and domestic markets,

firms at home have gradually streamlined their import requirements.

As a result, large economies in the region including India have

restructured their sources of imports and exports destinations over a

period of time. While some of them continue to focus on developed

countries as their export destinations, their dependence on

developing countries for imports have increased many fold. As large

economies in the region open up their markets for imports of

intermediates, demand for these products has grown persistently

over a period of time. It is imperative that the regional countries in

South Asia take full advantage of such opportunities, as large

regional economies are shifting to the developing Asia for their

import requirements.

The regional countries have comparative advantages in the

125124

production and trade of Environmentally Sensitive Products (ESGs),

but they face strong barriers from industrialised countries in

accessing their markets. Mohanty and Chaturvedi (2005) found that

the region has large potential to trade within the region. Over 10

percent of the region's exports is covered by ESGs, and a

considerable amount of such trade is in vogue among regional

countries. The intra-regional trade in ESGs has remained very high

during the 1990s and in the new millennium. There has been a

steady progress in liberalising trade in ESGs in different rounds of

SAFTA. The region has enormous scope to focus on sectoral products

for further tariff liberalisation.

There has been significant change in the trade pattern of the region

with different parts of the world. Between 1985-94 and 1995-2004,

the share of South Asian exports to the developed economies

declined from 60.3 percent to 56.8 percent, while the export share to

the developing countries increased from 38.1 percent to 41 percent as

presented in Table 2. The average decadal growth rates of the

region's exports to developed countries have declined from 13.8

percent during 1985-94 to 8.2 percent during 1995-2004, whereas

the rates have surged from 9.1 percent to 14.4 percent in the case of

developing countries, during the corresponding periods. In 2004,

total regional exports were almost equally shared between developed

and developing countries because of the sustainability of high growth

of exports with the latter group of countries.

As the region relies more on imports for its exports, it has also shown

increased import dependence on developing countries by switching

its sources of imports from developed to developing countries. The

region's changing trade relationships with developed and developing

countries are more pronounced in the case of imports than exports.

Between the periods 1985-94 and 1995-2004, the share of South

Asia's imports from the developed countries declined significantly

from 53.4 percent to 39.6 percent, whereas it increased from 43.8

percent to 49.5 percent in the case of developing countries, during

the same periods.

The region's trade has been gradually becoming 'Asia-centric' during

the last two decades. Almost one-sixth of South Asia's exports were

destined to developing Asia during the period 1985-94, and it

increased to one-fifth during the period 1995-2004. There has been

considerable improvement with regard to imports too. Developing

Asia continued to be the most attractive source for the region's

imports, increasing from 17.8 percent during 1985-94 to 26.3 percent

during the period 1995-2004. Excepting for developing Europe,

South Asia has made substantial progress in stepping up its exports

growth performance with most of the broad grouping of developing

countries in the world. Apart from developing Asia, the Middle East

has emerged as a major export destination in the new millennium.

Among the developing countries, import share of the region picked

up in Asia and Africa, but declined in other regions such as Europe,

Middle East and Western Hemisphere.

Persistence in the improvement of the region's trade relationship

with Asia is partly because of its presence in the continent and also

because of trade liberalisation under multilateral and regional

processes. A number of new regional and bilateral trading

arrangements have been established, including BIMSTEC, India-

Singapore Comprehensive Economic Cooperation (CEC), India-

Table 2: Trends in South Asia’s Trade with Major Trade Destinations

South Asia

Actual

Share (%)

Growth (%)

Share (%) Growth (%)

Destination

1980

2004

1985-94

1995-04

1985-94

1995-04

2004

World

12888

102959

100.0

100.0

11.2

10.8

100.0 20.8

Industrialised Countries

5805

50944

60.3

56.8

13.8

8.2

49.5 17.0

Developing Countries

6855

50478

38.1

41.0

9.1

14.4

49.0 26.4

Africa

668

5325

2.7

4.1

13.0

17.5

5.2 36.6

Asia

2080

25170

15.4

20.5

14.3

17.1

24.4 25.6

Europe

1957

3222

9.3

3.5

30.8

10.7

3.1 14.8

Middle East

2024

14564

9.9

11.0

6.4

15.4

14.1 24.3

Exports

Western Hemisphere

126

2197

0.8

1.9

33.8

18.0

2.1 49.3

World

24811

139980

100.0

100.0

5.8

12.8

100.0 12.8

Industrialised Countries

11765

46918

53.4

39.6

9.0

5.6

33.5 9.0

Developing Countries

12595

64032

43.8

49.5

7.2

12.3

45.7 12.3

Africa

348

4158

2.8

4.6

13.0

14.5

3.0 14.5

Asia

3001

38719

17.8

26.3

10.9

15.1

27.7 15.1

Europe 1904 3230 5.1 2.4 13.4 3.0 2.3 13.4

Middle East 6796 15716 16.4 14.7 9.4 7.2 11.2 9.4

Imports

Western Hemisphere 545 2210 1.8 1.6 10.8 7.8 1.6 10.8

Source: Direction of Trade, IMF, 2005, CD-ROM

Note: Developing countries columns do not add up to 100 since transitional economies are represented separately.

127126

Thailand CEC, India-Sri Lanka CEC, India-ASEAN FTA, Bangkok

Agreement, and Pakistan-Sri Lanka FTA in Asia. These

developments have contributed to improvement in trade with other

regional economies. There are also strong initiatives to form an Asian

Economic Community, which would further consolidate the

economic strength of the region (Mohanty, 2006, Mohanty, Pohit

Roy, 2005).

Is SAARC a Non-Starter?Often, South Asia is characterised as a non-starter as intra-regional

trade (IRT) is very poor among regional countries. On the other

hand, intra-regional trade in the enlarged European Union and

NAFTA has been very high compared with South Asian region. Some

of the leading South-South RTAs like MERCOSURE, ASEAN, etc

have also shown better performance over the South Asia in this

regard. Though SAARC has been in operation for over two decades,

the IRT has not crossed over the magical quotient of 5 percent of its

total trade. Some critics predict that the situation is unlikely to

improve in the future, considering the fact that political factors

override economic factors.

However, the definition of a 'non-starter' of an RTA is not precisely

articulated in the literature. To make a regional grouping more

vibrant and useful for expansion, a threshold point for the IRT needs

to be settled based on experiences of different RTAs. Besides, both

political and economic environments should be congenial enough to

spur economic activities, particularly with private entrepreneur

initiatives. In regional groupings like SAARC, supply constraints

have been a major issue where small countries have a small export

basket to trade within the region, coupled with inelastic supply

capabilities. There is a need to develop capabilities to maintain a

supply-demand balance in trade.

Among the regional economies, the trade basket has been small, and

competition takes place for a smaller number of products. For a large

number of tradable products, there is either limited or no

competition among regional partners. The supply constraint has

been a major impediment for promoting regional trade. For example,

Bangladesh's export of urea to India is a specific point in case. India

is a major importer of urea, with a domestic market for fertiliser that

is large and expanding. India's entry/exit into/from the global

market for urea determines the world prices. Some time in the 1990s,

India imported substantial amounts of urea from Bangladesh, and

this contributed to substantial reduction in trade imbalances with the

latter. However, substantial decline in Bangladeshi exports of urea to

India in later years has adversely affected their bilateral trade

imbalance with India. This shows that there is a need to improve

supply capabilities among the regional countries, and also to take

advantage of the expansion of regional economies.

It may be argued emphatically that SAARC is no more a non-starter

as a regional grouping. Regional integration takes place through the

external sector, and as along as regional trade grows slower than the

region's overall trade with the world, the region may be labelled as a

'non-starter'. South Asia has this criterion. In Figures 1a and 1b, a

comparison is made to highlight the relative movement of intra-

regional trade with the rest of the world. The figures show that the

intra-regional export and import curves of the region were below the

region's trade with the rest of the world prior to the early years of the

new millennium. This shows that IRT was growing less rapidly than

Figure 1a: Is South Asia a Non-Starter? Examining Region's Intra & World Exports

0

1000

2000

3000

4000

5000

6000

Y80

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Figure 1b: Is South Asia a Non-Starter? Examining Region's Intra & World Imports

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129128

their trade with the rest of the world. This tendency may be

accredited as making the region 'non-starter'. However, this trend

has been reversed in since, and the region may no longer be ascribed

as a 'non-starter'.

It is clear from Figure 1a and 1b that trade flows within the region

have passed through various stages, which is hardly discussed in the

literature. The idea about the formation of a regional caucus started

in 1980 and the regional grouping took formal shape in 1985. This

may be considered the pre-formation period (Period I: 1980-85).

During this period, the exports and imports of the region almost

stagnant. The intra-regional trade picked up following the formation

of SAARC, and trade expansion took place during 1985-92 (i.e.,

Period of trade expansion - II), although the imports of the region

responded to the SAARC formation after a certain time lag. In the

early 1990s, most South Asian countries initiated economic reforms

on a unilateral basis. During this period (i.e., Period of volatility III,

1993-94), regional trade passed through a phase of high degree of

fluctuations. The region recovered from its erratic trade behaviour

during the period 2000-02, and the region's IRT remained

consistent and robust (i.e., Period of expansion - IV). Until this

phase, the rate of IRT expansion (both exports and imports) was

much lower than the region's overall trade within the region. The

region ultimately took shape after 2003, when the rate of expansion

of regional trade has been either higher or at par with the growth rate

of the region's trade with the rest of the world. This is a positive sign

for the expansion of the region through mutual cooperation. The

region's exports increased much faster than that imports, implying,

thereby, the imports take more time adjust with the regional trade

liberalisation than exports. If the current trend in period-V (i.e.

2003-04) persists for longer, there will be large polarisation of trade

within the region than with the rest of the world.

To sum up, regional economies have performed well during the early

phase of the this decade. In 2005-06, India is poised to achieve

growth rate of 8.1 percent, surpassing its growth rate during 2004-

05. Other major economies are also showing robust growth

performance in the region (ADB Outlook, 2005). As the regional

economies are booming and so also their intra-regional trade, there

is good prospect for the region to grow if appropriate measures are

taken by the regional countries. Strong and self-restraint measures

need to be taken to achieve a higher level of economic

accomplishment in the region, as nothing moves automatically. The

success of SAFTA will determine the pace of regional progress

through regional cooperation in South Asia.

Intra-Regional TradeThe present level of intra-regional trade is low, although it has

increased significantly since the 1990s. As shown in Figure 1a and 1b,

there has been a structural transformation of intra-regional trade

during the current decade. Trade within the region increased faster

than that of the world during this period. Further, intra-regional

imports have been growing more rapidly than exports. However, the

growth of regional trade has been accompanied by a high degree of

instability (RIS, 2002).

The overall performance of the region in intra-regional trade

indicates that both exports and imports have grown significantly

during the last decade as shown in Table 3. Regional trade has

witnessed a more than seven-fold increase during the period 1990-

2004, and imports expanded more rapidly than exports. Though the

regional trade increased during the period 1991-99, it was highly

volatile, which may be attributed to economic reforms in the earlier

part, and the 'East Asian Economic Crisis' during the latter part of

the 1990s. The instability in regional trade has not only affected

regional trade flows, but also the trade balances of regional

countries. Prior to the commencement of reforms during the early

1990s, the region witnessed favourable trade within the region, but it

became obnoxious during the reforms, particularly during the period

of 'Asian Crisis'. The pressure on the regional trade imbalance started

declining after 1998, and it turned out to be favourable in 2002.

Table 3: Intra-Regional Trade in South Asia: 1980-2004

Intra-Regional Trade 1985-89 1990-94 1995-99 2000-04 1985-94 1995-2004

Exports (Mill. US$)

684

1148

2198

3872

916

3035

Imports (Mill. US$)

555

1134

2648

3864

844

3256

Growth of Exports (%)

7.7

11.2

10.1

21.7

9.5

15.9

Growth of Imports (%)

0.1

23.4

14.4

18.1

11.8

16.3

Region’s Share in World Exports (%)

3.8

3.6

4.3

5.0

3.7

4.7

Region’s Share in World Imports (%)

1.9

2.9

4.0

3.9

2.5

4.0

IRT as % of Region’s World Trade (%)

2.9

3.2

4.2

4.4

3.1

4.3

Source: Direction of Trade Statistics 2005, International Monetary Fund, Washington DC.

Note: Statistics estimated for a period is based on taking average of the annual figures of each period.

131130

The movement of intra-regional trade over the last two and half

decades is presented in Figure 2. The experience of the region

indicates that there was a wide gap between the intra-regional export

ratio (IRTX) and intra-regional import ratio (IRTM) prior to the

formation of SAARC. As the process of SAARC formation started in

1980 and the regional caucus was finally formed in 1985, the

divergence between IRTX and IRTM narrowed during the second

half of the 1990s. After a brief spell of trade deceleration, regional

trade once again picked up in 2000, but the gap between IRTX and

IRTM increased further during the period 2003-04.

Since the inception of SAARC, both the exports and imports of the

region grew consistently during 1985-2004, except for the brief

period of 1995-99. In overall trade performance, the region's imports

increased more rapidly than exports during the 1980s and the 1990s.

The trend was reversed in the new millennium where growth rates of

exports exceeded that of imports. The experience of the region

indicates that intra-regional imports fluctuated more than exports

during the period 1985-1999. Moreover, the level of volatility in

different sub-periods was higher in the case of imports than exports.

During 1985-99, export growth was ranged between 8 percent and 11

percent, whereas it was between zero and 23 percent in the case of

imports. Regional trade was affected, to some extent, during the

period of reforms. The results show that regional trade picked up in

the early phase of reforms, but slowed down during 1995-99. Exports

and imports surged in the 2000, and exports grew much faster than

imports. In the two decades of SAARC's existence, the IRT

performance of the regional caucus was more profound in the recent

decade than in the earlier one. The achievement of the region in this

regard may be attributed to comprehensive trade liberalisation in the

form of SAPTA since 1995. A detailed analysis of the impact of

SAPTA on regional countries is presented in the subsequent part of

this paper.

Association of individual countries with the region provides an

interesting insight. India continues to maintain favourable trade

balance with the region. Pakistan was also as a trade surplus country

vis-à-vis the region, except for a few years during the second half of

the 1990s. The nature of trade deficit differs significantly among the

regional countries. For example, Bangladesh, Maldives, Nepal and

Sri Lanka had significant level of trade deficit with the region. In the

case of Maldives and Nepal, the trade deficit with the region

increased significantly during 1990-2000, but their trade base was

very low. During the second half of the 1990s, Sri Lanka's trade

imbalance with the region was high and fluctuated significantly.

Furthermore, its trade imbalance was significantly large with India,

but Sri Lanka was satisfied with the emerging trade equation with

India in the process of reducing its overall trade deficit (Kelegama,

2001). Sri Lanka could source some of its critical imports from India

at a cheaper rate than other competing suppliers. For example, Sri

Lanka's import of Hero Honda motorcycles was 30 percent cheaper

than Suzuki motorcycles. Similarly, Sri Lanka was importing a large

number of motor vehicles for war preparation from Mitsubishi, but

later similar products were sourced from Tata and Ashok Layland,

for almost half the rate with comparable level of product quality. As

many products are unavoidable for imports, the choice of

appropriate suppliers could reduce the overall trade imbalance of a

country. The implementation of Indo-Sri Lanka FTA (ILFTA) had

brought more dynamism into bilateral trade in 2000.

The trade deficit of Bangladesh with the region was more than one-

third during the latter half of the 1990s. Exports from Bangladesh to

the region constitute about 2 to 3 percent of its global exports, and

the corresponding figure for imports ranges between 7 and 17

percent. The bilateral trade performances of regional partners

indicate that Bangladesh maintained bilateral trade imbalances with

most of the regional partners during the last decade. During the mid-

90s, it had favourable trade with Nepal, but the trend was reversed in

later years. So far as Bangladesh's trade balance with Sri Lanka is

concerned, it was almost even during the 1990s.

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

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Y80

Y82

Y84

Y86

Y88

Y90

Y92

Y94

Y96

Y98

Y00

Y02

Y04

IRT

/Wo

rld

(%)

IRTX

IRTM

Average IRT

133132

South Asia has become an important trade destination for India.

Exports to the region constituted between 3 to 6 percent of global

exports, whereas imports from the region was relatively lower than

exports. India maintained favourable trade balance with South Asia

over a long period of time. The level of trade balance with

Bangladesh and Sri Lanka was significant; and moderate with Nepal

and Maldives. The trade surplus with Bangladesh was subject to a

high degree of fluctuations whereas it was rising with Nepal.

However, India's bilateral trade balance with Bhutan remained

adverse. Up to 1994, India registered a positive trade balance with

Bhutan, but the trend was reversed in subsequent years due to a

significant rise in Bhutanese exports to India.

Pakistan exported 3 to 5 percent of its total exports to South Asia and

imported between 2 to 4 percent of the total imports from the region

during the last decade. Pakistan's most important export

destinations in the South Asian region are Bangladesh, Sri Lanka and

India. These three countries constituted nearly 95 percent of

country's exports to the region during the 1990s. India's share in the

total imports of Pakistan from the region reached 72.4 percent in

1996, and declined to 42.8 percent in 2000. The declining share of

Pakistan's imports from India resulted in a surge in Sri Lanka's

exports to Pakistan in a significant manner. Pakistan continued to

maintain favourable trade with the region, except for the period

1996-99. Pakistan's adverse trade balance with the region increased

to more than 7 percent of its total trade deficit with the world in

2000.

Sri Lanka's dependence on the South Asian region has been more on

imports than exports. The regional exports of Sri Lanka were

between 2 to 4 percent of its global exports. Though Sri Lanka

imports more from the region, its dependence on the region has

declined gradually in recent years. Sri Lanka's largest trading partner

in the region is India, and other important partners are Maldives,

Pakistan, Bangladesh and Nepal. With the gradual reduction of

imports from the region in relative terms, the trade imbalances with

the region have declined significantly. However, it maintains a

favourable balance of trade with Maldives and Bangladesh and also

with some other South Asian countries. Maldives is critically

dependent on the region for trade. Its exports depended on the

region to the extent of 13 to 25 percent of its global exports whereas

dependence for imports varied between 10 and 21 percent in the

1990s. The trade imbalance of the country is almost proportionate to

its regional trade. Sri Lanka has emerged as the most important

trading partner of Maldives, and the bilateral trade deficit with Sri

Lanka increase significantly in recent years. It has relied

considerably on India for its imports but exported very little to India,

thus incurring a large trade imbalance with India in the 1990s.

Maldives' trade with Pakistan showed no significant improvement in

the 1990s, though the latter enjoys a favourable trade balance with

the former.

The Indo-Nepal Trade and Transit Treaty of 1996 had a lasting

impact on Nepal's strong association with the region. The share of

Nepal's regional exports to total exports increased from 9.3 percent

in 1995 to 36.5 percent in 1998. Similarly, the share of imports from

the region jumped from 17.5 percent in 1995 to 33.1 percent in 2000.

India has been Nepal's largest regional trading partner, and other

important trade partners are Bangladesh and Sri Lanka in the region.

The strengthening of economic ties with the region has widened its

trade imbalances with the region. It has the largest bilateral trade

deficit with India in the region.

How Critical is the Bilateral Trade Imbalance Issue?The trade imbalance among the regional trade partners has been one

of the most contentious issues in the regional process. The trade

imbalance issue is mostly hovering around India. It may be noted

that India's export and import baskets are highly diversified as

compared to the smaller countries of the region. Moreover, scale of

production of India is high, partly due to large domestic demand and

growing export demand in the post-reform period. India's

production and export bases are also larger than other regional trade

partners. Some of these countries very often import from India to

overcome short term problems concerning supply inadequacies in

their economies. It may be recalled that the Nepalese economy

suffered from high inflation and shortage of essential products for a

brief period, when Indo-Nepal transit points were temporarily closed

following expiry of the Indo-Nepal Trade and Transit Treaty in the

1990s.

A similar situation also occurred in other neighbouring countries.

Therefore, in supply-constraint economies, occurrence of trade

135134

imbalances is a natural phenomenon, and an importing country has

the option of choosing neighbouring countries or other suppliers to

meet its domestic requirement based on various considerations,

including assured and cheap supply of products. The dependence of

smaller countries on larger ones is not a situation unique to South

Asia, rather, several such instances are found in other parts of the

world. For example, South Africa is a large country in the southern

tip of Africa surrounded by several member countries in SACU and

SADC. Supply constraints in these countries have prompted them to

depend on South Africa as long as supply constraints are not

resolved. In an interdependent world, domestic demand cannot be

contained due to lack of production, rather, 'basic and essential

imports' must be made available in the domestic economy through

imports either from a neighbouring country or from the rest of the

world. In a completely free trade regime, production-deficient

countries are likely to face trade imbalances. Attempts are required

to augment exports to trade-surplus countries to reverse the trend in

trade imbalances in the medium term. The trade-surplus countries

also need to devise suitable instruments to compensate the trade-

deficit countries and to support them in augmenting their production

and export capabilities.

However, a large country like India has domestic compulsions. It is

primarily a trade deficit country with respect to the rest of the world.

Considering the level and varieties of import requirements, the

regional partners can take advantage of the large market in India,

particularly in commodity trade. Even the demand for certain types

of specialised services is very much required in India. India's total

global import was US$ 106 billion in 2004-05. It will be to the

benefit of the regional partners, particularly the trade-deficit regional

partners, to tap such opportunities.

The India-Bhutan trade relationship may be taken as a model for

regional cooperation in South Asia. Bhutan was chronically a trade-

deficit country with India, where bilateral trade takes place primarily

in goods. Bhutan's export basket was not only small, but also lacked

supply capabilities. With the support from India, Bhutan developed a

hydro-electricity project, and exported surplus energy to India on a

commercial basis. Consequently, the India-Bhutan trade imbalance

problem has been effectively addressed, and Bhutan has favourable

trade balance with India.

Very often the trade imbalance problem at the regional level remains

unresolved because of political interventions. For a long period,

Bangladesh continued to have an adverse bilateral trade balance with

India. In the 1990s, it declined substantially on account of a surge in

urea export to India. India is a major global player so far as import of

urea is concerned. India's domestic demand for urea is so vast that it

can consume Bangladesh's entire exports of urea can be absorbed by

India. However, the political decision to hike the gas tariff in

Bangladesh led to an increase in the cost of production of urea, and

consequently it became uncompetitive vis-à-vis other international

supplies. India switched to another source of supply, and

Bangladesh's bilateral trade deficit with India went up again. A large

gas reserve is found in the eastern coast of India, which can meet

India's large domestic demand for gas. India has made a buy-back

arrangement with Oman for purchase of urea on a long term basis.

In this changed situation, Bangladesh may have to look for new

products to gain wider market access in India.

The overall trade deficit in the region indicates that the region

maintained a low level of trade deficit until 1989, and the trade

deficit widened slowly up to 1994, as presented in Figure 3. During

1995-2000, the period of trade volatility in the region, trade gap

widened in an unprecedented manner. This led to a critical phase for

the trade regime in the region. However, the trade gap completely

narrowed by 2001, but resurfaced again in 2003 through 2004.

Though the region witnessed serious debate on trade imbalances,

there is very little scope to contain trade deficit in a consistent

manner unless there are substantial changes in restructuring

production.

Figure 3: Trade Imbalance in South Asia

-800

-600

-400

-200

0

200

400

600

Y80

Y81

Y82

Y83

Y84

Y85

Y86

Y87

Y88

Y89

Y90

Y91

Y92

Y93

Y94

Y95

Y96

Y97

Y98

Y99

Y00

Y01

Y02

Y03

Y04

Mill

ion

US

$

-40000

-35000

-30000

-25000

-20000

-15000

-10000

-5000

0

Intra region

World

137136

Is there any Trade Diversion in the Region? Examining the

case of BangladeshIndia has maintained trade balance with many countries, and this

has been discussed widely in the region. Bangladesh raised this issue

at different forums, and at various occasions. The intensity of such

discussion varies in different political regimes. It is very often argued

that Bangladesh's large trade deficit with India has been the main

contributing factor to its overall trade deficit. We have examined the

structure of Bangladesh's trade deficit since 1980. In the early 1980s,

Bangladesh's trade deficit with India was very small, and many other

countries such as Japan and China had a higher trade deficit with it,

as shown in Figure 4. Between 1980 and 1989, India's bilateral trade

deficit increased, but slowly. In an unprecedented manner,

Bangladesh's bilateral trade deficit with India increased rapidly and

persistently during 1990-1994. However, it became highly volatile

between 1995 and 1999. Following a surge in bilateral trade deficit

again during 2000 to 2002, it declined in the subsequent period.

Bangladesh has not only had large trade deficits with India, but also

with extra-regional countries like China and Singapore in the new

millennium. While Bangladesh's bilateral trade deficit with India has

declined, but has grown with China during 2004. Interestingly,

Bangladesh's trade deficit with India and China is almost converging.

Bangladesh also has bilateral trade deficit with Hong Kong. It must

be noted that Bangladesh's combined trade deficit with China-Hong

Kong is much higher than that with India. We have also tried to

approach the issue in a different manner. The bilateral exports-trade

deficit ratio is presented in Figure 5. The higher the ratio, the more

critical is the bilateral trade relationship with a country. The figure

shows that the ratio for India has been declining; showing, thereby,

Bangladesh's vulnerability to India is slowly declining whereas it is

compounding with China. Moreover Bangladesh's bilateral trade

deficit has also been growing very fast with Kuwait in new

millennium. There is a need to examine the wider issues, such as

structure of imports from these countries (i.e., intermediate products

or anything else), the impact of having a large bilateral trade deficit

with selected countries on the overall trade deficit, and measures to

reverse the order of Bangladesh's bilateral trade deficit

Analysis of Tariff and Non-Tariff BarriersThe level of tariff protection in the region is not only high compared

with other regions of the world, but also highly diversified among

regional countries in South Asia. The region has witnessed two

parallel trends in its tariff structure: (a) the level of tariffs is not

uniform among regional economies, and (b) there is no

harmonisation among the regional economies so far as level of

protection across broad trade sectors is concerned. Until the 1970s

the regional economies were protected against external competition

and pursued Import Substitution Industrialisation (ISI) as the thrust

area of economic policy. Trade liberalisation started gradually in the

region after seeing the growth of the Asian Tigers in the East. It took

almost two decades for South Asia to switch over to the alternative

policy paradigm. As countries initiated reform at different points of

time, their level of tariff liberalisation differ significantly.

South Asia has large resource endowments, and it differs

significantly among the regional countries. Though most of the

countries are at a similar level of economic development, their tariff

structure differs significantly because of the differences in their

resource endowments. As trade policies are mostly guided by

domestic compulsions, a country prefers to lower its level of tariff

protection where it is more competitive. This disharmony in tariff

Figure 4: Bangladesh's Bilateral Trade Imbalance with

Selected Countries

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

%ofT

ota

lTra

de

Defic

it

India China Singapore Kuwait Japan Hong Kong Korea

Figure 5: Changing Distribution of Bangladesh's

Source of Imports

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Y1980

Y1982

Y1984

Y1986

Y1988

Y1990

Y1992

Y1994

Y1996

Y1998

Y2000

Y2002

Y2004

Import

Share

(%)

India China Hong Kong Japan Kuwait Singapore

)

139138

structures among regional countries highlights the dimension of

trade protection. In this context the structure of tariff bands is

important to understand the strategic character of each country's

tariff policy.

Structure of Tariff in South AsiaManagement of tariff band is an important aspect of fiscal policy for

managing tariff administration. The relevance of tariff bands has

been much greater in the context of multilateral trade negotiations in

the WTO. A comparative analysis of the tariff bands indicates that a

number of tariff bands used by the regional countries are highly

diversified. In the early phase of the new millennium, the region had

as many as 30 tariff bands, ranging between zero and 250 percent.

These countries do not follow any pattern so far as the number and

range of tariff bands are concerned. As shown in Table 4, countries

like Bangladesh, Bhutan and Nepal have maintained much fewer of

tariff bands than others countries in the region.

Most of the countries have assigned zero tariffs to a number of tariff

lines. In the case of Bangladesh and Sri Lanka, 8 to 10 percent of

their tariff lines are subject to zero tariffs. Individual countries in

South Asia have used a large number of tariff bands, but the major

chunk of their tariff lines are concentrated around a few tariff bands.

Such tariff bands are three for Bangladesh, Bhutan and Sri Lankan,

and four for Nepal and Pakistan.

Discussions in the WTO focus on the composition of tariff peaks in

the total number of national tariff lines, in each country. Countries

having more products falling under the category of less than peak

tariff may have less adjustment cost under further trade

liberalisation than others. If tariff rates of 12 percent and above are

considered as peak tariff, the experiences of South Asian countries

have been diverse with regard to administration of tariff rates in

addressing peak tariff in their customs duty structure. The number of

products below peak tariff has been substantial in the case of Sri

Lanka, Nepal and Pakistan; and moderate for Bangladesh and

Bhutan. A substantial number of product lines lie above the peak

tariff in the case of India. The tariff structure of regional countries

indicates that most of their product lines are subject to either 30

percent tariffs or less. Between 91 to 100 percent of their product

lines are subject to this tariff range. While all the product lines of

Bangladesh are covered within the tariff range of 0-30 percent, 91.18

percent of Bhutan's products fall within this tariff range.

As a strategic trade policy management, the developed countries

usually maintain very high tariff for certain key products, although

their average tariff rates have been very low compared with other

developing countries. By and large, developing countries are

adversely affected by such tariff policies. Peak tariffs generally exist

for both agricultural and manufacturing products. In South Asia,

some countries follow this policy while others do not. India, Pakistan

and Sri Lanka maintain very high peak tariffs as a strategic tariff

policy, while Bangladesh and Nepal do not follow this principle. For

India, Pakistan and Sri Lanka, the highest peak rates are 182, 200

Table 4: Tariff Structure of South Asian Countries in 2004 (in perc entage)

Band Bangladesh Bhutan India Nepal Pakistan Sri Lanka 0 7.97 3.77 0.78 1.63 0.67 10.71 3 0.06 35.08 5 1.15 22.16 24.08 6

7.33

7.5

20.41

10

30.28

0.89 31.30

23.26

12

24.87 15

19.39

2.23

3.12

28.22

16

0.82 20

23.06

2.91

14.55

0.25

22.5

16.52

25

17.67

11.21

34.55

27.5

20.67

30

35.71

31.84

66.41

0.21

35

0.04

1.41

40

4.26

4.86

45

0.10

0.03

50

8.13

0.08

0.10

0.02

55

0.01

0.02

60

0.04

0.31

70

0.40

0.13

75

0.11

0.06

80

0.05

0.62

0.06

90

0.21

100

0.70

1.10

0.35

0.08

105

0.53

150

0.03

160

0.12

182

0.17

200

0.03

250

0.11

Total 100.00 100.00 100.00 100.00 100.00 100.00

Data Source: Trains Wits 2006, ITC, UNCTAD, WTO and World Bank, Geneva.Note: Figures in each cell denote share of product lines (HS National Lines) in the corresponding tariff band

141140

and 250, respectively, in the early 2000s. As the magnitude of the

highest peak differs from one country to another, we have examined

a number of products subject to peak tariff of 100 and above. The

results show that the share of such products constitutes a very small

proportion of the total product lines in each country, having very

high peak tariff rates. The share of high peak tariff products (i.e.

tariff rate equal to 100 or more) to total number of products is 1.92

percent in India, and the corresponding figures are far less in the

case of Pakistan and Sri Lanka. To protect the very sensitive and

strategic products, there is a need to maintain very high tariff in a

selective manner. This may have very little impact on the overall 2tariff of a country.

It is evident from the literature that sectoral tariff structure differs

among the regional countries, depending upon their domestic

resource endowments. There are also some common sectors that are

critically sensitive to most of the economies, which are protected in

the entire region. The sectoral profile of countries with regard to

tariffs is presented in Table 5. South Asian countries differ

significantly in terms of their level of customs tariff at the beginning

of the new millennium. If the average tariff is considered as the index

of domestic protection, excluding specific tariff, regional countries

can be broadly categorised into three broad groups. While Nepal and

Sri Lanka have maintained a low level of average tariffs, India and

Bhutan maintained very high average tariffs. Bangladesh and

Pakistan may be considered middle level countries so far as their

trade protection is concerned.

It is apparent from the behaviour of the regional countries that the

average level of protection to agriculture is much higher than the

manufacturing sector. The only exception is Nepal, where the

average import-weighted tariff in manufacturing is much higher than

that of agriculture. Regional countries are also divided on the basis of

level of protection to agriculture. In countries like Nepal, Pakistan

and Sri Lanka, the level of average tariff in agriculture is much lower

than other countries in the region. However, the processed food

sector is protected in most of the region.

The nature of protection in the manufacturing sector is different

from agriculture. There are some sectors which are subject to higher

tariff than others in the region. For example, within the

manufacturing sector plastic products, textiles, footwear, plaster and

cement, vehicles, arms and ammunitions are protected with high

tariff rates. The manufacturing sectors which attract very low tariffs

are minerals, chemical products, leather, wood, pulp, gems and

jewelleries, base metals, machinery and cinematography. India has

very high tariff rates as compared with other countries of the region.

In the past, the level of tariff in India was very high and this has

come down significantly in recent years on a unilateral basis. In

principle, India has committed to bring down the level of tariff to the

ASEAN level within a few years from now. A brief overview of India's

tariff regimes is presented in the following section.

Table 5: Structure of Tariffs in SAARC Countries: By HS Section (in percent)

HS Section Description Bangladesh Bhutan India Nepal Pakistan Sri Lanka

I

Live Animals and Animal Products

25.9

33.0

30.9

10.3 13.6 17.7

II

Vegetable Products

19.7

44.5

39.4

10.7 15.9 21.3

III

Animal or Vegetable Fats and Oils

21.2

47.0

61.1

12.5 4.6 19.6

IV

Prepared Foodstuff, Beverages, etc.

24.3

46.3

45.9

21.4 29.0 28.9

V

Mineral Products

15.1

26.4

19.9

11.1 12.6 6.7

VI

Products of Chemicals

13.9

12.9

29.4

11.6 12.0 5.1

VII

Plastics and Articles thereof

19.9

23.6

30.0

18.9 18.7 13.4

VIII

Raw Hides and Skins, Leather, etc.

13.7

30.3

22.3

12.4 13.6 18.1

IX

Wood and Articles of Wood

18.6

16.9

25.7

9.3 18.1 11.1

X

Pulp of wood or of other Fibres

19.4

18.8

26.8

14.9 18.4 12.8

XI

Textile and Textile Articles

25.6

26.1

27.8

15.6 21.3 5.5

XII

Footwear, Headgear and Umbrella

28.9

30.0

30.0

25.3 23.1 24.0

XIII

Articles of Stone, Plaster, Cement

21.8

28.7

29.4

18.0 21.5 19.1

XIV

Natural or cultured pearls, Jewellery

15.9

30.0

30.0

10.6 6.5 2.0

XV

Base Metals and Articles of Base Metal

19.1

18.3

31.5

12.7 15.8 10.0

XVI

Machinery and Mechanical Appliances

13.2

11.1

24.9

10.1 13.5 6.7

XVII

Vehicles, Aircraft and Vessels

18.7

16.5

45.3

21.2 38.8 12.3

XVIII

Optical, Photography and Cinematography

13.0

14.5

25.5

9.3 10.7 6.7

XIX

Arms and Ammunition

17.9

50.0

30.0

80.0 25.0 7.7

XX

Miscellaneous Manufactured Articles

24.9

26.8

29.2

17.9 21.2 19.2

XXI Works of Art Collectors' Pieces 21.4 38.8 24.7 22.1 8.6 12.0

Agriculture 22.8 42.0 41.0 13.7 18.1 22.2

Manufacture 18.7 19.8 29.3 14.2 17.1 9.1

Overall 18.9 22.3 29.9 13.7 16.7 10.8

Data Source: Trains Wits 2005, ITC, UNCTAD, WTO and World Bank, Geneva.

143142

Has Tariff Declined in India?Analysis of Tariff BandsIndia made steady progress in liberalising its tariff policies in the

31990s. The structure of tariff bands is analysed here to throw some

light on the speed of tariff liberalisation in the country. Though

economic liberalisation started in the latter half of the 1980s, the

economy was highly protected as shown in Table 6. In 1986-87 the

tariff rate ranged between 0 to 300 percent in terms of ad valorem

duties. As many as 62 National Lines (NL) were subject to zero

tariffs, and about 72.6 percent of the total number of products was

subject to a tariff rate of either 100 percent or more. During the

period 1986/87-1991/92, there was very little change in the tariff

structure. Moreover, there has been high concentration of products

in a select number of tariff bands.

There has been a perceptible change in the tariff structure of India

following implementation of economic reforms in the country. While

the highest peak tariff declined steadily, the number of products with

tariff rates equal to 200 percent or more declined over the years. In

1991-92, highest peak tariff was 355 percent which declined to 290

percent in 1995-96 and further to 182 percent in 2002-03. Similarly,

the number of products (6-digit HS) subject to the tariff rate of 200

percent or more was 419 items in 1986-87, 288 in 1991-92, 13 in

1995-96 and zero items in 2002-03. During the reform period, the

mode tariff band declined significantly. Between 1986-87 and 1991-492, the mode tariff rate was 100 percent, but the rate declined to 50

percent in 1995-96. Since 1999-2000, a sizable number of products

concentrated on a group of tariff bands rather than on a single tariff

band. Three tariff bands (viz. 25, 35 and 40) covered about 88.67

percent of total tariff lines in 1999-2000 and 84.6 percent of total

tariff lines (viz. 25 and 30) in 2002-03.

Though tariff liberalisation took place during the 1990s, the number

of tariff bands did not decline, rather, they increased during the

period. For example, in 1986-87 there were 12 tariff bands, which

increased to 15 in 1991-92 and further to 21 in 2002-03. Thus, the

number of tariff bands increased substantially to above 40 percent,

despite the decline in the level of peak tariffs at the upper layer

during the second generation of reforms.

Structure of Tariff India was one of the most highly protected economies in the world

during the 1980s. The process of liberalisation started in the mid-

1980s and this process continued with a higher order of

restructuring, followed by the implementation of a structural

adjustment programme in the 1990s. For a comparative analysis of

the liberalised periods in the 1980s and the 1990s, we have taken the

ad valorem tariff at the 6-digit HS level for all sectors, including

agriculture and manufacturing. The trend in the overall tariff rate

indicates that there was a significant decline in the ad valorem tariff

rates between 1986-87 and 2002-03. It should be noted that we have

considered only the basic ad valorem duties for this analysis, and

other forms of tariffs such as specific tariff, para-tariff and other ad

hoc duties are not included in the tariff analysis.

It is interesting to note that tariff rates declined slowly between the

Table 6: Number of Tariff Bands in India during 1986/87-2002/03

No. of Bands

1986-87 1990-91

1991-92

1995-96

1999-00 2002-03

Rate

NL

Rate

NL

Rate

NL

Rate

NL

Rate NL Rate NL

1

0

62

0

68

0

68

0

29

0 48 0 57

2

47

287

40

288

30

1

3

7

3 7 3 6

3

50

214

50

213

40

288

5

4

5 107 5 75

4

60

758

60

744

50

213

10

302

10 11 10 35

5

70

85

70

85

60

744

15

3

15 354 15 181

6

100

2998

81

89

70

85

20

5

20 19 20 159

7

110

62

100

2292

81

89

25

79

25 1036 25 977

8

150

113

110

62

100

2283

30

99

30 14 30 3348

9

200

221

150

20

110

62

35

13

35 1544 35 8

10

250

61

200

114

150

20

40

155

40 1953 40 158

11

270

13

250

61

200

113

45

7

100 8 45 6

12

300

124

270

5

250

61

50

4383

120 1 50 4

13

..

..

300

101

270

5

105

1

180 2 55 1

14

..

..

355

8

300

101

135

1

230 8 60 3

15

..

..

..

..

355

8

145

3

.. .. 70 13

16

..

..

..

..

..

..

290

13

.. .. 75 2

17

..

..

..

..

..

..

..

..

.. .. 80 4

18 .. .. .. .. .. .. .. .. .. .. 100 49

19 .. .. .. .. .. .. .. .. .. .. 105 16

20 .. .. .. .. .. .. .. .. .. .. 160 2

21 .. .. .. .. .. .. .. .. .. .. 182 8

Source: Based on author’s calculations.

145144

years 1986-87 to 1993-94, and a significant reduction took place 5between 1994-95 and 2002-03. We have not included recent years'

tariff data in our analysis as they are reported with different trade 6classification (HS 2002). During the years 2000-01 and 2001-02,

the average tariff rate for the manufacturing sector remained more or

less constant, but the average tariff for the agricultural sector

increased significantly compared with previous years. This was

primarily due to an adjustment in the tariff structure to protect the

agricultural sector in response to the removal of quantitative

restrictions.

The average ad valorem tariff rates of India and the sectoral averages

including agriculture and manufacturing have shown a high degree

of fluctuation in some years. Other studies like WTO (2002) and

Goldar and Mehta (2001) point out that those corresponding rates

are quite consistent without much fluctuation. These studies have

made adjustments to compute the applied tariff rates using

additional duties. In the present study, no such adjustment is made

to accommodate additional duties which have been imposed by the

Government of India from time to time. Since basic duties are

important for negotiations in the WTO, and the primary objective of

the present study is to examine the trend in India's average tariff

rates since the mid-1980s, we have concentrated on basic ad valorem

duties.

Some studies have made appropriate adjustments to include

additional tariffs imposed by the Government of India along with the

basic duties while estimating average tariffs for the manufacturing

and agricultural sectors. It should be noted that these additional

duties were purely ad hoc in nature, and also for a specific time

period. For example, in 1996-97, the Government of India imposed

Special Custom Duties (SCD) of 2 percent, which increased to 5

percent during 1997-98 and 1998-99. The SCD was abolished in

1999-00, but a surcharge of 10 percent was imposed along with Basic

Customs Duty (BCD) for the years 1999-00 and 2000-01. When

these additional duties are included in the basic customs duties, the

average rate of ad valorem duties shows a gradual decline without

much fluctuation from year to year as shown in Table 7. During the

period 1993-94/1996-97, the average tariff rates reported in the

present analysis and Mehta (2002) are almost similar. However, a

discrepancy was noticed during the period 1997-98 to 2001-02. The

results of the present analysis show that there was a significant

decline in the basic duty from 32.4 percent in 2001-02 to 27.5

percent in 2002-03.

Although there has been a persistent decline in the average ad

valorem customs tariff during the period of reforms, certain sectors

continued to have very high average ad valorem tariff. The

agricultural sector has continued to have a high average tariff in

recent years, and within the sector animal or vegetable fat and oil has

been subjected to very high level of protection. The average tariff for

prepared foodstuffs, beverages. in the agricultural sector also

remains very high as compared with the other HS sections in

agriculture.

The average tariff for the manufacturing sector is much lower than

Table 7: Average Tariff Rate by HS -Section (in percentage)

Section Description 1991-92 1994-95 1996-97 1999-00 2002-03 I Live Animals and Animals Products

75.5

16.6

15.8

19.5

30.9

II Vegetable products

99.7

36.6

28.6

26.6

34.6

III Animal or Vegetable Fats and Oils

200

65

37.8

33.9

65.1

IV Prepared Foodstuff, Beverages, etc.

107.5

87.7

66.1

50.6

42.5

V Mineral Products

81

47.3

23.9

21.7

19.9

VI Products of Chemicals

103.6

64.5

38.6

33.7

28.9

VII Plastics and Articles thereof

124

65

39.7

36.3

30.1

VIII Raw Hides and Skins, Leather, etc

71.9

61.8

24.9

23.6

20.2

IX Wood and Articles of Wood

64

65

28.5

30

25.5

X Pulp of wood or of other Fibres

86.5

62.4

26.8

29.9

25.1

XI Textile and Textile Articles

100.4

64.6

48.3

38.6

17.8

XII Footwear, Headgear and Umbrella

100.0

65.0

50.0

40.0

30.0

XIII Articles of Stone, Plaster, cement

92.1

65

49.2

39.3

29.7

XIV Natural or cultured pearls, jewellery

79.2

65

50

40

30

XV Base Metals and Articles of Base Metal

127.1

49.1

30.7

32.8

30.3

XVI Machinery and Mechanical Appliances

89.9

64.9

32

28.1

24.9

XVII Vehicles, Aircraft and Vessels

70.2

63.9

45.5

36.7

36.3

XVIII Optical, Photograph and Cinematography

78.2

60.9

38.4

31.2

26

XIX Arms and Ammunition 100 65 50 40 30

XX Miscellaneous Manufactured Articles 106.6 65 43.4 35 29.2

XXI Works of Art Collectors' Pieces 66.7 58.3 40 33.3 25

Source: Various budget documents, Government of India.

147146

Figure 7: Structure of India's NTBs

in 2003

Canalized

0%

Prohibited

0%

SIL

0%

Restricted

4%

Free

96%

the agricultural sector. In 2000-01, the average ad valorem duties in

agriculture were 40.4 percent as against 30.8 percent in the

manufacturing sector; and in 2002-03, they were. In certain sub-

sectors in the manufacturing sector, the average ad valorem tariffs

remain very high. These sectors include products of chemicals,

plastics and articles, footwear, headgear, articles of plaster and

cement, gems and jewellery, base metals, vehicles. On the other

hand, some broad sub-sectors such as prepared foodstuff, beverages,

raw skins and leather, articles of wood, textiles and machinery,

witnessed a sharp decline in average tariff rates. In the

manufacturing sector, the highest level of average tariff was reported

in the broad product group dealing with vehicles, aircrafts and

vessels.

India has been importing various quantities of technology intensive

products from the global economy. The proportion of high

technology intensive products to total imports has been quite

significant in recent years as compared with earlier years. India's

high technology intensive imports are mostly concentrated in three

major product groups: chemical products, machinery and

mechanical and appliances, photography and cinematography.

In 2002-03, the overall average tariff declined substantially, mostly

due to a decline in the average tariff rates in the agricultural and

manufacturing sectors as shown in Figure 6. The relative movement

of average tariff rate overtime in the manufacturing and the

agricultural sectors is quite interesting. During the period 1987-

88/1992-97, the average tariff in agriculture was higher than

manufacturing, and this trend was reversed during the period 1993-

94 to 1999-2000. However, the average ad valorem tariff of the

agricultural sector continues to be higher than that of the

manufacturing sector since 2000-01.

The Government of India is committed to reducing the level of tariff

further to the ASEAN level within a couple of years. Since India is a

part of the WTO process and desires an FTA with ASEAN by 2012, it

is necessary to have a lower level of tariff for both the WTO

negotiations and to enter into close economic cooperation with fast

growing countries. Looking at the tariff structure, it may be observed

that there is ample scope to reduce the average level of tariff. Except

for the sensitive products, tariff can be reduced for a sizable number

of products. The preparation of list of sensitive products is crucial to

reduce protection non-sensitive products.

Analysing NTBs in India as a Barrier to Regional TradeAs in the case of tariffs, India has made substantial progress in

liberalising its NTBs over a period of time. In 2003, the level of

quantitative restriction had come down to nearly 4 percent of its total

number of tradable products at the 10-digit HS level as shown in

Figure 7. Under the provision of Article XX, and XXI of GATT, such

restrictions are permitted under various grounds such as health,

safety and essential security (Batra, 2005). The number of national

lines subject to forms of quantitative restriction includes 568 of

11,671 lines in 2003 at 10-digit HS. As the reform process is in

progress, there is a possibility of further decline in the level of

quantitative restrictions in the future.

The level of NTBs remained very high during the pre-reform period,

and the trend continued in the 1990s. Among the total number of

Manufacturing

Overall

Agriculture

0 20 40 60 80 100 120

Tariff Rates

1991-2

1994-5

1996-7

1999-00

2002-3

Figure 6: Tariff Liberalisation in India During Reforms

Overall Agriculture Manufacturing

149148

tradable items, the share of hard core NTBs was more than 30

percent in 1996, which declined significantly in the latter part of the

1990s as shown in Table 8 and Figure 8. The hard core NTBs consist

of prohibited and restricted items in India. The proportion of the

prohibited items to the total number of national lines was very small

in 2000. The share of restricted and SIL remained very large in the

mid-1990, but declined sharply towards the late1990.

Because of the reduction in NTBs, the share of national lines in the

free category rose significantly in the early part of the 2000. Though

regulatory control was very strong on account of domestic

compulsions, comprehensive economic reforms have brought down

NTBs to a significant level. This has contributed to the surge in

India's import along with its exports. In 2004/05, India's total

import bill accounted for US$ 106 billion, and thus India provides

enormous scope for regional countries to take advantage of the large

Indian market.

Regional Trade Liberalisation in South Asia: What Have

We Learnt from SAPTA?The trade agenda was not accorded high priority in the first SAARC

meeting, held in 1985. It almost took a decade to launch SAPTA to

foster trade within the South Asian region. Between 1995 and 2003,

four rounds of SAPTA were signed and three of them were

successfully implemented. The implementation of the Fourth round

is awaits for concurrence from the member states. The SAPTA

process has raised expectation among peoples of the region for a

deeper level of cooperation and a higher trajectory of economic

progress.

Simultaneous initiatives were taken to formalise SAFTA along with

the SAPTA at the early phase of the new millennium. In the Male

Summit in May 1997, an ambitious target was set to implement

SAFTA by 2001. Considering the geo-political realities in the region,

the adoption of SAFTA was deferred to 2003. In the Colombo

Summit in 1998, a decision was taken to set up a committee of

experts to prepare a draft treaty for SAFTA. Finally, the SAFTA

Agreement was signed in January 2004, which allowed regional

economies to benefit from the earlier rounds of SAPTA along with

the other provisions of the new agreement.

Several studies have indicated that the SAPTA process is not very

effective as compared with other RTAs like ASEAN, MERCOSUR,

ANDEAN and CARICOM, in augmenting intra-regional trade to a

respectable level (Wadhva, 1996 and Bhuyan, 1996, RIS, 2002). The

impact of each round of SAPTA has been different for individual

member countries. For a number of small countries in the region,

bilateral concessional trade is much higher than non-concessional

trade. There are various reasons for the poor performance of the

SAPTA process. It may be noted that the regional countries

underwent trade liberalisation as part of their multilateral

commitments along with their domestic economic reforms in the

1990s. With trade liberalisation sweeping across the world on

account of multilateral trade negotiations, concessions offered under

SAPTA became very meagre and less attractive. The series of global

economic shocks in the form of the East Asian crisis, surge in global

crude oil prices, and volatility of the US dollar, etc. have adversely

affected the stability of regional currencies. The depreciation of

regional currencies has outweighed the concessions provided under

Figure 8: Decline of NTBs in India

RestrictedSIL

Free

-2000

0

2000

4000

6000

8000

10000

12000

1996 1997 1998 1999 2000 2001 2002 2003

No

.o

fH

SN

ati

on

al

Lin

es

Prohibited Restricted Canalized /STE SIL Free

Table 8: Decline of Non-tariff Barriers in India (No. of National Lines at 10-digit HSb)

NTBs

1996

1997

1998

1999

2000

2001 2002 2003

Prohibited

59

59

59

59

59

59 52 52

Restricted

2,984

2,322

2,314

1,183

968

479 554 484

Canalised /state trading enterprises

127

129

129

37

34

29 33 32

Special import license (SIL)

765

1,043

919

886

226

0 0 0

Free

6,161

6,649

6,781

8,055

8,854

9,582 11,032c 11,103

Total

10,096

10,202

10,202

10,220

10,141

10,149 11,671 11,671

SOURCE: Report on Currency and Finance, 2002/2003, Reserve Bank of India.

a As of April

b As per Harmonised System of India Trade Classification of export and imports

c Includes 148 items with conditions.

151150

rounds of SAPTA. Besides, political factors played a critical role in

diluting the relevance of SAPTA in the region.

However, strong positive developments in the region strengthened

the process of rebuilding economic ties between the member

countries. The countries initiated various approaches to liberalise the

regional trade including regional, sub-regional and bilateral trade

initiatives. Despite apprehensions from various quarters, the

regional countries pursued the SAFTA process, and the Agreement

came into effect on January 1, 2006 as per schedule. After a

prolonged phase of negotiations, India and Pakistan opened up their

markets to their regional counterparts by lowing trade barriers in

specific sectors.

Moreover, the regional countries are slowly getting in to bilateral free

trade agreements (BTAs) after seeing certain successful BTAs in the

region. India's bilateral engagement with Nepal, Bhutan and Sri

Lanka proved successful, and other regional partners have also

begun to move in the same direction. Pakistan and Sri Lanka signed

and FTA in 2005. Bangladesh is also actively engaged with both

Pakistan and Sri Lanka to form bilateral FTAs in the near future. The

political rapprochement between India and Pakistan has begun to

move towards initiating a bilateral FTA on a reciprocal basis. Several

other initiatives are in the process to make the South Asian region a

free trade zone. The urgency for promoting regionalism in South Asia

has been the outcome of the economic and political compulsions of

the region. While the entire world economy is thriving on

regionalism, South Asia can not be a mute spectator to this

development around them. The region has large trade potential to

drive the regional economy with both intra-regional and intra-

industry trade. The region has the capabilities to initiate efficiency -

seeking restructuring of its industrial base to access the global

market, in a number of sectors (Das, 2004). Combining both, the

growing interest among the regional economies for mutual

cooperation, and the existing trade potentials, there are prospects for

the region to grow in the future.

Brief Overview of LiteratureSo far as the efficacy of the preferential trade regime in South Asia is

concerned, the existing literature provides mixed responses. Some

studies have found that the SAPTA process started with a very low

profile. Wadhva (1996) observed that a very small number of

products were considered for tariff concessions in SAPTA I for

regional trade liberalisation. Considering the nature of concessions

offered, the size of gains in terms of additional regional trade was

very minimal. In another study, Bhuyan (1996) observed that the

effectiveness of SAPTA I could have been improved with the

inclusion of tariffs and para-tariffs in the concessions of national

schedules. The SAPTA process could have been more effective with

deeper cuts in the rates of concessions.

Several studies have attempted to examine the implication of SAPTA

on intra-regional trade. Some of these studies suffer from various

limitations, including the choice of appropriate methodology to

examine impact analysis. Srinivasan and Canonero (1993) attempted

to examine the consequences of tariff liberalisation at the regional

level using the gravity model approach. They used various criteria to

categorise the regionally traded commodities into nine broad

commodity groups. Such an exercise, obviously, is self defeating, for

the commodity groups will consist of aggregates. Moreover, the

nature of the products is so divergent within each group that

application of similar tariff elasticities for non-homogeneous

products may be inappropriate in simulating the implications of

tariff removal on bilateral trade flows. Thus, from the point of view of

policy making, simulation exercise based on these elasticities may

not lead us an appropriate policy conclusion.

Mehta and Bhattacharya (2000) examined the implications of the

first three rounds of SAPTA on the four largest economies of the

region, namely India, Bangladesh, Pakistan and Sri Lanka. For the

simulation exercise, they used the gravity model estimates of

Srinivasan and Canonero (1993) on the data for year 1993/94 and

1994. Obviously, the choice of the year pre-empts the efficacy of their

study to investigate the implications of SAPTA on the four countries.

Such a study may not be appropriate to predict the actual effects of

SAPTA I, II and III on regional trade. However, their study

concluded that the SAPTA process would mostly promote intra-

regional manufacturing trade.

Bhattacharya (2001) analysed the effects of the first three rounds of

SAPTA on the region as a whole. It was found that the net increase in

the regional trade after the conclusion of the third round was very

153152

small. It was suggested that deeper tariff cuts and selection of highly

traded products for trade liberalisation within the region could

improve the trade prospects of the region.

The implication of the three rounds of SAPTA on the Indian economy

was also examined by Mukherjee (2002). Using time series bilateral

trade flow data, it examined the implications of SAPTA on India's

exports and imports. The study tried to examine the combined

effects of SAPTA I, II and III to understand the impact of regional

tariff liberalisation on India's external sector. However, as pointed

out earlier, different rounds of SAPTA were launched at different

points of time in the latter half of the 1990s. In order to study the

efficacy of each round, there is a need to examine their effects

separately. The study observed that the second and third round were

effective in boosting intra-regional trade.

Kemal et al (2000) examined the trade complementarities between

regional countries for the period 1985-95. The study found that India

has large potential to export a wide range of products to several

South Asian countries. It also highlighted the existence of large trade

complementarities between India and Bangladesh during the study

period. It was found that the level of such bilateral

complementarities not only increased, but also remained significant

compared with other countries in the region. It was also pointed out

that the largest regional countries such as India and Pakistan enjoy

strong trade complementarities.

The existing literature presents a mixed response with regard to the

future of the South Asian region, so far as success of the trade

liberalisation process in the region is concerned. It emerges from the

review of literature that the region has substantial trade potential,

which is not harnessed in an effective manner on account of several

reasons, most of them being non economic in nature. There is

tremendous pressure from the people of the region on their

respective Governments to realise the trade potentials. The gain from

the SAPTA process has been picking up in the later rounds, and

initiation of SAFTA is a step forward in this direction. Among the

regional partners, India has been the largest partner in the region,

and has contributed substantially to the trade liberalisation process

in the region. The impact of different rounds of SAPTA on the Indian

economy is discussed below.

India's Sectoral Trade with the RegionSAARC took almost a decade to enforce its most desired trade

agenda in 1995 in the form of SAPTA. Within a short duration, the

region approved four rounds of negotiations, and three of them were

implemented in earnest. The implications of these agreements are

felt in India's trade. India's imports under the first three rounds of

SAPTA made a six-fold increase between 1994/95 and 2000/01.

Except for a few broad product groups like gems and jewelleries,

vehicles, and arms and ammunitions, India imported a sizable

number of products from the region covering all sectors. Agricultural

imports constituted about one-third of India's total imports from the

region under the SAPTA process in 2000-01. Traditionally, import of

vegetable products is the most important sector for the country. The

bulk of import demand also involves fats and oils. In addition, India's

import demand also includes the manufacturing sector. Some of the

important manufacturing import sectors are chemicals, textiles,

plastic products, wood products, base metal and mechanical

appliances. Thus, the SAPTA process augmented India's imports of

both manufactured and agricultural products from the region. While

concessions under SAPTA are narrowly focused on agriculture, it is

rather more diversified in manufactured product groups.

India's exports to the region under the SAPTA process have been

heavily concentrated in a few sectors. The agricultural sector played

an important role in India's exports to the region under the regional

PTA. Exports of oils and fats and processed food products constitute

a large proportion of the country's exports of agricultural products to

the region. The bulk of India's manufacturing exports are dominated

by sectors like chemicals, textile products, and base metals. India

also exports vegetable products, minerals, plastics, leather products,

mechanical appliances, optical products and other manufactured

items, but at a low scale. India has consistently improved its market

presence in certain important product segments such as processed

food products, chemicals, textile products and base metals,. It must

be noted that India's exports, particularly those products which

attract concessions under SAPTA, have been subject to a high degree

of fluctuations.

Implication of Different Rounds of SAPTA for IndiaThe existing literature suggests that the first three rounds of trade

liberalisation were not equally efficient in liberalising regional trade.

155154

It may be because that there was no compulsion on member

countries to liberalise their trade for regional partners in a definite

manner. The contracting states have adopted a product-by-product

approach to promote regional trade. It was left to the individual

contracting States to open up their economies to the region

depending on their priorities. For this reason there has been no

uniformity in the liberalisation of products under the SAPTA process.

India's trade with the south Asian region in concessional group of

products is estimated for different rounds of SAPTA. The volume of

trade in three different SAPTA rounds is presented in Table 9. The

shaded regions indicate the years in which the agreements were

implemented. If the volume of trade was substantial and the trade

flow was growing or remained at a level without substantial decline,

it can be concluded that the specific SAPTA round was effective for

the concerned member country.

It is evident from the empirical analysis that SAPTA-I was less

effective in accelerating India's imports from regional partners. The

volume of trade under round I was much lower than that under the

other two rounds. Except for Nepal, other LDCs failed to access the

Indian market under the concessional route. In the round II, the

volume of Indian regional imports increased substantially as

compared to the earlier round. The LDCs of the region gained more

market access than non-LDCs in this round. Among the non-LDCs,

Table 9: Profile of India’s Trade with the Region under various rounds of SAPTA (in lakh (’0,000) rupees)*

A. Imports

Exporting Country

SAPTA Round

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00 2000-01

I

-

-

-

-

13.57

26.56

203.31

II

9.08

6.56

6.49

35.90

26.91

26.34

65.47

III

5959.24

6739.92

9203.63

12024.00

20868.79

22546.51 24086.08

Bangladesh

NCT

897.76

516.48

388.98

1520.46

1222.91

942.27 3155.92

I

-

-

-

-

-

-

1.20

II

-

-

-

21.95

-

60.83

13.56

III

1571.63

2651.16

3739.88

1454.58

1957.06

1043.46 1052.94

Bhutan

NCT

424.26

1011.57

515.84

366.61

242.25

365.48 432.40

I

107.80

239.66

485.70

524.74

2353.29

2519.35 2119.47

II

210.19

536.10

307.79

244.44

63.20

182.52 208.07

III

12.37

38.76

18.70

118.99

150.83

142.68 63.95

Sri Lanka

NCT

6711.08

7651.31

9324.20

7269.00

9536.14

10966.04 13709.19

III

4.93

2.24

6.23

24.65

7.75

61.94

17.52Maldives

NCT

24.00

59.24

44.62

38.89

10.67

95.85

20.43

I

462.48

302.05

612.15

541.44

612.35

644.71 1077.24

II

129.54

460.03

102.65

206.75

891.67

1576.37 1232.42

III

3457.11

7402.13

11601.48

23314.90

43605.77

54552.47 71653.79

Nepal

NCT

3497.20

3866.79

4212.32

5140.60

5919.46

7987.94 18813.78

I 60.24 70.29 211.28 115.23 287.68 379.10 208.42

II 1961.00 2161.73 841.48 634.21 583.62 983.05 3657.64

III 5932.59 4286.06 8403.92 7809.43 8315.35 9606.31 11199.12

Pakistan

NCT 5679.01 1509.01 965.96 6325.79 78338.00 11019.59 11558.94

B. Exports

Importing Country

SAPTA Round

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00 2000-01

NCT

165722.2

299735.59

238244.16

225025.19

359620.71

196849.52 305369.96

I

629.75

991.63

1426.91

1237.55

1326.14

3220.15 2723.38

II

524.35

747.91

2263.99

6002.01

5268.59

6507.98 14279.7

Bangladesh

III

261.32

499.4

1191.67

562.04

454.07

907.89 1468.58

NCT

3008.82

4879.82

6562.21

3496.21

2710.96

2222.06 306.75

I

-

-

3.59

2.58

2.05

-

2.6

II

-

-

41.11

3.94

2.07

3.75 0.28

Bhutan

III

-

-

4.88

4.8

3.34

-

-

NCT

76910.03

90523.22

117795.27

116488.19

114750.25

137742.75 174787.73

I

6841.35

9027.69

8588.59

7546.64

8333.84

6846.51 8851.79

II

5698.7

5828.02

8371.64

10163.86

6059.29

14387.14

Sri Lanka

III

223.99

323.07

1447.07

1268.39

832.94

1317.94 1402.67

NCT

3539.36

3777.65

2834.27

2829.08

3004.3

2469.76 8615.94

I

2.85

15.15

7.14

4.43

8.38

6.15 13.96

II

-

-

-

-

0.11

-

2.93

Maldives

III

0.46

0.42

5.62

3.18

2.27

3.16 31.13

NCT

26445.88

37870.15

37622.28

42556.4

33341.93

43985.74 37631.37

I

180.04

649.94

807.3

681.68

535.27

666.04 290.47

II

5603.94

7302.56

9390.05

10230.26

9880.02

12575.82 14919.73

Nepal

III

19.29

48.28

30.33

47.57

89.79

43.01 89.55

NCT

5388.44

7558.92

34536.98

28880.11

18572.95

19126.94 49781.68

I 332.31 920.52 542.36 531.69 1268.13 1149.74 563.36

II 8712.49 14741.11 14992.15 17339.37 18187.41 14066.27 15692.5

Pakistan

III 391.23 74.82 46.84 103.17 556.21 117.15 274.81

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

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

NCT denotes bilateral trade out side SAPTA.

* 1,000,000 rupees = 10 lakh rupees

157156

the depth of Pakistan's market access in India was much deeper than

that of Sri Lanka in the round II. The SAPTA process received the

maximum gain in the third round. India's imports volume from

Bangladesh, Nepal and Pakistan increased significantly in this round.

Both Bhutan and Maldives also benefited significantly from this

round in accessing Indian market.

A comparison between trade flows of concessional and non-

concessional groups of commodities may present the effectiveness of

SAPTA to the member country. The results indicate that the volume

of India's import under the first three rounds of SAPTA much higher

than the volume of trade outside SAPTA in the case of Bangladesh,

Bhutan, Nepal and Pakistan, as shown in Table 9. India's imports are

greatly influenced by the concessions offered by Maldives to India,

where almost 50 percent of its imports from the country were

covered under SAPTA in 2001.

The trade concessions offered by regional countries to India has been

very small as compared with India's total trade in the region. The

implications of trade concessions offered to India in three rounds of

SAPTA are different for India's exports to the region. One can

examine the nature of commodities traded in each round over a

period of time with each Member country separately.

The empirical results indicate that the first two rounds of SAPTA are,

rather, more important than the third round in terms of the volume

of commodity exports. Among the first three rounds, the second

round became important for India in terms of better market access in

the region. The use of the 'before-after approach' on the

implementation of different episodes of SAPTA indicates that the

trade liberalisation process in the region was not very conducive for

India's exports to the region. A comparative analysis of India's

exports growth before and after the commencement of each round of

SAPTA in specific SMCs indicates that it improved significantly in

the case of Bangladesh, Sri Lanka and Nepal, but remained slow

among the other regional partners.

Trade offers through various rounds of SAPTA have not provided

substantial advantage to India in terms of greater market access in

the region. On the contrary, India benefited from the expansion of

trade under the non-concessional route. The benefit from the SAPTA

process is greater for the LDCs than the non-LDCs in the region.

While the volume of exports is important for regional trade, the

quality of trade is also equally important to understand the welfare

gains from regional trade cooperation. UNCTAD (2002) observed

that analysis of trade should focus on both the volume of exports as

well as the net value addition to the exports, simultaneously. As net

exports earning increases along with total volume of exports, the

country stands to gain from external sector activity. A country is

likely to gain from exports when it moves up in the value added chain

of exports, and that is possible when the composition of exports

starts increasing in favour of more technology-intensive products.

Technology Intensive Products in SAPTA TradeIt is generally believed that South Asian countries generally trade in

primary and low technology products. India's specific imports from

the regional partners, with SAPTA concessions, are further classified

in terms of technology intensities. The study by Lall (2001) classified

the tradable products into primary, resource intensive, low tech,

medium tech and high tech products, depending upon the type of

technologies involved in the process of production. India offered

concessions to regional member countries in almost all broad areas

of products as shown in Table 10. The majority of India's

concessional imports from the region fall under the category of

primary and resource based agro-manufactured products. Other

priority imports under SAPTA are low-tech textile and footwear

products, and medium technology processed products.

A. Exports

Sl No Product Description 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

1 Primary products 7560.88 13406.37 16521.46 19768.38 20543.53 21133.55 27273.68

2 Resource based Mnf (agro-based) 479.22 631.42 639.72 464.22 656.54 837.33 824.93

3 Resource based Mnf (other) 4224.82 6830.56 7122.39 8981.57 8973.16 5981.96 8630.17

4 Low technology Mnf (textile and footwear) 2010.91 2438.89 4104.71 5818.27 3991.22 4510.76 6471.21

5 Low technology Mnf (Other products) 3348.51 1735.75 2840.11 4036.08 3083.29 3587.4 4374.34

6 Medium technology Mnf: Automotive

Table 10: Structure of India’s Technology Intensive Imports from

2663.32 5657.34 4080.9

South Asian Countries under SAPTA I, II and III (in lakh rupees)

3091.01 3846.88 2610.98 4833.3

7

Medium technology Mnf (process)

3427.64

3552.05

4599.51

3695.58 1702.83 1933.49 7462.41

8

Medium technology Mnf (engineering)

856.65

747.66

1144.03

1068.88 1133.87 1852.08 1559.78

9

High technology Mnf (Electronic and Electrical)

261.59

202.97

390.37

207.66

239.3 225.09 179.36

10

High technology Mnf (Other)

4588.53

5967.51

7718.04

8601.51 8639.3 11078.81 13385.4

Total

29422.07

41170.52

49161.24

55733.16 52809.92 53751.45 74994.58

159158

The composition of India's imports indicates that the quality of

India's imports from the region is improving under the SAPTA

process. The share of primary and resource based agro-

manufactured products constituted nearly 87 percent of India's

imports in 1994-95, which was reduced to more than half during

2000-01. It is interesting to note that the composition of India's

import basket has shifted in favour of products which are higher in

the technological hierarchy.

From the point of view of technology intensity of the products

covered under SAPTA, India's exports are more diversified than its

imports. Indian exports range from primary products to high

technology products. The major chunk of India's exports falls under

the group of primary products, resource based agro-manufactures,

medium technology process-manufactures and high technology

manufactures. These broad groups of products constitute more than

three fourths of India's exports to the region under SAPTA. India

also exports a significant amount of low and medium tech

manufactures, particularly automotive products, to the region.

India's exports have consistently increased over the years in some

product groups such as high-tech manufactures, low-tech

manufactures (textiles and footwear) and primary products. In the

case of some medium-tech products, the volume of exports was very

high in 1994/95, but declined significantly during 1995/96-1999-00,

and again picked up in 2000-01. The performance of some product

groups over the years has been very impressive. Some of these broad

product groups are primary products, resource based non-agro

manufactures, low tech manufactured products, medium tech

processed manufactures and high tech manufactures.

In the era of globalisation, domestic consumers require low to high

technology-intensive products. As the reform process continues in a

number of countries in the region, the percentage of population in

the middle income group is increasing very fast in most of the

regional countries. With the rise in population in this group, coupled

with a surge in their per capita income, the demand for technology

intensive products will rise in the near future. Several countries have

already started the process of restructuring their export basket to

include the technology-intensity product category. Regional

countries can make use of India's vast market and liberal economic

policies to improve their trade performances. During 2004-05,

India's imports from the rest of the world exceed $ 106 billion.

Several small economies like Myanmar have strengthened their

presence in India's imports during the last few years. Therefore,

regional countries can benefit from India's fast rising import

requirements.

How Critical is SAFTA for the Region? SAFTA was launched at a time when the region was moving rapidly

towards economic and political normalcy among partner countries. It

also coincided with a situation where most of the regional economies

witnessed rapid economic expansion in a significant manner (ADB,

2005). The global trading situation is also turning out to be

favourable to the region, particularly as a consequence of the phasing

out of the MFA regime. As a part of regional trade liberalisation,

various rounds of SAPTA have brought substantial gains to the

regional economies. Political normalisation has steadily improved

during the last few years. There is high expectation from SAFTA,

which may accelerate the pace of economic progress in the region.

Despite the fact that the region is progressing fast, regional countries

have not yet utilised the growth potentials of the region to their

mutual advantage. Now, is the most appropriate time to initiate

industrial restructuring within the region based on their natural

competitiveness using the regional process. SAARC could learn from

the experience of the EU, where small markets were integrated on

the basis of competitiveness of individual countries to create large

markets for each of them. The same model could be emulated in the

South Asian region. Countries of the region are perceptibly

B. Imports

Sl No Product Description 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01

1 Primary products 8776.5 10015.0 12117.2 13385.7 17777.7 16928.9 20313.2

2 Resource based Mnf (agro-based) 8456.3 8302.6 12471.7 14148.9 31468.9 34308.3 36913.0

3

Resource based Mnf (other)

129.7

249.7

286.4

464.7 1056.6 2070.1 2016.8

4

Low technology Mnf (textile and footwear)

1580.3

2721.7

3625.6

7855.4 15589.9 13924.3 22254.0

5

Low technology Mnf (Other products)

24.1

58.6

412.6

378.5 920.2 3485.8 5378.5

7

Medium technology Mnf: Automotive

872.8

2628.0

3755.5

8021.6 10651.9 19590.2 24715.0

8

Medium technology Mnf (process)

-

3.0

0.0

79.0 122.0 792.5 1028.8

9

Medium technology Mnf (engineering)

25.0

1.0

9.0

20.0 65.5 19.0 80.8

10

High technology Mnf (Electronic and Electrical)

13.5

917.1

2863.4

2717.5 2085.1 3233.1 4160.1

Total 19878.2 24896.7 35541.4 47071.2 79737.8 94352.2 116860.2

Data Source: India Trades, CMIE, India

Note: The classification of products is made by the author based on Lall (2001).

161160

distinguished by their competitive strength. Each county can become

a hub for specific product segments in the region, and use its

competitive advantage in enhancing the strength of the region while

also strengthening itself through mutual support. For example,

Bangladesh could emerge as the energy hub of the region, and other

countries could represent other specialised areas such as Nepal for

natural resources, Maldives for fisheries resources, and Sri Lanka for

plantation resources. But this depends on the political vision of the

regional partners.

The phase of 'full political reconciliation' has not yet begun. The

continuing of political discontent among the regional partners has

adversely affected bilateral relationships, leading to slow progress in

regional economic cooperation. As such individual countries are

driven mostly by their domestic requirements, and regional countries

may not remain mute spectators when the entire global economy is

on a high growth trajectory. Most regional countries look for avenues

to engage themselves in hassle-free regional initiatives. As time and

opportunities are limited, individual countries may associate

themselves with other viable RTAs, without wasting much energy

and resources with the SAFTA process. As a matter of principle,

many countries in South Asia have already joined a number of RTAs

outside the region, showing the possibility of moving out of the South

Asian process if SAFTA fails to deliver the desired results.

In such a situation, regional partners are left with limited options to

associate themselves with the South Asian regional process. This

implies that liberalisation under the SAFTA process should be given

high priority, so that liberalisation of sectors can be undertaken in

the most desirable manner. The alternative approach could be to

disassociate from the SAFTA process, and join other fast growing

extra-regional RTAs to optimise domestic welfare.

Considering the various developments in the region, three alternative

scenarios can be conceptualised to analyse the response of the region

if member countries prefer to choose alternative approaches as their

regional policies. To conceptualise the situation, we have formed

three scenarios. Scenario I relates to situation of three free trade

area, where complete trade liberalisation is envisaged covering both

tariff and non-tariff barriers in South Asia. In Scenario II, the South

Asian countries choose to pursue alternative regional approaches

and opt out of the SAFTA process. In Scenario III, a situation is

conceptualised where a country has simultaneously pursued FTAs

with other RTAs and with South Asian countries to pursue trade

liberalisation. In these three scenarios, we are trying to examine how

member countries are likely to benefit from regional economic

liberalisation and assess the relevance of SAFTA for the regional

countries.

Regional Welfare Gains from SAFTAThe efficacies of these three alternative scenarios are empirically

examined using the Computable General Equilibrium (CGE) model

to estimate the possible economic gains for the South Asian region,

and also for global economy as a whole. Very often, the relevance of

RTAs is discarded in favour of multilateralism because of the likely

effects of the overall losses to the global economic welfare on account

of trade diversion. As the region is confronted with supply

constraints, the impact of an FTA within the region may result in

either trade creation or trade diversion, and therefore requires

empirical examination.

The welfare gains as a result of economic liberalisation may be due to

various policy initiatives. Welfare gain reflects the combined effects

of number of macro-economic policies as a consequence of trade

liberalisation in the region. The trade liberalisation policies affect

reallocation of productive factors across sectors owing to surge in

demand for tradable sectors within the region. In the process, the

allocative efficiency of the existing factor endowments alters and so

also their relative prices. Moreover, these changes are also seen in

various production sectors. A surge in exports as a result of regional

trade liberalisation may generate additional pressure on certain

tradable sectors. There are possibilities of a reduction in demand for

certain non-tradable sectors in each economy because of a change in

economic policy at the regional level. The implications of policy

restructuring are captured in the calculation of welfare gains. Trade

liberalisation is mostly reflected in expansion of trade, investment,

etc. within the region. Due to various factors, production conditions

in each country undergos significant changes, leading to efficiency

seeking restructuring at the firm level. Such structural changes may

have an impact on competitiveness of each country's exports.

The welfare implications of SAFTA on regional countries and other

163162

regions are presented in Table 11. The results indicate that SAFTA is

likely to enhance welfare gains in each member country, and also to

improve the overall welfare position of the South Asian region. It is

important to note that SAFTA is not only enhancing welfare gains in

the region, but the whole world economy. In case SAFTA is

implemented fully as under Scenario I, the size of welfare gains

would be more than US$ 436 million annually. The results show that

gains from SAFTA are likely to be asymmetrical in nature. In terms

of absolute gains from trade liberalisation in the region, India is

likely to gain the most followed by Sri Lanka and Bangladesh.

Despite the fact that some extra-regional groups are likely to be

affected adversely, absolute gains for the global economy may be

positive, thus suggesting trade-creating nature.

In a situation where SAFTA does not take off, India may choose to

continue with its liberalisation commitments with other extra-

regional RTAs/BTAs, and the implication of such a situation is

presented in Scenario-II. As the Indian economy has expanded

rapidly in recent years, surpassing the 'Hindu rate' of growth of 3.5

percent per annum, it has been negotiating with a number of RTAs to

undertake comprehensive economic liberalisation. In a situation of

political stalemate, where SAFTA does not move and India chooses

to move ahead with other RTAs, the economic implication for

regional economies is assessed in Scenario II. The results show that

India is likely to benefit substantially more in the second scenario as

compared with the first one (i.e. with SAFTA alone). In the process,

Sri Lanka is likely to benefit more from the alternative liberalisation

process as an India-Sri Lanka FTA is already in operation. However,

Bangladesh and the rest of South Asia are not likely to gain from the

alternative trade liberalisation approach of India. In addition, other

regional groupings/bilateral arrangements are likely to gain along

with India.

If the SAFTA process is not moving in the desired direction, India

may undertake liberalisation with other extra-regional RTAs and

SAFTA simultaneously, and this situation is modelled in Scenario III.

The magnitude of India's gain from Scenario III is likely to be

substantially higher than in Scenario II. However, in a situation like

this, the economic interest of the South Asian region is likely to be

adversely affected. Simultaneous trade liberalisation of India with

ASEAN plus three, SAFTA and a few other RTAs/BTAs may reduce

the magnitude of gains for some South Asian countries as compared

with Scenario-I. This provides a clear indication that credible

liberalisation in RTA may give an advantage to the early birds, i.e.

those who join early in regional arrangement. If SAFTA is

implemented within its stipulated time frame with effective trade

liberalisation (i.e., in its sectoral liberalisation programme), the

region is likely to gain significantly from the regional process. In that

case, sectoral liberalisation under SAFTA should be implemented

based on the merit of the sectors in the regional context.

Effects of Liberalisation on Prices of Factors of ProductionThe implications of regional trade liberalisation are likely to be felt in

several sectors of the economy. The results of the model indicate that

the likely restructuring of the regional economies has significant

Table 11: Welfare Effect of SAFTA on Regional Partners (Million US$)

Country/Region Scenario I: SAFTA Scenario II: Without SAFTA, liberalisation with other RTAs

Scenario III: Simultaneous liberalisation with other RTAs and SAFTA

Bangladesh 8.34 -2.99 10.92

India 344.64 2749.67 3045.04

Sri Lanka 51.47 26.71 51.37

Other SA 31.43 -49.54 16.93

China -10.53 262.42 250.51

Korea -12.26 213.68 202.17

Singapore -14.90 264.41 252.04

Thailand -8.00 109.41 102.36

ASEAN-5 -12.50 539.73 528.57

ANDEAN 1.12 151.75 152.95

MECOSUR -5.82 152.13 146.68

SACU -0.63 337.08 337.12

NAFTA -19.94 -323.74 -334.4

EEA -38.15 -486.24 -515.46

ROW -92.39 -698.7 -776.37

Source: Author’s estimation based on GTAP V.6 database

165164

implications for prices of different factors of production, including

capital and labour in individual member countries. The overall

effects of free trade on various types of factors of production have

been favourable in ameliorating their real factor prices in the post-

regional arrangement period.

The implication of regional restructuring on different forms of labour

is examined in partner countries. The simulation results indicate that

the real wage rate of unskilled labour is likely to go up in a number of

South Asian countries following implementation of SAFTA. The

impact on the real wage rate of unskilled labour is likely to decline if

SAFTA does not take off, and India chooses to go with other extra-

regional partners. In a situation where simultaneous liberalisation is

likely to take place (i.e. SAFTA along with other RTAs), the

possibility of improvement in the wage rate of unskilled labour is

favourable, but it would be much lower than with full liberalisation

under SAFTA.

So far as the implication for the wage rate is concerned, the prospect

for skilled labour is different from that of unskilled labour. Under the

full implementation of SAFTA as in Scenario I, the wages of skilled

labourers are likely to rise in most of South Asian countries. In case

India liberalises its trade under PTA with other extra-regional

agreements in Scenario II, wage rate of skilled labour is likely to

increase in India and Sri Lanka, whereas it is likely to decline in

Bangladesh and other countries in South Asia. In the third scenario,

the upward trend in real the wage is likely in most SAARC countries,

but the magnitude of the hike in wage is likely to be lower in Scenario

III than in Scenario I.

Trade liberalisation in the SAARC region may improve the rate of

return of investment in the region. In a situation like SAFTA under

Scenario I, regional countries are likely to witness a surge in the

efficiency in their domestic investment due to improvement in the

allocative efficiency of capital. The level of increase in the rate of

return of investment may vary from one country to the other. For

example in SAARC region, most countries are likely to benefit from

trade liberalisation but the impact will be more robust in case of Sri

Lanka and India. As such South Asian countries are passing through

a phase of economic reforms, and efficiency of capital is likely to go

up in these countries. Implementation of SAFTA would give more

dynamism to this trend. If India does not participate under the

SAFTA process as in Scenario II, the efficiency of capital for other

South Asian countries may rise but lower than that under Scenario I.

In Scenario III, most South Asian countries are likely to gain in terms

of increase in the real interest rate following trade liberalisation

under SAFTA and extra-regional liberalisation.

Effects on Exports The results of export performances of the South Asian region

indicate that the trade sector performance is likely to improve if

SAFTA is implemented earlier than other RTAs participating in

regional trade liberalisation. Trade liberalisation under SAFTA is

expected to be a positive sum game, where all regional partners are

likely to improve their regional exports performances without facing

any adverse effect on their total exports.

The SAFTA process offers a distinct advantage to member countries

in terms of improving export performance of individual countries.

When SAFTA is fully implemented, some countries in South Asia,

including Bangladesh, are likely to register a significant increase in

their export performance. However, SAFTA is likely to offer very

little to countries like India and Sri Lanka in improving their exports

performances. Trade liberalisation as under Scenario II may have

significant advantage for India. Its exports may increase by 9.5

percent per annum following implementation of trade liberalisation

with the extra regional groupings in real terms. Under the

overarching trade liberalisation in Scenario III, participating

countries/regions will see a positive impact on their trade

performances. However, gains for the individual South Asian

countries in exports may be more in Scenario I than in Scenario III.

The sectoral results indicate that early implementation of SAFTA

may have a more enduring effect on the regional economies than

slowing down the process. In that situation, exports are likely to

increase in a sizable number of sectors. Exports in Bangladesh are

likely to increase in most of the broad trade sectors. It may witness a

surge in exports in sectors like cereals, minerals, petroleum and

chemicals, metal products and machinery. India is likely to improve

its export performance in sectors like fruits and vegetables, mining,

prepared food, and motor and transport items. Sri Lanka is likely to

compete strongly in a number of products. Scenario II indicates that

167166

India is likely to improve its export performances in several sectors if

it liberalises along with other extra-regional partners on a reciprocal

basis. But such trade liberalisation initiatives may adversely affect

the export prospects of a number of South Asian countries. In

Scenario III, India is likely to have an edge over alternative scenarios

in improving its export performance in a number of sectors.

However, South Asian countries may be adversely affected if the

SAFTA process is delayed and other regional groupings take

advantage of the liberalisation process in South Asia.

A 'second wave of regionalism' has reached its peak in recent years.

Countries around the globe are realigning themselves to take

advantage of the current global trading environment. In a gradual

process, trade barriers across the world are declining on account of

multilateral trade negotiations and unilateral trade liberalisation.

But the present level of trade barriers in a number of countries is so

high that benefits under regionalism could be substantial from

perfect regional arrangements. The possibility of reaping benefits

from regionalism exists as long as the average level of tariff remains

relatively high, and thus is limited to a short period. Individual

countries are keen to align themselves with the regional process, but

the issue is to choose the best option available to them. If the best

option is not heeded, the second best option may be considered to

give priority to national interest.

ConclusionThe South Asian economy has expanded rapidly over on the last few

years. Most regional countries have maintained growth rates

between 5.5 to 8 percent during the period 2004-05. According to

forecast of the Government of India and the IMF, India is expected to

grow between 7.5 and 8.1 percent during the period 2005-06. The

continuation of the region's high growth performance is due to

robust the macroeconomic and external sector performances. ADO

(2005) observes that macroeconomic fundamentals of the region are

strong, which can be assessed from the region's high growth rate, low

inflationary pressure, high investment rate, etc. This is a positive

development for the success of regional cooperation in South Asia.

The dynamic performance of the external sector has been the most

important factor for the sustenance of high growth in the region. The

expansion of exports was sturdy, but imports expanded more swiftly

than exports during the early 2000s. The foreign exchange reserve

position was strong for large economies, and India's Forex reserves

alone exceeded US$ 140 billion in early 2006. Exports from the

region were mostly spurred by a surge in manufacturing exports, and

the region is rapidly integrating itself with the global economy.

Intra-regional trade has made steady progress during the last decade,

reaching almost 5 percent of the region's total trade with the world

during the period 2000-04 as compared to 3.6 percent during the

period 1990-94. Though significant progress has been made in

ameliorating the level of intra-regional trade, it is at the cost of a high

degree of volatility. Instability in intra-regional trade has not only

affected regional exports but also their balance of trade. Towards the

latter part of the 1990s, the region's trade situation became soured

on account of the 'Asian Crisis'. After the inception of SAARC, there

was considerable divergence between intra-regional import and

intra-regional export, and the gap between them narrowed gradually

over a period of time. The gap between the two almost disappeared

in the late 1990s, but reappeared again in the new millennium with

lesser intensity.

Trade imbalance is one of the most widely discussed issues in the

region India is often dragged into the controversy as it maintains a

favourable trade balance with the rest of South Asia. Traditionally, a

number of small regional countries used India's large competitive

production base to meet their short term requirements for 'basic and

essential' imports. In the past, there were instances of cessation of

essential supplies from India for technical reasons, and that caused

turmoil in those importing countries. Supply constraints in these

importing economies have been the underlying factor in their

inability to access the large Indian market, despite having large

export potentials. India provides MFN status to all the WTO member

countries, and does not discriminate against any South Asian country

in providing access to its large market. There is a need to devise

radical strategies to arrest supply inadequacies in some regional

countries access market in large countries.

The tariff regimes of the region show that the level of tariffs is not

similar across countries; and protection of sectors differ significantly

among them during the last decade. The region has large resource

endowments, and each South Asian county has distinct advantage in

169168

having access to some of these resources. This is why there is no

uniform level of sectoral protection across countries. The regional

countries had as many as 30 tariff bands, ranging from zero to 250

percent in 2004. Though each country maintains a large number of

tariff bands, most of their tariff lines are concentrated in a few tariff

bands. Some of the countries maintain very high tariffs to protect

their sensitive sectors. While the average level of tariff is low in Sri

Lanka and Nepal, it is high in India and Bhutan. Invariably, the

region maintains high protection against certain sectors such as

plastics, textiles, footwear, plaster and cement and vehicles; and low

protection against minerals, chemicals, leather, wood pulp and base

metal.

From one of the most highly protected economies in the world

during the 1980s, India significantly lowered its average tariff rate

from 101 percent in 1991-92 to 27.5 percent in 2002-03. It has

further declined in recent years, and is likely to reach the ASEAN

level within a few years from now. Till the mid-1990s, the NTB

regime in India was very strong, but liberalised drastically in the

early 2000s. In 1996, nearly 39 percent of India's national tariff lines

were subject to NTBs, but declined sweepingly to around 4 percent in

2003. Harmonisation of the level of tariff among South Asian

countries may boost intra-regional trade, mostly in the non-

concessional trade segment.

The liberalisation of trade under SAPTA has benefited regional

countries as evident from the experience of India. India's imports,

under the first three rounds of SAPTA, registered a six-fold increase

between 1994/95 and 2000/01. The coverage of imports has been

comprehensive, linking almost all the broad sectors of trade except

for sectors like gems and jewelleries, vehicles, and arms and

ammunitions. The LDCs have gained more market access in India

than non-LDCS of the region under SAPTA. The list of trade

concessions under SAPTA covered both agricultural and

manufacturing sectors; and trade in agricultural products constituted

almost one third of the total trade. India's exports to the region have

been restricted to a few sectors. India has benefited very little from

the concession under SAPTA, and substantial market access is

realised through the non-concessional route. However, the SAPTA

process was slow, and could have taken a few decades to reach full

trade liberalisation in the region, considering the progress made

under different rounds of SAPTA in the past. SAFTA is likely to

accommodate most of the shortcomings of the SAPTA Agreement.

Implementation of SAFTA is a positive step towards aggressive trade

liberalisation in the region. Taking into account the global trend in

the post-WTO period, particularly the manner in which regionalism

has taken an edge over multilateralism, the long term trade policies

of the regional countries will be guided by the potential gains from

regionalism. The South Asian region is likely to benefit the maximum

from the SAFTA process, as evidenced from the CGE results. It is

alleged that large countries are likely to benefit more from the

SAFTA process, and therefore, there is lukewarm response from

other regional partners for the effective implementation of SAFTA. If

SAFTA does not take off appropriately, regional countries may

engage themselves in forming other RTAs to enhance their domestic

welfare. In a hypothetical situation, if India joins other extra-regional

RTAs, in the event of a failure of the SAFTA process, India's welfare

would be much higher than what it could have gained from SAFTA.

Instead, if India implements SAFTA, India-Brazil-South Africa

initiatives, GCC, BIMSTEC, etc., simultaneously, the possible gains

are likely be the largest for India, and others RTAs including SAFTA

are also likely to gain from the arrangement. But the gains for other

South Asian regional countries under this scenario would be lesser

than that of SAFTA. Therefore, there is distinct advantage for South

Asian countries in implementing SAFTA in the most effective

manner.

S K Mohanty is a researcher at Research and Information System

for Developing Countries (RIS), New Delhi, India.

Endnotes1 See details of the Tenth plan document of India, highlighting the role of

foreign savings2 When tariff rates are very high to restrict importation effectively, the

import weight for these commodities would be close to zero and the net

contribution of these products to the overall calculation of tariff might

be almost zero. 3 The results of WTO (2002), Goldar and Mehta (2001) and Mehta (2000)

show that average tariffs of India and also broad sectors have declined

persistently in the 1990s.4 In this case we have used individual series to calculate mode tariff.5 Further decline in average tariff rate might have taken place after 2002-

03, but we have not analysed the tariff policy after 2002-03. The Indian

171170

Government has taken a consensus view that India's average tariff may

be at par with that of ASEAN soon. For achieving this end, the tariff

rates might have declined further.6 The tariff data used in our analysis are almost with similar trade

classification (Harmonised System). Even in HS trade classification,

there are various variants of classifications; they are different at a micro

level. Since aggregation in the present analysis is undertaken at a macro

level (at HS Section), the variations in the product classification under

various HS classification (such as HS88, HS92, HS96) may not affect

results while we compare results from one year to another.

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Geneva.

Informal and Free Trade Arrangements

Nisha Taneja

he importance of studying informal trade in South Asia can be

best understood if it is placed in the context of formal trade.

The South Asian countries have made several attempts at Tenhancing trade in the region. As early as 1985, the South Asian

countries of Bhutan, Bangladesh, India, Maldives, Sri Lanka,

Pakistan and Nepal formed the South Asian Association for Regional

Co-operation (SAARC). In 1991, a South Asian Preferential Trading

Arrangement (SAPTA) amongst the SAARC member countries was

set up with the ultimate goal of achieving a South Asian Free Trade

Area (SAFTA). The signing of the SAFTA at the 12th SAARC Summit

held in Islamabad is now a reality. In addition, there have been

several bilateral free trade agreements within the region. India has

free trade agreements with Bhutan and Nepal and has recently

signed one with Sri Lanka. Similarly, Free Trade Arrangements are

being negotiated between Pakistan and Sri Lanka and between

Bangladesh and Pakistan. Despite such efforts by the South Asian

countries, trade within the countries continues to be abysmally low.

Clearly there would be other mechanisms that would inject vitality

into trade flows in the region. One way would be to focus on the

large and vibrant informal trade in the region. It is in this context

that the present focus is on informal trade flows in the South Asian

region. Available evidence suggests that informal trade is rampant

and if such trade is brought within the ambit of official trade, a

significant increase could be witnessed. However, this will largely

depend on the nature of informal trade, which is discussed later.

175174

There are two key issues that are at the forefront of studying informal

trade in the South Asian region- the magnitude of such trade and the

factors underlying such trade flows. Quantitative estimates are

important since they would reflect the extent of potential trade that

exists in the region. If recorded trade statistics give a misleading

picture of the actual amount of trade taking place, poor regional

trade policies may be formulated. In the latter issue it is important to

understand the institutional mechanism that drives informal trade,

how it differs from formal trade and why such trade takes place. To

the extent that high tariffs and non-tariff barriers in the South Asian

region encourage the use of informal channels, bilateral/regional

Free Trade Arrangements would induce a shift of informal trade

flows to formal trade channel. However, if there are factors other

than trade policy distortions that determine informal trade, then a

deeper understanding is needed. Thus, as long as the transacting

environment for informal trading is more efficient than that of

formal trading, informal trade may continue to co-exist with formal

trade. It is useful to classify factors determining informal trade flows

into two broad categories: (i) those that are related to trade policy

barriers and (ii) institutional and other factors. Since India is the only country which shares its borders with almost

all the South Asian countries and at the same time no country shares

its border with countries other than India within South Asia, the

central actor in informal trade has been India. India shares a long

and porous border with Bangladesh, Nepal and Pakistan. Informal

trade with these countries largely takes place across the land borders.

Informal trade with Sri Lanka takes place largely through air

passengers, with a small proportion being carried out by sea through

country boats. A crucial aspect to be kept in mind while analysing

issues related to informal trade is the definition of such trade flows.

Informal or unrecorded trade is broadly defined to include all trading

activities between any two countries which should be included in the

national income according to national income conventions but are

presently not captured by official national income statistics.

I. Magnitude of Informal TradeThe only method to estimate informal trade flows is through primary

surveys. The Delphi technique is the most robust methodology used

so far. It is essentially used for gathering and processing the opinions

of informed individuals. The iterations are repeated till broadly

converging responses are received. Reasonably good estimates are

available for Bangladesh, Nepal and Sri Lanka that are based on the

Delphi technique. Estimates for Bhutan are based on primary

surveys, but the methodology is not clear. Information on estimates

for Pakistan is quite scanty, though its informal trade is believed to

be the largest in the South Asian region.

It is worth noting some interesting features. Total informal trade in

the South Asian region exceeds US$ 3 billion which is almost double

the formal trade in the region for corresponding years for which

informal trade estimates are available. India's informal trade with

Pakistan is almost ten times that of formal trade in the region, that

with Nepal and Bangladesh is almost as large as formal trade, with

Sri Lanka it is almost one-third of formal trade and that with Bhutan

is three times as much as formal trade. (see Table1 and Table 2)

Another noticeable feature is the fact that India has a trade surplus

with Bangladesh, Pakistan, Sri Lanka and Bhutan on the unofficial

trade account, while with Nepal it has a trade deficit. Interestingly, a

similar pattern can be observed on the official trade account. (See

Table 1 and Table 2)

One also needs to examine the extent to which the composition of

formal and informal trade differs. Of the US$ 2 billion informal trade

with Pakistan, almost half is traded through third countries

(technically official trade) such as Dubai, CIS countries and

Afghanistan, while the remainder is cross-border informal trade.

Unofficial exports through both routes comprise machinery, cement,

tyres, tea, medicines, videotapes, alcoholic beverages, chemical

products, steel utensils etc.- the range covering low cost mass scale

produced goods to Indian branded items such as Tata's Tetley tea

and products made by Dabur and Pioma Industries. Informal

imports from Pakistan consist of food items, synthetic fibers and

some chemical products.

India's official exports to Pakistan consist largely of food items- the

main item being animal feed stuff; primary products mainly iron ore

and crude vegetable materials, and manufactured goods- the chief

item being building material. Official imports comprise of food items,

mainly sugar and dry fruits.

177176

As Bangladesh is sandwiched between the north-eastern region of

India and the West Bengal borders of India, informal trade between

India and Bangladesh takes place both along the borders between

West Bengal and Bangladesh and between the north-eastern regions

and Bangladesh. Commodities exported informally from India to

Bangladesh through West Bengal comprise of cattle, sugar, kerosene

oil, sarees, bicycles, automobile components and parts and other

consumer goods like plastic items, razor blades, medicines etc. Items

imported from Bangladesh into India through West Bengal comprise

of synthetic fabrics, spices and Hilsa fish. Informal exports from the

North East Region to Bangladesh comprise fruits, fish, sugar, cattle,

raw cotton, spices, medicines, sarees and coal. Imports on the other

hand consist of polythene, palm oil, plastic shoes and a range of

miscellaneous consumer items. The formal exports are dominated by

industrial manufactures among which textile products is the largest

item. India's formal imports from Bangladesh comprise largely of

crude raw materials- chiefly jute, and Chemical related products-

mainly fertilisers.

India exports informally sarees, electrical and mechanical items,

textiles and utensils to Sri Lanka while informal imports consist of

spices, electronic items, cosmetics and liquor and cigarettes. India's

formal exports to Sri Lanka comprise a wide range of goods, the bulk

of which are a variety of manufactured goods, dominated by textile

fabric, machinery and transport equipment and a variety of food

items. India's formal imports from Sri Lanka consist overwhelmingly

of primary products and raw materials.

Indo-Nepal informal trade includes a very wide variety of items.

India exports textiles, processed and unprocessed food, cement,

hardware, automobiles and parts, electrical goods, utensils, plastic,

live animals, fuel, sanitary items, medicines, fertilizer, machinery

and parts, coconut oil, spices, dry fruits, electronics, tobacco etc.

Informal imports from Nepal are electronics, bags/suitcases, spices,

electrical goods, footwear, betel nut, medicinal powder, glass

crockery items, cosmetics, beverages, processed food, toys, lighter,

lock, fuel etc. While formally, India exports transport equipment and

machinery- mainly motor vehicles, medicines and other

manufactured goods, official imports consist largely of edible and

other essential oils, man-made filaments and copper.

Commodities exported informally from India to Bhutan consist of

rice, sugar, flour, yarn, garments and aluminium. Major

commodities imported by India from Bhutan are liquor, and

electronic items and footwear. Formal exports consisted of products

including spirit and beverages, residual chemical products etc.

Informal imports from Bhutan consisted mainly of wood products

and inorganic chemicals

It can be surmised that commodity baskets being traded formally

and informally are different. Also important is the fact that while a

large part of informal imports into India comprise third country

goods, informal exports to the South Asian countries consist of

essential goods (both food and non-food) and mass scale consumer

items.

II. Why Informal Trade Takes PlaceBy their very definition, SAFTA and the bilateral trade agreements

imply removal of trade barriers. Considering the extent to which

such barriers restrict official trade flows, a removal would lead to a

Table 1: India's Informal Trade with South Asia

Exports(X)

Imports(M)

Trade Balance (X -M)

Total Trade(X+M)

Bangladesh 1

299.0

14.0

285.0

313.0

Sri Lanka 2

185.5

21.8

163.7

207.3

Pakistan3

n.a.

n.a.

Positive

2000

Nepal 4

180.0

228.0

-48.0

408.0

Bhutan 5

31.3

1.2

30.1

32.6

Total South Asia

-

-

-

2960.9

Table 2: India's Formal Trade with South Asia

Exports (X)

Imports(M)

Trade Balance (X -M)

Total Trade(X+M)

Bangladesh1

349.1

7.8

341.2

356.9Sri Lanka 2

640.2

45.0

595.2

685.2Pakistan 3

157.2

36.1

121.1

193.3Nepal 4

141.0

255.0

-114.0

396.0Bhutan 5 7.0 3.0 4.0 10.0Total South Asia - - - 1641.4

Sources: Chaudhary (1995) for Bangladesh; Taneja et. al. (2002) for Sri Lanka

and Nepal; Economist (1996) for Pakistan; Rao et. al. (1997) for Bhutan. Notes : X denotes exports while M denotes imports.1. (1992-93), 2. (2000-01), 3. (1996), 4. (2000-01), 5. (1993-94)

Sources: Chaudhary (1995) for Bangladesh; Taneja et. al.(2002) for Sri Lanka

and Nepal; Commodity Trade Statistics for Pakistan, Nepal and Bhutan.Notes: X denotes exports while M denotes imports.1. (1992-93), 2. (2000-01), 3. (1994), 4. (2000-01), 5. (1994).

179178

shift in trade flows from informal to formal trade channels. By the

same logic, if informal trade is driven by factors that do not fall

under the purview of free trade agreements, then informal trade will

persist in the region.

(a) Trade policy distortionsHigh tariffs within the SAARC region encourage informal trade

across borders. High tariff rates create a strong incentive to avoid the

formal channel in order to evade tariffs. It can be seen that tariffs in

India, Bangladesh and Pakistan have been high through the 1990s.

The informal channel is particularly attractive for exports of mass

consumer goods that are being exported informally from India to the

other South Asian countries. Such products are not being produced

by very large firms. Tariffs form a significant proportion of final

prices for such firms and evading them makes informal trade

profitable. It needs to be mentioned that a movement from SAPTA to

SAFTA would mean gradually moving to zero tariffs and informal

trade occurring due to high tariffs will automatically shift to formal

channels. At the same time tariffs are continuously falling under the

free trade agreements that India has with Nepal, Bhutan and Sri

Lanka. With these developments a large part of informal trade is

likely to shift to formal channels.

The presence of non-tariff barriers, (NTBs) in the form of

quantitative and other restrictions has, in the 1990s, encouraged

informal trade in the region. In the early 1990s, India and

Bangladesh had the highest non-tariff barrier coverage ratio for

primary and manufactured goods. In fact, India had an NTB

coverage ratio of 66 per cent and Bangladesh had an NTB coverage

ratio of 52 per cent. In recent years, quantitative restrictions have

come down considerably in the region and, to the extent that trade in

the region is obstructed by NTBs, a shift to formal channels is likely

to occur.

While Free Trade Arrangements require abandoning both tariff and

non-tariff barriers, they also require rules of origin to ensure that

goods from third countries do not enter a low tariff country through

official channels to be traded informally into the country with higher

tariffs. Thus goods from third countries passing through another

member country of the FTA before arriving at the final market for

consumption need to meet minimum processing requirements to

benefit from duty free entry. Even though SAPTA lays out such rules

clearly, as long as tariff rates differ across countries, there is a strong

incentive for traders to flout the rules of origin principles and trade

informally. In the early 1990s, the unweighted tariff average was

highest for Bangladesh at 79 per cent followed by Pakistan 59 per

cent and India 51 per cent. Tariffs were relatively lower for Sri Lanka 127 per cent and Nepal 14 per cent . In 2000, the average tariffs were

highest in India at 39 per cent, followed by Pakistan (25 per cent), 2Bangladesh (20 per cent) and Sri Lanka (15 per cent) . In several

years, through the decade of the 1990s, India had higher tariffs than

its neighbouring countries. Clearly there is an incentive for countries

to import goods at lower tariffs from third countries and export them

to India through informal channels.

Rules of origin are also known to be complex and sometimes provide

the excuse to block trade, operating in effect as a non-tariff barrier.

For instance, products eligible for preferential concessions have to be

certified by a certificate of origin, which is to be issued by an

authority designated by the Government of the exporting member

state and notified to the other state in accordance with certification

procedures. However the importing member state can refute the

certificate and the settlement could be very time consuming, thereby

affecting trade adversely.

(b) Institutional and other factorsIn order to go beyond the conventional role of trade policy barriers in

influencing informal trade flows, it is useful to understand the

functioning of informal trading and formal trading markets. Under

formal trading arrangements, the recourse to law defines contracts

between two contracting parties. This ensures that goods move

across borders and payments are guaranteed. On the other hand,

contracting parties in informal trade cannot resort to the law for

violation of terms of contract. Consequently, it is reasonable to

assume that individuals trading through the informal channel have

developed parallel institutional mechanisms for contract

enforcement and dispute settlement. Also, the smooth functioning

of such markets shows that traders have developed efficient

mechanisms for obtaining information on quantities and

commodities to be traded and for mitigating risk that arise from the

transacting environment. On the other hand, it is important to

understand the institutional structure that supports formal trade

181180

where exchange is affected by factors which are not related to the

physical process of production, such as administrative processes,

government rules and regulations, infrastructure bottlenecks, etc.

Thus, if the institutional arrangement under informal trading is more

efficient than that supporting formal trade, traders may prefer to

trade informally.

The inadequate transport and transit systems that have been in

existence between India and her neighbouring countries have led to

high transportation costs in the region. One major hurdle in road

transport between India and Bhutan is the temporary blockages due

to landslides. In the case of trade between India and Nepal, the

terrain in Nepal makes building and maintaining roads not only

difficult but expensive as well. Even with respect to transit modalities

several bottlenecks have been identified: port congestion, excessive 3documentation, delays , slow movement of goods, non availability of

equipment and railway wagons, transhipment and other indirect

costs. A large part of trade therefore takes place informally. Thus

traders use the informal channel in order to save on transportation

costs. Particularly in the case of perishable commodities it is more

cost effective to trade informally. Thus, as long as transport costs are

higher in the formal channel than in the informal channel, informal

trade will continue to take place.

There are other transaction costs that emanate from the transacting

environment of formal and informal trading. While informal trading

markets function smoothly, there are costs that have to be incurred

to mitigate the risk associated with such transactions. Risk in such

trading has been found to be extremely low. For instance in Indo-

Bangladesh informal trading, the probability of goods being seized

was less than 0.1 while that in Indo-Nepal and Indo-Sri Lanka 4informal trading was still lower at 0.03 . In fact, studies have shown

that even when goods are seized, they can be released on nominal 5payments . On the other hand, formal trading procedures are

extremely complex in the South Asian region. For instance the

number of documents that need to be filled up for trading is 29 for 6India, 83 for Nepal and 15 for Pakistan . Also clearances have to be

obtained from multiple agencies at various stages of trading that

include obtaining licences and getting clearances from banks. Such

procedures not only involve incurring costs in terms of time taken

but also lead to rent seeking activities. Traders are known to pay

hefty bribes at various stages of trading before their goods can finally

reach their destination.

Intrinsic to the activity of trading is the issue of payments. Formal

banking facilities are not only inadequate in the region but also very

time consuming. Traders have to wait for several days before their

payments can be realised. The informal banking system, on the other

hand, is very organised and payments are not only ensured but are

also very quick. The uniqueness of the informal banking system is

that there is no physical transfer of currency. This mechanism,

referred to as Hawala in India, Hundi in Bangladesh and Undiyal in

Sri Lanka, operates on the same principles. Partner country

currencies are easily convertible in the informal money market

making it possible for traders to trade in different currencies. In fact,

the informal banking is so efficient that payments can be received

within a day. Traders may therefore prefer to use the informal

channel as it has a better payments mechanism than the formal

channel.

Perhaps what lies at the core of informal trading markets is the close

ethnic ties between trading markets. A common language, religion,

culture etc., play a crucial role in facilitating trading across the

border. This is particularly so where the same ethnic community is

divided into two national boundaries; for example in the case of

India, Bangladesh, Pakistan and Nepal. There are strong ethnic links

between the Tamils in South India and those in Sri Lanka. Ethnic ties

amongst trading partner countries in the informal channel not only

ensure that payments are made but also go towards reducing risk

and other transaction costs in carrying trade across borders. It has

been observed that in Indo-Nepal, Indo-Bangladesh and Indo-Sri

Lanka informal trading ethnic ties are stronger in the informal 7channel than in the formal channel .

In some cases, traders trade informally not because they are

unwilling to abide by laws and regulations but rather because they

lack the necessary resources to do so. A large number of informal

traders have low levels of education. The lack of education deters

traders from using the formal channel. Also, lack of education would

preclude traders from having information on trade policy. Most

informal traders are not aware of the details of different trading

arrangements. In fact informal traders in Sri Lanka have pointed out

183182

that the terms and conditions of trade agreements are available only 8in English and not in any local language spoken in the two countries .

Under such conditions, traders would prefer to use the informal

channel. It has been found in various studies that in Indo-Nepal,

Indo-Bangladesh and Indo-Sri Lanka trading, levels of education for

formal traders are significantly higher than those of informal 9traders .

III. Concluding RemarksIt is evident that informal trade in the region is quite large and

cannot be ignored in any policy dialogue. The Framework Agreement

for SAFTA signed at the 12th SAARC Summit does not address this

issue. Informal trade between India and Pakistan, believed to be the

largest is a subject area where not much information exists. As the

two countries move closer to improved trade relations, it is

important to understand the functioning of such markets and the

inadequacies of the formal trading channel. The Indo-Sri Lanka

Comprehensive Economic Partnership Agreement Framework signed

recently includes trade services, corrects the anomalies of the

currently operational Indo-Sri Lanka Free Trade Agreement but

makes no attempt to look into the issues of informal trade. India and

Nepal have a long history of bilateral FTAs signed since 1961, but

these agreements have focused only on unauthorised trade in third

country goods, with clear reference to flow of goods informally from

Nepal to India. It is not widely known that informal trade from India

to Nepal in locally produced goods is of equal magnitude and cannot

be ignored in bilateral talks. The bilateral Free Trade Agreement

between India and Nepal was renewed in 2002 but did not recognise

the importance of the two-way informal trade flow.

There is no doubt that the implementation of SAFTA and other

bilateral trading arrangements would lead to a reduction in informal

trade flows. It may be stated here that the incidence of informal

trade, particularly in goods from third countries into India has come

down with lowering of tariffs in the region. For instance, in 1991,

informal trade in third country goods from Sri Lanka to India was

almost as large as informal trade from India to Sri Lanka. Further, in

1990, informal trade in third country goods from Nepal to India was 10almost 10 times of formal trade . Recent estimates of informal trade

in third country goods show that such trade has come down

considerably and further reduction and harmonisation of tariffs

would reduce the incidence of informal trade.

It is evident that the institutional mechanism in the informal trading

market facilitates informal trade. The channels through which

informal trade takes place are rooted in the strong ethnic ties among

the traders and in the historical linkages in these societies. Ethnic

trading networks that operate on trust and honesty mitigate risks

associated with such trading. The involvement of law enforcement

agencies to collect rents (thereby mitigating informal trading risks)

makes the transacting and transporting processes smooth and acts

as an added incentive to carry on informal trade. It is easily

perceived that informal trade under these circumstances would be

difficult to eliminate. While it can well be argued that if the

transacting environment for informal trading is more efficient than

for formal trading, why not let it continue- the danger is that the

associated money laundering to finance such trade deals might prove

to be a threat to the smooth functioning of formal capital markets. A

focus on law enforcement agencies to detect and obstruct informal

transit of goods across borders is not a viable solution as increase in

enforcement mechanisms could only lead to increase in rent

collections. What would be more effective would be to reduce the

impediments to trade in the formal channels. Time delays due to

unnecessarily long and complicated procedures need to be reduced

by simplifying procedures. Clearly, the reform process in the South

Asian countries should undertake institutional reforms so that

transaction costs can be lowered. This would also have a much larger

impact in the form of trade expansion from and within the South

Asian region. Information is another important aspect, which has to

be looked into. It is true that a major proportion of informal traders

are locals who do not have high levels of education or are only

conversant with local languages. Such gaps have to be filled by

suitable dissemination of information and creation of awareness

among traders of the various norms.

In sum, while informal trade is unlikely to be totally eliminated

because ethnic trading networks between trading partners would

continue to facilitate informal trade by reducing transaction costs

through minimisation of risk costs, market information and search

costs; further reduction of tariffs, improvements in the transacting

environment of formal trade, improving awareness and education

levels and improving information dissemination would lead to a

185184

decline in informal trade flows.

Nisha Taneja works at the Indian Council for Research on

International Economic Relations (ICRIER), New Delhi, India.

Endnotes1 World Bank (1997)2 World Bank (2003)3 Trucks have to wait for 8-10 days before documents are endorsed and

checked at the customs before crossing the border. The concerned

transit authorities at Petrpole-Bongaon transit point are closed three

days in a week resulting in no trade on these three days.4 Pohit and Taneja (2000) and Taneja et.al. (2002)5 Taneja et. al. (2002)6 ESCAP (2000)7 Pohit and Taneja(2000); Taneja et. al. (2002)8 Taneja et. al. (2002)9 Pohit and Taneja (2000); Taneja et. al. (2002)10 Taneja (1999)

ReferenceslS.K. Chaudhari, 'Cross Border Trade Between India and Bangladesh',

NCAER, Working Paper 58, New Delhi, 1995.lESCAP, 'Alignment of Trade Documents and Procedures of India, Nepal

and Pakistan', Paper presented at the National Workshop on Facilitating

Intra- and Intra-sub-regional Trade in the SAARC sub-region, 2000.lS. Pohit and Nisha Taneja, 'India's Informal Trade with Bangladesh and

Nepal: A Qualitative Assessment', Working Paper No. 58, Indian

Council for Research on International Economic Relations, Delhi, 2000.lV.L. Rao, S. Baruah and R.U. Das, India's Border Trade with select

Neighbouring Countries, (New Delhi: RIS, 1997).lTaneja, 'Informal Trade in the SAARC Region', Working Paper No. 47,

Indian Council for Research on International Economic Relations,

Delhi, 1999.lNisha Taneja, M. Sarvananthan, B.K. Karmacharya and S. Pohit,

'Informal Trade in the SAARC Region: A Case Study of India, Sri Lanka

and Nepal', Paper prepared for South Asia Network of Economic

research Institutes (SANEI), 2002.l'Pakistan's Least Favoured Nation', The Economist, January 1996.lWorld Bank, 'South Asia's Integration into the World Economy',

Washington, 1997.lWorld Bank, 'Trade Policies of the South Asian Countries', Paper

presented by Garry Pursell at a Workshop held in New Delhi, October

16-17, 2003.

Pakistan, India, and Regional Cooperation

Shahid Javed Burki

he main conclusion reached in this essay is that the full and

unconstrained resumption of trade on the basis of MFN T(most favoured nation) status granted by India and Pakistan

to each other, as required by the World Trade Organisation, holds

great promise. It has been seen in many parts of the globe that deep

animosities among nations can be overcome by trade which

produces a dynamic of interdependence between people and the

owners of production systems. It has often been claimed that

democracies don't go to war with one another. That may be true to

some extent. It can also be maintained that countries that have tied

their economic systems with bilateral and regional trade agreements

find it difficult to use military force to settle differences. The main

line of thought to be advanced in this article is that the peace process

between India and Pakistan would succeed if it is supported

vigorously by trade. However, to make sure that the two countries

don't use 'trade wars' as they did in the 1940s and 1950s to make

political points against one another, it would be a good strategic

move to fix Pakistan and India into a regional trading arrangement.

This thesis is developed in four sections in addition to the

introduction and conclusion.

?Section 1 looks at regionalism in trade and how the lessons

learnt from the experience of other regions in the world could be applied to South Asia.

187186

?The second section examines Pakistan's recent economic

situation and explains why a leap frog strategy of growth, adopted within the context of a South Asian regional trading arrangement could help the country improve on its recent growth performance.

?The third section analyses the Indian situation and focuses on

how trade in 'knowledge-intensive' goods and services is helping India turn its population into an economic asset.

?The fourth section provides in rough form the contour of the

regional trading arrangement that could emerge in the region for the next one decade, say by the year 2015.

I. Why Regional Trade?Economic theory is ambivalent about regionalism- an arrangement

that provides the members of a regional association preferential

access to each others' markets. The purists have no time for such an 1approach . They maintain that the only way to promote trade for

individual countries is not to worry about how their partners

reciprocate if they themselves open their borders. Borders not only

in the developing countries but all across the world are blocked with

all manner of barriers. They cover the entire gamut of restrictions

governments place in the free flow of goods across their frontiers.

These restrictions include tariffs, quantitative restrictions, and a vast

variety of non-tariff barriers. The last category encompasses

practices such as health, labour and environmental standards

importers impose on the exporters. Sometimes importers also

include the requirement that the products imported by them contain

a certain amount of raw material that originates with them. How to

dismantle these barriers? According to pure economic theory,

unilateralism is the only way to proceed since the advantages of free

trade are far greater than the damages they may cause.

However, since that is not the way the world functions, purists are

prepared to make room for global trading arrangements such as the

one that led to the creation of the World Trade Organisation. The

WTO is the second best route towards free trade. This is about as far

as pure theory is prepared to go in terms of promoting global trade.

It has no patience with regional trading arrangements (RTAs).

But there are pragmatists who argue that in an imperfect world,

regional trading arrangements (RTAs) play an important and

productive role. But, argue the proponents, such arrangements must

be open, they must not discriminate too much against those who are

not included within their purview. Open regionalism of this type is

useful for a number of reasons. To begin with, it locks in a

government's commitment to lower tariffs and to the removal of

other constraints against a relatively free movement of goods.

Countries operating on their own can- and often do- change trade

regulations in response to pressures by vested interests or to meet

resource shortfalls. This has been sdone very frequently in Pakistan

by a device called the SRO, issued from time to time by the Central

Board of Revenue, usually in response to pressure from vested

interests. Such unilateral actions are difficult to take when countries

surrender some of their rights and a bit of their sovereignty to

regional trading arrangements.

RTAs also lead to greater foreign direct investment. Foreign

investors operating within RTAs have the comfort that government

policies will not change suddenly. They can also access much larger

markets. They can locate their investments in one place and expect

to sell their goods in a wider market. Some RTAs also tie their

member countries to follow certain rules in the areas of politics,

human rights, governance and the like. Mercosur- an arrangement

between Argentina, Brazil, Paraguay and Uruguay- makes it

incumbent upon the member countries to design their political

systems in line with the basic principles of liberal, representative

democracies. Any sharp deviation from this type of governance can

lead to expulsion from the arrangement. It was this requirement in

the treaty that originally set up Mercosur that prevented a military

take-over in the perpetually troubled Paraguay in the late 1990s.

When we talk about regional cooperation from Pakistan's

perspective, should we talk only about South Asia or should we also

look at other possibilities including regional alliances with the non-

Arab countries of the Middle East, the Muslim countries of Central

Asia, even bilateral trading and economic arrangements with China,

Asia's largest and most dynamic economy? We should certainly look

at all these possibilities. We will for the moment concentrate on the

subject of regional cooperation in South Asia.

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

189188

Pakistan, were once part of a single political entity- British India. It

was, therefore, inevitable that even after partition, there would be

considerable inter-country flow of goods and commodities. This

happened, but only for a while. In 1948-49, the first full year after

partition, 32 per cent of Pakistani imports came from India while

India bought 56 per cent of Pakistan's exports. Fifty two years later,

the situation was dramatically different. In 2000-01, India imported

only 0.42 per cent of Pakistan's exports and provided only 0.13 per

cent of the latter country's imports.

In absolute terms, Indian exports to Pakistan in 2000-01 were

valued at only US$ 186 million out of a total of US$ 44 billion. In

the same year India imported only US$ 65 million worth of goods

and commodities from its northern neighbour while its total imports

were US$ 50 billion. While politics have obviously interfered in the

conduct of trade between India and Pakistan, other countries have

not done well either. South Asian intra-regional trade declined from

19 per cent in 1948-49 to 12 per cent in the early 1950s to only 2-5

per cent in recent years.

These official numbers, however, underestimate the real volume of

trade between the countries in the region, particularly between India

and Pakistan. Estimates of illegal trade between these two countries

through smuggling or through third countries (for example

Singapore and Dubai) put its value at one billion dollars a year.

From being major trading partners at the time of their birth, India

and Pakistan now exchange very little of the goods, commodities and

services they produce.

While political quarrels between India and Pakistan have caused

many problems, they are not the only reason why intra-regional

trade did so poorly in South Asia. There were several other causes as

well, among them the autarkic economic policies followed by all

countries in the region, poor communication links among the

countries and lack of complementarity in the products produced by

the regional economies. Let me deal with each of these three factors.

The South Asians, under the influence of Fabian socialism bought to

the region by Jawaharlal Nehru, India's first prime minister, and

later adopted by Prime Minister Zulfikar Ali Bhutto in Pakistan and

Mujibur Rahman, Bangladesh's first president for his country, gave a

large role to the South Asian state. In turn, the governments of the

region pursued import substituting policies in both industry and

agriculture, de-emphasising export led growth that brought

economic miracles to East Asia.

The South Asians, having taken the decision to delink their

economies, made no effort to improve intra-regional

communications. This was an incredibly short sighted and

economically self-defeating policy to adopt. The British had left a

fairly well developed road and railways network that linked all parts

of their large empire in India. The North Western Railway linked

Karachi with Delhi and the fabled Grand Trunk Road connected

Peshawar through Delhi with Calcutta. The railway and road

network that was built with the NWR and the GT Road as their

backbones could have been of considerable economic value had the

two countries continued to develop them. That, of course, did not

happen.

And in so far as the complementarities among the regional

economies are concerned, these were not sufficiently pronounced for

several decades to warrant the development of strong regional

trading ties. It is only in recent years, with the IT sector becoming a

leading player in the Indian economy, that Bangladesh, Sri Lanka

and Pakistan can begin to take advantage of what India has already

achieved.

Even if Pakistan and India have the political will to open their

presently closed borders to inter-country trade, it would be better to

do it initially in the context of a regional arrangement. Using such

an arrangement will reduce the temptation for either country to use

trade as a weapon of diplomacy. The time has come to build these

relations on a more robust foundation.

II. Growth Strategy for PakistanOnce Pakistani policymakers begin to factor in international trade as

an important determinant of development, they could adopt an

entirely new strategy of growth. This strategy, as we will suggest

below, would not necessarily follow those that propelled the region

of East Asia and China towards relative prosperity. It would also not

seek to build the knowledge-intensive export sector to the extent

India has done. Instead, it could follow a strategy of its own- a kind

191190

of hybrid based on the experiences of other Asian nations.

Pakistan could follow one of the three models that have been tried

successfully by various Asian countries. The first of these is the

model that produced the 'miracle economies' of East Asia. Also

called 'tigers' and 'cubs,' these economies essentially tapped the large

export markets available in the industrial world. This strategy

essentially duplicated what Japan had done in the 1950s and 1960s.

In following export led strategies, the industrial sectors in the

miracle countries were guided by the state which identified areas for

them to expand into. The industries that were being helped were

almost always privately owned.

Nonetheless, the state not only helped industries identify markets

abroad, it also got the financial sector to lend large amounts of

money to the chosen industries at below market rates. In the

parlance of economics this was called 'directed credit'- credit

provided by banks to industries at the direction of the state. This

connection between industry and finance proved remarkably

successful but it also led to the financial crisis of 1997-98. What

came to be called 'crony capitalism'- that is how directed credit

evolved- worked for a while but had to be adjusted once the financial

crisis exposed its weaknesses. This has been done successfully and

the East Asians are back on the high growth trajectory- something

few analysts expected at the peak of the crisis.

The other model that Pakistan could adopt was pursued by China. It

focused on developing the human resource by providing all people-

boys and girls, men and women, and residents in all parts of the

country- with free education and health. China's human resource

development occurred in an environment of authoritarian

management of the economy and of the political system. Either by

design or purely because of pragmatism, the Chinese, starting in the

1970s, released the enormous energies of this well educated and

healthy labour by gradually loosening the political and social

controls they had placed on them. First agriculture and then small

scale and privately owned industries responded to these incentives.

The rest, as they say, is history.

Then there is the Indian model, one aspect of which we will discuss

below in some detail. What is today known as the 'Indian way' was

not a well thought-out strategy initially. In fact, the explicit Indian

strategy for development adopted by the country's first generation of

leaders achieved a result exactly the opposite of that intended. It

constrained growth rather than accelerating it. In the period

between the mid 1950s and the mid 1980s, the Indian economy

chugged along at what came to be called the 'Hindu rate of growth' a

growth rate of some 3-3.5 per cent a year. The model being followed

now is the product of a series of accidents and ad hoc decisions.

It has as its foundation Prime Minister Jawaharlal Nehru's decision

taken in the 1950s to set up half a dozen institutes of technology.

When these institutes began to produce thousands of engineers and

science graduates, there were very few employment opportunities

available within the state dominated, moribund, highly inefficient

and stagnant industries. A large number of graduates of the now

famous IITs had to look outside India for jobs and they found

thousands of them in the telecommunications, information and

communication technology (ICT) industry in the West. When, in the

late 1990s and the era of dotcom explosion, the U.S. industry ran

into serious skill shortages, a significant part of this was met by

labour imports from India. Thus the Indian Diaspora was created

which in the 1980s and 1990s not only acquired great wealth but also

considerable experience and expertise. Once the non-resident

Indian community had become viable in terms of size, wealth,

income, and expertise, it was able to help with the development of

the ICT industry back in the homeland. Consequently, India's IT

sector became one of the most vibrant in the world.

What we see in India today is an economy that is being pushed

forward by a growth rate which has relied very heavily on knowledge

accumulation as an important contributor to growth. India's

policymakers are now confident that, based on the recent

transformation of the economy, they will be able to get their country

to climb on to the same growth trajectory on which China is

proceeding. This, in sum, is the much applauded Indian model of

economic success.

Looking at the future, but also looking back at the experience of the

various successful Asian countries, what strategy should Pakistan

193192

follow? Islamabad has a menu of options available. It could use

private industry to aggressively enter the export sector, exploiting

the abundant financial resources now available within the reformed

financial sector. This would mean following the track previously

travelled by the miracle economies of East Asia. But, unfortunately

for Pakistan, there is not much synergy between the structure of

Pakistan's industrial sector and the nature of demand in the world's

large markets. Pakistan will not be able to duplicate the experience

of East Asia.

Or, alternatively, Pakistan could invest massively in developing its

large human resource by providing it with education, health and

opportunities for skill development and knowledge accumulation.

Such a strategy could work if Pakistan had the resources but more

importantly the political will. When China went on that track it

saved about 42 per cent of its gross national income, a proportion

more than three times Pakistan's abysmally low saving rate of today.

China's human resource oriented strategy produced results after two

generations, or at least a generation and a half, had been sacrificed

for the sake of the future. Pakistan neither has the luxury of time

nor the political will on the part of its leaders to take the country

through such a grind.

Finally, Pakistan could follow the Indian approach of concentrating

on the accumulation of skills and knowledge by one segment of the

population. A small (small relatively to the size of the population

but still numbering in the millions) highly skilled workforce could

enter the growth niches available in the global markets. This is the

strategy adopted by the first administration of President Pervez

Musharraf. It was championed with great energy by the then

Minister of Science and Technology, Dr. Atta-ur-Rahman.

Unfortunately, it did not produce the promised results.

I would advocate, instead, an approach that draws a bit on the

Indian experience but then moves on an altogether different track.

This two pronged approach would still emphasise knowledge and

skill development as India has done so successfully. Based on a well

equipped workforce, Pakistan could either export its abundant

workforce or take part in the rapidly evolving 'outsourcing'

opportunities that are changing the global production system. On

the other track, Pakistan could become the hub of north-south and

east-west commerce. The north-south track could link Central Asia,

including Afghanistan, with India and points beyond. The east-west

track could connect the western parts of China with the Arabian Sea

through the ports of Karachi and Gwadar. These two tracks will

cross in Pakistan and bring enormous benefits to the country.

For Pakistan to follow such a strategy, it will have to undertake large

investments in improving the physical infrastructure- roads,

railways, ports and airports. It will also need to develop its economy

to supply this transit trade with the services it needs including

insurance, finance, warehousing, processing, transhipment, etc.

Modernisation of the service sector to facilitate such a strategy would

mean focusing on creating appropriate levels of skills within the

country in a number of diverse areas.

What I have spelt out above is a strategy for sustained growth and

development suitable for a country in Pakistan's situation. Pakistan

could successfully exploit its young people to work for the skill-short

sectors in the western economies. It could, at the same time, use its

geography as a point of transit for two routes- new versions of the

old Silk Route- that would allow commerce to flow from different

parts of the world. Following this two-pronged approach, Pakistan

could leap frog into the future without going through the paces of

development followed by other Asian countries. But a great deal of

thought and planning will need to be done to develop and implement

this novel strategy. And, most important of all, for this strategy to

succeed Pakistan will need to draw strength from its neighbours,

particularly India, and work within the frameworks of regional

trading arrangements. In the section that follows, I will examine

how India has fared in the last few years after analysing how

Pakistan could benefit from its neighbour's experience.

III. A Resurgent IndiaPakistan's rapidly improving relations with India should produce

economic opportunities that could be successfully employed. One of

them is in the sector of information and communications

technology, or ICT, where India has begun to experience shortages of

skilled workers. There are reports of reverse migrations of Indians

from the United States back to their homeland. There are also

195194

reports of Indian companies entering into strategic alliances with

firms in Asia in order to enter the rapidly expanding markets of the

region. Could Pakistan take advantage of these developments? To

answer this question, let us first look at the IT sector.

The global economy, in spite of some recent hiccups, has begun to

respond to some extraordinary developments in information and

communication technologies. Rapid progress in electronics,

telecommunications, and satellite technologies over the last two

decades permit high-capacity data transmissions at a very low cost.

This has brought about a quasi-neutralisation of physical distance as

a barrier to communication and as a factor in economic

competitiveness. As Andrew S. Grove, founder and CEO of Intel

Corporation, said at a software conference in October 2003, 'from a

technical and productivity standpoint, the engineer sitting 6,000

miles away might as well be in the next cubicle and on the local area

network.'

It is the enormous reduction in the cost of communicating with

distant places and the ease with which enormous amount of data and

information can flow instantaneously that has brought about the

shrinking of physical space. For instance, in 1985 the cost of sending

45 million bits of information per second over one kilometre of

optical fibre was close to one hundred dollars; in 1997 it was possible

to send 45,000 million bits per second at a cost of just 0.05 cents.

This has led to the redefinition of the work place. Even those

working on a single project, such as the architectural design of a new

building, don't have to sit together or be located in adjacent offices.

They can easily communicate with one another over the internet.

All change is unsettling; rapid change such as the one brought about

by the revolution in ICT has had the same effect in many different

ways. Initially the fear was that this extraordinary development will

produce an unbridgeable digital divide between the rich and the poor

across the globe as well as within countries. This fear led the UNDP

to devote the better part of its Human Development Report,

published in 2001, to this subject. The authors of the report warned

that unless full cognizance was taken of the adverse consequences of

the spread of information technology, there was a real possibility

that a couple of billion of world citizens will be condemned to live for

generations within impoverished ghettos scattered all around the

globe.

However, as with most technological changes, the benefits that

accrued to both individuals and countries that were quick to

participate in this change far outweigh the associated costs. That

notwithstanding, there is now the opposite fear, expressed by many

in the United States. This concerns the possible loss of jobs to places

such as India, a country that has shown the ability to turn their large

and young populations into economic assets rather than

burdensome liabilities. There is no doubt that under the influence of

the IT revolution, the global economic system is going through a

fundamental transformation. One manifestation of this is the way

corporate America is linking itself with the high-technology sector of

India. But those who are adversely affected initially by this link see

it as a 'zero-sum' development, in which India's gain comes at the

cost of America's loss. There is greater likelihood that this will prove

to be a 'plus-sum' game in which both sides, India and the United

States, will gain.

Why is India the most prominent beneficiary in the developing world

of the ICT revolution? This question has many answers; of which

two provide a clue to what is happening in that country. One, India's

great success in the ICT sector, particularly as an exporter, is owed in

part to a decision taken half a century ago by Jawaharlal Nehru, the

country's first prime minister. When Washington decided that the

imperatives of the cold war required it to provide large amounts of

economic and technical assistance to South Asia, Nehru asked for

the establishment of institutions patterned after the MIT. This

initiative led to the founding of the Indian Institutes of Technology

at six different locations. The IITs now have the well-earned

reputation of producing world class engineers and scientists.

However, these institutions served only a small segment of the

country's vast population. Last year, for instance, they accepted only

3,500 of 178,000 persons who applied for admission. Very wisely,

the Indian government, drawing a lesson from the success of the

IITs, replicated them within the large public sector.

While the IITs became institutions of excellence, the entire public

sector geared itself to train tens of thousands of scientists and

197196

engineers. Consequently, India now produces 3.1 million college

graduates a year, a number that is expected to double by 2010. The

number of engineering colleges is expected to grow 50 per cent, to

nearly 1,600 in four years. Not all the graduates are qualified to do

world class work which is the reason why there is a movement to

improve the quality of teaching by offering much higher salaries.

Indians living abroad are also helping. The non-resident Indians

(NRIs) in the United States have teamed with Wharton School and

Northwestern University's Kellog Graduate School to found a new

Indian School of Business at Hyderabad.

The second reason for India's attraction as a destination for

corporate back-office work is the play on what economists call 'wage-

arbitrage.' This is the difference in the cost of labor in the developed

and developing countries for doing the same kind of work. To take

one example: it is estimated that this year the tax returns of some

20,000 were prepared in India, a number set to increase tenfold, to

200,000 next year. An Indian accountant charges US$ 500 a month

for this work which is equal to the amount paid for a single day by an

American preparing the same tax return.

The Indians have been able to forge alliances with corporate America

that have brought enough employment opportunities to the country

to accommodate a significant number of graduates from technology

institutions. By some estimates, at least one-third of new IT

development work for big U.S. companies is done overseas, with

India the biggest site. By 2008, forecasts McKinsey, the consulting

firm, IT services and back-office work in India will increase five-fold,

to a US$ 57 billion annual export industry employing four million

people and accounting for 7 per cent of the country's gross domestic

product.

While India has succeeded, is there place for other countries with

young populations for obtaining similar benefits from the rapidly

changing structure of the global economy? A large part of the

increment to global output will be in the knowledge-intensive service

sector. Manufacturing in developed countries accounts for just 14

per cent of output and 11 per cent of jobs. It is in this part of the

economy that initial outsourcing occurred and East Asia and China

were the main beneficiaries of that development. The service sector

accounts for 60 per cent of the output of developed economies and

more than two-thirds of employment. It is in this part of the

economy that the Indians have taken a share. But the sector is large

and there is space for other developing countries. Consider one

developed country and one part of the knowledge-intensive service

sector. The output of America's IT sector is estimated at US$ 240

billion. It is growing at a rate of more than 8 per cent a year.

Indians, with exports to the U.S. of about US$ 7 billion, still have

less than three per cent share in the market.

What are the lessons available to other developing countries from

the Indian experience? There are at least four and the most

important of these is to rapidly develop tertiary education. Second,

to boost government spending on research and development, which

is quite properly the province of government. Third, provide public

funding for graduate science and engineering students. Fourth,

develop financial markets so that new technology can be financed by

institutions such as Venture Capital Firms or through instruments

such as high-yield bonds and initial public offerings. These lessons

would be transmitted more readily within the context of a regional

trading arrangement in which the Indian IT sector becomes a major

player.

IV. A South Asian Regional ArrangementOne way of promoting trade relations with India is to do it within the

context of a regional arrangement. That could be one way of

overcoming the enormous suspicion that exists on both sides of the

border. This suspicion cannot be suddenly willed away in a season.

Working with India within the regional context may be a good way to

start.

South Asia has already paid a heavy price for not taking the regional

route. In the late 1950s, when economic development was adopted

as a major goal by all developing countries, South Asia and East Asia

were at about the same stage of development. In the early years of

the 21st century, the latter region has left the former behind by a

very wide margin. In terms of average incomes of the citizens of the

two regions, East Asia is about ten times richer than South Asia.

Even if we assume that better regional cooperation would have

added, on average, one percentage point of growth to the South

199198

Asian regional output, the combined GDP of South Asia today would

be at least 70 per cent higher. This would have translated into an

equivalent increase in per capita income and a considerable decline

in the number of people living in poverty. It would not be an

exaggeration to say that a significant part of the persistence of

poverty in South Asia can be attributed to the lack of economic

cooperation among the countries of the region.

Another way of assessing the benefits of closer economic cooperation

among the countries in the area is to look at the impact of open trade

between India and Pakistan, the region's two largest economies. A

study prepared for the World Bank in 1993 estimated that free

exchange of goods and commodities between India and Pakistan

would have resulted in a nine-fold increase in the flow of trade

between them over a period of five to ten years. Simply removing

the import bans the two countries have placed on their exports to

one another could bring enormous gain to both sides. For instance,

granting each other the 'most favoured nation' status but still

maintaining a 50 per cent tariff would increase the volume of trade

between the two countries by a factor of three.

As a member of the World Trade Organisation, Pakistan is supposed

to grant the 'most favoured nation' treatment to India. This has not

been done while India has extended this benefit to Pakistan. An

MFN status would help to remove some of the distortions that exist

in the flow of trade between the two countries. But such a move

would still be within the context of bilateral relations. To go beyond

that and cast relations within a regional context, policymakers in

Islamabad may begin to focus their attention on the areas in which

such an arrangement could work.

There are four areas in particular in which regional economic

cooperation holds considerable promise. They are information

technology, energy, water, and research and development. Let us

look at each of these in turn.

India, along with Israel and Ireland- the three 'Is'- are now major

players in the global IT sector. As discussed in a previous section,

India has already carved out a significant place for itself in the world

in this sector. There are many ways smaller countries of South Asia

could benefit from the enormous advances India has made.

Institutions providing training in IT could get affiliated with the

well-known and highly developed science and technology centre in

India. Fledging IT companies in Bangladesh, Pakistan and Sri Lanka

could form strategic alliances with the larger companies in India.

Even though India has a very large population and thousands of IT

graduates are produced by the training centres in the country, there

are some labour shortages that could be met by the skilled

workforces from other countries. There are many other

opportunities in the IT sector that could be exploited.

There are even more opportunities available in the sector of energy.

Of all the major economies on the mainland of South Asia, India is

the most deficient in energy and the existing gap between demand

and supply will expand as the economy continues to grow. What are

the options available to India for closing the gap? Currently, oil and

gas constitute 63 per cent of India's primary energy consumption.

According to one estimate, oil demand will increase from 1.9 million

barrels per day to 4.9 million by 2020, an annual rate of growth of

4.6 per cent a year, slightly less than the expected rate of increase in

GDP. Two thirds of oil and consumption is now met from imports.

This places a very heavy burden on the Indian economy which could

be lessened somewhat by importing cheaper electric power and

natural gas from a number of countries in the neighbourhood that

have deliverable surpluses.

Pakistan is one source of energy India could tap. Both the structure

of supply and demand for energy are very different in Pakistan

compared to that in India. Gas is by far the most important source

of energy supply in the country; 32 per cent of electricity is generated

by this fuel. An additional 25 per cent of electricity comes from

hydel power.

Pakistan has the potential to increase both the supply of gas and

hydel power well beyond even the more optimistic projections of

increase in domestic demand. Some 100 undeveloped dam sites

have been identified by various groups of experts which could

generate an additional 35,000 MW of electricity. The country also

has coal reserves of 185 billion tons, the second largest deposit in

South Asia. China, which produces a significant amount of

201200

electricity from coal and where coal still accounts for 80 per cent of

electric power generation, is helping Pakistan to develop coal-

powered electric generation. Once developed, this would add to the

surplus of power Pakistan will have available for sale.

Pakistan, in other words, could become a major supplier of energy to

the north-western states of India. This won't happen unless India

and Pakistan shed mutual suspicion. This is more likely to occur in

the context of formal agreements for regional cooperation. Such an

arrangement could also facilitate the supply of the Bangladeshi

natural gas to India's north eastern states and hydel power produced

by Nepal to the same parts of India.

It is as a transit country for the gas flowing either from Iran or from

Turkmenistan to India that Pakistan could draw the most benefit

from a regional arrangement in South Asia. Take the proposed

pipeline between Iran and India as an example of the benefits that

could accrue to the two countries. A study by Reliance Industries,

India's largest private sector corporation, has concluded that such a

pipeline would halve natural gas prices in India while Pakistan could

collect as much as $500 million annual fees for allowing and

managing the transit of this fuel.

If the countries in the South Asian region mustered enough political

will and dispensed with some of the suspicions that have marked the

relations among them- in particular between India and Pakistan- it

is not beyond the realm of possibility to foresee the development of

various kinds of energy grids in the area. Bangladesh, India, Nepal

and Pakistan in South Asia along with Afghanistan and the Central

Asian states could be connected with one another by a network of

electric, gas and oil grids that would bring enormous benefits to all

of them.

Water is the third area in which regional cooperation among the

countries in South Asia would be enormously beneficial. This is

particularly true for Pakistan which receives 40 per cent of its water

from outside the country, the highest figure in the region after

Bangladesh. Per capita consumption of water in Pakistan is also

much more than the regional average. This is because of the

extensive use of irrigation for agriculture- Pakistan has the world's

largest contiguous irrigated area in the world. For this reason, the

country is the 14th highest consumer of water in per capita terms in

the world and the consumption is likely to increase as population

continues to grow, as cities continue to expand and the economy

continues to modernise. On the supply side there are now severe

limitations on tapping domestic resources. Ground water

development is reaching its limit. Tube wells are being dug deeper

and deeper, mining the underground reservoir. If this continues for

long, the impact on the economy and the environment could be

severe.

A new water-sharing arrangement with India could help to alleviate

some of the problems since Pakistan's neighbour is also running into

the same kinds of shortages and is tempted to exploit the water

available in the disputed state of Kashmir.

It is now recognised that without technological growth, economies

cannot become efficient and worker productivity cannot increase.

Without a significant increase in productivity the incomes earned by

the working poor would not grow at a rate significantly high to pull

them out of poverty. Are there opportunities available in the various

countries of South Asia that could be exploited in order to benefit the

entire regional population?

The answer is yes. India has the most developed educational and

technological base in the region which could serve other countries in

the area. Its science and technology schools have attained world

status. But Pakistan also has the capacity to develop institutions

specialising in irrigation, engineering, textiles, food preparation, and

health sciences that could benefit India and other countries in the

region. Models for such cooperation already exist in other parts of

the world. There are other areas in which collaboration could occur

among the South Asian countries other than the four we have

mentioned above.

V. ConclusionAt the time of the Islamabad summit, the seven SAARC nations

agreed to work towards the creation of a Free Trade Area in South

Asia. They set themselves the target of 2007 by which time the

South Asian Free Trade Area, or SAFTA, will come into force,

allowing goods and commodities to move freely among the countries

203202

in the region. This is a good move since the trade track holds the

greatest promise for bringing about peace in the South Asian

subcontinent. There are plenty of examples around the world to

suggest that deep animosities among nations can be dissolved once

trade begins to move freely.This happened, of course, in Europe which, after two catastrophic

wars in the twentieth century, is now a zone of peace. This also

happened in the Mercosur, a trading arrangement among the

nations in the southern cone of South America. The countries in this

area had fought several wars and they continued to view one another

with deep suspicion for a very long time. The birth of Mercosur

helped to change this mind set. In fact, the warming of relations

between Argentina and Brazil, the area's two largest economies,

ultimately led to both sides giving up their nuclear ambitions. The

same can be said to be true for the North American Free Trade Area

that has brought Mexico closer to the United States and is likely to

stay that way in spite of the uneven progress made by the trading

arrangement during its first ten years.

In what way should SAFTA evolve? In working out a plan for its

development and evolution, how carefully should the founding

countries look at the experience of other successful regional trading

arrangements? What are the lessons that could be drawn from what

has happened in other parts of the world? How much focus should

be placed on moving beyond trade to other issues that have stood in

the way of regional integration in South Asia?

Historians of deep conflicts between nations tell us that

accommodation can be reached once the motives for doing so begin

to coincide. The resolution of the sharp animosity between Germany

and France occurred when the two countries recognised that they

would gain enormously if they lifted their sights beyond narrow

national interests and started to focus, instead, on the economic

future of continental Europe. Once that happened, the rest was easy.

Unfortunately, India's and Pakistan's motives are different in

seeking come kind of accommodation. Of the many different

motives that are propelling the two countries to seek rapprochement,

two are compelling. On the Indian side, the ongoing conflict with

Pakistan is a major distraction in its quest for global play. The

Bharatiya Janata Party (BJP) leaders have begun to recognise that

they cannot place India on the global map as a world player for as

long as it remains entangled with Pakistan. On the other side of the

border, President Musharraf has begun to appreciate how big a

menace the rise of Islamic fundamentalism and jihadi groups has

become. The two assassination attempts on him in December 2003

seem to have convinced him to focus on eliminating one of the

reasons that provides these groups their raison d'etre. Peace with

India would accomplish that.

Could these two motives be aligned in some way that they begin to be

seen as a part of a plus-sum game in which neither side loses and

both sides gain? That could happen if the building of trade between

the countries- rather than solving the Kashmir problem- is placed at

the centre of the evolving détente.

Shahid Javed Burki has served as vice-president of the World Bank and

as finance minister in the Pakistan government.

Endnotes1 The most articulate exponent is the Indian economist Jagdish Bhagwati,

who has written extensively on the subject of regional trade and why it

would hinder the development of true multilateralism in trade. See

Bhagwati, 1998.

205204

India-Pakistan Trade Dr S. Akbar Zaidi

ndia and Pakistan are both low income countries and are amongst

the poorest and least developed nations of the world. They are also Itwo of the seven countries which have openly undertaken nuclear

testing and consider themselves to be nuclear powers. Add to this the

fact that the two neighbours have fought at least two full-fledged wars-

with Pakistan losing its more populous wing as a consequence- and

numerous other battles and skirmishes from as early as a year after

independence and as recently as less than five years ago in 1999. They

have a history wrought with difficulties and distrust and a future which

threatens far worse. The worst fear, not just of residents of the two

countries but of the region and the world, is that irresponsible

governments in both, or either country, could resort to the extreme

measure of using nuclear weapons against one another.

This article proposes a different path to normalisation of ties between

India and Pakistan keeping in mind that different and conflicting

stands and claims on Kashmir are the biggest, or perhaps the only,

stumbling block to normalisation of ties between the two countries.

Since it is unlikely that the Kashmir issue is going to be resolved to

anyone's liking in the near future, the argument is that, rather than

Kashmir hold the 1.4 billion people of India and Pakistan hostage, it is

perhaps important to make headway in other directions, which may

eventually also have a positive impact on the impasse over Kashmir.

Partial normalisation in other areas can still take place despite the

continuing disagreements and conflicts over Kashmir.

The route towards better relations between India and Pakistan is open

trade between the two countries. The paper argues that there is no

economic rationale and justification for either of the two countries not

to trade with each other, especially in an era of globalisation and

liberalisation and after the setting up of the World Trade Organisation,

of which both countries are members. Not only are there large trade-

related advantages to governments and consumers in both countries,

but positive exogenous factors are also likely to emerge as a result. The

most important argument in this paper is that, given Pakistan's

relatively weaker economy, especially compared to India's, it is in

Pakistan's interest far more than it is India's, to have normal trade

relations with each other.

1Trade Logic with IndiaPakistan and India have been trading with each other since 1947 and,

in the last 57 years, trade has come to a complete halt for only nine

years- between 1965-74. However, despite a largely uninterrupted

trade regime since 1974, the extent of trade between India and Pakistan

is limited and almost negligible as Table 1 shows. Rajesh Chadha and

Devender Pratap- using figures only for legal trade- show that:

While about 4.5 per cent of India's total exports are directed to South 2Asia, the figure is 3 per cent in the case of Pakistan . Exports to Pakistan

constitute about 8 per cent of India's total exports to South Asia.

Pakistan's exports to India have a higher average share of about 40 per

cent, during 1998-2000, of Pakistan's total exports to South Asia

compared with an average share of about 17 per cent during 1995-1997.

In the case of imports, 0.8 per cent of India's imports originate from

South Asia and the figure is 0.5 per cent for Pakistan. Within India's

imports from South Asia, 36 per cent originate from Pakistan. Pakistan

sources 69 per cent of its total South Asian imports from India. Clearly,

India and Pakistan are two major trading partners among the South 3Asian countries despite all hurdles .

However, there is no India-Pakistan trade agreement and Pakistan

allows only a handful of commodities to be imported from India, which

have, nevertheless, increased over the years. In 1996, 615 items were

permissible for trade, although 90 per cent of the trade took place in 4only 42 items ; in April 2003, following the peace initiative by the

Indian Prime Minister, the Pakistani Prime Minister increased the 5number of tradable items . While the South Asian Free Trade Area

207206

(SAFTA) agreement will, by 2006, open doors to further trade between

the two countries, India-Pakistan trade should take place before the

agreement comes into effect, and should go well beyond the guidelines

set by the agreement.

There are some curious facts about trade between India and Pakistan

which need to be highlighted (see Tables 1 and 2). Firstly, open, formal

(legal) trade between the two countries is very small, and in the last

decade has varied between a low of US$ 106 million in 1994-95 which

was a mere 0.6 percent of Pakistan's total trade that year, to a high of

US$ 321 million in 1998-99 or 1.9 percent of Pakistan's total trade.

Clearly the volume and scale of trade between the two countries is very

small in absolute terms and as a percentage of the total trade of both

countries. However, given the political history of the two countries-

with many wars and consistently poor diplomatic relations affecting

trade and economic cooperation- it is believed that third-country trade

and smuggling increase the volume of trade from anywhere between

US$ 1-1.5 billion, still a small number, but of somewhat more

significance, particularly for Pakistan's smaller economy.

Although much is made of the rather limited volume of trade between

India and Pakistan, a number of points, especially from the Pakistani

angle, have been overlooked. Firstly, the quantum of official trade

between the two countries of between US$ 200-300 million needs to be

supplemented with illicit trade between the two countries and the trade

of goods which originate in either country but are imported through a

third country. This recalculation increases the total trade between the

countries by a factor of four or five. This is a significant increase,

especially when one considers the fact that already, for Pakistan at least

and using the official bilateral trade figures alone, India is the main

trading partner in the SAARC region. A new set of figures would further

enhance that dominance. Compared to Pakistan's neighbours-

Afghanistan, Iran, and China- trade with India is far greater than the

former two, and with the new set of figures, India comes a close second

to China. Clearly, despite an unfavourable trade, economic and

political environment, there is already substantial trade between

Pakistan and India which has even greater economic possibilities.

Perhaps the most curious fact about Pakistan's trade with India is this

assumption that it is so low. Certainly official figures, as we show in

Table 2 above, do enforce that perception, but even if we limit ourselves

to these official figures, some rather interesting observations emerge.

For example, in recent years, when imports from India have ranged

from US$ 145 million in 1998-99 to US$ 235 million in 2000-01 and to

US$ 187 million in 2001-02, India emerges as Pakistan's 16th biggest

trading partner in terms of imports. This figure is more interesting

since the four largest importers into Pakistan are oil-exporting

countries (Saudi Arabia, UAE and Kuwait) and Malaysia which exports

mainly palm oil to Pakistan. Despite hostilities, wars and diplomatic

breakdown, Pakistan imports (based only on official figures, which are

perhaps a third of actual volume) more from India than it does from

France, Canada, Switzerland, the Netherlands, Turkey, Iran or even

Thailand!- most interesting given the political relations between the

two countries. In terms of total trade, exports and imports based on the

under-reported 'official' trade between the two countries, India ranks

21st as Pakistan's trading partner. Clearly the possibilities of gains from

opening trade are tremendous, especially if we look at the nature of

trade between the two countries.

In the decade 1990-2000, Pakistan has had a trade surplus with India

Table: 1

Table: 2

Share of India's total Exports, 1990-2000: to South Asia: 2.7-5.1

to Pakistan: 0.2-0.4 Share of India's total Imports, 1990-2000: from South Asia: 0.4-0.8

Pakistan: 0.2-0.6from

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

to South Asia: 2.6-4.9

to India: 0.4-2.4

Share of Pakistan’s total Imports, 1990-2000:

from South Asia: 0.4-1.7

India: 0.2-0.6from

Source: Chadha, Rajesh and Devender Pratap, 'New Era of India-Pakistan Trade Relations: More

Butter and Less Guns', unpublished mimeograph, New Delhi, 2003.

1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-01 2001-02

Total

6819

6812

8141

8707

8323

8627

7779

8568 9201 9134Export

Import

Export

Import

9963

8561

10401

11804

11894

10118

9431

10309 10728 10339

India

83 42 42 41 36 89 175 54 55 49

67 70 64 95 197 153 146 127 235 187

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

209208

in only three of these ten years, importing far more than it exports.

Most of Pakistan's exports to India have been in the 'food and related'

category, rather than in raw materials, manufactured goods or

intermediate products. India's exports to Pakistan (Pakistan's imports)

have been distributed over the categories 'agricultural and allied

products', manufactured goods, and chemical and chemical related 6products (see Tables 3 and 4). Pakistan's and India's imports have both

been heavily influenced by single commodity (usually food), items as

the tables show, although Pakistan does import chemicals and tyre

related products. Moreover, the tables also show considerable

inconsistency and annual variability between the types of commodities

imported by both countries, and other than food items, there is no

consistent pattern of traded commodities. This shows that both

countries, despite having had poor political and diplomatic relations,

do turn to each other in times of need.

Some observations give India-Pakistan trade a rather ironic twist. It

was in 1977-78, when Pakistan was under General Zia-ul-Haq's martial

law, that trade between the two countries got an impetus following the

1974 protocol for the restoration of commercial relations on a

government to government basis, signed by the two countries after the

1971 war. Again, still under a military government in 1987, Pakistan

increased the number of permitted traded goods with India nearly six-

fold, from 42 to 249, a measure which led to a three-fold increase in the 7following three years . Although both countries avoid improving their

mutual trading status, they turn to each other at times of crises and

shortfalls of eatables. In 1990, India helped Pakistan tide over an onion

and potato crisis, and again Pakistan imported 50,000 tons of sugar

from India on an emergency basis in 1997. Likewise, India has also

depended on Pakistan for sugar, potatoes, onions and chillies, at a time

of a shortage. The fact that the largest amount of trade between the two

countries ever- of US$ 320 million- was during Pakistan's fiscal year

1998-99 is extremely interesting. Pakistan's fiscal year runs from July

to June, which means that this was the fiscal year which followed the

May 1998 nuclear tests by both countries, included the Lahore

Declaration of February 1999 as well as the Kargil war of May and June,

1999. By any measure, this was a rather eventful year in South Asia, and

yet, registered the largest volume of trade. Moreover, in 2000-01-

General Musharraf's first full year- imports from India were US$ 235

million, the highest ever. This suggests two things: India and Pakistan,

despite huge differences, trade with each other at times of shortfalls

and crises; and, if need be, even a military ruler can improve (trade)

relations with India.

E. Sridharan argues that 'India does not import any of Pakistan's major 8exports. Nor does Pakistan import any of India's major exports' - as

shown in the tables above. He explains this fact in terms of trade-

related and economic (rather than political) arguments, and says that

this is because of the competitive, rather than complementary, nature

of the two economies exporting similar products, and argues, that there

is the 'general tendency for poor countries to trade with developed ones

2001-02 2000-01

Total Imports Rs 11,471,155 Rs 13,928,480

%

%

Agri culture and Food

(Sugar)

16

(10)

53

(39)

Iron and manganese ore

9

6

Chemicals

(Pure Xylenes)

38

(17)

21

(1)

Medicinal inputs

4

2

Plastics

8

4

Tyres and Rubber 7 4

2001-02

2000-01

Total Exports

Rs 3,246,436

Rs 2,777,405

%

%

Agriculture and Food

(Dates)

(Rice)

66

(42)

66

(35)

(23)

Asafoetida

5

-

Crude Petroleum - 8

Cotton staple - 10

Cotton yarn and related

(Cotton tents)

18

(12)

5

( - )

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

Note: Agriculture and food includes 'residue of soybeans oil-cake', and Chemicals includes

dyes, paint and ink.Source: Federal Bureau of Statistics, Annual Trade Statistics 2001-02, Government of

Pakistan, Islamabad, 2003.

Table 4: Pakistan's Exports to India 2000-02 (in thousands of rupees)

Source: Federal Bureau of Statistics, Annual Trade Statistics 2001-02, Government of

Pakistan, Islamabad, 2003.

211210

rather than with their neighbours until a certain level of development 9has been achieved'. This explains the reasons why trade did not take

place between the two countries, and he thinks that 'the real scope for 10trade and investment is in the future and begins now.' For Sridharan,

however, rather than the trade of goods and commodities, 'the real

potential for economic cooperation today is in energy, for example, a 11gas pipeline and the export of electricity ...'. Not denying the fact that

past and existing patterns and trade between the two neighbours have

been rather limited, we still see far greater opportunities than does

Sridharan.

This point of view is also propagated by the Ministry of Commerce of

the Government of Pakistan, which conducted an extensive study on

the prospects and implications of trade with India. The study published

by the Ministry had, as part of its team, a number of very prominent

businessmen, all who advocated increased and fair trade with India. It

is worth looking at some of the ideas which form this report.

The Ministry of Commerce study argues that there are numerous

advantages of trade between neighbour, as there are low transportation

costs, cultural similarities which influence taste and cause profitable

complementaries to emerge. In addition, transaction costs are also

lowered and such trade 'facilitates the flow of ideas and knowledge that 12strengthen international competitiveness'. The study looks at a

number of sectors in the Pakistan economy and concludes that 'the 13economic benefits of liberalising trade with India outweigh costs'.

Consumers in Pakistan will benefit 'unambiguously' because of lower

prices, and the government will get far greater revenue from legalising

the existing illicit border trade. Moreover, 'important segments of

producers would also benefit because of increased competitiveness and 14market access to a much larger Indian economy'.

A study by the Karachi Chamber of Commerce and Industry endorses

the idea of trade with India on the grounds that now, having signed the

agreements which have led to the setting up of the World Trade

Organisation, all signatory members have to be treated equally, and

understands that giving the Most Favoured Nation (MFN) status to

India 'is not a special favour to India, but an obligation under WTO and 15an economic and geopolitical imperative'. In this new world order,

Pakistan has to face competition from all countries, including India,

and hence 'instead of shying away, we should be well prepared to face

the eventuality. In any case, salvation lies in streamlining of operations 16and upgrading of technology which was long overdue'. This study

presents a sector-wise analysis of trade with India and shows the

impact on each sector, looking at numerous aspects including what it

calls 'silver linings'. For example, it feels that while the opening up of

trade with India is likely to affect the engineering sector, cheaper steel

and iron ore imports from India, will have a positive impact overall and

'will result in the reduction of very high inventory costs of the 17 engineering sector'. However, the main argument which this report

seems to be making is that Pakistan trades with almost every country in

the world, so why not with India?

There is also the important issue of the impact of globalisation. All

countries of the world are affected by it, some favourably and others not

so favourably. To take further advantages or to protect themselves from

the negative impacts of globalisation, many neighbouring countries

have established trading blocs and currently around 60 per cent of

world trade takes place through regional trading arrangements. There

are huge advantages and benefits to such regional trading

arrangements, yet, 'South Asia is the only major world region not to 18move towards regional cooperation and integration'. Clearly,

normalisation of trading ties between India and Pakistan should be

seen as a first step to such trading arrangements. As Burki argues, 'our

policy-makers must be cognisant of the fact that the world is organising

itself into a number of regional arrangements and we in Pakistan 19cannot afford to be left out of them'.

All discussion on trade between India and Pakistan is limited by a host

of factors which makes conclusive analysis difficult. Firstly, no one

really knows how much of unofficial (smuggled) and third-country

trade actually takes place, so even figures of US$ 1-1.5 billion are open

to debate; we really don't know. Secondly, and perhaps more

importantly, much of the analysis on improving trade relations

between the two countries is based on a static analysis which is based

on the very limited existing trade patterns. No one really knows the true

potential of trade between India and Pakistan because so far most of

the trade takes place in a very small handful of commodities. Free

'normal' trade between India and Pakistan allows thousands of goods,

which have so far not been traded, to come into the market of both

213212

countries. For example, the talk about two pipe and gas lines from

Turkmenistan and Iran to India resulting in gains to both Pakistan and

India, may materialise once talks resume and political conditions

improve. Although it is difficult to say how much Pakistan will gain

from royalties and by laying the pipelines- royalty figures, though

unreliable, are being quoted at US$ 500 million each year for each of

the pipelines- if true, they could eventually be equivalent to as much as

5 percent of Pakistan's export earnings, no mean figure to scoff at.

Moreover, with lower transportation costs, there is likely to be some

import 'switching' as well, where goods previously imported from other

countries may now be imported from India. Trade between India and

Pakistan will bring down the cost of business (particularly for

Pakistan), enhance the purchasing power of consumers and increase

government revenue. The volume and variety of tradable goods, given a

period of time, can be extraordinary.

Trade with India might not radically alter Pakistan's economy for the

better (and the fears that Pakistan's India will be swamped by cheap

Indian goods are also unwarranted), but there are likely to be

numerous positive externalities which can accrue from opening up

trade by Pakistan with India.

Numerous small industries are likely to benefit from cheaper raw

materials from India and may help address the problem of some of our

sick industries. This is likely to have an employment-enhancing effect.

Moreover, many of Pakistan's industries will benefit from increased

competitiveness and will have to become more efficient in light of

international and Indian imports. Also, greater market access of

Pakistani exports should be beneficial. As we have argued above,

consumers in Pakistan are going to benefit by cheaper Indian imports

as well. As the Ministry of Commerce study argues, 'exposure to

competition from a neighbour would encourage policy makers as well

as the private sector in Pakistan to focus more sharply on the

investments needed to strengthen Pakistan's international 20competitiveness' . Moreover, the report continues, 'the fear of a deluge

of Indian products in the Pakistan market after liberalising trade is

much exaggerated. This has not happened in the past when trade has

been liberalised and is unlikely to happen in the future, given Pakistan's

global orientation in trade and the quality conscious Pakistani 21consumers' . Also, the arguments by E. Sridharan and by the

Government of Pakistan that 'it is unrealistic to visualise either

country, particularly India, having a large impact on the total trade of 22the other' , do not examine the possibilities for presently non-

tradables coming into the trade orbit.

While trade can be a component of broader Confidence Building

Measures (CBMs) and an improvement in the overall atmosphere

between these two neighbours, micro level linkages and opportunities,

particularly in Pakistan's Punjab and the NWFP, may pay higher

dividends. In terms of the broader political economy factors, trade

normalisation is likely to improve the overall atmosphere in which

India and Pakistan address all contentious issues. Even if there are no

substantive improvements in Confidence Building Measures between

the two countries on account of trade, improved trade is unlikely to

make matters much worse. Trade with India, in this regard, is a win-

win situation.

Dr S Akbar Zaidi is a leading Pakistani social scientist based in

Karachi.

Endnotes1 Much of this paper draws from the following sources: E. Sridharan,

'Economic Cooperation and Security Spill-Overs: The Case of India and

Pakistan', in Michael Krepon and Chris Gagne (eds.), Economic

Confidence-Building and Regional Security, The Henry L Stimson

Centre, Report No 36, Washington, October 2000; S. Akbar Zaidi,

'Economic Confidence Building measures in South Asia: Trade as a

Precursor to Peace with India', in Moonis Ahmar, (ed.), The Challenge of

Confidence Building in South Asia, (New Delhi: Haranand Publications,

2001); Rajesh Chadha and Devender Pratap, 'New Era of India-Pakistan

Trade Relations: More Butter and Less Guns', unpublished mimeograph,

New Delhi, 2003, and S. Akbar Zaidi, 'Pakistan's Development Options:

Does India Matter At All?', Paper presented at the Deterrence Theory and

South Asia workshop, as part of the University of Pennsylvania Institute

for the Advanced Study of India project International Relations Theory

and South Asia: Towards Long-range Research on Conflict Resolution and

Cooperation-building, New Delhi, August 26-27, 2003, to be published in

a collection of essays shortly.2 Average for three years, viz. 1998-2000.3 Chadha and Pratap, op. cit., 2003.4 Government of Pakistan, Ministry of Commerce, Pakistan-India Trade:

Transition to the GATT Regime, Islamabad, September 1996. 5 Some countries have a negative list for traded goods, i.e., they import all

215214

commodities except those which are on this negative list, as does Pakistan

when it imports from most countries. In the case of India, however,

Pakistan only allows import of items on this 'positive' list.6 E. Sridharan, op. cit., p. 97.7 Government of Pakistan, op. cit., p. 3.8 Sridharan, op. cit., p. 68.9 Ibid., p. 70.10 Ibid., p. 89.11 Ibid., p. 89.12 Government of Pakistan, Ministry of Commerce, Pakistan-India Trade:

Transition to the GATT Regime, Islamabad, September 1996, p. 1.13 Ibid., p. 2, emphasis added.14 Ibid., p. 2.15 Karachi Chamber of Commerce and Industry (KCCI), Freer Trade With

India: Its Raison d'etre and Impact, Research and Development Cell,

KCCI, Karachi, March 1996, p. 1.16 Ibid., p. 3.17 Ibid., p. 5.18 Shahid Javed Burki, 'The Themes to be Explored', Dawn, Karachi, January

23, 2001.19 Ibid.20 Government of Pakistan, op. cit., p. 16.21 Ibid., p. 16.22 E. Sridharan, op. cit., p. 76.

India's Regional Trading ArrangementsSujata Jhamb

ndia adopted inward orientation and self-reliance after

Independence. Restrictive measures turned the country into a

virtual 'closed' economy or state of 'autarky'. Domestic Isubstitution of the imports shifted focus away from exports and

export promotion. Taking the 'inward looking approach', the

planners assumed India would focus export promotion only after

self-sufficiency.

However, after 1991 India opened up by liberalizing trade, foreign

investment, and financial and industrial sector. The reforms helped

the country experience a steady growth of 6-7 percent improving

standard of living, availability of consumer goods, foreign trade and

employment opportunities.

This paper covers the Indian experience with Regional Trading

Arrangements (RTA) and preferential trading taken up after 1991 as

a part of the trade liberalization strategy, and draws lessons from

them to promote more effective RTAs. It describes India's trade

arrangements with South Asian countries such as South Asian Free

Trade Agreement (SAFTA) and Bay of Bengal Initiative for Multi-

Sectoral Technical and Economic Cooperation (BIMSTEC), and

analyzes their success or failure. The last part of the paper carries

recommendations for India.

India's Preferential Trade Areas (PTAs) post 1991The period following Cancun has seen signing of several agreements

in South Asia, especially by India. The South Asia Association for

217216

Regional Cooperation (SAARC) member countries have signed

SAFTA replacing the ineffective South Asian Preferential Trade

Agreement (SAPTA). India also has a framework agreement called

BIMSTEC, and is engaging in Free Trade Area (FTA) negotiations

with Association of South East Asian Nations, and has worked out a

Comprehensive Economic Cooperation Agreement (CECA) with

Singapore. A partial scope agreement has been signed between India

and Mercosur, a trading zone between Brazil, Argentina, Uruguay,

Paraguay and Venezuela formed to promote free trade and the fluid

movement of goods, peoples, and currency. Mercosur has more than

220 million consumers and a combined Gross Domestic Product of

more than one trillion dollars a year. India is also exploring the

option of FTAs with Chile, Gulf Corporation Council and the

Southern African Customs Union of South Africa, Botswana,

Lesotho, Namibia and Swaziland. FTA agreements with Sri Lanka

and Thailand are operational.

Review of PTAs in IndiaIndia has signed the maximum number of bilateral trade

agreements. However, as seen in South Asia, the RTAs have not been

effective in integrating the region or making a mark globally. In the

face of successful trading blocs like North Atlantic Free Trade Area,

European Union, ASEAN, Indian FTAs have witnessed a lackluster

performance. So, the agreements merit a review to learn from the

mistakes for maximum benefit.

(i) SAARC, SAPTA, and SAFTAFor a number of South Asian nations the 1990s marked liberalizing

of trade and investment regimes to intensify their integration with

the world economy.

The regional cooperation body SAARC, including India, Pakistan,

Bangladesh, Sri Lanka, The Maldives, Nepal and Bhutan, has not

achieved much since its initiation in 1985, primarily due to the

tenuous political relations between India and Pakistan and a general

environment of mistrust among member countries. Political

economy considerations are important. At the time of its inception,

each country of the group was pursuing autarkic economic policies

and had almost no integration with the international and the

regional economy.

Compared to other regional blocs, the SAARC performance is dismal.

With a total population over one-fifths of the world population and a

combined gross national income of $3 trillion, SAARC only provides

about one percent of world production. Despite geographic

proximity, trade and weak transit links, infrastructure difficulties,

high tariff and non-tariff barriers hamper investment.

Intra-SAARC trade has remained low at a mere 3 percent since the

organization's inception and it still remains small because of high

tariffs and a variety of non-tariff barriers such as quantitative

restrictions, fiscal charges and discriminatory practices and outright

ban on imports. It has been viewed that SAARC must deal with the

world's major trading blocks as a composite unit to maximize the

gains of trade for both sides. Although the intra-region trade is not

impressive, the South Asian nations have been maintaining strong

links with the outside world with the advanced countries.

Indo-SAARC Trade RelationsThe SAARC, despite several attempts to encourage regional trade

under the regulation of SAARC and the SAPTA, has not taken an

effective shape as a regional trade body because of political problems

between Pakistan and India hampering regional interests. Despite

official declarations to transform the SAPTA into an FTA in this

region by 2001, the idea seems unrealistic. India has had problems

with RTAs for its neighbours do not want free trade with a giant

neighbour they do not trust or like. Hence, multilateralism will

remain India's only choice. (Sarita,A & Tanvi,P 2000). During the 10

years before SAARC (1975-1985), India's exports increased from US$

160 million in 1975 to US $ 315 million in 1984 registering a

compound growth rate of 7.8 percent. During the 10 years after

SAARC inception, India's exports increased from US $ 277 million in

1986 to US $ 1532 million in 1995, i.e. from eight percent to 30

percent constituting an additional growth of 22 percent. So, the

SAARC has encouraged India's exports to its member countries.

Since 1991, liberalization too has increased India's exports to SAARC

countries. From US $ 622 million in 1991, the exports have touched a

peak level of US $ 2005 million in the year 2000, upping the decadal

growth from five percent during the 1980-90 liberalisation to nine

percent. Similarly, India's exports to the world during the pre- and

post- liberalisation periods have witnessed an upward trend. On the

other hand, India's import from the SAARC countries is quite low. It

219218

was just US $ 56 million in 1975 and rose to only US $ 105 million in

1984 and further to only US $ 182 in 1995. The immediate reform

period has shown a decline in India's imports from the SAARC

registering a low level of US $ 96 in the year 1993 and later picking

up only to US $ 363 million in 2000. They have grown at a constant

rate of 7 percent before and after liberalisation. This shows that India

is not a good importer for its neighbouring countries. While the

turnover of India's trade with SAARC members was US $ 382 million

in 1985, it increased to US $ 1714 million in 1995 and further to US

$2368 million in 2000. So, the increase in India's trade with SAARC

members outclasses the rise in its trade globally, from US $ 24594

million in 1985 to only US $ 94018 million in 2000.

The tables show that before liberalization India exported mostly to

Pakistan followed by Bangladesh and Maldives. But after the

liberalization Nepal and Maldives became the major export

destinations. The growth rate of exports to Pakistan had fallen

considerably until the substantial boost of 2005. The tremendous

decline in the previous years may be attributed to the tensions

between the two nations. But the growth in India's export to the

entire bloc has increased from 8.61 percent before liberalization to

12.43 percent after, showing an increase of 3.82 percent. The growth

rate of India's imports from all the SAARC nations has been negative

before and after liberalisation. Nepal is a major exporter of Indian

products with a high growth rate of about 27.5 percent followed by

Sri Lanka (15.4 percent) and Bangladesh (14.7 percent). Though the

volume of trade with the bloc has increased, India does not have a

good trading partner within the bloc. Except Nepal, all other nations

have registered a very low growth rate. Overall, the growth of India's

exports and imports show a growing trade imbalance between India

and its neighbouring South Asian countries.

Steps towards formal economic cooperation were made with the

signing of the SAPTA in 1993. SAPTA did not achieve much in

increasing intra-regional trade either. Intra-SAARC trade, as a

percentage of South Asia's world trade, increased from 2.42 percent

($1.59billion) in 1990 to 4.56 percent ($6.53 billion) in 2001 and

marginally to 4.7 percent by 2003, mostly attributed to rapid

liberalisation under bilateral trade agreements and WTO regimes,

rather than to SAPTA. The SAPTA failure is also reflected in the

skewed pattern of trade in the region. Since India has not fully

integrated into South Asia, this purely regional agreement did not

expand trade much and failed to address high transport and

transaction costs. The idea of a SAFTA was mooted in 2002, and

culminated into an agreement in January 2004. The SAFTA

agreement is expected to come into force from January 1, 2006 on

completion of all formalities. (New date is now July1). SAFTA lists

additional measures not included in the SAPTA such as

harmonization of standards, reciprocal recognition of tests and

accreditation of testing laboratories, simplification and

harmonization of customs clearance, import licensing, registration

and banking procedures; removal of barriers to intra-SAARC

investment etc.

An expansion of intra-regional trade by 1.6 times the current level as

proposed by SAFTA is not possible in the absence of concomitant

moves towards investment and trade liberalization. If this

arrangement is to be successful, the political tensions will have to be

kept at bay and India's role as a leader would have to be enhanced, as

Roy (2004) points out that India needs to take the lead in greater

regional integration since it accounts for 80 percent of the total

South Asia GDP.

(ii) BIMSTECThis agreement includes Bangladesh, India, Sri Lanka, Thailand,

Myanmar, Bhutan and Thailand. The idea of this regional

cooperation was first mooted by Bangladesh, India, Sri Lanka and

Thailand at a meeting in Bangkok in June 1997. The aim, purpose

and principles are contained in Bangkok Declaration of June 6, 1997

on the establishment of the Bangladesh-India-Sri Lanka-Thailand

Table 1: India’s Linear Growth of Exports, Imports and Volume of Trade With Saarc Countries.(In per cent)

Item Bangladesh Maldives Nepal Pakistan SrilankaTotalSAARCBloc

Exports

(1980-1990)(1991-2000)

Imports

16.310.67

8.3718.86

4.7921.13

24.9714.49

1.8510.63

8.6112.43

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

(1980-1990)

(1991-2000)

Trade volume

(1980-1990)

(1991-2000)

-2.0

14.72

0

0

-1.6

27.58

-7.05

3.82

-12.03

15.46

-5.51

15.11

13.55

10.89

8.37

18.86

2.96

22.96

1.38

9.91

-0.91

11.03

4.49

12.81

221220

Economic Cooperation (BISTEC).

At a special ministerial meeting convened in Bangkok on 22

December 1997 the Union of Myanmar was admitted to the grouping

renaming it as BIMST-EC (Bangladesh-India-Myanmar-Sri Lanka-

Thailand Economic Co-operation). This is known as Declaration of

22 December 1997. A ministerial meeting in February 2004

welcomed Bhutan and Nepal as new members.

The inter-regional grouping will serve as a bridge between the five

SAARC countries and two ASEAN countries. BIMSTEC will have a

greater potential to increase the trade among member countries by

taking advantage of their geographical location in the region of the

Bay of Bengal and the eastern coast of the Indian Ocean. Discussions

have already been held on building a TransAsia Highway linking the

five countries and also setting up a BIMST-EC Airline connecting the

capitals and important cities of the member countries.

Held in Bangkok on 7 August 1998, the first BIMSTEC economic and

trade ministers' meeting termed as the Retreat, decided that BIMST-

EC would initially begin cooperation efforts in six areas. It was

agreed that each country would play a lead role in planning and

implementing programmes in each of the areas. The sectors and lead

countries at the inception were:

Trade & Investment BangladeshTechnology India Transportation and Communication ThailandEnergy Myanmar

Tourism Sri Lanka Fisheries Sri Lanka

Recognising that sub-regional cooperation can progress only in inter-

governmental cooperation and coordination, and that the private

sector is an engine of growth for enhancing interaction between

government bodies and the private sector representatives of the five

BIMST-EC countries, the BIMST-EC Economic Forum was

conceptualized at a meeting in Dhaka in 1999. The BIMST-EC

Economic Forum is a representative group of both the public and

private sectors, formed to discuss ways for achieving the objectives of

BIMST-EC and making recommendations for the ministerial

meetings each year.

BIMSTEC covers a population of approximately 1.3 billion and the

trade value between Thailand and other countries in the group

exceeded US$3 billion in 2003. The forum is unique as the only link

between South Asia and Southeast Asia, bridging South Asia's Look

East policy with Thailand's Look West policy. BIMSTEC can also be

considered as a mechanism to promote opportunities for trade,

investment and tourism between Thailand and South Asia.

BIMSTEC's objectives stretch from creation of economic and social

prosperity based on equality, to enhancement of mutual benefits in

economic, social and technological aspects. They also involve intra-

regional assistance in training, research and development as well as

beneficial cooperation in agriculture, industry, expansion of trade

and investment, improvement in communication and transport, for

improving living standards and cooperation with other international

organisations.

RESULTS: India's trade with the Bimstec countries rose by eight

percent in dollar terms and six percent in rupee terms to reach more

than $6.6 billion during 2004-05, according to the findings of the PHD

Chambers of Commerce and Industry.

Reflecting good performance of India's “New Age Sector”, drugs and

pharmaceuticals, there has been appreciable increase in the country's

exports of such products to the Bimstec countries. The growing thaw

in Indo-Myanmar relations has increased pharma exports to

Myanmar by over 36 percent. Export of pharmaceutical products to

India's total trade, exports and imports with

Bangladesh

0

500

1000

1500

2000

1999-

2000

2000-

2001

2001-

2002

2002-

2003

2003-

2004

Years

Valu

es

inm

illio

ns

EXPORT

IMPORT

TOTAL TRADE

223222

Bangladesh that stood at $50 million registered a 19 percent growth.

While India's exports to these countries have grown faster, imports

have remained almost stagnant.

Having proved its information technology worth to the world with

aggregate software and services exports of over $ 22 billion, Indian

software industry is making steady inroads into the Bimstec

countries. Though starting from a very low base, Indian software

exports to Sri-Lanka stood at $1.2 million. Similar trends have also

been observed for Bangladesh, Thailand, and Nepal.

Member countries should work towards greater air transport

liberalization, short-sea shipping, and trilateral highway linkages

among India, Myanmar and Thailand and between Bangladesh,

Myanmar and Thailand, including linkages with other BIMSTEC

countries. Implementation of transport linkages and physical

connectivity among the member countries would generate huge

benefits and expedite the trading process.

ConclusionFrom an economic standpoint, FTAs could spell potential trouble for

India. Any move toward preferential trading without further

liberalisation is unlikely to work. India having high trade barriers

makes the scope for trade diversion and the accompanying losses

considerable. Being relatively powerful in most countries in the

region, business lobbies are likely to exploit the rules of origin and

sectoral exceptions in these arrangements in such a way as will

maximize trade diversion and minimize trade creation.

According to economist Arvind Panagariya, countries within the

SAARC region trade "too little" with one another compared to what

one would expect on the basis of their proximity and income levels.

There could be various reasons for this. First, the low level of trade

has been essentially the result of autarkic policies in the region. The

reason for the low level of intra-regional trade until recently was not

the absence of trade preferences but the absence of liberal trade

policies in general. Pitigala, Pursell and Baysen (2000) show that

once the countries in the region began to liberalize, their intra-

regional trade expanded rapidly. The effect of trade liberalization by

India, which is by far the largest country in the region, is especially

pronounced. Second, there has been a considerable amount of

"informal" trade among member countries of the region. This was

not only to evade the high tariffs that must be paid on official trade,

but also to carry out some trade that would not have been permitted

at all.

Since South Asia accounts for less than one percent of the world

production and tariffs in the region are high, the risk of trade

diversion from preferential trade liberalization is high. With 99

percent of the world production outside the region, the likelihood

that the most efficient and competitive producers of the large

majority of products are within the region is very low. This means the

scope for trade diversion is substantial. Clearly, the country with

higher tariffs loses while the country with lower tariff benefits from

FTA.

Sujata Jhamb is assistant professor of economics at the Narsee

Monjee Institute of Management Sciences in India. ReferenceslBhagwati, Jagdish and Arvind Panagariya. 1996. "Preferential Trading

Areas andlMultilateralism: Strangers, Friends or Foes?" in The Economics of

PreferentiallTrade Agreements. Jagdish Bhagwati and Arvind Panagariya, eds.

Washington,lD.C: AEI Press, pp. 1-78.lDuttagupta, Rupa and Arvind Panagariya. 2001. “Free Trade Areas and

Rules of Origin: Economics and Politics, ” University of Maryland at

College Park, mimeo.lFrankel, J., Stein, E. and Wei, S., 1995, "Trading Blocs and the

Americas: The Natural, the Unnatural and the Supernatural," Journal of

Development Economics 47, 61-96.lMattoo, A. and C. Fink. 2002. “Regional Agreements and Trade in

Services: Policy Issues.”lPolicy Research Working Paper #2852. The World Bank. Washington,

DC.lNarayan, S. 2005. “On leveraging opportunities from CECA” Financial

Express. June 8.lNewfarmer, R. 2004. “SAFTA: Promises and Pitfalls of Preferential

Trade Arrangements” The World Bank. Washington, DC.lPanagariya, A. 2005. “An India-China Free Trade Area.” Economic

Times. April 20.lRoy, J. 2002. “Towards International Norms for Indirect Taxes and

Trade Facilitation in India”

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

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

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

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

Express. October 21.lRoy, 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 L“Envisioning South Asia”, facilitated by SAFMA, on 29-30 April

2006 in Islamabad, Pakistan, have deliberated upon and initiated a

process of evolving a holistic and integrated South Asian vision by

and for South Asians and a strategic understanding on meeting the

challenges of the 21st century and globalisation and ushering in a

new era of fraternal, equitable, and collective partnership:

1. South Asia is at a historic moment of unprecedented potential

for transforming its economic and social conditions and,

together with China, emerging as two large economies in the

next two decades, playing a key role not only in the global

economy, but also in the development of human civilisation in

the 21st century. Yet the world cannot be sustained by economic

growth alone. Human life is threatened with environmental

crises, conflicts, endemic poverty, natural calamities and an

arms race. 2. Our societies have a rich cultural tradition of unity in diversity,

creative growth through human solidarity and harmony with

nature. In bringing these aspects of their culture in facing

contemporary challenges, the people of this region could bring

new consciousness and institutions to the global market

mechanism that can take the world on to a new trajectory of

cooperative, sustainable development and human security.

Global cooperation in environmental protection, poverty

reduction and defusing the flash points of social conflict and an

227226

end to violence, terrorism and repression will become the

essential underpinning of sustainable development and human

security in this century. Thus it is not the military muscle of a

state/region that will be the emblem of status, but its

contribution to meeting the challenge of peace, overcoming

global poverty, protecting the planet from environmental

disaster and contributing to humanizing the world and

advancement of its people.3. The global environment provides a historically unprecedented

scale of capital flows, trade opportunities, information and

technologies, which, if utilized, can dramatically transform the

material and social conditions of life of the peoples of South

Asia. A vision is efficacious to the extent that it can be

concretized. This requires bringing to bear the new

consciousness of South Asian cooperative and equitable

partnership to undertake specific policy actions. Apart from

implementing the decision at the Islamabad SAARC Summit to

establish a South Asian Free Trade Area, SAARC Social Charter,

ISACPA Report on Poverty Alleviation, three broad areas for

deepening economic cooperation can be identified for the

purposes of specific policy action: (1) energy cooperation and

water management and conservation within South Asia; (2)

Increased investment for accelerating economic growth,

especially in physical and social infrastructures; (3)

Restructuring growth for faster poverty eradication and human

resource development. 4. With the most contiguous region of the world, a common history

to share and similarities of cultures, South Asia has less baggage

to shed than Europe or the Far East. It is now booming with the

ideas of regional cooperation that take a wholist approach

towards the collective good of the region as they increasingly

find state-centric and security-centred approaches inconsistent

with the interests of our 1.4 billion people and the imperatives of

our times. 5. India and Pakistan are at a crucial moment in history when

economic cooperation between the two is necessary for

sustaining their respective economic growth rates. a) India will

require rapidly rising imports of oil and gas from the Middle

East and Central Asia to fuel its economic growth. Pakistan is

the natural conduit through which these oil and gas supplies can

be transported into India and the rest of South Asia. b) India's

growth in the past has been based essentially on the home

market. In the future, sustaining growth will requite export

markets in Pakistan and other South Asian countries. c)

Similarly, the sustainability of Pakistan's GDP growth requires a

large increase in investment, particularly in infrastructure, and

the Indian private sector, along with direct foreign investment,

can fill this gap for Pakistan. d) The oil and gas pipeline from

Iran through Pakistan to India alone can generate over $700

million a year and with similar lines from Central Asia,

Afghanistan through Pakistan another $500 million. This could

add 1.5 percentage points to Pakistan's GDP growth. e) The gains

from trade between India and Pakistan will be greater for

Pakistan than India, and can accelerate GDP growth in both

countries. Thus opening up trade and investment is vital for

growth sustainability in South Asia.6. Energy and Water are two vital resource inputs into economic

growth. South Asia requires integrated gas and electricity grids

for the welfare of each South Asian country. Similarly, South

Asian regional agreements among upper and lower riparian

states on the model of the Indus Basin Treaty need to be made

between Nepal, India, Bangladesh. Similar protocols need to be

developed for upper and lower riparian districts/ provinces

within each country. These are necessary to avid inter and

intrastate tensions in the future.7. Governments in South Asia need to realize that in the next two

decades, South Asia will become the second largest economy in

the world after China. This means that the centre of gravity will

shift for the first time in 300 years, to this part of the world from

the West. This presents a new challenge to South Asian citizens

to develop new paradigms of economic policy, governance and

international relations. a) At the level of economic policy we

need to restructure our GDP growth so as to achieve growth with

equity which requires making the poor not into victims but the

subjects of the growth process, from being marginal to becoming

the mainstream of economic growth. b) At the level of

governance we need to give up the 18th century notion that

economic gains must be translated into increased military

power. In an inter-dependent world the emblem of the status of

a country will be based not on its ability to destruct but its ability

to save the planet from ecological disaster and to build a more

humane world. c) At the level of international relations we need

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to replace the competitive and hegemonic model of interstate

relations with a cooperative model. We can start with South

Asian cooperation to demonstrate to the world that the

maximization of national welfare lies not in conflict but

cooperation, not through aggression but through human

solidarity.8. The remarkable concurrence of views expressed by the experts at

South Asian Journal's conference reflect the immense urge of

our peoples to outgrow the past and take a leap into a future that

is free from want and conflict. Certain stages of history can be

skipped, so can various evolutionary stages through which, for

example, the European Union had to pass in the 20th century.

The intrastate conflicts and interstate disputes must move from

management to resolution in a result-oriented process that must

at the same time allow, rather than hinder, regional cooperation

to address the demands of our peoples. The lines of conflicts

must change into the bridges of friendship and the fenced-

borders must gradually soften before the urge of South Asians to

become a fraternal and indivisible community of people with

nation states, while keeping their sovereign equality, joining

hands in submitting before the will of their real sovereigns - the

people. 9. With a step-by-step approach, and simultaneously, all sided

measures can be taken through an integrated and well calibrated

sequencing and realistic stages, towards South Asian Free Trade

Area, South Asian Union, (tourism/environment/water/energy/

communication /information/economic), South Asian Tariffs

and Customs Union, South Asian Monetary Union, South Asian

Bank and Development Fund, South Asian Cooperative Security

and South Asian Parliament. However, to take a leap forward,

there will have to be no hegemony, or ganging up by the small

against the big. A new paradigm of equitable, if not equal,

partnership must evolve to reshape our all-sided relations. 10. Welcoming the current peace process between India and

Pakistan with its two-fold objectives: the exploration of all

options for a final settlement of the J&K question in an

atmosphere free of violence, terrorism and normalization of

bilateral relations while implementing their joint statements of

January 6, 2004, September 24, 2004 and April 18, 2005 in

their letter and spirit. Appreciating the efforts by India and

Pakistan to undertake nuclear and conventional military

confidence-building measures, we urge them to put in place a

comprehensive regime of CBMs that will ensure a nuclear-

tension free subcontinent. We endorse the demands of India and

Pakistan for negotiations with the other nuclear weapons powers

to promote global non-proliferation and effective nuclear

disarmament. Appeal to all countries in the region to put in

place comprehensive sustainable dialogue mechanisms for

resolving all bilateral disputes. While India and Pakistan today

have a composite dialogue in place which needs to be given

further impetus and momentum, similar exercises are needed,

for example between India and Bangladesh.11. Concerned about various intrastate conflicts, such as in Sri

Lanka, Nepal and elsewhere, we call upon the concerned parties

to hold fire, take necessary confidence building measures and

allow peace process to address their relevant genuine concerns

and propose alternative solutions on which the parties could

mutually agree to resolve their disputes. 12. Welcoming the victory of democratic struggle in Nepal, a

broader consensus on convening a Constituent Assembly,

without any conditions, the urge of all segments of civil society

to find an amicable peaceful solution to the causes that gave

birth to the Maoist upsurge and to set a democratic path of free

and fair elections, we hope that the people of Nepal will realize

the dream of a republic and set a laudable example for those

other peoples who are still struggling to achieve their democratic

aspirations against the remnants of authoritarianism and

extremism. 13. Facing the challenges of globalization and taking a collective

stand in the ongoing trade negotiations on WTO, South Asia

should set its own house in order to pursue its collective goal of

creating an even playing filed both within the region and in the

world.

In view of the above, the individual working groups set up under

SAPANA put forward recommendations in the following areas:

South Asian Free Trade Area The agreement on South Asian Free Trade Area (SAFTA) requires

effective implementation, expanding the space for trade and, more

importantly, economic collaboration, investment and development.

If South Asia's economies are to be integrated, it presupposes

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development of transnational communication networks and physical

infrastructure and monetary cooperation involving greater

coordination among the governments and the central banks. Despite

limited complementarities in trade-able items, due to similar

comparative advantages, expansion of trade warrants vertical and

horizontal integration of industries and investment in joint ventures

by public and private sectors. However, trade and investment will

not move ahead unless tariffs are lowered, the negative list kept to

the minimum, para- and non-tariff barriers removed and standards

harmonized.

Streamlining borders transactions through trade facilitation at sub-

regional junctions, special attention needs to be focused on

promoting border trade. Increase in efficiency within the sub-region

often spills over into trade outside the region as well, because

improving customs or improving efficiency of ports helps both

intraregional trade and international trade.

The Group on Tariff and Macroeconomic Harmonisation

recommends:14. The average rate of tariffs has gone down in all the South Asian

countries, but some of them impose para-tariffs, including

regulatory duties, anti-dumping duties, and specific duties and

non-tariff barriers. Transparency in the tariffs structure needs to

be ensured. While the average duties are not all that high there is

a need to remove tariff peaks. Further reduction in duties should

ensure that the industries where the country has dynamic

comparative advantage are not closed down. The group also

recommends trade facilitation because various procedural

requirements discourages growth of trade;15. Containing fiscal deficit policy should be pursued by making

judicious choices between growth and stability;16. The prudential regulations for the banks should be effectively

implemented and it needs to be ensured that the efficiency gains

result in higher deposit rates and/or lower rates on the

advances. The pursuit of prudential regulations should not be

applied on the small and micro enterprises who cannot meet the

collateral requirements; 17. South Asian countries may continue to have floating exchange

rates and the central banks may only intervene to keep the

currency near the equilibrium value;

18. The South Asian countries may further deregulate the economy

and may continue privatization policies as long as the private

sector monopolies are properly regulated; 19. Whereas South Asian countries are struggling to promote trade

within the region, the ultimate objective should be the economic

union and common currency. Whereas political agreement

would be necessary to make SAFTA effective, formulate the

custom union and economic union, various steps will have to be

taken before economic union is formed. The countries will have

to coordinate the exchange rate, fiscal and monetary policies;20. The coordination of policies would imply that the countries are

willing to increase interdependencies and the commitment of

the union to help the country suffering from any problem and a

South Asian Fund may be created for this purpose. Various

studies need to be conducted to examine the problems by way of

policy coordination and the lack of economic policy options

when the economic union is formed; and21. The group also feels that the South Asian countries have

achieved growth rates exceeding 8 per cent in recent years and

they expect the growth rate to continue. However, the

investment rates and other prerequisite to the high growth rates

are missing and they must try to overcome the stumbling blocs

to growth.

InvestmentsIntra-regional investment plays an important role in transferring

surplus capital from capital endowed countries of a region to capital

deficit ones and along with it technical, managerial and marketing

skills. It also plays a vital role in industrial restructuring within the

region and helps in moderating trade imbalances among the member

countries.

In view of the crucial role of investments, it is desirable that member

countries of SAARC evolve a common investment policy so that

instead of competing with each other in terms of offering fiscal

incentives, they facilitate freer flow of capital among them that

extend beyond their respective countries. The elements of such an

investment policy include capital flows to mitigate the trade deficit

and capital scarcity, avoidance of double taxation, protection of

investment and conditions governing the management of foreign

exchange, differentiating between the requirement s of least and

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non-least developing countries.

The 13th SAARC Summit held in December 2005 adopted three

treaties for promoting investment facilitation. These are related to

customs cooperation, limited double tax agreement and setting up of

an Arbitration Council. The scope of these agreements needs to be

extended so that the goal of a SAARC investment area is realized.

South Asian Customs, Tariffs, and Monetary UnionIntra-regional trade and Investment will, subsequently and

gradually, translate into a South Asian Customs and Tariffs Union

which may lead to a common exchange rate policy that will,

eventually, necessitate the creation of a South Asian Monetary Union

underwritten by macro-economic management and harmonization of

trade, fiscal and monetary policies at the regional level.

No less important is the cooperation in the transport and

communication sectors envisaging an integrated transport

infrastructure that allows uninterrupted travel across and beyond

our region and communication highways, facilitating free movement

of people, goods and unhindered flow of information across the

region and beyond, connecting South Asia with Central, South

Western and South East Asia. Not only do rail and road links

between Pakistan, India, Nepal and Bangladesh need to be

rehabilitated, a system of connectivity will have to be constructed

especially for the railways and the truckers will have to be issued

special permits.

Nevertheless, the Indian and Pakistani governments must agree to

transit of trade between Pakistan, Bangladesh, Nepal, India and

Central Asia. For promotion of trade the countries will have to

facilitate cross border movement of people and goods. Visa and

custom facilities will have to be simplified, and for special categories

of people and goods waived, across the board.

The Group on Custom Laws and Issues recommends: 1. Trade is growing in the region the mindset of protectionism is

changing. Trade barriers still exist, with high tariff barriers and a

large number of non tariff barriers. The economies are booming

and clearly need to be integrated.2. Customs laws need simplification and harmonization;

3. Dry ports need to be set up and transit rights be given freely;4. Valuation procedures need to be harmonized;5. Warehousing infrastructure, charges and fees needs

improvement;6. Common formats need to be developed for declaration forms;7. These forms be made available in electronic form, and available

in all major languages in the region;8. Information and data be exchanged freely;9. Countries to do away with secretive sensitive lists;10. A common software be used that would simplify declaration and

valuation;11. Mutual recognition of certification;12. Common standards and testing procedures to be followed;13. Capacity building and technology transfer be speeded up;14. Pakistan to take a lead in trade facilitation efforts, Sri Lanka to

lead the efforts towards breaking down non tariff barriers;15. Allow and encourage trade in services by recognizing University

and college degrees across the region.

Water Sharing and ManagementIncreasingly, the governments and concerned institutions are

realizing the need to address acute shortage of energy and water,

incidence of drought and floods that often bring miseries to the

people and, at times, states into conflict. The distribution and

management of water resources, though quite a divisive issue among

the upper and lower riparian regions across states, needs to be

undertaken amicably without depriving the lower and upper riparian

regions of their due to avoid a conflict over water issues which must

not be politicized.

Bilateral treaties, such as Indus Water Treaty between India and

Pakistan and the Treaty over Ganges between Bangladesh and India

must be respected and upheld in letter and spirit. The Mahakali

Treaty between Nepal and India may be implemented by removing

reservations of either side. The quadrangle of Bangladesh, Bhutan,

India and Nepal may take up an integrated approach to manage

water resources while keeping the interests of upper and lower

riparian, on the one hand, and India and Pakistan must overcome

their differences over Tulbul, Baglihar and Kishanganga projects

within the framework of the IWT, on the other.

There are other major water related problems that need to be

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addressed on a priority basis with water cooperation among the

member countries of SAARC to enhance water and food security.

There is a great hydro-power potential in Bhutan and Nepal that can

be utilized by other countries of the region. However, that would

involve the need for a common or bilateral grid, on which all

concerned countries would have to agree.

Recommendations of the Water Group1. The regional water scenario of South Asia is predominated by

increasing gap between increasing water demand and

insufficient supply, high allocation to agriculture and growing

new commercial demands, trans-boundary and regional

conflicts generated from upper versus lower riparian water

needs/interests, increasing interest in hydropower and new

management experiences. Policy challenges are linked to the

socio-economic approaches, selection of technical solutions and

institutional capacity. The following general and specific

recommendations could be made, based on the group

discussion:2. The trans-boundary conflicts are based on concerns of the lower

riparian countries to secure river flows (Pakistan and

Bangladesh versus India) on one hand and development

interests of the upper riparian especially for the hydropower

(Nepal versus India, India vs. Pakistan). The multi-purpose and

multi-country planning for the Himalayan water resources and

the South Asian water basins is the proposed future option.

(proposed NIBB-C Water Ways is an example)3. All South Asian countries are going through the experiences of

decentralization and local management. Different models have

been tried the success so far indicates involvement of local civil

society, political acceptance and local institutional

implementation capacity as the key elements. The national

experiences needs to be impartially evaluated and put in the

proper context. 4. The efficiency and productivity of water use in agriculture must

be enhanced along with sustainable use of water in agriculture.

The physical water stress and growing urban needs of Pakistan

and India suggest a slow transfer of water from the sector. 5. All infrastructure developments should consider long term

conservation of the natural water resources (all water bodies,

including lakes, river sections and groundwater) and

regenerative use of water. The central and top-bottom

engineering approaches are not able to move forward due to

political as well as hydrological reasons, hence, the technical

options must be formulated across the appropriate local

hydrological and political boundaries.6. The human access to water resources, on the one hand, and

increased commercial value of water, on the other, are the

growing challenges for the planning and development. The

secure allocations for the domestic and drinking water, equitable

distribution and fair water pricing in different sectors and

regions are the essential regulatory measures. The public sector

as a service provider has the responsibility to define guidelines.7. The water related sectors have the great opportunity for the

knowledge sharing in the technical and managerial fields.

South Asian Energy GridSimilarly, the energy cooperation should evolve into a South Asian

Energy Grid with integrated electricity and gas systems. As India and

Pakistan now agree, and they must move forward, the gas and oil

pipelines can run from Central Asia, Gulf, Iran and Myanmar

through Pakistan, Afghanistan and Bangladesh to whole of South

Asia and beyond. In this context of developing energy markets,

power trading in the region calls for establishment of high voltage

interconnections between the national grids of the countries. India,

Pakistan, Nepal and Bangladesh should cooperate in transportation

of gas and jointly developing, trading and sharing of energy.

The Energy Group recommends: 1. South Asia is home to 22% of the world's population and

occupies only 4% of the world land mass. All the countries in the

region are developing economies and heavily dependent on

energy imports despite being bestowed by nature with large

energy resources including hydro, solar, wind and, to some

extent, natural gas resources. However, they have not been able

to exploit their energy resources to meet the demand. Energy

imports constitute 27% to 87% of their commercial energy

needs. Price fluctuations in the international oil market have

been adversely impacting the economies of the region. Projected

energy consumption to sustain the current economic growth

levels would call for a more than 300% increase in their energy

consumption by 2020. Energy security, therefore, assumes

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greater significance for the socio-economic development of

South Asia. The major causes of concern from the regional

energy security perspective are:(i) Short-term supply risks due to threat of war and military action

that may impact Middle East or Iran, the primary source of

commercial energy supply to South Asia;(ii) Difficulty to pay for oil imports, when the prices shoot up

sharply;(iii) Prospect of obtaining to long term gas and oil supply contracts at

affordable prices, which can also ensure greater price stability;(iv) Availability of electricity to all households within a reasonable

time span to enhance the socio-economics development and

improve quality of life.2. The following steps need to be taken urgently to address the

above concern:3. Expedite development of indigenous energy resources including

hydropower while taking into account issues of resettlement and

socio economic crisis. Non-conventional energy resources, such

as, the wind and solar energy resources, such as, the wind and

solar energy to meet the long term energy demand;4. Establishment of a South Asian regional power grid to facilitate

exchanges and trading of power to meet the electricity demand

in the region;5. Development of a South Asia Gas Grid with pipelines from Iran.

Turkmenistan, to facilitate natural gas surplus countries in the

neighborhood of South Asia to facilitate natural gas imports into

the region and its distribution among the countries of South

Asia;6. Establish South Asia Energy Research Programs for

development of new technologies that would facilitate

harnessing the benefits of solar and other energy resources on a

more sustainable basis;7. Establish regional energy cooperation on a long-term basis;8. Undertake evaluation to examine the appropriateness and

impact of power sector reform initiatives undertaken by the

countries in South Asia to identify the need for any course

correction or policy change.

South Asian Development Bank Given a low rate of investment to GDP ratio, South Asia must create

attractive environment for investment in high value-added

manufacturing lines and trans-regional projects. Enhanced

investment flows, both from within and outside the region, would

culminate in production facilities located across the region through

integrated production systems. Shares of both national and regional

companies would be quoted on our stock exchanges as capital moves

without hindrance across national boundaries to underwrite

investment in joint ventures and projects in any part of our region

through a South Asian Development Bank.

Addressing LDCs' ConcernsHowever, economic cooperation and trade would not produce

tangible results unless the concerns of Least Developed Countries

(LDCs) are genuinely addressed, the negative-list is minimized,

tariffs are substantially brought down and non-tariff and para-tariff

barriers lifted, the economies are gradually opened up with a

recourse to investment-trade linkage that takes care of trade deficits

between partners through investment flows and capital account,

vertical and horizontal integration of industries that benefits from

relative advantages and economies of scale. The time frame

envisaged in the agreement on SAFTA must be strictly adhered to.

South Asian Cooperative SecurityWe resolve to get out of the straitjacket of enmity, overcome

obsession with over-demanding militaristic security paradigms and

look beyond the traditional notions of security and focus on an

integrated South Asian Cooperative Security that recognizes

interdependence and mutuality of interests. The states ought to act

in their enlightened self-interest to resolve their conflicts and

differences through peaceful means and to the mutual benefit of our

peoples. The choice is often, erroneously, posed between regional

cooperation and conflict resolution. We urge all our states to

simultaneously move forward to address long-standing political

disputes through peaceful means. The main obstacle to regional

cooperation and economic integration remains political and

strategic. Therefore, we vow to be courageous, flexible and consistent

to help resolve interstate and intrastate conflicts and dismantle

political barriers to regional economic takeoff.

Countering the widespread threat of terrorism, the SAARC countries

must implement the current protocol for cooperation against

terrorism and bring it in line with the international norms. The

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regional efforts against terrorism must also include measures to

combat the spread of small arms and light weapons, narcotics

trafficking, smuggling, organized crimes and criminal mafias. This

will require exchanges and interaction between the national

intelligence and security agencies with their counterparts across the

border and greater interaction between the armed forces and

military establishments in the region.

The conference strongly emphasizes the principle that there can be

no intervention in the internal affairs of any nation in the

subcontinent. Yet, given the implications of internal conflicts for

regional security as a whole, the SAARC must pay greater attention

to the relationship between internal and regional security. It calls on

both parties to the ethnic conflict in Sri Lanka to take immediate

steps towards a revival of the stalled peace process and creation of an

interim administration in the Tamil-dominated regions while

securing integrity of the country and the rights of minorities there.

Without prejudice to the current positions of the SAARC

governments on amending the SAARC charter, the conference calls

upon the SAARC to initiate a study on mechanisms for cooperative

security in the region. Advancing the SAARC charter, the conference welcomes the

decision, in principle, of the Islamabad SAARC summit to establish

procedures for cooperation with other countries and organizations.

Given the increasing interdependence among regions, cooperation

with neighboring countries, such as China, Afghanistan and

Myanmar and Central Asia, and other regional organizations, it is an

essential future activity for SAARC.

The Group on Nuclear Stabilization recommendsThe existence of nuclear weapons in South Asia remains an issue of

major concern for the peoples and region's security analysts. Given

Indo-Pak history of constant tensions and intermittent crises, we are

concerned about the likelihood of a crisis spiralling out of control

and eventually leading to a nuclear conflict. While we find the South

Asian nuclear regime to be relatively stable in peace time, there is

indeed nuclear instability induced into the nuclear equation in time

of crises. This is borne out of an analysis of the 1999 and 2002 crises

between India and Pakistan. Moreover, since one of the adversaries,

Pakistan, inherently links nuclear escalation to conventional

asymmetry, the growing asymmetry in conventional arms between

Pakistan and India could also lead to a lowering of the nuclear

thresholds in terms of South Asian crises. Finally, while the mutual

ambiguity of the nuclear regime in South Asia contributes to stability

on some counts, it does not allow the adversaries to make informed

decisions in times of crises and can thus lead to instability.

Given the above, the recommendations of the group

include:1. Recognizing that much of the tensions are a result of outstanding

disputes, we recommend that Pakistan and India must continue

dialogue on these issues and continue on the overall drive

towards CBMs through the existing normalization process. With

regard to nuclear weapons, Pakistan and India should mutually

initiate a global drive towards disarmament. The starting point

should be a declaration that transforms South Asia into a nuclear

weapons free zone. More specifically, the two sides could focus

on the following:2. Declaring a bilateral ban on nuclear testing through an

agreement;3. Ceasing the production of all fissile material (agreement);4. Signing a non-deployment agreement, agreeing that weapon

systems will not be mated or deployed (agreement);5. Signing an agreement no to pre-empt nuclear installations of the

adversary;6. Establishing of NRRCs but with a legally binding agreement that

such channels will remain open during crises;7. Enhancing command and control structures to eliminate the

likelihood of an accidental or unauthorized nuclear conflict.

The Group on Conflict Resolution Mechanism Proposes: Conflicts in South Asia are passing through a critical phase of

transformation which requires a proper understanding,

interpretation and information about issues which cause conflicts.

For a long period of time, South Asia has perceived conflicts through

a zero-sum perspective but the process of gradual conflict

transformation is taking place in the region which may help the

formulation of conflict resolution mechanism.

Recommendations:1. Need for proper conceptualization and understanding of

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conflicts and their interpretations in a rational manner.

Therefore, it is recommended to establish conflict resolution

centers and institutes at the governmental and non-

governmental levels so as to unleash the process of meaningful

research in the field of conflict resolution. It is also

recommended to design academic curricula on conflict

resolution so as to create a better awareness among the people of

South Asia about the need for a conflict resolution process. Both

print and electronic media of South Asia can play a plausible role

for creating proper conditions for conflict resolution process; 2. Involvement of stake holders and allow them the space to craft

out alternative conflict resolution mechanism. Stakeholders

must have political will for conflict resolution and women should

be made an integral part of this mechanism. The composite

dialogue going on between India and Pakistan should also focus

on the practicable conflict resolution strategy as far as

contentious issues are concerned;3. State structures and their proponents should also be influenced

because states are often the creators, promoters and sustainers

of conflict;4. There should be SAARC conventions on minority and water

rights' charters and the existing human rights' charter of SAARC

needs to be strengthened and properly implemented.

South Asian Human Security Beyond cooperative security, South Asian nations must ultimately

move towards South Asian Human Security by placing people -- their

wellbeing and rights to peaceful life and development -- at the centre

of security concerns, rather than intensifying the arms race. To

include the excluded, governments of South Asia should take

concrete steps to implement the SAARC Social Charter and give

priority to poverty eradication by implementing ISACPA Report on

Poverty Alleviation and meeting the Millennium Development Goals.

This can be done by increased investment, enhanced economic

growth and development, which do not necessarily translate into

poverty alleviation unless structured to address the root-causes of

poverty and give priority to human resource development,

employment generation and empowerment of the dispossessed,

women and the poor, in particular.

South Asian Parliament The South Asian region emerged out of decolonization as a result of

the drawing of political boundaries with sovereignty attributes

forming new states. The political boundaries have further been

reinforced through divergent strategies of state and nation building,

reinterpretations of history and religion, and due to the Cold-War

strategic divides. In the context of these reinforced boundaries and

divisions, it may sound imprudent and even unrealistic to talk of

political integration in the region. However, over the past decades,

the imperatives of globalization, end of the cold war and rising

popular aspirations in each of the South Asian states have brought

about qualitative changes in the regional perceptions. Processes like

SAARC have created institutions and generated impulses under

which people are visualizing the prospects of establishing a South

Asian community. Regional integration should and will take place

within the framework of community building, not by conceiving or

attempting erosion of state sovereignties or identities. The examples

of SAFMA's initiative towards South Asian parliament and the

collective and individual attempts in India and Pakistan to re-write

history text books are indicative of growing popular pressure in

favour of community building.

The SAPANA Group decided to mobilise country-based but

comparative studies, that address the question of state building

strategies, nationalism, status of minorities within and otherwise in

the context of human rights and democratic polices. Studies will also

take note of the professional engagements like that of Chamber of

Commerce and industries, media, lawyers, academics, doctors and

human rights activists across the board initiated and

institutionalised within or outside the SAARC framework. The basic

strategy to be adopted towards community building through

integration will be to encourage institution building and

engagements. Patterns of sub-regional cooperation amongst the

parts of the states and societies in South Asian, linkages among

parliamentarian, political parties, scholars and analysts, as well as

transport and communication networks across the borders driven by

popular pressures present concrete examples of such strategy. The

conclusions of the studies will then be put in a perspective to map

out the properties of community building through integration.

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The Group on South Asian Political Integration

recommends:The participants overwhelmingly endorsed the view to initiate a

process of moving towards the creation of an institutional interactive

mechanism for parliamentarians of South Asia keeping in mind the

concept of a South Asian Parliament. A full fledged SAP may take a

decade or two, but it is time to initiate moves in that direction. To

begin with, the conference proposes: a) Creation of an Intra-

Parliamentary Union in South Asia; b) SAARC may in principle agree

to create a South Asian Parliament and appoint a group of experts,

responsible before the SAARC Speakers Forum, to prepare a

comprehensive report and a timeframe to establish it in stages and

through an evolutionary process; c) The SAARC Speakers Forum

should be activated and; d) To begin with, SAP may be set up as a

deliberative and consultative body, not as a legislative body, so as to

create regional opinion on and build regional pressures on the issues

pending for implementation at the SAARC level. This deliberative

body may work within the SAARC agenda. By ultimately creating a

South Asian Parliament, the evolution of a regional South Asian

identity, without in any sense compromising on or conflicting with

respective national identities and sovereignty of nation-states of the

region.

The Group on Rewriting History recommends: There is very little shared knowledge of how history is researched,

written and taught in each of the countries of South Asia.

Furthermore, there is inadequate recognition or appreciation of the

shared past of this region. Despite this lack of knowledge about the

past, references to and the use of history as a resource in a variety of

political debates has only increased, particularly for the promotion of

communalism, fundamentalism, casteism, regional and linguistic

chauvinism. This makes it more difficult to produce trans-national

historical perspectives.The close link between the state and historical research and textbook

production has had ambiguous and conflicting consequences for

developing a sense of the past. Historical research and analysis is still

dependent on Western categories and tools of analysis. There is need

to develop more indigenous categories.

Recommendations:1. The efforts at working out a common history of South Asia are

viable. Even though there may be fundamental differences in

perspective, it is possible to identify and work on common

themes. Rather than focusing on national histories, themes that

are shared by all the countries of South Asian countries should

be identified and worked upon. 2. Furthermore, a perspective on history that emphasizes the

people, and neither fights shy of acknowledging historical

injustices of caste, region, religion, gender, (to take some

examples) nor glorifies them is an urgent imperative. 3. We believe that such histories can help evolve a broader

framework through stronger institutional linkages between

groups of professional historians in South Asia. Such an

engagement with the past will make a richer, fuller sense of the

past possible, and have a great impact on society and the polity

today and in the future.

The Group on Religious Extremism and Minorities

recommends:Both minority persecution and ghettoisation have to be countered.

There is still a major deficit in terms of information and

understanding about events across the region even among those

actively engaged with various human rights causes.

Recommendations: 1. A standing body charged with responsibility to study and

compose the institutional frameworks that seek to empower

minorities across the region. Where institutional support is

absent it should be highlighted.2. The political position, strategies and rhetoric employed by the

participants in the political process be monitored in order to

identify issues that may impact minorities. 3. Intellectual tendencies and debates within discourses generated

by the minorities about their situation those that promote

minority empowerment be highlighted.

South Asian Human Rights CodeIt is imperative for the South Asian countries to agree to and set up

institutions under the Paris Principles and purposefully set about

creating the required mechanisms to implement all internationally

recognized fundamental human, civil and democratic rights. The

Proposed Draft on Human Rights Code for South Asia presented

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before the South Asian Parliament's Conference, convened by

SAFMA, will be circulated among the human rights bodies of the

region and Human Rights Commission of Pakistan and other human

rights bodies in the region will be requested to develop broader

understanding among the major stakeholders to develop a regional

framework at the level of SAARC and its member countries.

People to People ContactThe prevailing barriers to cross-border movements make neither

commercial nor logistical sense and originate in the pathologies of

interstate, as well as domestic, politics. There is an urgent need to

allow greater interaction among the policy-makers,

parliamentarians, businessmen, media practitioners, professionals,

youth and the leaders of civil society. To enable it to happen, it is

necessary that India, Pakistan and Bangladesh, who have the most

restrictive visa regimes, drastically revise their visa policy and

remove impediments to free movement of people. All-country visas

may be granted at separate South Asian counters on arrival at the

airports and on all border-crossings.

South Asian Information Society To overcome information deficit in the region, it is essential that all

restrictions on access to and free flow of information are removed

forthwith and media persons and products are allowed free

movement across frontiers. In this regard, SAFMA's Protocols on

'Free Movement of Media Persons and Media Products' and

'Freedom of Information' must be adopted by the national

legislatures/governments and the SAARC. To ensure the citizens'

right to know, we support SAFMA's Protocol on Freedom of

Information. The media, on their part, should rise above national

divides, avoid demonization and give special attention to the

coverage of the countries of South Asia that remain under-reported.

Given the rising numbers of South Asian Cyber citizenry, there is an

urgent need to upgrade, integrate and facilitate cyber connectivity

and accessibility.

Culture and TourismThe scope of collaboration in the sphere of culture, tourism, sports,

education, health, research, human resource development and

environment is infinite. At the level of SAARC, measures should be

taken to promote cultural exchanges, tourism, health and education

services and research in all fields.

Promotion of HumanitiesPrivate initiatives and those of universities should be encouraged by

the authorities to introduce country studies, invite faculties from the

neighbourhood, exchange students, promote humanities and

physical sciences through South Asian congresses and undertake a

non-discriminatory portrayal of history. Visa restrictions and tedious

process for academics, experts and scholars must be dispensed with.

Women's ConcernsAcknowledging the inadequate attention to and focus on redressing

the marginalization and invisibility of women at all levels of national

and regional policy-making; and the disproportionately high burden

of poverty that women face in South Asia; SAPANA resolves to work

towards gender equality and gender justice in all aspects of our work

in the process as well as the substance; and exhort all the South

Asian governments to acknowledge and rectify the glaring gender

inequalities especially the feminization of poverty.

South Asian Policy Analysis (SAPANA) NetworkThe participants of South Asian Journal conference have agreed to

form South Asian Policy Analysis (SAPANA) Network that will

pursue virtual research and develop networking among various

independent research groups and scholars across the region to

promote free and pro-people thinking and a course of development

that addresses the concerns of the people, in a wholist and

sustainable framework.

The objective and purpose of SAPANA will be to redress the

shortcomings found in existing Think Tanks and research

organisations. Firstly, it is proposed that the main purpose and

objective of SAPANA will be to liaise with policy makers and with

governments in separate countries and in South Asia as a whole. The

research undertaken by SAPANA, while following all the principles of

objectivity and rigour, will serve as a platform for policy dialogue and

intervention.

SAPANA has a great advantage over all existing think tanks and

similar institutions, in that it is part of the Free Media Foundation

and will work closely with the South Asian Free Media Association

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(SAFMA). This proximity will allow SAPANA's research output to be

available in the public arena through the media. This ability to

disseminate extensively will be one of the major advantages SAPANA

will have over other institutions.

SAPANA will focus on multidimensional and multi-thematic

interventions rather than specialise in one particular area. Because of

the already existing network of the Free Media Foundation and

SAFMA, SAPANA is being perceived as a sort of a 'virtual' institution.

Unlike most research organisations and think tanks, for the first few

years, it will not employ scholars and academics, but will out-source

research. Because of its 'virtual' nature, not constrained by the

abilities of an in-house research staff, SAPANA will have access to

the best scholars working on South Asia who will be hired on short

term contracts for specific purposes. Moreover, SAPANA will also be

able to design research themes of a more topical and immediate

nature requesting scholars to respond quickly. Its flexibility will be

one of its strengths. The participants appreciated South Asian

Journal and SAFMA for taking this timely initiative. The participants

of the First SAPANA Conference agreed to meet again within two

years to pursue their objectives and shared goals.