Report No. 29949 Trade Policies in South Asia: An Overview (In Three Volumes) Volume II: An Overview September 7, 2004 Poverty Reduction and Economic Management Sector Unit South Asia Region Document of the World Bank Trade Policies in South Asia : Some Key Sectors NAFTA NorthAmerican Free Trade Area SAPT South Asian PreferentialTrade NFC National Fertilizer Corporation SD Non-supplementary Duty NTB Non-Tariff Barriers SEZ Special Economic Zone NTC National textile Corporation SPS Sanitary and Phyto-Sanitary OPT Outward-Processing Trade SRO Statutory Regulatory Order PASSC Pakistan Agricultural Storage and Services SSI Small Scale Industry POL Petroleum, Oil and Lubricants STE State Trading Enterprises POY Polyester Partially OrientedYarns T & C Textile and Clothing PSU Public Sector Units TBT Technical Barriers to Trade PTFY Polyester Texturized Filament Yarn TCB Trading Corporation o f Bangladesh QR Quantitative Restrictions TPR Trade Policy Review REER Real Effective Exchange Rate TRIMS Trade RelatedInvestmentMeasures RMG Ready Made Garments TRQ Tariff Rate Quotas ROO Rules-of-Origin TUFS Technological UpgradationFund ROW Rest of the World TV Tariff Values SAARC SouthAsian Association for Regional Cooperation UR Uruguay Round Sadd Special Additional Duty VAT Value Added Tax SAFTA South Asian Free Trade Area WTO World Trade Organization SAIL Steel Authority o f India Vice President: Praful C. Patel, SARVP Regional Director: Alastair J. McKechnie, SAC01 Sector Director: Sadiq Ahmed, SASPR Sector Manager: Ijaz Nabi and Kapil Kapoor, SASPR Task Manager: Zaidi Sattar, SASPR and Gany Purse11(Consultant, SASPR) TRADEPOLICIESINSOUTHASIA: AN OVERVIEW TABLE OF CONTENTS CHAPTER 1:INTRODUCTION ..................................................................................................... 1 Trade Regimes in South Asia ................................................................................................ 1 Trade, Growth and Poverty Reduction in South Asia.................................................................... 3 ThisReport............................................................................................................................... 4 Current Trade Policies: Some Salient Features............................................................................. 4 Trends inReal Effective Exchange Rates .................................................................................... 6 CHAPTER 2: NON-TARIFF IMPORT BARRIERS..................................................................... 15 Introduction ....................................................................................................................... 15 India ....................................................................................................................................... 16 Pakistan .................................................................................................................................. 22 Bangladesh ............................................................................................................................. 23 Sri Lanka ................................................................................................................................ 24 Nepal.................................................................................................................................................. 25 Bhutan................................................................................................................................................ 26 Maldives ............................................................................................................................................ 26 CHAPTER3: TARIFFS.PROTECTIONAND REVENUE........................................................... 27 Level and Structure o f Tariffs .............................................................................................. 27 India.,..................................................................................................................................... 38 Palustan.................................................................................................................................. 43 Bangladesh ............................................................................................................................. 49 Sri Lanka ................................................................................................................................ 66 Nepal.................................................................................................................................................. 70 Bhutan................................................................................................................................................ 73 Maldives ............................................................................................................................................. 74 Anti-Dumpingand Safeguards .......................................................................................................... 74 Tariff Collection Rates ...................................................................................................................... 79 Tariffs and Government Revenue...................................................................................................... 82 CHAPTER4: EXPORTPOLICIES............................................................................................. 101 101 Export Policies duringImport Liberalization ........................................................................... Export Policies duringthe Import Substitution Period ......................................................... 102 Current Export Policies................................................................................................................... 104 . . Some Conclusions and Suggestions ........................................................................................ 109 CHAPTER5:REGIONAL TRADEAND REGIONAL TRADINGARRANGEMENTS.............121 Introduction ..................................................................................................................... 121 Regionaltrade: scale and trends ........................................................................................ 121 Trade Policies inSouth Asia : Some Key Sectors Early regional trade agreements ................................................................................................. 126 SouthAsia Preferential Trading Agreement (SAPTA) .............................................................. 131 The India-Sri Lanka Free Trade Agreement (ILFTA)..................................................................... 134 From SAPTA to SAFTA? ............................................................................................................... 137 Typology PTNFTAs....................................................................................................................... 140 Concluding Remarks ....................................................................................................................... 144 CHAPTER 6: CONCLUSIONSAND RECOMMENDATIONS................................................... 145 145 Non Tariff Barriers to Imports................................................................................................ Dominant Role and Influence o f India ................................................................................ 145 Tariffs .............................................................................................................................................. 147 Other Import Taxes and Levies ....................................................................................................... 150 Anti-Dumping.................................................................................................................................. 150 Special Protective Treatment........................................................................................................... 151 Tariffs and Government Revenue.................................................................................................... 154 Performance by Country.................................................................................................................. 155 Performance o f Key Sectors ............................................................................................................ 161 Epilogue........................................................................................................................................... 165 BIBLIOGRAPHY.,....................................................................................................................... 167 LIST OF FIGKRES CHAPTER 1:INTRODUCTION ..................................................................................................... 1 1.1 Average Tariffs .............................................................................................................. 2 1.2 South Asia's Poor ............................................................................................................... 3 1.3 South Asia GrowthPerformance: Per Capita Growth.................................................................. 3 1.4 India REER.................................................................................................................................. 11 1.5 Pakistan Exchange Rate Indices................................................................................................. 11 1.6 Bangladesh RER......................................................................................................................... 12 12 1.8 Nepal Exchange Rate Indices..................................................................................................... 1.7 Sri Lanka Exchange Rate Indices............................................................................................... 13 1.9 Bhutan-India RER ...................................................................................................................... 13 1.10Maldives-IndiaReal Exchange Rate .......................................................................................... 14 CHAPTER2: NON-TARIFFIMPORT BARRIERS........................................................................... 15 2.1 South Asia Percentage o f HS 6-digit Tariff Lines subject to QRs............................................. 26 CHAPTER3: TARIFFS. PROTECTIONAND REVENUE................................................................ 27 3.1 Tariff Trends............................................................................................................................... 27 3.2 Average Tariffs inSouth Asia .................................................................................................... 33 3.3 India: Distribution o f Tariffs Lines............................................................................................. 41 3.4 Palustan: Distribution of Customs duty rate .............................................................................. 45 3.5 Bangladesh: All Tariff Lines, Unweighted Average ................................................................. 50 3.6 Bangladesh: IndustrialTariff Lines, UnweightedAverage ....................................................... 51 Table o f Contents 3.7 Bangladesh: Agriculture Tariff Lines. UnweightedAverage .................................................... 51 3.8 Bangladesh: Effects o f end-user Concessions on average Industrialtariffs .............................. 62 3.9 Bangladesh: Distribution o f total protectionrates ..................................................................... 62 3.10 Sri Lanka: Distribution o f Protective Import Tax Rates........................................................... 68 3.11 Nepal: Distribution o f Total Protective Import Tax Rates....................................................... 72 3.12 Comparative Import Duty CollectionRates ............................................................................ 86 3.13 India 1994-2002: Estimated Tariff Collection Rates ............................................................... 88 3.14 India 1980-2002: Estimated Tariff Collection Rates ............................................................... 89 3.15 Palustan: Tariffs and Sales Taxes Collected on Import ........................................................... 89 4.16 Palustan: Customs Duties and Sales Taxes on Imports as Shares o fTotal Indirect Tax .........91 3.17 Palustan: Tariffs Collection Rate............................................................................................. 91 3.18 Pakistan: Share o f Sales Taxes on Import ............................................................................... 92 3.19 Palustan: Share o f Import and Customs Collections inGDP .................................................. 92 3.20 Bangladesh: Tariff Collection Rate ......................................................................................... 93 3.21 Bangladesh: Shares o f Imports in GDP ................................................................................... 94 3.22 Sri Lanka: Shares o fImports and Import Duties inGDP ........................................................ 95 96 3.24 Nepal: Imports and ImportDuties Shares inGDP................................................................... 3.23 Sri Lanka: ImportDutyCollection Rates and Import Duty Shares ......................................... 97 3.25 Nepal: Imports Tariff Collection Rates ................................................................................... 97 3.26 Nepal: Shares o f Import DutiesinGovernment Revenue ....................................................... 98 3.27 South Asia and China Import DutyCollection Rates ............................................................... 99 3.28 South Asia and China ImportDutyRevenue as percent o f GDP ............................................. 99 3.29 South Asia and China Imports as percent GDP...................................................................... 100 3.30 South Asia and China Imports Duties inRelation to Imports ................................................ 100 CHAPTER5: REGIONAL,TRADE AND REGIONAL,TRADING ARRANGEMENTS..............121 5.1 South Asia's Intra-RegionalTrade ........................................................................................... 122 5.2 Indian Trade with South Asia Countries................................................................................... 123 5.3 Share o f Recorded South Asian Trade inIndia's total trade .................................................... 123 5.4 Four Asian countries 2002103: Shares o f trade........................................................................ 124 LIST OF TABLES CHAPTER2: NON-TARIFF IMPORT BARRIERS............................................................................. 0 2.2 Evolution o f Import Restrictions ................................................................................................ 23 CHAPTER3: TARIFFS. PROTECTIONAND REVENUE................................................................ 27 3.1 Estimated UnweightedAverages o f MFNCustoms Duties ....................................................... 30 3.2 Structure of Tariffs in South Asia............................................................................................... 32 3.3 Ranlung o f Average Tariffs inSouth Asia ................................................................................. 34 3.4 Average Tariffs inSouth Asia ................................................................................................... 35 3.4 India: Average Protective Import Taxes.................................................................................... 38 3.6 India: Normal MaximumCustoms Duties................................................................................. 39 3.7 India: Distribution o f Tariff Lines ............................................................................................. 40 3.8 Palustan: Customs duties ............................................................................................................ 44 3.9 Pakistan: Duration o f 6-digit tariff Lines.................................................................................... 45 3.10 Bangladesh: Unweighted Average Protective Import Duty...................................................... 50 3.11 Summary Indicators o fMFNTariffs inBangladesh 1992-2005 .............................................. 52 Trade Policies in South Asia : Some Key Sectors 3.12 Bangladesh: Averages o f Customs duties and Para-tariff Components ................................... 54 3.13 Bangladesh: Distribution o f Tariff............................................................................................ 55 3.14 Bangladesh: Distribution According to Customs Duty ............................................................ 56 3.15 Bangladesh: Some Examples o f the Extra Protection............................................................... 59 3.16 Bangladesh: Indicators o f Tariff............................................................................................... 63 3.17 Bangladesh Tariffs 2003/04: Some example ............................................................................ 64 3.18 Sri Lanka: Increase inUnweightedAverage ProtectiveImport Taxes..................................... 67 3.19 Comparative ImportDuty Collection Rates 2000/01 ............................................................... 86 3.20 India 1980-2202: ImportDutiesand Indirect Taxes on Imports .............................................. 87 3.21 India 1981-2001: Revenue from Taxes as Percentage o f GDP ................................................. 88 3.22 Pakistan 1990/91-2001/02: Import Tax Collection Rates and Government Revenue ..............90 3.23 Bangladesh: Protective Import Tax Collectionrates ................................................................ 93 3.24 Bangladesh: Protective Import Taxes and Government Revenue ............................................ 94 3.25 Sri Lanka: Import Duties and Government Revenue................................................................ 95 3.26 Nepal: Import Duties and Government Revenue...................................................................... 96 3.27 Comparative Collection Rates .................................................................................................. 98 CHAPTER 4: EXPORT POLICIES............................................................................................. 101 4.1 Export Policies inSouth Asia ...................................................................................... 114 4.2 Some Representative Tariffs on Intermediate Goods and Machinery in South Asia..............117 4.3 India 2000/01: Approximate Values o f Imports and Exports.................................................. 119 CHAPTER 5: REGIONAL TRADE AND REGIONAL TRADINGARRANGEMENTS.............121 5.1 Officially Recorded Intra-Regional Trade .................................................................... 122 5.2 Indian Trade with Sri Lanka ........................................................................................ 136 5.3 PlannedPhasedTariff Cuts ......................................................................................... 138 CHAPTER 6: CONCLUSIONSAND RECOMMENDATIONS................................................... 145 6.1 Summary of Trade Regimes inSouth Asia ................................................................... 146 ACKNOWLEDGMENTS This report was preparedby Garry Pursell (consultant, SASPR) and Zaidi Sattar (SASPR). Ziaul Ahsan (consultant, Bangladesh) compiled and analyzed essential data and provided superb general research support for the sections on Bangladesh. Rangarajan Krishnamani (consultant, SASPR) contributedto the chapter on textiles and garments and provided general research support. The chapter on regional trading arrangements draws from an earlier draft paper by Garry Pursell and Nihal Pitigala (Consultant, DECRG-Trade). Useful information, comments and guidance was received at various stages from SASPR staff in India (Deepak Mishra), Pakistan (Zareen Naqvi and Asya Akhlaque), Bangladesh (Syed Nizamuddin and Zahid Hussain), Sri Lanka (Terence A beysekera, Princess Ventura) and Nepal (Roshan Bajracharya and Sugandha Shresthha). Subject to time and other constraints, the authors did their best to take account o f s uggestions made by UriDadush and many insightful and thoughtful detailed comments received from peer reviewers Aaditya Mattoo, Javier Suarez, Paul Brenton, Steve Jaffee, and Ataman Aksoy (all at Bank headquarters in Washington) and from Professor Wahiduddin Mahmud (Dhaka University). In the World Bank Dhaka office Aneeka Rahman and Nermeen Shams Rouf provided research support while Mehar Akhter Khan and Joyce Mormita Das shared most o f the responsibility for puttingthe report together and slullfully formatting the voluminous text inrecord time. The study also relied on secretarial support at various stages from Oxana Bricha and Shunalini Sarkar in Washington, Shahnaz Rana and H.Bhawani inDelhi, and Neena Shreshtha inKathmandu. Sadiq Ahmed conceived the idea o f a comparative overview o f the South Asian trade regimes and, with much appreciated patience and forbearance during many delays, provided overall guidance throughout. Likewise, Ijaz Nabi and Kapil Kapoor provided useful oversight and direction when they were needed. Lastly, the authors would like to express their appreciation for the assistance and cooperation of many government officials, businessmen, academics, researchers, and others in India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan and Maldives who gave up their time for interviews, attended workshops in Colombo, Islamabad, Lahore, Dhaka and New Delhi, and provided feedback, essential information and guidance during the preparation o f this report. Financial support o f UK's DFID for the regional workshops i s gratefully acknowledged. Vice President: Praful C. Patel, SARVP Regional Director: Alastair J. McKechnie, SAC01 Sector Director: Sadiq Ahmed, SASPR Sector Manager: IjazNabi and Kapil Kapoor, SASPR Task Manager: Zaidi Sattar, SASPR and Garry Pursell (Consultant, SASPR) Chapter 1: Introduction TradeRegimesin SouthAsia The countries o f South Asia have a long history o f inward-looking trade policies. Untilthe early 199Os, with the lone exception o f Sri Lanka, few recognized that trade could serve as an engine o f growth and poverty reduction. Long-standing trade policies, instead, (a) protected domestic industries in support o f import-substitution strategies that were considered a sure way to rapid industrialization, growth and job creation; (b) reflected distrust o f international markets and discriminated against exports through export controls and taxes, overvalued exchange rates, and the use o f tariffs and other controls which impeded access to, and increased the costs of, the inputs needed for successful exporting; (c) discriminated against agricultural sectors where most poverty was located, through the use o f parastatal monopolies and other restrictions over agricultural exports, and indirectly through much higher protection o f manufacturing than o f agriculture; (d) prevented or actively discouraged direct investment by foreign firms which - as sources of new technology and competition in other developing countries -- had contributed to rapid export growth. One consequence o f these policies was that the South Asian countries missed the historic opportunity for rapid export and general economic growth that other developing countries-especially inEast and South East Asia- seized duringthe 1960s, 1970s, and 1980s. The trade policies followed in South Asia discriminated against intra-South Asian trade even more than against trade with the rest o f the world. From the year after independence, in 1948, officially recorded intra-regional trade shrank from about 19% of total South Asian trade to less than 4% by 1974, piclung up only slightly to 4.9% o f total trade by 1998, mainly due to general trade liberalization on the part o fthe countries on India's periphery. The potential for increased regional trade i s not very great, compared to increased trade with the rest o f the world (ROW), especially with the developed countries. While South Asian counties have comparative advantage in relation t o ROW ins imilar, mostly 1abor- intensive products, the trade and economic benefits from trading these products among themselves are limited. This shows up in various statistics and indicatorsincluding: 0 Trade intensitymodifiedby geographical proximity 0 L o w correspondence between South Asian exports with revealed comparative advantage and South Asian import demand 0 L o w correspondence between the principal exports o f the South Asian countries to ROW and their principal exports to other South Asian countries. Even so, the potential for regional trade i s much greater than the trade that i s actually occurring. This is apparent from scattered studies of unrecordedinformal trade, the volume o f which cannot be accurately quantified, but which could plausibly be as much as half o f recordedtrade or even more during some periods. The economic welfare effects o f informal trade are complex. On the one hand, consumers benefit, as do firms which obtain smuggled intermediate inputs. Some informal trade i s also reported to involve much lower transactions costs than the costs that would be incurred ifthe same goods were traded formally. But informal trade also involves substantial revenue losses, not only from evaded import duties but also from evaded indirect domestic taxes. It also creates uneven conditions o f competition, and incentives for firms not directly involved in the informal trade to improve their competitive position by tax evasion and similar activities. This conduct, intum, leads to increased enforcement efforts by tax and other government authorities, and associated costs for both enforcers and the general business community. Trade Policies in South Asia : An Overview Trade liberalization in South Asia started with a series o f sweeping reforms in Sri Lanka in 1977/78. There was some backtraclung from these reforms during the 1 9 8 0 ~ ~ followed by a new second phase o f trade liberalizationbetween 1990 and 1996, but then some further backtracking when the ethnic conflict put heavy demands on revenue, part o f it raised from import taxes. For the rest o f South Asia, the 1980s and 1990s saw substantial reductions o f tariffs and phasing out o f QRs, along with liberalization o f the exchange regimes. By about 1997, with some exceptions, Sri Lanka and Nepal had relatively open, low-to-moderate protectiontrade regimes, but despite substantial reforms, India, Bangladesh and Pakistan still remained among the most protected countries inthe world. After 1997, however, Pakistan embarked on a sweeping trade liberalizationprogram that it followed consistently for the next 6 years to emerge as a moderate- -protection country by general, developing-country standards. But between 1997 and about 2002, trade policy reform lost momentum and in some respects retrogressed in India and Bangladesh, a reaction, in part, to the financial crisis in East and South East Asia, the sharp devaluations o f many o f these currencies, and the consequent increased competitive pressures from these countries' exports. Reform resumed, however, with tariff reductions in Bangladesh's and India's 2002-03 budgets. Further small reductions were made in Bangladesh's 2003/04 budget, but they were partly offset by increases in other protective import taxes, and in general the resulting extent o f trade policy liberalization was very modest. By c ontrast, India announced that the 2 002-03 tariff cuts would be followed by future tariff reductions, and, with the important exception o f agricultural tariffs, this program continued inthe March 2003 budget, and again when sharp tariff reductions were announced on January 8, 2004. These changes drastically reduced India's average tariffs on manufactured and other non-agricultural goods by almost half compared to their level five years previously. However, agricultural tariffs were omitted from the latter stages o f these reforms and they increased substantially after 2001. In early 2004 India's unweighted average agricultural tariff was higher than the unweighted average agricultural tariffs o f all except a few o f 105 developing countries, and was two and a half to six times the average levels o f agricultural tariffs in other large developing countries, such as China, Brazil and Indonesia. Furthermore, even though India's non-agricultural tariffs have been drastically reduced, they still far exceed non- agricultural tariffs in the vast majority o f other developing counties and in developed countries, in addition to which India has become a major user o f other protective instruments, in particular specific duties, anti-dumping, state trading, tariff rate quotas, health and safety regulations, SPS and TBT. (%1 Fig. 1.1: South Asia had the highest average tariffs till 1998 70 1 60 - 50 - 1986-90 1991-95 CS 1996-98 20 I 10 - o + South Asia Latin America East Asia Sub-Saharan Middle East and Europe and Industrialized Africa North Africa Central Asia Economies 2 Introduction Trade, GrowthandPovertyReductioninSouth Asia Five decades o f development experience has shown that being open to external trade and investment flows allows a developingcountry to grow faster economically than otherwise, and that faster economic growth i s an effective and efficient means for alleviating poverty. For developing countries to achieve more rapid growth through greater integration with the world economy, a liberal and open global trading and financial system i s essential. Except for Sri Lanka, which went for deep liberalization inthe late 1970s and benefited from it, most of South Asia largely ignored these lessons. By the mid-l980s, however, some momentum in the direction of liberalization became noticeable in the region, with trade policy reforms being introduced during the late 1980s and early 1990s, in India, Palustan, Bangladesh, andNepal. What were the impacts o f these structural changes on the region's economic performance and on the conditions o f the poor? Because o f some variability in individual country performance, it i s difficult to give a simple answer to this question. But some broad generalizations are possible if one sees the outcomes inthe context o f the global experience o f developing countries that followed the route o f greater trade openness. A major finding o f recent empirical research on international economic integration (Art Fig. 1.2SouthAsia's Poor Kraay and David Dollar, 2001) has been that a (Headcountratio 2000) third of the developing countries o f the world, 50 described as "rapid globalizers", did extremely well in terms o f income growth and poverty reduction over the past two decades or so. These countries, which include Bangladesh, India and Sri Lanka in South Asia, have experienced large increases intrade and significant reduction in tariff and non-tariff barriers. In contrast, the remaining two-thirds of the developing world, largely concentrated in Afiica, that did not experience trade expansion due to a lack of sufficient outward orientation, performed poorly both in terms o f growth and poverty reduction. For South Asia as a Fig. 1.3 South Asia's Growth Performance whole, the period 1985-2000 saw significantly 1975-85 and 1985-2000 Per Capita Growth higher per capita GDP growth performance, although Palustan (political reasons) and Sri Lanka (ethnic conflict) suffered setbacks inthe 1990s (see Fig.l.3). The effect on reduction in poverty in India was dramatic, entirely in keeping with the Bhagwati hypothesis o f the early 1960s that growth was the principal driver o f poverty reduction. By the Government o f India's (2000) estimates, poverty incidence fell from 51% in 1977-78 to 27% in 1999-2000. Bangladesh also experienced 0 1975-85 1985-2000 the sharpest reduction in poverty in the 1990s, from 45% in 1991to 34% in2000. The South Asian experience could be seen as further confirmation o f the findings o f recent global empirical research indicating the relationship between trade openness and growth. The linkage between greater trade openness and poverty reduction i s not necessarily direct, but rather through the positive 3 Trade Policies in South Asia : An Overview impact o f trade expansion on growth performance - a correlation that has been established in numerous empirical studies. Cross-country studies on the relationship between growth Performance and poverty reduction conclude that there exists a close correspondence between growth o f per capita income and growth o f incomes o f the poor, though all growth i s not necessarily pro-poor. If trade openness has a favorable impact on growth and poverty reduction, then there seems to be a vast unfinished agenda o f trade reforms to be undertaken by most o f the countries inthe South Asia region. This Report This study looks at some principal aspects of the current state o f trade regimes in South Asia and points to the scope for further reform to achieve greater global economic integration. It covers the seven SAPTA countries, focusing mainly on India, Pakistan, Bangladesh, Sri Lanka and Nepal, with occasional references to Bhutan and Maldives. At the outset, it must benotedthat there are conceptual problems ingeneralizing about the extent to which whole economies are protected (for example high protection o f import substitution industries implies highdisprotection o f export industries), and the various standard indicators o f trade openness and o f the extent t o which economies are protected, are not always c losely c orrelated. This ambiguity in generalizing about national levels o f protection i s especially marked in South Asia, where there has always been a great deal o f redundant protection in the sense that (due to domestic internal competition andlor large scale smuggling) actual differences between domestic prices and world prices are frequently much less than would be implied by tariff levels or other formal protective instruments. Nevertheless, formal protective instruments are important, and in terms o f them, despite past and continuing reforms, two o f the large South Asian countries, India and Bangladesh, are still among the most protected and least open economies in the world. In 1996197, Pakistan was also heavily protected and belonged in the same category, but following five years o f consistent and sweeping trade policy liberalization, it now has a fairly open and relatively non-interventionist trade regime, with moderate protection by the standards o f developing countries. Interms o f the average level o f its tariffs, Nepal's trade regime i s about equivalent to Palustan's, but its trade and trade policies are closely linked to and affected by developments in India. Except for some major agricultural crops, Sri Lanka has a much more open trade regime than these four, and mainly through its bilateral free trade agreement with India and to a limited extent through SAPTA, it also has important trade and trade policy connections with the rest o f the subcontinent. Some salient features o f the current trade policy situation ineach o f these counties are briefly outlinedbelow. Currenttrade policies:some salient features InIndia, trade liberalizationthat started during 1991/92 continued for about five years duringthe 1990s, but lost momentum in some key respects between 1997 and 2001. Under outside pressures which originated in the Uruguay Round, the large number o f QRs that India retained to protect consumer good producers were phased out duringthis period. On the other hand, many industrial import tariffs rose, anti- dumping became a major activity, specific duties were imposed to protect the textile and garment industry,local content (TRIMS) arrangements were used inthe auto industry, and towards the end o f the period especially, tariffs protecting major agricultural products and agro-industries were substantially increased. Substantial tariff reform resumed, however, with the reduction o f the general maximum customs duty from 35 percent to 30 percent in the 2002103 budget, to 25 percent inthe 2003104 budget, and to 20 percent on January 8, 2004, when another protective import tax (the Special Additional Duty) was also abolished. But agriculture was excluded from this new liberalizing initiative: state trading import monopolies are being maintained over the major foodgrains, and agricultural tariffs have been going up even as the average level o f industrial tariffs has been declining. India's unweighted average agricultural tariff in February 2004 (including tariffs on processed foods) exceeded the latest available 4 Introduction estimates o f average agricultural tariffs in all but three (Turkey, South Korea and Morocco) o f 124 developed and developing countries. InPakistan,trade liberalization which started inthe 1980s continuedslowly but without serious interruptions until 1996/97. A new, comprehensive trade liberalization program commenced in that year and continued until 2002/03, when the general maximum Customs duty was reduced to 25%. Actual protection rates are a bit higher then Customs duties, however, owing to differences inthe incidence of an income withholding tax which i s applied to imports and domestic transactions. N o major changes to tariffs were made in the 2003/04 budget, and there are no officially announced plans for further reductions inindustrial tariffs. Onthe other hand, the government has largely completed an ambitious and politically sensitive program o f comprehensive liberalization o f the trade and other policies that affect its agricultural sector. This contrasts with India, Bangladesh and Sri Lanka, where there are strong protectionist elements in agricultural policies. One factor influencing trade policy liberalization in Pakistan i s the recognition o f the large volumes o f illegal imports via Afghanistan and from India that highprotectionhas encouraged. Bangladeshhas a very large export-oriented garment industry established in the 1980s, which has grown rapidly during the 1990s to the present. However, many of the manufacturing industries supplying the domestic market are still heavily protected: tariffs (including the effects of protective import taxes on top o f Customs duties) o f 50 to over 100 percent are common. As in India, trade liberalization slowed down in Bangladesh from about 1995. Customs duties were reduced, but these reductions were offset by the use o f a variety o f other protective import taxes. By 2000/01 these para- tariffs accounted for more than one-third o f Customs collections from protective import taxes. Inaddition, Bangladesh has retained a number o f QRs, some ostensibly for trade reasons, the purpose o f which i s to protect large local industries, notably textile fabric producers. The 2002/03 budget reduced the basic maximum customs duty and abolished one o f the para-tariffs, and there was a further reduction in the basic maximum Customs duty in the 2003104 budget, but increases in the other para-tariffs more than offset this reduction. In early 2004, as measured by its average unweighted protective import taxes, Bangladesh was the most protected o f the South Asian economies, with especially high tariffs and other taxes in agriculture. However, the extent to which these measures actually enable local firms to increase their prices i s uncertain, owing to the large volumes o f illegal imports, especially from India. The illegal imports include conventional smuggling across the border that by-passes Customs posts, but a larger volume i s generally considered to be "official" smuggling which comes through both the port and land Customs posts, involving under-invoicing and other misdeclarations, despite the operations o f pre- shipment inspection organizations. Sri Lanka's trade and its industrial sector are dominated by its export-oriented garment industry and its textile sector. Despite the addition of a surcharge to Customs duties, industrial tariffs are low, and in 1997all textile tariffs were abolished and since then the textile industryhas beenoperating under free- trade conditions, both in supplying garment exporters and the domestic market. However, there i s significant protection of some manufacturing industries, and also considerable intervention and protection o f some major agricultural import substitution crops, especially rice, potatoes, onions and chilies. Sri Lanka's early trade liberalization and the appreciation o f its currency inrelation to the Indian Rupee led to a large and growing trade deficit with India, and inthe hope o f correctingthis deficit, Sri Lanka entered into a free trade agreement with India which became operative inMarch 2000. Although Sri Lankan exports to India have increased quite rapidly since then, up to 2002/03 they were still very small, and the bilateral trade deficit with India had increased substantially. Inthe future, if Sri Lanka's internal conflict i s resolved and its economy takes o f f with rapid, export-led growth, the strength o f the rice and other agricultural lobbies suggests that trade policies may go inthe direction o f the East Asian countries such as Korea, with an agricultural sector shnnkmginrelative terms but benefiting from very highprotection. 5 Trade Policies in South Asia :An Overview Nepal has generally low, but some moderate and a few highindustrial tariffs. Agricultural trade i s quite open with low tariffs. Under its trade treaty with India, Nepal gives generally rather small preferences to imports from India, but most o f its exports to India are duty fi-ee, although subject to quite restrictiverules o f origin and other barriers. Ofthe very substantial illegal trade with India, some o f which bypasses Customs posts, a large portion i s under-invoiced, misclassified, or otherwise un-or under- recorded at Customs. Because Nepal's tariffs are generally much lower than India's, India is highly sensitive to Nepal's trade policies and periodically imposes special tariffs or other restrictions. This happened in early 2002 when India imposed tariff rate quotas on Nepalese exports to India o f vegetable ghee (hydrogenated palm oil) and copper wire and rods and imposed anti-dumping duties on acrylic yarns. These measures caused considerable disruption inNepal. In 2002, in order to finance the conflict with the Maoist guerilla movement, the Nepalese govemment added a "security tax" to its Customs tariffs butnot to domestic transactions, thereby increasingtariff protection for localindustries. At least while the conflict continues, it seems unlikely that Nepal will reduce tariffs or otherwise liberalize its trade policies. Bhutan About 80 percent o f Bhutan's merchandise trade i s with India, approximately three quarters o f its imports and 95 percent o f its exports. In addition, its hydro-electricity exports, which are the principal driving force in its economy, are entirely to India. India's dominance inBhutan's trade i s a natural outcome o f its location, but i s reinforced by a free trade agreement under which Bhutan's exports are exempt from Indian tariffs, and Bhutanese imports from India are exempt from Bhutan's import licensing and from tariffs. For a tiny economy, some o f Bhutan's tariffs are rather high, and protection i s further increasedby a s ales tax which is applied to imports butnot to the production of local import substitution firms. A priori, these arrangements appear to be economically inefficient in some ways, by diverting imports from third countries to higher cost suppliers in India, and by providing excessive protection to local import substitution production. On the other hand, the FTA may benefit some Bhutanese exporters by giving them duty free access to protected markets inIndia. Maldives' Foreign exchange earnings inthe Maldives are predominantly from tourism and fish exports. Customs duties on imports provide about two-thirds o f government tax revenue, as there are no other indirect taxes. For a very small economy, tariffs are quite high, averaging about 21 percent, and even though there i s no local production o f most imported goods, they have the potential to shelter pockets o f high cost local production and to distort resource allocation away from economically more efficient activities, especially export related activities. In the past a number o f imported products were subject to QRs,but most o f these were removed quite recently in 1998. However, as o f December 2002, import quotas, most o f which were allocated to a parastatal (the State Trading Organization), were still being used to regulate imports o f rice, sugar and wheat flour. About a fifth o f Maldives trade (mainly imports) i s with South Asia, about 13 percent with Sri Lanka and 8 percent with India: trade with Palustan, Bangladesh, Nepal and Bhutan i s zero or negligible. Trends in RealEffective Exchange Rates As background for later discussion, Figs I.1-I.illustrate trends inthe real effective exchange 12 rates (REERs) since 1980 o f each o f the South Asian countries, both the general REER indices for total trade (the CPI-based versions) and the bilateral real exchange rate o f each country's currency with the Indian Rupee (also CPI-based). Trade weighted REER indices are not available for Bhutan and Maldives: Figs 1.13 and 1.14just show their bilateral CPI-based indices with the Indian Rupee. Since, except for Maldives, India i s the dominant regional trading partner for the other South Asian countries, real exchange rate trends with the Indian Rupee are important influences on the volume and direction o f intra- regional trade, both formal and informal. Most o f the information inthis section i s from the WTO's December 2002, TPR report on the Maldives. 6 Introduction The most important general development for the South Asian region during this period was the continuing and eventually very large devaluation (around 150% in real terms) o f the Indian Rupee, starting in 1985 and ending in 1992. From 1992 to late 1997, the nominal exchange rate was managed so as to approximately just offset, but not exceed, inflation in India relative to inflation rates in its trading partners. From early 1998, the REER began to slowly appreciate, reflecting a strengthening balance o f payments driven by growing manufactured exports, the rapid expansion o f services (especially software) exports, and capital inflow. However, inlate 2003 the appreciation since 1998 was only about 13 percent, and the total real devaluation since the mid-1980s was still well over 100 percent. The sharp devaluation o f July 1991, which was part o f the IMF-World Bank supported policy package to deal with India's balance o f payments crisis, can be seen inretrospect to have been an acceleration o f a trend already underway for about six years. Because the Indian Rupee devaluation up to 1992 was much faster and larger than REER changes in Pakistan, Bangladesh and Sri Lanka, the Indian Rupee became much cheaper relative to their currencies in real terms. This has helped spur Indian recorded and unrecorded informal regional exports, especially to Bangladesh and Sri Lanka, while making it more difficult for the peripheral countries to export to India. Bangladesh and Sri Lanka have been concerned about the resultinglarge bilateral trade deficits with India, but the Indian devaluation is best interpreted as a return to a more normal and economically efficient situation, following many years o f extreme exchange rate overvaluation in India, during which India's exports to the rest of the world as well as to the other South Asian countries were taxed and compressed. Following the A sian financial crisis o f 1997, the exchange rates o f a number o f the East and South East Asian countries, including South Korea, Indonesia, Thailand, and Malaysia were sharply devalued in real terms in relation to the South Asian currencies. This increased competition for South Asian exports and slowed their growth, and at the same time sharpened import competition. With the notable exception o f Palustan, the increase in import competition was an important factor inthe slowing o f the general momentum o f import liberalization in the region, and its reversal in some respects in India and Bangladesh between 1997 and 2002. Some o f the linkages o f the exchange rate to trade policy developments in each o f the countries are briefly summarized below. India. The early Rupee devaluation from the mid-1980s (about 85% inreal terms between end- 1985 and end-1990) which preceded the 1991/92 crisis was associated to some extent with the slow, cautious 1iberalization o f intermediate and capital goods imports that occurred during this period, but principally with growing budget deficits that discouraged remittances and capital inflows. The subsequent crisis- induced devaluation o f 1991/92 was more than sufficient to limit imports following the removal o f most QRs on intermediate and capital goods and the abandonment of industrial licensing, key elements o f the 1991/92 economic liberalizationprogram. Consequently, no further devaluation was required after 1992 to support the pre-announced tariff reduction program that continued until about 1996/97. The devalued exchange rate also supported rapid export expansion, especially o f manufactured exports, but also o f some agricultural and agro-industrial products. Before 1996/97, there i s evidence o f considerable tariff redundancy across a wide range o f manufactured products, including consumer goods which continued to be protected by import licensing, inpractice, animport banfor most. However, around that time the tariffreductions beganto bitefor some producers o f intermediate and capital goods no longer protectedby QRs, and pressures from these groups were reflected in tariff increases, increased anti-dumping activity, local content schemes, and the application o f increasingly rigorous health, safety and technical regulations to imports. On the other hand, inabout 1997 it became apparent that India would no longer be able to permanently continue its general import licensing system, which still effectively banned the import o f nearly all consumer goods and agricultural commodities. Following a delaying action by India at the WTO (see later discussion), these 7 Trade Policies in South Asia : An Overview QRswere removed instages and finally abolished inApril 2001, buttariffs and other protectivemeasures have tumed out to be more than sufficient to prevent a major surge inconsumer-good imports. Combined with slower but continued growth o f manufactured exports, the rapid expansion o f software exports, and increased capital inflow, since 1998 it has been possible to allow the real exchange rate to appreciate slowly but steadily while maintaining a satisfactory current account balance. Although India's tradable economy i s still very heavily protected, it is also considerably more diversified, flexible and competitive than it was 12 or 13 years ago, before its liberalizing reforms took hold. Consequently, no significant exchange rate adjustments were needed to support the new tariff reduction program for industrialproducts that started with the 2002/03 budget and continued untilJanuary 2004. Pakistan. P alustan's REERwas devalued a t a steady rate between the mid-1980sand 1992, stabilized at or slightly below this level until mid-1998, and then was devalued rather sharply until late 2001, after which it strengthened somewhat (Fig 1.5). The total devaluation between about 1985 and 1992 was more than two-thirds inreal terms, and as inIndia, it was inpart a consequence of, and a support for, trade liberalization measures introduced during the period. The devaluation after 1998 also helped insulate Pakistani producers to some extent from declining world prices for a number o f major commodities which followed the 1997 Asian financial crisis, and supported a tariff reduction program which started in 1996/97. During the 1980s, until about 1987, the rate o f devaluation in Pakistan somewhat exceeded the devaluation rate inIndia, so that the bilateral PalustadIndia Rupee rate was also steadily devalued. But after 1987 the Indian devaluation rate was much faster than Palustan's, so that Palustan's bilateral real exchange rate with India strengthened by about 30 percent between 1987 and 1993 (Fig 1.6). The bilateral real Pakistan Rupeehdian Rupee rate remained at about this appreciated level until the end o f the 1990s, when it declined rather steeply, reflecting faster nominal devaluation by Palustan. As noted later, the appreciated level o f the real bilateral rate with India, which was maintained untilabout 1998, was associated with a fairly fast growth of officially recordedimports fromIndia, albeit from an extremely small base owing to the very restrictive trading relationshipbetween the two counties. This trend did not continue during and after 1999, but this had more to do with periods o f worsened diplomatic relations than with the sharp real depreciation o f the bilateral PalustadIndia rupee exchange rate. In2003, total officially recorded trade between India and Palustan constituted only 0.22 percent o f India's total trade, and only about 1percent o f Palustan's total trade. Bangladesh. Comparedwith India and Palustan, Bangladesh's REERhas been remarkably stable for over 20 years (Fig 1.7). Except for a period in the mid 1980s during which the REER appreciated rapidly for three years but was then devalued sharply during 1985, the rate has moved within a fairly narrow band o f about 10%.around trends o f slow devaluation from 1980 up to about 1996, modest appreciation from 1997 to 1999, followed by steady but slow devaluation duringthe following four years. The strength o f the Taka during this period i s in part due to the rapid growth o f ready-made garment exports from $US 116 million in 1985 to $US 4.8 billion in 2000, and increasing remittances, both through formal channels and unrecorded, from Bangladesh workers outside the country. Together, these increases more than offset the decline in aid inflows relative to GDP, and were sufficient to balance whatever increases in imports resulted from the trade-liberalization measures implemented during the 1980s and 1990s. However, one consequence o f the relatively stable Taka alongside the massive devaluation o f the Indian Rupee between 1985 and 1992, was that the bilateral real TakaRupee rate appreciated by about 30 percent during the same period (Fig 1.5). During the 1990s, this appreciating trend of the real Taka/Rupee rate continued at a slower pace until, in 1999, the total real appreciation of the Taka relative to its value in 1983 was more than 50 percent. Combined with Bangladesh's gradual removal o f QRs and tariff reductions over the same period, this led to a rapid growth o f imports from India, which during the 1990s became Bangladesh's largest single supplier, accounting for between 15- 18% o f its total recorded imports. Inaddition, studies o f informal trade suggest a similar, large increase in unrecorded imports from India. If this i s correct, India could be supplying as much as 25% to 30% o f 8 Introduction Bangladesh's total imports. By contrast, Bangladesh's officially recorded exports to India have remained at very low levels and have barely changed over more than 10 years: in 2003 they were only about $US 62 million, c omparedwith Indian o fficially recorded exports to Bangladesh o f about $U S 1.2 billion. These developments have made the trading relationship with India a key concern in Bangladesh, with some groups usingthe import competition from India and the large bilateral trade deficit to argue against both further general trade liberalization and preferential or free trade arrangements with India, while others argue for general trade liberalization combined with reform o f the Customs service, so as to divert illegal imports into legal channels. Sri Lanka. As inBangladesh, REERmovements in Sri Lanka since 1980 are also very different from the trends in India and Pakistan (Fig1-9). Compared to the latter two, and especially to India, the Sri Lankan REER has moved within a relatively restricted range and currently the index i s only about 10-15 percent below its level in 1980. The first phase o f Sri Lanka's trade liberalization started much earlier than in the other South Asian countries, in 1977. The early reforms were supported by a sharp nominal devaluation, but these were soon overtaken by inflation that resulted from large increases in government spending, especially on the massive Mahaweli irrigation project which aimed to make Sri Lanka self- sufficient inrice production'. Consequently, duringthe 1980s until about 1986 the REER appreciated by roughly 20 to 25 percent. This trend was reversed between 1986 and 1989, after which the REER stayed at about the same level until it appreciated again from late 1995 onwards. One important reason for the relative stability o f the Sri Lankan Rupee over this long period, has been the rapid and sustained expansion o f manufactured exports, mainly garments, which now account for about 60% o f total exports, compared with less than 10% before the 1977 reforms. As in Bangladesh, the stability o f the Sri Lankan Rupee involved a large appreciation in the real bilateral exchange rate with India, in total by about 60 percent between 1981 and 1998 (Fig 1-10). Together with Sri Lanka's generally open import regime, this intumhas ledto rapid growth of imports from India, and a large bilateral trade deficit. In2003, imports from India exceeded those from any other individual country, and accounted for about 14 percent o f Sri Lanka's total imports. The desire to reduce the bilateral trade deficit with India through better access to the Indian market played an important part for Sri Lanka in negotiating the free trade agreement with India, which became operative in March 20003. This was perceived as having relatively low trade- diversion costs for Sri Lanka owing to its generally low tariffs, provided India was willing to offer tariff exemptions for products which Sri Lankan exporters can supply and which are still subject to highMFN tariffs inIndia (see later discussion). Nepal. The Nepalese Rupee is set at a fixed rate with the IndianRupee, and since inflation rates in Nepal do not differ greatly from inflation rates in India, Nepal's REER index (Fig.l.8) has broadly followed the Indian Rupee index, the principal difference being that the IndianRupee component, which has a very hightrade weight, has not greatly changed. Hence the increase (devaluation) inNepal's REER index fi-om the mid-1980s to 1992 was much less pronounced than the equivalent increase in the Indian REERindex. Even so, the real devaluation that did occur duringthese years with respect to Nepal's other trading partners was substantial and, as in India, made tariff reduction and other trade liberalization measures carried out inthis periodrelatively painless. From the mid-1990s untilearly 2002 the Nepalese REERstrengthened somewhat, probably reflecting increasing tourismreceipts, which are also allowedfor inthe REERestimate itself, but in2002 there was a sharp reversal o f this trend. Because of apparently higher inflation in Nepal than in India, Nepal's real bilateral exchange rate with the Indian Rupee also strengthened consistently from the mid-1980s until 1999/2000, when the trend reversed (Fig.l.12). Ifthe differences between the Nepalese and Indian price indices which give these results are credible indicators o f relative inflation rates in the two countries, the attractiveness o f Nepalese exports to India should have declined up to about 1999/2000, whereas importing from India into Nepal should have become more * For adiscussionof exchange rate policy during Sri Lanka's reforms, see Athukorola and Rajipatirana(2000), Chapter 4. For a summaryofthe India-Sri LankaFreeTrade Agreement and further references see Purse11andPitigala (2001, August). 9 Trade Policies inSouth Asia :An Overview profitable, with these trends partially reversed since. The bilateral real exchange rates with the other South Asian currencies have not been estimated, but Nepal's REER devaluation fkom the mid 1980s suggests that a substantial real devaluation o f the Nepalese Rupee with these currencies would have occurred, which would have boosted Nepalese exports had there been adequate transport links. Bhutan. Bhutan's currency, the Ngultrum, is fixed at par with the Indian Rupee, and Indian Rupees freely circulate and can be used for transactions in Bhutan. There are no estimates o f trade- weighted nominal or real effective exchange rates for the Ngultrum,but such a series would be in any case be dominated by the REER with the Indian Rupee. This i s entirely a function o f the difference between inflation in Bhutan and inflation in India, As measured by the CPI indices, it seems (Fig 1.13) that between 1980 and 1999, because o f persistently higher inflation inBhutan than inIndia, there was a small but consistent real appreciation o f the Ngultrum,the cumulative result o f which was that by 1999 the bilateral REER index had appreciated by almost 30 percent. There was a slight reversal o f this trend after 1999, but at the end o f 2002 the cumulative appreciation was still substantial. Aid inflows and electricity exports to India which started inthe mid-l980s, both o f which are large inrelation to the size o f Bhutan's economy, suggest that the currency appreciation which the series indicates, has been real and sustainable, and i s not merely the result o f systematic errors in relative inflation rates as measured by trends in the Bhutanese and Indian CPI indices. However, because o f the tie to the Indian Rupee, like the Rupee the Ngultrumwould have been very substantially devalued from the mid-1980s until about 1992, with respect to both the currencies o f the other South Asian countries and countries outside the region. For the same reason, if they were calculated, REER trends with other currencies would approximate trends inthe equivalent real India Rupee rates with those currencies. Maldives. For many years the Maldives currency, the Rufiyaa, has been pegged to the U S dollar, but the rate has been changed (usually devalued) periodically to take account of the changing strength of the dollar, and generally higher inflation in the Maldives than in the U S and other developed countries. Between 1980 and 2003, the nominal RufiyaaiUS dollar rate was devalued by about 70 percent. There are no long term trade- weighted REER estimates for Maldives, but estimates for 1995-20004 indicate substantial real appreciation, probably reflecting the strength o f the U S dollar duringthose years. As was the case inPakistan, Bangladesh and Sri Lanka, the Maldives bilateral real exchange rate with India (Fig 1.14)5 appreciated very substantially during the late 1980s and early 1990s, by about 50 percent between 1998 and 1993. After 1993 it has remained at this appreciated level, except for some slow real devaluation starting inabout 2000. As notedpreviously, the Maldives's principal export earnings are from tourism and fish exports, and the principal role o f the tariff system i s to generate government revenue. Hence the interplay between exchange rates, tariff levels and protection for local industries has not been as important inthe Maldives as it has been inthe other South Asian countries. WTO (2002), MaldivesTF'R report Table 1.3. The WTO report does not indicatehow the REERnumbershave been calculated, andinparticularwhether weights have beengivento tourismreceipts. MaldivesCPI indexnumbers for 1983-87 are missingandthe bilateralMER index couldnot be estimatedfor those years 10 Introduction Fig 1.4 India Real Effective Exchange Rate Index 1980-2003 (Annual averages: Increase=devalutaion) 120 I10 100 90 80 70 60 50 40 I ~ Fig 1.5 Pakistan Exchange Rate Indices 1980-2003 (Annualaverages: increase=devaluation) I 3 O1 120 110 100 90 ao 70 60 50 40 --CPakistanRupeellndianRupeeindex +REER 10 index (total trade) 0 ' 11 Trade Policies in SouthAsia :An Overview Fig 1.6 Bangladesh Real Exchange Rate Indices 1980-2003 (Annual averages: increase=devaluation) 160 150 A 140 130 , 120 A 110 8 100 50 40 1+Taka/lndian 30 Rupee Index 20 ~ I 10 --EREERindex(totaltrade) ~ 0 1 Fig 1.7 Sri Lanka Exchange Rate Indices 1980-2003 (Annual averages: Increase=Devaluat ion) 150 _l_l__l 140 130 120 110 100 90 80 70 60 50 - 40 -~ +Sri Lankanllndian Rupee Index 30 -~ 20 +REER Index(totaltrade) I I ~~ 10 0 12 Introduction Fig 1.8 Nepal Exchange Rate Indices 1980-2003 (Annual averages: Increase=devaluation) 140 130 120 110 100 40 1-+Nepal RupeellndianRupee 1 index 30 20 10 0 Fig 1.9 Bhutan-India Real Exchange Rate Index 1980-2002 (Annual averages: increase=devaluation) 13 Trade Policies in SouthAsia : An Overview Fig 1.I0 Maldives-IndiaReal Exchange Rate index 1981-2003 (Annualaverages: Increase=devaluation) 130 7 I 14 Chapter 2: Non-TariffImportBarriers INTRODUCTION During their earlier periods of government-controlled, planned development the South Asian countries used QRs o f all kinds as the predominant means o f controlling imports and protecting local industries. QRs o f various kmds were also used, though less frequently, to control exports: these are discussed in Chapter 4, which deals with export policies. The QRs applied to imports included dejure and defacto import bans (in India for many years import licensing amounted to a defacto ban on the import o f nearly all consumer goods), import licensing, import quotas (infrequently), government or government- mandated import monopolies, and a variety o f other non-tariff barriers. As pointed out inChapter 1, trade liberalization in these countries followed different timetables and moved at different speeds. Some indication o f the rate o f removal o f traditional protective QRs (i.e. import licensing and import quotas) i s given in Fig 11.1, illustrating trends in QR protection in India, Pakistan, Bangladesh and Sri Lanka from the 1980s until 1998. Before looking at what has happened in the individual countries since 1998, the following general points are worth noting: By 1998 the QRregimes o fthese four countries were muchless comprehensive than they hadbeenin the 1980s With some exceptions, Nepal was never such an active user o f non-tariff import controls as the other major South Asian countries, nor was Bhutan. However, because o f their location, dependence on trade with India, and difficult access to the rest o f the world, to a large extent, producers inNepal and Bhutan were and remain indirectly protectedthrough whatever protection policies are followed in India. Serious QRremoval inthe region started first in Sri Lanka, in 1977. Substantial QR liberalization got under way in Pakistan and Bangladesh during the mid-1980s, but only after 1991 inIndia. There was some slow relaxation o f QRs in India during the second half o f the 1980s, but discretionary QRs remained much more important than in the other South Asian countries until the removal o f import licensing from most capital and intermediate goods began in 1991. Inparticular, all consumer goods (including agricultural products) remained s ubject t o import licensing, which amounted for most to a defacto import ban. The phasing out o f these QRs began in 1998, and the last set was finally lifted in April 2001. However, as o f February 2004, the import o f most major agricultural commodities in India were still controlled by government-owned or government- authorized import monopolies', and a wide range o f other formally GATT-consistent NTBs were in place. With a few exception^,^ the other South Asian countries no longer maintain state trading arrangements for agricultural commodities. Inaddition, Pakistan, Sri Lanka, Nepal (and also Bhutan and Maldives) are not active users o f other non-tariff techniques for restricting imports, incontrast to India and to a lesser extent Bangladesh, where NTBs still have a major role. These agricultural import and export monopolies (e.g. the Food Corporation of India) were previously called "canalizing agencies". For consistency with the WTO Agreement on Agriculture, they are now known as "State Trading Enterprises" (STEs). Whereas in principle all QRs applied to products covered under the Agreement on Agriculture are GATT-illegal, STEs are *permittedprovidedtheir operations meet certain conditions. Notably, a wheat import monopoly in Sri Lanka. Notably, a wheat import monopoly in Sri Lanka. Trade Policies in South Asia : An Overview INDIA As noted inChapter 1, India's 1991192reforms removedmost butnot all QRsfrom manufactured intermediate goods and machinery and equipment. But nearly all consumer goods (manufactured or otherwise) remained subject to import licensing, in practice an import ban, and the import o f nearly all agricultural products was subject to import licensing or controlled by parastatal import monopolies ("canalizing agencies"). It has been estimated that in May 1995, about two-thirds o f tradable GDP was still protected by some lund o f non-tariff import restriction: 84 percent o f agriculture, 36 percent o f manufacturing, and 4 0 percent o f mining and quanying4. D uring the s econd half o f the 1990s, these restrictions were gradually removed in large measure in response to international pressures. The first o f these pressures came out o f the Uruguay Roundnegotiations on textiles and clothing, and the second from a dispute brought against India at the WTO under the balance-of-payments clause o f the GATT (Article XVIII (B). Before 1991 all imports o f textiles and garments were in practice banned, except for some intermediate textiles used inthe manufacture o f exported textiles and garments and imported using special arrangements for exporters. The 1991/92 reforms did not change this policy. In December 1994, however, in separate treaties with the EUand the USA, inpart as a quid pro quo for the ATC agreement to phase out the MFA quotas, and inpart in exchange for increases in its MFA quotas in these markets, India agreed to a comprehensive liberalization o f these policies. In early 1995 the process started by freeing (i.e., removing QRs) imports o f wool tops, synthetic fibers, textile yarns and some selected industrial fabrics. At the same time selected textile fabrics (most woolen and synthetic fabrics but few cotton fabrics), selected textile products ("made-ups"), and a fairly long list o f apparel items,5 were made eligible to be imported with the use o f a new import license issued to exporters (see below). It was also agreed that these products would be freed from import licensing altogether at specified future dates (in 1998, 2000 or 2002), and tariff rates were agreed which were to decline to levels o f between 20 and 40 percent by the year 2000. These important reforms, though negotiated with the U S A and EU, were multilateral; under the WTO MFNprinciple, they applied and continue to apply to all countries exporting to India. Innegotiating these agreements, India was careful to leave itself considerable discretion intheir implementation. Most importantly, it reserved the right to revert to its 1990 import policies (an import ban and tariffs o f 110 percent or more) if the liberalization process envisaged by the WTO agreement on textiles and clothing does not materialize in full or i s delayed. Secondly, it reaffirmed its right to restrict textile imports under the GATT balance o fpayments provision. Thirdly, it was agreed that the negotiated maximum tariffs could be varied by levying specific duties. Finally, most cotton fabrics, which account for the bulk o f Indian fabric production, and about half the apparel tariff lines, were omitted from the treaties altogether and were subject to continuing QRs (inpractice an import ban) with no commitment to remove them inthe future. Despite all this, when considered in the light o f India's hermetic textile and apparel import policies o f the previous 40 or so years, the US/EU agreements constituted a major step towards a more liberal trade regime. The second international influence on .India's QR regime also came out o f the Uruguay Round. Since 1955 India h a dused the GATT balance o f payments provision (Article XVIII (B) t o justify i t s routine use o f QRs.This right was reasserted inits Uruguay Round submissions and its continuing import bans and other quantitative import restrictions were formally justified on this ground. Moreover, India also claimed exemption from the "minimum access" requirements o f the Uruguay Round agricultural Pursell, Garry (1996). Indian TradePolicies since the 1991/92Reforms ( World Bank, mimeo) The lists of Indian products to be liberalisedunder the U S and the EU treaties are largely complementary . Between them, about 125 of 233 six digit HSC tariff lines inthe apparel Chapters of the Indiantariff bookwere covered. 16 Non-TariffImport Barriers agreement, which might have obliged it to import limited quantities o f otherwise restricted agricultural products. But signingthe Round agreement and becoming a WTO member also involved acceding to an undertakmg to discontinue the use o f QRs under Article XVIII (B), unless they are justified by much more stringent standards than hadbeen applied inthe past. Inthe post-Uruguay Round GATT, there is a strong presumptionthat countries should manage balance o fpayments difficulties by the use o f fiscal and monetary policies and exchange rate adjustments. Iffor some reasonthese actions arenot sufficient, tariff surcharges should be usedto limit imports, rather than import restrictions. Whatever measures are used are supposed to be temporary, price-based, administered in a transparent manner, and most importantly, applied only to control the general level o f imports. This last provision was and remains crucial, because it makes it patently absurd to pretend that QRs are protecting the balance of payments when they are selectively applied only to some products. Soon after the Round agreements became effective, during 1995 a number o f countries' import restrictions (including Sri Lanka's - see below) were questioned in the WTO balance o f payments committee6, and in December 1995 India's theretofore unrestrained use o f QRs was strongly challenged by the US, the EU and other developed countries7. Inthese discussions, the position that the QRs were justified by India's balance o f payments situation was particularly difficult to maintain, given that in the years following the July 1991 devaluation, there were a strong current account, substantial capital inflows, and large foreign exchange reserves which for a while caused the Reserve Bank o f India to intervene to prevent the Rupee from appreciating. Thereafter, India fought a five-year rearguard action to preserve its QRs against the developed-country challenge, and removed the last 715 o f the 2714 tariff lines subject to BOP-justified QRsinthe April 1,2001 Export-Import policy announcement. Since April 2 001, therefore, India has no 1onger been using the GATT BOP c lause to j ustify conventional import licensing which protects domestic industries. But understandably, against the background o f approximately 40 years o f defacto autarchy, when these controls were finally lifted, there was great deal o f apprehension about how well domestic producers o f manufactured consumer goods and agricultural products would be able to compete with imports. Inresponse to these apprehensions, inMay 2001 a "War Room" was established inthe Ministry o f Commerce, and a list o f 300 "sensitive" consumer goods published, imports o f which have since been regularly monitored with a view to taking prompt action to preempt or minimize disruption o f local production by competing imports. Products are periodically removed from or added to the list: in February 2004' it consisted o f 240 HS products, including meats, dairy products, nuts, h i t s , coffee, tea, spices, cereals, edible oils, silk products, cotton, stones, c eramic products, motor c ars, toys, pens, pencils and others. Domestic productiono f many o f these products i s now protected by special measures, including hightariffs and also by the use o f various non-tariff techniques. The way for this was prepared duringthe negotiations on the Article XVIII (B) case at the WTO, when, inaddition to the 2714 BOP-justified tariff lines, India listed 600 tariff lines on which it said import controls o f some kind were justified on other grounds, inparticular under GATT Articles XX (b) (protection o f human, animal or plant life or health) and Article XXI (security and defense), or which it said were justified under the GATT STE (state trading enterprise) rules that that allow government-authorized import or export monopolies. Consequently, inIndia, imports are subject to nearly all the non-tariff restrictions which are formally compatible with GATT rules. NTBs in force currently or duringthe recent past, include the following: InOctober 1995, Brazil's use ofthe balance ofpayments argument for the use of QRs was also severelycriticizedinthe WTO Committee on Balance of Payments Restrictions. In November 1995 the Committee recommended against Sri Lanka's quantitative restrictions. * Australia, New Zealand, CanadaSwitzerland and eventually Japan Imports of the sensitive products are regularly published on the DGFT (Ministry o f Commerce) website at 17 Trade Policies in SouthAsia : An Overview Government mandated import monopolies or State Trading Enterprises (STEs). In South Asia , India i s the principal remaining user o f STEs ("canalizing agencies") to control imports, notably o f rice, wheat, all coarse grains except maize and barley, and copra. These crops between them account for about 40% o f Indian agricultural GDP. Beginning in 2003, STE import monopolies have also been used to administer import quotas for vegetable fats (vanaspati) and edible oils from Nepalg. Imports o f urea and the most important refined petroleum products are also controlled by STES". By contrast, in the other South Asian countries, import monopoly STEs are important inthe petroleum sectors, but otherwise their role has been drastically reduced, in particular in agricultural products and fertilizers where they previously played a major role. Tariff rate q uotas (TRQs) are being used by India to protect i t s producers of powdered milk, maize, crude sunflower and safflower oils, and refinedrape, colza and mustard oil. These were introduced quite recently to permit small quotas o f these products to be imported over moderate tariffs, while applying high tariffs which are generally prohibitive, to imports in excess o f the quota amounts. The high tariffs for the out-of-quota quantities are compatible with India's WTO commitments under the Agreement on Agriculture because o f its high bindings (e.g. 60 percent for powdered milk and 100 percent for maize). A secondary function o f the TRQs is to subsidize parastatal firms, since they are the only entities eligible to apply for them, and they therefore benefit from the economic rents". Technical standards and regulations. It has been reported (see Box 2.1) that new rules introduced in 2000 and being administered by the Bureau o f Indian Standards (BIS), are being systematically used to restrict imports o f products which are periodically moved on and o f f the list e.g. imports o f 33 types o f steel products were restricted in this way for almost three years, until they were removed fiom the BIS list in October 2003, following substantial increases in world steel pricesI2. The use o f technical regulations i s dealt with by the WTO agreement on Technical Barriers to Trade (the TBT agreement), which provides that technical regulations s houldnot be used as disguised restrictions o n , trade. India has long been concerned about the effects o f other countries' technical standards and regulations on its exports, but now appears to be usingthese techniques to restrict imports13. Sanitay and phytosanitay (SPS) rules. As noted above, following the final phase out o f the BOP-justified QRs on April 1, 2001, India continued import licensing o f 600 items which it said was justified by other GATT articles, in particular on the grounds that restrictions are needed to ensure "human, animal or plant life or health". A number o f these continuing restrictions were challenged at the WTO by the EU, and inMarch 2003 some o fthe restrictions (on spices) were dropped. However, around Nepal's tariffs on edible oils-especially palm oil- are much lower than India's very high (specific) tariffs protecting this industry. Consequently, as with a number o f other products with high protection in India, exports o f processed crude oils from Nepal to India benefiting from the duty exemption under the India-Nepal Treaty o f Trade, have always been an irritant in India- Nepal trade relations. This came to a head in 2002 and 2003: the problem was solved by India setting tariff rate quotas and allocating the quotas to the State Trading Corporation (for vanaspati) and the Central Warehousing Corporation (for edible oils).. The normal out-of-quota specific tariffs for these products are prohibitive for Nepal, given its inland location. lo Gasoline, diesel, aviation fuel and kerosene are "canalized" by public sector oil companies. Kerosene was free o f import licensing for some years but was recanalized in November 2003. According to Goyal (Big's WeeklyIndex of Changes, Vol XX, N o 3 6) this f ollowed complaints about import c ompetition from the public s ector o ilcompanies and a major private se ctor refinery(Reliance Petroleum). Crude oil imports usedby the domestic refineries are not canalized. I' The import quotas are allocated by a committee headed by a Ministry o f Commerce (DGFT) official. See Goyal (Eggs Weekly...) Vol XX, NOS& 8, 14-27 May, 2003. 7 l2 Goyal (Biggs Weekly...) Vol XX N o 32,511 November, 2003. l3 There are reports that imports o f other products not on the BIS list are also being restricted by technical regulations e.g. in December 2003, the import o f measuring tapes containing inches and feet was banned by the Customs, using the Standards o f Weights and Measures Act , 1976 as justification. It was reported that this was done to protect the sole Indian producer o f measuring tapes (Goyal, Siggs Weekly...,V o l XX, N o 36,3-9 December, 2003) 18 Non-Tariff ImportBarriers Box 2.1 Technical barriersto trade inIndia Indianstandards are managedby the Bureau o f Indian Standards (BIS), which i s also the inquiry point for standards required under the WTO TBT agreement'. India has signed the TBT agreement, and inprinciple its activities inthe standards area conform to the agreement's basic provisions that technical regulations and standards "do not create unnecessary obstacles to international trade" and that "they are not applied in a manner which would constitute a means o f arbitrary or unjustifiable discrimination between countries where the same conditions prevail or a disguised restriction on international trade"'. However, inNovember 2000, apparently as the result o f a recommendation o f the "War Room" set up in the Ministry o f Commerce to monitor and combat excessive imports that were feared would follow the final phase out o f QRs, a list o f 133 products and product groups for which standards hadpreviously either been voluntary or which had been compulsory but not enforced against imports, were made compulsory. Since then various groups of products have been dropped from and added to the list: inearly 2004 it consisted o f about 118 items. Although at first sight this is not a very extensive list, the items are very broadly defined e.g. items such as "structural steel (ordinary quality)" or "hot rolled carbon steel sheet and strip" correspond to a large number o f HS tariff lines, and to a substantial volume o f domestic production and potential imports. To be sold in India, these products are required to be certified as meeting Indian quality standards and must obtain an Indian standard mark. The 159 products and product groups that are or have been on the list include food ingredients, powdered milk and other milk products, cements, steel tubes, steel sheets and other steel products, X-ray equipment, gas cylinders, dry batteries, electrical equipment, and household electrical appliances. According to BIS, the certification scheme operates in "in an impartial, non-discriminatory and transparent manner." In accordance with this principle, i t i s required that the products o f both domestic and foreign suppliers be tested for quality and meet the same standards. For Indian suppliers the transaction costs ingetting their products certified should inprinciple be quite low in view o f BIS's presence in most o f India (with 17branch offices, 5 regional offices, 8 testing laboratories indifferent cities, and the use o f independent laboratories). The costs are also quite low: application fee Rs 1000 (about $20), annual license fee Rs 1000, license renewal Rs 500, inspection charges Rs 2000 per day. However, at least for steel products, which were included on the list for about three years until they were dropped in October 2003, the way this was implemented for foreign exporters and Indian importers was such that, according to Indiantraders inthe steel business, the new regulation effectively shut out all "off-the-shelf" foreign supplies o f steel from theIndianmarket. Thereasonforthisiseasytoseefromthelistofconditions (applicabletoall products,notjust steel) a foreign supplier i s required to meet: (1) Ithas to set up a liaison or branchoffice inIndia; operating through an Indianagent is not sufficient'. (2) A BIS technical team has to visit the foreign supplier's factory to inspect and certify that the production process meets the Indian standards. The cost o f the visit and the test is paidby the foreign firm. (3) There i s an annual "marking fee" o f $US$2000 plus 1% o f the invoice price o f products shipped to India plus an annual license fee o f Rs 1000. (4) The initial license is good for one year and can be renewed, subject though to "follow-up periodic inspections," the costs of which are also borne by the exporting firm. As an alternative to this an Indian importer can apply for certification o f imported products in which case he i s inprinciple treated as equivalent to an Indianmanufacturer. But this includes: (1)An obligation to set up a "fully equippedlaboratory for testing." (2) The righto f BIS to "impose any conditions" which may include (a) pre-certification o f componentsfraw materials and (b) a visit to the original product manufacturer's premises at the expense o f the importer. The key deterrents to imports inthis system are the obligation on the foreign manufacturer to establish an Indian office, the required visits to the foreign factories by BIS inspectors, and in the case o f Indian importers, the requirement to establish their own testing laboratories and the broad discretion o f the BIS inspectors as to pre-certification o f components and visits to the foreign factories. Apart from the cost o f all these procedures, there is obviously considerablepotential for delay when foreign visits and the establishment o f Indian branch or liaison offices are involved. I t would appear to be almost impossible for foreign trading firms which buy from different sources around the world to meet the conditions and to supply India with products included on this list. As regards steel, according to Goya14: "Steel industry with 33 standards is due for a good dose o f protection. Practically the whole range o f steels ranging from hot rolled to cold rolled to alloy and stainless steel is covered. ...There i s no harmonised system code on the items, which means that the customs has full power to classify arbitrarily and the importer will never know where he stands before the crucial customs clearance event" Consequently, inthe case o f steel, while the restrictions were inplace, it i s probable that only large, long-term suppliers with sufficient volume to justify the transaction and other costs o f meeting the BIS conditions would have been able to export steel and the other products on the BIS list to India. A similar result has been reported for dairy products, where: "It i s almost impossible to get past the BIS standard restriction. The costs in the inspection process o f the foreign dairy, subsequent certification, and the discriminatory marking fee will daunt imports." The system also confers a great deal o f "license Raj" type discretion on BIS and Customs officials and appears to be violating the spirit if not the letter o f the TBT agreement. One obvious way to change this outcome would be action by B I S to accept international standards or standards inthe exporting countries, through mutual recognition agreements with them. 1.For more on this see the May 2002 WTO TPR report onIndia and the Bureau o f Standards website 2. Quoted from the preamble o f the Agreement o n Technical Bamers t o Trade W TO, 1994. Resulfs of the Uruguay Round of the . Multilateral TradeNegotiations. TheLegal Texts. 3. I t is provided that the establishment of an Indian office may not be required if there i s an agreement between the Indian government and the government o f the exporter's country guaranteeing the liabilities o f the exporter under the BIS legislation 4. Goyal. Easy Reference Customs Tarif2002-2003,~.Pf38. 5. Goyal. Biggs WeeklyIndex.... VolXYNo 25, 17-23 September,2003 19 Trade Policies in South Asia :An Overview the time o fthe general QRphase-out, oldlaws onplant quarantine, sanitary permits, food adulterationetc were reactivated and applied to imports: now imports o f nearly all livestock, agricultural, and food products require some kind o f phytosanitary or sanitary certificate issued under the general supervision o f the Ministry o f Agriculture. These are discussed at greater length in the chapter on agriculture (see Volume 11, Chapter 1). As in other countries, these regulations reflect legitimate national concems, but they have considerable potential to be used to restrict imports. It has been reported that this in fact has been happening inIndia, with the rules not being rigorously applied to domestic production, but involving a substantial harassment factor at Customs which heavily disadvantages imports. Other health and safety regulations. Apart from food products, there are two other major groups o f import restrictions justified on the grounds o f health and safety, pharmaceuticals and pharmaceutical intermediates, and second hand goods. Import licensing for pharmaceuticals was introduced in April 2003, and has onerous requirements under which foreign manufacturers must register and subject their premises to inspection, along the lines o f rules applied by the BISI4. Especially in the case o f pharmaceuticals, health and safety are legitimate concems, but domestic industries also have a motive to influence the ways the rules are applied in practice to keep out competing imports. In some cases protection o f local producers clearly seems to be the dominant motive for the restrictions. This is especially apparent as regards the import bans and restrictions on second handproducts, including second hand consumer goods, used and waste intermediate materials, and second hand machinery and equipment. The restrictions on consumer good imports include a longstanding ban on the import o f used clothing, restrictions on the import o f second hand household machinery such as air conditioners and refrigerators, and restrictions on the import o f second hand cars. It i s significant that imports o f used clothing are banned in India but are allowed in the rest of South Asia, and that second hand cars are a major import in Bangladesh and Sri Lanka, where there i s no domestic car production, but are respectively banned and restricted inIndia and Pakistan, where there are heavily protected domestic auto industries.The case for banning or restricting the import o f scrap and other usedraw materials and second hand machinery onhealthand s afety grounds i s even more dubious, given the v ery 1arge v olumes o f domestic scrap, second grade materials and old machines that are traded in India. Inthe case o f second hand machinery and equipment imports, however, reforms introduced in the 2003104 budget to benefit exporters seem to have the potential to gradually undermine these restrictions (see Chapter 4 on export policies). Local content (Trade Related Investment Measures or TRIMS) schemes. These act as NTBs,and were widely used for many years in India, but were never challenged even though they are clearly incompatible with basic GATTprinciples. The situation changed after the GATTrules were consolidated in the Uruguay Round TRIMS agreement. After this, India discontinued a number of its pre-existing TRIMS arrangements, but introduced a major new local content program in its auto industry.Following objections from other WTO members and protracted consultations at the WTO, India finally dropped its auto local content program in200215, and at present does not appear to be operating any others. However, in WTO negotiations, together with Brazil, Palustan and other developing countries, it has consistently pressed for changes that would exempt or partially exempt developing countries from the TRIMS rules, presumably signaling its interest inhaving at least the right to use these measures inthe future. l4For importeddrugs, this system replaced the previous systemunder which both domesticallyproducedand importeddrugs were licensed at the manufacturing,packing and labeling, or distribution stages. At the same time the system was widened to includeall drugs oftherapeutic value, andnotjust designated classes of drugs subject to special controls.According to Goyal, by this measure the Indian government was "...raising prices and reducing availability just to retaliate against developed countries andpaythemintheir own coin". See Goyal, Biggs WeeklyIndex...,Vol XX No 4,22-28 April 2003. l5A WTO panelfound against India (see WTO documentsWTiDS146R and WTiDS175/R, 21 Dec 2001) in adispute initiated by the US andthe EU.Indiaappealedthe panelfinding to the WTO Tribunal, but subsequentlywithdrew the appeal. 20 Non-Tariff Import Barriers Limiting theports and inland Customsposts at which imports can be cleared. A technique which India has systematically usedto make theimport of "sensitive" products more difficult, i s the designation o f specified ports and land Customs posts at which these products can be cleared. For example, initially, from May 2001, the 300 "sensitive items" could only be imported through 11 Customs posts out o f a total o f 21516.Only one out o f 51 inland container depots at which containers could normally be cleared, could be used for these products, in addition to which none o f the 145 import entry points along the land borders with Bangladesh, Bhutan, Nepal, Myanmar, China and Palustan could be used. The list o f authorized Customs clearance points for these products was later increased (by February 2004 to about 70), but the ability to move products on and off the "sensitive list" and on and off the list o f places through which they can be imported, still operates inmany ways as a substitute for the old "license Raj" negative lists, and i s a particularly effective non-tariff technique for regulating imports from the inland areas of neighboring countries. For example, in February 2004, clothing accessories could only be imported through five specified ports and two inland container depots". The same technique i s also being used to regulate imports in other contexts e.g. under the India-Sri Lanka FTA, imports from Sri Lanka o f clothing and tea (both "sensitive" products inthe FTA, with duty free imports subject to Indian quotas) can only be made, respectively, through four and two specified ports. The official reasons usually given for restricting Customs clearance points in these ways, i s that Customs posts other than those specified are considered to be less reliable (e.g. in controlling mis-declarations and under-invoicing) and also do not possess the required capability to monitor and provide timely information on the volume and nature o f imports o f these "sensitive" items (e.g. information that would be needed to keep track of how tariff- exempt tea and garment imports from Sri Lanka are developing inrelation to the bilateral FTA quotas). Restricting imports of domestically produced intermediate inputs used by exporters. India operates a comprehensive set o f export mechanisms, the object of which i s to free inputswhich are used in exports, from import duties and domestic taxes. One o f the most widely used facilities used by exporters (see Chapter 4 for more detail) are "advance licenses", under which inputs needed for exports can be imported duty free in advance o f production, on the basis of confirmed L/Cs for the exports. As in other c ountries, this facility allows c ountries which export the intermediate inputs to s ell duty free to Indian exporters, even if their access to the Indian domestic market i s restricted by tariffs or NTBs. However, inresponse to domestic lobbies, India has periodically banned the import o f some intermediate products used by exporters unless they pay normal import duties. For example, the import o f natural rubber for use by exporters under advance (duty free) import licenses was banned for a period o f four and a half years, between March 1999 and July 2003. This import ban reflected the lobbying power o f the heavily protected rubber growers, mainly in Kerala, against the tire, footwear and other exporters, and was finally only removed following protractedlegal proceedings finishing in the Indian Supreme Court18. For a while Indian pharmaceutical exporters were also subject to a similar restriction, under which the issue o f duty free advance licenses for drug intermediates were subject to the controls on drug imports for use in the domestic market, that were introduced in April 2003''. These measures are perfectly compatible with the GATT- countries are not obliged to exempt imports from normal import duties -but (insofar as exporters still operate even while not using some or all o f the normal export facilities), they do provide additionalprotection for the domestic producers o f the intermediate inputs. This andthe following information on the "sensitive list'' i s from Goyal, Siggs Weekly Index, Vol XVIII, Nos 5 & 6, 10 May 2001. "MinistryofFinance,DeptofRevenuenotificationNo150,14.10.2003. l8Goyal, Biggs Weekly Index, V o l H , Nos 15, 31 and 38 21 Trade Policies in South Asia :An Overview PAKISTAN Pakistan used import licensing and other non-tariff barriers t o imports widely duringi t s early import substitution period, but they were never as pervasive or as multi-layered as inIndia. They began to be removed duringthe 1980s, with progress continuing steadily into the 1990s so that by 1998 (Fig 2.1) the proportion o f product lines subject to traditional QRs was only 2.7%, slightly lower than the proportion in Sri Lanka in the same year. The removal o f QRs up to this point proceeded behind declining but still very hightariff barriers, however, and in 1998 some o f the industries protected by the remaining QRs and also by government or govemment-controlled import monopolies were very large, including, for example most o f agriculture and the fertilizer industry.But starting in 1997/98, Pakistan embarked on a radical new trade liberalization program which by 2003 -- subject to some exceptions -- had eliminated all remaining traditional QRs and parastatal import monopolies, while drastically reducing the level and simplifying the structure o f import tariffs. The most sweeping reforms occurred in the agricultural sector, where government trading monopolies were abolished and other government interventions greatly reduced. An exception to the general removal o f QRs is the continuation of a long-standing ban on imports from India o f products not on a limited positive list o f 677 items (corresponding to about 1030 8- digit tariff lines)24. Given the considerable potential o f this trade, this practice (together with equivalent informal restrictions by India which appear to severely constrain Indian imports from Palustan) i s a major qualificationto Palustan's otherwise generally QR-free trade policies. Another major exception i s the continuation o f local-content programs in the auto industry, for which a second three-year phase-out extension was requested at the WTO in December 2003, until December 2006. Pakistan's local content programs started in 1988, but the Uruguay Round TRIMS agreement required developing countries to remove them over five years i.e. by 2000. Pakistan applied at the WTO and obtained a further three year extension, and phased out all its programs except the auto programs between July 2001 and December 200325.Pressure o f other WTO members26was crucial for this change of policy, but it was also facilitatedby reductions inthe tariffs on intermediate materials and components, which made the programs less attractive to local firms, since the incentives for going into them i s to obtain tariff exemptions or reductions for some imported intermediates and components, in return for commitments to produce or buy other materials and components domestically. 2o For more on this see the May 2002 WTO TPR report on India and the Bureau o f Standardswebsite 21 Quoted from the preamble of the Agreement on Technical Barriers to Trade WTO, 1994.Results of the Uruguay Round of . the Multilateral Trade Negotiations. TheLegal Texts. 22 It is provided that the establishment of an Indian office may not be required if there is an agreement between the Indian governmentandthe government of the exporter's countryguaranteeingthe liabilities of the exporter under the BISlegislation.As ''ofEasy mid-2002,no such agreements hadbeenmade. Reference Customs Tariff2002-2003.p. pi38. 24 The positive list i s in Government o f Pakistan,CentralBoard o f RevenuePakistan Customs Laws, lgthedition, 2003-04(Vol I1 of the PakistanCustomsTariff). 77 items were addedto the list in2003. 25 Details o f the phase out of Pakistan's local content programs and the various extensionrequestsat the WTO, are availableon the WTO document website (see in particular the following documents : GlCIwl288, 9 August 2001; GlCIw1294, 31 August 2001; GlCIwl478, 22 December 2003; and GICIWI 480 30 January2004). 86 local content (also known as "indigenization" or "deletion") programs)were abolished. They covered a variety o f engineering products including various kinds of machines, electrical equipment, and domestic appliances. These programs were administered by the Engineering Development Board (EDB) , a semi-autonomousbody which comes under the Ministry of CommerceandIndustry.EDB is staffedby engineersand industry experts and also uses specialized private industrial consultants, It has considerable discretion in deciding on the permittedlocal content levels of individual firms andwhether they will be allowedto importparticularmaterialsand components at low preferentialtariffs. Inmany respectsit resemblesthe erstwhile DirectorateGeneralo f Technical (DGTD) inIndia, which was a key unit administering India's import licensing systemuntil it (DGTD) was abolished in 1991. The phase-out of the 86 engineering deletionprogramsleavesEDB withjust the 16 remainingauto industryprograms, andhas greatlydiminishedits role inindustrialandtradepolicy. 26 Especiallythe US, the EUandJapan. 22 Non-Tariff Import Barriers As in India, apart from these exceptions, the principal potential source o f protective non-tariff restrictions over imports arises through the use o f technical regulations and regulations based on health and safety. Many o f these are being employed in Palustan, including restrictions on imports o f second- hand products. Protection o f local industries i s clearly the dominant motive for the latter e.g. the bans on the import o f second-hand consumer durables such air conditioners and refrigerators, vehicles, and various types o f industrialmachinery and equipment. BANGLADESH Although Bangladesh has made substantial progress in reducing the use o f QRs to protect domestic industry, it remains the only country in South Asia with traditional QRson imports still inplace. Pervasive until the late 1980s, QRscovered nearly 56% o f items at HS 6-digit level. Trade liberalization inthe early 1990s was characterized by sharp reduction intariffs as well as significant removal o f trade (protection) as well as non-trade motivated QRs (e.g. health, religion, national security). The Import Policy Order 1991-93 saw a major scaling down o f QRs, both for trade and non-trade reasons. The process that continued with the P O 1993-95 stagnated over the next two IPOs: 1995-97 and 1997-02. (Table 2.1) Table 2.1: Evolutionof import restrictions IPO 1991-93 IPO 1993-95 IPO 1995-97 IPO 1997-02 IPO 2003-06 Number of items in the control 193 111 120 122 63 list at the H S 4-digit level (15.6%) (9.0%) (9.7%) (9.8%) (5.1%) Number of trade-related items 79 19 27 28 24 inthe control list at the HS 4- (6.4%) (1S%) (1.9%) (2.2%) (1.9%) Source: ?$TOTradePolicy Review, Bangladesh 2000; IPO variousyears Of the two lists for QRs, the first comprises the list o f HS-4 headings subject to bans or restrictions. Some restrictions might not be quantitative per se, but might require fulfillment o f certain conditions for imports to be cleared. The problem area i s the bunch o f trade-related QRs which, though progressively removed over the years, still accounted for some 2% o f total HS 4-digit tariff lines (and 0.5% o f import value) subject to prohibitions or bans until 2002. The situation changed little under the latest P O 2003-06 released inMarch, 2004. Inthis latest PO, although the restrictedlist appears to have been reduced appreciably, they have beenreplaced by text that explains the host o f conditions that need to be fulfilled before import o f restricted items couldbe cleared by customs. Trade related restrictions are now limited to mainly three categories: agricultural products (chicks, eggs, salt), packaging materials, and textile products. Nearly 40% o f all QRs apply to textile products that enjoy the heaviest protection. Although the readymade garment sector imports woven fabrics and grey cloth duty-free under bonded warehouse facilities, the system i s cumbersome and susceptible to corruption (through leakage into the protected domestic market). Some o f the badrestriction on imports i s ostensibly applied on grounds o f health, religion, environment, culture and so on. Yet a review o f all the items in this group reveals that many o f the prohibitions or restrictions cannot be justified on these grounds, and are presumably included for protection purposes (e.g. salt, insecticides for mosquitoes). Thus, in the interest o f economic efficiency and predictability of impacts, it would still be more meaningful to replace the QRswith equivalent tariffs. 23 Trade Policies in South Asia : An Overview Quasi QRs. Although import licensing was abolished early in the 1990s leading to the near but incomplete demise o f the office o f CCIE (Chief Controller o f Imports and Exports), sundry permits, clearances, and approvals are still required for specific imported products, quite apart from the standard LCA. The net effect o f these procedures i s alun to import licensing. Furthermore, administrative procedures designed to manage QRs are equivalent to "non-automatic licensing" that implicitly places ceilings on imports o f certain products. Another procedure that could effectively serve as a barrier to imports i s the required registrationo f importers. The registration fee itselfis unlikelyt o c onstitute a significant barrier, but the need to register involves a costly layer o f bureaucracy with clear potential for obstruction and abuse. Bangladesh has been subject to simplified consultations in the GATT and WTO Committee on BOP restrictions since 1993. Bangladesh QRs have been justified under Article XVII1:B (on trade measures taken for balance-of-payments reasons). However, a legitimate invocation o f the BOP rationale would apply inorder to restrainthe general level o f imports rather than some specific imports inthe event o f balance o f payments difficulties. With Bangladesh's current account recently approaching surpluses and no apparent pressures on the balance o f payments, this rationale no longer appears valid. Since the tenure o f P O 1997-02 has ended and a revision o f the P O i s in the works, this i s a good time for Bangladesh to consider phasing out the list of 122 restricted items (bannedrestricted), as it committed to do inthe WTO Committee on BOP in 1999. State trading, government procurement practices and local content schemes. (a) Quite apart from the import o f arms and ammunitions, there i s a ban on imports o f petroleum products and salt by private importers. The s ole importers for these products are state monopolies, Bangladesh Petroleum Corporation and government designated importers, such as Salt Crushers Association, respectively. The restriction on sugar has recently been lifted but the product i s subject to a total o f 70% tariffs and other levies. Another state trading corporation, TCB, i s in the process o f being disbanded as its role has all but vanished. (b) Governmentprocurement practices generally discriminate against suppliers from abroad by offering explicit price preference margins or discriminatory tendering. Such practices have effects equivalent to import controls as far as government purchases are concerned. These effects are o f course partly mitigated by non-discriminatory imports o f similar products by the private sector. (c) The government's cash compensation scheme for selected exports at various rates on fob (15% for leather goods, agricultural and agro-processing products, crushed bone, bicycle and light engineering, textiles, 10% on frozen fish; and 20% on fresh fruit) also constitute indirect barriers to imports. S R I LANKA Sri Lanka abolished most o f its QRs during i t s 1977 reforms and c ontinued to remove others duringthe 1980s and 1990s. By 1998 only 3.7% of its tariff lines were still subject to traditional QRs -- import restrictions explicitly aimed at protecting local industries, other than restrictions justified on health, safety and similar grounds. However these QRs applied to Sri Lanka's principal import substitution food crops: rice, potatoes, chilies, and onions and to a number o f industrial product^.^' Like India, Pakistan, and Bangladesh, for many years Sri Lanka had formally justified its QRs at the WTO under the GATT balance o f payments clause (Article XVII1:B) on the grounds that they were needed to support the balance o f payments. In 1997 this justification was challenged at the WTO, and after consultations a WTO panel recommendedthat Sri Lanka remove them. Sri Lanka did so inM a y 1998 by disinvokmg Article XVII1:B and removing the import licensing of these products. ''Chilies, potatoes and onions were subject to seasonal import licensing in which import licenses to import were only given outside the marketingseasons for the domestic crops. The industrialproductsstill subject to import licensingincluded anumber of drugs andchemicals, timber, motor vehicles, photocopiers etc. They are describedinthe 1995 WTO TPR reporton Sri Lanka. 24 Non-Tariff Import Barriers The finding o f the panel reaffirmed the explicit Uruguay Round Undertaking on balance o f payments measures that countries cannot pretend that import licensing and other QRs are aimed at supporting the balance o f payments when they are not across-the-board, do not include products that are not locally produced, and are invoked in order to protect particular industries. The panel also reaffirmed the need to show some evidence o f genuine balance o f payments difficulties, and show that, in'such a case, standard means o f dealing with the problem, such as exchange rate devaluation cannot be used for some reason or need to be supplemented with temporary import licensing. Following this decision, with two principal exceptions, since 1998 Sri Lanka has not been operating any non-tariff import restrictions except those justified under other GATT provisions. But highprotection o f the import substitution crops has continued with the use o f seasonally varying tariffs and specific duties. The two exceptions are import bans on tea and certain types of spices. Both tea and spices are major export crops. The argument used for banning imports i s based on past experiences where inferior imported varieties were blended with domestic varieties and exported as Sri Lankan products, thereby (it i s alleged) undermining the reputation o f genuine Sri Lankan varieties in export markets. However, it i s reportedthat the bans also reflect pressure from domestic producers o f varieties that would be adversely affected if imports were allowed, and it would seem that there must be more efficient ways o f dealing with the alleged reputational problem than banning importsz8.As inother countries, in Sri Lanka GATT- consistent regulations on health and safety and technical standards are also potential sources o f discrimination against imports, but very little i s known about this aspect o f the administration o f these rules. Inaddition, Sri Lanka justifies an import monopoly over wheat (which i s not grown in Sri Lanka) under the GATT state trading provision. NEPAL Import licensing and other non-tariff measures have never been widely used in Nepal. An important exception until 1997 was the monopoly a parastatal, the Agricultural Inputs Corporation, held over fertilizer imports. This monopoly was abolished inNovember 1997 when competing private imports o f fertilizers were allowed. At present there are no government import monopolies, except for petroleum products, and the only traditional import QRs (an import ban) i s on machine made wool yarn. This has been imposed on the ground that if imports were allowed, the machine made yarn would be incorporated in exported hand-woven artisanal carpets, thereby undermining their "hand-made'' reputation and the associated price premium at which they sellz9. Technical regulations on standards and SPS regulations are a potential source of protective import restriction, but probably less so inNepal than in India and the other larger South Asian countries, in view o f Nepal's more limited technical and administrative capabilities inthese areas. 28 See Chapter IV on export policiesfor further discussion. 29See Chapter IV on export policies for further discussion 25 Trade Policies in South Asia : An Overview BHUTAN Fig 2.1: South Asia, percentage of HS 6-digit tariff lines subject to QRs, 1987-1998 90 - 80.7 1987 1990 1992 1996 1998 India OPakistan 0Bangladesh E3 Sri Lanka Sources: 1987, 1990, & 1992, Panagariya(1999); for Bangladeshin 1992 & 1996, Dowlah (2000); for 1998, World Bank. Bhutan has no explicit QRs, but does have various health and safety and technical regulations which are applicable to imports as well as to domestic products. However, little i s know about how these regulations are applied in practice. As pointed out elsewhere, 90 percent o f Bhutan's imports are from India, so if there i s any non-tariff protection for Bhutanese producers, it i s mainly indirect via the NTBregime inIndia. MALDIVES Inthepast a number of importedproducts were subject to NTBs: inparticular, the import of staple foods was a monopoly o f the State Trading Organization (STO). Most o f these restrictions were removed quite recently, in 1998, but as o f December 2002, import quotas, most of which were allocated to STO, were still being used to regulate imports o frice, sugar and wheat flour3'. 30STO TPR Report onMaldives, 2002, pp 38-39. 26 Chapter 3: Tariffs, Protection and Revenue Level and structure of tariffs: some comparisons As noted inChapter 1, despite the substantial liberalization that occurred duringthe 199Os, at the endof the decade, South Asia as a whole still remaineda heavily protectedregion with some o f the highest tariffs in the world. The tariff reductions that were made during this period were substantial, especially in India, Palustan and Bangladesh, but tariffs were still very highin 1998, notably in India and Palustan (Fig 3.1). Since 1998, pre-announced tariff reduction programs, in Pakistan between 1996197 and 2002103, and in India between 2002103 and January 2004, have brought their tariffs down to about half their previous levels. In Bangladesh, however, since the mid-l990s, Customs duty reductions have been largely offset by the increasing use o f selective para-tariffs. Currently, including para-tariffs, Bangladesh's average tariffs overall and for industry are by far the highest in the region. Below Bangladesh, the unweighted average tariffs o f India, Pakistan, and Nepal are about the same, and Sri Lanka's tariffs remain clearly lower than the average level o f tariffs in the other major South Asian countries (Fig 3.2). However, looking more carefully, there are still large differences among the South Asian countries in the structure and sectoral incidence o f tariff protection (Tables 3.1 and 3.2). Some general features o f these comparisons are notedbelow. This i s followed by more detailed discussions o f tariff policies in each o f the principal South Asian countries, and some brief notes on tariff policies in Bhutan and Maldives. Fig 3.1 Tariff Trends, 1983-1998 1982183 1986187 1991192 1997198 India c] Pakistan Bangladesh OSri Lanka Before proceeding, a few points should be noted about these cross-country comparisons. First,the average tariffs are unweighted averages o f 6 or 8 digit tariff lines and therefore do not necessarily provide a good estimate of the average available tariff protection o f existing local industries. Thls i s particularly pertinent for comparisons between India and the other far smaller South Asian economies which have much less diversified production structures, both in agriculture and manufacturing, and therefore have a much larger number o f tariff lines which are not protecting domestic production. Since domestic producers have an interest in lobbying to keep tariffs that protect them up, and to keep tariffs on inputs that they use down, this suggests that production or value- added weighted average tariffs are likely to be higher than unweighted tariffs in all the countries including India, but that the excess of production- weighted tariffs over unweighted tariffs i s likely to be greater in the smaller countries. Second, the averages are o f MFN tariffs and do not allow for preferential tariffs. Third, they do not allow for Trade Policies in South Asia : An Overview exemptions and partial exemptions, o f which there are a large number, especially in India, Pakistan and Bangladesh. Fourth, it should be noted that Palustan, Bangladesh, Sri Lanka and Nepal use other import taxes (described below) as well as Customs duties which are intended to protect domestic producers, or have the e ffect o f doing s 0. F ifth, a11the S outh A sian c ountries impose VAT-style indirect taxes o n imports, and these t axes have become a n increasing s ource o f govemment revenue, replacing the lost revenues from Customs duties. Except when the tax i s deliberately used to provide extra protection by exempting producers o f specified products (as in Bangladesh), inprinciple, these taxes should not affect protection levels o f local industries ifthose industries pay the same VAT rates as imports. But inpractice it maybe easier to collect the taxes from imports at Customs than inthe domestic economy, allowing tax- evading or avoiding local producers to get extra protection against imports. As discussed later, the very high shares o f indirect tax revenue coming from VAT-style taxes on imports in several countries (e.g. Pakistan) suggest that they may be having some haphazard protective effects. Finally, it i s important to remember that tariff levels only indicate the protection available from tariffs. For many reasons - including strong domestic competition and smuggling from neighboring countries - this available protection may not be used by domestic producers to price their products up to the levels o f import prices plus tariffs. Past price-comparison studies in South Asia have revealed a great deal o f redundant tariff protection, and it i s highly likely that this remains the case throughout the region. An important feature of tariff policies in South Asia is that Palustan, Bangladesh, Sri Lanka and Nepal all use import taxes which have protective effects (also known as para-tariffs or, in WTO terminology, "other duties and charges") over and above the protection provided by Customs duties. India also has a long history o f usingother protective taxes, and only removed the last o f these inJanuary 2004. The majority o f these taxes were initially imposed to raise revenue, sometimes in the expectation that the need for the extra revenue would be temporary, but in the absence o f equivalent taxes on domestic production, they provide extra protection. Some o f these para-tariffs are applied across-the- board to all or practically all imports (e.g. Bangladesh's "Infrastructure Development Surcharge") and can be considered as general or normally applied protective taxes which affect all or nearly all tariff lines. Others are selective protective taxes in that they are only applied to selected products e.g. Bangladesh's "supplementary" and "regulatory" duties. The base for the taxes varies: insome cases it i s the "assessable value" (usually the cif price or the cif price plus landing charges), in others it i s the assessable value plus Customs duties. The para-tariffs employed now or in the recent past in each o f the countries are summarized below. More information on them i s provided inthe sections discussing tariff policies inthe individual countries. India No para-tariffs since January 9, 2004l Special additional duty (Sadd) 1998199-January 8,2004 Special duty 1996197-1998199 Surcharge 199912000-200012001 Pakistan Income withholding tax Extra protection for some products through the sales tax ( a VAT style tax). The extent and scope o f the extra protection i s uncertain, however, and no attempt has been made to quantify it inthis monograph Regulatory duties (now mostly phased out) 'Indiaintroduced a 1% "National CalamityDuty" in its 2003 budget,but its scope so far appears to be very limited( to imports o f petroleumoils, hightenacitypolyester yams, and smallbuses) 28 Tariffs, Protectionand Revenue Bangladesh' Infrastructure Development Surcharge (IDSC) Supplementary duties (SD) Regulatory duties VAT exemptions for specified domestic products License fee (abolished in 2002/03) Sri Lanka Surcharge on Customs duties (since February 2001) Ports and Airport Levy (PAL) (since May 2002) Cess to fundthe Export DevelopmentBoard (since 1981) Nepal Local Development Fee Special Fees Agricultural Development Fee Tables 3.1 and 3.2 attempt to allow for the protective effects o f these para-tariffs. With the exception o f the supplementary duties, regulatory duties, and VAT exemptions in Bangladesh, and the possible use o f sales tax exemptions in Pakistan (indicated by a +), all o f them have been treated as general protective taxes inthese tables. For varying reasons the para-tariffs are very difficult to quantify, buti t is apparent that not dealing with them would miss an important component o f these countries' import policies. For example, with the para-tariffs included (both general and s elective) Bangladesh's average protective rate in FY05 i s 62 percent higher than its unweighted average Customs duty. Likewise, the average protective rates o f Palustan, Sri Lanka and Nepal exceed their respective unweighted average Customs duty rate by about 8.7%, 18.6% and 31.4%, andbefore it was abolished, the Sadd tax in India increased average protection from Customs duties by approximately 24%. As well as increasing protection, the number o f para-tariffs, their varying bases, other rules for applying them, and exemptions and partial exemptions which may or may not include them, increase the complexity o f Customs administration, reduce transparency, and increase opportunities for discretion and negotiationin Customs clearance. Following India, the other South Asian countries should move to a system in which Customs duties are the sole protective import tax. * There i s also an "advance income tax" (AIT) in Bangladesh (3.5% o f the assessable value o f imports) which couldhave some protective effect insome circumstances. Inthe absence o f informationon its incidence, it has not been treated as a protective para-tariff inthis survey. 29 Trade Policies in SouthAsia : An Overview Table 3.1 South Asia: Estimated Unweighted Averages of MFN Customs Duties and Other Protective Import Taxes India India India 'akistan Bangladesh Sri Lanka Nepal 2002-03 2003-04 2004-05 !002-03 2004-05** Jan-04 Aug-03 All tariff lines Customsduties 29 24.8 22.2 17.3 16.3 11.3 13.7 Othergeneral protectivetaxes 6 6 0 1.5* 3.8 2.1 4.3 Otherselective protectivetaxes 0 0 0 + 6.4 0 0.0 Total 35 32.7 22.2 18.8*++ 26.5 13.4 18.0 General maximum Customs duty 30 30 30 25 25.0 27.5 25 Other general protectivetaxes 6 6 0 2* 4.0 3.75 4.5 General maximum: Customs duty+other 36 36 30 27* 29.0 31.25 29.5 Non-agriculturaltariffs Customsduties 27.4 24.6 19.7 16.9 15.6 8.8 13.7 Other general protectivetaxes 5.9 5.8 0 I * 3.9 1.9 4.1 Other selective import taxes 0 0 0 +* 5.9 0 0.0 Total 33.3 30.4 19.7 17.9*++ 25.4 10.7 17.8 General maximum: Customs duty + other 36 30.8 20 27* 29.0 31-3 29.5 Agricultural tariffs Customsduties 40.6 40.3 40.1 19.6 19.7 24.6 13.5 Other general protectivetaxes 6.5 6.5 0 3* 3.7 3.5 6.1 Other selective importtaxes 0 0 0 + 8.7 0 0.0 Total 47.1 46.8 40.1 22.6*++ 32.1 28.1 19.6 General maximum Customs duty 100 100 100 25 25.0 27.5 40 Other general protectivetaxes 8.6 8.6 0 6* 4.0 3.8 4.5 General maximum: Customs duty+other 108.6 108.6 100 31* 29.0 31.3 44.5 Percent of tariff lines bound at WTO Total 72.4 72.4 72.4 36.8 13.2 26 100 Non-agriculture 68.2 68.2 68.2 35 0.9 15 100 Agriculture 100 100 100 89.6 100 100 100 Average of bound tariff levels Total 50.6 50.6 50.6 61.4 188.3 50 27.0 Non-agriculture 37.7 37.7 37.7 45.4 50 50 24.5 Agriculture 115.7 115.7 115.7 101.6 188 50 42.3 !Specific duties as percent of tariff lines 5.3 5.3 5.3 0.9 0 0.7 0.6 30 Tariffs, Protectionand Revenue Notes: The averages are of non-preferential MFNrates as given in official tariff schedules and do not allow for SAPTA or other preferential rates. The averages for "Agriculture" are for HS 01-24 and include livestock, fish and fish products, agriculture, processed foods including alcoholic drinks. This definition differs from the WTO definition, mainly by the inclusion offish and crustaceans (HS 03) and by excluding hides and skins, silk, wool, cotton, andjute. The 2004-05 tariffs in India are the rates which came into force on January 9, 2004 in advance of the budget. The 2002-03 tariffs for Pakistan changed only slightly in 2003-04. All the Customs duty and other rates are percent of assessable value (cif in Pakistan, Sri Lanka and Nepal, cif +landing charges inIndia and Bangladesh). The protective taxes other than Customs duties that have been allowed for are: in India, the SpecialAdditional Duty (Sadd) ,which was abolished in January 2004; inPakistan, the income withholding tax and domestic sales tax exemptions; in Bangladeshthe IDSC tax, Supplementary Duties and domestic VAT exemptions (see text discussion); in Nepal the Local Development Fee, Special Fee and Agricultural Development Fee; and in Sri Lanka the 20 percent Customs surcharge and the 1 percent Port and Airport Development Levy (PAL). No allowance has been made for Bangladesh's advance income tax, which is levied on imports. The estimates do not include the ad valorem incidence of specific duties in the few cases where that is the sole duty. However they include the ad valorem rate in the large number of compound duties (nearly all in India) where the rate applied is the higher of an ad valorem rate and a specific rate. Average tariffs inIndiawould probably be higher ifthe ad valorem equivalent of the specific duties were estimated. The averagestariffs do not allow for duty exemptions for inputs imported by exporters. They also do not allow for exemptions and partial exemptions which are separate from the general tariff schedules and which are often use and/or user-specific (see text discussion). The "general maximum" Customs duty rate is defined as a rate which includes at least 5% of total tariff lines, and above which there are no more than 10% of total tariff lines. For Indian agricultural tariffs, the "general maximum" Customs duty rate was considered to be 100% because about 9% of agricultural Customs duties were at this rate. Generally applied protective taxes (such as the Sadd in India, the income withholding tax inPakistan, and the IDSC tax in Bangladesh), but not selective import taxes are added to the "general maximum" Customs duty to indicate the generally applied maximum level of total protective import taxes. However, no allowance was made for the Advance Income Tax on imports in Bangladesh(see text discussion). "Selective" import taxes (e.g. Supplementary and Regulatory duties in Bangladesh, the effects of domestic sales tax exemptions in Pakistan, ) are import taxes which are not applied across-the-board to all or most imported products, but only to some that are specified in the tariff schedule. To estimate average total protective import taxes, these have been averaged across all tariff lines including products to which they are not applied. Ininterpretingthis table, it should be borne in mind that the ad valorem equivalents of specific import duties are often very high in relation to low value imports. This is especially important for India's specific tariffs, most of which are in the H S textile and garment chapters. .Note also that the estimates of the protective effects of Pakistan'sincome withholding tax are especially problematical, and the averages of these effects even more so: this has been indicated with an asterisk. The average protective effects of Pakistan's domestic sales tax exemptions are even more uncertain and no attempt has been made to quantify their effects on the averages: this is indicated by a +,(**) Bangladeshtariffs are recordedas of June, 2004. Protectionrates therefore reflect tariff adjustments made inthe FY05 Budget announced on 10 June, 2004, which reduced the top CD rate to 25, moved to three-tier tariffs, and significantly mtinnnli7ml ciinnlpmpntnrv rliitipc 31 Trade Policies in South Asia :An Overview Table 3.2 Structure o f Tariffs in South Asia PrincipalNormally AppliedCustoms DutyRates and Normally Applied Other Protective Taxes (%) India Palustan Bangladesh Sri Lanka Nepal Jan 2004 2002103 2003104 Feb 2004 August 2003 C D CD CD+ C D CD+ C D CD+ CD CDt other other other other 0 0 014 0 1 0 2.5 3 4.3 5 5 6.9 5 7.519.5 7.5 11.5 6 7.6 10 10 12.0 10 12.5114.5 12 14.2 15 15 19 15 19,5124.5 16 18.6 20 20 22.1 22.5 26.5 25 25 27.2 25 29.5 27.5 31.3 30 30 34 Approximate percentage o f tariff lines subject to ad valorem Customs duty rates in excess o f "normal" maximum 6.9% 1.1% Zero. 0.9% 5.2% Approximate percentage o f tariff lines with total protection rates (inclusive o f selective para-tariffs) in excess o f "normal maximum" Customs duty + general para-tariffs 2.8% 1.1% 0.9% 5.8% Number and range o f "above normal" ad valorem Customs duty rates 17 rates 10rates from 40% to Zero. SD, RD & 3 rates: 75%, 100% 3 rates: 40, 80 and 35% to 250% VAT used for extra and 125% 130% 182% protection Approximate percentage of tariff lines subject to specific Customs duties 5.3% 0.7% Zero. But use tariff 0.7% 0.6% values Notes: CD=Customs duty. SD (Bangladesh)=SupplementaryDuty, RD(Bangladesh)=Regulatory Duty. See text for a description and explanation o f the other protective import taxes. Protection rates separated by a slash mean that there are two "normal" total protection rates correspondingto a single Customsduty rate. 32 Tariffs, Protectionand Revenue Fig 3.2 Average Tariffs in South Asia 2003 and 2004 45- OAll tariff lines W Non-agriculture Agriculture ~~ Table 3.1, Table 3.2 and Fig 3.2 bring out a number o f important points about current tariff policies in South Asia: 0 There has been a major reduction in the average Indian ad valorem tariff since 2002/03, which has come down from 35% to 22.2%. Whereas previously Indian tariffs were much higher than tariffs in the other South Asian countries, on average they are now well below Bangladesh's tariffs, and only about 3 to 4 percentagepoints higher than tariffs inPakistan and Nepal. 0 However 5.3% o f India's tariff lines (mostly textiles and garments) are compound tariffs inwhich the imported product i s subject to the higher o f ad valorem or specific customs duties, but only the ad valorem rates were used in estimating average Customs duties. The average Indian Customs duties would be higher than shown here if the ad valorem equivalent rates applicable to textile and garment imports from low-price sources were estimated. By contrast, fewer than 1% o ftariff lines inthe other countries are specific tariffs, and Bangladesh does not explicitly use specific tariffs. In the past Bangladesh has effectively done the same thing by systematically using tariff values instead o f actual invoice values as the base for Customs duties and other import taxes. This protection technique i s not picked up in p rotection estimates based ona d v alorem C ustoms duties and information onother import taxes. Inprinciple Bangladesh i s no longer usingtariff values to provide additionalprotection. 0 Bangladesh has by far the highest tariffs in South Asia. After allowing for para-tariffs, the average protective rate has declined only slightly since 1995/96, from 32% to 29.2% in2003/04, with a sharp drop to 26.5% occurring in the budget o f FY05. Although average Customs duties declined substantially duringthese 10 years, from 28.7% to 16.3%, this was almost entirely offset by increases inpara-tariffs, which went up from and average of 3.3% to 6.3%. The IDSC tax is applied generally to all imports, but other import taxes (see later discussion) are being used to protect favored domestic industries which as a result benefit from very high protection levels in excess o f the normal maximum Customs duty rate. This i s principally being done by the imposition o f "supplementary" duties on top o f Customs duties and the IDSC tax, but also by exempting some domestic industries from VAT even though VAT i s paid on imports, and by imposing "regulatory" duties. A large number o f new regulatory duties were imposedin2003/04 but taken o f f in2004/05. 0 On average, protective tariffs are about the same in Pakistan and Nepal and slightly lower in both countries than in India, but Sri Lanka's are markedly lower than tariffs in the other South Asian countries. With the important exception of agriculture, Sri Lanka i s a low-to-medium tariff country by the general standards o f developing countries. 33 Trade Policies in SouthAsia :An Overview 0 In all five countries, "agricultural" tariffs (which include tariffs on fish, livestock, and processed foods as well as agricultural prod~cts)~exceed non-agricultural tariffs. They are only moderately higher inPakistan and Nepal, but considerably higher inIndia and Bangladesh and also in Sri Lanka (almost three times the level o f industrial tariffs). Agriculture was left out o f India's three year tariff reduction program, and in fact since the final phase-out o f QRs in April 2001, Indian agricultural tariffs have been going up. They are presently about double industrial tariffs (40.1% versus 19.7%), and many tariffs protecting even exportable agricultural c ommodities such as tea and coffee, are clustered at 100%. Bangladesh's para-tariffs protecting agricultural, livestock marine product and food processing industries were sharply increased in2003104. Table 3.3 Rankings of Average Tariffs in South Asia in Relation to Average Tariffs in Other Developing Countries All products Manufacturing Agriculture and all other India 10 12 7 Pakistan 15 18 26 Bangladesh 5 7 10 Sri Lanka 42 59 12 Nepal 22 20 42 Notes & sources: South Asia unweighted average tariffs from Table 3.1. Other developing country average tariffs from files kindly provided by Francis Ng, World Bank. The other developing country ranking for all products relates to averagetariffs in 134 countries in2002. The rankings for "manufacturing and all other" relate to 106 developing countries in 1998, 1999, or 2000 (most in2000). The rankings for agriculture are for the same countries and years as in the "manufacturing and all other" set, except that Nigeria has been added, and for it and 9 other countries 2002 averages have replaced the earlier tariff averages. The rankings are in descending order o f averagetariff levels. "Agricultural" tariffs inthese comparativetables refer to productscoveredby HS Chapters 01-24, This definition is not the same as the WTO Agreement on Agriculture definition, principally by including fish and crustaceans inHS Chapter 03, andby excludinghides andskins andfibres such as cotton, wool andjute. 34 Tariffs, Protection and Revenue Table 3.4 Average MFN tariffs in South Asia comparedwith average tariffs in some other large and medium size developing countries All products (134 countries) Agriculture (134 countries) Average Average tariff Rank Data year tariff Data Rank year P/n) PA Morocco 33.4 1 2002 Morocco 53.6 1 2002 Tunisia 30.2 3 2002 Turkey 51.6 2 2001 Bangladesh 26.5 5 2004-05 Tunisia 44.7 4 2002 Iran 23.9 7 2002 Korea 43.5 5 2002 Nigeria 23.4 8 2002 India 40.1 7 2004-05 India 22.2 10 2004-05 Iran 35.7 9 2002 Pakistan 18.8 15 2002-03 Bangladesh 32.1 10 2004-05 Egypt 18.4 20 2002 Sri Lanka 28.1 12 2003-04 Nepal 18.0 22 2003-04 Mexico 25.7 14 2002 Mexico 16.2 30 2002 Nigeria 23.0 25 2002 Vietnam 15.0 32 2001 Pakistan 22.6 26 2002-03 Ghana 14.7 34 2000 Ghana 20.2 37 2000 Thailand 14.7 35 2002 Vietnam 19.7 40 2001 Sri Lanka 13.4 42 2003-04 Nepal 19.6 42 2003-04 Turkey 12.6 47 2001 Egypt 18.2 46 2002 Korea 12.6 48 2002 China 17.9 50 2002 Brazil 12.3 51 2002 Thailand 16.2 56 2002 China 12.3 52 2002 Colombia 15.9 59 2003 Argentina 11.8 62 2001 Median 15.1 Colombia 11.7 63 2003 Argentina 12.3 85 2001 Median 11.2 Brazil 11.7 90 2002 Malaysia 8.8 86 2002 Philippines 10.5 101 2003 Indonesia 7.2 99 2002 SouthAfrica 10.2 104 2001 Chile 7.0 101 2002 Indonesia 8.4 115 2002 SouthAfrica 6.4 106 2001 Chile 7.0 119 2002 Philippines 5.1 120 2003 Iran 3.1 128 2000 MaIaysia 3.0 129 2002 Mean 11.7 Mean 16.7 Notes: The average tariffs and rankings for "all products" are for 139 developing countries from data provided by FrancisNg, DECRG, World Bank. The averages for the South Asian countries are as indicated in Table 3.1: the averages for the other countries are for 2002, from a file kindly provided by Francis Ng. The averages and rankings for "Agriculture" include fisheries and livestock and are for the years indicated in the Table. The data is from a file provided by Francis N g which provides average agricultural tariffs for 106 developing countries in 1998, 1999 or 2000 (most in 2000). The averages given in this file for the five South Asian countries was replaced by the later estimates shown in this Table, and for 9 other countries by averages for 2002 also shown in this Table. In addition average agricultural tariffs for Nigeria (not included in the original data set) in 2002 were added, giving a total data set of 106 developing countries. 35 Trade Policies in South Asia :An Overview 0 Tables 3.3 and 3.4 gives an indication o f where average tariff levels stand inrelation to tariffs inother developing countries. Overall, South Asian countries are still among the more highly protected: except for Sri Lanka, they all come within the top 20% among 139 developing countries. By this indicator, Bangladesh is n o w one o f the most highly protecteddeveloping c ountries in the world, ranhng fifth after Morocco, Tunisia, Bahamas and Mauritius. India's recent tariff reduction program has however removed it from the group of countries with exceptionally high average tariffs. On the other hand India's and Bangladesh's average agricultural tariffs are respectively the seventh and tenth highest (after Tunisia, Turkey, Korea and Morocco) among 106 developing countries, and average agricultural tariffs are also exceptionally highinSri Lanka. 0 Table 3.1 compares the "general maximum" Customs duty rates and general maximum total protective rates o f the five countries. The latter includes the normal maximum customs duty and other normal protective taxes which would be routinely added unless the particular product imported were exempted. The "general" or "normal" maximum Customs duty i s defined as the maximum rate which applies to at least 5% o f total tariff lines, and above which there are no more than 10% o f total tariff lines. In each country there are products subject to customs duties andor other protective taxes which take the protective rates for these products above (often far above) these general maxima (see later discussion). For all tariff lines, the general maxima inthe table are defined as follows : India: General maximum customs duty 30%. This general maximum i s because of the large number o f agricultural tariffs clustered at 30%. The general maximum non-agricultural tariff is 20%. Pakistan: General maximum customs duty 25%+ approximate protective effect o f income withholding tax 2%=27% Bangladesh: Generalmaximumcustomsduty 25%4 IDSCtax 4%=29%.+ surcharge + Sri Lanka: General maximum customs duty 27.5% 2.75% (10% o f customs duty) + PAL 1%=31.25% Nepal:General maximumcustoms duty 25%+other taxes 4.5%=29.5%. 0 The "top down" approach to tariff reduction followed in all the South Asian countries has greatly reduced the number o f normally applied tariff bands or "slabs" (Table 3.2). Leaving aside above- normal peak tariffs and considering just Customs duties, Palustan i s now operating with a relatively simple, four-rate structure (5,10, 20 and 25 percent). Bangladesh uses three non-zero rates: 7.5, 15, and 25. Including zero, Nepal i s using 5 rates, Sri Lanka 6, and India 7. However, the structure i s more complex in Nepal once the para-tariffs are taken into account, since the Agricultural Development Fee i s only charged on imported agricultural products, so that there are two total protective rates corresponding to three o f the Customs duty slabs. In this regard, the abolition o f the Sadd tax in India was responsible for a major simplification, since immediately prior to its abolition there were a large number of total protective import tax slabs (41 in 2002/035) associated with the seven "normal" Customs duty slabs. The reductions in the number o f normally applied import duty rates that have occurred in all five countries should have simplified and speeded up Customs administration, but the increased use o f para-tariffs has worked in the other direction, especially in Bangladesh since the mid- 19908. Duringthis period, Bangladesh reduced the number o f Customs tariff rates it uses, but this advance in simplicity o f administration has been more than offset by the increasing use o f other import taxes and the unnecessarily complex ways in which they are related. The expansion o f preferential tariffs under SAPTA and the various other preferential trade agreements together with the rules o f origin that go with these agreements, have also increased the The general maximumCD rate was reduced to 25% inthe new budget o f FY05. ArunGoyal, 2002. Easy Reference Customs Tarzf2002-2003. ReadyReckoner of CustomsDuties 2002-2003, p. xv. InBangladeshthere arejust 4 normal Customs duty rates, but some zero ratedCustoms duty items pay the IDSC tax whereas others do not. 36 Tariffs, Protection and Revenue complexity and reduced the transparency o f tariff structures and administrationin all the South Asian countries. 0 Tariff setting in South Asia i s everywhere guidedby a principle that appears to be a general article of faith inthe region, even though, from the viewpoint o f economic efficiency, it has no economic logic. L o w tariffs are imposed on raw materials; higher ones for processed intermediate materials, components and machinery; and highest for final consumer goods. Ifactually applied in this way, the processing margins (value-added) and effective protection available from tariffs would increase along this chain, with the 1owest rates for raw materials and the highestfor final consumer goods. The implementation of the principle has been very imperfect, but even s o tariff structures inPakistan, Bangladesh, Sri Lanka, and Nepal are quite escalated. The structures are much flatter in India, however, with two thirdso f tariff lines including many intermediates concentrated at the top "normal" rates. This reflects the muchmore diverse industrial s tructure inIndia and the 1obbying power of industries producing intermediate materials. Allowing for the large numbers o f full and partial tariff exemptions in India would probably change this picture somewhat: these are typically the outcomes o f lobbying efforts o f producers endeavoring to reduce the costs o f their inputs and equipment so as to raise their processing margins and effective protection. 0 As noted above, each country has tariff peaks, that is tariff lines with basic Customs duties and para- tariffs exceeding the general maximumrates. Table 3.2 summarizes some information on these peaks. Inclusive o f specific duties, India has the largest number, especially tariffs protecting its agncultural, textiles and garments and automobile sectors. India uses a large range and large number o f above- average Customs duty rates: around 830 eight -digit tariff lines at 17 different levels between 35% and 182% as well as about 640 compoundrates -- tariffs which are the higher o f an ad valorem rate or a specific rate -- with specific components that can correspond to very high ad valorem rates at low cif prices. Palustan has very few tariff peaks, although protecting important industries (edible oils and automobiles.) Bangladesh uses other taxes, especially its "supplementary" and "regulatory" duties, rather than Customs duties to provide extra protection. In 2003/04, approximately a fifth o f Bangladesh's tariff lines were subject to one or more para-tariffs, and allowing for these, a corresponding proportion (about 14 percent) exceeded the "general maximum" rate o f 34% shown in Table 3.2. Sri Lanka uses specific duties to provide highprotection for some key import-substitution food crops, but otherwise imposes only a few above-normal Customs duty rates on industrial products. A surprisingly large proportion (5.2%) o f Nepal's tariff lines exceeds its general maximum rate o f 29.5 %. Most are at 44.5% with a few at 83% and 141.5%, plus some specific duties. 0 India has bound 68% o f its non-agricultural tariff lines at the WTO, mostly at 40% but with some intermediate products at 25%. In recent years these bindings have been important in constraining tariff increases. Fewer non-agricultural tariff lines are bound inPalustan and Sri Lanka, however, and at higher rates (mostly 50%). However, the bindings have little influence on tariff setting in these countries, inpart because both counties have hadrelatively strong and consistent reductionprograms for non-agricultural tariffs. InBangladesh practically no non-agricultural tariff lines have been bound (0.9% o f the total), and there i s therefore practically no external WTO constraint on tariff increases. Nepal acceded to the WTO in December 2003, and like other recently acceding countries it has been required to bindall its non-agricultural tariffs and also all its para-tariffs ("other duties and charges"). These bindings (average 24.5%) are much lower than the bindings o f the other South Asian countries and are likely to constrain future tariff increases. 0 Under the Agreement on Agriculture all agricultural tariffs were required in principle to be bound. However, as i s apparent from Table 3.1, the ceiling bindings requested by India, Pakistan and Bangladesh and agreed to by other WTO members were mostly high-to-prohibitive. In India and Bangladesh the lack of any constraint from WTO commitments i s now showing up in agricultural lobby groups pushing for and obtaining high-to-very-high applied tariffs with little or no domestic resistance (see later discussion o f agricultural trade policies). The general binding o f 50% in Sri Lanka may be providing some constraint on agricultural tariff increases, even though some 37 Trade Policies inSouth Asia : An Overview agricultural tariffs (e.g. specific duties on potatoes) have gone well above this level without so far evokmg protests from other WTO members. Likewise, Nepal's agricultural bindings (average rate 42.3%) may constrain future tariff increases. The following sections provide a more detailed account o f recent tariff policies in India, Palustan and Bangladesh, Sri Lanka and Nepal, and brief commentaries on a few aspects o f these policies in Bhutan and Maldives. Special attention i s paid to Bangladesh owing to recent and not well known changes which have reversed many of its earlier liberalizing tariffreforms. Table 3.5 India: Average Protective ImportTaxes 1990191- 2004105 Unweighted Import weighted 1990191 128 87 1991192 n.a. n.a. 1992193 94 64 1993194 71 47 1994195 55 33 1995196 40.8 27.2 1996197 38.6 24.6 1997198 34.4 25.4 1998199 40.2 29.7 1999100 39.6 30.2 2000101 n.a. n.a. 2001102 38.4 n.a. 2002103 35 n.a. 2003104 32.7 n.a. 2004105 22.2 n.a. Sources and notes: Includes estimated protective incidence of other import taxes as well as Customs duties. 1990/91-1999/2000from World Bank (2000, January). Annex Table 6.6. 2001102 and 2002/03 are estimates starting from the unweightedaverage Customs duty in 2001102 of 32.3%reportedinthe 2002 WTO TPRreport on India, and an estimatedaverage Customsduty in2002/03 of 29 percentreportedby Goyal (Easy Reference Customs Tarijfl. Up to and including 2001/02 the averages are of approximately the same number of consistently defined 6-digit HSC tariff lines (about 5400 lines in all.). From2002103 they are averages of 12076 8-digit tariff lines and are not directly comparablewith the pre- 2002/03 averages. The 2004105 averages are calculated from estimates of the distribution of Customs duties following the 2003/04 budget provided by Arun Goyal, as modified by changes announcedon January 8, 2004 and published on the Ministry of Finance (Central Board of Exciseand Customs) website All the ratesare percentof assessable value (cif+l%). India Before the 1991/92 reforms, Indian tariffs as actually applied were probably the highest in the world. Starting from already highlevels inthe 1970s, they peaked in 1988, averaging between 120% and 140%. A "tops down" tariff reform process started inmid 1991 which combined reductions o f tariffs on selected products to levels below successively announced maxima, and aimed for a maximum tariff o f 30% on intermediate and capital goods and 50% on consumer goods by 1997/98 (even, if possible, by 1996/97). Because many tariffs had been redundant during the 1980s, because o f the very large real Rupee devaluation between the mid-1980s and 1991192, the tariff reduction program carried out during the first half o f the 1990s proved quite painless for most producers o f intermediates and machinery and equipment, even though the QRs which had previously protected them had been removed. Incontrast, producers o f industrial consumer goods and the agricultural sector continued to be protected by QRs bound about two thirds o f its industrial tariffs at somewhat lower rates than the 1991 reform objectives - which in most cases amounted to a defacto import ban. During the Uruguay Round negotiations India mostly a t 4 0% and 2 5% for a proportion o f intermediates and c apital goods. Starting in 1995, these bound rates came down in steps from the applied levels at the time o f the Round and became operative at the new announced levels in2001/02. Applied tariffs continued to follow their pre-announced planned decline until 1997/98 when they reached 34.4% versus 128% at the beginning o f the process in 1990/91 38 Tariffs, Protection and Revenue (Table 3.5). After 1997/98, for reasons discussed in Chapter 1, the decline was reversed. On average, tariffs increasedby about 5 percentage points in 1998199, and remained above the 1997198levels untilthe first stage o f an announced new reduction program started in 2002/03. The increase in protective tariff levels duringthe four years 1998/99-2001/02 was due to the introduction of other protective import taxes on top o f Customs duties, rather than higher Customs duties themselves. The protective taxes and the resulting total protection corresponding to the normal maximum Customs duties are shown inTable 3.4. As inthe other South Asian countries, the use of additionalimport taxes greatly complicated and reduced the transparency o f Customs administration, and this aspect o f the reversal o f the earlier trade liberalization duringthese years could well have been as economically costly as the consequences of the higherprotection levels. The surcharge, which followed an earlier "Special duty", was discontinued inthe 2001/02 budget but the Special Additional duty (or SAdd) was retained untilJanuary 2004. This tax was levied at 4% o f (Assessable value + Customs duty + Additional duty). "Additional duty" i s a VAT-type tax applied to imports at the same rate as the Central government VAT (CENVAT) on domestic sales, generally at the rate o f 16%. The SAdd tax was introduced inthe 1998199budget, initially at 8% but soon reduced to 4%. It was justified as offsetting the protection-reducing effects o f state and Central sales taxes (frequently butnot always 4%) applied t o s ales of domestically producedmachinery and intermediateinputs,but which would not be applied if the using firms imported them directly. But goods imported by intermediaries are subject to normal sales and other domestic taxes when they are resold, so that for them value o f the import (the CIF price + 1%)the extra protection went up with the Customs duty rate and the the SAdd tax provided extra protection over and above the Customs duty. Inrelation to the assessable rate o f additional duty. For example, with the general additional duty rate o f 16%, the extra protection with a 15% Customs duty was 5.3%, giving a total protectiverate o f 20.3%, andthe extra protectionwith a 30% Customs duty was 6%, giving a total protective rate o f 36%. The protection for producers o f equipment and intermediate inputswhich the users had the option o f importing directly, was the same as the Customs duty rate. Table3.6 India: Normal maximum Customs duties and import taxes, 1996/97-2004105 Customs Customs Special Additional S A d d Total Total protective duty(non- duty duty1 duty protective rate agriculture) (agriculture) surcharge (CVD) rate(non (agriculture) agriculture) 1996197 50 50 2 18 52 52 1997198 40 40 5 18 45 45 Apl-June 98 40 40 5 18 8 58.6 58.6 June 98/99 40 40 5 18 4 51.8 51.8 1999100 40 40 0 16 4 46.5 46.5 2000101 35 35 3.5 16 4 44.9 44.9 2001102 35 35 16 4 41.3 41.3 2002103 30 100 16 4 36 108.6 2003104 25 100 16 4 30.8 108.6 2004105 20 100 16 20 100 Notes: The Customs duties are the maximums of the normally applied rates in each year. Higher Customs duties than these were applied on some products. The general maximum rate was the same for agriculture and non-agriculture until 2001102, after which agricultural tariffs were increased while other tariffs were reduced.. A "special" customs duty, initially at 2% percent and then at 5% o f assessable values, was applied on top of Customs duties between 1996197 and 1998199. In 199912000this was replaced by a surcharge equivalent to 10% of the Customs duty rate, but only on Customs duties o f 35% or less. This surcharge was dropped in 2001102. The "additional" or "countervailing" duty is the equivalent o f VAT-style excise taxes on domestic transactions and in principle does not provide protection to domestic production. A "Special Additional Duty" (SAdd) was introduced in 1998199, initially at 8% and then reduced to 4%. It was abolished inJanuary 2004. The base for the SAdd tax i s explained inthe text. 39 Trade Policies in South Asia : An Overview The plan to bringthe general maximumCustoms duty rate down from 35% to 20% inthree steps, was announced in 2001102 and was implementedwith 5% percent reductions inthe 2002103 and 2003104 budget, and finally inan unexpected reduction starting from January 9,2004, inadvance o f the postponed budget which i s normally on March 31each year. The abolition o f the Sadd tax on January 9 was not pre- announced however, and both reforms together amounted to a large single-step reduction in protective import taxes. After this reform, the unweighted average tariff was about 22.2% compared to 32.7% previously, and was much lower than the estimated combined average protection rates (Customs duties+ Sadd) o f 35% in2002103 and 38.4% in2001/02. Average non-agriculturaltariffs came down even further, to about 19.7% from 30.4% previously. The tariff structure was also simplified, above all by the abolition o f the Sadd, but also by reducing the number o f exceptions that previously existed to the general Customs duty ceiling for non-agricultural products. The principal exceptions are now a number of steel tariff lines (25% tariffs) and automobiles, motor cycles and scooters (60% tariffs). Most other exceptions at higher ad valorem rates than the announced "maximum", which were previously scattered throughout the HS chapters, were cleaned out. Following these reforms, 76.3% o f all tariff lines, and 87.2% o f non- agricultural tariff lines, are at 20%. Inthe first stage ofthis reformprogram, the general maximumagriculturaltariff, whichhadbeen 35%, was reduced to 30% along with the non-agricultural tariffs. However, at the same time many agricultural tariffs were increased very substantially, and as defined for purposes o f comparison with the "general maxima" for agricultural tariffs in the other South Asian countries (see above), the Indian general maximum has since been 100%. The unweighted average agncultural tariff (now equivalent to average Customs duties) i s just above 40 percent, lower than the previous estimated average protective tariff owing to the abolition o f the SAdd tax, but still among the world's highest: about number 4 among 105 developing countries. 76.5% o f agricultural tariffs are at 30%, 18.4% (including a large number o f 100% tariffs) exceed 30%, and only 5.1% o f agricultural tariff lines are less than 30% (Table 3.7 and Fig 3.3). Table 3.7 IndiaJanuary 2004 Distributionof Tariff Lines Percent Tariff rate% All lines Non-ag Ag 0 0.99 1.00 0.86 5 1.88 2.06 0.59 10 1.28 1.23 1.58 15 3.02 3.25 1.45 20 76.25 87.21 0.00 25 4.11 4.62 0.53 30 9.66 0.04 76.55 35-50 0.33 0.00 2.64 55-100 2.21 0.56 13.70 > I00 0.28 0.02 2.11 Specific 5.10 n.a. n.a. Note: The ad valorem component of compound tariffs (Le. tariffs which are the higher of an ad valorem or a specific component) have beenused in calculatingthe distribution of ad valorem tariff rates. Specific (nearly all compound) tariffs account for about 5.1% of total tariff lines 40 Tariffs, Protectionand Revenue Fig 3.3 India January 2004 Distribution of Tariff Lines 100 - 5 70 - 60 - ii 50- CI 2 40 - IC 0 30 - 20 - 0 v ) 0 v ) 0 ~ 0 0 0 0 r r " m ~ 0 0r .-c0 A 0 P v) Customs duty rate % UAll tariff lines HNon-agriculture Agriculture As notedpreviously, Indian non-agricultural tariffs are much less dispersed than non-agricultural tariffs elsewhere in South Asia The concentration o f rates at the top o f the range i s due to the "tops down" process o f tariff reduction as a result o f which more and more tariff lines were reducedto the top general maximum rate o f 20%, starting from 50% in 1996/97. However, the extent to which this process reduces tariff escalation and effective protection depends on the extent o ftariff exemptions and partial exemptions for intermediate inputsnot c aptured inthis analysis o f the general t ariff s chedule, and the s uccess of affected industries inobtaining extra protection in other ways. Strongpressures on both these fronts have beenapparent inIndia inrecent years. As regards exemptions and the more common partial exemptions, in 2003-04 a "Jumbo Exemption" Customs notification lists 433 items for which some kindo f exemption i s allowed, each item corresponding to an H S code (two digit, four, six or eight digit) and many supplemented by one or more o f 46 product lists which contain over 1100 detailed product descriptions. The vast majority o f these exemptions are for intermediate material inputs or for machinery and equipment items including spare parts and may involve the basic customs duty, the additional (VAT-style) duty, and inthe past the Special Additional duty (SAdd), or any combination of these. The exemptions are sometimes for specific subcategories o f H S codes, for products to be used as inputs in the production o f specified products, for use by particular firms or industries (but not other users o f the same products), or even for particular (non- preferential) foreign supplyingcountries. The Indian "Jumbo Exemption" notification was introduced in 1996 to consolidate and bring greater clarity to the previous impenetrable maze o f exemption notifications, but since then the jumbo has grown, and the total number o f exemptions now appears to be at least double the number in 1996. There is no published quantitative analysis o f the incidence and effects o f these exemptions, and the 2001/02 WTO TPR team found them too complex to incorporate in their analysis o f India's tariff structure'. The exemptions generally reflect the lobbying power o f industries which in this way reduce the cost to them o f raw materials and components and o f the machinery that they use. While increasing these industries' processing margins, at the same time the exemptions squeeze the processing margins o f actual or potential domestic producers o f the intermediate products and machinery, many o f which may face relatively high tariffs affecting the prices o f their intermediate inputs.Inthis regard, it i s probable that there have been some especially strong disprotective 'WTO 2002, IndiaTPR report, p.32.. 41 Trade Policies in South Asia : An Overview effects for the machinery industries, since many o f the exemptions cut machinery tariffs to 5%, most o f which would otherwise be 20% at present'. These industriesface considerably higher tariffs for many o f their inputs e.g. steel tariffs which are currently 25% and which in the recent past have been supplemented by anti-dumping duties and import restrictions implemented by the Bureau o f Indian Standards. As with many other aspects o f tariff reform, the simplest and most direct way o f dealing with this problem is to get tariffs down to muchlower levels so that the costs to producers o f negotiating and lobbying for exemptions begin to exceed the benefits. This i s reportedto be happening inPakistan where many intermediate input and machinery tariffs are now about 10 percent or lower (see discussion below). In addition to the separate treatment of agriculture and exemptions for inputs, the removal of most industrial QRs and the descending general Customs tariff ceiling have also generated pressures for other forms o fprotection. These include the following: Increasing use o f specific tariffs. The number o f these (mostly compound tariffs) increased from 0.2% o ftotal tariff lines before 2001 to about 5.3% o ftotal tariff lines at present. Most are usedto protect textile fabrics and garments against low priced import competition. The ad valorem equivalents o f some specific duties estimated in the chapter on the textile and clothing sector, turn out in some cases to be prohibitively high, ranging from 50 percent to over 100 percent. Among other things, even with generous preferences under SAPTA (e.g. 50% or 60% for garments from Bangladesh) these specific duties make it impossible or very difficult for other developing countries to compete inthe Indianmarket. Anti-dumpinnduties. Starting in 1993, anti-dumpinghas grown into a major activity inIndia. Of the more than 150 cases completed, nearly all have resulted inthe imposition o f specific duties on imports from particular firms and countries on top o f normal import duties. On-going research on this activity shows that the ad valorem equivalent o f the anti-dumping duties imposed ranges from around 10% to over 100% o f normal international prices. The total resulting import tariffs are often prohibitive. This now-major activity in India i s steadily undermining much o f the other efforts -- -- including tariff reduction to liberalize the trade regime, and India's example i s influencing the other South Asian countries to embark on anti-dumping as well. Because of its importance it i s discussed separately later inthis chapter. Small scale industrv (SSI) excise tax exemptions or partial exemptions. These exemptions as intended give a tax advantage to Indian SSI firms over larger Indian firms, but also benefit the SSI firms incompetingwith importsthat pay the equivalent ofthe normal domestic excise taxes. For imported products subject to a Customs duty o f 20% and the normal "additional duty" o f 16%, the protection rate for small domestic producers which are exempt from excise duty i s 39.2%. Because o f the dominant role o f small scale firms in fabric and garment production (see Volume 11, Chapter 3) the scope o f the extra protection provided in this way i s potentially greatest in these sectors. For cotton fabrics and cotton garments, the advalorem Customs duty of 20% and the additional duty o f 8% are equivalent to an import protection rate o f 29.7%, and for non-cotton fabrics and garments (Customs duty 20%, additional duty 10%) the protection rate i s 32%. The extra protection from the SSI excise tax exemption would be greater than this if specific rather than ad valorem Customs duties are operative. On the other hand, at present the excise exemption applies to enterprises with annual sales o f up to only Rs 20 lakhs (approximately $US 45,000), and with the exemption these enterprises cannot offset excise taxes included inthe cost o f their inputs. For these reasons the role and scope o f the SSI excise tax exemptions appears to be diminishing, For example, in 2003, three plantation industries (coffee, tea and rubber) lobbied for and obtained low 5% tariffs for specializedandnon-specializedcrop machineryfor which the normalprotectivetariff was then25%. Inthis case, controls would be needed to ensure that the non-specializedequipment is only used in these three industries (Customs Notification No 175, 1Oil2i2003) 42 Tariffs, ProtectionandRevenue both as a subsidy for small firms relative to larger firms, and as a source o f extra protection for small firms against import competitiong. Other excise tax exemptions. Even though the basic value added structure o f the Indian excise tax system i s having a key role in limiting the distortive consequences o f varying excise tax rates and exemptions, changes continue to be made, some of which are targeted and ad hoc with effects on import protection rates. For example, in September 2003, in order to encourage investment in India's north eastern states (Arunchal Pradesh, Assam, Manipur, Megalhaya, Mizoram, Nagaland and Tripura) tobacco and cigarette manufacturing firms were subjected to special ad valorem excise tax rates on sales o f units inthese states, whichare muchlower than thenormal specific excisetax rates appliedto domestic salesin other parts o f India and on imports". These concessions are designed to make it more attractive to produce in plants located in these areas than in plants elsewhere in India, but in the process the concessions also raised the protection rates for these plants in relation to imported tobacco products, in particular from Bangladesh and other neighboring c ountries. The use o f excise t ax concessions in the pursuit o f regional and other objectives has a long history in India, and in the past the impact on trade could be and was ignored. This should no longer the case in an era o f much more open and transparent trade policies when discriminatory actions o f this lundmay conflict with the interests o f trading partners and with basic international trade rules, such as the WTO national treatment principle. Tariff rate quotas applied to a number of agricultural commodities (see later discussion o f agricultural trade policies). The use o f values other than actual cif prices ("tariff values") as the base for ad valorem import duties. This i s the current technique, which has replaced specific tariffs, for protecting the edible oil industry.Rather than changing specific duties, the tariff values are regularly altered so as to increase or decrease protection rates as world prices vary. The same technique is also used for a number o f industrial products (e.g. brass scrap)". The use o f technical s tandards and regulations (TBT) t o restrict imports (already discussed in Chapter 2) Limitingthe sea and land Customs posts at which certain products can clear Customs (already discussedinChapter 2). The use o f sanitary and phyto-sanitary standards (SPS) to restrict imports (see Chapter 2 and the chapter on agriculturaltrade policies inVolume 11). Pakistanl2 Tariff reduction was a key part o f trade liberalization started in the 1980s but continued quite slowly and cautiously duringthe 1990s.As discussedbelow, Pakistan's income withholding tax and sales tax also provide some protection, but the liberalizing reforms have focused on Customs duties. In1996/97 Pakistan's Customs duties were still very high (unweighted average rate 41.7%) with a complex and opaque structure including large numbers of rates or "slabs" (14 "normal" ad valorem rates) and many Inareviewof changes inthe excisetax rulesinthe textile andgarment industry,Goyal(Weekly Index, XX, No 06, May 6-12, 2003) comments: "Thus the exemption covers only single loom owners or the five machine garment boutiques runb y lady entrepreneursin garagesandbarsatis.The department of revenuehas ensuredthat coverageis limited to the very small". loThese concessionsare describedinGoyal, Weekly Index, XX Nos 23& 24, September 3-16,2003. Onbrass scrap, see Goyal, WeeklyIndex XX, N o 25, Sept 17-23,2003. More detailon many of the topics coveredinthis section are inarecent World Bank report preparedby Philip Schuler. World Bank, 2004, March.Pakistan TariffRationalization Study. 43 Trade Policies inSouth Asia : An Overview exemptions and partial exemptions. That year, however, saw the start o f a new reduction and simplificationprogram that was consistently implemented in successive budgets up to and including the 2002/03 budget, after which the process seems to have come to an end. Only minor changes were made inthe 2003104budget13. -- there are no comprehensive estimates which systematically quantify the effects o f exemption^'^ -- are Some principal trends inthe statutory Customs duty rates.published inthe official tariff schedules given in Table 3.5. It can bee seen that the reduction program brought unweighted average Customs duties down from 41.7% to 20.4% in 2001/02 and to 17.3% in 2002/03. Like all the other tariff reduction programs in South Asia, Pakistan's was "top down" with reductions inthe top normal rate pushing more and more tariff lines into lower rate categories or "slabs". However, the number o f slabs was also reduced independently, notably from 14 to 6 between 1996/97 and 1997/98 and later on in 2001/02 with the abolition o f the zero tariff slab, cutting the number o f slabs to from 5 to just 4 at present. Table3.8 PakistanCustomsduties 1996/97-2002/03 Simple average 1996197 1997198 1998199 1999100 2000101 2001102 2002103 rates Allproducts 41.7 n.a. n.a. n.a. 24.8 20.4 17.3 Ag products 47.2 n.a. n.a. n.a. 28.0 21.8 19.6 Industrial products 40.8 n.a. ma. n.a. 24.3 20.2 16.9 Normal maximum 65 45 40 35 35 30 25 rate No. o f standard 14 6 6 5 5 4 4 . rates ("slabs") Notes: UnweightedaverageCustoms duties f o r 1996197,2000101 and 2001102fromWTO TPR report on Pakistan, 2002, Table 3.1. Averages for 2002103 calculatedfromWITS database..The averages are of statutoryratespublishedin the Pakistan Customs Schedule and do not include specific tariffs. They also do not take account of exemptions and partial exemptions. Allowing for exemptions would reducethe average level and change the tariff structure, especially in the earlier years. Despite the steady reduction o f the top rates and the removal o f the zero-duty slab, Customs duties in Palustan are still quite dispersed (Table 3.9), although far less than they were in 1996/97 and before. In 2002103 about 45% were either at 5% or 10%and almost 40% at 25%. In the 2002103 budget, a fairly large number o f duties were reduced from 20% to 10% and others (all raw materials and components o f various lunds) from 10% to 5%. These changes would have partly offset the reduction in available effective protection resulting from the drop inthe ceiling Customs duty from 30% to 25%. Even though as a result Customs duties in Palustan still appear to be quite escalated, the present structure i s much lower on average and appears to be much less distorting than it was during the 1980s and the first half o f the 199Os.l5The reducednumber o f slabs and the large numbers o f rates within H S chapters that are identical have increased the transparency o f the system and should have reduced the transaction costs o f the business community and the administrative costs o fthe Customs administration. ~~ ~ ~ l3 The unweightedaverage Customsduty in 2003-04 was 17.1%comparedto 17.3% in2002/03 l4 Howeverthere are a number o f useful unpublishedWorld Bark reportsb y Tom Maxwell which analyzePakistan's tariff exemptions.(Maxwell, Tom. Issues in TarifSReform in Pakistan. Mimeo draft, December 11, 1996; Tariffs in Pakistan. Mimeo draft, June 25,2000. Improving the Export Environment in Pakistan. Mimeodraft, July 4,2000). l5 This i s nicely illustratedinthe 2002 WTO TPR report (p.10). 44 Tariffs, Protectionand Revenue Table 3.9 Pakistan 2002103 Distribution of 6-digit tariff lines Tariff % Total Industrial Agriculture 5 16.2 18.2 3.0 10 28.6 27.6 35.2 20 14.1 13.4 18.6 25 39.3 39.8 36.3 >25 1.I 0.9 2.1 Specific 0.7 0.1 4.7 Average 17.3 16.9 19.6 No. of lines 6043 5219 823 Notes:The tariffs are the MFNCustomsduty ratesinforce during fiscal 200212003.There were some minor changes only in the June 2003 budget. "Industrial"=HS Chs 25-97. "Agriculture" =HS Chs 1-24. This differs slightly from the definition of "agriculture" under the WTO Agreement on Agriculture. Averages are o f ad-valorem tariffs only and exclude specifictariffs. Fig 3. 4 Pakistan: Distribution of Customs duty rates 2002103 45 1 5 10 20 25 >25 Specific Rate percent Total HIndustrial AgricuIture Imports inPakistan are subject to two principal taxes inaddition to Customs duties: (1) sales tax, and (2) an income withholding tax. In addition a few products are subject to excise taxes. The tax base for the sales tax on imports i s the (cif price (WHT) i s (cif price + Customs duty sales tax). The general sales tax rate (on bothimports and domestic + +Customs duty). The tax base for the income withholding tax sales) i s 15%. The general income withholding tax rate i s 6% for imports and 3.5% on the sales o f 45 Trade Policies in South Asia : An Overview domestic taxpayers. When applied to imports at these normal rates, the total import tax rates for the four principle Customs duty rates ("slabs") inPalustan, and one illustrative above- normal Customs duty, are: Pakistan: Typical import taxes as percent of CIF price Customs Sales tax Income Total import duty withholding tax rate tax 5 15.8 7.2 28.0 10 16.5 7.6 34.1 20 18.0 8.3 46.3 25 18.8 8.6 52.4 100 30.0 13.8 143.8 Notes: Illustratedfor the four principal normal Customs duty slabs and for one representative above-normal ad valorem tariff (100%). The sales tax, income withholding tax and excise tax are also levied on the production o f domestic goods and services, and in principle they should be neutral as regards protection o f domestic industries.However, as applied inpractice the income withholding tax is providing some extra protection over and above import duties, to a number o f domestic industries, and the sales tax also appears to be protective insome cases. Excise taxes do not appear to have significant protective effects. The income withholding tax i s protective because the withholding tax rate i s higher on imports than on domestic sales, and because it i s "presumptive" i.e. it substitutes for taxes based on actual incomes or corporate profits and therefore acts as an indirect taxI6. Estimating its protective effects i s difficult and highlyuncertain, because doing so requires estimating whether andby how much it increases the income tax paidby importers of a given product relative t oincome taxes paidby domestic producers o f that product. This task i s further complicated by various exemptions from the domestic withholding tax, in particular for manufacturers importing raw materials, components and equipment for their own use, and for producers o f unprocessed agricultural products. Assuming gross importer profit margins o f 20 percent, the extra protection i s between 1.9 and 2.2 percent o f cif prices, inthe general case o f imports subject to Pakistan's normal "tariff slabs" o f 5, 10, 20 and 25 percent. The extra protection for unprocessed agricultural products i s considerably more ,ranging from about 4.9 percent to 8.6 percent o f cif prices. But no extra protection i s provided to local producers supplying intermediates or equipment to other producers who have the option o f importing these products directly. There are no systematic estimates o f the average protective incidence o f this tax: very roughly, it i s probably equivalent to (unweighted) average tariffs o f about 1.5 percent (all tariff lines), one percent (non-agricultural tariff lines) and 3 percent (both processed and unprocessed agricultural tariff lines). These approximations have been given inTable 3.1, but are provisional and would need to be checked by more detailed analysis than has been undertaken for this report. Since the 1980s the sales tax has been gradually converted into a VAT by extending its coverage and the number o f stages in production and distribution that it covers. At present its coverage i s comprehensive i.e. it covers importing, manufacturing, services, wholesaling and retailing. The present basic uniform sales tax rate i s 15%". Revenue from the sales tax has been growing rapidly and it i s now by far the largest single revenue source (41% o f total central government revenue in 2001/02). However, l6The withholding tax is presumed to be equal to the income tax that would be paid if it were based on income or profits in the normal way, and cannot be adjusted against the tax based on actual profits. This means, for example, that a person or firm must pay the income withholding tax even ifthere i s no taxable income or a loss. "Thereisalistof approximately 182productswhicharetaxedat20%(S.R.O.389(1)2001) 46 Tariffs, Protectionand Revenue it is significant that most sales tax revenue (about 58 percent in 2001/02) comes from sales tax on imports. A large number o f products-mainly domestically produced agricultural products and foodstuffs- are exempt from sales tax. The exemptions are given in the Sixth Schedule to the Sales Tax Act. If sales taxes are exempt both when the item i s imported and produced and traded locally, the sales tax provides no extra protection. But there may be extra protection if the sales tax i s applied to a product when it i s imported, but not when it i s produced locally'8. In this regard, the Palstan system i s distinctly non- transparent, and it i s extremely difficult to assess which locally produced products may be receiving additionalprotection, and how muchlg. Some possible cases which need t o be checked are powdered milk, fresh fruits and nuts (HS OS), some foodgrains, meat and fish preparations, and agricultural machinery including tractors. If this i s correct, the total protective import duty rates on these products, including the protective effect o f the Customs duties, sales taxes and the income withholding tax, appear to be more than the double the Customs duty rate alone e.g. inrelation to cif prices, the total protective rate for fresh fruit would be approximately 52.4%, consisting o f Customs duties (25%), sales tax (18.7%) and income withholding tax (8.7%). The sales tax exemptions need to be clarified so that it i s possible for importers, businessmen and others to know in a transparent way which products are exempt, and for policymakers to know the resulting protectionrates for domestic producers. On average, ad valorem agricultural Customs duties are now a bit higher than industrial Customs duties, but there are more specific agricultural tariffs and proportionately more agricultural tariffs that exceed the 25% general maximum tariff. In addition, as noted above, extra protection from the income withholding tax and from sales tax exemptions seems to be much more marked for agncultural products than for non-agricultural products. For these reasons nominal protection rates available from protective import taxes are on average markedly higher for agriculture than for manufacturing and other sectors. On the other hand, manufacturing i s generally considerably more inputintensive then agriculture, and so the highproportiono f low industrialCustoms duties onraw materials and components most likely is creating on average higher available effective protection rates to value added inimport substitution manufacturing, than the effective protection rates inagriculture. The "tops down" reduction o f tariffs that occurred between 1996/97 and 2002/03 seems to have reduced the role o f tariff exemptions and concessions, for which demand i s obviously greater when tariffs are high.InPalstan these are announced in SROs (Statutory Rules and Orders), and past analyses have shown that the result has been to modify both the level and structure o f tariffs very substantially, and to increase the effective protection o f the firms that benefit from them. Most o f these exemptions and concessions are for particular users, leading to many situations where the identical product pays different import duties depending on who imports it. The concessions often include exemptions or lower rates o f the sales tax as well as Customs duties, but the value o f this to importing firms inprinciple i s small, since they then lose this as a their normal credit against sales taxes (in effect VAT) on their own sales. Most concessions benefit engineering and metal working firms, including firms inthe auto industry.A majority are linked to local content (TRIMS) agreements under which the import duty reduction i s given inreturn The exemption may not provide extra protectionto domestic producers if subsequent purchasers of the domestic product are subject to sales tax. This is becauseby buying from the local supplierwho is exempt from sales tax rather than importing, there is no input sales tax credit that can be deducted from the sales taxes they owe on their taxable sales. Therefore, with a choice betweenimporting andbuyinglocally, they would pay alower price for the local goodto offset the absence of the inputcredit. '' A principal reason for this opacity is that the Sixth Schedule of the Sales Tax Act does not define many of the exempted products in terms of their HS codes, and in many cases it is unclear whether the exemptions apply to domestically produced products only, or to both domestic products and imports. The published Customs Tariff Schedule provides for sales tax on imports of practically all productsin the HS agriculture chapters (1-24), but despite this it seems that inpracticemany of these products are exempted from sales tax when they are imported. Another problemis that some products (vegetables and fruit) are exemptfrom sales tax only when they are not "bottled, cannedor packaged". 47 Trade Policies in South Asia :An Overview for commitments to incorporate specified locally produced inputs or to meet local-content targets. Others are simply requests from using firms for lower tariffs that are granted if the particular input cannot be supplied by domestic producers. In order to administer both the local-content schemes and the general provision for tariff concessions which are independent o f any local content requirement, an elaborate apparatus was established under the Ministry o f Industry and Production. Its Engineering Development Board (EDB) was made responsible for creating and updating a list o f products produced in Pakistan which can contribute to local content requirements. A network o f experts determines case-by-case whether the specifications, quality, and delivery conditions o f particular 1oca1 products are s atisfactory, and if not satisfactory to decide whether applicant firms should receive a Customs duty exemption or concession if the product i s imported. The considerable potential o f this system for creating negotiating opportunities and delays and leading to inefficient economic decisions i s apparent from its description. It has attracted the critical attention o f analysts o f Palustan's trade policy regime, including inthe past at least one World Bank-sponsored stud?'. The local content arrangements (generally known as "deletion" programmes inPakistan) clearly breach the WTO TFXMs agreement, and under the TRIMSrules for developing countries, were supposed to have been phased out by December 31 1999. Following a number o f W T O extensions, the non-auto engineering industry deletion programmes were phased out, some going in June 2002, others in December 2002, and the remainder inJune 2003. An extension for the auto industrydeletion programmes to December 31 2003 was obtained at the WTO, but as o f April 2004 these programmes were still operating and a further extension until Dec 312006 had been requested21.With the important exception o f the auto industry,both the phase-out o f the general engineering and other TFUMs arrangements, and the big reduction o f tariff rates that has occurred since 1986/87 are reported to have greatly reduced the interest o f Pakistani firms in negotiating with the EDB and Customs to obtain tariff exemptions or concessions. It would be worth having a closer look at how these apparently efficiency-enhancing effects o fthe abandonment o fTRIMS and lower tariffs have worked out. Comparedt o the other S outh A sian c ountries, Pakistan has very f e w tariff peaks" above the " general maximum of 25%. However, one set o f very high tariffs (with rates o f 75%, loo%, 125%, and 150% for cars and vans, 90% for motorcycles, and 60% for trucks and light commercial vehicles) protects the auto assembly and component industry, and i s part o f the complex regulatory framework managed by the EngineeringDevelopment Boardthat gives tariff concessions on imported components in return for local content commitments. The other set o f "tariff peaks" that protect a major industry are specific duties on edible oils (discussed in the chapter on agriculture). Apart from these, there are high tariffs o n alcoholic drinks, but these appear t o be for c onsumption c ontrol s ince there is no officially recognized domestic production. There are also specific duties on most petroleum products, but the ad valorem equivalents o fthese duties are not known. In the past Pakistan used "regulatory duties" imposed after inquiries by the Tariff Commission on top o f normal Customs duties to provide extra protection to particular local industries. Currently only a few regulatory duties are inforce, and new duties are not being imposedz2. One o f the principal industries protected inthis way was the steel industry,with regulatory duties on steel coils and steel pipes, but these duties appear to have been dropped by 2003/04. Customs duties on these and other steel products were at the general maximumrate o f 25%. ' OWorld Bank,. ... 'I For information onthe latest extensionrequest, see WTO document G/C/W/487, dated 16 Apri1,2004 on the WTO website. 22 WTO, 2002. PakistanTPR Report pp 32-33, anddiscussionsat the Tariff CommissioninFebruary2002. 48 Tariffs, Protectionand Revenue The principal function o f the PakistanNational Tariff Commission usedto be managing inquiries, following industry requests for regulatory duties, and making recommendations to the govemment. Instead, duringthe past three years the Tariff Commission has helpedprepare and geared up to commence administering a new anti-dumping law. For this it received technical assistance from a variety o f international sources, including the WTO (rules division) EU, ADB (legal de~artment)~~, the US International Trade Commission and the U S Department o f Commerce. The first anti-dumping case (on electrolytic tinplate from South Africa) was decided in November 2002, and there have been two others since then (on sorbitol imported from France and Indonesia) and on acetic acid from China (Taiwan)24.As inIndia, and greatly influencedbythe Indianexample, unlessthere is greater awareness ofandresistance to the protection-increasing andrent-seelung potential o f anti-dumpingthan appears t o be the c ase in Palustan at present, anti-dumping i s likely become a major source o f additionalprotection over and above prevailing tariffs. In Palustan, as elsewhere, now that anti-dumping has been established and has an institutional home, reining it in, let alone removing it, will be extremely difficult in the face o f domestic protectionist lobbies and its international legitimacy. As regards the latter, it seems that the advice received by the Tariff Commission was almost entirely from lawyers expei-t in the technical legalities o f anti-dumping and that there was practically no advice on, or recognition of, its likely negative consequences for the liberalization o f trade and trade-related policies inPalustan. Duringthe first half of the 1990s Bangladesh cut its tariffs drastically, bringingthe unweighted average protective rate (Customs duties plus para-tariffs-see discussion below) down from 73.6% in 1991/92 to 32% in 1995/96 (Tables 3.10, 3.11 and Figs 3.5, 3.6, 3.7 and 3.8). However, after 1995/96 this liberalizing impetus stalled, and during the following nine years tariffs declined only slightly. Average industrial tariffs came down modestly (by 5.1 percentage points from 31.9% to 25.4%) but the average protective rate for agriculture (including fisheries, livestock and processed foods)26 remained practically unchanged (from 32.4% to 32.1%). Over all tariff lines the unweighted average protective rate declined by only 5.5 percentage points, from 32% to 26.5%. Duringthis period many other developing countries were continuing to increase their integration with the world economy by cutting tariffs, so that, as noted previously (Table 3.4) interms o f average tariff 1evels, Bangladesh i s now one o f the most protected economies inthe world. Using the WTO's benchmark o f tariffs exceeding 15%, almost three-quarters o f i t s tariffs are "international peaks" (Table 3.11). It also has by far the highest average tariffs in South Asia, except in agriculture where India's tariffs are even slightly higher than Bangladesh's. However, as has been emphasized previously, average tariffs are indicators o f average a vailable protection against import competition: actual domestic prices may not reflect these tariff protection levels, and if the average tariffs were weighted by production, the weighted averages could tum out to be higher or lower than the unweighted averages. As in both India and Pakistan, both these observations are especially relevant for Bangladesh's agriculture, where, inparticular, rural production i s dominated by rice which i s generally priced at, or even below world prices, and for which protective tariffs are generally low (in 2003/04 they were 7.5%). These and other trade policy issues inagriculture are discussed inmore detail inthe chapter on agriculture inVolume I1ofthis study. 23 The support from ADBs legal department is surprising considering that during these years (1999-2002) ADB was simultaneously supportingamajor and successful programto liberalizePakistan's trade regime. Depending on how it develops, anti-dumpingcouldunderminemany o f these initiatives. 24 Detailsofthese cases are on the National Tariff Commissionwebsite 25 Analysis o f tariffs, protection and revenue inthis section reflects Bangladeshtariffs as o f April 2004. Therefore, it precedes the tariff changes announced inthe FY05 Budget on 10 June, 2004, whichbrought down the top CD rate to 25, moved to three-tier non-zero tariffs, and significantly scaled down supplementary duties. 26 HS 1-24.This definition of "agriculture" differs somewhat from the WTO definition ofthe sectors coveredby the Agreement on Agriculture, mainly by including fisheries and marine products (HS 03) and excluding hides and skins and various natural textile fibres such asjute, cotton andwool. 49 Trade Policies in SouthAsia : An Overview Table 3.10 Bangladesh 1991192-2003104:UnweightedAverage Protective Import Duty Rates All tariff lines Industrialtariff lines Agriculture tariff lines Customs Para- Total Customs Para- Total Customs Para- Total duties tariffs prot rate duties tariffs prot rate duties tariffs prot rate 1991192 70.64 2.98 73.62 69.72 3.44 73.16 76.64 -0.01 76.63 1992193 57.93 2.59 60.52 57.34 2.99 60.33 61.83 -0.03 61.80 1993194 43.47 2.43 45.90 43.13 2.84 45.97 45.58 -0.17 45.41 1994195 34.24 3.30 37.55 33.52 3.54 37.06 37.49 2.23 39.72 1995196 28.70 3.26 31.96 28.40 3.47 31.87 30.07 2.28 32.36 1996197 28.24 3.38 31.61 27.79 3.58 31.37 30.25 2.48 32.73 1997198 27.27 5.88 33.15 26.80 5.98 32.78 29.42 5.42 34.83 I999199 26.59 5.82 32.41 26.23 5.92 32.15 28.19 5.37 33.56 199912000 22.40 6.99 29.39 21.86 7.33 29.19 24.87 5.41 30.28 2000101 21.10 7.43 28.54 20.39 7.84 28.23 24.53 5.46 30.00 2001102 21.02 8.41 29.43 20.28 8.47 28.75 24.60 8.15 32.74 2002103 19.91 6.51 26.42 19.08 6.74 25.82 23.85 5.44 29.29 2003104 18.82 10.29 29.11 18-02 8.81 26.82 22.56 17.22 39.77 Fig 3.5 Bangladesh 1991/92-2003/04:All Tariff Lines, Unweighted Average Protective Import Duties 0Customs duties W Para-tariffs 50 Tariffs, Protection andRevenue Fig 3.6 Bangladesh 1991192-2003104: Industrial Tariff Lines. Unweighted Average Protective Import Duties -mm 0Customsduties HParatariffs Fig 3. 7 Bangladesh 1991/92-2003/04: Agriculture Tariff Llnes. UnweightedAverage Protective Import Taxes 0Customs duties W Para tariffs 51 Trade Policies in South Asia : An Overview Table 3.11 Summary Indicators ofMFNTariffs inBangladesh, 1991/92-2004/05 1991192 1995196 2003104 2004105 Unwtdaverage Customs duties %, alltariff lines 70.64 28.70 18.82 16.31 Industrial (HS 25-97) 69.72 28.40 18.02 15.62 Agricultural etc (HS 01-24) 76.64 30.07 22.56 19.66 Unwtd total protectionrate %, all tarifflines 73.62 31.96 29.11 26.50 Industrial (HS 25-97) 73.16 31.87 26.82 25.35 Agricultural etc (HS 01-24) 76.63 32.36 39.77 32.12 Standard deviation o f total protection, all tariff lines 41.87 15.91 25.90 25.54 Industrial (HS 25-97) 42.61 16.14 24.48 25.56 Agricultural etc (HS 01-24) 36.55 14.82 29.43 24.71 Percentage & number o f lines with international 93.28 86.06 72.46 70.05 tariff peaks (total protectionrate > 15%) (6233) (5810) (4983) (4698) Average collection rate %, all import taxes, all lines 28.66 23.66 18.00 NIA Average collection rates, all import taxes, all lines, NIA excl. duty free export-related imports 37.41 31.77 25.53 WTO bindings: % o falltariff lines 0.0 13.2 13.2 Average o f bound rates n.a. 188.3 188.3 WTO bindings:% o findustrialtariff lines 0.0 0.9 0.9 Average of boundrates n.a. 50 50 WTO bindings: % o f agricultural tariff lines 0.0 100 100 Average o f boundrates n.a. 197.1 197.1 Notes.The averagesreportedinthis Table are for 6877 8-digit basic tarifflines. They do notinclude exemptions or concessional lower rates for specified uses or users o f these products. However the tariff collectionrates take account o fthese exemptions and concessions. The collection rates (import duty collectedvalue o fimports)include VAT butnot the advance income tax onimports (AIT). As inthe other South Asian countries, Bangladesh's early tariff reductions from the extremely highand inmany cases prohibitive levels of the 1980s, were implementedby a "tops down" process in which maximum Customs duties were successively cut, thereby drastically reducing the number o f Customs duty bands (or "slabs"). The top Customs duty rate came down from 350 % in 1991/92 to 50% in 1995/96, and the duty structure was simplified by reducing the number o f Customs duty "slabs" from 17 to 627.After 1995196 the maximum Customs duty rate was reduced each year to 37.5% in 1999/2000, and subsequently to 32.5% in 2002103, 30% in 2003104, and 25% in 2004/05. There are now only three Customs duty s labs, o r effectively four Customs duty slabs if zero is includedv iz, 25, 15, 7.5 and 0 percent. Because o f these reductions, average Customs duties continued to decline after 1995/96, and by 2003/04 they were respectively about 10, 10 and 8 percentage points lower (for all tariff lines, industrial tariff lines, and agricultural, fisheries and livestock tariff lines) than they hadbeen in 1995196 However, Bangladesh also uses a number o f other import taxes (currently four-hereafter collectively referredto as para-tariffs) which raise protection above the levels providedby Customs duties alone. These are a central and important feature of the import regime and are discussed in more detail belod'. The average total extra protection provided by these para-tariffs i s shown separately in Table 27For more details on Bangladesh's tariff reductions up to 199912000 see Annex Table A.1 in the November 1999 World Bank report on Bangladesh's trade policies (World Bank, 1999, November). The unweighted average tariffs given in the World Bank report are lower than the averages reported here because they include various exemptions and partial exemptions for particular uses or users of the importedproducts. '*Bangladesh's para-tariffs have been discussed in anumber of earlier reports andpapers, notably inthe November 1999 World Bank study of Bangladesh's trade policies (World Bank, 1999,November), in the WTO TPR report on Bangladeshin 2000, and inDaly, Khan andOshikawa(2001). 52 Tariffs, Protectionand Revenue 3.10 and inFigs 3.5, 3.6 and 3.7, and details o f the average protective incidence o f each o f the individual para-tariffs since 1991/92, are given in Table 3.12. As i s apparent from these statistics, in the early stages of the Customs duty reductions, the extra protection provided by the para-tariffs remained (on average) quite modest (about 3 to 3.5% o f import prices) and the drastic reductions in Customs duties were accompanied by corresponding reductions in total protection rates. But since 1995/96, the total protective incidence o f the para-tariffs has been going up, especially for agriculture where there was a sharp increase in 1997/98, and a really dramatic increase in 2003/04. Consequently, for all tariff lines, between 1995/96 and 2003/04, average Customs duties fell by 9.9 percentage points, but most o f this reduction was offset by an increase in average para-tariffs o f 7 percentage points. For industrial tariffs, Customs duties duringthese years went down by 10.4 percentage points, but about half o f this reduction was o ffset by a n increase inaverage para-tariffs o f approximately 5 percentage points. Inthe c ase o f agriculture, Customs duties were cut duringthe periodby 7.6 percentage points, but this reductionwas far outweighed by an increase in average para-tariffs o f approximately 14.9 percentage points. In 2003/04, para-tariffs accounted for 35% o f the average protectionrate for all tariff lines, 33% o f the protectionrate for industrial products, and 43% o f the average protection rate for agricultural, fisheries, livestock and processed food products. The Bangladesh para-tariffs can be divided into two categories, general import taxes that are applied more or less across the board to all tariff lines, and selective import taxes that are applied to particular products only. At present there is just one general para-tariff, the "Infrastructure Development Surcharge" (IDSC). It was introduced in 1997/98 at a rate o f 2.5% , subsequently increased to 3.5% in 2002/03, and to 4% in2003/04. The base for the IDSC i s "assessable value", i.e. the cif price plus a 1% "landing fee", which i s the same as the base for Customs duties. Even though in principle it i s a general import tax applied to all imports, in 2003/04 210 tariff lines (about 3% o f the total ) were exempt. Until 2001/02, there was also an across-the-board "license fee" (LF) at 2.5% o f assessable values. This was abolished in 2002/03. In addition to these taxes, imports are also subject to an "advance income tax" (AIT) at a general rate o f 3% o f assessable value: some products are exempt. Since the AIT i s a payment towards the income taxes o f the importer, and since most domestic producers are also subject to income taxes, in Bangladesh it is generally not consideredto provide extraprotectionand (incontrast to Pakistan's advance incometax on imports) it has not been treated as a protective para-tariff in this study. However, like any other domestic tax also applied to imports, it c ould conceivably have protective effects if income taxes are exempt or not effectively collected fi-om domestic producers o f importable products. 53 Trade Policies inSouthAsia : An Overview Table 3.12 Bangladesh1991/92-2003/04 Averages of Customsduties and para-tariffcomponentsof total protectionrates Numberof General Protection Selective Protection Total FY Category Tariff Lines CD Rate IDSC Rate LF Rate RD Rate P-SD P-VAT Protection 91-92 Agricultural 882 76.64 2.50 -3.25 0.73 76.63 91-92 Non-Agricultural 5,800 69.72 2.50 -0.99 1.93 73.16 91-92 Total 6,682 70.64 2.50 -1.29 1.77 73.62 92-93 Agricultural 862 61.83 2.50 -3.16 0.63 61.80 92-93 Non-Agricultural 5,703 57.34 2.50 -0.80 1.29 60.33 92-93 Total 6,565 57.93 2.50 -1.I 1.20 1 60.52 93-94 Agricultural 859 45.58 2.50 -2.96 0.29 45.41 93-94 Non-Agricultural 5,436 43.13 2.50 -0.82 1.16 45.97 93-94 Total 6,295 43.47 2.50 -1.11 1.04 45.90 94-95 Agricultural 1,213 37.49 2.50 -0.32 0.05 39.72 94-95 Non-Agricultural 5,401 33.52 2.50 -0.15 1.19 37.06 94-95 Total 6,614 34.24 2.50 -0.18 0.98 37.55 95-96 Agricultural 1,223 30.07 2.50 -0.30 0.08 32.36 95-96 Non-Agricultural 5,528 28.40 2.50 -0.16 1.I4 31.87 95-96 Total 6,751 28.70 2.50 -0.19 0.95 31.96 96-97 Agricultural 1,261 30.25 2.50 -0.31 0.29 32.73 96-97 Non-Agricultural 5,689 27.79 2.50 -0.02 1.10 31.37 96-97 Total 6,950 28.24 2.50 -0.07 0.95 31.61 97-98 Agricultural 1,261 29.42 2.49 2.50 0.25 0.18 34.83 97-98 Non-Agricultural 5,746 26.80 2.49 2.50 0.24 0.75 32.78 97-98 Total 7,007 27.27 2.49 2.50 0.24 0.65 33.15 98-99 Agricultural 1,276 28.19 2.46 2.50 0.24 0.17 33.56 98-99 Non-Agricultural 5,764 26.23 2.49 2.50 0.17 0.77 32.15 98-99 Total 7,040' 26.59 2.48 2.50 0.18 0.66 32.41 99-00 Agricultural 1,253 24.87 2.47 2.50 0.27 0.17 30.28 99-00 Non-Agricultural 5,693 21.86 2.45 2.50 1.56 0.82 29.19 99-00 Total 6,946 22.40 2.46 2.50 1.33 0.70 29.39 00-01 Agricultural 1,159 24.53 2.48 2.50 0.07 0.28 0.14 30.00 00-01 Non-Agricultural 5,584 20.39 2.46 2.50 0.01 2.05 0.82 28.23 00-01 Total 6,743 21.10 2.46 2.50 0.02 1.75 0.70 28.54 01-02 Agricultural 1,164 24.60 2.48 2.50 2.64 0.35 0.18 32.74 01-02 Non-Agricultural 5,642 20.28 2.45 2.50 0.26 2.18 1.08 28.75 01-02 Total 6,806 21.02 2.46 2.50 0.67 1.86 0.92 29.43 02-03 Agricultural 1,213 23.85 3.42 0.05 1.84 0.13 29.29 02-03 Non-Agricultural 5,739 19.08 3.42 0.12 2.42 0.77 25.82 02-03 Total 6,952 19.91 3.42 0.11 2.32 0.66 26.42 03-04 Agricultural 1,214 22.56 3.67 5.65 2.82 5.08 39.77 03-04 Non-Agricultural 5,663 18.02 3.92 0.17 3.90 0.82 26.82 03-04 Total 6,877 18.82 3.88 1.14 3.71 1.57 .- 29.11 The averages are of basic tariffs: they do not take account of exemptions or concessions for specified uses or users. CD=Customs duty; IDSC=lnfrastructure DevelopmentSurcharge; LF=Licensefee: RD=Regulatoryduty; P-SD=Protective supplementary duty; P-VAT=ProtectiveValue Added Tax; P-Total=Total protective rate 54 Tariffs, Protectionand Revenue There are three selective para-tariffs which provide extra protection above the protection from Customs duties and the IDSC tax. These are "regulatory" duties, "supplementary" duties, and the use o f the VAT to provide extra protection by exempting domestically produced products, or levying VAT on the production o f specified products at lower rates than the VAT rate on imports. The way these para- tariffs operate and provide extra protection i s complex and distinctly non-transparent, especially when more than one o f these techniques i s applied to a given product. In 2003104 either singly or in combination, they were being applied to 1328 tariff lines (19.3% o f the total-see Table 3.13). The number o f tariff lines subject to them expanded very considerably in2003104: Number o f tariff lines2' 2002103 2003104 Increase Withregulatory duties 35 334 +299 Withprotective supplementary duties 356 691 +335 Withprotective VAT 442 727 +285 Almost all the regulatory duties and the protective supplementary duties (87% and 93% respectively) are being used to provide extra protection when the Customs duty i s already at the maximum appliedrate o f 30% (Table 3.14). However, for reasons that are not immediately apparent, 31% o f the protective VATSare being used when the Customs duty i s below the maximum applied Customs duty rate. How each of these para-tariffs are applied andtheir protective effects arebriefly described below. ~~ Bangladesh2003104: Distributionof tariff lines with extra protectionprovided by VAT exemptions,supplementary duties or regulatoryduties Extra No of Percent Protection tariff of total from lines lines VAT only 372 5.41 SD only 389 5.66 RD only 145 2.11 VAT+SD 233 3.39 VAT+RD 122 1.77 SD+RD 67 0.97 Total 1328 19.31 No extra protection 5549 80.69 Total lines 6877 100.00 Notes:World Bank staff estimatesfrom NBR database *'The total of these para-tariffs i s less than the number shown in Table 3.11 owing to their use in combination e.g. extra protection for particular products from both supplementary duties and protective VAT. 55 Trade Policies in South Asia : An Overview Table 3.14 Bangladesh 2003/04: Distribution according to Customs duty rates of tariff lines with extra protection provided by non-general para-tariffs CD rate % VAT exemption Supplementary duties Regulatory duties 30.0 432 59.42 644 93.47 290 86.83 22.5 126 17.33 33 4.79 31 9.28 15.0 99 13.62 8 1.I6 8 2.40 7.5 58 7.98 4 0.58 0 0.00 0.0 12 1.65 0 0.00 5 1.50 727 100.00 689 100.00 334 100.00 Notes:World Bank staff estimatesfrom NBR database RePulatory duties are applied to assessable values and so they in effect become an additional Customs duty. Even though they have been on the books for many years they were not used during the 199Os, but were reintroduced during 2000/01 (Table 3.12). In2003/04 there were 5 different regulatory duty rates (5, 10, 15, 22.5 and 30 percent): 71 percent o f the applied rates were at 30 percent. About two thirds o fthe regulatory duties were beingusedto provide a massive increase inprotectionto the domestic marine products industries (producers ,of fresh and processed fish, shnmp, and crustaceans coveredby HS 03 of the tariff schedule). As a result, in 2003104 most total protection rates for these industries went up from approximately 36% to either 64% (fresh products) or 88% (processed products). The other regulatory duties were providing extra protection for various producers o f transport equipment and electrical and non-electrical machinery. There were no regulatory duties applied through the budget o f 2004/05. Supplementary duties (SDs) are applied to (assessable value + Customs duty), and so their protective effect increases with the Customs duty rate. In 2003104 there were 691 tariff lines subject to SDs, and nine SD duty rates applied to imports (15, 25, 30, 40, 50, 60, and 75 percent). For a Customs duty rate o f 30%, these supplementary duties are respectively equivalent to the following percentages o f the duty free import price: 19.5, 32.5, 39, 52, 65, 78, and 97.5, percent. Approximately 35% o f the SDs were on textiles (HS chapters 52, 54, 55, and 57) but the others were scattered over a heterogeneous set o f products covered by 41 other HS chapters (out o f the total o f 97 chapters). Inprinciple, SDs can also be imposed on domestically producedproducts, but in2003/04 there was no domestic SDs for 94.5% o f the 691 products subject to SDs when imported. Of the 38 products which were also subject to SDs if produced domestically, in only 18 cases (beer, various alcoholic drinks, and mobile phones) were the supplementary duties more or less neutral, in the sense o f providing little or no extra protection for domestic production. For the other 20 products, the domestic SDs were markedly lower than the import SDrates, thus providing extraprotection. Omittingthe 18 productswith approximately equivalent import and domestic SD rates, the average import SD rate applicable to the other 673 products was 30.1 %, but the average domestic SD rate on the same set o f products was only 0.37%. Consequently, a major intention and effect o f the supplementary duties i s to provide extra protection. Otherwise, if the sole intention were to discourage consumption andor raise revenue, the import and domestic SDs would be set at the same rate. Value added tax (VAT) inprinciple i s a trade-neutral tax, but in Bangladesh for at least 13 years in the past it has been systematically used to provide extra protection for selected import competing industries, by charging VAT on imports but exempting VAT on domestic production, or by imposing a 56 Tariffs, Protectionand Revenue lower VAT rate on domestic production. In a complete and rigorously administered VAT system with VAT imposed and actually collected at all stages of production and on wholesale and retail distribution, exempting final stage manufacturers from VAT would not provide additional protection, because wholesalers and retailers buying from them would not obtain a VAT credit which they would be able to offset against the VAT liabilities on their own sales, whereas they would obtain this credit ifthey were to buythe same product from an importer. InBangladesh, the scope ofthe VAT system does not effectively extend beyond the formal sector, so that exempting or imposing lower VAT rates on locally manufactured products which are not resold to other firms which are effectively subject to VAT, provides the manufacturers with extra protection. For example, imported textile fabrics are subject to the general 15% VAT, but the equivalent locally produced textile fabrics are subject to a domestic excise tax that works out to an equivalent VAT o f 2.5%. Inthe domestic market, nearly all textile fabrics are sold to small-scale distributors and then to final consumers who mostly provide them to local tailors to cut and sew garments to order. None o f these activities are effectively subject to VAT, so the low 2.5% VAT rate paid by the domestic fabric manufacturers provides them with a substantial extra advantage in competing against imported fabrics. value + The customs duty + regulatory duty + supplementary duty). The effective VAT rate as a percentage of general VAT rate inBangladesh i s 15%, and the base for the VAT on imports i s (assessable the assessable value therefore goes up with these other import duties. The base excludes the IDSC tax which i s imposed on nearly all imports with few exceptions. The base for the domestic VAT o f a manufacturer competing with imports i s the ex-factory price, and so to estimate the protective effect o f an exemption o f the domestic VAT or a lower domestic VAT rate, it i s necessary to first estimate this price. However, the domestic price includes the protection from the IDSC, s o that (assuming manufacturers price up to the protection available to them) the base for the domestic VAT i s a bit higher (by the protection from the 4% IDSC) than the base for the import VAT. Consequently, in the normal case when the import and the domestic VAT are the same (15%), there i s small amount o f negative protection (approximately -0.52% o f border prices) from the VAT. Because o f the interaction with Customs duties and the other protective import taxes, estimating the separate protective effect o f the domestic VAT exemptions or lower domestic VAT rates, i s extremely complex. In 2003/04, positive extra protection through the VAT was provided for 727 tariff lines (about 10.6% o f the total). The VAT protection rates across all tariff lines were distributedas follows: VAT protectionrate as percent of No. o f % o f Comments assessablevalue tariff total lines lines 17 rates from +12.2% to +32.2% 727 10.6 Average protective VAT rate 19.0% 0 897 13.0 Lines exempt from both import and domestic VAT (most also exempt from all other import duties and taxes) -0.52% 5262 76.4 Import VAT = domestic VAT=15% -16.5% 1 0.01 Domestic VAT but no import VAT (ayurvedic medicines etc) Of the 727 tariff lines with positive VAT protection, for 56% the domestic VAT was zero, and for other 44% (all textile products) it was 2.5%. Products with positive VAT protection were in 31 o f the 97 H S chapters, but most were textiles and agricultural, livestock and fisheries products. In2 003/04, a large number o f domestic VAT exemptions were used to further increase the extra protection for the marine products industries (HS 03) that resulted from the imposition o f the regulatory duties discussed previously. Other primary and processed food products with extensive VAT protection include meats (HS 02), dairy products (HS 04), vegetables and pulses (HS 07), spices (HS 09) and some cereals (HS 57 Trade Policies in South Asia :An Overview 07). Of the products which received extra protection from VAT exemptions, about a third also received extra protection from supplementary duties, and 17 percent from regulatory duties. For the rest (`just over half) the VAT exemptions were the only source o f additional protection over the "normal" protection from Customs duties and the IDSC tax. Industries with positive VAT No o ftariff lines Percent o f total protection HS 2-24 Agriculture, livestock, fisheries 307 42.3 HS50-58 Textiles 360 49.5 H S 84 Machinery 39 5.4 10 other HS chapters Various 20 2.8 TOTAL 727 100.0 Of more concern than the effect o f the selective para-tariffs on the average level o f tariffs, is the fact that almost without exception they are invoked to give extra protection to local industries which are already benefiting from the maximum general protectionrate o f 34% i.e. the maximum Customs duty rate 30%, plus the IDSC tax (4%). They therefore bringup the general level o f available tariff protection, not by small increases ina large number o ftariffs, butby creating a set ofhigh-to-very-high protective tariffs benefiting local industries which lobby for them. They are also distinctly non-transparent and complex. Some idea o f their complexity i s apparent from the descriptions o f how they operate and the formulas for calculatingtheir protective effects giveninthe Annex to Volume Io f this study. Table 3.15 gives some examples o f the extra protectionprovided by para-tariffs and the resulting total protection rates. These are just a relatively small proportion o f the 1328 products to which selective para-tariffs were being applied in2003/04. The following points are worth noting: With a few exceptions (e.g. cement, iron and steel pipes) most o f the products inthis sample are import- substitution light consumer goods However, very high protection in the domestic market i s also being provided to some o f Bangladesh's principal exports e.g. cotton shirts, cotton trousers and cotton knittedT-shirts (total protectionrate 85.48%), various seafood products (64% or 88%), sports footwear (52.98%), other footwear (65.98%). Total protection rates for the many o f the industries protected by selective para-tariffs are in a range o f from 50% to well over 100%. These levels are about the same or not far below prevailing tariff levels duringthe 1980s, before the Customs duty reductions o f the early 1990s. For some products just one selective para-tariff i s being used, but for others two in combination e.g. supplementary duties combined with protective VAT inthe case o f dairy products, sugar, and textile fabrics. The reasons for the use o f particular instruments or combinations o f instruments are obscure. Table 3.15 also compares the total protection rates o f these 55 product groups and products with their total protectionrates in 1997/98. It i s apparent that for industries producing these products, there was a massive increase in the tariff protection during these six years. The simple average protection rate for this sample ofproducts went upby approximately 24 percentage points, from 51%to 75%. For 50 ofthe 55 products, protection went up over the period, in most cases very substantially e.g. processed seafood from 35% to 88%, milk powder from 47% to 62%, sugar from 47% to 85%, sweet biscuits from 47% to 131%, cement from 25% to 66%, soaps and detergents from 61% to 98%, plastic tableware from 51% to 91%, textile fabrics from 65% to 72%, glass and glass products from 47% to 85%. For the five products for which total protection rates declined, the reduction was minimal and from already high levels e.g. the salt protection rate fell from 150.8% to 143.2%, and the protection rate for after shave preparations fell from 64.6% to 54.6%. 58 Tariffs, Protection andRevenue -LI o(D 2 2 $ ? - hl I n - N m S - I 0 d 2 - z- 0 03 0 2 0 d 0 m - -aa Q Q m vi a Q 2 P) vi a m c 2 .-2 8 c - L L 03 0 co 0 (D- 0 co 0 0 In- EL 59 Trade Policiesin SouthAsia : An Overview - b rK - d Q) h! 3 .j - 3 '? \l 3 6 0 3 d f 0 m 3 3 - c n 53L 3 F 60 Tariffs, Protectionand Revenue As well as creating very highprotection rates for a wide range o f domestic industries, the para- tariffs greatly reduce the ability o f countries involved inpreferential arrangements with Bangladesh (e.g. under SAPTA, the Bangkok Agreement or other preferential agreements) to benefit from preferences granted by Bangladesh (which are very small in any case). This i s because the preferences generally do not apply to the para-tariffs, with the result that the preferential total protection rates may be prohibitively high, and because, whenregulatory duties are used3', the para-tariffs can greatly reduce the effective proportional margin o f preference. For example, for fresh apples and apple juice, Bangladesh's preferential Customs duty for Bhutan i s 15%, versus a general MFN Customs duty o f 30%. However, after the IDSC tax and a 40% supplementary duty, the total protection rates on imported apples and apple juice from Bhutan (under a bilateral agreement) are 65% versus 86% from non-preferential sources. Preferential tariffs at this or similar very high levels may be prohibitive, and even if imports are feasible the resulting price preferences are very small or minimal. For example, the price preferences for apples from Bhutan and Nepal (under SAPTA) versus apples subject to the normal MFNCustoms duties, are respectively only about 12% and 3.4% respectively, and the preferential total protection rate on frozen fish from Nepal, Bhutan and Maldives (under SAPTA) i s 84.6%, versus the MFNtotal protection rate o f 88%. There is evidence that Bangladesh's initial tariff reforms up to the mid-1990s considerably reduced the potential for economic inefficiency in the form o f high effective protection rates in import substitution industries, large incentive differences between industries, and overall high anti-export bias. According to the Bangladesh Tariff Commis~ion,~'for the domestic production o f 40 sectors producing ' tradable goods, the average effective protectionrate made available by tariffs fell from 75.7 % in 1992193 to 33.3% in 1995/96, and the standard deviation o f EPRs among the 40 sectors fell from 84.4% to 25.7%. After 1995/96 until the last estimates reported for 1999/2000, the average and standard deviation o f the EPRs of the 40 sectors continuedto fall, but at a muchslower rate. Since then there are many indications that strong and effective resistance has developed to the compression o f processing margins that i s the intended and normally expected consequence o f the kmd o f "tops down" tariff reduction program that has been implementedinBangladesh: 0 In budget speeches, Ministers ofFinance have frequently statedthat insetting import tariffs, the government i s following a principle in which tariffs are escalated according to the degree o f processing. For example, the 2002/03 budget speech stated that Customs duties were to be set as follows: "basic raw materials" 7.5%; "intermediate raw materials not produced in the country" 15%; "semi finished and locally manufactured intermediate goods" 22.5%; and "manufactured goods" 32.5%.32 0 As already discussed, para-tariffs are being routinely applied with increasing frequency to raise protection for the outputs o f many local industries to levels which are far above the maximum Customs duty rates. Many o f these protection rates are now at, o r n o t far below pre-reform levels. The establishment or expansion o f new industries (e.g. cement) i s also being encouraged byhighpara-tariffprotectiono ftheir outputs 0 At the same time, processing margins for local industries are being widened by cutting tariffs for raw materials, other intermediate inputs, and for machinery and equipment, when they are not already being produced domestically. This has included reducing tariffs on a wide range o f raw materials and intermediates to zero. For example, Customs duties and all other import taxes 30Normalpreferencesrelatedto Customs duties indirectlyalso reduce supplementaryduties andprotectiveVAT, sincethe bases for supplementary duties and VAT include Customs duties. Hence, when the para-tariffsused are supplementary duties and/or protectiveVAT, the proportional margin of preference is only slightly less than the Customs duty preference. However, the proportionalpreferentialmargin is reduced when there are regulatory duties, since that is applieddirectly to the import price (assessablevalue) and is notindirectlyreducedbythe preferences. 3'ReportedinWorldBank (1999, November),Annex 1. 32Budgetspeech, 2002103. Secondpart,FiscalMeasures,pp 56-57. 61 Trade Policies in SouthAsia : An Overview (including VAT) are zero for many inputs (animal feed, seeds, bulbs and roots, live poultry and live animals, fertilizers) used inthe livestock, fisheries and agricultural sectors, and for a variety o f steel and other metals and machines usedinmanufacturing. 0 Alongside these general reductions o f tariffs on intermediate inputs, many "end-user'' concessions are granted by which specified materials, components or machines can be imported at lower (sometimes zero) Customs duty rates than the general rate, when they are used to produce specified products, or by specified firms or organizations. There are also "end user" concessions that exempt imports from VAT. These concessions have a long history in Bangladesh: they are the equivalent o f the exemptions and partial exemptions that are also a feature o f the tariff regimes in India and Pakistan. However, in Bangladesh they have been codified and given separate tariff lines inthe tariff schedule, and in contrast to these countries it i s possible to quantify them without undertaking a major separate research effort. Some indication o f their importance can be seen inFig 3.8, which shows that for the industrial sectors (HS 25-97) unweighted average industrial total protective import duty rates are considerably lower after including the end-user concessions. However, this does not mean that average tariff protectionto existing industries i s lower than previously indicated: on the contrary, the end user concessions increase the effective protection t o the processingmargins o f the e stablished industrieswhich benefit from them, even though a t the same time they reduce the protection to the outputs o f potential producers o f the products subject to the concessions. Fig 3.8 Bangladesh 1991/92: Effects of end-user concessions on average industrial tariffs 2%2 3 0 - 5 0 - 4 0 - u- 2 0 - c 0 s 1 0 - -Basic tariffs unweighted -Including end user concessions unweighted Including end user concessions importweighted Fig 3.9 Bangladesh 2003/04: Distributionof total protection rates g 25 Em 5 20 Total protection rate % c 15 c 10 c 8 5 La, O OAll tariff lines fii Industry Agriculture etc 62 Tariffs, Protectionand Revenue Some indication o f the effects o f the trends and pressures described above can be seen from the very wide distribution o f total protectionrates in2003/04 (Fig 3.9), with 86% o f tariff lines below 34%, and 16% exceeding 34 percent. In addition (Table 3.1l), whereas the variability o f protective tariffs (as indicated by the standard deviation) fell considerably between 1991/92 and 1995/96, since then has increased quite sharply. According to this indicator, in 2003/04 the tariff structure is considerably more distortive than it was in 1995/96. Some o f this change i s a consequence o f the increasing differences between protection rates o f products subject to selective para-tariffs and products subject only to Customs duties and the IDSC tax, and another part to increases in the gap between tariffs protecting outputs, and tariffs affecting the cost o f intermediate inputs and machinery. That the latter gap i s substantial, i s apparent from Table 3.16, which shows that in2003/04 average protectivetariffs on final consumer goods were markedly higher (about double) than average protective tariffs on basic raw materials and intermediate products. However, the tariff escalation between raw materials and intermediates i s much less marked. This suggests that pressures to keep intermediate product tariffs down in the interests o f final consumer good producers, have squeezed the processingmargins o f actual or potential producers o f intermediate goods. The principal impact o f this seems to be on industrial machinery when allowance i s made for end-user c oncessions, since the average protective machinery tariff ( 12.23%) in that case is lower than the average protective tariffs for raw materials and intermediate products. Further study and analysis would be neededto obtain a clearer picture, but it seems highly likely that one by-product o f the concerted effort to reduce the costs o f import substitution consumer goods industries, has reduced the relative incentives for actual or potential producers o f intermediate materials, components, and machines33. Table 3.16 Bangladesh2003/04: Indicatorso f Tariff Escalation Tarifflines without Tariff lines including end-user concessions end-user concessions No o f Average total No o f Average total tariff protection tariff protection lines rate lines rate Basic raw materials 445 16.23 467 16.11 Intermediate products 2398 22.53 3265 19.76 Machinery and equipment 1103 19.22 2240 12.23 Final consumer goods 2931 40.16 3219 37.22 Notes: The end user concessions are entered inthe tariff schedule as separate tariff lines. They do not include baggage imports and concessions for duty free imports o f inputsusedby exporters (principally imports inbond under back-to-back LiCs and imports by firms inexport processing zones). Table 3.16 indicates the existence o f tariff escalation on average, but the averages include protective tariffs for many products that are not being produced in Bangladesh. As in other countries, the gaps between the output and input tariffs of products that are actually inproduction will typically be greater than the average gaps considering all tariff lines, since there i s an obvious motive for firms to lobby for increases in output tariffs that protect them against import competition, and for reductions in the tariffs that affect the costs of their inputs. This is certainly the case inBangladesh: some examples o f the escalation o f total protection rates along some typical processing chains are illustrated inTable 3.17. Inthese examples, the escalation (and consequent high effective protection rates for the manufacturing processes) i s made possible by the apparently minimal resistance on the part o f the government to 33 Iti s important to recognize that what matters are the relative incentives made available by the tariff structure, not their absolute level. The main problem with the apparently low or negative EPRs for potential intermediate good and machinery producers i s not that they are low or negative, but that they are low relative to apparently very highEPRsfor other industries. 63 Trade Policies in South Asia : An Overview suggestions and pressures to impose para-tariffs to protect the outputs, and to pressures to either cut input tariffs or to create special end-user concessional tariffs. Table 3.17 Bangladeshtariffs 2003/04. Some examples of tariff escalationalongprocessingchains: total protectiverates% for principal materialinputsand final products Flour 19.00 Plastic Plastic Copra 26.5 Sugar 98.35 Clinker 33.48 Cotton 0 materials 18.48 materials 18.48 Crude Sweet Cotton Plastic Plastic coconut 25.98 biscuits 130.98 portland 65.98 carded or 12 bathware 65.98 tableware 90.88 oil etc cement combed Refined Cotton coconut 65.98 Yam 32.93 oil Cotton fabrics 71.63 Note: plastic materials include PVC, >85% polystyrene, polyethylene, polypropylene, Cotton A B S copolymers, PVA etc in all forms shirts 85.48 (granular, powder etc) M&B Recent estimates o f effective protection rates for manufacturing industries available from Bangladesh's tariffs in 2002/03 indicate very large continuing distortions and economic inefficiencies. The average EPR o f 33 sectors with no exports or exporting less than half their output was 82.3%, compared w ith an average EPR o f six export oriented s ectors (shnmp, other fish, tanning and 1eather finishing,jute textiles, mill cloth and ready made garments) of -1.5%. EPRs o f the import substitution industries ranged from -37% (pulses) to 538% (cosmetics and toiletries), and 13 o f the 33 import substitution industries had EPRs exceeding 100%. It i s highly likely that the increases inpara-tariffs that occurred in2003/04 will have further increasedthe general level o f the processing margins and effective protection rates o f import substitution industries made available by tariffs, and further increased both the dispersion o f EPRs among import competing firms, and the very large excess o f the incentives to produce for the domestic market over the incentives to export34. Bangladesh has bound only 50 (about 0.9%) o f its industrial tariffs at the WTO. The Customs duties on these are bound at 50%, and "other duties and charges" (presumably meaning the para-tariffs discussed above, other than VAT and possibly supplementary duties) at 30%. All the rest, both Customs duties and para-tariffs, are unbound. Under the Agreement on Agriculture, it was required to bind all its agricultural tariffs, but nearly all o f these (92%) were bound at the prohibitive level o f 200%, plus "other duties and charges" bindings o f 30%. Consequently, with only a very few exceptions, there i s no formal extemal WTO-enforceable upper limit on Bangladesh's tariffs, It i s highly unlikely that effectively not bindingits tariffs will provide Bangladesh with leverage infuture tariff negotiations, whether withthe rest o f the world at the WTO, or in regional trade negotiations. The reluctance to do so seems to reflect a desire to retain unlimited flexibility to increase tariffs whenever it i s bureaucratically or politically opportune. This i s a continuing issue for Bangladesh at the WTO, where other countries have regularly complainedabout the uncertainty this creates for their exporters and for Bangladeshimporters35.In 2000, legal statutory Customs duty rates were brought down close to the levels o f applied Customs duty rates, and this to some extent constrains the possibility o f large reversals o f Customs duty reductions, since 34World Bank staffestimates.The estimatesuse 1998 firmlevel survey data and unweighted2002/03 average tariffs for outputs andinputs. For exports, it is assumedthat 80% of the tariffs on importedinputsare exemptedor rebatedthroughdrawback. 35This point i s made in the 2000 WTO TPR report on Bangladesh(pp 38-39) . Inthe discussionson the report in May 2000 (see WTO document WT/TPR/MI68), the Bangladeshrepresentative said that there were no plans to expand the number of bindings or to reducetheir levels, but gave no reasons. 64 Tariffs, Protectionand Revenue amendments to the statute need to be approved by Parliament. However, there i s no effective constraint on the levels o f the para-tariffs, which i s why they have been become the method o f choice for selective tariff increases in response to lobbying pressures. For this reason, the para-tariffs have also become a separate ongoing issue for Bangladesh at the WTO, since, as implemented, except for the regulatory duties, they are inconsistent with basic GATTrules36. Customs valuation has been and remains an issue inBangladesh. Before 2000, lists o f fixed tariff values, pre-shipment inspection (PSI) and actual invoices all had a role in determining the basis for Customs duties. The list o f fixed tariff values was abolished inFebruary 2000 and Bangladesh moved to the WTO transactions value system supported by mandatory PSI3'. This has been accompanied by major efforts to computerize and improve Customs admini~tration~~.Despite these reforms, there i s evidence that discretionary valuation practices, under-invoicing, and unpredictable transaction costs have continued, especially in the land border trade with India. The very highprotective rates on a wide range o f importable products, and the extreme complexity and general lack o f transparency o f the tariff system are not conducive to effective institutional reform o f the Customs administration or of the other government ministries and agencies involved with trade policies. To summarize this discussion o f Bangladesh's tariff policies, although reductions in the top Customs duty rate and of average Customs duties since the mid 1990s give the impression of continuing import liberalization, the expanding use o f selective para-tariffs and "end-user" concessions for inputsand machinery have markedly increased rather than reduced the distortionary potential o f the tariff system. In various ways these changes have maintained or restored well known inefficiencies that the trade liberalization programs o f the late 1980s and early 1990s were intended to remove or diminish. In particular: 0 Very high protection of selected import substitution industries has the potential to remove or diminish the discipline o f import competition and to support high cost production that is not viable inthe long run 0 Very high protection for their sales in the domestic market i s being given to major export industries such as ready made garments, ceramics and seafood, largely precluding the possibility o f economically efficient intra-industry trade in these sectors and malung it more attractive for these industries to supply domestic niche markets rather than diversifying their product lines in export markets 36 The use o f VAT as a protective device i s inconsistent with the national treatment principle (GATT Article I11 (l)),which requiresthat internaltaxes "not be appliedto importedor domesticproducts so as to afford protectionto domesticproduction". In addition, supplementaryduties protectingsome agricultural, fisheries and livestockproducts exceed the 30% binding of "other duties andcharges". Inthe May 1990consultations on the WTO TPR report, Bangladesh's written responsesto questionsfrom other GATT membersstatedthat bringing the supplementary duty into conformity with Article I11was "being examined" (p.27), but in contradiction to this and incorrectly it was also stated that both the VAT and the supplementary duties "are imposed on both imports and domestic productsand hence are trade-neutral" (p.33). The IDSC and the erstwhile license fee appear to be inconsistent with Article VI11which requires that fees and charges on imports other than Customs duties should be "limited in amount to the approximate costs of services provided, and ...not represent and indirect protection to domestic products". However, insofar as they are consideredto be Customs duties, regulatoryduties are probably GATT-legal, since imposingthem isjust another way of increasingCustomsduties. If this is correct, all questions concemingthe GATT-legality of the para-tariffs could be by-passed, by simply replacing them with regulatory duties. Regulatory duties could then be freely moved up and down subject only to the few industrial products with bindings, and the very high bindings of almost all the agriculturaltariff lines. 37 For a discussion of Customs administrationand valuation issues including PSI up to 2000, see the 2000 WTO TPR report on Bangladesh,pp 34-37. 38 Customs administration and other trade policy reforms have been supportedby the World Bank and other aid agencies. See World Bank (1999, May) 65 Trade Policies in South Asia : An Overview 0 Since effective incentives for exports are generally about zero or negative, the increasing nominal and effective protectionrates for import substitution products are increasing anti-export bias and making it more profitable to invest and produce for the domestic market rather than for export. 0 Many o f the very high protection rates are highly regressive with a disproportionate impact on low income consumers: for example, milk powder, dairy products, sugar, salt, sugar confectionery, sweet biscuits, cement3', soap and detergents, textile fabrics, cotton shirts and trousers, dry cell batteries, bicycles, f m i t u r e . Ex-factory prices for these products would exceed world prices by 60% to more than 100% if local firms were to fully price up to the protection available to them from these tariffs (see Table 3.15). This should be a major concern for poverty reduction programs. 0 In the process of ratcheting up protection for selected industries, tariff policies have discriminated heavily against the domestic production o f products that have not been favored, especially intermediate materials and components, and machines. This i s an outcome of reductions in raw material and intermediate products tariffs, the use o f "end-user'' concessions, and more generally from much lower incentives for these sectors than for the favored firms and industries. The many highprotection rates make any serious negotiation on regional preferential trade (e.g. under SAPTA, SAFTA, o f the suggested bilateral free trade agreement with India) highly problematic, because o f the potential for large scale trade diversion and the consequent pressures to put these industries on an extensive "sensitive list". The tariff system remains distinctly non-transparent, creating difficulties and uncertainties for everyone involved in the system. For example, there i s no easily available up-to-date published tariff schedule that includes all the para-tariffs, which would enable exporters to Bangladesh, importers or potential investors to identify the tariffs and protection rates that apply to the products that interest them. This inturn puts a premium on information and advice from insiders such as Customs agents and officials. The very highprotection rates resulting from the para-tariffs, and the extreme complexity o f the system, create obvious incentives for both "technical" smuggling" involving misdeclarations, under-invoicing and corruption at Customs, and reinforce "traditional" smuggling which by- passes Customs posts at land borders. This runs counter to longstanding efforts to automate and streamline the Customs administration system. Inparticular, both forms o f smuggling are a major concern for the landborder trade with India. Sri Lanka After its 1977reformprogram, Sri Lankan tariffs were already much lower duringthe 1980sthan tariffs inthe other South Asian countries (Fig 3.1). Duringthe 1990sthere were further reductions inCustoms duties and by 1999 the structure o f protective tariffs had been considerably simplified. This included the abolition o f Customs duties on textile fabrics and garments in 1997, so that since then the textile industry (as distinct from the garment industry) has been operating under free trade conditions. Since early 2001, however, there has been much churning and some backtrackmg from this earlier import liberalization: 0 Introduction o f a surcharge on Customs duties in February 2001. This was initially 40% o f the Customs duty (e.g. a 10% duty was increased to 14% and a 25% Customs duty became 35%). In November 2002 the surcharge rate was reducedto 20% ,and inJanuary 2004 to 10%. InOctober 2001, reductions inthe Customs duties onmanyrawmaterials (mostly notproduced inSri Lanka) from 10%to zero. While this reduced the unweightedaverage of Customs duties in 39A recent study of the cement industry indicates that domestic pricesactuallyexceedworldpricesbythe about the same margin as the cement tariff i.e. by about 66%. 66 Tariffs, Protectionand Revenue the industrial sector, it increased the effective protection o f import substitution industries which use the raw materials4'. 0 InMay2002, the introduction ofa"Ports andAirports Levy" (PAL) at 1%ofcifprices. 0 Across-the-board increases in most Customs duties in January 2004, especially for agncultural products (Fig3. )41. 0 The increasinguse of specific duties, principally t o protect a number o f domestic agricultural industries. A "Cess" (introduced in 1981 to fund the Export Development Board) equivalent to 10% o f Customs duties which are equal to or greater than 45% has also been continued. By comparison with 1999, it seems that the combined effect o f these changes has increased the protectiveness o f the system, but on the other handmajor improvements to the indirect tax system culminating inthe introduction of a VAT inAugust 2002, have improved transparency and reduced the complexity o f Customs clearance42. This not to say that the system is simple: including zero, there are six most commonly used Customs dutyrates (Table 3.2), as well as the surcharge, a number ofhighabove normal Customs dutyrates, specific duties on some products, and the PAL tax. Still, compared to the various para-tariffs in some o f the other South Asian countries (especially inBangladesh) the across-the-board surcharge is transparent with easy-to-see protectiveeffects, and there are also relatively few ad hoc exemptions. Table 3.18 Sri Lanka: Increase inUnweighted Average Protective Import Taxes between 2002/03 and January 2004 2002-03 Jan 2004 Customs Para- Total Customs Para- Total duties tariffs protective duties tariffs protective rate rate All tariff lines 9.6 2.9 12.5 11.3 2.1 13.4 Non-ag lines 7.6 2.5 10.1 8.8 1.9 10,7 Agriculture 21.1 5.2 26.3 24.6 3.5 28.1 NotesThe para-tariffs are the surcharge (20% in2002103, 10% after January 2004) and the 1% PAL tax. The averages are o f MFNtariffs only: they do not take account o f preferential tariffs. They include the ad valorem component of compound tariffs (tariffs which are the higher of an ad valorem or a specific rate) but not specific- only tariffs. On average, the protectiveness o f Sri Lanka's tariffs increased a bit in January 2004, with increases in average Customs duties partly offset by the reduction in the tariff surcharge. Tariff rates are also quite dispersed (Fig 3.10). A recent paper has reported the results o f firm level estimates which have compared domestic-market effective protection rates for manufacturing in 1991 with effective protection rates in2002. These estimates find that. as expected, that there was a substantial decline inthe ~~ 40 ESCAP (2003). Tariffand TradePolicy Frameworkfor Sri Lanka in 2003. Ch 3, p.8. 4' These changes are on the Sri LankaCustomsdepartment website at 42 During the 1990s and before imports were subject to a "tumover tax" (three different rates) based on the dutiable value plus Customsduty and a 25% margin, and tumover taxes at the same rates were imposed on domestic production. In 1998, this was replaced by a "Goods and ServicesTax" (GST) with VAT features, also imposed on both imports and domestic production. Parallel but separate from the GST and its predecessor tumover tax, to help finance the civil war, there was also a "Defense Levy" (later known as the "National SecurityLevy") initially at 3.5% andincreasedto 4.5% inJuly 1995. Likethe GST, this tax was imposed at the same rates on imports and domesticproduction, so inprinciple it did not provide additionalprotectionto Sri Lankan producers, but together with the GST, Customs duties and the PAL tax, it made the calculation of total import taxes enormously complicated. 67 Trade Policies in South Asia :An Overview EPRs over this period, from approximately 138% to 62%43. The still high effective protection rates in 2002 (approximately 138% to 62%44)resulted from lower average sub-sectoral input Flip 3.10 Sri Lanka Jan 2004: Distributionof Protective ImportTax Rates all tariff lines , 50 Non-agricuIture EfAgriculture Protection rate tariffs (6% to 15%) than output tariffs (18% to 25%). Bearing in mind that EPRs for most export activities are zero or negative, the decline after 1991 represents a substantial improvement in the economic efficiency o f resource allocation in Sri Lanka, but the disparity between EPRs in 2002 for import substitution manufacturing and exporting (62 percent versus about zero) was still very large. Moreover, there were still big differences in domestic market effective incentives between manufacturing sub-sectors, with EPRs for 10 sub-sectors ranging from 25% to 125%. The ESCAP report recommends that the government move toward a low uniform tariff that would produce lower and less variable effective protection rates, but the changes introduced in January 2004 appear to have done the opposite, by increasing the general level o f protection made available by tariffs, and probably increasing the variance o f the effective protection rates as between different import substitution activities. As already indicated in discussing Sri Lanka's non-tariff barriers to imports, agriculture trade policies have been especially difficult to manage, reflecting the basic underlying reality that production costs for the major import substitution food crops-especially rice, potatoes, onions and chilies-are very high relative to the prices at which these same products can be imported in most years. During the Uruguay Round, Sri Lanka bound all its agricultural tariffs at 50 percent (much lower than the agricultural bindings o f India, Pakistan and Bangladesh-see Table 3.1) and following the loss o f its Article XVII1.B case at the WTO, in July 1996 it removed all its remaining agricultural QRs, except for the import monopoly over wheat, which Sri Lanka argued was a WTO-consistent state trading enterprise arrangement. In 1997, the Paddy Marketing Board, which had controlled the domestic rice trade and 43Unweighted averages of the sectoral averages reported in ESCAP (2003) Table 3.2, p.10. The firm- level effective protection estimateson which the sectoral averages are based, were madeby the Tariff Advisory Council. 44Unweighted averages of the sectoral averages reported inESCAP (2003) Table 3.2, p.10. The firm- level effective protection estimates on which the sectoral averages are based, were made by the Tariff Advisory Council. 68 Tariffs, Protectionand Revenue imports o f rice, was closed. There followed a period o f tariffs-only (mostly at 35%) protection o f rice and the other principal import substitution food crops, during which imports of potatoes, onions and chilies surged and domestic production declined45. Duringthis period, tariff policies for these crops attempted to achieve two incompatible objectives, protection o f producers and low prices for consumers, by announcing import duty waivers during months o f shortages when there was upward pressure on domestic prices. The unpredictability o f these tariff changes created a great deal o f uncertainty inthe domestic commodity markets, in particular for traders and processors (e.g. rice millers) who were often caught with inventories o f products they had purchased when tariffs were high, and were obliged to resell while facing import competition over much lower tariffs. Because o f this risk, they were subsequently reluctant to offer farmers prices (e.g. for paddy) which fully reflected the tariff protection once the duty waivers hadbeenremoved and higher tariffs restored, so that these opportunistic tariffpolicies inthis way underminedthe protection for farmers that the tariffs were intended to provide46. These experiences led to strong reactions fi-om farm lobbies4'. They were influential in the decision in 1999 to put the whole o f the agricultural sector on Sri Lanka's negative list in the India-Sri Lanka FTA, inthe reintroduction of import licensing for rice during 2000, inthe introduction o f the 40% tariff surcharge in February 2000, and the use o f specific rather than ad valorem tariffs for these crops (for potatoes from December 2000, and for rice, onions and chilies from January 2002). The 40% tariff surcharge brought the then 35% percent Customs duty rate on imports o f these commodities up to a total protective rate o f 5 0% (after allowing for the 1% PAL t ax), just equal t o SriLanka's W TO binding. Subsequent tariff changes which reduced the normally applied top Customs duty to 25% and the tariff surcharge to 20% and subsequently to lo%, cut the total protectiverate for most agricultural commodities to 31%, but then increased them again slightly to 31.25 % in January 2004 (corresponding to the new normal maximum Customs duty o f 27.5% and the reduced surcharge o f 10%). At present (Fig 3.10) about 55% percent o f SriLanka's tariff lines have a total import protection rate (Customs duties plus para- tariffs) o f 31.25%, and most really high tariffs in excess o f this level are for agncultural products, both very high ad valorem tariffs and specific tariffs. For example, new edible oil tariffs introduced in January 2004 (Customs duties plus para-tariffs) are prohibitive (152.2%)48. More significantly, the key domestic food crops which account for the bulk o f agricultural production are protected against imports by specific duties. Inabout September 2003, the ad valorem equivalents of these duties (which vary with world prices) were estimated as follows49: Specific duty Rs/kg Estimatedad valorem equivalent rate % Rice 7 50 Chilies 30 34 Bigonions 6 43 Other onions 5 17 Potatoes 20 133 Sugar 3.5 16 45Ranaweera(2003) 46Formore on this see World Bank (2002, May) 47Kelegama(2003, October) 48The new Customs duties are 126% : they increase to 152% after adding the 10% surcharge, the 10% Cess on Customs duties over 45%, and the 1%PAL tax.. They are publishedon the Customs department website www.customs.gov.lkas W O 0612003 wef 0110112004. 49Estimatesreportedby Ranaweera(2003), p.8. 69 Trade Policies in South Asia : An Overview Specific duties have are also increasingly being used to protect other agricultural commodities. There i s presently a specific tariff on sugar, 50 specific surcharges rather than the general percentagerate was used to increase edible oil tariffs between January 2001 and September 2002, and specific tariffs were introduced for various processed vegetables in 200251. As indicated in Fig. 3, most o f the compound specific tariffs (i.e. tariffs that are the higher o f an ad valorem rate or a specified sum) and also the purely specific tariffs that are presently in force, are applicable to agnculturalproducts. Inthe future, ifSriLankaisableto achieveitspotential for fasteconomic growthbasedonexport oriented manufacturingand services, the strong pressures that have emerged inrecent years for protecting agriculture and for exempting it from the initiatives to further liberalize the trade regime, suggest that there i s a real danger that its agricultural trade policies could develop along the lines o f the agricultural trade policies o f East Asian countries such as Korea. Inthese countries, fast economic growth based on manufactured exports and rapidly increasing wages and living standards, were accompanied by steadily increasing agriculturalprotectionto offset the resultingpressures on the sector to increase its productivity and/or contract. These policies, which eventually ledto prohibitively high levels o f protection for favored rural industries, slowed down economic growth that would have been even faster without them, removed or diminished export opportunities for the rest o f the world (including efficient developing country exporters) and increasedthe already large distortions inworld agriculturalmarkets. Nepal Reforms initiated in the early 1990s cut both the level and variance o f tariffs in Nepal very substantially. Between 1989-90 and 2001-02, the unweighted average Customs duty fell from 39.8% to 13.7%, and whereas in 1989-90 almost 80 percent o f Customs duties were over 25%, and more than 40% over 50%, in 2001/02 three quarters were 25% or lower5'. However, beginning in fiscal 2001/02, this liberalization o f the import regime has been partially reversed by the imposition o f additional taxes (all applied to CIF prices) on top o f Customs duties. InAugust 2003, the unweighted average protective rate o f Customs duties plus para-tariffs was about 18 percent over all tariff lines, 17.8 percent for non- agricultural products and 19.6 percent for agriculturalproducts (Table 3.1). These average protectiverates are nowjust a bit above Palustan's and not far below India and Bangladesh, so by this criterionNepal i s a moderate to highprotection country by the standards o f developing countries. The import taxes or para- tariffs are: 0 A "Local DevelopmentFee" o f 1.5% 0 "Special Fees" o f 1% when Customs duties are 5% or less, 3% when Customs duties exceed 5%, 10% for vehicles (cars, motorbikes etc) and specific duties (Rs 1000/Liter) on petroleum products. 0 An "Agricultural Development Fee" o f 5% on imports o f unprocessed agricultural products and o f some processed agricultural products. Inthe case o f paddy and rice, the fee i s 10%. These taxes were imposed to help finance extra government expenditure resulting from the conflict between the government and the Maoist guerillas, but unlike the National Security Levy in Sri Lanka (abolished in2002) which was also imposed to help finance a civil war, they are not applied to domestic production and therefore increase protection o fNepalese industries. On average (Table 3.1) the taxes have increasedthe unweighted average protection rate over all tariff lines, from about 13.7 percent (Customs duties only) to about 18 percent (Customs duties plus para-tariffs). The extra protection 50The sugar specific duty was increased from Rs 3.5KG to Rs 4.5ikg in January 2004. At low to moderate world sugar prices varying from say US 13-22 cents/Kg, this corresponds to ad valorem tariffs of about 22% to 35%. 51Central Bankof Sri Lanka, Annual Report, 2002, Chapter 9. 52Bajracharya, Pushkar (2003), p.4. 70 Tariffs, Protectionand Revenue provided in this way i s greater for agriculture (from 13.5% to 19.6%) than for industrial and other non- agriculturalproducts (from 13.7% to 17.8%). The structure o f the increase i s as follows: Increase inprotective rate (% o f cifprice) Non-ag products with Customs duties I 2.5 5% Most non-agproducts with Customs duties > 5% 4.5 Most vehicles (HS Ch 87) 11.5 Unprocessed ag products 9.5 Processed ag products with Customs duties I 2.5 5% Processed ag products with Customs duties > 5% 4.5 Paddy and rice 14.5 Cumulatively, these extra import taxes amount to a substantial increase in the protection to local producers, especially in agriculture. While they are generally applied across the board according to the level o f the Customs duty rate and whether or not the product i s "unprocessed", in some cases the taxes have been used selectively. For example, the 10 percent Agricultural Development Fee on wheat and rice imports increases the protection rate for wheat from 10% to 19.5% ,and for rice from 10% to 24.5%, and imports o f wheat four and other cereal flours (processed products) are subject to the 5% Agricultural DevelopmentFee even though it i s not applied to imports o f most other processed agricultural products. Wheat Rice Customs duty 10 10 Local Development Fee 1.5 1.5 Special fee 3.O 3.O Agricultural DevelopmentFee 5.O 10.0 Total Drotective rate 19.5 24.5 The para- tariffs taxes have considerably increasedthe complexity o f the Nepalese tariff. Without them, there are 8 ad valorem Customs duties "slabs" and some specific tariffs, but with the para-tariffs included, them there are 14 ad valorem protective rates, ranging from 2.5% to 141.5%, plus specific tariffs. The resulting distribution o f total protective rates i s shown inFig 3.11. Most protective rates are either 14.5% or 19.5%, but some (principally industrial raw materials and equipment not produced in Nepal) are at 7.5%, while others are clustered at 29.5% and 44.5%. A fairly large number o f Nepal's import substitution industries operate with the protection o f these latter groups o fhighto very hightariffs, while benefiting from much lower tariffs for their imported equipment and raw materials and components e.g. producers o f processed foods, sugar, juices, coffee, Portland cement, building stone and materials, soaps, matches, plastic goods, footwear, iron and steel products, furniture and batteries53. 53Ibid 71 Trade Policies in South Asia : An Overview Fig3.11 Nepal Aug 2003: Distribution of Total Protective Import Tax Rates 40 36 fl 30 26 20 16 i o 6 0 As noted previously, for India, Pakistan, Bangladesh and Sri Lanka, the volume o f trade and of domestic production which is actually affected by regional preferential agreements (SAPTA, the India- Sri Lanka FTA and the India-Nepal Treaty o f Trade) i s negligible, and preferentialtariffs can for the most part be safely be ignored in assessing the broad protection levels that the tariff system makes available to domestic producers. By contrast, about 30 to 40 percent o f Nepal's imports normally come from India, about a third o f its exports are to India, and all this trade is under the terms set by the Treaty o f Trade between the two countries. Under this treaty: Subject to rules o f origin and some exceptions for "sensitive" products, all Nepalese products have duty free access to the Indian market54. 0 Nepalese imports o f unprocessed agriculturalproducts from India are exempt from Customs duty inNepal. However, they mustpaythe other fees andtaxes describedabove, includingthe Agricultural Development Fee. 0 For all other Nepalese imports from India, there are preferences equivalent to 20% o fthe Customs duty rate, for Customs duties o f 40% or less, and equivalent to 10% o fthe Customs duty rate for Customs duties exceeding 40%. Onthe import side, especially after allowing for the other import taxes described above, the resulting overall tariff preferences inNepal for Indian manufactured goods are minimal, but a little more significant for unprocessed agricultural products. For example: MFNrate Preferential rate for India Industrialproducts subject to 5% Customs duty 7.5 6.5 Industrialproducts subject to 15% Customs duty 19.5 16.5 Industrialproducts subject to 25% Customs duty 29.5 24.5 Industrialproducts subject to 40% Customs duty 44.5 36.5 Industrialproducts subject to 80% Customs duty 84.5 76.5 Unprocessed agricultural products : Customs duty 10% 19.5 9.5 Paddy and rice: Customs duty 10% 24.5 14.5 54For more detail on the Treaty of Trade provisions, see Purse11and Pitigala(2001, September). New more restrictive rules of originwere introducedinMarch2002. 72 Tariffs, Protectionand Revenue Because o f these very s mall tariff preferences for India, the relationship with India only very s lightly reduces the protection available to Nepalese industriesfrom its MFN Customs duties and para-tariffs. A much more important determinant o f import competition for local industries i s the large volume o f . smuggled imports from India, which either bypass Customs posts altogether, or which pass through Customs and avoid or underpay import taxes with the connivance o f Customs officials55. Illegal trade in both directions over the long Nepal-India border i s a longstanding and permanent concern inboth Nepal and India, and among other things i t severely limits the extent to which increases in Nepalese tariffs actually produce extra revenue or provide extra protectionto local industries. On the export side, the Indian preferences are substantial, and offer important export opportunities to Nepal, especially for products which are highly protected in India. But not surprisingly, the corresponding industries in India have been active and successful in lobbying for measures to make sure that exports from Nepal o f such "sensitive" products do not grow too fast or become too great. This issue i s discussedin Chapter IV on regional trade and regional trade agreements. Nepal acceded to the WTO inDecember 2003, 14 years after it first applied. Like other recently acceding countries, it had to agree to a more comprehensive and rigorous set o f constraints on its trade policies than those applying to existing members. Inparticular, it has bound 100percent o f its tariff lines including all o f its non-agricultural lines (Table 3.1): this compares with much lower percentage coverage o f non-agricultural tariffs by the other South Asian countries, especially Bangladesh and Sri Lanka. Its bindings are also considerably lower than the bindingso f the other South Asian countries, particularly in agriculture. The accession negotiations also focused on Nepal's para-tariffs (in WTO terminology "Other Duties and Charges" or ODCs) and Nepal has agreed to phase them out over a period o f 2-10 years, and to bind them at zero once they are eliminated56.This will simplify the administration and improve the transparency o f Nepal's tariff system, but it won't necessarily lead to lower protective tariffs, since for most tariff lines the present applied rates (Customs duties plus para-tariffs) are well below the boundrates. Bhutan Bhutan i s landlocked with borders with India, China and Sikkim, and its only road connections suitable for merchandise transport are with India. It has a free trade agreement with India under which Bhutan's exports are exempt from Indian tariffs, and Bhutanese imports from India are exempt from Bhutan's import licensing and from tariffs. However, for a tiny economy, some o f Bhutan's tariffs are rather high and are quite escalated. For example, cotton and synthetic fibres zero, textile yams zero, textile fabrics 20%, and garments 30%, flours lo%, lo%, baked products (biscuits etc) 30%, fresh vegetables and processed vegetables 30%57.Potential protection i s further increased by a sales tax which i s reportedt o be applied t o imports but not t o the production o f local import s ubstitution finns, which therefore also provides some protection against imports from India, despite the free trade agreemen?. At present, no direct bonded imports are possible through India, so Bhutan's MFNtariffs are o f little or no relevance. except for imports which come by air. However, if and when bonding arrangements are made with India, apriori, its present arrangements would appear to be economically inefficient in some ways, by diverting potential imports from third countries to higher cost suppliers in India, and by providing excessive protection to local import substitution production. A small empirical study which would take account o f the transport costs of imports from alternative sources and which would estimate the likely 55For recentdiscussions of this informal trade, see Pohit, Sanjib andNishaTaneja(2002), andBajracharya, Binodand .... 56WTO (2003, August). Report of the Working Party on the Accession of the Kingdom of Nepal to the World Trade Organization. WTIACCINPLII 6 57Ministry of Finance, (2002, January) Bhutan Trade Classification Customs Tariffand Sales TaxSchedule. See the discussionin WorldBank (2002, January)Bhutan Private Sector Survey, pp 14-15, 116-117, and 141-143. 73 Trade Policies in SouthAsia :An Overview trade diversion and economic welfare consequences o f this protective structure and the FTA with India, would be useful. Customs duties on imports in the Maldives provide about two thirds o f government revenue, since there are no other indirect taxes. In2002 the unweighted average Customs duty was 20.8% over all tariff lines, 21.2% for non-agriculturalproducts and 17.8% for agricultural products. All tariffs are bound, mostly at 30%. Maldives i s a member o f SAPTA, but only provides very small preferences (for example, 22.5% tariffs instead o f MFN tariffs o f 25%) for a limited number o f products. For a very small economy, protective tariffs are quite high, and even though there i s no local production o f most imported goods, the tariffs have the potential to shelter pockets o f highcost local production and to distort resource allocation away from economically more efficient activities, especially export related activities. As emphasized in the December 2002 WTO TPR report, the principal needed reform i s to substantially reduce the protective Customs duties and to use a VAT-style indirect tax as the principal source of govemment revenue. Anti-DumpingandSafeguards The WTO agreements on anti-dumping (AD), countervailing duties (CVD) and safeguards provide three GATT-legitimate justifications for giving extra protection against imports at rates which exceed bound tariffs. AD measures are intended to offset injury to the national industry resulting from export sales at prices lower than prices in the domestic market o f the exporter (dumping)60. Countervailing duties are imposed to offset foreign subsidies. Safeguard duties provide temporary extra protection to an industry while it adjusts to import competition. Since the mid-l980s, anti-dumping has been by far the most frequently used o f these three instruments, and the most prolific users were initially the developed countries. However, as tariff and non-tariff barriers came down in developing countries in the 1980s and after, they also became active users o f anti-dumping. South Asian exports have frequently been harassed by both AD and C V D measures, mostly in developed countries. None o f the South Asian countries used anti-dumping untilIndia started in 1992/93. 59This section mainly relies onthe December 2002 WTO TPR report onthe Maldives, pp 29-38 6o For anti-dumping duties to be levied it must be shown that (1) "dumping" exists, as measured by a "dumping margin" equivalent to the excess of the "normal value" o fthe productinthe exportingcountry over the exportprice to India, and (2) that the dumpedimports are causing or threatento cause "material injury" to the local industry. Ifboth these allegations are upheld, an anti-dumpingduty sufficient to eliminate the "injury" to the local industry, but no higher than the "dumping margin", can be imposed. Inthe absence of information from the exportingfirms, the "normal value" o f the exporter has been constructedby the Indian AD Authority on the basis o f "best availableinformation", most of which was provided by the complainingIndianfirms. In a number of cases the "normal value" was inferred from productioncosts in India plus an allowance for reasonable profits. "Material injury" is defined very broadly and includes practically any actual and also potential adverse consequence of competitionfrom the dumped imports. It includescases where the complainingdomestic firms are profitable, but where the AD Authority assesses that these profits are lower than they would havebeeninthe absence of the "dumped" imports.Nearly all AD duties are specific and typically calculatedas the additionalimport duty neededto enablethe complainingdomesticfirms to sell at "fair" prices which take account of their production costs plus a "reasonable" margin for profits. Until the late 1990s they were usually set in Rupees per quantity unit (per kg, per ton etc) but since then most have been set in $US per quantity unit in order to avoidthe decline in the ad valorem equivalentof Rupee AD duties over time resulting from inflation and exchange rate devaluation. Startinginthe secondhalf of calendar 1998, AD duties in anumber of cases have beenset as the differencebetween specifiedreference prices and the import-duty- inclusive price o f imports, provided that the resultingAD duty does not exceed the "dumping margin.This provides amotivation for the exporter to set hisprices suchthat the duty inclusive pricewill equalthe reference price and so ensure that no AD duties will be imposed. If this happens, the tax imposed on the Indian buyers of the importedproductis collectedby the foreign exporter rather thanby the Indian government. 74 Tariffs, Protection and Revenue Pakistan's first AD case was decided in November 2002. Bangladesh, Sri Lanka and Nepal do not use AD, although there are strong pressures to introduce anti-dumping in all three, especially following two recent Indian anti-dumping cases which resulted in the imposition o f duties on imports from Bangladesh and Nepal. The 1ack o f interest in anti-dumping in earlier years was the consequence o f the region's highly protectionist policies. Very hightariffs and unrestricted use of QRs obviated any need for other ways o f keeping imports out. This was most apparent inIndia prior to its 1991/92 trade policy reforms, when a basic principle o f the import licensing system was to allow imports only when the product was "essential" but not available from domestic producers. The 1991/92 reforms removed import licensing from most intermediate manufactured materials and from machinery and equipment, and started a process o f annual reductions in tariffs. Initially, most domestic manufacturers o f intermediates were more than adequately protected by tariffs and by the very large real devaluation o f the Rupee between 1986 and 1992. Despite this, some industries began to feel the effects of import competition and India's first three anti-dumping cases were initiated in 1992/93. As tariffs declined, anti-dumping activity increased61. As o f March 31 2003, a total of 153 AD cases had been initiated, 30 o f them in the previous 12 months62. These cases involve over 100 products imported from 47 countries -- 17 developed, 13 low-income developing, and 17 others, including middle-income developing countries, FSU countries etc. By far the most frequent targets o f complaining Indian firms have been exporters in China, followed by exporters inTaiwan, EU, affect many more individual foreign exporting firms -- probably well over 1000 -- since AD duties are South Korea, Japan, USA, Singapore, Russia, Thailand, Indonesia and Brazil in that order. The cases firm-specific, often with different duties applied to imports from three or four different firms inthe same country. AD duties, which come on top o f normal import duties, are currently being applied to a wide range o f intermediate materials and inputs, including chemicals and petrochemicals, pharmaceuticals, synthetic fibers, and steel and steel products. Inthe past few years, following the final phase-out o f import licensing o f consumer goods in April 2001, anti-dumping i s increasingly being used against imports o f consumer goods. Anti-dumpingactivity increased sharply at the time o f the East Asian crisis around 1997-98, and has continued increasing since then, with 19 new cases in 1999/2000, 28 in 2000101, 30 in2001/02, and 30 in 2002/03. It continued at a rapid tempo during 2003/04. Apart from the impetus resulting from reductions inworld prices and the removal o f most QRs, anti- dumpinghas expanded as a result o f active promotion by the Directorate General o f Anti-Dumping (DGAD) in the Ministry o f Commerce, and country-wide liaison for the business community with the DGAD in Delhi provided by DGFT offices in 30 port towns and cities. By contrast, as o f March 2003, no C V D cases and only 15 safeguard cases had been initiated. Extraprotection through anti-dumping is preferredby domestic industries because it is generally more easily obtained63,more protective, and longer lasting64and i s also preferred by most administering government authorities. Unlike safeguard rules, the AD rules contain no provisions for compensating the affected exporting countries. 61The anti-dumpingcases are targeted against imports from particular firms inparticular countries, and for the same product the AD duties canvary accordingto the firm andthe country. Inmanyof these cases, a separate (usually higher)higher dutythan the duties on importsfromthe individual targetedfirms is imposedon "any other exporter" from that country. India,Ministry o f CommerceandIndustry,DirectorateGeneralof Anti-Dumping andAllied Duties.Annual Reporf2002-2003. 63Once an AD case is initiated, it i s almost certain that AD duties will be applied. There are only a few exceptions so far. One early case (styrene butadiene rubber in 1992/93) ended with a finding of no injury attributable to dumping. The same industry reappliedand obtained AD protection in 1998, however. In another case (newsprint) AD duties were recommendedby the AD Authority but were not imposedby the MinistryofFinance. Of the 153 cases initiated up to March2003, only 6 did not result in the impositionof AD duties. 64All the IndianAD duties havebeenimposedfor aperiodof five years, which is the maximumallowedby the Indianlegislation and the WTO rules. However, they can be reviewed and renewed at the end of this period for another five years, and this can continue indefinitely. 75 Trade Policies in South Asia : An Overview Anti-dumpingmay act as a safety valve which allows a government wishingto reduce the general level o f protection to accommodate lobbying and political pressures which might otherwise buildup and compromise the general program. Though seldom explicitly stated, this i s an important motive in India and has been a consideration behind the introduction o f AD in Pakistan. But whether the use o f AD i s on balance justified economically then depends on how frequently the safety valve i s used and on the economic costs involved, as against the benefits o f the trade liberalization that the safety valve makes possible. Inorder to make this judgment, there would need to be some knowledge and understanding o f the economic consequences o f the AD activity, but in Indian debates on economic policy there i s very little awareness o f the scope o f the AD that has been occurring, let alone general knowledge o f its economic effects. For a number o freasons these effects are likely to be serious and highly adverse. First, the foreign firms targeted and penalized by the anti-dumping cases are almost always the most competitive that have the largest and/or fastest-growing market shares. Their export prices to India have typically been within the range o f prevailing prices for their products in international markets, but under the AD laws such facts are irrelevant if a "dumping margin" and injury to domestic firms are established. Consequently the AD duties are in practice an extra import duty on top o f normal import duties, not a tax that brings up the export prices o f these firms to the prevailing normal level o f internationalprices. Ina number o f the Indian cases, the AD Authority stated that evidence that the Indian firms requesting AD protection were themselves exporting at the same or similar prevailing world prices was irrelevant to the case. This attitude in turn signals other exporters to charge "reasonable" prices or also face anti-dumping actions, and results in a real terms-of-trade loss to India65. Second, the anti-dumping cases have been greatly increasing the protection o f industries producing numbers o f important and widely used intermediate materials. Until the recent tariff reduction program, even without the additional anti-dumping duties, the tariffs protecting these industries were extremely high by developing country standards, generally about double the levels o f intermediate material tariffs that the government committee (the Chelliah Committee, which recommended the post 1991/92 tariff reduction program) said should be achieved by 1996/97. For example, following the 2002/03 budget, many o f the tariffs on the intermediate products subject to AD duties were 30%, equivalent to 36% after allowing for India's SAdd duty, compared to Chelliah Committee targets o f 20 or 25 percent. The majority o f these tariffs have now been reduced to 20%, but the ad valorem equivalents o f AD duties vary from about 10 percent to 80 percent, with most in a range o f approximately 20 to 50 percent. This means that total import duties on imports o f these materials from foreign firms subject to the AD duties, are mostly ina range o froughly 40 to 70 percent. Third, the Indian anti-dumping cases have been reinforcing the market power of highly concentrated Indian industries. A study o f AD cases up to mid-1999 indicated that o f 29 products subject to AD cases inwhich information i s provided on the structure o f the Indian industry, there was only one Indian producer for 11 products, only 2 Indian producers for 5 products, and 3 Indian producers for 7 products. In only 6 o f these 29 cases were there 4 or more Indian producers66.That the market power o f the Indian producers was being exercised was apparent from a number o f factors, including the 65For a number of products, AD duties have first been imposedon imports fromfirms inone or a few countries, and thena new case has later beeninitiatedand AD duties imposedon imports fromfirms in selectedother countries. The texts o f the AD cases makeit clear that the AD Authority intends that AD duties imposedin a first case are intendedas awaming to exporters inother countriesto charge"fair andreasonable"pricesandto notindulge indumpingwhen exportingto India. Aggarwal (2003) reports that of 97 cases she investigated, there were only three in whichthere were more than 5 petitioners, and in 90% of the cases the number of petitionerswas betweenone and three. Inthe cases where there was only one petitioner, the average market share was 89.7%. This observation is confirmed by Prasad (2003) who comments that fragmented and dispersed industries find it difficult to meet the "standing requirement" for initiating an AD case i.e. the requirement that the petitioningfirmsbetweenthemhavea specifiedminimummarket share. 76 Tariffs, Protectionand Revenue profitability o f a number despite considerable excess capacity, and in other cases export sales at prices generally about the same or lower than the "dumped" import prices about which the same firms were complaining6'. For potassium permanganate and hot rolled steel coils - both the subject o f anti-dumping cases in India - the Indian industryhad been the subject o f anti-dumping cases brought against it in the EU. Fourth, two new bureaucratic bodies6*have been created to implement the AD and safeguards policies and given considerable discretionary power over India's trade policies. The most active by far i s the DGAD. To give general advice, prepare for and represent private firms in anti-dumping cases, a whole new specialized service industry has been created of accounting and economic consultants, technical specialists and lawyers, some o f whom are ex-employees of the DGAD. Inits own terms the system has been administered in a transparent way in that the proceedings o f each case including the arguments and evidence presented and the reasons for recommendations are summarized and promptly published, and lists o f cases initiated and completed are provided to the WTO. But the system i s ad hoc and distinctly non-transparent in other more fundamental respects. Inaddition to the uncertainty it creates for Indian importers and foreign exporters, it has created many incentives for rent-seeking behavior. The rent-seelung opportunities are obvious, since a successful AD case against individual exporting firms in other countries limits their ability to compete in India and might well exclude them from the Indian market altogether, perhaps indefinitely6'. Such a judgment correspondingly hurts the Indian importers with whom the foreign firms have links, gives extra protection to domestic producers, and reduces or eliminates the competition faced by firms exporting to India that are not subjected to AD actions. Fifth, the extra protection currently being given to domestic industries by Indian anti-dumping measures i s increasing the already considerable vulnerability o f Indian manufacturing industries to retaliatory anti-dumping actions intheir export markets. Between 1991 and July 2003, 77 AD cases were initiated against Indian exports in 15 countries, and 31 CVD (anti-subsidy) cases in 5 countries. Added to already high tariffs, AD duties in India allow local firms to increase their domestic prices and thereby increase the "dumping margins" which are the basis for AD duties imposed on Indian exports elsewhere. Even industries that are not themselves protected by AD duties may become more vulnerable to the extent that they raise their domestic prices to offset increases in the prices paid for material inputs which are affected by anti-dumping duties". Finally, the increased protection and prices o f key intermediate materials resulting from the proliferation o f AD cases since 1992/93 has implications for the continuing liberalization o f Indian trade policies. It raises the costs o f products which use these materials, reinforces the resistance of these industries to tariff cuts, and motivates them to press for offsetting extra protection For example, during a period o f low international s tee1 prices during the late 1990s until about 2003, AD duties added to already highprotection of the Indian steel industry, which fed into the costs o f producers o f machinery and equipment, and a wide range o f steel products such as steel pipes, consumer appliances and automobiles and trucks. More generally, during this period, increased protection and prices of intermediates increasedthe production costs o f consumer goods just as India was being obliged to remove 67 Inmany of the Indian cases, the AD Authority explicitly states that the prevailing level of international prices is irrelevant, including cases where the complaining Indian industrywas exporting the same product at about the same prices as the alleged "dumped" import price. Int aking this position, the AD Authority is c orrectly interpreting the Indian1aw and the WTO AD agreement. 22 Safeguards are administered separately from the DGAD, inthe Ministry o f Finance. 69 The repeated renewal of anti-dumping measures to keep out competitors for long periods is well documented in the literature on anti-dumping inother countries. A colorful but reliable account o f the US experience i s in Bovard (1991). ' OA possible motive for introducing AD is to deter other countries from using AD against a country's exports (Aggarwal, 2003). This does not appear to have been a motive in India, at least explicitly. 77 Trade Policies in SouthAsia :An Overview import licensing. These increases in turn fueled arguments and pressures for higher tariffs, many of which were not constrainedby WTO bindings and the use o f other protective techniques. By contrast to anti-dumping, the safeguards cases so far concluded inIndia71appear to have been much less economically damaging. The duties imposed seem to be lower than the ad valorem equivalent o f most AD duties, are inplace for shorter periods (one to three years) and most decline before they are phased out. Most importantly, the firms requesting safeguards protection have had to demonstrate that they are restructuring in order to face the import competition without the extra protection. Initially, in accordance with the main thrust o f the WTO agreement, the safeguards duties were non-discriminatory, and they applied to all imports o f the concerned products fi-om all countries. Subsequently, however, as permitted by the WTO agreement in certain circumstances, the law was amended to allow for the use o f tariff rate quotas. Because the quota i s generally rationed, this kindo f safeguard duty has the potential to create considerably more economic damage than the safeguards duties so far imposed. An argument can conceivably be made for imposing temporary safeguard duties while a local industry adjusts to import competition, but except for meeting the desire o f local industries for extra protection, there i s no coherent economic rationale for AD measures. Sales at prices which are sometimes below average production costs or which discriminate between buyers and markets are normal and necessary inefficiently functioning contestable markets, whether domestic or international. InIndia, as in other counties, the use o f anti-dumping i s justified by arguing that it i s needed to deal with predatory pricing by foreign firms, which otherwise will undercut and drive Indian firms out o f business and then raise their prices and exploit Indian buyers. Detailed studies o f anti-dumping cases in other countries7' have shown that the alleged dumping firms have almost never gained sufficient market power to raise prices, even supposing their alleged dumping caused competitors in the importing country to close. The existence o f such market power i s also quite implausible inthe Indian cases. Ina number o f these, imports were coming from 20 or more countries. Inothers, even though fewer supplying countries were involved, some o f these were very large (USA, China) with a number o f strongly competing domestic firms. The AD cases already decided in India and the potential for unrestricted anti-dumping to undermine the liberalization o f the trade regime that has been achieved so far suggest that a review o f current AD policies and practice i s urgently needed. The present momentum o f anti-dumping in India could be stopped or slowed in a variety o f ways73: e Repealingthe AD law and using the safeguards provisions as the main safety valve for responding to protectionist pressures. Inthis regard, it should be noted that there i s no WTO obligation on member countries to have an AD law on their books: the only obligation i s that if they have an AD law, it should be consistent with the W T O agreement. e Channeling all or most cases to the safeguard route and maintaining it as a temporary, short term tariff-based instrumentto provide extra protection to firms while they adjust. e Incorporating a buyer/consumer interest in the AD and safeguards laws, and requiring cases to be decided on the basis o f the overall economic costs and benefits o f imposing duties. e Explicitly including an anti-trust type filter in the AD law to make predatory pricing and the likelihood o f subsequent market power preconditions for the imposition o f AD measures. "ForanaccountofIndiansafeguardcasesuptomid-2003,seeGupta(2003). As of mid-2003,hearingson 14petitionsfor safeguardhad been concluded, of which 8 had resultedin the imposition of safeguard duties and 6 had either been rejected, droppedor delayed. 72J. Michael Finger, 1998. GATT Experience with Safeguards. World Bank, Policy Research Working Paper 2000. October, p.13. 73See discussion in J. Michael Finger (1998)pp.14-16and in J. Michael Finger (ed), 1993.Antidumping: How it Works and Who GetsHurt. University of Michigan Press, Ch.4. 78 Tariffs, Protectionand Revenue Despite the economic desirability o f reforms along these lines, the political economy o f anti- dumping is such that, once anti-dumping laws are introducedand operational, it may be difficult to alter them substantively without similar reforms being instituted and supported internationally, inparticular at the WTO. Since there i s at present no sign o f the latter happening, the most effective way o f constraining anti-dumping activity may be through administrative measures that make it more expensive, time consuming and difficult for petitioning companies to succeed in anti-dumping cases. Inthat regard, it i s relevant to note that inDecember 2003, the EC asked for consultations with India on 27 recent AD cases affecting EC exporters74. The EU complaint questions many key aspects o f the procedures followed by the Anti-DumpingAuthority in these cases, basically claiming that the investigations were superficial and not sufficiently detailed or careful, and did not provide exporters with sufficient information or time to effectively defend themselves. One possible outcome o f this dispute could be that in future the cost and difficulty for Indian firms o f obtaining favorable AD judgments will increase, thereby reducing the number and scope o f the cases that are initiated. Finally, an unfortunate consequence o f anti-dumping activity in India i s that producer groups looking for ways to obtain extra protection in the neighboring South Asian countries are using India's example as another reason why their governments should introduce AD laws and develop the technical capacity to implement them. As already discussed, this has now been done inPalustan where the first two AD case have been decided, and anti-dumping has become the principal role o f the Tariff Commission. Similar pressures and arguments for introducing anti-dumping are being heard in Bangladesh, Sri Lanka, and Nepal, but, as in Palustan, the economic costs o f AD are almost completely lost or ignored in these discussions: all that i s being heard i s that AD i s a legitimate WTO-sanctioned way o f dealing with "unfair" foreign competitors. The willingness and interest o f various international and national organizations to provide technical assistance to establish AD capabilities in developing countries, make succumbing to such pressures much easier. There are also no systematic economic evaluations o f the consequences o f Indian anti-dumping. Some applied, policy oriented empirical research on this topic could provide the basis for, at the least, some public questioning o f AD in India. Such studies, if well done, could also be useful to other South Asian governments presently under pressure to go down the same path. Tariff Collection Rates Tariff or import duty collection rates -- import duties collected divided by imports -- should be easily available. Inpractice they are not. They are in some ways useful indicators o f the effects o f tariffs, since they measure the extent to which, on average, tariffs increase the cost o f imported goods to importers. In most circumstances, however, they systematically understate the protection that tariff systems provide to domestic production. Since the usual tariff structures involve a range o f tariffs from low to high, imports o f high-tariff products are reduced more than low-tariff products and therefore have a lower weight in the average, import-weighted average collection rate. At the top end o f the tariff structure, it i s quite usual (especially in South Asia) for the tariffs to be almost prohibitive or prohibitive, so that there are negligible or no imports, with the result that the most protected domestic products often receive almost zero or zero weights. If the objective i s to provide an empirical indicator o f the average protective effects o f tariffs as regards established domestic industries, it would be better to weight tariffs by the value (preferably value-added) o f the domestic production the tariffs protect, but matching disaggregatedproduction or value added with tariffs i s difficult and time consuming7'. 74WTO document WT/DS304/1 dated 11December2003. See also Weekly Index, Vol XX No 38 17-23 December. 75Import duty collection rates would accurately indicate changing levels o f protection to domestic production if there were just one uniform tariff, but inthat case the weighted average would be the same as the uniform tariff rate and there would be no need to calculate it. An extreme example o f a misleading duty collection rate would be a situation inwhich all domestic production i s 79 Trade Policies in South Asia :An Overview Despitethese problems, the levels o f and trends induty collection rates are a useful supplement to more detailed information on tariff structures and trends, provided their drawbacks are kept in mind. In South Asia, as regards levels, they are consistent with inter-country comparisons o f other protection indicators, and as regards trends, they are consistent with those o f such other indicators as unweighted averages o f tariffs by tariff line. Levels in 2001. Loolung at levels first (Table 3.19 and Fig 3.12), the aggregate collection rates are consistent with the earlier discussion o f tariff rates and structures, which show that in 2000 India has the highest tariffs in South Asia by a clear margin, followed by Bangladesh, Pakistan, Nepal, and Sri Lanka inthat order. These collection rates have been estimated by excluding the (in principle) non- protective indirect taxes imposed on imports76,but taking into account the other protective taxes described earlier in addition to Customs duties i.e. inIndia the SAdd duty; inBangladesh the IDSC duty, the license fee77,supplementary duties, and the effects o f VAT exemption for domestic producers; and in Sri Lanka the Customs duty surcharge (40% o f Customs duties in 1999/2000). In Palustan and Nepal, Customs duties were the only protective import duties. Comparing these South Asian collection rates with China's in 1998 (Fig 3-27-28), China's rates (2.7%) prove to be about half that inthe most open of the South Asian economies (Sri Lanka) and about one-seventh o f India's (17.5%). Since 2000/01, tariffs have been reduced in India, Pakistan, Bangladesh, and Sri Lanka, but it i s unlikely that these reductions would greatly change these comparisons. Aggregate import duty collection rates provide an indication o f the average tariff- induced increase inthe prices o f imports above their average cif price, including the prices o f inputsimported by exporters generally duty free as a result o f one o f the standard exemption or drawback schemes. Inorder to provide a better indication o f the price-raising effects o f tariffs on imported products which are either intermediate or final goods for the domestic market, it i s useful to deduct duty-exempt intermediate inputs imported by exporters from the import duty collection rate. Where data i s available another adjustment has also been made for petroleum, oil and lubricants (POL) imports by removing tariff revenue from such imports from the numerator and POL imports from the denominator. POL products are a very large import item for all the South Asian countries, and how the import taxes are described i s arbitrary and has little relation to protection objectives. Some countries apply high excise or fuel taxes and low Customs duties; others do the opposite. The results o f these adjustments are shown in Table 3.20-25 and Fig 3.13-26. D ata for both adjustments was only available for India and Bangladesh. In India the combined effect i s to raise the collectionrate for domestic-use imports excluding POL well above the aggregate collection rate, to 26.6% compared to 17.5%. InPakistan, excluding POL also gives a considerably higher domestic-use collection rate (14.6% versus 10.3%). Separate data on imported inputsused by exporters was not available but if it protectedbyprohibitive tariffs so that there are no imports, andthe only importsare of inputs for local industriesall exempt from tariffs. Inthat case the import duty collection rate would be zero even though nominal protection could be extremely high and effective protection even higher. Import duty collection rates for obvious reasons are also misleading indicators of average protectionlevelswhen imports are restrictedor effectivelybannedby QRs. 76 Pakistan, Sri Lanka andNepalpublishcustoms revenuestatisticswhich distinguish c ustomsduties from indirect taxes on imports. However, in India until 2001/02 the two were not distinguishedeither in publishedstatistics or it seems in aggregated form in internal records. The estimates given in Table 3.20 for India are from unpublishedresearch on this and related topics (Garry Pursell, Indian Trade Policies Since the 1991/92 Reforms: see notes to Table 3.20). In 2001102 the protective taxes (Customs duties and the SAdd) and indirect taxes on imports were distinguishedfor the first time in the annex papers to the 2002103 budget. As in India, Bangladesh published statistics do not separate out domestic indirect taxes paid on imports from other Customs taxes. The dataestimatesreportedinTable 3.22-23 hasbeencompiledby Bank staff from datakindly suppliedby the NationalBoardo fRevenue.A difficult andtime consumingpart ofthis task was estimatingthe protectivecomponentof VAT andsupplementaryduties, owing to the fullor partial exemptionof some domesticproductsfrom these taxes. 77 Since removedinFY03 80 Tariffs, Protection and Revenue were, it would probably not greatly increase the collection rate, since a large share o f Pakistan's exports use domestic cotton, and importedexport-related inputsare a relatively small share o f total imports. InBangladesh, where taxes describedas Customs duties onPOLproductimports were quite low, removing such imports reduces the average collection rate below the aggregate rate. However, imports o f inputs for Bangladesh's export industries, mainly fabrics for the readymade garment sector, account for a large share (36% in 2000/01) of total imports, and netting these out gives a much higher collection rate than the aggregate rate, 16.7% versus 11.7%. This i s consistent with the level and structure o f Bangladesh's tariffs, which suggests that the domestic market for Bangladesh industryi s the second most- protected in South Asia next to India, at least interms o f the protection available from tariffs. InSri LankaandNepalno data is readily available for either adjustment. Inbothcases, however, it is likely that adjusting for duty-exempted inputs imported for export production would substantially increase these countries' duty collection rates. For example, if these imported inputs (fabrics etc) were 70% o f Sri Lanka's garment exports, they would account for about 30% o f Sri Lanka's total imports in 1999/2000, and adjusting for this, the import duty collection rate would be 7.2% in this year rather than 5%. This is still a low collectionrate incomparison with the other South Asian countries, however, and i s consistent with the generally open and low protectionpolicies that Sri Lanka i s presently following, albeit with some significant exceptions. Garments using duty exempt imported fabrics and other textiles as inputs are also Nepal's largest export (about 28% o f total exports in 1999/2000), followed by carpets which are also fairly intensive users o f imported fibers and yarns. If duty-exempt imports for exporters were 30% o f Nepal's total officially recorded imports, the average duty collection rate would go up from 10.1% in the aggregate to 14.4%, probably a better indication o f protection conditions in the domestic market than the lower aggregate collection rate. Trends.Tariff collection rates have declined in all the South Asian countries since the late 1980s and during the 199Os, but starting from very different levels and at different rates (compare Figs 3.13 - 26) : e InIndia (Table 3.20 and Figs 3.13 and 3.14) collection rates peaked at extremely high(62 percent -- surely a world record) levels in 1987/88, came down slowly for some years, and then fell rapidly during the early 1990s along with the pre-announced reductions that were part o f India's 1991/92 reforms. Over the whole periodsince 1979/80, it can be seen that netting out POL and export-related imports systematically raises the collection rate, with especially wide gaps between the aggregate rate and the adjusted rates during the 1980s and again for a few years between 1998/99and 2000/01. The rising trend until the peak 1987/88 had little to do with changes inprotection levels, however, since until 1991/92practically all imports were subject to licensing: the main use o f the tariffs duringthe 1980s was to mop up economic rents from the issue o f import licenses. It i s possible that implicit nominal protection and untaxed economic rents from licensing may have been higher in the earlier years than later on when tariffs were higher. The 1990s decline in the collection rates leveled out in about 1997/98,trended upward for two years after 1998/99, and then declined again in 2001/02. The sharp drop in 2001/02was probably due mainly to the removal o f the 10% customs duty surcharge in the March 2001 budget. It is probable that there will be another drop in 2002/03 resulting from the reduction inthe general maximum basic customs duty from 35% to 30% inthe 2002/03 budget. e By contrast with India, inPalustan, between 1990/91and 2000/2001 collection rates were ina strong downward trend throughout the period and fell in every year except one (Table 3.22 and Fig 3.15-19). Netting out POL imports shifts the rate up uniformly during the entire period, but proportionately more in the later years. As noted previously, adjusting further for export-related imports would shift the collection rate up again, but probably not by much inview or the relatively low level o f imported inputs used by Pakistan's textile and clothing exporters. It is likely that this downward trend will 81 Trade Policies inSouthAsia : An Overview continue during2001/02 and 2002/03 as a result o f the reductions inthe general maximumtariff, now 25%, and the relatively few exceptions being allowedto this general maximum. The estimation o f reasonably accurate collection rates in Bangladesh i s especially difficult owing to the multiple protective import taxes that are used in addition to customs duties, and they have only been calculated for five years, 1991/92 and for the four years 1997/98-2000/01 (Table 3.23-24 and Fig2 0-21). C ollectionrates were considerably lower during the 1atter four y ears than in 1991/92, reflecting the customs duty reductions during the late 1980s and 1990s, but the decline stopped in 1998/99 owing to the new import taxes. It i s probable that the earlier decline in collection rates has resumed during 2002/03 following the tariff reductions announced in the 2002 budget. As shown in Fig 3.20, netting out POL imports in this case reduces the collection ratio, but adjusting for export- related imports increases it substantially. With this done, it i s interesting to note that with both adjustments, the collection ratio was not only considerably higher than the collection ratio for aggregate imports, but also trendedup slightly between 1998/99 and 2000/01. InSri Lanka, the peak tariff collection rate (19.8 % of total imports) duringthe past 20 years was reached in 1998/99, far lower than the peak levels seen in India, Pakistan and Bangladesh. The increase during the 1980s was associated with the replacement o f import licensing by tariffs, a key part o f the early Sri Lankan reforms, and also with the phasing out o f export taxes applied to exports o f plantation crops, a major source o f tax revenue the early 1980s. After 1998/99 the collection rate fell steadily for the next 11years until in 1999/2000 it reached 5%, about one quarter o f its peak level (Table 3.25 and Fig 3.22-23). Tariff reductions announced in the 2002 budget will probably take the collection rate below 5% during2002/03. Nepal's maximumtariff collection rate (Table 3.26 and Fig 3.25-26) since 1984/85 (just over 14% in 1989/90) was much lower than the pre-liberalization maximum collection rates o f the other South Asian countries during the same period. Nepal's trade liberalization and tariff reductions during the early 1990s sharply reducedthe collection rate from this level over two years, but it then stabilized at between about 8 and 9 percent o f imports. Itprobably remains at about this level in2002. Tariffs and GovernmentRevenue In South Asia as elsewhere in the developing world, one of many reasons govemments are reluctant to cut tariffs i s their fear o f losing revenue that would be difficult to replace by increasing domestic taxes. Tables 3.20-27 and Figs 3.13-30 give some indicators of the current importance of tariff revenue for India, Pakistan, Bangladesh, Sri Lanka and Nepal, and also some comparisons with China. The following points are worth noting: Revenue from tariffs i s still a big share o f GDP ina l l these countries: 1.6 percent in India, 1.87 percent in Palustan, over 2 percent in Bangladesh and Sri Lanka, and almost 3 percent in Nepal. In China, by contrast tariff revenues are currently only around one half o f one percent o f GDP, indicating that China could if it wished move to free trade with minor consequences for govemment finances. InS outh A sia, other taxes w ould have t o bringin revenue o n the order of one or more percent o f GDP to support further tariff cuts, even after allowing for substantial potential increases in import-to-GDP ratios. InNepal and Bangladesh, import duties account for much higher shares o f total government current revenue, total taxes, and total indirect taxes than inIndia, Pakistan and Sri Lanka. But the dependence o f a11the South A sian c ountries o n tariff revenue is muchhigher than C hina's, where 1998 tariff revenue only accounted for 3.1 percent, 3.4 percent and 4.2 percent respectively o f total govemment revenue, total taxes, and total indirect taxes. India's dependence on revenue from tariffs i s three to four times that o f China; Bangladesh's, 7 to 9 times. The share o f tariff revenue in the economy and in govemment revenue depends o n average tariff collection rates inrelation to imports, the share o f imports in GDP, and the size o f the government in 82 Tariffs, Protectionand Revenue relation to the economy. Reflecting higher tariffs on average, India has the highest import duty collection rate o f the five S outh A sian c ountries ( 17.5 percent in2 001) and SriLanka by far the lowest (5 percent in2000). Since Indian imports are low inrelation to GDP (only around 11percent) whereas Sri Lankan imports are over 40 percent o f GDP, the share o f import duties in tax and total government revenue in the two countries i s about the same. Somewhat surprisingly, the average import duty collection rate inNepal (which reflects tariff preferences affecting about 40 percent or so o f its imports which come from India) i s more than double Sri Lanka's. Together with its relatively highimport/GDP ratio, this explains the very highshares o ftariffs inGDP and government revenue inNepal. Once again, import duty collectionrates inChina (around 2.7 percent) are far lower than in all the South Asian countries. India's collectionrate i s almost 7 times China's and even Sri Lanka's i s about double. 0 Since imports increase with lower import duties, import duty collection rates tend to be negatively correlated with the share o f imports in GDP. This relationship i s apparent if India (high collection rate, l o w share o f imports in GDP) i s compared with Sri Lanka (low collection rate, high share o f imports in GDP). However factors other than protection levels, especially the size of the economy (large economies tend to trade less than small economies) also affect openness, and as a result collection rates are roughly similar inPahstan, Bangladesh andNepal even though their import/GDP ratios differ substantially. In this regard, however, it i s pertinent to note that China's import/GDP ratio (21 percent in 2001) i s about double India's even though China's economy i s more than twice the size o f India's. In2001 China's import/GDP ratio also exceeded the import/GDP ratio o f Pakistan (14.7 percent) and Bangladesh (17.5 percent) which had economies which were respectively 5.7 percent and 4.5 percent o f China's. These relationships suggest that there i s considerable potential in South Asia for increases inthe volume o f imports to reduce the revenue losses that would result from tariff cuts. This effect could be reinforced if tariff cuts bring some o f the very substantial illegal smuggled trade -- especially inNepal, Bangladesh and Pakistan --back to legal, tax-paying channels. Although tariffs still provide large shares o f government revenues in South Asia, this dependence has diminished substantially except in Nepal during the past 10 to 15 years, and other non-trade taxes have increased their share in total revenue. InIndia (see below) the most important change has been the increasing role o f corporate and personal income taxes. The other principal change has been the introduction o f VAT-type indirect taxes, which are now in place in all the South Asian countries and which have become for all o f them the principal indirect tax. The immediate motivation for employing VAT-style t axes is their efficiency a s revenue raisers, especially the built-inmotivation for buyers o f intermediate inputs to ensure that their suppliers provide them with adequate documentation that VAT taxes on these inputs have been paid. For reasons discussed in the previous section, VAT-type indirect taxes have much less distorting impact than cascading excise and sales taxes, which among other things, can create substantial differences in nominal and effective protection even when tariffs are reasonably uniform. The following sections summarize the extent to which domestic taxes including VATShave replaced protective tariffs ineach o fthe South Asian countries. India. The story o fwhat has happened inIndia is apparent fromTable 3.20-21and Figs 3.13-14. 0 As already discussed, the tariff collection rate on total imports declined from its high o f about 50 percent in 1988, to about 12.3 percent in 2002. The rate o f decline slowed for a while in the late 1990s, but dropped sharply from around 17.5 percent in2001 to 12.3 percent in2002. 0 Correspondingly, the share o f tariff revenue in GDP has steadily declined from about 3.5 percent in 1988 to 1.8 percent in2001 (Table 3-20), with a further decline likely to have occurred in2002. This waning has, however, beenproportionately less than the fall inthe tariff collection rate because, since 1988 the share o f imports in GDP has increased 57 percent -- from around 7 percent in 1988 to 11 percent in2001. 83 Trade Policies in SouthAsia : An Overview 0 The total tax collection rate from imports (tariffs plus domestic indirect taxes on imports as a percentage o f imports) has declined less than the tariff collection rate alone, from around 60 percent in 1988 to 19 percent in 2002. This is because of the increased share of domestic indirect taxes in total tax receipts from imports (in2002 a bit above one-third, compared to about 17 percent in 1988.) Altogether, total import taxes in2 001 were 2.7 percent o f GDP, o f w hich 0.88 percent was from domestic indirect taxes on imports and 1.8 percent from protectivetariffs. 0 From 1988 until 1999, indirect taxes on domestic transactions (mainly central government excise taxes and central and state sales taxes) declined by muchmore inrelation to GDP than tariff revenues. However, there was a sharp turnaround between 1999 and 2001, a two-year period when domestic indirect tax revenue increasedby about 1.5 percent o f GDP. 0 Untilthis happened, the only offsets to declining revenues from tariffs and even more from indirect taxes o n domestic transactions w ere increasing revenues from direct taxes, principally c orporation taxes and personal income taxes. These remained flat in relation to GDP until 1991, but from then until2001 they increasedby almost 2 percent of GDP. Domestic indirect taxes on imports also made a small positive contribution after 1995. To summarize, by any international standard, Indian tariffs actually collected reached almost astronomical levels in relation to imports in the mid-1980s. As noted previously, these very high collection rates are best interpreted a s the partial transfer o f economic rents from the beneficiaries o f import 1icenses to the government. Following the abolition o f import 1icensingo n most manufactured intermediates and capital goods in 1991/92 and the steady reduction o f import duties until about 1997, the contribution o f import duties to govemment revenues (as measured by their share o f GDP) steadily declined. From the mid-1980s efforts were made to simplify and generally clean up the indirect tax system, starting with the introduction o f a "modified" VAT ("Modvat"), the scope o f which was gradually broadened during the 1990s. But until 2000, instead o f compensating for the revenue losses from lower tariffs, the total contribution o f indirect taxes (which include state and central government sales taxes as well as the new central VAT-type taxes) to government revenues actually declined in relation to GDP by more than the decline inrevenue from tariffs. Even though revenue from direct taxes (mainly corporate and personal income taxes) increased over the period, the net result was a big decrease intotal tax revenue inrelation to GDP after 1988, from around 18 percent then to 14.6 percent in 1999. After 1999, however, the contribution from domestic indirect taxes and direct taxes increased quite sharply, by about 2.5 percent o f GDP over two years. This development suggests that further substantial tariff reductions over the next few years (such as the reduction t o a general maximum o f 20 percent forecast in the 2002-03 budget speech, or preferably to lower levels) would be easily fiscally sustainable, especially when allowance i s made for the likely increase inimports inrelation to GDP. Pakistan. The steep and steady decline in tariffs and in the tariff collectionrate in Pakistan duringthe 1990s (Table 3.22) was accompaniedby a correspondingly steep decline inthe contribution o f tariffs to indirect tax revenue (Fig 3-16), from about 46 percent to only 15 percent in 2001/02. These tariff cuts were not offset by increases in the share o f imports in GDP, which stayed within a range o f about 16% to 19% o f GDP. Consequently, tariff revenue as a share o f GDP also fell by more than half, from around 4 % percent inthe early 1990s to 1.73 percent in2001/02. However, revenue from the VAT- style sales tax on imports went up as revenue from tariffs went down. From 1999/2000 onwards, it exceeded tariff revenue (Fig 3.16). The combined contribution o f the tariffs and the sales tax on imports to total indirect taxes consequently declined only slightly over the period up to 2000/0 1.Nonetheless, the extent to which government revenue continues to rely on taxes on imports i s a cause for concern. In 2000/01 tariffs plus sales taxes on imports accounted for 34.4% o f total govemment (central and provincial) tax revenue and 49.1% o f total indirect tax revenue, and the sales tax on imports accounted for 57.7% o f total sales tax revenue, havingrisen from around 45% in 1990/91 (Fig 3.18). If,as appears, sales tax collection in the domestic economy i s less comprehensive and rigorous than on imports, the sales tax 84 Tariffs, Protectionand Revenue would not be operating as intended as a protection-neutral VAT, but to an unknown and probably haphazard extent as another protective import tax. The possibility that a substantial part o f the apparent tariff reduction in Palustan during the 1990s has been spurious would be worth investigating. It might help explain, among other things, the lack o f response o f the import/GDP ratio to the big decline in tariff rates duringthe period. Bangladesh. As noted previously, tariff collectionrates inBangladesh came down inthe first half o f the 1990s, but new protective taxes brought the decline to a halt from 1998/99 onwards. Consequently the contribution o f Customs duties plus the protective taxes to government revenue came down only slightly after 1991/92(Table 3.23) and then stabilized at highlevels, in2001/01 at 27.5% o f total central government revenue and 36.1% o f total indirect taxes (Table 3.23-24). As in Palustan, the tariff reductions had practically no impact on import/GDP ratios (Fig 3.20). If anything, imports for the domestic market (as distinct from duty exempt export-related imports) declined very slightly as a share o f GDP. The estimates o f protective import taxes in Bangladesh include the component o f VAT receipts from imports from which domestic production i s formally exempt (e.g. textile fabrics). The remainder in principle non-protective component o f VAT on imports currently accounts for about one third o f total tax collections from imports. Altogether, total tax collections from imports between 1997/98 and 2000/01 accounted for about 56-58 percent o f total indirect tax receipts, only slightly lower than the share (62.3%) in 1991/92. This is a disturbinglyhighlevel and, as inPakistan, suggests the possibility that incomplete VAT collection from domestic transactions in import-competing tradable goods (apart fi-om and in addition t o formal V AT exemptions) m a y mean that the V AT o n imports is also acting as a n import barrier, over and above the explicit protective taxes. Some research on this aspect o f domestic and import tax administration would be useful. Sri Lanka. The contribution o f import duties to government revenue increased in Sri Lanka in the early trade liberalization period after 1978, as QRs were removed and replaced by tariffs and later in the 1980s as export taxes on plantation crop exports were replaced and eventually abolished. The decline in import collection rates that started in 1989/90 was accompanied by long-term decline in the contribution o f tariffs to indirect taxes and total taxes, but at a slower rate than the decline in collection rates owing to a steady expansion o f imports relative to GDP (Table 3.25 and Figs 3.22-23). As already noted, Sri Lankan public finance i s now much less dependent on tariffs than i s the case inthe other South Asian countries. Even so further reductions might be fiscally difficult unless further expansion o f Sri Lanka's already highimport/GDP ratio (42.7 % in 1999/2000) could help offset them. NeDal. InNepal, tariff collection rates have never been very high. The trade liberalization that brought them down to about 8 percent in the early 1990s initially cut their contribution to government revenues (Table 3.26 and Fig 3.24-26), but this reduction was soon offset by steady expansion inNepal's import/GDP ratio, which almost doubled between 1990 and 1997. Consequently, Nepal's fiscal reliance on import duties following trade liberalization has remained at about the same high level as during the 1980s. Import duties account for 40-45 % o f total indirect taxes, 30-35% o f total tax revenue, and around a quarter o f total government revenue. It i s possible that one reason for the increase in the import/GDP ratio that followed the earlier tariff reductions was diversion o f some o f the large volume o f unrecorded or under-recorded imports into officially recorded channels where import duties were paid. This effect could also mitigate the fiscal effects o f fbrther tariff reductions inthe future. 85 Trade Policies in SouthAsia : An Overview Table 3.19 Comparative Import Duty CollectionRates 2000/01 Ontotal Ontotal imports On total minus imports minusPOL POL minus export-related India 17.5 19.7 26.6 Pakistan 10.3 14.6 n.a. Bangladesh 11.9 10.4 16.7 Sri Lanka (2000) 5.0 n.a. n.a. Nepal 10.1 n.a. n.a. Datafor fiscal 2000/01 except for Sri Lankawhich is for 199912000.Import duties include other protective taxes as well as Customs duties but exclude indirect taxes such as VAT collected on imports. For details see discussion of individual countries Fig 3.12 Comparative Import Duty Collection Rates 2000101 HOn total imports OOn total imports minus POL UOn total minus POL minus export-related 86 Tariffs, ProtectionandRevenue Table 3.20 India 1980-2002 ImportDutiesAnd IndirectTaxes OnImports InRelationTo Imports, GDP And Total GovernmentRevenueAnd Taxes Percentoftotalimports % shareinGDP of % share of importduty in Year Indirect Indirect Importsas %Indirect Indirect Total Total Taxes onTariffs Import Taxes +of GDP Taxes onTariffs Import Taxes +Current TotalTaxes Indirect Imports Tariffs Imports Tariffs revenue Taxes 1980 8.0 22.0 30.0 8.2 0.65 1.80 2.46 1981 7.1 18.6 25.7 9.6 0.69 1.79 2.48 9.5 11.8 16.8 1982 7.2 23.0 30.2 8.9 0.64 2.06 2.70 1983 7.4 27.1 34.5 8.4 0.62 2.28 2.91 1984 8.6 25.7 34.3 8.0 0.68 2.05 2.73 9.9 12.9 18.2 1985 8.8 31.1 39.9 7.7 0.67 2.40 3.07 11.3 14.9 20.9 1986 7.5 40.2 47.7 7.8 0.58 3.15 3.73 13.8 18.1 25.1 1987 9.6 46.2 55.8 7.2 0.69 3.33 4.03 14.3 18.7 25.8 1988 10.2 50.1 60.2 7.0 0.72 3.53 4.24 15.2 19.6 26.7 1989 9.3 45.7 55.1 7.5 0.70 3.41 4.11 15.1 19.3 26.7 1990 8.7 41.2 49.9 8.1 0.70 3.32 4.03 14.1 18.7 21.9 1991 8.3 39.6 47.9 8.2 0.68 3.27 3.95 15.1 19.0 26.3 1992 7.7 36.3 44.0 8.1 0.63 2.95 3.57 13.0 16.8 20.1 1993 7.7 29.0 36.7 9.4 0.72 2.73 3.46 12.0 16.1 19.4 1994 5.3 24.5 29.8 9.4 0.50 2.29 2.79 10.6 14.7 18.0 1995 7.2 22.6 29.8 9.6 0.69 2.16 2.85 9.8 13.4 20.3 1996 8.7 20.7 29.4 11.2 0.97 2.31 3.28 10.3 14.2 22.2 1997 11.6 20.0 31.7 10.9 1.27 2.18 3.45 10.7 13.6 20.8 1998 9.6 18.5 28.1 10.2 0.99 1.89 2.88 9.4 12.3 19.7 1999 9.4 17.5 26.9 9.8 0.92 1.72 2.65 9.0 11.8 19.2 2000 8.6 16.3 24.8 11.1 0.95 1.81 2.76 8.9 11.5 19.0 2001 7.9 17.5 25.4 10.9 0.88 1.63 2.51 7.3 9.5 15.9 2002 6.7 12.3 19.0 Notes and sources: (1) Total revenuefromtariffs and indirecttaxes on imports is published annually in the Indianbudgetpapers and in the Economic Survey. However, until fiscal 2001-02, this series (described as inthe Economic Survey as tax revenue from "Customs")didnot distinguishrevenuefromprotectivecustoms duties and domestic taxes on imports and gave the total of bothof them only. At various times the principal domestic taxes on imports have been called "countervailingduties" or "additional duties" and at present constitute the import component of the generalcentralVAT tax system. Inprinciple,domestic taxes appliedto importsdo not protect local producers from import competition sincethey are appliedat the sameratesto domestic producersofthe sameproducts.Henceimporttax collectionratios calculated from the published GO1 import tax numbers overstate the protective effect of import duties. We have separated out tariff revenue and domestic indirecttaxes on imports for 1961-2001in a separate exercise using a detailed annual publicationof DGCI&S (various years).The requireddatawas not available for some years duringthisperiod, however, and for those years the divisionbetweenimport duties and domestictaxes was assumedto bethe same as the average ofthe few precedingyears. Inthis table the estimatesfor which the breakdownwas made in this way are indicated in italics. For 1987-92 import duties were assumedto be 82 percent of total import taxes, and 59 percent of total import taxes during 1998-2000. In 2001 they were assumed to be the same as the actual percentagein 2002 i.e. 65 percent. (2) Total governmentrevenueand taxes are the consolidatednet revenueand taxes of the centralgovemment, state governments and unionterritories as published annually inthe Economic Survey. Total current government revenue includes the internalresources o f public sector firms i.e. current revenueminuscurrentoutlay. 87 Trade PoliciesinSouthAsia : An Overview Table 3.21 INDIA 1981-2001 Revenue fiomtaxes as percent o f GDP Protective Import DutiesIndirectTaxesDomestic Indirect Taxes onDirect Taxes (corp., on Imports Goods &personal income &Total Taxes Services other) 1981 1.79 0.69 8.21 4.55 15.24 1982 n.a. n.a. n.a. n.a. n.a. 1983 n.a. n.a. n.a. n.a. n.a. 1984 2.05 0.68 8.51 4.64 15.88 1985 2.40 0.67 8.39 4.62 16.08 1986 3.15 0.58 8.78 4.83 17.34 1987 3.33 0.69 8.88 4.89 17.80 1988 3.53 0.72 8.97 4.82 18.03 1989 3.41 0.70 8.66 4.92 17.68 1990 3.32 0.70 8.78 4.93 17.74 1991 3.27 0.68 8.46 4.76 17.17 1992 2.95 0.63 8.64 5.31 17.52 1993 2.73 0.72 8.23 5.28 16.96 1994 2.29 0.50 7.69 5.12 15.61 1995 2.16 0.69 7.76 5.51 16.12 1996 2.31 0.97 7.12 5.93 16.33 1997 2.18 1.27 7.01 5.63 16.09 1998 1.89 0.99 6.74 5.71 15.33 1999 1.72 0.92 6.32 5.61 14.58 2000 1.81 0.95 6.76 6.19 15.71 2001 1.81 0.95 7.77 6.65 17.17 Fig. 3.13 India 1994-2002 EstimatedTariff Collection Rates 30 - 28 - 26 - 24 - .- 2E 22 - L 0 c c 20 -8 a, 2 18 - a a, 16 - 14 - 12 10 , 1994 1995 1996 1997 1998 1999 2000 2001 2002 On total imports +Total imports less POL -On total imports less POL & export related imports 88 Tariffs, Protectionand Revenue Fig. 3.14 India 1980-2002 Estimated Tariff Collection Rates 70 60 14 50 - 40 - Lc 0 30 - 20 - I lo-I 0 Fig. 3.15 Pakistan Tariffs and Sales Taxes Collected on Imports, 1991-2001 0.40 7 0.35 - P2 0.25 '0 0.20 E - 'z c 0 0.15 cr: ~ 0.10 - 0.05 - 0.00 c 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 +Customs dutieshnports J = (Customs+Salestaxes)/imports 89 Trade PoliciesinSouthAsia : An Overview Table 3.22 Pakistan 1990/91-2001/02: ImportTax Collection Rates And Government Revenue Rsbillion 90191 91/92 92/93 93/94 94/95 95196 96/97 97/98 98/99 99/00 OOiOl 01/02 Total imports 171.1 229.9 258.6 258.3 320.9 397.6 465.0 436.3 466.0 533.8 627.0 Imports o f duty exempt intermediate inputs f0rn.a. ma. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. ?.a. exporters (& imports s.t. drawback) 90 Tariffs, Protectionand Revenue Fig. 3.16 Pakistan 1990/91-2001/02 Customs Duties and Sales Taxes on Imports as Shares of Total Indirect Tax Revenue I u .-e! U .-c 0.40 0'50 0.20 4 c m 0.10 4 0.00 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 Customs -Sales taxes Customs+ sales tax Fig. 3.17 Pakistan 1990/91-2001/02 Tariff Collection Rates: Total and excluding POL 0.45 - --CCollection rate total imports Collection rate excl POL 0.40 - 2g0.35 - 0.30 - c E 0.25- 0 0.20 - 0.15 a 0.10 0.05 0.00 , 91 Trade PoliciesinSouthAsia : An Overview Fig. 3.18 Pakistan 1990101 -2001102 Share of Sales Taxes on Imports to Total Sales Taxes and to Total Indirect Taxes 0.80 - 0.75 - 0.70 - 0.65 - +Share of total sales taxes Share of total indirect taxes 0.60 A - * T - e 0.45 * 0.40 0.35 1 0.30 - 0.25 - 0.20 0.15 1 0.10 - 0.05 Fig. 3.19 Pakistan 1990/91-2001/02 Shares of Imports and Customs Collections in GDP +Share of imports in GDP Customs duty collections/GDP 4 a 112-- 143 b 11 - c. 10 - C 8 - 9 - a",O a, 7 ; 6 1 92 Tariffs, Protectionand Revenue Table 3.23 Bangladesh1991/92 and 1997/98-2000/01: ProtectiveImport Tax CollectionRates 1991192 1997198 1998199 19991000 2000101 ImportsTk million Total imports 132120 340789 369089 397983 450949 POL imports 15364 23041 24766 26684 27633 Duty exempt importsfor exporters 30827 116322 112254 140781 160241 Total importsminusPOL 116756 317748 344323 371299 423315 Total minusPOL minus export related 85929 201426 232069 230518 263075 Importtaxes Tk million Total protectiveimport taxes (PIT) 26,177 46,464 45,464 46,881 53,604 POL Customsduties 2816 9674 9555 9374 9656 PITminusPOL Customsduties 23,361 36,790 35,909 37,507 43,948 Protectiveimporttax collectionrates% On total imports 19.8 13.6 12.3 11.8 11.9 Ontotal importsminusPOL 20.0 11.6 10.4 10.1 10.4 On total importsminusPOL minus export relatedimports 27.2 18.3 15.5 16.3 16.7 Sources and notes: The estimates in this table have been synthesized from various sources by Bank staff. The principal sources used were: Economic Survey, various years; Maxwell -Stamp 2002. Review of Relatiie Protection; Wdrld Bank 1999; Bangladesh Trade Liberalization: Its Pace and Impacts; and data kindly supplied by the National Board of Revenue (trade database), the BangladeshBank Statistics Department, andthe BangladeshExportProcessingZones Authority. Fig 3.20 Bangladesh 1991/92and 1996197-2000/01:Tariff Collection Rates 10 - 4 On total imports On total imports less POL +On total imports less POL less export-related imports 93 Trade Policies in SouthAsia : An Overview Table 3.24 Bangladesh 1991192 and 1997/98-2000101:Protective Import Taxes and Government Revenue 1991192 1997198 1998199 199912000 2000/01 Tk million Total Central government tax revenue 78234 150010 158550 170960 194900 Total indirect taxes 59601 128559 126364 131297 148514 Total estimatedprotective import taxes 26177 46464 45464 46881 53604 GDP at factor cost (current Taka, billion) 849 2001 2196 2371 2581 Protective import taxes as % o f Total central govemment tax revenue 33.5 31.0 28.7 27.4 27.5 Total indirect taxes 43.9 36.1 36.0 35.7 36.1 GDP 3.08 2.32 2.07 1.98 2.08 Total V A T on imports 11581 27450 27245 30598 32537 Estimated protective VAT on imports 627 567 436 899 2,085 Residual: "non-protective VAT" on imports 10954 26883 26809 29699 30452 Import taxes as % o f total indirect taxes Non-protective VAT on imports 18.4 20.9 21.2 22.6 20.5 Protective import taxes 43.9 36.1 36.0 35.7 36.1 Total import taxes 62.3 57.1 57.2 58.3 56.6 Share o f Imports in GDP Total Imports 15.6 17.0 16.8 16.8 17.5 Imports for domestic consumption 11.9 11.6 11.9 11.1 11.5 Export- related imports 3.6 5.4 4.9 5.7 6.0 Fig 3.21 Bangladesh 1991/92 and 1997/98-2000/01: Shares of Imports in GDP l4I l2 I 10 - 8 - 6 - 4 - 2 - 0 I -Total imports Domestic market imports Export related imports 94 Tariffs, Protectionand Revenue Table 3.25 Sri Lanka 1981-2000: Import Dutiesand GovernmentRevenue Percent of GDP Import duties as percent of Imports Import Total Govt.Tota1 TaxTotal Indirect Duties Imports Revenue Revenue Tax Revenue 1981 18.2 19.7 23.7 1982 6.8 15.4 17.0 21.9 1983 9.5 17.2 20.1 24.8 1984 14.3 19.7 22.4 27.9 1985 16.5 22.4 26.6 33.2 1986 18.3 25.3 30.0 36.4 1987 18.6 26.4 31.6 38.7 1988 15.2 25.7 29.8 36.3 1989 19.8 27.6 31.4 37.5 1990 15.9 24.9 27.5 33.1 1991 14.6 24.3 27.3 33.9 1992 13.9 24.2 27.2 33.7 1993 36.3 4.12 11.4 20.9 23.6 29.3 1994 38.3 3.90 10.2 20.5 22.7 28.3 1995 36.9 3.69 10.0 17.9 20.6 25.4 1996 36.0 3.31 9.2 17.4 19.6 24.5 1997 41.4 3.32 8.0 16.2 18.7 23.3 1998 40.4 3.09 7.6 16.1 19.1 23.5 1999 38.1 2.78 7.3 14.1 16.7 21.3 2000 42.7 2.15 5.0 11.4 13.2 16.3 Fig 3.22 Sri Lanka: Shares of Imports and Import Duties in GDP a 40- n c3 3 5 - y- 3 0 - 0 5 - 0 ' 95 Trade Policiesin SouthAsia : An Overview Fig 3.23 Sri Lanka Import Duty Collection Rate and Import Duty Shares of Government Revenue 50 - I 45 - 35 40 30 4 2 5 - a 20 - Share of total taxes Share of indirecttaxes -Percent of total imports Table 3.26 Nepal: Import Duties and Government Revenue 1985-2001 Percentof GDP ImportDutiesas Percentageof Total Indian VATIndian Import Duties + VAT Imports Importduties Imports Total Govt TotalTax Indirect Refunds Refunds 1985 16.62 2.16 11.7 31.5 32.0 38.7 1.3 13.0 1986 16.76 2.07 11.6 24.9 31.6 38.3 0.8 12.4 1987 17.08 2.23 11.8 23.8 32.5 39.2 1.3 13.0 1988 18.04 2.74 14.3 28.9 36.6 44.1 0.9 15.2 1989 18.22 2.49 13.1 28.6 35.4 44.6 0.6 13.7 1990 17.72 2.56 14.4 28.5 36.3 45.0 0.0 14.4 1991 19.30 2.46 11.9 27.6 36.3 43.4 0.9 12.8 1992 21.37 2.17 8.8 24.0 32.8 38.9 1.4 10.2 1993 22.86 2.22 8.1 25.1 32.6 38.9 1.6 9.7 1994 25.88 2.42 8.4 24.6 31.3 37.9 0.9 9.3 1995 28.92 3.03 9.2 27.2 34.0 42.1 1.3 10.5 1996 29.78 2.86 8.4 25.6 33.0 41.9 1.2 9.6 1997 33.33 2.89 7.6 26.7 33.2 42.3 1.1 8.7 1998 29.58 2.75 8.0 25.1 31.9 41.6 1.3 9.3 1999 25.58 2.67 9.0 24.5 31.7 42.5 1.4 10.4 2000 28.58 2.72 8.3 24.1 31.2 42.0 1.2 9.5 2001 28.26 2.95 9.2 24.7 31.0 41.4 1.3 10.4 Sources: Nepal RastraBank, QuarterlyEconomic Bulletin, Mid-January ,2002. Vol. XXXVI, no 1&2, and World Bank (2002) NepalDevelopmentForum,EconomicUpdate2002. January 30,2002. WorldBank. SIMA database. 96 Tariffs, Protectionand Revenue Fig 3.24 Nepal 1985-2001: Import and Import Duty Shares in GDP 28 26 - E 24 i 2 2 - c3 2 0 - % 1 8 - 2 16 g 1 4 1 12 10 1 *Imports --)-Import duties Fig 3.25 Nepal Import Tariff Collection Rates 1985-2001 18 - 16 - r" 14 - .-E El,- L 0 10 - L c (u ,O 8 - 97 Trade Policies in South Asia :An Overview c 3 2 5 - 20 - 15 - 10 - 5 - Table 3-27: Comparative Collection Rates I ~ Total import duty revenue as percent of ~ ~ ~ ~ / GDP % Total govt. Total Indirect GDP Imports Revenue taxes taxes India 2001 10.9 1.81 17.5 7.3 9.5 15.9 Pakistan 2001 14.7 1.87 10.3 11.8 14.5 20.7 Bangladesh 2001 17.5 2.08 11.9 22.2 27.5 36.1 Sri Lanka 2000 42.7 2.15 5.0 11.4 13.2 16.3 Nepal 2001 28.3 2.95 9.2 24.7 31.0 41.4 China 1998 14.5 0.39 2.7 3.1 3.4 4.2 China 2001 21.0 0.60 2.7 98 Tariffs, Protection and Revenue Fig 3.27 South Asia and China Import Duty Collection Rates . e 201 Fig 3.28 South Asia and China Import Duty Revenue as percent of GDP 3.51 99 Trade PoliciesinSouthAsia :An Overview Fig 3.29 South Asia and China Imports as Percent of GDP Fig 3.30 South Asia and China Import Duties in Relation to Imports and Government Revenue 45 - 40 7 35 - 30 - b 2 0 - India 2001 Pakistan Bangladesh Sri Lanka Nepal 2001 China 1998 2001 2001 2000 FA lmpt dutiesilmports 0Import dutiesitotal god revenue 0 lmpt dutiesitotal tax revenue lmpt dutiesitotal indirect taxes 100 Chapter 4: Export Policies Exportpoliciesduringthe importsubstitutionperiod During the early years when the dominating objective o f trade policies was to substitute for imports behind non-tariff barriers and very hightariffs, all the South Asian countries developed systems o f varying complexities and comprehensiveness which aimed to enable exporters to function profitably in this environment. Even though exports were given very low priority, they were needed to eam foreign exchange to pay for imports that were not being produced domestically or not in sufficient quantity, and for other outlays in foreign exchange such as debt service, travel, technology imports, insurance, shipping etc. The various schemes that were developed had two principal objectives. The first was to make available to exporters needed inputsthat could otherwise not be imported at all, or only after difficult and time consuming efforts to obtain a normal import license. The second objective was to eliminate or offset the cost raising effects o f NTBs o f various lunds and o f tariffs and domestic taxes, on the cost o f inputs used by exporters. Given the stringency o f import licensing and other non-tariff barriers to imports, and the high tariffs that prevailed, with some exceptions, it would have been impossible to export most products without these schemes. The principal exceptions were primary commodities exported inbulk or informs which didnotrequiremany importableinputs. An indication o f the low priority attached to exports in general and to primary exports in particular, was that many o f these products were subject to export restrictions and taxes. Another set o f exceptions were some manufactured products (e.g. cotton textile yams and fabrics in India and Palustan, jute textiles in Bangladesh) where the domestic prices o f the primary inputs were about equal to or below world prices. Exports o f some of these manufactured products (e.g. cotton textiles in India and Pakistan) were indirectly subsidized by export controls which suppressed the domestic prices o f the raw materials, such as cotton. These measures were principally justified as another form o f protection aimed at creating or expanding production and employment inthe processing industries. As well as attempting to offset or neutralize the effects o f import policies on the cost o f exporters' inputs, some schemes went beyond this and provided export subsidies, in the sense that the processing margins o f exporters were increasedbeyond what they would have been if all their outputs and inputshad been sold and purchased at prevailing world prices. For example, until they were abolished during its 1991 reforms, India provided Cash Compensatory Support (CCS) subsidies to exports which were specified percentages o f fob prices, and which were paid even though the import duties on the inputs for the same exports had been exempted by special duty free import licenses or refunded through the duty drawback system'. India also used saleable "replenishment" import licenses issued to exporters which gave them the right to import otherwise restrictedproducts many o f which sold for highpremiums in the domestic market'. Export subsidies were also provided, although in a haphazard manner and not always intentionally, through the ways in which the various duty exemption or drawback schemes were administered e.g. as a result o f using higher than actual physical input-output ratios or wastage ' IndianCCS subsidiesduringthe 1980s are discussedinPursell(1992). They werejustified as compensatingfor domestic sales and other taxes, but they varied substantiallyfromproductto productmainly according to the "needs" of exportersto competein export markets, and there was no serious attempt to make quantitative links between the varying rates and the incidence of domestic taxes. For descriptions and analyses of Indian export policies before the 1990s see Bhagwati and Desai (197..), Wolf(l97..), and Pursell (1992) and the references given there. Many of these export schemes are still operative under the same names (e.g. advancelicenses andduty drawback) of under different names but performingthe same or similar functions. Trade Policies in South Asia : An Overview allowances, from overestimation o f the prices o f imported inputs, from delays inadjusting for declines in imported input prices3, and from failure to ensure that all duty free imported inputswere actually used in exports. Duringthis early period, goingbeyondthe neutralization of inputprotection andproviding export subsidies, was motivated in part by the recognition that exports were being discouraged much more generally by the high-protection import substitution regimes that were inplace, than simplyby the import controls and duties that raised the costs o f exporters' imported inputs. This had been clearly articulated very early on by many economists4, who pointed out that (1) restricting imports necessarily allowed the South Asian countries to equilibrate their current accounts with stronger exchange rates than would have existed with less restrictive import policies, thereby reducing the domestic currency prices o f exports (2) even with perfect neutralizationo f inputprotection involving no transaction costs, the effective protection o f exporters would be zero, compared to generally high effective protection o f import substitution industries, Despite many repetitions o f these general principles, and studies which illustrated the points empirically5, businessmen and bureaucrats involved in the practicalities o f trade policies had great difficulty in grasping them. Instead they emphasized the many disadvantages that exporters faced in the South Asian countries, such as highcost and unreliable power supplies, various state and local taxes, poor quality roads, port facilities, telecommunications, banking and other services, and argued for export subsidies that would help offset these disadvantages. They were reluctant to draw the obvious and very simple conclusion, namely that protection against imports i s simultaneously a tax on exports, and that the most direct way to reduce the bias against exports i s to reduce NTBs and tariffs applied to imports. Apart from the conceptual difficulty of grasping the connections between protection and exchange rates, this reluctance was also a consequence o f the vested interests o f important segments o f the business communities and o f the trade policy bureaucracies, inthe continuation o f protection policies, and similar vested interests on both sides in the continuation o f duty neutralization schemes and export subsidies, both o f which involved substantial transaction costs and rent-seeking opportunities. Exportpoliciesduringimportliberalization One very important motive for the trade liberalizations that have occurred in South Asia and that are still inprocess, w as the belated recognition that the S outh A sian c ountries hadmissed out o n the spectacular export and general economic expansion that had benefited in particular East Asian and South East Asian developing countries since the 1960s. This point was underlined, especially in India, when it became apparent during the 1990s that China's example showed that export oriented economic growth was possible and feasible even for very large countries. As noted in the previous chapters, substantive Most drawbackrates are first estimatedusingdataprovidedby exporters on physicalinput-outputcoefficients andthe cif prices of the requiredimportedmaterials, from which is calculatedthe import duty on the inputs neededfor a given quantity (e.g. per kilo or per ton). To simplify administration,the import duty to berefundedis then expressed as percentageof the fob price of the exported product. It is apparent that drawback payments in this system are unlikely to exactly correspond to the actual import duties paid on the importedinputs, and may be substantiallyhigher or lower. They will tend be higher if, comparedto the data used to calculate the drawback rate, actual fob prices are higher, input prices are lower, or fewer materials are used, and vice versa. For obvious reasons exporters are not motivatedto providenew information if the refunds or duty exemptions they are receiving exceed what is needed to just neutralize the import duties and other taxes on their imported inputs, but are likely to complain if the benefitsthey receive are inadequate. On the other hand the basic role of Customs services is to collect import duties according to official tariff schedules and rules and to limit the avenues by which they can be evaded. Duty drawback and exemption schemes for exporters are therefore inevitably a major source for negotiation, bargaining and conflict between Customsdepartmentsandexporters, the more so when import duties are high. These basicpointswere madevery clearly andillustratedempiricallyduring the 1960sby Bhagwati, Desai andT.N.Srinivasan. Most recently in a study completed in 2002 which among other things compares effective protection rates for domestic sales andexports.Maxwell Stamp.2002. 102 Export policies trade liberalization occurred first in Sri Lanka, came later in Pakistan, Bangladesh and Nepal, and reluctantly and slowly, with hesitations along the way, in India. There were corresponding changes in attitudes to the role o f exports and to export policies, with a strong policy commitment to exports as a growth engine at a very early stage in Sri Lanka duringthe late 1970s, slower recognition and later policy commitments in Pakistan, Bangladesh and Nepal, and despite the installation o f an extremely elaborate export incentive and promotion apparatus, very slow change inbasic understanding and attitudes inIndia. As regards India, it is significant that as late as January 2002, an official government report on India's Export-Import policies felt it necessary to state the following6: "It is noteworthy that while the reform program has emphasised the need to reduce import protection and to provide a facilitating policy environment for private initiative, the mind-set regarding exports has remained virtually unchanged. Even today, when policy makers address the issue or exports, it is mainly interms o f their contribution to foreign exchange earnings and thus the extent to which they fundour imports. The Committee feels that the Government mustre-orientthis attitude andrecognize the multifaceted contribution o f exports to the economy, in terms o f developing links with the high productivity and high quality markets abroad, thus providing a basis for improved efficiency at home. In addition to providing a larger market for our domestic production with the attendant benefits o f economies o f scale, exports contribute importantly to acquisition and dissemination o f modem ideas, technology, design, marketing and packaging techniques, and infuse changes in our work ethos that will have a lasting impact on improving our efficiency through, for example, emphasis on modernization, quality and even innovation." This increased recognition in South Asia o f the positive role o f exports in economic growth, led to much greater scrutiny and efforts to streamline existing export policies and mechanisms, and to new export-friendly initiatives. Most o f these initiatives have had important benefits for other aspects o f the economy, notjust exports. Inparticular: Itwas recognizedthat drawback and other duty neutralization schemes were often cumbersome,slow, involved high transaction costs for exporters while not fully refunding or exempting duties on imported inputs, had inadequate product coverage, and were subject to abuse. The general response was to increase the scope o f the schemes and broaden their coverage, to build in checks against misuse, and to pay attention to the efficiency o f the Customs and other government services involved. Direct investment and other roles by foreign firms in export sectors was seen as a fast and effective way of acquiring the production and marketing skills needed for successful exporting. This was especially important in the development o f the garment export industries in Sri Lanka and Bangladesh. The key role o f foreign firms in accelerating export growth contributed to more supportive general attitudes towards FDIand other forms o f foreign participation in the South Asian economies. Successful exporting, especially to developed country markets, needs special skills and capabilities that were not generally needed to the same extent in supplyingprotected domestic markets, including attention to quality and quality reliability, technological and marketing know-how, reliability and speed o f delivery, and general operational flexibility. To speed up the development o f these skills and capabilities, a wide range o f supportive export promotion policies and institutions were established. These covered things such as support for export marketing, the provision o f market intelligence, technical assistance and training, quality testing and assurance programs, and increasing the availability o f pre-shipment and post-shipment credit. While the means employed to achieve these objectives were frequently o f dubious efficacy (e.g. the establishment o f government owned and Government o f India, Department of Commerce, Directorate General of Foreign Trade. January 2002. Report on the High Level Committeefor the Exim Policy 2002-07, p.3. This i s an excellent report which provides a very useful and practical critical review of key aspects o f India's current export policies. 103 Trade Policies in South Asia : An Overview bureaucratically managed export promotion organizations and the provision o f subsidized export credit), others hadpositive spillover effects as well as aiding exports. The efficiency of Customs services became a major concern. It was recognized that while highly inefficient Customs operations were generally good at keeping imports out, they were also responsible for keeping exports in. This concern for efficient, transparent and faster Customs clearance in the service o f exports, was an important motive behind Customs reform programs initiated at different times in all the South Asian countries. These reforms still have a very long way to go, but they can havemajor general economic benefits beyond the benefits to exporters, most directly in reducing transaction costs and delivery times for all importers, increasing import competition in the domestic economy, and reducing government revenue losses in the face o f declining tariff rates. Currentexportpolicies Table 4.1 provides a summary list o f most o f the principal export-specific policies currently being operated in the South Asian countries, with the exception o f the policies affecting textile and garment exports that allocate MFA quotas. They have been grouped into (i) policies that restrict exports, such as export controls and export taxes; (ii) policies that subsidize exports, both directly and indirectly; (iii) import duty neutralizationschemes, that exempt or refund import duties on inputs usedby exporters; (iv) export zones and bonded warehouse schemes that provide duty exemption and other benefits in one package (v) export promotion and quality control policies and organizations; (vi) export incentive and promotion schemes tailored for particular products or industries. Other policies o f course also affect exports: in particular exchange rate, labor market and tariff and other protection policies. Bearing this inmind, some general points about the export-specific policies are worth noting. Not surprisingly, o f the five countries India has the most comprehensive and complex set of export policies. This reflects the facts that, compared to the other countries, it has a much larger and more diversified economy, that it has been slower to liberalize its import regime, and that its import policies are consequently more protective and comprehensive. At the other extreme, Sri Lanka's export regime i s fairly simple, reflecting its generally low tariffs on intermediates and capital goods, absence o f QRs, and export specialization, especially in garments and plantation crops. O f the other three countries, corresponding to similar differences in their import policies, the most complex and comprehensive export regime i s inBangladesh, followed by Pakistan and Nepal. 0 Table 4.2 provides an indication o f one key aspect o f the current differences between the export policies o f the five countries, namely, the levels and the complexity of tariffs on intermediate inputs with which their exporters and export bureaucracies have to grapple. It can be seen that present tariffs in Sri Lanka on many key raw material and partly processed industrial inputs are only 2.4%, while all the principal textile tariffs -fibres, yarns and fabrics-are zero. By contrast, tariffs on major raw materials are much higher and also more complex in India and Bangladesh, e.g. for organic chemicals, three different rates with a maximum o f 30.8% plus some anti-dumping duties in India, and five different rates ranging from 3.5% to 36% in Bangladesh. This i s without allowing for preferential tariffs under SAPTA and other agreements which further expand the number o f different rates for the same or related raw materials, and correspondingly increase the administrative tasks involved in implementing mechanisms such as drawback. The differences between Sri Lanka, on the one hand, and India and Bangladesh especially, and to a lesser extent Palustan and Nepal, are even more marked as regards textiles, where domestic productiono f wool, cotton and synthetic textiles has been systematically protected by the use o f escalated tariff structures. In Sri Lanka free trade in textiles means that no special scheme i s needed to exempt or rebate tariffs on textiles imported by 104 Export policies garment exporters: only the VAT on these imports (currently 20%) would need to be credited or rebated as part o f the normal VAT accounting settlements in which exports are exempt from VAT'. By comparison, in India there are four different advalorem tariffrates within both the wool and cotton textile H S chapters, plus a large number of compound tariffs where the applicable duty i s the higher o f an ad valorem rate and a specific duty'. Similarly there are two ad valorem rates within the man-made fiber and staple fiber textile HS chapters, plus compound tariffs and also anti-dumping tariffs. The levels o f these textile tariffs in India means that it would be impossible or at best very difficult to export while using imported textiles as inputs, unless the tariffs are exempted or rebated, but at the same time the number of different rates for similar products makes this process time consuming and expensive in terms of transaction costs. Other examples are iron and steel materials and partly processed steel and alloy steel products (HS chapter 72), where over 95% o f Sri Lanka's tariffs arejust 2.4% incontrast to India where over 95% o f ad valorem rates are at 30.8%, plus the use o f an extensive list o f arbitrary "tariff values" (minimum values to which tariffs are applied), plus anti-dumping duties. Inthis case, in India, exporters wishing to use imported iron or steel products as inputs would also have to contend with highly restrictive technical certification rules for imported steel managed by the Bureau of Indian Standardsg. Similarly, inBangladesh, iron and steel tariffs are very escalated, with five rates ranging from 3.5% to 36%. Steel inputs for exporters are also a problem for exporters in Palustan, where tariffs (5, 10 and 25 percent) have been escalated to protect the public sector firm, Palustan Steel. Table 4.2 also illustrates, however, that very considerableprogress has been made in all the South Asian countries in simplifiing and (except in India) reducing machinery and equipment tar8.i. At present most o f these tariffs are either 2.4% or 6% in Sri Lanka, 6% in Nepal, 7.5% in Bangladesh, and 5% or 10%inPalustan. Inthese four countries, while exemptions and rebates o f various lunds are provided for exporters (see T able 4 .1) the quite 1ow equipment tariffs meanthat eventhoughthe exemptions and rebates are useful, they are not generally essential for profitable exporting, and it i s probably not worthwhile for firms to incur substantial transaction costs in obtaining them or in lobbying for further reductions or special treatment. InIndia, considerable progress has also been made in simplifyingthe structure of machinery tariffs, with most (including Customs duties and SAD) now at 30.8%. However in order to protect domestic equipment producers, this rate (which usually also applies to replacement components and part2 as well as to original equipment) is very high and i s a significant disincentive for exporters. Consequently, since 1990, India has been using an elaborate and administratively very onerous facility (the Export Promotion Capital Goods scheme) under which at present machinery import duties are reduced to 5% in return for the firms satisfying specified export obligations. Since firms can use the equipment to produce for the domestic market as well as for exports, under some conditions the scheme amounts to a cross subsidy o f exports by widening the profit margins on domestic sales. In the 2003-04 budget, this scheme was made much more flexible by reducing the export obligation by more than half, by allowing second hand capital goods (previously excluded) to be covered, and by a separate reform which removed restrictions on the resale o f imported second hand capital goods". This would apply to a garment exporter operatingoutside one of Sri Lanka's EPZs. Garment and other exporters operating in thesezones are exemptfromVAT as well as import duties. For a discussionof India's specific textile tariffs and some estimates o f their ad valorem incidencesee Chapter I11involume 2 o fthis study. See discussion in Chapter 2. lo These reforms are describedby Arun Goyal in "India Trade Notes" ,BIG'SWeekly Index o f Changes, Vol XX No 01,Ol-07 April, 2003. The reforms reduced the export obligation from 8 times the cif value of the importedequipment to about 3.7 times, were extended to cover importsof second hand equipment, and removedan "actual user" restriction which preventedthe resale of the importedequipment. The permissionto import second hand capital goods only applies to machines that are less than 10 years old: otherwise a special import license is required.Goyal (ibid) thinks that the new export obligation (8 times the value of the foregone import duties) will be easily met, since import duties on second hand machines are low due to the Customs 105 Trade Policies in South Asia : An Overview According to Goyal", these reforms will lead to a substantial opening o f the Indian market for capital goods, increased import competition for domestic machinery producers, and lower domestic machinery prices. Such a development would benefit all equipment users including exporters not arranging imports under the EPCG scheme, and i s a good example o f how pressures from exporters can lead to much more general economic benefits. However, even if this turns out to be the case, slow indirect liberalization o f capital goods imports through the EPCG scheme inIndia contrasts with direct and much more s traightfonvard c apital goods 1iberalization through tariff reductions to 1ow levels in the other South Asian countries. Among other things, it i s evident from a glance over the structure and the enforcement and other rules o f the EPCG scheme,'* that it i s very much an "inspector Raj" creation with ample opportunities built infor discretion, negotiation and rent-seelung behavior. 0 Despite the emphasis on export facilitation and promotion, a surprisingly large number of products are still subject to restrictive export policies which are in placefor "trade" reasons i.e. that are not intended to ensue that exporters meet importing country SPS requirements or quality standards, and are not for domestic religious, social, environmental and similar reasons. These include export bans and licensing, government export monopolies, and export taxed3. Most o f the direct controls are in India and Banglade~h'~:there are only a few inPalustan, Sri Lanka andNepal. The major motive i s to ensure local availability and suppress domestic prices, either in the interests o f final consumers (e.g. onions and pulses in India and Bangladesh) or domestic intermediate consumers (farmer purchasers o f subsidized fertilizers in India, processors o f hides and skins, r a w wool and 1ogs and timber in Nepal). Some export bans or restrictions have the effect o f indirectly subsidizing exports o f products further down the productionchain. For example, Bangladesh's ban on the export o f animal hides and skins subsidizes production and exports o f processed leather products. Similar export restrictions on unprocessed skins and partially processed leather inIndia and Palustan were successfully challenged at the WTO by the EUand have been replaced by export taxes. These also indirectly subsidize processed leather products, but in a more transparent manner15. Nepal imposes export taxes on 23 products and in addition a general export tax o f 2.75% consisting o f a 0.75% turnover tax and a defense tax o f 2% imposed in 2001. As noted in Chapter 3, the defense tax (imposed to raise revenue to deal with the Maoist insurrection) was also added to import duties, but it would be more efficient economically to levy a general tax on production or consumption rather than providing extra protection to high cost import substitution production while taxing relatively more efficient export production. Sri Lanka does not have any export taxes, but appears to be hindering the efficient development o f two major export industries, tea and spices, by disallowing imports o f tea varieties for blending with local teas, and spices for partial processing andre-export duringperiods when domestic spices are not depreciationrules which provide for the dutiablevalue to be reducedby about 4% per quarter up to a maximum of 70% of the original value. Ifthis is correct, hepoints out that foreign suppliers of the machinerymight have little difficulty in channelingthe required export order to the firm importing it. These exports could be diverted (with some compensationinvolved) from other Indianfirms with establishedexportmarketsthat are not currentlyinthe market for importedequipment. Ibid l2 Goyal (Easy Reference Customs Tarzf2003-04, pp W45-68) gives the provisionsof the EPCG scheme andthe many changes init since 1990. l3 There are a number of small export "cesses" (generally at less than one percent of fob prices) on particular commodities which havenot beenincludedinTable 4.1 as export taxes e.g. inIndiaand Sri Lanka. These are not really exporttaxes since they are generallyploughedback into the same exportingindustryto promoterather than restrict its exports. l4 The 18 agricutural, livestock, and fisheries products the export of which i s either bannedor restrictedinBangladesh, i s given inthe chapteron agriculture inVolumeI1(Table 1.6) Subject to one principal exception, export bans and restrictions breach Article 11 of the GATT, but export taxes are prima facie GATT compatible,even though countervailingduties couldbe imposedby countries importing products which use them as inputsonthe grounds that the export taxes on the inputsconstitute indirect export subsidies. 106 Export policies available. Both o f these restrictions appear to be responses to domestic grower lobbies who object to the potential competition and the adjustments that would be required if the imports were allowed". Nepal has a similar restriction on imports o f machine spun woolen yarn which protects the hand-spun yarn producers who supply its export carpet industry,but which inhibits the development o f woolen carpet exports usingimportedmachine spunyarn". Across-the-board direct export subsidies are no longer being used, but ad-hoc direct subsidies and a large variety o f indirect export subsidies are employed, especially by India, Palustan and Bangladesh. For example, since early 2001, India has been subsidizing exports o f large excess stocks o f wheat and rice"; Bangladesh subsidizes exports o f garments which use domestic fabricslg and its Export Development Fundprovides a number o f different subsidies to exporting firms; Sri Lanka subsidizes exports o f chicken meat; Pakistan provides a general 25% freight subsidy; India, Pakistan and Bangladesh provide transport and marketing subsidies to agricultural exports, and together with Nepal they also provide indirect subsidies through export prohibitions, restrictions and taxes applied to raw materials used as inputs for processed products. India also subsidizes exports in a number o f non-transparent little-noticed ways, e.g. provisions which benefit export houses, handicrafts, EPZ firms, and provisions inits Export Promotion Capital Goods scheme2'. Other indirect export subsidies (see Table 4.1) are through directed credit and credit subsidies, government export credit guarantee funds, income and corporate tax exemptions or reductions linked to exports, and grants and other subsidies to small and medium exporters. All the South Asian countries are using duty neutralization schemes to either refund or exempt in advance import duties and other taxes on inputs and machinery used by exporters. It i s important to note that it is also necessary to deal with import taxes other than Customs duties, including especially VAT-style indirect taxes. This means that even under free trade with no protective Customs duties or other protective taxes (as i s the case for textiles in Sri Lanka) some form o f exemption or refund mechanism i s needed for exporters. The methods used in South Asia include drawback schemes, various kinds o f prior exemption schemes, ad hoc exemptions for particular products or exporters, duty exemptions and concessions for equipment and replacement parts, provisions for duty neutralization o f inputs used by indirect exporters (i.e. firms supplying intermediate inputs to exporters), rules for the treatment of deemed exports" (e.g. domestic sales involvingc ompetitive " l6 These ostensible reason given for these restrictionsi s that without them inferior quality teas and spices would be importedand then packaged and exported either in their original state or more likely blendedwith local varieties. It is arguedthat this would undermine the special reputationof Sri Lankanteas and spices for quality and reduce the net export returns. This seems a very dubious argument at best, since ifthere were a premiumfor unblendedpurely Sri Lankanproductsexporterswould have a strong motive to make sure that their productswere labeled and marketed accordingly. The relevant export trade associations would have a motive to make sure that accurate labeling is observed, and this could be reinforced if necessary with appropriate government regulations.Inthe case of tea, it is reportedthat the import banhas contributedto decisions of major tea marketing companiesto establishthemselvesinDubai and Singapore insteadof inColombo. Inthese places they import inbulk, blendand market teas from Sri Lankaandelsewhereinbulk. One reasongiven for this restriction is that it protectsthe integrity of the reputationand,the export price premiumof Nepal's hand-madecarpets.As is the case with tea and spices in Sri Lanka, the alleged export price benefitso f the restrictionare dubious at best, and are probably outweighedby the inhibiting effects of the restrictionon the carpet weaving industry: see discussion in World Bank (2003). Chapter 2: In any case it is likely that the restriction is by-passedto some extent by illegal imports via India(textiles are one of the largestitems inthis informaltrade: see Tanejaet al, 2002). For further discussiono f these export subsidies see Volume 11, Chapter 1. This subsidy program started in 1997198 and was originally either at 25% of the value of the domestic fabrics and yams suppliedto the garment exporter, or at 25% of 75% o f the value of the garment exports Le. 18.75% of fob prices. Inprinciple it was not availableif the yam or fabric supplier had itself used drawback for its own inputs, but at least in the case of two major inputs for yams (raw cotton and polyester staple fiber) this is irrelevant since the Bangladeshimport duty is zero. In2002 the subsidy rate was reducedto 15% and it was announcedthat it would be reducedagain 2003 and 2004 and eventuallyphased out in2005. These provisionsare in the 2002-07 Export Import Policy (available at ). See sections 3.7.2.1 (duty free import entitlements for export houses), 3.4.iv (duty free entitlement for handicrafts), 5.1 and 5.3 (resale or use for domestic productionof capital goods subject to reduced import duties linked to incrementalexports); reduced import duties on domestic salesby SEZ firms. 107 Trade Policies in South Asia : An Overview bidding against duty free imports), and in India and Sri Lanka, special schemes for the export activities of trading firms. VAT-style indirect taxes are sometimes refunded or exempted by these schemes, or handled separately by the domestic indirect tax administration rather than by the Customs administration. In order to implement these various schemes, India, Pakistan, Bangladesh and Nepal have set up organizations which systematically estimate and periodically update input-output coefficients which are used to calculate the drawback amounts and the quantities and values o f duty-free imported inputs corresponding to the exported products. India has many more and also far more complex duty neutralization schemes than the other countries: e.g. three different types o f drawback and two prior exemption schemes. The proliferation o f duty neutralization schemes in India, and also frequent changes to which they are subject, reflects on one side dissatisfaction and pressures from exporters concerned about such things as inadequate coverage and delays, efforts by the DGFT21inthe Ministry o f Commerce which i s constantly devising and revising means to streamline the systems in the interests o f export expansion, and on the other hand efforts by Customs to plug loopholes based on well founded concerns about excessive revenue losses and the misuse of the mechanisms for bribery and fraud. Because o f the complex structure o f tariffs and other protective taxes on many intermediate inputs in Bangladesh, the duty neutralization process can also be opaque and transaction-intensive, although for the major ready made garment sector, a good deal o f these difficulties are by-passed by the use of bonded warehouse facilities. However, for machinery inBangladesh and generally inPakistan, Nepal and Sri Lanka, as already pointed out, the duty neutralization schemes are fewer and less complex, reflecting much less diverse export structures than India's and considerably lower and more uniform import duties. 0 As well as duty neutralizationschemes, most o fwhich are separately available to exporters regardless o f their location or the extent or nature o f their export business, the South Asian countries are also providing export facilities and incentives in a package to manufacturing firms which operate their own bonded warehouses, and (except in Nepal) also toprms which locate in export processing zones (EPZs), also known as free trade zones (FTZs). Most Sri Lankan exports come from EPZ garment firms, but EPZs have always accounted for a quite minor share o f exports from India, Pakistan, and Bangladesh. Since 2001, there have been efforts to increase their export role in India by renaming them and changing them to become "Special Economic Zones" offering broader and more comprehensive advantages and facilities modeled on the export zones in China. In the meantime, firms operating as bonded warehouses i.e. as EOUs, are a bigger source o f exports (about 7.8% of total exports in 2000/01) than EPZ firms (about 4.2% o f total exports in 2000/01), but the bulk o f exports come from normal domestic firms using the various duty neutralization schemes and export incentives and facilities, especially Advance licenses, i.e. duty free import o f inputs prior to exporting, and the DEPB scheme, which i s a simplified form o f drawback inwhich exporters receive salable credits against future import duties. This reflects many long- continuing inadequacies in the FTZ arrangements, especially as regards infrastructure services and regulatory controls, restrictions on the relations EPZ and EOU firms can have with the domestic market, and on the other hand improvements in the general environment for exporters operating independently o f these arrangements. Some indication o f the relative importance o f the various export schemes in India i s shown inTable 4.3. Hard data on the relative importance o f the various schemes for exports has not been found for Pakistan, Bangladesh, Sri Lanka and Nepal, but discussions and reviews o f relevant literature and websites suggests the following: *' DirectorateGeneral o fForeign Trade 108 Export policies Pakistan:relies principally on drawback (Duty and Tax Remission for Exports (DTRE) scheme). There i s only a small volume o f exports from three hnctioning EPZs or based on bonded warehouse arrangements. Despite this there are official announcements that 19 new EPZs are planned. Bangladesh: manufacturer bonded warehouses are a major source for ready made garment (RMG) exports. Sri Lanka: most exports (principally garments) are from firms inEPZs Nepal: most exporters use traditional drawback. 0 Inadditionto the generalexportpoliciesdescribedabove, there are anumberofpolicies whichfocus on the needs and problems of export development faced by particular industries. Most o f these schemes are in India (Table 4,1), but Bangladesh also focuses attention and assistance on at least ten export industries viz, frozen shrimp and fish, leather products, ready made garments, poultry, vegetables, h i t s , bicycles, handicrafts, jute products, and bone dust. Pakistan, Sri Lanka and Nepal also pay special attention to the export potential o f some o f these and also o f other industries, but as part o f the implementation o f other domestic or general export policies and not as part o f a concerted separate effort mainly related to a particular industry's exports. 0 Finally, all the South Asian governments operate official export promotion organizations which provide general and market intelligence, organize or assist exporters with trade fairs, maintain connections with relevant domestic and international organizations etc. Each country also has its own export quality inspection and control policy which is managed either by government officials or by a separate organization, such as the Export InspectionCouncil inIndia. These arejust noted here and in Table 4.1 for completeness: to describe and evaluate these activities in the five countries would be a very large topic on its own, and no attempt to do so i s made inthis study. Some conclusionsand suggestions Duringthe past 20 years, and inparticular during the 199Os, the general trade policies and the export policies o f the South Asian countries have become much more conducive to the participation o f their exporters inworld markets than they were duringthe earlier import substitution period. The crucial policy developments behind this change have been the liberalization o f import regimes through the removal o f QRsand the reduction o f tariffs, and the provision o f facilities for exporters to enable them to operate outside or bypass the import regimes. Other government pro-export initiatives such as the activities o f export promotion organizations have also been helpful, but conducive trade policies are a necessary condition for these to be effective. As a result o f these reforms, anti-export bias in manufacturing, agriculture and for services, understood as incentives for exports relative to incentives for import substitution production, has declined substantially ina11 five countries. The following sections comment briefly onthe currentgeneral situation ineach c ountry, starting with Sri Lanka where anti- export bias i s certainly the lowest in South Asia, and finishingwith India, where it i s probably highest. Sri Lanka. Although there are no recent empirical estimates which would enable systematic comparisons o f levels and trends, the generally low tariffs and protection regime for manufacturing in Sri Lanka suggests that its trade policy environment for exports is considerably more favorable than in the other four countries. Even so, Sri Lanka's overall policies are still not neutral owing to highprotection o f large import substitution crops in the agricultural sector (especially rice, but also potatoes, onions and chilies) and still positive protection o f the import substitution manufacturing sector, involving quite markedtariff escalation givinghigheffective protection rates in some cases. Nepal. Anti-export bias in Nepal is probably also positive but overall not very marked, as apparently high effective protection for some import substitution industries available from escalated tariff 109 Trade Policies in South Asia : An Overview structure i s reportedto be underminedby Nepal's large smuggled informal trade. On the other hand, the smuggled goods mainly come fiom India, where hightariffs and other forms o f protection cause domestic prices for many manufactured goods and some agriculturalcommodities to exceed world prices. Pakistan. Palustan's quite sweeping trade 1iberalization reforms after 1997have probably cut anti-export bias there substantially, although the post reform level and structure o f tariffs suggests that it still remains quite high.Inaddition, the extent o f the probable improvement may not be well indicated by changes in tariffs and other official instruments, in view o f considerable tariff redundancy at the beginning o f the process, associated inpart with reportedly highlevels o f informal imports. Nevertheless, the considerable compression and simplification o f tariffs and the deregulation o f agriculturalpolicies that has occurred should in principle have simplified and reduced the administrative costs o f the various export mechanisms such as drawback. Bangladesh. Similar reductions inanti-export bias to Palustan's occurred inBangladesh with the trade policy reforms o f the late 1980s and early 1990s. However, as noted in the previous two chapters, trade policy reform stalled for a number o f years from about 1997, and only seems to have resumed, albeit in a hesitant way, after 2002. Corresponding to this slowdown, an empirical firm-level study of manufacturing indicated continuing high levels o f anti-export bias during 1999/2000, 2000101 and 2001/02, with effective protection in the domestic market available from tariffs generally two to three times greater than effective protection for manufactured exports22.The effective protection indicators used in the study measure protection made available by tariffs, and do not allow for the possibility o f tariff redundancy which i s likely to be quite marked inBangladesh's import competing sectors, especially in view of the reportedly large volume of unrecorded imports from India. But even though actual price differences may mean that anti-export bias inpractice could be lower than suggested by these estimates, this does not change the implications o f the results for policy; namely, that, to the extent that they are binding,the current structure o f tariffs inBangladeshcreates a markedbias inthe incentive system which pulls resources into heavily protected import substitution activities with relatively low economic rates of return, and away from export activities with higher economic rates o f retum. The probability that high output tariffs and other protective import taxes (especially supplementary duties on top o f Customs duties and the IDSC tax) are helping create large volumes o f informal and "official" smuggling and the associated black economy activities, is another reason for reducing them, in addition to the desirability of shifting resources out o f high cost activities into lower cost and economically more efficient activities, especially exporting. India. As pointed out inprevious chapters, as inBangladesh, India's trade policy reforms stalled in some respects in about 1997 and churned for about the following five years, with one major new liberalizing development (the final phase-out o f the general import licensing system), but with increases inthe general level of tariffs, the revival of protection for the agncultural sector, and widespread use of anti-dumping, SPS and TBT rules to make 1ife difficult for importers. There are no recent systematic empirical studies o f the resulting structure o f effective incentives across industries, but, if done, these ** Maxwell Stamp (2002), pp 53-61. The study useda standard measure o f anti-export bias which divides the effective protection coefficient for exports by the effective protection coefficient for domestic sales. For exports, it used alternative assumptions that 100% o f the legally refundable or exempt import duties on imported inputsusedby exporters was refunded, or that only 80% was refunded or exempted. The latter assumption was made to roughly allow for inadequate refund rates, delays, and transaction costs includingbribes, in getting imported input tariffs refunded or exempted. Other indicators o f anti-export bias inBangladesh are consistent with these results, inparticular estimates for the 1990s which compare aggregate effective exchange rates for imports with aggregate effective exchange rates for exports (World Bank, November 1999). The comparisons o f effective protection coefficients are a more accurate indication o f relative incentives, however, as they take into account the typical escalated structure o f tariffs, in which processing margins inproduction for the domestic market are widened by lower tariffs on tradeable inputsthan tariffs protecting the products beingproduced. Effective exchange rate measures just allow for the aggregate protective effect o f average tariffs and export subsidies or taxes on output prices, not for the effects on processing margins (value added). 110 Exportpolicies would undoubtedly reveal the continuing existence o f substantial anti-export bias, although at lower levels than during the early import substitution years, and probably declining somewhat for the manufacturingsector following tariff reductions inthe 2003/04 budget. Theprincipal message that emerges from this brief survey of the situation in the South Asian countries, is that import liberalization remains very much at the center of the policy reforms that are needed to accelerate their export growth. This i s especially hue inIndia and Bangladesh, and should be a key consideration in Palustan and Nepal, and even in Sri Lanka, where protection levels for manufacturing in the aggregate are much lower than inthe rest o f South Asia. Import policy reforms that would help accelerate exports go beyond the removal o fprotective non-tariff barriers and the reductiono f tariffs, and should also increase the transparency o f the tariff system by abjuring the use o f other protective taxes on top o f Customs duties. Apart from the resultingreductions innominal protectionrates, simple tariff structures usingas few rates as possible (ideally only one) greatly simplifythe administration and the transaction costs involved inessential export mechanisms such as drawback. Inthisregarditisimportanttorecognizethatinasystemwithhighandcomplexprotectivetariffs and other instruments, export policies and mechanisms which provide for exemptions and refunds so that exporters can function profitably, inevitably become a major focus for lobbying and corrupt practices, involving boththe Customs service and the other government agencies responsible for the export policies. These rent seelung activities generate various checks and controls, which in turn slow down and reduce the accessibility o f the system, especially for small and new exporters. To get a flavor o f the kind o f activity and the reactions to it, it i s worth quoting from an article o f a retired high level official o f India's import licensing office (which was replaced by DGFT in the Ministry o f Commerce in 1991). His comments concern a new rule announced inApril 1995 that dispensedwith the requirement that exporters should surrender foreign currency earned by their exports for Rupees, before being eligible to use duty exemption import licenses: "This is a liberalisation only on the surface. Insubstance it is veritable dynamite...We can now go back to the glorious days when broken bricks and empty tin containers were invoiced and shipped as art silkfabrics, inorder to obtain license for import of art silkyam. The ingenuity o f our lawbreakersis quite amazing, and they can come up with a number o f methods by which they can obtain benefits o f duty exemption license without exporting anything. All that i s required i s an address abroad. A relative or friend can receive the "goods "at their destination and dump them inthe sea or a garbage hill. It has been stated that presently 30% o f exports against duty exemption license i s under hawala i.e. bogus exports. Under the revised procedure a fly by night operator does not have to pay the hawala premium[ i.e. the black market premium to buy the foreign exchange which previously had to be surrendered to the Reserve Bank]. Liberalisation i s a must,but it must not be custombuilt for the dishonest. The Ministry o f Commerce i s banking on the Reserve Bank's power for taking action against exporters who do not realise the foreign exchange. It will take a minimumo f six months for the Reserve Bank to know whether the foreign exchange has been realised or not. If swift action i s initiated, it will take another 3 months for it to culminate in any punitive order. Inthe meanwhile, the offender and his ill- gotten gains will vaporize. It is not difficult to envisage the ensuing scenario. There will be two DRIInspectors supervising every customs appraiser. The Ministry o f Commerce will blame the Reserve Bank. The Reserve Bank o f India will blame the customs, who, inturn, will blame the DGFT [the Director General o fForeign Trade - responsible for import licensing in the Ministry o f Commerce]. As for the political executive, it has 111 Trade Policies in South Asia :An Overview readymade excuses in "Bureaucratic Bungling and o f c ourse System Failure". The chapter will be " " closed after suspending a couple o f clerks".23 The continuingneedfor bureaucratic checks and controls and the provision of severe penalties for not fulfilling various conditions o f the export incentive schemes, have a number o f consequence^.^^ First, access to the schemes i s limited, especially o f small exporters, potential new exporters, and indirect exporters, who find the requirements for using the schemes -especially the duty exemption schemes - too onerous. Secondly, there are long delays in all aspects o f the system, even though speed and agility are so important for successful exporting. For example, a survey o f Indian exporters in 1994 found that it took from two to eleven months to fix input output norms they had requested as against an official target o f - 45 days.25In order to speed up the system, for a number o f years official time limits have been set for dealing w ithimport license applications and a v ariety o f other functions, but delays far beyond these limits are reported to be normal, usuallyjustified by incomplete or defective applications.26 Finally, the complexity o f the system and the potential delays open the way to harassment o f exporters and allegedly widespread corruption, which, according to one study, by 1995 had become institutionalisedto the extent that *'. "there i s a smooth illegal market through which an exporter can get the necessary certificates and import licenses by paying bribe[s]." The problems o f the Indian export incentive system described above refer to the situation in the mid-1990s with references back to the 1980s and earlier. There appear to have been substantial improvements invarious aspects o f the administration o f these schemes since then, aided most recently by the introduction o f computer technology and internet links between exporters and their agents, Customs and the DGFT.Nevertheless, c ontinuing c overage o f the system by informed outsiders28and a 2 002 Ministryo f Commerce Committee report" make it clear that major administrative problemsremain, with complaints o f delays and harassment by Customs officials on the part o f exporters, complaints from Customs officials o f dishonest practices by businessmen involved inexporting, and conflicts between DGFT and Customs officials. In2002, a major corruption scandal involving falsely documented export containers shipped with the purpose o f obtaining export incentive payments was reported to have involved the highest official in India's Customs and Indirect Tax administration. Similar large scale corruption scandals involving Bangladesh's export incentive system have also been reported e.g. in2002 an investigation that i s alleged to have involved a number of non-existent textile mills that obtained export subsidies based on non-existent exports3'. No matter what improvements are made, these episodes 23 Quoted from an article by LA. Rashid,( former Joint Controller o f Imports and Exports) ."Exim Policy on Balance", Times, June 25, 1995,p.43. 24 Aspects o f the points made inthis paragraph are emphasised and discussed indetail inWorld Bank (August 2, 1994). 25 Ibid pp.10-11. 26 The Impex Times is replete with complaints about delays justified by allegedly incomplete or inaccurate paperwork e.g. see the M a y 25, 1995 issue ( pp41-42) and the editorial article inthe September 25, 1995 issue. " Article inthe EconomicTimes, NewDelhiissue,May 1, 1995,asreportedintheImpexTimes, May101995issue, p.7. Insofar as this report i s accurate, it suggests that at least those exporters who can afford to pay the bribes are able to avoid or reduce the delays It also should be mentioned here that there i s an extensive network o f consultants (many o f whom are ex- . officials o f the import licencing authority ) which specialise in obtaining import licenses on behalf o f exporters and others, and also firms which buy and sell transferable import licenses. Before 1992, this network o f intermediaries usedto trade inparticular inthe transferable REP ( replenishment ) licenses which were abolished in the initial reforms. The REP license system and the intermediaries' role in it was a usefulfunction which considerably reduced the economic costs o f the old import licensing which the newspaper article refers i s by Rajeesh M. Nair and Pradeep Kaul , Exporting Garments from India-Procedures, system, by making intermediate materials which otherwise could not be imported, available to manufacturingfirms. The studyto -Project LARGE,NationalLaw School ofIndia University. 28 Detailed week by week coverage o f developments inIndia's export incentive policy and administration apparatus are provided inBigs WeeklyIndex of Changes(fortnightly) and the Impex Times (fortnightly). The 29 Government of India, Department o f Commerce, Directorate General o f Foreign Trade. January 2002. Report on the High Level Committeefor the Exim Policy 2002-07 30 Article by Rafiq Hasan: "Textile perks go to the wrong pockets". Daily Star, August 02, 2002. Available at 112 Export policies indicate that as long as there are economic rents inherent inthe export incentive system, there are likely to be continuing problems inone form or another. Thesurest way to reduce their severity and the brake they constitute to export expansion, is to continue to liberalize imports and to reduce the protection of the domestic market, thereby reducing the incentivesfor misuse and rent seeking behavior. 113 Trade Policiesin SouthAsia :An Overview : 3 ?: z z 3z 0 z B nE e, 2 U 5 Y -c 8 5 M t 114 Export policies m m j: j: Z 0 $m m Z 0 z" z0 m $ * m m > * e, v1 * m m m > 115 Trade Policiesin SouthAsia :An Overview - v) % z0 116 Export policies 26/36 Tanning & dyeingextracts, 32 30.8 20125 11118.5 2.4 6113118 pigments etc Plasticintermediates Primaryform 3901-3914 30.8+AD 10120125 3.5111118.5 2.4 18 26136 Waste, parings, scrap 3915 30.8 25 18.5 2.4 43 Naturalrubber, primary forms 4001 30.8170 15 11118.5 12 6 Synthetic rubber, primary 4002 30.8tAJI 5 1 1 2.4 6 forms Rawhides & skins 4101-4105 0*125 5 0 12 6113 Wood inthe rough 4403 9.9 I O 3.5 2.4 0 Woodpulp andwaste paper 47 019.9120.3 5110 3.5 2.4 6113 Wool textiles 51 9.9120.3125.6130.8+S 5110120125 3.5111118.5 0 016118 26136 Cottontextiles 52 15.1/20.3125.6/30.8+ 5/10/20/25 3.5/11/18.5/3 0 0/6/18 5 6 Manmadefilament textiles 54 25.6130.8+S+AD 10120125 11118.5126136 0 6113118 Staplefibre textiles 55 25.6130.8+S+AD 10120125 3.5111118.51 0 6113118 26136 Knitted & crochetedfabrics 60 20.3130.8+S 15 18.5 0 13118 Iron& steel 72 9.9130.8*+TV+AD 5110125 [ 3.5111118.51 2.4*/6112 6113143 26136 Copper .. I74 I30.8 I 5110120125 1 3.5111118.51 12.4 I 6113118128 26136115.8 Nickel 75 15.1 15120 3.5111126136 2.4*16 13/18 Aluminium 7601-7603 20.3 15 11 2.4 6113118128 Lead 78 25.6 5115 3.511 1118.51 2.4 6118 26136 Tin I79 I20.3 I5110120 II3.5111118.512 I2.4 16/13/18 Overheadtraveling 8426 11 30.8 10120 7.5 6 6 cranes Combineharvester 843351 30.8 I O 7.5 6 6 threshers Papermaking 843920 30.8 I O 7.5 6 6 machinery Textile spinning 844520 30.8 10 7.5 2.4 6 117 Trade Policies in SouthAsia : An Overview machines~ ~ ~ .. . . . ~ ~ ~ ~ ~ I I I II I I Shuttleless looms 844630 30.8 10 7.5 2.4 1 6 Flat knitting II844720 II30.8 II I II I 10 7.5 2.4 1 6 machines Automatic sewing I 845221 I 30.8 j 10 1 7.5 1 2.4 1 6 machines Shoe making 845320 30.8 10 7.5 6 6 machines Casting machines 845430 30.8 10 7.5 6 6 Metal cold rolling 845522 30.8 10 7.5 6 6 mills II II 11 1 ~~~~~~~ Machining centres 845710 30.8 1 5 7.5 1 6 1 6 Numerically 845811 30.8 1 5 7.5 1 6 1 6 controlled lathes Computers 8471 20.3 5 0 2.4 13 Ball bearings 848210 30.8 10 18.5126136 6 13 Electrical machinery Generatine s e t ~ 3 7 5 - I 850134 I 30.8 I 20 I 7.5 1 6 I 18 K V A Industrial electric 851410 30.8 5 7.5 6 18 furnaces Automatic welding 851521 30.8 10 7.5 6 6 Agricultural tractors (new & 870190 30.8 25 3.5 2.4 13 used) Trucks of gvw 5-20 M T 87042201 30.8 60 18.5126136 2.4 28/83 I I I I I I Notes: MFN tariff rates from national tariff schedules, as percentages of assessable values. The Indian tariffs include the SAD. The Bangladesh tariffs include IDSC and supplementary duties if any, but do not allow for VAT exemptions on domestic sales (see discussion in Chapter 3). The Sri Lankan tariffs include the 20% national security surcharge. The Nepal tariffs include the national security tax in force since 2001 i.e. +1% of CIF for customs duties of 5% and below, +3% of CIF for Customs duties above 5%. Different rates for finer subdivisions of the indicated HSC code are separated by a forward slash. A tariff rate followed by an asterisk means that 95% or more of the finer subdivisions not shown inthis table are at that rate e.g. 2.4*/6112 for steel in Sri Lanka (HSC code 72) means that more than 95% of the disaggregated HSC positions in Chapter 72 are at 2.4%, so that tariffs of 6% and 12% would account for less than 5% of the total. +S means that some tariff lines are subject to specific duties, usually compound duties where the applicable duty is the higher of the maximum ad valorem rate and the specific duty. +AD means that some tariff lines are subject to anti- dumping duties applied to exportsfrom specified firms and countries, in addition to the normal MFN duties. +TV means that some tariff lines are subject to minimum assessable values on which tariffs must be based if declared CIF values are lower. The products and HSC tariff lines were chosen more or less at random to illustrate some general aspects of the intermediate input and machinery tariff structures inthese countries. The table i s not intendedto be comprehensive. 118 Exportpolicies TABLE 4.3 INDIA2000/01: APPROXIMATEVALUES OF IMPORTSAND EXPORTS ASSOCIATEDWITH VARIOUS EXPORTINCENTIVE SCHEMES Imports o f Exports fob Share o f total inputscif $US $u'S billion exports % billion Drawback schemes n.a. n.a. n.a. DutyExemptionPassbook (DEPB) n.a. 12.77 28.7 Advance (duty free) license 5.21 8.60 19.3 DutyFreeReplenishment Certificate 0.34 0.51 1.1 Gems &jewellery scheme 2.42 3.39 7.6 Export Only Units (EOUs) n.a. 3.48 7.8 Export Processing Zones (EPZs) n.a. 1.88 4.2 Electronic hardwardsoftware schemes n.a. 4.67 10.5 All other n.a. n.a. n.a Total n.a. 44.56 100.0 Source: Estimated from data in Government o f India, Department o f Commerce, Directorate General o f Foreign Trade (January 2002). Report o f the High Level Committee for the EximPolicy 2002-07. 119 Chapter 5: Regional Trade and RegionalTrading Agreements' Introduction As discussed inthe previous chapters, following independence from Britishrule, India, Palustan and Sri Lanka adopted policies which made them amongst the least open economies o f the world. They pursued inward-oriented, import-substituting industrializationwith public sector planning and regulation of their private sectors, and their policies included stringent barriers to intemational trade, with many QRs,hightariffs, export controls and taxes, and regulated foreign exchange regimes. Emerging in 1971 as an independent country, Bangladesh adopted the same policies. The land-locked South Asian countries, Nepal and Bhutan, had open trade relations with their dominant neighbour, India, but followed similarly restrictive trade policies with respect to the rest o f the world. Starting with Sri Lanka in 1977, these highly restrictive trade policies began to be liberalized in Palustan, India, Bangladesh and Nepal during the late 1980s and early 1990s. But despite renewed reforms inIndia and Palustan in the early 2000s, in mid-1994 South Asia remained one o f the most protected regions inthe global economy. Duringthe colonial periodunder Britishrule, the whole of BritishIndia was, inprinciple, and, to a large extent, inpractice, a single market with well developed transport and marketing links inimportant regions that were subsequently divided. Customs posts and controls were erected along the new national boundaries, and, soon after, new industries were promoted and others expanded to deliberately replace imports which had previously come from overseas countries, but also from across the new borders. For example, before independence, most o f Bengal's jute had been grown inwhat became East Pakistan, and processed injute textile mills in Calcutta. After 1947, jute farming was promoted in India and protected by restricting the imports that had traditionally come from the east, while in East Pakistan jute textile mills were established to processj ute and protected against competition from processedj ute made in India. Similarly, imports o f raw rubber that had previously come to India from Sri Lanka (as well as from Malaysia) were restricted in order to protect the development o f a rubber industry in Kerala. Following independence, trade amongst the South Asian countries were also affected by the continuing conflict between India and Pakistan, concems about their external and internal security, the spillover effects of ethnic and religious conflicts, a multitude o f bilateral disputes (for example the "trade and transit" crisis between India and Nepal between 1989 and 1991), and a generally low level o f mutual trust. India's almost autarchic policies on agriculture (dominated by parastatal import and export monopolies) and consumer goods (with a defacto import ban in place for almost 40 years) were especially constraining and completely blocked large volumes o f Indian imports from neighbouring countries which would otherwise have taken place through legal channels. Regionaltrade: scale andtrends For all these reasons, with the exception o f the trade o f Nepal and Bhutan with India, and the trade of the Maldives with Sri Lanka, intra-regional trade in South Asia has been restricted even more than trade with the rest of the world. As shown in Fig 5.1, the trade o f the newly independent countries The original version o f this chapter was extracted from a paper by Garry Pursell and Nihal Pitigala (Pursell, Garry andNihal Pitigala ,2001, August. TradeAgreements in the SouthAsia Region. World Bank, mimeo). More detail on a number o f topics (especially the various bilateral trade agreements) are inthis paper and inreferences given there. The chapter was subsequently updated and also revised to take account o f new developments and also to reflect comments from discussants at workshops in South Asia. Detailed comments from I.N.Mukherji (2003, October) at the workshops inColombo and Delhi were especially useful. Trade Policies inSouth Asia : An Overview with each other fell fromabout 19percent of their total trade in 1948, immediately after independence, to around 4 percent by the end o f the 1950s and to only 2 percent by 1967. After recovering for a while into the early 1970s, it declined steadily again from then until 1990, when it was just over 2 percent o f total trade (Table 5.1). This very low share only began to increase duringthe 1990s, as the general trade policy Fig 5.1: South Asia's Intra-regional Trade as a Share of Total Trade, 1948-99 18 16 14 12 10 8 6 4 2 Source: Calculated from IMFDirection o f Trade Statistics Table 5.1 Officially Recorded Intra-Regional Trade As a Share o f Total Trade 1981, 1990, 1995 and 1998 Country Intra-regional Imports Intra-regional Exports Total Intra-regional Trade 1981 1990 1995 1998 1981 1990 1995 1998 1981 1990 1995 1998 India 1.3 0.4 0.6 1.1 2.9 2.7 5.1 5.6 1.8 1.4 2.7 3.2 Palustan 1.9 1.6 1.5 2.4 5.5 4.0 3.2 4.9 3.1 2.7 2.2 3.6 Bangladesh 4.7 7.0 17.7 17.5 7.9 3.1 2.3 2.7 5.4 5.8 12.7 12.4 SriLanka 5.2 7.0 11.4 12.9 8.8 3.7 2.7 2.4 6.5 5.6 7.5 8.2 Nepal 13.4 17.5 31.7 63.8 7.7 9.2 36.2 47.4 11.9 15.0 32.8 Maldives 6.0 7.4 4.5 7.7 22.3 13.8 22.5 16.6 9.4 9.2 6.7 9.4 Bhutan NIA 10.9 57.5 59.9 NIA 9.6 87.9 81.9 NIA . 9.7 73.5 71.8 SouthAsia 2.4 2.0 3.8 4.3 4.8 3.1 4.3 7.5 3.2 2.4 4.1 4.9 Source: Estimated from IMFDirection o f Trade Statistics. Notes: Shares for Bhutan are based o npartner data ("mirror" statistics). There are discrepancies between FOB and CIF values inmirror statistics. The large decline inNepal's regionaltrade inthe early 1990swas due to the "trade and transit" crisis with India, duringw h c h India closed a number o f key trade and transit points with Nepal. 122 RegionalTrade and Regional Trading Agreements liberalizations in the individual countries began to take hold, and reached around 5 percent of the region's total trade in 1999.However, since then, despite some apparent progress inincreasing the scope o f the principal regional preferential agreement (SAPTA) and the commencement of the India Sri Lanka Free Trade Agreement (ILFTA) in March 2000 (see below) there was very little change in this still very low share of recordedregional trade in South Asia's total trade (Figs 5.2, 5.3 and 5.4). Regional trade in South Asia (over 80%) overwhelmingly consists o f bilateral trade between India and the countries on its periphery, and according to India's trade statistics, the share o f India's trade with its six South Asian neighbours inits total trade increased only marginally during the five years after 1997/98: in2002/03 the share was just below 3%. The Indian data for this period also show that the basic patterns o f regional trade that emerged duringthe 1990shave continued. Inparticular: Fig5.2 Indiantrade with SouthAsia countries 2002/03 3000 -1 .Indian imports from ulndlan exports t o Fig 5.3. Share of recorded South Asian trade in India's total trade, 1997/98-2002/03 6 1 -Imports -Exports -Total trade 5 - EQ, 43 -- g n 2 - Indian fiscal years 123 Trade Policies in South Asia : An Overview Fig 5.4 Four Asian countries 2002/03:shares of trade w ith India in total imports,exports and total trade 45 8Shareof imports 40 35 Share of exports 1c 30 0Shareof totaltrade 25 n 20 15 lo 5 0 Pakistan Bangladesh Sri Lanka Nepal Four countries Regional trade i s dominated by exports fiom India, which in 2002103 accounted for 84.4% o f its total regional trade and probably about three quarters o f total regional trade2 Most o f India's regional exports go to Bangladesh and Sri Lanka, both o f which consistently run large trade deficits with India (Table 5.2). India also has regular trade surpluses with Palustan and Maldives, although the total volumes o f trade are small (especially considering the potential for trade with Pakistan). According to India's and their own trade statistics, Nepal and Bhutan normally run trade surpluses with India3, but the total volumes of this trade i s very small from India's perspective (about halfo f one percent o f its total trade) Likewise, for India, imports from the South Asian region are tiny relative to its total trade: less than one percent. South Asia i s a somewhat more important destination for India's exports, accounting for about 5% o f its total exports (Fig 5.3). For all the countries on India's periphery except Palustan, regional trade, nearly all o f which i s bilateral trade with India, i s much more important than it i s for India (Fig 5.4). Inparticular, India i s a major source o f imports for Bangladesh and Sri Lanka ( in2002103 12.2% and 13.8% o f their total imports respectively), but a very minor export destination (in 2002103 0.9% and 1.8% o f their total exports). But India i s by far the dominant trading partner for Nepal and Bhutan, both for imports and exports. The almost negligible share o f Pakistan in South Asian regional trade reflects the political difficulties between it and India. Without these difficulties, the trade would undoubtedly be much larger, at the very least in absolute and relative terms as large as the India-Bangladesh and India- Sri Lanka trade. The official trade statistics just discussed omit large volumes o f unrecorded trade in the region, which takes a number o f forms, including traditional smuggling which physically by-passes Customs posts (especially at the land borders), "official" or "technical" smuggling which involves misclassification, under-invoicing etc at Customs, and indirect smuggling which includes, for example, This assumes that about 15% o f total regional trade in2002103 was between the peripheral countries. Complete data on trade between the peripheral countries in2002103 is not yet available. India's trade statistics showing a surplus With Nepal in 2002103 appear to be a-typical. There are major discrepancies between India's and Nepal's official trade statistics, but both normally show a trade surplus for Nepal. The apparent trade surpluses (according to Indian official statistics) of Bhutan with India probably reflect failure to record Bhutanese imports under the bilateral free trade agreement with India. Bhutan's principal export to India i s electricity, which i s not included inthe merchandise trade statistics. 124 RegionalTrade and Regional Trading Agreements exports to Palustan from India which are routed through Dubai or Afghanistan. Recent studies o f this informal unrecorded trade suggest that it may be as large as the recorded India-Nepal trade, but that it i s probably considerably less than the recorded India-Bangladesh trade and seems to be declining, and i s also much less than the recorded India-Sri Lanka trade. There are no recent studies or estimates o f the likely scale o f the informal India-Pakistan trade, but the tightening o f security along the India-Palustan border since 1998 suggest that informal trade with India by the principal land routes i s probably much less than it was generally considered to be duringthe early and mid-1990s. The recent studies also suggest that the direction o f the informal trade i s similar to the direction o f recorded trade. Inparticular, Nepal probably normally runs a surplus with India on informal trade account, while India runs a substantial informal trade surplus with Bangladesh. There are a number o f reasons for the overwhelming predominance o f Indian exports inregional trade and the failure so far of the peripheral countries to substantively penetrate the Indian market. Most fundamentally, India has a far more diversified economy than the other countries, especially in manufacturing, and many o f its products-notably durable consumer goods, intermediate materials, components and certain kinds o f machinery- are especially well suitedto buyers inthe region, interms o f price, quality and adaptation to South Asian conditions. At the same time, tariff structures in the other South Asian countries have systematically been amended to increase the processing margins o f established local industries by cutting the tariffs applied to imports o f many raw materials, intermediate components and machines that are not domestically produced. India i s very competitive with the rest o f the world in the production and export o f a number o f these products and has been successfully supplying them-notably to Bangladesh and Sri Lanka-in competition with exporters in the rest o f the world, and in nearly all cases without any assistance-or at least any substantive assistance-from tariff preferences. Thirdly, the peripheral economies are far smaller than India's in every dimension, and their export industries are appropriately much more specialized in producing labor intensive consumer goods- e.g. textiles, garments, leather goods, seafoods, various agricultural products-which are also low c ost internationally competitive industries in India. The consequent basic difficulty o f exporting these labor intensive products to India on any substantial scale i s made even more difficult by high "just-in-case" protection of these industries in India e.g. prohibitively high specific duties on low -value textile fabrics and garments principally aimed at keeping out imports from China and other low cost developingcountry suppliers, and very hightariffs over wide ranges o f agricultural products (for more discussion on this see the chapter on agriculture, livestock and fisheries and the chapter on textiles and clothing in Volume 11). Fourth, although under SAPTA and ILFTA (see discussion below) India has granted a large number o f tariff preferences, many o f these are on products which are either not produced and exported by the other South Asian countries, or which, if they are produced (e.g. garments), are subject to special high protection treatment in India. Fifth, (for many reasons including political tensions and priority to more profitable and bigger opportunities in the domestic market and in exporting to developed countries), so far there has been little or no direct investment by Indian firms in the peripheral countries as a means o f more profitably sourcing supplies for the Indian market. Finally, as discussed in Chapter 1, the correction to many years o f exchange rate overvaluation that resulted from the massive devaluation o f the Indian Rupee between the mid-1980s and 1992, involved correspondingly large real devaluations in India's bilateralreal exchange rates with Palustan, Bangladesh and Sri Lanka. This provided an initial impetus to the expansion o f Indian exports to these countries during the 1990s at the same time as their non-tariff barriers and tariffs were being reduced, while increasing the difficulty for exporters in these counties to profitably supply India. 125 Trade Policies inSouth Asia : An Overview Early regionaltrade agreements The South Asian countries have always been conscious o f both the economic advantages and of the political and other difficulties o f less restrictive regional trade. Consequently, there have been many initiatives to free up trade. This section briefly summarizes the principal early agreements, which in modified forms, are still inforce. The India-NepalTreaties o f Trade and Transit Trade between India and Nepal are centuries old, trade having been carried out traditionally on a barter basis. Trade relations are strongly influenced by, and have often been subordinate to political, security and military considerations, especially the Indian preoccupation with China. This led to a major breakdown in Indian-Nepalese relations between March 1989 and M a y 1991. During this period India closed key trade and transit points with Nepal, thereby effectively creating a partial economic blockade with respect to a number o f crucial commodities, especially petroleum products. The blockade only ended in 1991 with a constitutional crisis and change o f government in Nepal. Since then, this experience has been a dominant background factor in the political and economic relations between the two countries. The Indo-Nepal Treaty o f Trade, signed in 1950, was the first formal post-independence trade agreement in the South Asia region. The Treaty was renewed in 1961 and in 1971 and modified to incorporate provisions on transit facilities extended by India for Nepal's trade with third countries, and cooperation to control unauthorized trade, the principal concern o f the latter being smuggling o f third country goods from Nepal into India. The treaties were formally suspended during the trade and transit crisis and were renewed only in December 1991 following the change o f government in Nepal. In December 1996 a new Treaty o f Trade4was signed with the provision for automatic renewal every five years. In January 1999 a new Treaty o f Transit liberalized transit arrangements in Calcutta for Nepalese imports, and the Treaty was made automatically renewable every seven years. Frequent bilateral consultations are held between the Indian and Nepalese Customs to deal with the administration o f these agreements. An early protocol to Article V o fthe Treaty o fTrade stipulated that such goods must containnot less than 80 percent o f Nepalese materials, or Nepalese and Indian materials, to be eligible for concessions. This was mucht 00 stringent for exporters inNepal t o make much impact o n the Indian market. Insubsequent revisions to the Treaty and the relevant Protocol the proportion o f value added was first lowered to 65 percent and later to 55 percent, but these rules o f origin still proved too demanding for the underdeveloped Nepalese manufacturing sector to make much progress in exporting to India, at least bylegalmeans. Reflecting this, these percentage rules o f origin requirements were eliminated in the December 1996 Treaty. Between then and 2002, all goods manufactured inNepal were exempt from Indian QRs and also from Customs duties provided they were accompanied by a Certificate o f Origin (COO) issued by authorized agencies in Nepal. This was essentially an ad hoc rule o f origin system, in which the admissibility o f each shipment for duty-free treatment w as s equentially decided by the administering Nepalese agency and then by the Indian Customs. However, after a few years the system was questioned by manufacturers inIndia, who complained o f competition from duty free imports from Nepal, especially Details o f the Treaty provisions with respect to Indian imports from Nepal are inArun Goyal (ed) Easy Reference Customs Tarif, Budget Edition (2003-04). This also gives information on the January 1999 Treaty o f Transit. A comprehensive account o f the Agreement and Protocol to the Treaty o f Trade up to 1995 is provided in V.L Rao, Srinath Baruah, R.Upendra Das (1996). . 126 RegionalTrade and Regional Trading Agreements o f hydrogenated edible oils (vanaspati), acrylic yams, copper products, and zinc oxide, all o f which were heavily protected in India. In response the Indian govemment re-imposed origin rules, which at present set the maximum share o f non-Nepalese or non-Indian materials in export prices at 70%. In addition, quotas were set for the four products mentioned above, and in one case (vanaspati) the quotas were allocated to an Indian state trading enterprise (the State Trading Corporation) as a.way o f appropriating the considerable resulting economic rent. Nepalese exports inexcess o f these amounts are s ubject t o India's normal MFN tariffs. To further reinforce protection, Nepalese exports o f one o f these sensitive products (acrylic yam) were subject to an anti-dumping action and anti-dumping duties were imposed. Manufactured goods n o t accompaniedby a s atisfactory C 00 would fall into three c ategories, none o f which can be exported to India, at least legally. The first and most important are imports into Nepal from third countries: the import o f these into India was always prohibited if the Nepalese import duty had been rebated, but in January 1996 the Indian Customs made this prohibition quite general, so that it applies to any third-country goods, even if Nepalese Customs duties have not been rebated. The second category i s Indian goods which have been exported to Nepal and which have received a Nepalese Customs credit for Indian excise duties (see below). The re-import o f these goods into India i s banned, as a way o f discouraging this potential method o f evading Indian excise duties. The third category i s Nepalese goods first sold domestically and then exported over the border to India. Inthat case they would be subject to both Indian import duties and Indian excise taxes, and in most cases, coming on top o f Nepalese indirect taxes, the total taxes involved would be prohibitive. The same basic principles apply to agricultural products exported t o India: t o qualify for QR and duty exemption, they must be "wholly produced" inNepal. On the Nepalese side, under the Treaty o f Trade, Nepal extends a reduction o f 20 percent in import duties on goods imported from India with customs tariffs up to 40 percent, and a reduction o f 10 percent inimport duties on goods with customs tariffs in excess o f 40 percent and up to 110 percent. The Nepalese preferences are therefore mostly quite small e.g. a 12 percent tariff instead o f a normal tariff of 15 percent, or an 8 percent tariff instead o f a normal tariff o f 10 percent. There are s eparate special arrangements for dealing with Indianindirect taxes. Inc ontrast t o Indian exports to other countries, which in most cases are effectively exempted from excise and sales taxes, these taxes have in general already been imposed on Indianproducts sold inNepal, and it would be impractical to refund them to the traders and others who bringthem inthrough the border Customs posts. To deal with this, the agreement and practice for many years has been for the Nepalese Customs to deduct the amount o fthe Indian central excise tax "and other duties"' from the Nepalese import duties and other charges, so that the importer only pays the difference, if any. With an upper limit equal to the Nepalese duties and other charges, the Indianindirect taxes o n the imported goods are then paid by the Indian govemment to the Nepalese government: in recent years these payments have amounted to about 5 percent o f total Nepalese government tax revenue. Under the Treaty o f Transit, India provides port facilities at Calcutta and Haldia for Nepal's trade with third countries, includingproceduraland other concessions and the facility o f 15 points o f entry/exit on the India-Nepal border and as many transit routes to Calcutta and Haldia.6. Nepal can also use the facilities at the Mumbai port and the Kandla port for third country trade. Inaddition, India has provided 22 entry/exit points along the India-Nepal border for bilateral trade and for Nepal-Nepal transit. Nepal's 'Presumablycentral sales taxes. There do not appear to be any special provisions inthe Treaty o n Trade or inother laws affecting India-Nepalese trade, regarding the treatment o f Indian or Nepalese s tate or provincial s ales and other indirect taxes. International obligations oblige landlocking countries such as India to provide landlocked countries such as Nepal with at least one transit route to the sea. 127 Trade Policies in South Asia : An Overview traffic intransit through Indian territory i s exempt from Indian customs duties, all transit duties, and other charges except for transportation. It i s unclear however, whether octroi (municipal levies charged for goods transported across municipal borders inIndia) applies to transit goods. To be effective, the Customs procedures described above would require efficient administration and reasonably accurate and complete record keeping at the border Customs posts, since there are substantial incentives to falsify records, and even more to avoid both Indian and Nepalese excise and sales taxes by bypassing Customs inspections altogether. The transaction costs o f preparing and negotiating the certificates o f origin required for each Nepalese shipment to India could also be considerable, especially inrelation to small shipments. The information and documentation requirements for both Customs officials and traders are also high e.g. as regards previously paid Indian excise taxes included in the prices o f goods exported from India to Nepal. For these reasons, it i s not surprising that the volume o f informal, unrecorded trade i s reported to be very high, even for products which are exempt from import duties under the Treaty o f Trade.' Over many years substantial leakages into India have also been reported from duty free bonded shipments passing through India to the Nepalese border. All o f this leads to complaints and pressures from Indian firms t o plug the leakages, but while Indian protection remains much higher than protection inNepal, it i s difficult to envisage viable administrative solutions*. For these reasons trade relations have been a constant source o f friction between India and Nepal, as i s apparent from the following Indian assessment o f the situation inOctober 2000: "Apart from the informal movement o f third- country origin goods through the unmannedborders with Nepal, the official imports through the customs points are third country goods in the disguise of Nepal-origin goods.. ..Nepal trade i s legalized smuggling with a wide network covering politicians, police, officials and businessmen on both sides o f the border"'. Large tariff reductions inIndia since 2002 and some tariff increases inNepal (see Chapter 3) will have reduced the incentives for "trade deflection'' through Nepal as a means for exporters from other countries to access the Indian market. However, applied research on the transaction costs o f the border trade" suggests that substantial simplifications o f import and export procedures and improvements in Customs administration would also be needed for there to be a really substantial redirection o f trade to formal channels. Agreement on Trade and Commerce BetweenIndia and Bhutan Being 1and-locked, Bhutan traditionally traded only w ithIndia, and their trade w as c onducted freely without a formal accord. Article V o f the Treaty o f Perpetual Peace and Friendship signed between India and Bhutan in 1949 implicitly recognizedthe existence o f free trade between the two countries, but it was not until 1972 that this was made explicit and formalized in the Agreement on Trade and Commerce. l1 This agreement was prompted by the gradual development o f the Bhutanese economy and 'Pohit and Taneja, (2000) The effects o f hightariffs inIndia were apparent from a complaint by Indian copper wire producers who asserted that copper rods were being imported into Nepal with a 5 percent duty and after a simple drawing operation inNepal were being imported duty free into India as finished copper wire. By contrast, in2000 Indian copper wire producers were importing copper rods over a tariff o f approximately 45 percent. Arun Goyal, "Export Import Notes", Economic Times, October 9, 2000. Since then, copper and copper wire tariffs in India have been reduced to 20%, 'substantiallyreducing the incentive for "trade deflection" to India throughNepal. Ibid lo Pohit, Sanjib andNisha Taneja (2000) and Karmacharya, B.K.(2002). 11 As well as facilitating trade and payments, this agreement included broader objectives under which India would helpfurther the e conomic development of Bhutanby providing technical and financial assistance for economic development and diversification. 128 Regional Trade and Regional Trading Agreements the needto distinguishBhutan's border trade from its growing trade with other countries. The agreement has been periodically renewed and will be inforce until2005. Among the major provisions, Article I1o f the Agreement gives Bhutan the right to impose non- tariff barriers o n goods o f Indian origin "as they may be necessary for the protection o f industries in Bhutan", with the provision that these NTBs would not be stricter than those applied to goods imported from third countries. However so far no NTBs have been imposed. Article I11allows both countries to impose non-tariff barriers to goods originating from third countries. A protocol to the agreement outlines the procedures for all imports and exports o f Bhutan to and from countries other than India and specifies 12 road depots, seaports and airports in India through which this trade may take place. A comprehensive import procedure has been annexed to the protocol to avoid goods destined to Bhutan from leaking into India. A notable absence from the agreement are rules o f origin stipulating the local content requirement o f goods o f goods that can be traded duty free between the two countries. There are also no Certificate o f Originrequirements, as inNepal. Arrangements similar to those in Nepal exist for the treatment o f excise and sales taxes. These taxes included in the cost o f Indian goods sold in Bhutan are a major revenue source for the Bhutanese government, approximately 13 percent o f the government's total tax revenue in 1998/99. But, as inNepal, the evasion o f indirect taxes i s a big incentive to bypass formal trade channels and Customs procedures, and it i s reported that the volumes o f unrecorded trade between the two countries are large relative to Bhutan's total recorded trade. Bhutan's trade i s dominated by electricity exports to India from hydro power stations financed and constructed by Indian companies. Relative to the economy, this activity i s far larger than the production and trading o f agricultural and manufactured goods, and also accounts for a large share o f total government revenue. As inNepal, tourism i s also an important export service industry. Bilateraltrade agreement betweenBangladeshand Bhutan After India, Bangladesh i s the second largest export destination for Bhutan. The main provision o f a trade agreement between the two countries are tariff preferences given by Bangladesh. The agreement was renewed for five years in M a y 2003. However, even with the preferences the total protection rates in Bangladesh for Bhutan's principal exports are high, and the preference margins are quite small. For example, as discussed in Chapter 3, after allowing for the preferences, in 2003104 Bangladesh's total protective import duty rate for apples and apple j uice (which are t w o o f Bhutan's principal exports) were 65%, versus an MFN protection rate o f 86%. Similar very high preferential protective rates were also applied to other exports which are important for Bhutan e.g. to mandarins and oranges. As noted in Chapter 3, these very high protection rates are the consequence o f Bangladesh's para-tariffs (for these products a 40% "supplementary" duty), which are not subject to the preferences applied to Customs duties. Protection rates at these very high levels appear to be supporting high cost marginal producers in Bangladesh, and are symptomatic o f the reluctance to seriously pursue preferential trading opportunities which would probably generate large trade volumes, but which would possibly hurt some domestic producers. Trade and Transit Agreements between India and Bangladesh India has historically been the largest single trading partner for Bangladesh, and Bangladesh has been the largest export market for India in South Asia. Previously East Pakistan, Bangladesh emerged as an independent country in 1971, following a war in which East Pakistan received crucial support from India. Immediately after, in March 1972, the two countries entered into a trade agreement the principal 129 Trade Policies in South Asia : An Overview provision o f which was mutual MFNtreatmentI2. InNovember 1972, a Protocol on Inland Water Transit and Trade was signed in accordance with Article V o f the main trade agreement for a term o f five years. This agreement provides for the u se of s pecified w atenvays, railways androadways for commerce between the two countries and for passage o f goods between two places in one country, through the territory o f the other. The trade agreement was renewed annually until 1977, but political differences led to its suspension for about three years between 1977 and 1980. Eventually a new trade agreement containing similar provisions to the original agreement was signed in October 1980, and the Protocol on InlandWater Transit and Trade has subsequently beenperiodically extended. The essence o f this Protocol i s 50/50 sharing o f barge trade both between India and Bangladesh, and trade between different parts o f India (e.g. Kolkata to Assam) which uses waterways passing through Bangladesh. While these agreements are essential for the existing trade and transit arrangements between the two countries, their scope i s quite limited and both trade and transit activities between the two countries remain highly constrained. For example, Indian trucks are not permitted to supply customers inside Bangladesh or to carry shipments inbond across Bangladeshto the Indian states on Bangladesh's eastern and north-eastern borders. Likewise, Bangladesh trucks are not permitted to operate in India. Apart from the extra costs that this imposes on inter-country trade, as a result, large volumes o f intra-Indian trade between the western and eastem states are carried by circuitous and extremely long routes via the narrow "chicken's neck" region between the far north o f Bangladesh and Nepal, S i k m and Bhutan13.In addition, these bilateral trade and transit agreements do not cover the severe constraints on legal India- Bangladesh border trade, which result from the fact that most land Customs posts (both in India and Bangladesh) are only authorized to clear a very limited number o f specified products. This creates obvious motives for smuggling, since the only legal alternative i s frequently to transport the goods to a distant location where the Customs posts are authorized to clear them. The agreements also never included any preferential tariffs or other preferential trade concessions. As discussed below, trade preferences were negotiated separately, first under the Bangkok agreement, and later under SAPTA. Bangkok Agreement The Bangkok Agreement14 resulted from an early initiative to liberalize trade between ESCAP" members. It was signed in Bangkok in 1975: the original signatories were India, Bangladesh, Sri Lanka, South Korea and Laos. In 1991 China joined, greatly increasing the potential scale and importance o f the agreement. Articles 3 and 4 provide for tariff concessions and the relaxation o f non-tariff barriers in favor o f goods originating inthe participating states. These are set out innational lists o f concessions, which are compiled by each country at negotiation sessions. The participating states also agreed to accord the MFN principle to each other,16 with the exception o f concessions to a "least developed country" (LDC) member, which can be given to that country only. The L D C members are currently Bangladesh and Laos". Concessions that are accorded by a "participating state" outside the Bangkok Agreement, such as tariff concessions given by India to Sri Lanka or vice versa under SAPTA, do not apply to other Bangkok Agreement participating states by virtue o f their participation inthe agreement. The rule o f origin that has to be met for goods to qualify for concessions i s that the total material and labor cost incurred in the l2 This agreement was redundant, since both countries were in any case obliged to accord MFNtreatment to each other as GATT signatories, and after 1995 as members of the WTO. l3 Aspects o f India-Bangladesh-Nepal trade logistics are described and analysed in Subramanian and Arnold (2000) l4 The full formal title of the agreement i s :FirstAgreement of Trade Negotiations A m o n g Developing Member Countries o f the Economic and Social Commission for Asia and the Pacific. l5 UnitedNations Economic and Social Commission for Asia and the Pacific l6 This meant that the other member countries would give each other GATT MFNtreatment and hence would not discriminate against Laos even though it was not a GATT signatory. l7 Laos dropped out in 1990 and Papua N e w Guinea acceded in 1993. Since then Laos has rejoined and Papua New Guinea has left. 130 Regional Trade and Regional Trading Agreements exporting country or in other Bangkok Agreement countries should account for at least 50 percent o f the ex-factory cost o f the product. This i s extremely demanding for the s maller c ountries and has been a major reason for the minimal impact o fthe agreement on trade so far. A standing committeerepresenting the participatingmembers meets at least once a year to review the progress o ftrade between the member countries andto sponsor negotiations. Despite the frequency of these meetings, national lists o f concessions and the extent o f the concessions were not substantial enough to have a perceptible impact on trade flows. Duringthe agreement's first 25 years, for all member countries there were tariff concessions on only about 500 six-digit HSC products, compared with approximately 5300 six-digit HS product categories, and there were practically no concessions on QRs. Moreover, particularly inthe case o f India, the tariff concessions that were givenwere often meaningless, since the same products were frequently subject to import licensing, and especially before India's trade liberalization reforms during the 1990s, the preferential tariffs it accorded were still prohibitively high''. Consequently, trade among the signatory countries from 1980 through the 1990s remained at only about 2.2 to 2.5 percent o f their total tradelg, and nearly all the increases that occurred duringthe period e.g. the expansion o f South Korea's exports to India and to the other member countries, had nothing to do with concessions negotiated under the Agreement. The scope and value o f the Bangkok Agreement tariff preferences inS outh A sia increased somewhat duringthe 1990s-especially t ariff preferences given by India to Bangladesh-but by then trade developments in South Asia were dominated by the unilateral liberalizations that had occurred or were under way, and SAPTA and other regional trade policy initiatives beganto have a more important role. China's accession to the Bangkok Agreement in 2001 seemed to have the potential to fundamentally change the impact and effects o f the agreement on trade. However, at the time China's concessions were on only 902 %digit H S product lines, plus 18 tariff lines for Bangladesh. Most o f these concessions were minimal e.g. for tyres China offered a preferential tariff o f 12.6% instead o f its general tariff at the time o f 12.9%20. Chinese trade with South Asia, especially with India (both exports and imports) have been expanding very rapidly since about 2001, but as i s the case with South Korean trade, this has little or nothing to do with the Bangkok Agreement concessions. Infact, the principal thrust of Indian trade policies towards China has been restrictive, on the import side through anti-dumping measures which have targeted Chinese exporters, and specific tariffs on textiles and garments (see Chapter 3), but also on the export side during 2003/04, with discussion o f measures to restrict booming exports o f iron ore and steel to China, as a way o f limitingthe impact o f this trade on domestic producers. Therefore, it seems that, as in the past, the Bangkok Agreement's role i s mainly symbolic and political, with minimalreal impact on trading relations inthe South Asia region. SouthAsia PreferentialTrade Agreement(SAPTA)2' As far back as 1975, the South Asian heads o f state discussed the formation of unions with political, social and economic objectives. The increasing number o f regional arrangements among developing countries in other parts o f the world also influenced thinking in South Asia. This was the background to the establishment o f the South Asian Association for Regional Cooperation (SAARC) - comprising India, Pakistan, Bangladesh, Sri Lanka, Nepal, Bhutan, and the Maldives - inDecember 1985. '*For a discussion o f the Bangkok Agreement inrelationto Indiantrade policies, see Purse11(1999). l9Fischer (1998) 2o The 2001 Bangkok Agreement concessions are on ESCAP's website www.unescap.or~/tid/Bkkagr.as~ (updated to 2004). The website does not indicate whether the concessions reported there are still current. 21 InSouth Asia the agreement i s also often referred to as the "SAARC Preferential Trade Agreement". 131 Trade Policies in South Asia : An Overview A notion that deeper trade interaction can create functional spillovers that would help build stronger general ties has long been inthe minds o f South Asian policy makers. Although the acceleration o f economic growth through regional cooperation was incorporated as an objective inthe SAARC Charter in 1985, it was not until 1987 that an explicit commitment to cooperation in the area of economic development was adopted. This eventually led to the signing o f SAPTA at the seventh SAARC summit in 1993, in Dhaka. The agreement provides a framework and institutional base for trade liberalization and economic cooperation between the seven SAARC member countries. The agreement provides for the exchange o f concessions between SAPTA members on tariffs, para-tariff~~~and non-tariff barriers. It envisages four basic approaches to the exchange o f trade preferences: (1) product-by-product; (2) across- the-board; (3) sectoral ;and (4) "direct trade" meas~res.'~ Key aspects o f the agreement are the following: "Suecial and Favorable Treatment" As do the UNagencies and the WTO, SAPTA distinguishes between its members according to their level o f economic development. Bangladesh, Nepal, Bhutan and the Maldives are defined as "Least Developed Countries" (LDCs) and are treated differently from the three "non-LDC" members, India, Palustan and Sri Lanka. The agreement provides for "Special and Favourable Treatment" for the LLDCs by the non-LLDCs, including deeper and wider tariff preferences; favorable terms for technical assistance; the provision o f special facilities with regard to shipping; assistance with the preparation and establishment o f industrial and agriculture projects; training facilities; and support inmarketing. Regional MFN urinciule. A unique feature o f SAPTA i s the application o f a regional MFN principle with regard to its members. Under this principle, tariff or other concessions accorded by a non- L L D C to another non-LLDC are extended unconditionally to all member countries. However, concessions extended by a non-LLDC to an L L D C are automatically applied only to other LLDC members. This clause was inserted in the hope that it would encourage India, Pakistan and Sri Lanka to give more generous tariff and other concessions to the LLDCs without worrying that doing so would automatically generate import competition from each other. Rules o f Origin. The SAPTA rules o f origin (ROOs) distinguishbetween goods that are "wholly produced or obtained" and goods that are not "wholly produced or obtained" in an exporting SAPTA country. The former includes domestic raw materials, agricultural products, fish, waste and scrap, and products wholly obtained from these inputs.As regards the latter, the agreement initially provided that the total value o f the materials, parts or produce originating from non-contracting states or o f undetermined origin and used in the production o f the exported product, should not exceed 50 percent o f the f.0.b. value, and that the final process o f manufacture was performed within the territory o f the exporting member state. The non-local inputs are valued at their cif prices where obtainable, or otherwise at "the earliest ascertainable price" paid for them in the exporting country. It i s apparent that this i s equivalent to a "local c ontent" requirement o f 50 percent o f the fob price. In order t o encourage regional value addition, the agreement also includes a "cumulative" rule o f origin which initially said that goods processedinmore than one member country can be eligible for concessions provided that the value added inSAPTA countries was at least 60 percent ofthe fob value. These ROOlocal content provisions have 22Agreement of SAARC Preferential Trade Agreement, 1995, SAARC Secretariat, Kathmandu, Nepal. 23 That is, discussed in Chapter 3, border and other taxes having the equivalent or similar protective effects as Customs duties. 24 Product-by-product" means negotiating at HS 6-digit tariff line level. "Across the Board" means a uniform reduction applying to all products under negotiations. "Sectoral basis" means agreements o n groups of products which are closely related in end use or in production. "Direct trade measures" means such things as long and medium term contracts containing import and supply commitments in respect o f specific products, buyback arrangements, state trading operations, and government and public sector procurement. 132 RegionalTrade and Regional Trading Agreements been a contentious issue and were subjected to continuous scrutiny by members who realized that the effectiveness o f SAPTA was quite limited, in part due to low value addition in many o f their most competitive exports. After much resistance, particularly from India, at the SAARC Council o f Ministers meeting held inMarch 1999, the local content requirement was reduced to 40 percent for non-LDCs and to 30 percent for the four LDCs, and the "cumulative" origin requirement was reducedto 50 percentz5. The principal objective o f SAFTA i s expand the scope o f tariff concessions and thereby promote regional trade. Following three negotiatingrounds held duringthe 1990s, the proportions o f traded and tradable commodities covered by regional tariff concessions was extremely low: for all seven countries, on average only 8.4 percent o f 5300 tariff lines inthe case o f imports from India, Pakistanand Sri Lanka, and 6.2 percent on average inthe case o f imports from the four LLDCs (Bangladesh, Nepal, Maldives and Bhutan).26This also comes out if the c oncessions are evaluated in terms o f import values rather than number o f product lines. For example, in 1998 total imports by a SAPTA country from other SAPTA countries, o f products subject to a SAPTA concession by at least one member during the three SAPTA negotiating Rounds, were about U S $480 milli~n.~' This was equivalent to only about 15 percent of the total imports o f SAPTA countries from other SAF'TA countries in that year. This situation has changed very little since the late 1990s. Boththese statistics make it clear that SAPTA i s so far from fulfilling the requirement o f Article XXIV o f the GATT rules for regional integration arrangements, which requires that they cover "substantially all trade". In addition, the rules o f origin, already discussed, further limit the potential o f SAPTA for increasing regional trade. Overall, as concluded by Mukherji, under SAPTA "the steps advancedhavebeen short, hesitant andinthe final analysis, halting".'* It is generally agreed in South Asia that SAPTA has had a minimal impact on intra-regional trade. Most o f the observed increases in intra-regional trade can be attributed to the unilateral liberalization efforts o f the individual countries, and during the late 1980s up to about 1992, the appreciations o f the currencies o f the larger peripheral countries vis-a-vis the Indian rupee. Furthermore, a significant portion o f the increases came from increased Indian exports to Bangladesh and Sri Lanka which had little or nothing to do with SAPTA concessions. The principal reasons for the very limited impact of SAFTA are: The extreme reluctance to make any meaningful concessions inthe earlier years, on all sides, but especially on the part o f the smaller countries inrelation to India. Until it was lifted for the SAPTA countries in 1998, India's import licensing system which effectively banned the imports o f nearly all consumer goods (including agricultural products) from all sources. The controls o f India's parastatals over imports o f major agricultural commodities The political problems and hostilities between India and Palustan and the consequent reluctance o f both countries to give tariff concessions to the other Palustan's ban on all imports from India, except for its "positive list" (currently about 677 products and product groups). This prevents the three "non-LDC" members from negotiating concessions between each other except for products on Palustan's list, and was one o f the principal reasons Sri Lanka negotiated its free trade agreement with India (see below). This by- This issue was discussedduringthe third negotiatinground. z6The estimate for LDCs is basedon data inMukherji(2000). 27Mukherji(2000) p.11 28 Iibidp.25. 133 Trade Policies in South Asia : An Overview passed SAPTA and from a strictly trade viewpoint, has made SAPTA almost irrelevant for Sri Lanka. The India- Sri LankaFree TradeAgreement(ILFTA) 29 Indian exporters to Sri Lanka were among the beneficiaries o f the Sri Lankan general liberalization o f its trade regime which commenced inthe late 1970s and continued duringthe 1980s and 1990~.~'Against this background, policy makers in Sri Lanka became increasingly concerned about the growing bilateral trade deficit with India and looked for ways o f reducing it. But they realized that, because o f Indian QRsand the complexities involving India-Palustan relations, it would be futile to seek preferential reductions in Indian tariffs across a broad range o f commodities o f interest to Sri Lankan exporters, through SAF'TA. They therefore pressed India for a separate trade agreement outside the SAPTA framework. This agreement finally became effective on March lst The general objective 2000. o f the agreement i s the elimination o f tariffs on all goods except goods included in specified negative lists according to agreed timetables. The agreement does not explicitly refer to QRs ,presumably because, by the time it was signed, India had already removed its balance-of-payments-justified QRs for the SAPTA countries, and nearly all QRs had been eliminated in Sri Lanka long before. The agreement i s administered by a joint ministerial level committee. A worlung group on customs issues, including the harmonization o f tariff categories had also been established, which reports to the joint ministerial committee. Ifa commercial dispute cannot be settled by consultations, there i s provision for referral to an Arbitral Tribunal to be constituted by the joint ministerial committee. The main substantive provisions o f the agreement deal with the scope and timing o f tariff elimination, negative lists i.e. exceptions to the general process, the rules o f origin, the treatment state trading enterprises, and safeguard provisions. Each o f these i s summarized briefly below. Tariff elimination. Subject to important exceptions, provided they satisfy the agreement's rules o f origin, India's basic commitment was to reduce tariffs on all products imported from Sri Lanka to zero over a three year period. This process started in March 2000, when import duties were removed on approximately 1000 (HS 6-digit) items and bilateral tariffs were reduced by 50 percent on another 3500 items. Tariffs on the latter group o f items were reduced to zero in two stages over the following three years and eliminated inMarch 2003. When the agreement came into force, Sri Lanka eliminated bilateral tariffs on 300 items (mainly industrial raw materials) and cut bilateral tariffs by 50 percent on approximately 900 other items, and then to zero inMarch2003. For another 2840 items, tariffs are being reduced to zero in three stages over eight years, by at least 35 percent in the first three years, and by at least 70 percent inthe first six years. Negative lists: India During the negotiations, both sides agreed to exclude a large number o f products from the tariff reductions just described. There are 434 items on the Indian negative list. This i s only about 8.5 percent o f the India's complete set o f HS tariff lines, but it includes products inwhich at first sight Sri Lanka appears to have a comparative advantage relative to India, at least in some specifications and varieties. Between them, the 434 products accounted for approximately 53 percent o f Sri Lanka's total exports in 1999, but only 1.1.percent o f India's total imports. Inparticular the negative list includes: Garments (HS 61 and 62) which are by far Sri Lanka's largest and most dynamic exports. All garments were initially on India's negative list, but Sri Lanka was later able to negotiate a tariff rate 29 Also commonly known as the India-Lanka Free Trade Agreement (ILFTA).A paper by Weerakoon (2001) "rovidesana detailed breakdown o f the agreement's import duty concessions . For account of Sri Lanka's experience with trade liberalization during this period, see Authokorala and Rajapatirana(2000) 134 Regional Trade and Regional Trading Agreements quota (TRQ) by which market access i s allowed for 6.67 million pieces per annum at tariffs 50 percent below the general MFNrate e.g. in mid-2001, at 22.2 percent rather than the effective MFNrate of 40.4 percent. By January 2004 the general tariff on garments had been reducedto 20% so with the preference the TRQ tariff for Sri Lankan garments was only 10%. However, in 2000 the MFN tariffs for many garments inthe lower price ranges were increased very substantially by setting minimumspecific duties: inthose casesthe tariffon garments from Sri Lanka ishalfthe specific duty.Other constraints are that 5 million o f the 6.67 million pieces have to be manufactured from Indian fabrics, and that the Indian government can fix maximum sub-quotas o f 1.5 million pieces for any category o f garments, in addition to which the garments in question can only be imported through four specified The full tariff quota i s equivalent to only about 2 percent o f Sri Lanka's total garment exports. Textiles (HS C hapters 5 0-60). The general situation is that there are no tariff preferences for textiles, with the exception o f a list o fproducts which have a 25 percent preference, and a limitednumber o f other specified items with a 50 percent preference. In2000, as were garments, the general MFNtariffs for a large range o f textile products (including cotton and synthetic fabrics) were made subject to minimumspecific duties. Tea. This i s another major Sri Lankan export industry: Sri Lanka is the world's largest exporter. India agreed to a TRQ under which annual imports o f 15 million kgs o f Sri Lankan tea (equivalent to about 3.8 percent o f Sri Lanka's total exports, and approximately 2.3 percent o f the Indian market32)are subject to a 7.5% tariff, with normal tariffs (in2004 100%) applying to imports inexcess o f this. Imports can only be through four specified ports. In this case the preference i s very substantial, but so far for reasons that are unclear, Sri Lanka's exports have been well below its quota. Coconuts and coconut oil. Coconuts and coconut oil were excluded from the agreement: this was to ensure was no breach in the prohibitively high protection o f the coconuthopridcoconut oil industryinKerala. This industry developed after Indian independence in 1947, when competing imports from Sri Lanka and other countries (mainly developing countries in South East Asia) were first cut back and eventually excluded altogether by tariffs and QRs. For many years copra and coconut oil prices in India have been about double and as much as three times world prices. In2004 the general coconut tariff was 70 percent and the coconut oil tariff was 85 percent. Natural rubber. This i s a long established but declining export industry in Sri Lanka. As with coprdcoconut oil, inIndia after independence domestic prices were supported by cutting back on imports from the rest o f the world, principally from developing countries such as Malaysia, Indonesia and Sri Lanka. This policy was implemented by the Indian Rubber Board in order to develop rubber growing in southern India, principally in Kerala. The Board also pays subsidies to rubber farmers. On average, for long periods inthe past hightariffs and other protective measures kept domestic Indian prices for natural rubber (latex and smoked sheets) well above world prices. In2004 there was still very highprotection on latex (tariff 70%) but other natural rubber tariffs had been cut to 20%. However, rubber products including latex remained on India's ILFTA negative list. Negative lists: Sri Lanka. There are 1180 HSC items included in the Sri Lankan negative list, equivalent to 26 percent of the 4534 HSC 6-digit items Sri Lanka imported in 1999. The negative list items accounted for to 56.5 percent o f Sri Lanka's total imports in 1999, and for 25.5 percent o f India's total exports. The negative list products are spread across the tariff schedule and include agricultural, intermediate, and manufactured products. Apart from politically sensitive agricultural 31Mumbai, Nhava Sheva, Chennai andKolkata. 32Indianproduction and export data i s available from the Tea Board India website . 135 Trade Policies in SouthAsia : An Overview products (e.g. rice, potatoes, and onions) and products which are important for government revenue (e.g. motor vehicles, tobacco and liquor), the other products in the negative list appear to mainly reflect the effectiveness o f lobbying by local industries. 594 o f the negative list products are food and agricultural items, 514 are manufactured products, and 72 are minerals, metals and fuels. Rice i s a major Indian export, and onions are a potential exportable, but onion exports from India have in any case been prevented by export controls imposed to keep Indian domestic prices down. The Sri Lanka negative list also includes wheat and wheat flour, both o f which India periodically exports. Rules o f Origin The local content requirement for preferential treatment i s 35 percent i.e. the total value o f the material inputs imported from other countries included in an exported product, should not exceed 65 percent o f its f.0.b. value. If some o f the raw materials or other inputs are sourced from the importing country, the minimum value addition in the exporting country i s reduced to 25 percent, provided the cumulative v alue-addition is 3 5 percent, with a minimumo f 10 percent o ccurring in the importing country. Alternatively, products are considered to be sufficiently processed and therefore qualify for preferential treatment, if they belong to a different 4-digit H S classification than the 4-digit H S classifications of all o f the materials not originating inthe exporting country. According to a study o f Sri Lankan exports by Pitigala, about 57 percent o f Sri Lankan exports would qualify under the 35 percent ROO criterion33. However, a large proportion o f these are accounted for by tea, rubber, and coprdcoconut oil, so that this rule plus the Indian negative lists exclude considerably more than half of Sri Lanka's exports from preferential treatment under the FTA. Inparticular, the value added ratio of most o f Sri Lanka's garment exports are well below 35 percent, and to qualify they would have to import and use Indian fabrics. However, they would then run into the negative list constraints on garment and textile imports described above. A much larger range o f Indian products would probably meet the 35 percent value-added criterion, but some -especially light engineering products-might have problems with the HSC-4 digit test, depending onhow it is applied. Safeguards If imports from the other country cause or "threaten to cause serious injury", after consulting with the other country the tariff preferences for the products concerned can provisionally be withdrawn while at the same time notifying the Joint Committee. If a satisfactory negotiated settlement cannot be reached within 60 days, the complaining country can permanently withdraw the tariff preferences. The agreement also allows the two countries to apply anti-dumping and anti-subsidies policies against each other in the normal way. India has a well developed and very active anti-dumping and safeguards regime (see Chapter 3) but there are no anti-dumpingor safeguards laws in Sri Lanka. Table 5.2 IndianTrade with Sri Lanka 1997198-2002/03 $US million (current prices) imports Exports Total from to trade 1997198 30 489 519 1998199 38 437 475 199912000 44 499 543 2000101 45 640 685 2001102 67 631 698 2002103 90 921 1011 Source: Indian Ministry of Commerce (DGFT) website 33Pitigala, Nihal(l998) 136 Regional Trade and Regional Trading Agreements One initialreaction to ILFTA was that the rules o f origin combined with the negative lists required by India and the TRQs and other conditions that went with them, were too constraining and that the agreement would not provide significant export opportunities for Sri Lanka in India. In fact Sri Lankan exports to India expanded rapidly, doubling in the three years following the signing o f the agreement (Table 5.2) and continued to grow at a rapid rate inthe first six months o f 2003/04. However, they remain very small : only about 10% o f Indian exports to Sri Lanka, which increasedby 44 % from a much larger base during the same three year period. The expansion o f Sri Lankan exports has not involved any o f the principal products on India's negative list (garment exports to India ,for example, are practically nil) but in some cases this may have more to do with supply conditions on the Sri Lankan side and/or with competitive conditions in the Indian market, than with the TRQs and constraints imposed by India. For example, Sri Lankan tea exports to India have remained very small and well below its quota, despite the fact that they face a tariff o f only 7.5% compared with the MFNtariff o f 100%. Conversely, Indian exports to Sri Lanka have expanded very rapidly despite the large number o f Sri Lankan products on its negative list. It i s probable that most o f the expansion has occurred inproducts already subject to low MFNtariffs in Sri Lanka, but this would need to be verified empirically. More also needs to be known about the extent to which direct investment has had a role in the acceleration o f bilateral trade, especially direct investment by Indian firms in Sri Lanka. FromSAPTA to SAFTA? From an early stage discussions among the SAARC countries have included the idea o f eventually going beyond the exchange o f trade preferences ina preferentialtrade area, to the abolition o f intra-regional trade restrictions and tariffs, thereby creating a South Asian Free Trade Area, or SAFTA. This objective became explicit at the first meeting o f the SAARC Council o f Ministers in 1995, when it was decided to form SAFTA by the year 2001, but not later than year 2005. One reason given for accelerating the timetable for regional free trade, was that it would be a way o f preparing for more global competition which would result from the new round o f trade negotiations under the aegis o f the WTO. In order to prepare, i t was decided that the SAARC Council for Economic Co-operation (CEC) and the Inter-Governmental Expert Group (IGEG) should meet and discuss at length an action plan and terms o f reference for SAFTA. The parameters set out for SAFTA inthese discussions includedthe following: Tariff eliminations without any import restrictions; Removal o f "structural impediments" to regional trade; Harmonizing o f customs procedures and documentation; Banking facilitation; Port and transport facilitation; Facilitation o f trade-related services; Establishment o f a reviewing and monitoring mechanism; and Ensuring"equitable" benefits to all member countries.34 For the same reasons that SAPTA made very slow progress, for many years it was difficult to obtain unequivocal commitments to SAFTA, but finally, on January 6, 2004, at the Twelfth SAARC Summit held in Islamabad, the seven member countries o f the SAARC signed a free trade agreement 34 Under Article 9 o f SAPTA, a "Committee o f Participants" consisting o f representatives of Contracting States meets at least once a year to review the progress made in the implementation o f the Agreement to ensure that benefits o f trade expansion emanating from the Agreement accrue to all Contracting States "equitably". The review o f benefits i s supposed to include an assessment as to whether the SAPTA tariff concessions and other concessions have provided "desired" levels o f market access inan "equitable" manner as between countries. 137 Trade Policies inSouth Asia : An Overview which will go into effect from January 1, 2006. Under the trade liberalization component, the member countries agreed to gradually harmonize and eventually bring down their import tariffs on trade within SAFTA to the 0-5 percent range. Accordingly, in the first phase, the Least Developed Countries (LDCs) in SAFTA (Bangladesh, Nepal, Bhutan, and the Maldives) will reduce their maximumtariff rates to 30 percent within two years from the date o f coming into force o f the Agreement. The non-LDC members will reduce their maximum rates to 20 percent within the same time frame. Inthe second phase, which will resume on January 1, 2008, the non-LDC members will reduce their import tariffs to the 0-5 percent range in 5 years, while the LDCs will do the same in 8 years (Table 5.3). The described tariff reduction schedule may not apply to items on the `Sensitive Lists', which are to be negotiated among the contractingmembers. Table 5.3: Planned PhasedTariff Cuts onIntra-SAFTA Trade FirstPhase (two years) SECOND PHASE IA la January 1-2006-January JANUARY 1,2008- JANUARYl, 2008- 1,2008 JANUARY 1,20 13 JANUARY 1,2016 SAARC Countries: For LDCs: Reduce maximum tariff to Reducetariffs to the 0-5% 30% range in8 years. (Equal (Bangladesh, Nepal, annualreductions Bhutan, Maldives) recommended,but not less than 10%) For non-LDCs: Reduce maximum tariff Reduce tariffs to the 0-5 % rate to 20 % rangein5 years; (Sri Lanka:in 6 (India, Pakistan, Sri Lanka) years) (It is recommendedthat reductionsbe done inequal installments-at least 15 percent reductioneachyear) Reduce tariffs to 0-5 % for productsofthe LDCs within a timeframe of 3 years) /a: These phasedtariff cuts for intra-SAFTA trade may not apply to items on each country's `Sensitive Lists'. The SAFTA Agreement has a number o f positive features: Its political context reflects a desire to use stronger economic relations to reinforce improving political relations inthe region, especially the key relationshipbetween India and Pakistan. Ifit i s effective economically, it should help improve political relations, and vice versa An effective SAFTA should be able to improve the South Asian regions' bargaining position in multilateralnegotiations on trade with other regions and regional groupings 0 Recent substantial cuts o f industrial tariffs by India, and o f both industrial and agricultural tariffs by Palustan, indicate that trade liberalization is no longer feared by them as it had been in the past, at least for manufacturing if not for agriculture. If India and Palustan lead the way in trade liberalization, both through unilateral actions as well as regionally through SAFTA, they will have a strong liberalizing influence on the trade policies o f the other South Asian countries, especially Bangladesh. 138 RegionalTrade and Regional Trading Agreements 0 More radical and thoroughgoing regional trade liberalization than has been seen in the past, has the potential to give some impetus to dealing with a multitude o f infrastructure deficiencies, institutional problems and various behind-the-border bottlenecks and issues which seriously hamper regional trade inSouth Asia. On the other hand, in its current form, SAFTA has some major weaknesses, and it will have to face upto some difficult issues inthe future: 0 As shown in Table 5.3, SAFTA provides for back-loaded tariff cuts, particularly for the LDCs. There i s danger that it may lose the momentum ifthe reductions take place over such longperiods 0 The "tariffs" for which a reduction program has been agreed are Customs duties only. But as discussed in this report, protective para-tariffs are also usedby all the South Asian countries except India, and they are an especially important source o f protection in Bangladesh. However, at this stage the agreement has no clear strategy for dealing with them, beyond requiring that they be notified and consideredby the SAAFC committee o f experts. 0 Under the agreement, all GATT -incompatible NTBs are to be eliminated on regional trade. However, as with para-tariffs, no mechanism has so far been established for dealing with NTBsbeyondnotification and considerationby the SAARC committee 0 On the other hand, if highexternal protection levels for many sectors continues, faster and more drastic regional tariff cuts could lead either to substantial trade diversion and large economic welfare losses, or resistance to concessions, especially if the concessions would adversely affect highly protected industries (e.g. many of Bangladesh's import substitution industries) Both o f these possibilities would inturn create pressures to put these industries on sensitive lists and exclude them from SAFTA. 0 Inthisregard, agriculture (understood inthe broadsenseas includinglivestock fisheries and food processing industries) i s especially important and politically sensitive throughout the region. There i s no specific reference to agriculture inthe agreement, but as noted in Chapter 3, agricultural tariffs in the region are much higher on average than industrial tariffs. In particular, most of India's industrial tariffs are already below the SAFTA target for a maximum tariff o f 20% to be achieved between January 2006 and January 2008, but average agricultural tariffs in both India and Bangladesh are currently about 40% and have been rising in recent years, not falling. Likewise Sri Lanka's agricultural tariffs are also much higher than its industrial tariffs. In addition, as discussed in the chapters on agriculture and fertilizers in Volume 11, agricultural subsidies and government market interventions are still very important in India's agriculture. All this suggests that agriculture will be especially difficult to deal with in the context o f SAFTA, as has also been the case in other regional agreements e.g. the special treatment o f agriculture under the EU Common Agricultural Policy, and inNorth America under NAFTA. 0 The agreement i s subject to a considerable degree o f uncertainty due to the yet- to- be determined `sensitive lists' o f the individual countries. Ifthe past experience o f S M T A i s an indication, each country may present a long list o f `restricted' items that will not be subject to concessions. If these list are too long, they will quickly render SAFTA ineffective; 139 Trade Policies in South Asia : An Overview The agreement p rovides for t emporary s uspension of c oncessions granted by individual members that are facing balance o f payments difficulties. This is likely to create a significant element o f uncertainty and could undermine the stability o f SAFTA; The `rules o f origin' are crucial and still have to be negotiated e The agreement seems to indicate that regional trade will continue to be subject to anti- dumping and presumably safeguard and countervailing duty actions by SAFTA members (in contrast to other RTAs -for example the EC-in which it is agreed not to use anti- dumping against firms in other member countries). This possibility also creates uncertainty and could be very disruptive for regional trade. It i s too early to tell how the future SAFTA negotiations will proceed. It is important, however, to stress that if the above cited weaknesses are not addressed, the SAFTA initiative may face the same fate as SAPTA. Regional free trade agreements c ould be "stepping stones" toward multilateral trade liberalization or global free trade; but, sometimes they may be "stumbling blocs" inthe sense that they divert reforming energies away from the liberalization o f trade with the rest o f the world. There i s also a real danger (exemplified by the European experience with the CAP) that the path o f least resistance to regional agreements in agriculture will be external protection based on the highest, not the lowest common denominator o f protection and subsidy 1evels in the individual c ountries. 0n the other hand, there are some substantial potential benefits from increased competition and scale economies, especially iflower cost exports from one or more SAFTA members are allowed to effectively compete with firms with higher production costs inneighboring countries. There i s also the potential for firms to benefit from greater scale and to attract investment projects for which market size i s important, including foreign direct investment Removing regional barriers forces firms from different member countries into closer , competition with each other, inducing them to make efficiency improvements. If SAFTA accelerates processes such as these, it could increase the confidence and interest o f industryand government to lower tariff barriers against imports and increase the region's trading integration with the rest o f the world. Typology of PTMFTAs In the debates and negotiations on regional trade and economic integration in South Asia, political and foreign policy considerations have been dominant, and insofar as economic factors have had a role, they have been almost entirely mercantilist. That is, each country has been willing to trade off some preferential access to its markets for perceived diplomatic and political benefits, but subject to that, the objective has been to improve the access o f its industries to markets in the other South Asian countries, while resisting and giving away as little as possible in preferential access to its own markets. These have also been the principal driving forces o f the GATT and the WTO, and as history amply demonstrate^^^, a process o f mercantilist bargaining can lead to the progressive reduction o f tariffs and other trade barriers. But incontrast to the world-wide scope o f the bargaining that occurs within the WTO framework, the South Asian agreements involve countries in the region only, and one o f their principal objectives and results i s to divert imports from lower cost suppliers in other parts o f the world to higher cost suppliers in South Asia. The free trade arrangement in South Asia will induce purchasers to switch demand toward supply from partner countries, at the expense o f both domestic production and imports from non-members. This is trade creation and trade diversion. South A sian Governments w ould 1ose tariff revenue, and the overall effect on national income may be positive or negative, depending on the costs o f alternative sources o f supply and on trade policy toward nonmember countries. For instance, an FTA with India might shut out cheaper Chinese goods from the Bangladesh market unless tariffs are also reduced for them. For this reason it i s important that policy makers and politicians be aware o f the 35Hoekman, Bemard ,Aaditya Mattoo and Philip English (eds) .2002. 140 Regional Trade and Regional Trading Agreements consequences o f regional policies for the economic welfare o f their countries, but on this in South Asia there i s so far little or no systematic analysis36, and absolutely no recognition in the texts o f the various agreements or in the general statements and discussions that have accompanied them. For example, no references will be found inthe latter to c onsumer benefits, o r the possibility o f trade diversion costs, although government revenue losses have been the subject o f negotiation. How deep should regional trade liberalization be? The big gains from SAFTA are expected to come from regional integration o f South Asian markets. Removing tariffs but leaving other impediments will inflict all the costs o f revenue diversion without any o f the benefits o f competition and scale. Thus deeper is better. The agreement could cover border procedures where there is often large scope for illicit protection that undermines economic integration. Finally, as inEU, they can cover product standards, the simplest o f which i s mutual recognition. If a product can be sold inone country, it can be sold anywhere inthe region. Before concluding, however, we outline a framework for thinlung about these issues. This distinguishes between: (a) Preferential trade policies which discriminate in favor o f trade with other South Asian countries and against trade with the rest o f the world; (b) Policies which do not overtly discriminate against trade with neighbouring countries, but which hurt trade with these countries proportionately more than trade with the rest o f the world; and (c) Policies which directly discriminate against trade with other South Asian countries. (a, Preferential trade policies which discriminate in favor of trade with other South Asian countries and against trade with the rest of the world. There i s a large theoretical and empirical economic literature on the economics o f regional trading blocs, which mainly deals with how the economic welfare o f the participating states i s affected by granting each other preferential access to their domestic markets, usually inthe form o f reduced or zero tariff^.^' A number o f general propositions seem well establishedin this literature: 0 Unless the bloc as a whole has significant market power in world markets, free trade will maximize the bloc's economic welfare, and therefore policies which move the bloc towards free trade through general multilateral trade liberalization have greater welfare increasing potential than any regional preferentialpolicies that leave the general level and structure o f the bloc countries' protection against imports from the rest o f the world unchanged. 0 Even if the bloc has significant market power in some products, general trade liberalization with appropriate exceptions (tariffs or export taxes) for these products, will increase aggregate bloc welfare more than retaining the status quo modified only by regional preferential trade policies plus optimal import tariffs or export taxes. 0 Whether regional trade preferences on balance increase or decrease the aggregate economic welfare o f a bloc depends on the relative strength o f trade diversion effects on the one hand, and increased competition and efficiency effects and economies o f scale effects on the other. When one country allows a product to be imported from other bloc countries at zero or preferential tariffs which are lower than the general tariff rate on imports from the rest o f the world, its customs revenues are reduced and its terms o f trade are worsened, since imports are diverted from other countries to higher priced imports from the bloc countries. There are producer surplus benefits (exporter profits, higher tax receipts, higher wages etc) inthe exporting bloc countries, but as long as there i s no change inthe '' 36 A partial exception to the general lack of attention to the economic welfare consequences o f regional preferential trade policies i s a recent study by Mukherji (2000), who calculates the potential revenue losses of SAPTA references. H e also estimated the economic welfare consequences of SAPTA inan earlier 1998 paper. There i s a comprehensive discussion o f this literature in the World Bank policy research report Trade Blocs (2000). 141 Trade Policies in South Asia : An Overview domestic price in the importing country, the costs exceed the benefits and there i s a net reduction in the economic welfare o f the bloc as whole. In effect, the reduced tariff revenue in the importing country i s partly transferred to the increased producer surpluses inthe exporting country, and partly used up inthe excess cost o f the preferential imports over the cost o f the imports from the rest o f the world that have been displaced. On the other hand, it i s possible that the preferential imports will not only displace imports from the rest o f the world, but also increase competition for domestic producers inthe importingcountry andreduce prices there. The net effect onbloc economic welfare inthis case then depends on the relative size o f these effects. The net effect will still be negative if the customs revenue loss exceeds the increasedproducer surplus inthe exporting bloc country plus the benefits o f the reduced production costs and reduced consumer prices in the importing bloc country. But if the price reduction and the quantity o f higher cost domestic production,displaced are sufficiently large, the net economic welfare benefits to the bloc as whole may be positive. Another possibility i s that the freeing o f regional trade through tariff preferences will allow firms in the preferential region to increase their production and take advantage o f unexhausted economies o f scale, and inthis way reduce production costs. This could happen if, as a result o f preferential tariffs, a firm with unexhausted scale economies inone country i s able to export to a bloc country and displace products which that country previously imported. Once again, the net effect on bloc economic welfare could be negative or positive. Economic welfare i s reduced since lower cost imports from the rest o f the world are diverted and customs revenue falls, but ifthe decline inunitproduction costs resulting from larger scale production i s big enough, the producer surplus andor consumer surplus benefits in the exporting and importing country may between them exceed this loss. Similar results are possible if competition from the regional firmwith unexhausted scale economies drives out another or other sub- optimal scale firms, enabling it to take advantage o f scale economies and generating producer and/or consumer surplus benefits. However, it i s important to recognize the extent to which trade creating within-bloc efficiency improvements o f this kind occur, or are allowed to occur, depends very much on the motivations and philosophies o f the negotiators and the political background to the negotiations. If the scope o f the agreement in terms o f product coverage i s not complete and i s negotiable, and the philosophy o f the negotiators i s fimdamentally protectionist, the negotiators are likely to resist giving tariff concessions on products that would lead to significant increases in competition from bloc countries for industries in their countries, but may be willing to give substantial tariff preferences if the principal effect i s to replace imports from non-bloc counties with highercost bloc production. In that case the overall net effect of the agreement on the economic welfare o f the bloc will almost certainly be negative, even though some countries may gain. 0 Preferential trade arrangements may concentrate certain kmds o f production in some bloc membersat the expense o f others. Of particular concern to many countries i s the possibility o f the "deindustrialisation" o f some bloc countries, with manufacturing industries leaving the poorer, least developed members and establishing themselves in industrial centres in the most advanced countries o f the group. This hnd o f development could occur when all the all the bloc members protect capital intensive industries in which they are at a comparative disadvantage relative to the rest o f the world, but the comparative disadvantage o f the more advanced and higher income member o f the group is less than the comparative disadvantage o f the least developed and lower income members.38Then, if intra regional tariffs are abolished or reduced, capital intensive manufacturing firms may migrate to, and new firms establish themselves in the more developed country. This tendency may be strengthened if there are agglomeration economies from establishing in a larger and more developed industrial region. The capital intensive firms in this region may still be less efficient than the equivalent industries inthe rest o f the world, and needprotection against imports, but iftheir products are exported to the less developed bloc countries with low or zero duties while high tariffs are still applied in those countries to competing imports from the rest o f the world, there may be little or no 38For a discussionofthese possibilities see Venables (1999). 142 Regional Trade and Regional Trading Agreements benefit to the consumers o f the l o w income bloc countries while at the same time they lose the producer surpluses that were previously generated by the firms that have now migrated. (b) Policies which do not overtly discriminate against trade with neighbouring countries, but which hurt trade with these countries proportionately more than trade with the rest of the world. As noted earlier inthis paper, for many years all the South Asian countries followed import substitution policies which used a combination o f discretionary import licensing and very high, effectively discretionary3' tariffs t o exclude practically all imports unless they were j udged to be "essential" and unavailable from domestic s ources. In India, this w as reinforced by the general ban o n imports o f a l l consumer goods, and the "canalization" o f imports o f agricultural and mineral commodities by parastatal import monopolies. One effect o f these policies was to almost entirely exclude imports from neighboring South A sian c ountries and t o c onfine most imports t o machinery and intermediate materials most o f which came from developed countries and later on from East Asia, and to petroleum, petroleum products, minerals and some agricultural commodities (e.g. edible oils) not produced in sufficient quantities in South Asia. Starting in the 1980s, these policies were reversed in the peripheral South Asian countries, and during the 1990s this showed up in rapidly increasing imports from India. Import policies in India were liberalized after 1991 and the general consumer good import ban was finally phased out in April 2001. But despite recent substantial reductions inindustrial tariffs, Indian protection o f many products of potential export interest to its neighbors remains high, with minimum specific tariffs applied to textile fabrics and garments which are explicitly aimed at preventing or limiting low value imports o f these products, many extremely highagricultural tariffs, and imports o f major agncultural commodities such as wheat and rice remaining under the sole control o f parastatals or designated legal private monopolies. While these policies continue, export opportunities in India for India's South Asian neighbours are likely to remain limited and a large proportion o f Indian regional imports will continue to come through informal channels, either bypassing Customs controls altogether, or with the connivance o f Customs officials. (c) Policies which directly discriminate against trade with other South Asian countries. The most obvious and important example o f this i s the India-Pakistan trade relationship i.e. the Palustan ban on all imports from India except for products on Pakistan's positive list, and the measures on both sides which restrict transport links, business travel, and business contacts of all lunds.It i s obvious that the removal of this discrimination would increase economic welfare inbothIndia and Palustan.With the removal o f the Pakistan import ban, Indian products that would now be exported to Palustan would create increased producer's surpluses in India which would be divided between increased business or farm profits, tax revenue and labor incomes. If these new Indian imports into Pakistan only partially replace Palustan imports from the rest of the w orld and d o n o t affect prices inPakistan, there would be no change in economic welfare in Pakistan. But more likely, because o f the marked transport cost advantage o f Indian imports, especially products exported from the north-west regions o f India to northern Pakistan, some products or product varieties imported from the rest o f the world would be replaced entirely and Pakistan prices would fall, with corresponding economic welfare benefits in Pakistan. For example, periodically (as during 2000/2001) Pakistan imports wheat from world markets while there are large surplus stocks nearby in India that are more than sufficient to cover the Pakistan supply deficit. Selling these stocks to Palustan could reduce prices and benefit Pakistan consumers, while at the same time increasing economic welfare in Indiaby reducing the subsidies involved inexporting surpluswheat t o other countries and reducing the costs o f holding wheat stocks, including the cost o f the substantial quantities o f wheat that are lost in substandard storage. Conversely, the removal o f India's travel and other restrictions on trade with Palustan which are the defacto indirect counterpart o f Palustan's direct import restrictions, would 39 Ifan import license were granted, otherwise prohibitively hightariffs were generally reduced, but oftenjust for the importer receiving the import license. 143 Trade Policies in South Asia :An Overview increase economic welfare inPakistan via new exports to India, and would either leave economic welfare in India unchanged, or would increase it insofar as prices in India fall and/or the range of available product varieties improves. It i s probable that some part-possibly large- o f the increased trade would be goods that are already traded shiftingfrom informal to formal channels, but there would still be economic welfare increases associated with this change, since it would not occw unless the net benefits to the trade participants are higher using the formal channels. For the trade that shifts, the net benefits are likely to include reduced transaction costs and the replacement o f some smuggling rents by government revenue from import tariffs and other taxes. ConcludingRemarks Thus the potential for increased regional trade that is not welfare-reducing is not very great in South Asia, compared to increased trade with the rest o f the world (ROW), especially trade with the developed countries and with more advanced developing countries in South East and East Asia, including China. This is because the South Asian countries have comparative advantage in relation t o ROW in similar, mostly labor intensive products, and the volume o f trade and the economic benefits from trading these products among themselves are limited.This shows up invarious statistics and indicators including: 0 Trade intensity modified by geographical proximity 0 L o w correspondence between South Asian exports with revealed comparative advantage and South Asian import demand 0 Low correspondence between the principal exports o f the South Asian countries to ROW and their principal exports to other South Asian countries For all these reasons the South Asian countries would do much better economically if they were to increase their trading integration with the rest o f the world rather than pursuing regional preferential arrangements. The way to do this would be to reduce their tariffs and other forms o f protection generally on an mfhbasis, thus increasing the shares o f bothimports and exports intheir economies. Insofar as regional preferentialtrade arrangements continue and become effective, a South Asian country that liberalizes and moves to lower general (mfn) protection levels (e.g. a peripheral country such as Sri Lanka) would also lose less from the preferential arrangements, and could stand to gain substantially on balance if other South Asian countries (e.g. India) remain highly protected and are willing to accord significant preferences to imports from the region. But it is probably unlikely that this will actually occur, since the same industries and interests that resist reductions in general protection levels are likely to also resist reduced protection against imports from RTA countries. Hence it would be a tactical mistake for peripheral countries to delay general trade liberalization in the hope that doing so would improve their eventual access to, and the tariff preferences they receive, inthe markets o f the more highlyprotected RTAmembers. At the end o f the day, trade blocs are political. Trade blocs proliferated during the 1990s.. By 1999, more regional agreements had been notified to the WTO than it had countries as members. Evidently, there were powerful forces driving the process. Regional cooperation on trade issues (e.g. SAFTA) may help countries to cooperate on other issues. Small neighboring countries on India's borders have plenty o f scope for cooperation. Some infrastructure, such as power, telecoms, and railways, may be better provided regionally than nationally. Thus, even ifregional cooperation starts with trade issues, it i s unlikely to stop there. The main benefit from cooperation on trade issues may be the development o f a habit o f trust and cooperation between neighboring governments that can then be extended to issues on which there i s more scope for mutual gain. 144 Chapter 6: ConclusionsandRecommendations Dominant role and influence of India. India accounts for approximately 80 percent of the combined population, GDP and trade o f the South Asian countries, and most o f the regional trade (both formal recorded trade and unrecorded trade) i s bilateral trade between it and individual South Asian countries. Because o f their common history, institutions and continuing contacts, except in Sri Lanka, what India does on trade policy also has a very considerable influence inthe other countries. Inparticular, were India substantially to liberalize its trade policies duringthe next few years, its action would be sure to have a major impact and to reinforce trade liberalization inthe countries around it. On the other hand, restrictive trade policies in India (such as its current anti-dumping policies) increase the probability that other South Asian countries will adopt the same or similar policies. Therefore, initiatives to reinforce trade liberalization in India have an extra indirect benefit through their likely favorable regional impact. Neither liberalizingnor restrictive trade policy changes inthe other South Asian countries, however, are likely to influence India. Therefore, a work program aimed at reinforcing trade liberalization in South Asia should give India first priority. Table 6.1 presents a summary o f trade policies inthe region. Given the by-now overwhelming accumulation o f evidence across the globe suggesting that over the long haul trade openness is a more trustworthy friend of the poor than protectionism, India and its neighbors should welcome further liberalization. Hardly any evidence shows that a country has achieved rapid growth without expansion o f trade. On the other hand, trade reform i s only a necessary condition, not a sufficient one, for an improved growth performance. Reaching that goal requires other complementary policies, such as de-regulation, effective anti-conuption efforts to improve governance, upgraded infrastructure services, and an improved overall investment climate. The considerable and commendable progress made in South Asia inrecent years toward opening long-protected markets and redirecting incentives away from import substitution toward export competition signals how much can be done. Much more remains to be done. The recommendations that follow do not underestimate the challenges policymakers and publics face. They are meant, though, to help guide an undertalung that gets no easier the longer it i s postponed. Non-tariff barriers to imports Since India phased out its last QRs in April 2001, Bangladesh i s the sole holdout in South Asia usingthese traditional devices, some with the explicit purpose o fprotecting local industries. Byitself, that lonely distinction should strongly suggest t o Bangladeshis the losses they incur the longer they retain QRs. Inaddition, though, India, Palustan and Sri Lanka have done away with QRs except inregulating agricultural and food imports with sanitary and phytosanitary controls, all South Asian countries also still impose non-tariff barriers o f various sorts. A major exception to the move away from explicit QRs is Palustan's positive list of 600 items which can be legally imported from India. Nothing can be legally imported into Pakistan from India except for the products on this list. This restriction i s an outcome o f the difficult political relations between India and Pakistan. India does not impose equivalent formal restrictions on exports to or imports from Pakistan, but other restrictions (e.g. on travel, remittances, Customs clearance etc.) are generally believedto have a similar effect, especially as regards imports. Trade Policiesin SouthAsia : An Overview Summary of Policies India Pakistan Bangladesh*** Sri Lanka Vepal March 04 2002103 2004105 Feb 04 August 03 Exchange Rate Unified Unified Unified Unified Jnified Exchange Rate determination Freefloat Free float Free float Freefloat ?egged to Indian Rupee Payment convertibility Current account Yes Yes Yes, some limits Yes Yes Capitalaccount Yes, limited No No No V O Import restrictions (trade reasons) General import licensing No No No, but some No N O restrictions Some QRs on imports Yes Yes Yes Yes, minor Yes, minor State import monopolies (excl POL) Yes No No No N O Tariff structureMay 03 Top normal CD rate 30* 25 25.0 27.5 25 Other normal protective taxes 0 4.0 3.75 4.5 Top normal protectionrate 30 25 29.0 31.25 29.5 Average CD rate 22.2 17.3 16.3 11.3 13.7 Average of other normal protective taxes 0 1.5 3.9 2.1 4.3 Average of other protective taxes 0 0 6.3 0 Average CD+other protectivetaxes 22.2 18.8 26.5 13.4 18.0 % of products with total protection 2.8 1.1 15.8 0.9 5.8 rates>normal maximum protection rate** Number of normal CD slabs 7 4 4 6 5 Number of CD slabs>normal 17 10 None: uses para- 2 3 Range of CD slabs> normal 40-210% 40-250% tariffs & VAT 75 &loo% 40, 80, 130% YOof ad valorem tariff lines >normal CD rate 2 0.1 exemption for extra 0.2 5.2 YOof tariff lines with specific duties 5.3 n.9 protection 0.6 Uses anti-dumping Yes Yes No No No Percent tariff lines bound at WTO 72.4 36.8 13.2 26 * Avg of boundtariffrates 50.6 61.4 188.3 50 * Export policies Some export QRs Yes Yes Yes No Yes Some export taxes Yes Yes No Yes Yes Some direct export subsidies Yes No Yes No No Indirect export subsidies Yes Yes Yes Yes Yes Trade openness:trade-GDP ratio (%) 2000 19 33 33 77 44 CD=Customs duty (*) The "general maximun CD rate i s de led as a rate v ch includes at least 2I of total tariff lines, and above which there are no more-than 10% i ftotal tariff lines. The "general maximum `` is 30% in India because of the large number of agricultural Customs duties clusteredat this rate. The Indian general maximum CD rate for industrial tariffs i s 20%.(**)Percent of tarifflines with total protection rates (inclusive of selective para-tariffs) in excess of "normal maximum" CD plus normal (generally used) para-tariffs . For more details on the data in this Table see the main report, Tables 3.1 and 3.2 of Chapter 3. (***) Tariff data on Bangladesh as of June, 2004. These figures reflect tariff changes announced inthe FY05 budget on June 10, 2004, which indicated significant move towards reduction of protection: via reduction ofthe top rateto 25, moveto three non-zero tariff slabs, and rationalizationof supplementaryduties. 146 Conclusions and Recommendations India's general policy subjecting the import o f all second-hand goods (including industrial raw materials and machinery) requires some kind o f special procedure or import licensing. The restrictiveness o f these controls varies from product to product, and many o f the restrictions are justified on grounds of health, safety, security, consumer protection etc. and involve obtaining permits from various Ministries and other organizations inorder to clear Customs. Like India, Pakistan also bans or restricts the import o f a number o f second handproducts for which there i s certainly a substantial domestic demand. Although all o f India's and some o f Palustan's restrictions on second-hand goods are (or are claimed to be) WTO-compatible, the real and dominant motive for many (often quite explicit inpublished regulations) i s the protectiono f local industries. Some examples: 0 Used clothing :banned inIndia but allowed inall the other South Asian countries 0 Second-hand cars: banned in Pakistan and restricted in India (where there are heavily protected auto industries) but allowed inthe other South Asian countries where there i s no auto production. 0 Various kinds o f second-hand industrial machinery: banned inPalustan and subject to import controls inIndia (inorder to protect their engineeringindustries) butgenerally allowedinthe other South Asian countries. 0 Second-hand household machinery such as refrigerators, air conditioners etc. i s banned in Palustan, restricted inIndia, butpermittedinthe other South Asian countries 0 Used and retread tires: banned inPakistan, restricted inIndia, permitted in the other S outh Asian countries 0 Plastic scrap: banned in Palustan, importable in India but subject to restrictions, permissible in the other South Asian countries. Recommendation: These residual controls would not remain in place unless they involved important domestic economic and political considerations. Formally, they are WTO-consistent. But given the past history o f the region and still strong protectionist impulses, policymakers should undertake objective analyses o f the costs and benefits o f applying these measures for much longer. TariJfs At present the general maximum customs duties that apply to most but not all products in the South Asian countries are as follows: India, 30%; Pakistan 25%; Bangladesh 25%'; Sri Lanka 25%; Nepal 40%; Bhutan 30%. A major improvement on the situation 10 years ago when tariffs in all these countries were much higher, change has brought an additional, great simplification o f the structure o f tariffs with far fewer tariff bands. Most countries inthe regionnow have 3-5 o f them as opposed to 15 or more inthe early 1990s. Recommendations: Nonetheless, the many continuing problems with tariff policies suggest that a reformagenda for the future should include: 0 Further substantial "tops down reductions in the general level of tariff. The process for tariff " reductions used inthe past in India, Pakistan and Bangladesh and apparently envisaged for India over the next two years has been "tops down" (reductions in maximum tariffs) and has worked very well. The "tops down" process has, as intended, squeezed processing margins and created more uniform as well as lower tariff structures. As a policy (especially if announced in advance) it has the advantage that it i s simple and easily understood. This trendshould b e maintained for aI1 of South A sia. Although there i s a danger with this process that lower-level inputtariffs will also be reduced, thereby This was reducedfrom30% to 25% inthe FY05 Budget announced on 10June 2004. 147 Trade Policies in South Asia : An Overview maintaining effective protection levels, government revenue concerns and pressure from local producers o f intermediates have limited the extent o f such occurrences in South Asia. Try to contain pressures for high agricultural tar@, These pressures are most apparent in India, where average agricultural tariffs are now well above non-agriculturaltariffs, and where -- at the first sign o f import competition -- large tariff increases have become routine. However, similar tendencies are also apparent in Bangladesh for a variety o f fresh and processed foods and in Sri Lanka for rice and some other large import-substitutioncrops. Move towards more uniform tariffstructures. Tariffs in South Asia are still highly escalated; they rise along with the degree o f processing, although the reduction o f the top rates has substantially reduced the variance of effective and nominal protection. Government officials, businessmen and politicians on the whole seem to believe that this built-in escalation is the appropriate structure despite many empirical studies in all the South Asian countries during the past 20 or more years that have demonstrated the highly distorted and economically inefficient patterns o f effective protection that tariff structures based on this principle create. Accordingly, as suggested above, the main thrust o f tariff policy should be to press ahead with "tops down" tariff reductions, gaining further reductions in the variance of effective protection as a logical by-product. Inarguing this case for this policy, the main points likelyto be most easily understood and accepted by the official-business-politician groups that will need to support or at least accept the changes are: (1) local industries need low tariffs to be internationally competitive; (2) low tariffs level the playing field with export industries; (3) low tariffs simplify Customs clearance and reduce incentives for corruption and smuggling; (4) low tariffs make export-tariff exemptioddrawback mechanisms easier to manage; and (5) lower tariffs across the board lead to lower exchange rates which offset some o f the tariff reductions and help exporters. Of course, lower tariffs also benefit final consumers, but regrettably, in South Asia as elsewhere, except for some basic agricultural commodities, the reality is that this general final-consumer interest in low tariffs -- as distinct from the interests o f intermediate business consumers -- has practically no weight indiscussions and negotiations on tariff levels. Reduce and if possible eliminate the use of exemptions and partial exemations from standard tariff &. This practice is a major problem inIndiaand Bangladesh. Apart from the increases ineffective protection that result from the exemptions, the system is complex, opaque and gives excessive discretion to the officials who negotiate and recommend the exemptions. Removing the remaining tariff exemption culture should be attacked directly and should be a normal part o f Customs administration reform. Progress would be much easier ifthe demand for exemptions were reduced by cutting the general level o f tariffs. Recent experience in Pakistan shows that "tops down" tariff reductions that also involve reduced raw material, intermediate input. and machinery tariffs will eventually substantially reduce the demand for tariff exemptions. The number o f basic rates has certainly been reduced substantially as the top rates have come down, and there are probably far fewer exemptions and partial exemptions than during the 1980s. But in India, Pakistan and Bangladesh there are still far too many: for example the 2002-03 Indian "Jumbo Exemption" Customs notification lists 415 items for which some kindo f exemption i s allowed, each item corresponding to an HS code (two digit, four digit, or six digit) and many supplemented by one or more o f 43 detailed product lists, which contain over 1100 detailed product descriptions. The vast majority o f these exemptions are for intermediate material inputs or for machinery and equipment items including spare parts, and may involve one, two or all three o f the basic customs duty, the additional (domestic VAT) duty, and the Special Additional duty (SAdd). The exemptions are 148 Conclusions and Recommendations sometimes for specific subcategories o f HS codes, for use as inputs in the production o f specified products, for use by particular firms or industries (but not by other users o f the same products), or even for particular (non-preferential) foreign supplying countries. The Indian "Jumbo Exemption" notification was introduced in 1996 to consolidate and bring greater clarity to the previous impenetrable maze o f exemption notifications, but since then the Jumbo has grown, and the total number exemptions now appears to be about double the number in 1996. Of the many continuing exemptions in Pakistan, a large number are associated with "indigenisation" or local-content programs inthe engineering industries, which the government i s phasing out. These exemptions have also become less attractive as tariffs on intermediate materials and components have declined. The situation inBangladesh i s obscure: notifications (SROs) about non-export related exemptions are not consolidated in any one place, and their impact i s further complicated by the number o f taxes on imports (currently four) for each o f which exemptions could in principle be given. It i s reported that in practice exemptions and partial exemptions are negotiated individually at Customs, and many may not be systematically recorded in Customs service records. Consequently, inBangladesh it appears that there i s hazy and ill-defined boundary between legal exemptions formally agreed to by Customs and the many unrecorded, illegal ways to avoid Customs duties. The frequency o f exemptions in Sri Lanka, Nepal and Bhutan has not been investigated, but i s reported to be much lower than inIndia, Pakistan and Bangladesh, principally because most intermediate input tariffs and machinery tariffs are low (zero, 5% or 10%) so that there is less to be gained by negotiating for tariff exemptions or reductions. During the 1980s and before, the granting o f exemptions from normal tariffs was a normal accompaniment o f successful lobbying for an import license and --like import licensing -- was a major nexus o f rent seeking and corruption throughout South Asia. 0 Use WTO tariff bindings to tie in liberalizing reforms. As required by the WTO Agreement on Agriculture, India, Bangladesh, and Sri Lanka have bound all their agricultural tariff lines. Palustan has bound about 90 percent o f them. Except in Sri Lanka, which bound at 50%, most o f these agricultural bindings are prohibitively high (loo%, 150% and 300%) and fail, for practical purposes, to constrain the levels o f the corresponding applied tariffs. As regards non-agricultural tariffs, India has currently bound 68.2% o f its non-agriculturaltariff lines, most at 40% and a smaller proportion at 25%. However, the 32% or so o f unbound non-agricultural tariff lines are for products where protectionist lobbies are especially strong: textile fabrics, garments, steel, automobiles, e.g. Pakistan and Sri Lanka have respectively only bound 27.5% and 8% o f their industrial tariff lines; Bangladesh has bound practically none (50 lines or 0.9% o f the total). Most o f the Pakistan and Sri Lankan bindingsare well above (more than double) current appliedrates and consequently leave considerable scope for substantial tariff increases, ifthey so chose. Overall, then, except for some o f the Indian bindingsand some Pakistan bindings o f textile tariff lines, the South Asian countries have not benefited from their WTO membership by bindingtheir reduced industrial tariffs and thus protecting themselves from future backtraclung. If India goes ahead with its announced tariff reductions over the next few years and further tariff cuts are made in Palustan, Bangladesh and Sri Lanka, the W T O tariff-binding facility will become even less relevant unless many more tariffs are bound and existing bindingsare substantially reduced. A possible forum for negotiations on WTO bindings could include SAPTA, where there should be a mutual interest in obtaining commitments that SAPTA tariff preferences will not be made meaningless by future MFNtariff increases. Bangladesh, for example, could ask that India bindtariffs for which Bangladesh receives tariff preferences under SAPTA and vice versa. Additionally, continuing 149 Trade Policies in South Asia : An Overview efforts should be made to remind the South Asian trade policy communities o f the obvious advantages to their countries o f the WTO binding facility in (i) protecting liberalizing reforms against future pressures to reverse them; (ii) providing a more certain environment for trade and investment, including direct investment by foreign firms that want assurances against arbitrary tariff increases' undermining their investments; (iii) the extreme unlikelihood that the present value o f improved export access in the future as a result o f tariff bargaining would outweigh the present value o f the annual economic cost of keeping highunboundtariffs. Other import taxes and levies At present India, Bangladesh, Sri Lanka, and Nepal employ protective taxes on imports in addition to Customs duties. The practice is a major problem in Bangladesh, where three other protective taxes presently provide very high levels o f nominal tariff protection to local producers in distinctly non- transparent ways. Because o f import taxes other than customs duty that have protective implications, Bangladesh and India currently have de facto general maximum protective tariffs o f 34 % and as high as 100%(inagriculture), respectively. Moreover, in all the South Asian countries the share o f revenue collected from purportedly trade- neutral import taxes has greatly increased relative to the revenue from Customs and other protective taxes on imports. Provided that these indirect taxes are collected with equal efficiency at the same rates from domestic producers, the taxes are broadly neutral and do not favor domestic production, this development is highly desirable. However, if tax collection in the domestic economy i s less comprehensive and rigorous on domestic production than on imports, the so-called trade-neutral tax may operate to an unknown and probably haphazard extent as another protective import tax. Recommendations: e Inthe interests of transparency and efficiency, eliminate protective import taxes (other than customs duties) applied inIndia, Bangladesh, Sri Lanka, and Nepal. Especially in thejrst two countries, these holdoversfiom aprotectionist past put into question the seriousness of commitments to openness in trading. The sooner they are discarded, the more rapidly can theprivate sector adjust to integration into global markets, can governments reduce revenue leakage, and importers gainfiom a simpliJed and transparent tarif schedule. Pav special attention to the Dotential protective effects of domestic taxes collected both on imports and domestic production. Policymakers should conduct further systematic investigation in all the South Asian countries to see whether and to what extent some o f the reductions in protective tariffs may have been vitiated by inefficiencies in collecting indirect taxes such as VAT. At present the shares of imports and domestic production in indirect tax revenues are generally not reported: this distinction should be routinely made and trends monitored. The same applies to other taxes on imports and domestic transactions, such as the advance income taxes used inPakistan and Bangladesh. Anti-Dumping The AD cases already decided in India and the potential for unrestricted anti-dumping to undermine the liberalization o f the trade regime that has been achieved so far, suggest that a review o f current AD policies and practice i s urgently needed. Recommendations: The present momentum o f anti-dumping in India could be stopped or slowed by pursuingsome or all o fthe following policy choices: 150 Conclusions and Recommendations Repealing the AD law and using the safeguards provisions as the main safety valvefor responding to protectionistpressures. Channeling all or most cases to the safeward route and maintaining it as a temporary tarfl- based instrument toprovide extraprotection tofirms while they adjust. Incorooratinz a buyer/consumer interest in the AD and safeguards laws and requiring cases to be decided on the basis of the overall economic costs and benefits of imposing duties. Explicitlv including an anti-trust tvpe filter in the AD law so as to make predatory pricing and the likelihood of subsequent market power preconditions for the imposition of AD measures. An unfortunate consequence o f anti-dumpingactivity inIndia is that producer groups loolung for ways o f obtaining extra protection inthe neighboring South Asian countries are usingIndia's example as another reason why their governments should introduce AD laws and develop the technical capacity to implement them. In these discussions, economic costs are almost completely lost or ignored. All that i s being heard i s that AD i s a legitimate WTO-sanctionedway o f dealing with "unfair" foreign competitors, and that AD can act as "safety valve" to support more general import liberalization objectives. The willingness and interest o f various international and national organizations in providing technical assistance to establish AD capabilities indeveloping countries abet these domestic pressures. So far there are no systematic economic evaluations o f the consequences o f Indian anti-dumping. Some applied, policy-oriented empirical research on this topic could provide the background necessary for eventual public questioning o f AD inIndia and be salutary as well for other South Asian governments presentlyunder pressure to go down the same path. Specialprotective treatment Inall the South Asian countries the announced, "maximum" general Customs tariffs are not actual maxima. In addition to and apart from the use o f other protective import taxes on top o f Customs duties, every country has industries that receive special high-tariff treatment. Many o f these industriesare large and have a public-sector production and/or regulatory presence. They often also benefit from exemptions from input tariffs, NTBs o f various kinds, and subsidies. As a result, ifweighted by domestic production protected, average tariffs inmost of the South Asian countries (especially in India) would be considerably higher than unweighted averages o f tariff lines. Since they would rise as well above import- weighted tariff averages, where high tariffs reduce or keep out imports, they therefore systematically understate the extent to which tariffs are protecting domestic industries. As elsewhere, a number o f industries in South Asia receive special treatment in various forms from government. In addition to NTBs o f various lunds, protection can come from especially hightariffs that exceed the country's highest normal tariff band, from a combination o f high-to-moderate output protection and especially low-input protection, from direct and indirect subsidies, and by other means. By definition, since the industries receive special treatment, an influential interest i s always involved, one which will have to be dealt with in any thoroughgoing trade liberalization process. A partial but by no means comprehensive list o f problem industries in South Asia i s given below. Incompiling the list only the following relatively large industries have been included: (1) real "eyesores" (such as Pakistan Steel, the Pakistan auto assembly industry, the steel and urea fertilizer industriesin India) which have stood out and are widely recognized as problems, and where substantial 151 Trade Policies in South Asia : An Overview adjustment and restructuring would have to occur ifprotectionwere reduced and subsidies were removed; (2) industries which are not "eyesores" in this sense but where open trade policies would involve substantial adjustments even though after adjustment a large part o f domestic production would probably survive and prosper (e.g. the Indian auto industry); (3) industries inwhich the countries may have a basic comparative advantage but where some influential domestic interests oppose import competition or the removal o f subsidies, even though the industry as a whole would be strengthened and benefit (e.g. the Indian textile and garment industries) (4) "commodity" industries in which the industry may or may not have a comparative advantage but where world markets are cyclical and the industry has successfully lobbied for measures that protect it duringdownturns and limit the extent to which it has to adjust to these cycles e.g. various agriculturalproducts but also petrochemicals and synthetic fibres. India 0 Foodgrains 0 Oilseeds and edible oil processing 0 Sugar 0 Milkand milkproducts 0 Tea and coffee 0 Natural rubber 0 Basic steel 0 Copper, lead, zinc 0 Petrochemicals 0 Fertilizers (urea) 0 Synthetic fibers 0 Automobiles 0 Some auto components 0 Textile fabrics 0 Garments Pakistan 0 Sugar 0 Oilseeds and edible oils processing 0 Basic steel 0 Fertilizers 0 Automobiles 0 Some auto components 0 Some engineering industries 0 Bangladesh 0 Sugar 0 Jute textiles 0 Oilseeds and oilseed processing 0 Textile fabrics 0 Sri Lanka 0 Rice 0 Potatoes Nepal 152 Conclusions and Recommendations Inmany of these industries the strongest resistance to policy reform comes from public sector firms and government ministries and departments which oversee the PSUs and the industry generally. Prominent and well known examples inIndia are: Steel: the public sector firm SAIL (Steel Authority o f India) and the Ministry o f Steel Fertilizers: the Department of Fertilizers inthe Ministryo f Chemicals and Fertilizers Petrochemicals: the public s ector finns 0iland Natural Gas C orporation (Exploration), Hindustan Petroleum Corporation Ltd, Bharat Petroleum Corporation Ltd, Indian Oil Company (Refining and Distribution), and the Ministryo f Chemicals and Fertilizers Textiles and garments: the public sector firmNational Textile Corporation, the Cotton Corporation o f India, the Ministry o f Small Scale Industries, and the Ministry o f Textiles Auto industry: Thejoint public sector/Suzuki firm Maruti Udyog and the DGFT (Directorate General o f Foreign Trade) in the Ministry o f Commerce and Industry (responsible for the local content ("indigenisation") program) Natural rubber: the Rubber Board Food grains: the Food Corporation o f India (FCI), the National ....(NAFED), the Ministry o f Agriculture, the Ministry o f Food and Civil Supplies (responsible for the Public Distribution System), and various state government agriculture ministries and organizations. Edible oils and oilseed processing: Ministryo f Agriculture and Ministry o f Food Processing. The most difficult problem for reform inthese cases i s when large public sector firms would have trouble adjustingt o 1iberalization, especially when 1arge and influential w orkforces are involved. 0ne example i s the National Textile Corporation (NTC) in India, a public-sector holding company which employs over 100,000 workers in about 120 textile mills, all o f which were bankrupt when NTC took them over many years ago. It continues to operate most o f these mills with government subsidies, and cross subsidies from a number o f mills which it has been able to returnto profitability. As an indication o f the political sensitivity o f adjustment in this industry, during the many years when the Indian textile market was completely insulated from import competition, initiatives to close down and sell off the assets o f patently unviable NTC mills have either not been pursued or explicitly rejected (most recently in 2000 at Cabinet level). Another example in India i s the Steel Authority o f India (SAIL) which operates five integrated steel mills, some o f which would not be viable with open competition, and has a total, significantly inflated workforce o f 147,600 Another difficulty for policy liberalization are line ministries and other government entities with long established bureaucratic interests in industry controls, and which also usually have ministers with political constituencies related to the industry. As with any kind o f reform, in some circumstances, in order t o push trade policy refonn effectively, rather than directly threatening the regulatory roles and therefore the jobs o f the bureaucrats and the influence o f ministers, it may be more effective to attempt to change their roles from regulating the industry to restructuring and promoting it. This appears to be the current strategy inthe Indian Ministry o f T extiles, for example. Since 1999 the Ministry has been in charge o f a "Technology Upgradation Fund" scheme, which aims to help the industry face up to the MFA phase out and the April 2001 removal o f India's remaining textile and garment QRs. However, as this activity illustrates, unless there are some basic changes inthe culture o f the bureaucracy, what i s done in the name o f "development" may reflect old mindsets that distrust and don't understand market solutions. They may slow down or prevent the abandonment o f old regulatory controls while the developmental reforms introduce new types of planning and regulation which involve if anything an expanded role for the bureaucracy. 153 Trade Policies in South Asia :An Overview Tarvfs andgovernment revenue As tariffs came down in the South Asian countries during the late 1980s and 1990s the contribution o f protective import duties to government revenues declined. The decline was less than proportionate to the reduction in tariff rates, because the share o f imports in GDP grew. But by 2001, whether measured by tariff revenue in relation to GDP, or tariff revenue as a share o f total government revenue, total tax revenue or total indirect tax revenue, all the governments were much less dependent on tariffs than they had been 10 years before. Subject to a caveat discussed below, much o f this highly desirable lessening o f public finance dependence on tariff revenue has been due to the introduction o f VAT-style indirect taxes and the gradual extension o ftheir scope and improvements inthe efficiency with which they are administered. In India in the past few years there has also been a major expansion in revenue collected from individual and corporate income taxes. Given this past and continuing success inreducing governments' financial dependence on import tariffs, further substantial tariff cuts should not be too difficult to manage in India, Pakistan, and Sri Lanka. Import duties now account only for approximately 7, 12, and 11 percent respectively o f the total consolidated government revenues o f these three countries. As in the past, in India and Pakistan especially, part o f the shortfall would also come from the resulting increase o f imports inGDP. Some idea o f the potential in this regard i s provided by China which has an economy more than double India's and about 10 times the size o f Pakistan's and i s therefore likely to be less open. Despite the much greater size o f its economy, in 2001 China's import/GDP ratio was about 21 percent, compared to 10.9 percent in India and 14.7 percent inPakistan. The public finance consequences o f further tariff reductions might be more difficult to manage in Bangladesh and Nepal, however. Protective import duty revenues there are currently around 22 % and 25 % o f total government revenues, respectively, and 36% and 41% o f total indirect tax revenues. On the other hand, smuggling that i s truly clandestine or that i s accomplished through bribery o f Customs officials is generally recognized to be a proportionately much bigger activity in both these countries than inIndia, Sri Lanka, and (inpresent circumstances) Pakistan. Such contraband usually escapes all types of domestic taxes (direct and indirect) as well as protective and domestic taxes imposed at Customs points. Consequently revenue losses from tariff reductions are likely to be offset at least partly by the diversion of some o f this illegal un- or under-recorded trade into legal channels. Even so, more than in the other three countries, extension o f the scope and the base for domestic taxes and improvements in tax administration, including the administration o f the Customs service, will be especially important for sustaining further tariff reductions. Efficiency in the administration o f domestic taxes is also important because these taxes are generally more easily collected by the Customs service on imports than by indirect tax administrations from businesses in the domestic economy. For example revenue from the Pakistan sales tax (a VAT-type tax) on imports is currently almost 60 percent o f total economy-wide collections from sales tax. Part o f this very high share o f collections from imports in total net collections can be explained by the VAT feature which allows users o f imported intermediate inputs to claim subsequent credits. The high share also raises the possibility that sales tax on domestic transactions may not be as effectively collected as sales taxes on imports. Ifthis i s true, part o f the sales tax on imports may in fact be acting as a protective import duty, but probably in a haphazard way depending on which industries and f m s in the domestic economy avoid some or all o f the tax. A similar issue attaches to "advance income taxes" (AITs) on imports in Bangladesh and Pakistan. These are withholding taxes that can be credited against corporate or personal income taxes. The tax rates are presently 3% o f the cif price in Bangladesh and in Pakistan 6% o f (cif+customs 154 Conclusions and Recommendations duty+sales tax), equivalent to rates o f between 7.2% and 8.6% o f the c if price for Pakistan's normal customs tariff "slabs" o f 5%, lo%, 15% ,20% and 25%. InPalustanthis is a minimumtax; norefunds are given ifthe incometax liability ofthe importer turns out to be less than the advance income tax, although it can be used as tax credit if the income tax liability i s greater. Clearly, if domestic producers competing with the import avoid all or part o f their income taxes, or if they make losses or pay correctly assessed income taxes which, in relation to their selling prices, are lower than the AIT rates on competing imports, the AIT would also act as a protective import duty. For these reasons, to monitor how fast and effectively the South Asian countries are in fact freeing themselves from their dependence on protective import duties, it i s necessary to have a systematic look at the sources o f the domestic taxes which are replacing import duties, checking in particular that they are not coming disproportionately from imports. It is recommended that this scrutiny should be a normal part o f IMF and Bank monitoring of the tax and public finance situations S outh A sia and that the finance ministries be askedt o focus o n this aspect o f their tax policies by distinguishingand regularly reporting the breakdown o f the various taxes that are collected by Customs. Except in India, all this data has been collected but most countries do not publishit. InIndia, the different taxes collected by Customs were apparently not available inaggregated form even internally until fiscal 2001102. To put the newly published Indian data in perspective and to analyze trends, it would be usefulto check on the estimates for earlier years given in this report (Table 111.2). Performanceby Country The trade policy issues examined above relate to important choices facing all o f South Asia's five largest counties. The circumstances o f each country, however, vary. All can benefit from reducing the number o f tariff bands and lowering tariffs -beginning with the highest -but to different degrees. Those or other steps may be among the most productive trade reforms in Sri Lanka, where liberalization has already made significant progress. They might, however, make less impact where, as in India and Bangladesh, import taxes and levies have multiplied as tariffs dropped, providing substitute revenue but often replacing old, transparent trade barriers with new, discretionary ones. To assess the region's state o f progress, therefore, this section looks at the practices o f the different country, beginningwith Sri Lanka, the most advanced, and ending with India, the most complex. INDIA: Accounting for about 80 percent o f the combined population, GDP, and trade of the South Asian countries and most intra-regional trade, India leads in many areas o f economic policy and performance - but not in trade reform. Suggesting that liberalization may be reviving, however, India's 2002-03 budget cut the basic maximum customs duty from 35 percent to 30 percent in the 2002/03 budget, and officials announced a further reduction to 20 percent over the next two years. Should India energetically embrace trade reform, it may provide a decisive stimulus to progress throughout the region toward greater openness and trade-fueled economic growth. For the time being, however, it provides its neighbors a model for restrictive policies that some may be driven to emulate. Details o f its protectionist regime have been discussed above and will be again inthe following section on key sectors. Under every policy heading- and despite reform efforts between 1991 and 1997 -- India's trade barriers are the highest inthe region, the least transparent and the most diverse. For example, There has been a major reduction in the average Indian ad valorem tariff since 2002103, which has come down from 35% to 22.2%. Whereas previously Indian tariffs were much higher than tariffs in the other South Asian countries, on average they are now well below Bangladesh's 155 Trade Policies in South Asia :An Overview tariffs, and only about 3 to 4 percentage points higher than tariffs in Pakistan and Nepal. India now ranks 12' among 139 countries in terms o f average tariffs, and 5' interms of agricultural tariffs. 0 Although it phased out a large number o f QRs protecting consumer goods during the 1990s, it raised many industrial import tariffs; made anti-dumping a major activity, imposed specific duties to protect the textile and garment industry, used local-content (TRIMS) arrangements in the auto industry, and, especially since 1997, substantially increased tariffs protecting major agricultural products and agro-industries. 0 Including zero, India is currently using 7 normal Customs duty rates, but with many products subject to higher and lower "additional" duties than the standard 16-percent rate, there are in practice a large number o f total protective import tax slabs (41 in 2002/03) associated with the seven "normal" Customs duty slabs. 0 About 80% o f its tariff lines now have the general maximum customs duty o f 20%, though most agriculturaltariffs are bunched around 30%. 0 Inclusive o f specific duties, India has the largest number o f .tariff peaks -- lines with basic Customs duties that exceed the general maximum rates - in South Asia, especially tariffs protecting its agricultural, textiles and garments and automobile sectors. 0 The recent indications that serious trade liberalization is resuming appear to exclude agriculture. State trading monopolies still control the import and export o f most agricultural commodities, including the major foodgrains. Agricultural tariffs have risen even as the average level o f industrial tariffs has been declining to the point that in 2001/02, India's unweighted average agricultural tariffs (including tariffs on processed foods) were exceeded by only three other developingcountries, South Korea, Turkey and Morocco. 0 Even negotiating a major reform step with the US and EU to phase in lower tariffs and remove import licensing in the field o f textiles and clothing, India reserved the right to revert to 1990 policies that banned imports and imposed tariffs o f 110 percent or more if WTO liberalization efforts stalls, reaffirmed its right to restrict textile imports under the GATT balance o f payments provision, and excluded from the US/EU treaties most cotton fabrics, which account for the bulk o f Indian fabric production, and about half the apparel tariff lines, making no commitment to extend coverage inthe future. 0 Although, since April 2001, India no longer explicitly uses conventional import licensing to protect domestic industries, it continues to employ various GATT-compatible controls to shield against competition. InNovember 2000, apparently anticipating significant import flows after the last QRs were phased out, officials made a certification o f Indian quality standards and accompanying standard mark mandatory for imports o f 133 products and product groups2 not subject to such compulsory treatment. Although the Bureau o f Indian Standards (BIS) asserts that this certification scheme operates in "in an impartial, non-discriminatory and transparent manner," the new regulation has effectively shut out all "off -the -shelf' foreign supplies o f steel from the Indian market since foreign suppliers must, among other conditions, set up a liaison or branch office in India, pay for the cost o f a certification visit by a BIS technical team to the foreign supplier's factory, and pay an annual "marking fee" o f $US $2000 plus one percent o fthe invoice price o fproducts shipped to India. The 133 products andproductgroups includefood ingredients, powderedmilk and other milk products, cements, steeltubes, household appliances,gas cylinders, dry batteries, X-ray equipment, andsteelproducts. 156 Conclusions and Recommendations 0 As noted inthe earlier discussion of key policy issues, India has beenparticularly energetic since 1993 in bringing anti-dumping cases, 300 of which have been completed. Almost all have resulted inthe imposition o f specific duties on imports from particular firms and countries on top o f normal import duties. The total resulting import tariffs are often prohibitive, and India's activity in India i s steadily undermining much o f the other efforts-including tariff reduction-to liberalize the trade regime. As can be seen particularly in Palustan's adoption o f the same weapon, India's example i s influencing the other South Asian countries to also embark on anti- dumping. Aside from creating important "terms o f trade" losses by penalizing reasonable pricing, channeling protection notably to Indian producers o f intermediate goods and bolstering the market power o f a few, highly concentrated Indianindustries, the invocation o f anti-dumping claims raises the risk o f retaliation against Indian exports inthe markets o f aggrieved importers. Despite the persistence o f old, reworked and relatively new obstacles to trade liberalization, India has seen the share o f imports in GDP increase by more than half since 1988, from around 7 percent into 11percent in2001. As aresult, the decline intariffrevenues as a share o f GDP has not beenprecipitous - -from about 3.5 percent in 1988 to 1.8 percent in2001 -- and the sharp rise after 1999 inthe contribution from domestic indirect taxes and direct taxes suggests that further substantial tariff reductions inthe near term would be fiscally easy to sustain, especially assuming likely increases inimports inrelation to GDP. Moreover, as imports have risen, so have India's exports, backed inmany cases by new policies aimed directly at encouraging, even indirectly subsidizing, the sale o f Indian manufactures and produce in world markets. Institutingan extremely elaborate export incentive and promotion apparatus, India has the region's most comprehensive and complex set o f policies to expand exports. In addition to a range of indirect subsidies, specific schemes support exports o f gems and jewelry, electronics hardware and software, Jute, textile products and, since 2001, surplus wheat and rice. At the same time, India restricts exports of fertilizers, some specialty chemicals, and agricultural commodities. It taxes leather exports and gives State Trading Enterprises control over exports o f some metal ores, maize, onions and, like all its neighbors except Sri Lanka, petroleum products. Inthejudgment ofan official, January 2002 Department ofCommercereport onIndia's Export- Importpolicies, noting India's slowness to embrace export-oriented change: ... the mind-set regarding exports has remained virtually unchanged. Even today, when policy makers address the issue or exports, it is mainly in terms of their contribution to foreign exchange earnings and thus the extent to which they fund our imports. The ... Government must re-orient this attitude and recognize the multifaceted contribution o f exports to the economy, in terms o f developing links with the high productivity and high quality markets abroad, thus providing a basis for improved efficiency at home. ... PAKTSTAN: Ifit were not for the long-standing ban on imports from India o fproducts not on a limited positive list o f 600 items, Palustan could be counted a high achiever - at least since 1997/98 - among South Asia's trade liberalizers. Having widely used import licensing and other non-tariff barriers to imports, it began to remove them during the 1980s and continued to the point that by 1998, the proportionof product lines subject to traditional QRswas only 2.7%, slightly lower than the proportion in Sri Lanka inthe same year. Not only did the removal o f QRs proceed for most o f the period behind declining but still very high tariff barriers, in 1998 some o f the industries protected by the remaining QRs and also by government or government controlled import monopolies were very large, including, for example most 157 Trade Policies in South Asia :An Overview o f agriculture and the fertilizer industry. But starting in 1997/98, Pakistan embarked on a radical new trade liberalization program which by 2003-subject to some exceptions- had eliminated all the remaining traditional QRsand parastatal import monopolies, while drastically reducing the level and simplifying the structure o f import tariffs. Examples o f both extensive and incomplete reform include: 0 I t s four-rate (5,10, 20 and 25 percent) tariff regime has been radically liberalized in the last five years. Customs duties now constitute the sole explicitly protective import tax. From a very high 1996/97 level (an unweighted average rate 41.7%), administered under a complex and opaque structure including large numbers o f rates or "slabs" (14 "normal" ad valorem rates) and characterized by many exemptions and partial exemptions, Pakistan is now operating with a relatively simple structure. Its tariff reduction program brought unweighted average tariffs down from 41.7% to 20.4% in2001102 and to approximately 18.2% in2002103. 0 Like all the other tariff reduction programs in South Asia, Pakistan's was "tops down", with reductions in the top normal tariff rate pushing more and more tariff lines into lower rate categories or "slabs". However, the number o f slabs was also reduced independently o f the reductions in the top rate, notably from 14 to 6 between 1996/97 and 1997198 and later on in 2001102 with the abolition o f the zero tariff slab, cutting the number o f slabs to from 5 to just 4 at present. 0 Despite the steady reduction o f the top rates and the removal o f the zero-duty slab, tariffs in Pakistan are still quite dispersed, although far less than then they were in 1996/97 and before. In 2001102 over 40% were either at 5% or 10% and almost 40% at 30. The reduced number o f tariff slabs, and the large numbers o f tariff rates within H S chapters that are identical, have increased the transparency o f the system and should have reduced the transaction costs o f the business community and the administrative costs o f the Customs administration. 0 The "tops down" reduction of tariffs in Pakistan also seems to be reducing the role o f tariff exemptions and concessions, for which there i s obviously a greater demand when tariffs are high. Most o f these exemptions and concessions are for particular users, leading to many situations where the identical product pays different import duties depending on who imports it. The majority o f concessions benefit engineering and metal working firms, including firms in the auto industry.A majority are linked to local content (TRIMS) agreements under which the import duty reduction i s given in return for commitments to incorporate specified locally produced inputs or to meet domestic local content targets. Others are simply requests from using firms for lower tariffs which are granted ifthe particular input cannot be supplied by domestic producers. 0 The system holds considerable potentialto create negotiating opportunities and delays, leadingto inefficient economic decisions. Since the local-content arrangements clearly breach the WTO TRIMS agreement, the government decided to phase out all except those in the auto industry, some going inJune 2002, others by December 2002, and the remainder to go by June 2003. It has also been announced that the auto industry programs will be abolished by December 2003, even though it is unclear whether this will actually be done. 0 Pakistan, however, still employs many technical regulations and regulations based on health and safety, including restrictions on imports o f second-hand products justified on health and safety grounds, and in many cases protection o f local industries i s clearly a dominant motive (e.g. Pakistan's ban on the import o f second hand cars). 0 Compared to the other South Asian countries, Pakistan has very few "tariff peaks" i.e. tariffs higher than the general maximum o f 25%. However, one set o f very high tariffs, with rates o f 60%, 75%, 125%, and 200%, protects truck, auto and motorcycle assembly and i s part o f a complex regulatory framework which gives tariff concessions on imported components in return 158 Conclusions and Recommendations for local content commitments. Apart from these, hightariffs on alcoholic drinks appear to be for consumptioncontrol since there i s no officially recognized domestic production. 0 A steep and steady decline intariffs and inthe tariff collection rate inPahstan duringthe 1990s was accompanied by a correspondingly steep decline in the contribution o f tariffs to indirect tax revenue from about 4 6 percent t o only 15 percent in2001/02 and, a s a share o f GDP, f r o m around 4 % percent inthe early 1990s to 1.73 percent in2001/02. However, revenue from a VAT- style sales tax on imports went up as revenue from tariffs went down, and exceeded tariff revenue from 1999/2000 onwards. The combined contribution o f the tariffs and the sales tax on imports to total indirect taxes consequently declined only slightly over the periodup to 2000/01. 0 The extent to which government revenue continues to rely on taxes on imports i s a cause for concern. In2000/01 tariffs plus sales taxes on imports accounted for 34.4% o f total government (central and provincial) tax revenue and 49.1% o f total indirect tax revenue, and the sales tax on imports accounted for 57.7% o f total sales tax revenue, this share having risen from around 45% in 1990/91. If in fact as this suggests sales tax collection in the domestic economy is less comprehensive and rigorous than on imports, the sales tax would not be operating as intended as a protection-neutral VAT, but to an unknown and probably haphazard extent as another protective import tax. As an exporter, Pahstan still retains a few restrictions and a range o f import-duty neutralization programs and, along with India and Bangladesh, a 25% freight subsidy, transport and marketing subsidies to agricultural exports, and also indirect subsidies through export prohibitions, restrictions and taxes applied to raw materials used as inputsfor processed products. Like i t s neighbors, it has also set in motion a number o f official export-promotion efforts and, matching India's example, an initiative to boost exports o f gems andjewelry and computer software. BANGLADESH: Maintaining tariffs that are, along with India's among the world's highest, Bangladesh i s also the last South Asian state to retain traditional QRson imports. Pervasive until the late 1980s, when they covered nearly 56% o f items at H S 6-digit level, Bangladesh's protectionist QRs were steadily reduced during two rounds o f trade liberalization that also brought sharp reductions in tariffs. The Import Policy Order (PO) o f 1993-95, however, marked the high point o f the liberalization process; its successors in 1995-97, 1997-02, and 2003-06, have left in place a system that bans some imports entirely salt), packaging materials, and textile products -- whose importation i s banned and a second category o f There are two lists for QRs:the first group consists o f items -- agricultural products (chicks, eggs, goods that can be imported subjected to fulfillment o f certain conditions. Nearly 40% o f all QRsapply to textile products that enjoy the heaviest protection. Although the readymade garment sector imports woven fabrics and grey cloth duty-free under bonded warehouse facilities, the system i s cumbersome and susceptible to corruption (through leakage into the protected domestic market). Although some bans/restrictions are ostensibly applied on grounds o f health, religion, environment, culture and so on, many o f the prohibitions or restrictions cannot be justified on these grounds, and are presumably included for protectionpurposes (e.g. salt, insecticides for mosquitoes). Further, Bangladesh has managed to replace the import licensing it abolished early inthe 199Os, it still requires various permits, clearances and approvals that amount to licensing by another name. Additionally, the administrative procedures designed to manage QRs function as "non-automatic licensing" that implicitly places import ceilings on certainproducts. Finally, meeting the requirement that importersregister involves a costly layer o f bureaucracy with clear potential for obstruction and abuse. Bangladesh's efforts since 1993 to justify its QRs as trade measures taken for balance-of- payments reasons lose credibility along with the recent, approaching current account surpluses. In any 159 Trade Policies in South Asia : An Overview case, a legitimate invocation o f the BOP rationale would require restraining the general level o f imports rather than the specific "unimportables" that Bangladesh committed itself to phase out in 1999 before the WTO Committee on BOP. State enterprises that monopolize the import o f petroleum products put another hurdle inthe path o f trade reform, and relaxingtheir domination does not necessarily liberalize commerce inthe goods they controlled. Sugar, for instance, is no longer a monopolized import; instead it is subject to a total o f 70% tariffs and other levies. Moreover, government practices generally discriminate against suppliers from abroad by offering explicit price preference margins or discriminatory tendering, and current export policy explicitly encourages the use o f local raw materials, the intent being to establish backward integration, particularly in the textile and RMG sector. (The influence that Bangladesh's state-owned enterprises in such sectors as sugar, jute textiles, oilseeds and oilseed processing, and textile fabrics exercise over economic and fiscal policy extends far beyond their role in keeping trade barriers high. Having come into being in an era when import substitution dominated regional development efforts and a good deal o f accepted development theorizing by respected international analysts, these SOEs are political and policy burdens for South Asian reformers ina number o f fields.) Under the heading o f tariff reduction and simplification, Bangladesh's reform momentum has also left it with a four-tier tariff structure3, now the highest average tariff levels inthe region, and notjust one additional import tax, but two other protective taxes applied to give extra protection to selected local industries. Between them, the three taxes raise the unweighted average protection provided by Customs tariffs by about 50 percent. They also increase the complexity o f Customs administration, reduce transparency, and increase opportunities for corruption in Customs clearance. Another reason for the resistance to further tariff and import tax cuts may be the public finance consequences for Bangladesh, where protective import duty revenues are currently around 25 % o f total government revenues and 41% o f total indirect tax revenues. Since smuggling (both unofficial and "official" i.e. involving bribery o f Customs officials) i s generally recognized to be a serious concern for Bangladesh, the revenue losses from tariff reductions are likely to be at least partly offset by the diversion o f some o fthis illegal un or under-recorded trade into legal channels. Even so, extension o f the scope and the base for domestic taxes and improvements in tax administration, including the administration o f the Customs service, will be especially important for sustaining further tariff reductions. SRT LANKA: Having scrapped most o f its QRs inthe course o f its 1977 reforms and dropped others inthe next two decades, Sri Lanka, in 1998, retained only 3.7% o f its tariff lines subject to import restrictions explicitly aimed at protecting local industries. The residual QRs, however, carried significant weight. Not only did they apply (in the form o f seasonal import licensing) to rice, potatoes, chilies, and onions -- the main import substitution food crops-but also restricted imports o f such industrial products as timber, chemicals, some drugs, and motor vehicles. Losing its argument before a WTO panel that the GATT balance o f payments clause justified such practices, Sri Lanka did away with QRs in May 1998 except for GATT-sanctioned health and safety and technical standards and regulations and the import monopoly over wheat (which i s not grown in Sri Lanka) justified under the GATT state trading provision. The role o f protecting import substitution crops has not disappeared, but shifted to seasonally varying tariffs, and specific duties. Still, its protective tariffs are markedly lower than those in India and Bangladesh. Subject to some qualifications, Sri Lanka i s a relatively low tariff country by the general standards o f developing countries. Its average total protective tariff was 10.5 percent, and its general protective maximum tariff that year stood at 31 percent. On the export side, Sri Lanka was a regional pioneer entrant in developing a garment industry aimed at foreign customers. Its practices are less Brought downto four-tier tariff structure under the recently announcedFY05 Budget. 160 Conclusions and Recommendations advanced, however, in two other major export industries, tea and spices, where export taxes, though few and minor, nonetheless impede efficient development by disallowing imports o f tea varieties for blending with local teas, and spices for partial processing and re-export during periods when domestic spices are not available. Bothrestrictions appear to be responses to lobbying by domestic growers who object to the potential competition and the adjustments that would be required ifthe imports were allowed. NEPAL: With a low (2.75 percent) general tax on exports and only its state oil company acting as an official monopoly exporter, Nepal's export regime i s like Sri Lanka's in another sense; it restricts imports o f machine-spun woolen yam to protect the hand-spun yam producers who supply its export carpet industry. That interference, though, prevents the development o f woolen carpet exports using imported machine spun yam. Already, garments usingduty-exempt imported fabrics and other textiles as inputs have become Nepal's largest export (about 28% o f total exports in 1999/2000). The next largest category i s carpet exports, another industrymalung fairly intensive use o f imported fibers and yams. Currently negotiating WTO accession and reportedly being asked to bind all or most o f its non- agricultural tariffs at relatively low levels, Nepal began trade liberalization in the 1990s. Not yet as liberalized as Sri Lanka's, its policies are still closer to those o f its mainlandneighbors. For example, Tariff slabs number only five, but the highest - 40 percent - i s above the top nominal rates anywhere else inthe region. Except for the monopoly over fertilizer imports by the parastatal Agricultural InputsCorporation untilNovember 1997,Nepalhasmadelittle use o fimport licensingandother non-tariff measures. Instead, the source o f Customs duties that account for 3 percent o f GDP, various tariffs have been and still are high. Its average o f total protective import duties i s 16.5 percent, and Average agricultural protective import taxes inNepal ((16.3%) are a bit above Pakistan's. Moreover, beginning in 2002, Nepal imposed a sliding-scale security tax on imports to help finance extra government expenditure resulting from the domestic conflict between the government and the Maoist guerillas. Unlike the National Security Levy in Sri Lanka, which was also imposed to help finance a civil war, the security tax i s not imposed on domestic production and therefore increases protection o f Nepalese domestic industries. Significantly inthe context o f its ability to reduce import levies, Nepal depends heavily on import duties for fiscal revenues. The level o f reliance has remained about as high as it was during the 1980s before it began liberalizing trade. Import duties account for 40-45 % o f total indirect taxes, 30-35% o f total tax revenue, and around a quarter o f total government revenue Somewhat surprisingly, the average import duty collection rate in Nepal (which reflects tariff preferences affecting about 40 percent or so o f its imports which come from India) i s more than double Sri Lanka's. Together with its relatively high import/GDP ratio, this explains the very highshares o f tariffs inGDP and government revenue inNepal. Performance of Key Sectors In addition to identifying significant trade policy issues in South Asia and assessing the trade regimes o f the five largest countries individually, this study examines the nature and recent (since 1997) evolution o f the trade and trade-related policies that affect agriculture, fertilizers and textiles -- key sectors in terms o f their shares o f the workforce and GDP in the region. The findings are valuable in identifying areas o f the economy where trade liberalization - some o f it already in progress - holds significant promise o f stimulating growth that can directly and rapidly benefit poor, skilled and unskilled rural and urban workers. Subject to pressures for adaptation that arise out o f global trade negotiations The 133 products and productgroups include food ingredients,powderedmilk and other milkproducts, cements, steel tubes, household appliances, gas cylinders, dry batteries, X-ray equipment,and steel products. 161 Trade Policies in South Asia :An Overview such as the Uruguay Round, the Agreement on Agriculture (AoA) and the phasing out o f the Multi-Fiber Arrangement (MFA), agriculture and textiles are sectors where global market trends and opportunities may drive domestic policy even more rapidly inthe future than inprevious decades. Agriculture: With all but Nepal having WTO membership and being AoA signatories, the Uruguay Round, by permitting the countries to bindtheir agricultural tariffs at very high levels, had little or no immediate impact on their agricultural trade policies. Instead, India, Pakistan and Bangladesh have had the latitude to increase applied tariffs up to levels which in many cases amount to defacto import bans. Moreover, despite agreeing in principle to "tariffs only" protection o f agriculture, except for recognized GATT-legal import controls, some countries have implemented these controls to protect particular primary and food processing industries, even employing someprimafacie GATT-illegal QRs. Another major consequence o f the A o A was that all the South Asian countries agreed not to pay any export subsidies, apart from transport and marketing subsidies until January 1, 2004, and apart from the use o f normal export mechanisms such as duty drawback etc. Since 2001, India's heavily subsidized disposal o f large surplus stocks o f wheat and rice has made the pledge to scrap export subsidies a major issue. These sales undoubtedly breach the spirit o f the AoA, a fundamental purpose o f which is to limit and eventually prevent domestic price support and subsidy policies which create exportable surpluses that are then disposed o f by exporting at subsidized prices. Because India i s one o f the world's largest grain producers with significant export sales relative to world markets, its conduct raises basic questions about the credibility o f the A o A agreements and India's own long-term interest in open world agricultural markets. India's use o f such subsidies dates to the April 2001 removal o f its QRs and import licensing system, but also responds to the substantial declines since the mid-1990s in world prices o f some major agricultural commodities, such as food grains, edible oils and oilseeds, cotton, and rubber. Since, except inPakistan, real effective exchange rates remained about the same between 1997 and 2002, these world price declines have been more or less fully reflected in real domestic-currency border prices and, not surprisingly, have been important elements behind strong pressures for increased agricultural protection and subsidies which have emerged in South Asia since 1997. India, Bangladesh and Sri Lanka have been very responsive to these pressures, but for the most part they have been resisted in Pakistan, which i s continuing with a radical (by South Asian standards) liberalization o f its trade and trade-related policies in agriculture. There has been little change in Nepal and Bhutan, which with some exceptions have continuedtheir previous open trade policies for their agriculture livestock and food processing sectors. Noteworthy features o f current protection policies for the livestock, agriculture and food processing sectors, apparent from the applied tariffs and non-tariff measures, include: 0 In terms of these formal instruments, India's policies appear to be by far the most protective, followed by the policies o f Bangladesh and Sri Lanka. By contrast, in Pakistan, Nepal and Bhutan, with a few exceptions (notably edible oils in Pakistan), these sectors appear to be quite open to import competition. e Non-tariff measures are being freely used in India. These are formally WTO-legal (e.g. STEs, TRQs with out-of-quota tariffs below tariff bindings, and the use o f health, safety and technical standards), but protection o f local industries i s often a major and frequently the predominant motive for usingthem 0 There are many high to prohibitively high "tariff peaks" in India and Bangladesh, and some on major commodities in Sri Lanka, which greatly exceed the general maximum tariff. 0 There are some striking differences between countries in the restrictiveness o f import policies (i.e. the level of tariffs and the existence o f non-tariff measures) which apply to some major commodities, such as rice, wheat, dairy products, pulses, and edible oils. 162 Conclusions and Recommendations Inresponding to export opportunities inrecent years the SouthAsian countries have beenpaying increasing attention to the health and quality standards o f agncultural and processed exports in order to meet the SPS standards o f importing countries. Generally spealung, however, they are no longer explicitly taxing or using 1icensing or export bans o r quotas as they did inthe past t o deliberately restrict their agricultural exports and depress domestic prices. The removal o f cotton export QRsin India and Palustan i s especially significant. For many years both countries had used QRs to push domestic cotton prices below world prices, thereby taxing farmers and subsidizing the domestic textile industry. Compulsory parastatal export monopolies have also been abolished, including in India where they had previously been used to prevent or restrict exports o f some major commodities, notably common rice. However, there are some exceptions, in particular in India where export conditions for a number o f key commodities including common rice, wheat, coarse grains, wheat and coarse grain flours, sugar, bulk powdered milk, and butter are formally "free", but where export contracts have to be registered with APEDA, and the Ministry o f Commerce (DGFT) can announce quantitative ceilings "from time to time". Despite their zero-export subsidy commitments under the AoA, South Asian countries are applying general GATT-legal export policies that are used to promote manufactured exports to agricultural exports. These include the schemes for rebating or exempting import duties on imported inputs that are used in exported products, such as drawback, duty exemption, bonded warehouses, the Indian duty exemption passbook schemes, and export processing zones. India has established a number o f specialized agro-industrial zones for exporters. Various specialized facilities and subsidies that are generally available to exporters are being used e.g. preferential pre-shipment and post-shipment credit lines, export credit guarantee schemes, income and corporate tax exemptions and reductions, and reduced income withholding taxes. India and Pakistan are also paying freight and marketing subsidies for a number o f primary export. Fertilizers: Judged according to their objectives i.e. l o w fertilizer prices for farmers and the substitution o f local production for imports, the South Asian countries' fertilizer policies have been very successful. For example, farm urea prices in India declined by about 50 percent inreal terms between the early 1980s and the mid 1990s. They have been well below both average production costs and import parity prices while domestic fertilizer production expanded to supply almost 90% o f demand compared with about half inthe early 1980s. Fertilizer prices for farmers were also kept very low in Palustan, Bangladesh; Sri Lanka and Nepal, and in the first three domestic production rapidly substituted for imports. Still, there are strong reasons for thinkingthat the "green revolution" in grain farming in South Asia could have occurred at much lower economic cost without the subsidized farm fertilizer prices and that the forced import substitution in fertilizer production also involved high economic costs which were unnecessary because reliable supplies were available from imports. Recognizing this, all five countries have been tahng reform initiatives o f varying comprehensiveness. These reforms can be grouped into effects in the rural economy, effects on domestic producers, and effects on the government's budget. For the rural economy, subsidized l o w prices for fertilizers lead to their overuse since the cost to farmers i s lower than the opportunity costs o f the fertilizers, where the opportunity cost i s either the (marginal) cost o f importing or producing them, plus distribution and marketing costs. Subsidies for non-urea fertilizers have now been abolished in all the South Asian countries except India. Urea subsidies were removed inPalustan in 1996 and inNepal in 1999, but there are still large direct subsidies o f urea farm prices in India and Sri Lanka. In Bangladesh, there is no explicit subsidization o f urea farm prices, but there are probably implicit subsidies in the sense that low 163 Trade Policies inSouth Asia : An Overview prices for natural gas enable domestic producers to charge urea prices frequently below import parity prices. As regards domestic fertilizer production, the pursuitof import substitution means that traditional fertilizer policies in South Asia have also involved high economic costs. The sources o f these economic costs include: e Direct government controls over imports e Large input subsidies from low preferential feedstock prices e Absence o f price competition due to government mandated prices e management problems o fpublic sector enterprises Cost-plus pricing e Intrusive government regulationo f firms Finally, the traditional fertilizer policies in South Asia have involved high costs to national budgets. In India, where the full traditional structure i s still in place, the fertilizer subsidy recognized in the 2000/01 central government budget was 4.2% o f total central government revenue and 0.66% o f GDP. This is without accounting for the substantial non-quantified subsidy from low feedstock prices to the domestic fertilizer industry. Following liberalizing reforms in the other South Asian countries, only Sri Lanka now pays an explicit budgetary subsidy (for urea), in 2000/01 equivalent to 0.21% o f GDP. However, low natural gas prices to urea producers in Pakistan and Bangladesh amount to large subsidies. In Pakistan, these subsidies are entirely absorbed by the fertilizer manufacturers, as farm prices o f urea are directly linked to world prices through decontrol o f imports. In Bangladesh, an unknown share is passed on to farmers in the form o f urea prices which are lower than import parity prices. Nepal has had no budgetary fertilizer subsidies since the fertilizer market was liberalized and farm fertilizer subsidies finally abolished in 1999. Textiles, Garments and the i"A phaseout. The quota system under the Multi-fiber Arrangement is being phased out by 2005 as part o f the Agreement in Textiles and Clothing (ATC), and its dismantling is expected to increase the market access opportunities for T&C products from South Asia countries as well as pose serious challenges from unbridled competition in a quota-free regime. However, South Asian countries are not evenly poised to reap the benefits from the larger T&C market or to cope with the new challenges. Clear beneficiaries o f the quota system, which grew along with Sri Lanka into major exporting countries o f readymade garments (RMG) inthe 1990s, Bangladesh and Nepal suffer from major weaknesses that might stifle future growth o f RMG exports. These are: total dependence on buyers' agents with buying houses providing orders for manufacturers' garmenting capacities, unreliable delivery dates and inconsistent quality, low labor productivity and machine utilization levels, limited market knowledge, problems with ports and inland transport, and so on. Post- MFA challenges in gaining greater market access inthe expanding market for T&C products will be far greater for these countries than for India or Pakistan, which were endowed with large competitive primary textile sectors and which appeared to have been constrained by the quota system. Although the ATC provides the legal framework for the ten-year, four stage phasing o f the MFA and the integration o f T&C into the GATT/WTO framework by 2005, very few T&C categories (particularly in the largely labor-intensive apparel category) o f interest to countries in South Asia were integrated in the now completed three stages. The limited integration o f product categories in which the region's countries have comparative advantage suggests that virtually all o f the liberalization o f the politically sensitive high-value added textile and clothing items would come inthe final stage. 164 Conclusions and Recommendations Worldwide trends in T&C reveal that clothing and textile made-ups represent the growing segment o f world T&C trade. While countries in South Asia have made impressive progress in exporting T&C products o f good but not necessarily consistent quality, it has been largely in the low- to medium- range o f goods, where price i s the main determinant o f success. The world competition for these goods i s likely to be especially intense from the other low-wage countries which are increasingly being integrated in the global economy. I twould be in their interests to diversify the product composition in terms of higher value-added textile and apparel products, where their labor cost advantage would be a significant advantage in the post-quota phase, provided they make the necessary adjustments in terms o f reducing lead times through competitive sourcing o f fabrics and enhancing transport and logistics efficiency. Perhaps more than in any other part o f the world, the countries o f South Asia can see very substantial economic opportunities in the MFA phaseout. But for many reasons, with the exception of Sri Lanka, the continuing high protection of all or substantial segments o f their domestic markets suggests that they are far from ready to take full advantage o f these opportunities. Multiple considerations suggest the gains that could come fromreform: 0 Not only does high protection take the pressure off industries to improve performance, but protected industries are not likely to compete effectively in post-MFA, low-cost, internationally competitive domestic T&C markets. For example, there are many advantages for garment exporters when some or all o f their fabric requirements are supplied by domestic textile firms e.g. shorter delivery times, closer contact with suppliers, avoiding the inevitably more complex formalities o f international trade, especially at Customs. But exporters cannot afford to buy their inputslocally unlessthe firms that supply them are fully competitive with internationalsuppliers. Exports from a high-cost protected domestic industry, moreover, are much more vulnerable to anti-dumping and countervailing duty sanctions inimporting countries. They can be penalized for subsidized input prices and direct and indirect subsidies, especially excessive duty drawbacks or subsidies resulting from other schemes (such as the Indian advance licenses and duty exemption passbook (DEPB) scheme) which rebate or offset tariffs on directly or indirectly imported intermediate inputs. 0 Reform i s also important for the bilateral and multilateral negotiations on world T&C trade that are sure to continue after the MFA phaseout, including especially negotiations on regional preferences and the rules o f origin associated with them, anti-dumping and subsidies rules, technical and health standards, and labor and environmental standards. The SouthAsian countries will have a much more credible role in these discussions and will be able to pursue their own negotiating interests more effectively if segments o f their own domestic markets for textiles and clothing are not hermetically sealed or heavily protected against imports. 0 In addition to market openness as a remedy against smuggling, open domestic markets would benefit South Asian consumers, since not only are T&C exports important, but domestic sales are very large. Epilogue Integration into world markets spreads the rewards o f growth across many economic sectors and social groups, but there can be painful dislocations - for globalization in developing and developed countries produces losers as well as winners. Trade liberalization i s not a cure-all: it can hurt the vulnerable, often acutely, but it can and does create opportunities that protectionism denies for even the least well-placed. Nevertheless, there i s now overwhelming accumulation o f evidence across the globe suggesting that, over the long haul, trade openness i s a more trustworthy friend o f the poor than protectionism. There i s hardly any evidence to show that a country has achieved rapid growth without 165 Trade Policies in South Asia :An Overview expansion o f trade. Finally, trade reform in developing countries is a necessary, though not a sufficient, condition for an improved growth performance, which requires at least some minimal levels o f political and social stability, security, and attention to basic social welfare institutions. It also typically needs to be accompanied by other complementary policies, such as de-regulation, reforms to improve governance and reduce corruption, deregulation, the upgrading o f infrastructure services, and an improved overall investment climate. South Asians need only look at Myanmar to see the human price o f isolationistpolicies that verge on autarky. For contrast, they can look to their own successes, whether building textile and clothing industries in Bangladesh, Nepal and Sri Lanka from scratch (admittedly under the temporary shelter o f MFA quotas) or turning India into an exporter o f gems and jewelry and high technology software services. The considerable and commendable progress made inrecent years toward opening long-protected markets and redirecting incentives away from import substitution toward export competition signals how much can be done. Much more remains to be done. The recommendations made above do not underestimate the challenges policymakers and publics face. They are meant, though, to help guide an undertaking that gets no easier the longer they are postponed. 166 Bibliography Africa Growth and Opportunity Act (2000). www.agoa.gov. Aggarwal, Aradhna. (2003). "Anti-Dumping in South Asia". Paper presented at Workshop on Trade Policies of the South Asian Countries, New Delhi. 16-17 October 2003. Aggarwal, Aradhna. (April 2001). "Anti-Dumping Law and Practice: An Indian Perspective". ICRIER Working Paperno. 85. Aggarwal, Aradhna. (October 2003). "Patterns and Determinants of Anti-Dumping: A Worldwide Perspective". ICRIERWorking Paper no. 113. Agreement on Textiles andClothing (ATC) WTO Web site: www.wto.orq Ahmed, Nameen. (October 2003). "Trade Policies in Agriculture: Challengesfor South Asia". Paper presented at the Regional Workshop on Trade Policies in South Asia, Colombo. 2-3 October 2003. Ali, Shaukat. (January 2000). "Trade and Industrial Policy in Palustan: Post Uruguay Round Challenges" Paper prepared for the World Bank's WTO-2000 Project. Anti Dumping (AD); WTO Website. www.wto.org Asian DevelopmentBank (2001). Asian DevelopmentOutlook, Oxford University Press, NewYork. Asian Development Bank (November 2001). ProposedLoans. Agriculture Sector Program I1(Pakistan). Asian Textile Business, Various Issues. Athukorala, Prem-Chandra (2000). "Agriculture and the New Trade Agenda in the WTO 2000 Negotiations : Interests and Options for South Asia" in Ingco, M. and L. Alan Winters (2000). Agricultural Trade Liberalizationina New Trade Round. World Bank DiscussionPaperno. 410. Athukorala, Prem-Chandra and SarathRajapatirana (2000). Liberalization and Industrial Transformation: Sri Lanka inInternationalPerspective. Oxford UniversityPress. New Delhi. Bajracharya, Pushkar. (October 2003). "Exchange Rate, Tariff, Non-Tariff Barriers and Government RevenueinNepal". Bangladesh, Ministry of Commerce (September 1999). Import Policy Order 1997-2002. Bangladesh Ministryof Commerce. http:llwww.banaladeshgov.org Baughman, Laura, Francois Joseph and Spinanger Dean (2001). "Estimated Effects on the UnitedStates and Bangladesh of Liberalizing U S Barriers to Apparel Imports" Paper prepared for the Bangladesh Garment Manufacturers and Exporters Association. www.bgmea.com Trade Policies in South Asia : An Overview Bhattacharya, Debapriya and Rahman, Mustafur.(Sept 2000). "Experience with Implementation o f WTO-ATC and Implications for Bangladesh". Center for Policy Dialogue, Paper N o 7, Dhaka, Bangladesh. Bhattacharya, Debapriya and Rahman, Mustafur (July 2000). "Seeking Fair Market Access for Bangladesh Apparels in the USA: A Strategic View" Center for Policy Dialogue Paper. Paper N o 6, Dhaka, Bangladesh. Bhutan Ministry o f Finance. (January 2002). Bhutan Trade Classification, Customs Tariff and Sales Tax Schedule. Blarel, Benoit, Gany Purse11and Albert0 Valdes (eds) (1999). "Implications o f the Uruguay Round for SouthAsia: The Case o f Agriculture". Allied Publishers for the World Bank and FAO. Bovard, James. (1991). "The Fair Trade Fraud". St. Martin's Press. Bumb,B.L.,D.I.Gregory, A. Rab andM.Abdullah (August 2001). "Implications o fthe Uruguay Round Agreements for Agriculture and Agribusiness Development in Bangladesh". International Fertilizer Development Centre. Technical Bulletin IDFC-T-64. Bureau o f Standards. www.bis.orrr.in Central Bank o f Sri Lanka (2002). Annual Report 2001. Central Bank of Sri Lanka (2002). Annual Report 2002. Center for Monitoring the Indian Economy (CMIE) (July 2001). "Foreign Trade and Balance o f Payments". CMIE Economic Intelligence Service. Center for Policy Dialogue (December 1999). "The Textile and Clothing Industry o f Bangladesh in a ChangingWorld Economy". ReportN o 18, Dhaka, Bangladesh. Daly, M., M.A.Khan and M.Oshikawa (2001). "Tariff and Non-Tariff Barriers to Trade and Economic Development inBangladesh". Journal of World Trade. 35(2): 253-273. Dowlah, C.A.F. (December 2000). "Agriculture and the New W T O Trade Round. Economic Analysis o f Interests and Options for Bangladesh". Paper presented at workshop on the new trade round and agriculture. New Delhi. January 2001, World BankMimeo. Draper, Charles (2001). "Reforming Customs Administration: The Unlikely Case o f Bangladesh". Dr. Martelli Associates (August 1999). "Bangladesh: Textile Sector Study". Final Report, Commissionedby IFC- Washington DC. Economic and Social Commission for Asia and the Pacific. (July 2003). "Trade and Trade Policy Frameworkfor Sri Lanka in 2003". Draft report prepared for National Seminar, Colombo, July 2003 by Sandy Cuthbertson, Centre for InternationalEconomics, Australia. Economic Perspectives ( Feb 2000). An Electronic Journal o f the U S Department o f State. "The Labor Dimension and the JVTO".By Andrew Samet, Deputy Under Secretary o f Labor for International Labor Affairs. Vol. 5, No. 1. 168 Bibliography Economist IntelligenceUnit.(July 2001). "Country Report: Bangladesh". Eglin, Richard (2000). "Challenges and Implications o f China joining the WTO. What AT0 Accession Means?" WTO Secretariat, Geneva. EU GSP (2000). A User's Guide to the EU Scheme o f Generalized System of Preferences. http://europa,eu.int/co"/trade/market/devel//gspuide.htm EUTariff Schedule (2002). http://infoserv2.ita.doc.gov EXIM Bank Of India. (2002). Technology Upgradation Fund Scheme for Textile and Jute Industries. httu://www.eximbankindia.com/techo-up.html Faruqee, R., R. Ali and Y. Choudhry (1995). "Pakistan's Public Agricultural Enterprises: Inefficiencies, Market Distortions and Proposals for Reform". World Bank Discussion Papers. No. 305. Finger, M.J. (ed) (1993). "Anti-Dumping:H o w it Works and Who Gets Hurt". University o f Michigan Press. Finger, M.J. (1998). "GATT Experience with Safeguards". World Bank Policy Research Working Paper 2000. Fischer, Bernhard. (1988). "Globalization and the Competitiveness o f Regional Blocs". Intereconomics. Available at httd/www.brown.edu/Departments/ACUNS/NEWpublications/SOTUN.93/sotun93 .pdf Fonseka, (1999). "Sri Lankan Apparel Industry. Challenges and Prospects." Mimeo. Gereffi, Gary (February 2002). "The International Competitiveness o f Asian Economies in the Apparel Commodity Chain". ERDWorkmg Paper Series N o 5, Asian Development Bank. Gereffi, Gary and M.Korzeniewicz (eds) (1994). Commodity Chains and Global Capitalism. Westport, CT, Prager. Goldar, B.N. (October 2003). "Trade Policies in South Asia". Paper presented at the Workshop on Trade Policies o f the South Asian Countries, New Delhi. 16-17 October 2003. Goyal, Arun (ed) (March 2002). Easy Reference Customs Tariff 2002-03. Academy o f Business Studies, New Delhi. Goyal, Arun. (October 2003). "Exchange Rates, Tarus and Government Revenue in South Asia Trade Policies". Paper presented at the Regional Workshop on Trade Policies inSouth Asia, Colombo. 2-3 October 2003. Gulati, Ashok and Sudha Narayanan (2000). "Demystzfiing Fertiliser and Power Subsidies in India". Economic and Political Weekly, March 4, pp 784-794. Gupta, R.K. (September 2003). "Safeguards, Countervailing and Anti-Dumping Measures Against Imports and Exports: Commentary, Cases and Text". Second edition. 169 Trade Policies in South Asia : An Overview Hamid, N., I. Nabi and A. Nasim (1990). "Trade, Exchange Rate and Agricultural Pricing Policies in Pakistan". World Bank Comparative Studies: The Political Economy o f Agricultural Pricing. Hartmann, Udo (1993). "Trends inTextile Capacity" Gherzi Textile Organization, Zurich. Hoekman, B., A. Mattoo and P. English (2002). "Development, Trade and the WTO: A Handbook". World Bank, Washington DC. Hussain Committee (1997). Report o f the Expert Committee on Small Enterprises, Chairman Abid Hussain. New Delhi. ILO, SAAT (2001). "Rags or Riches? The Textile and Clothing Industry in Developing Countries after the Multi-Fiber Arrangement". Discussion Paper. New Delhi. India Apparel Portal, Website: www.apparel.indiamart.comilib/apparel/garment India's Budget 2001-2002. www.trade-india,com/bude;et/textiles.html India. Country Studies: Textiles: Trade and Development Case Studies. Trade and Development Center.http:www,itd.org/issues/india4.htm India. Department o f Commerce (March 2003 renewal). India-Nepal Treaty o f Trade. Available at www,commerce.nic.in India. Ministry o f Commerce and Industry, Directorate-General of Anti-Dumping and Allied Duties. Annual Report (200 1-2002). India, Ministry o f Textiles, Annual Report (2001-2002): http: www.texmin.nic.ermitude/texind.htm. India Textile Policy-2000. http:// appare1.indiamart.codIndia: Textile Policy.Index:html India Trade Policy 2002-2003. http://apparel.indiamart.com/Indian-textilePolicy. India-Pakistan Chamber o f Commerce and Industry (May 2001). "A Study on Prospects for India- Palustan Economic Partnership". Backgroundpaper for the second meeting, Islamabad. Inside U.S. Trade, "Daschle, Baucus Warn Zoellick Against NAFTA Approach to Labor, Environment Provisions," March22,2002. International Trade Center (2000)." Eco-labelling and Environmentally Friendly Products and Production Methods Affecting the InternationalTrade inTextiles and Clothing". Geneva. International Trade Center. 2000. "Implications o f the Introduction o f the Agreement o f Textiles and Clothing (ATC) on the developingcountries producing/exporting Textiles and Clothing". ITCWebsite. www. Intracenten.org/mds/Sectors/Textiles/uru200O.htm Islam, S. (2000). "The Textile and Clothing Industry o f Bangladesh in a Changing World Economy", Center for Policy Dialogue, Dhaka, Bangladesh. Kannacharya, B.K. (2002). "Informal Trade between Nepal and India". Study prepared for the South Asian Network o f Economic Institutes (SANEI). 170 Bibliography Kathuria, Sanjay, Will Martin and Anjali Bhardwaj. (2002). "Implications o f MFA Abolition for India and South Asia" in Stem, R.M. (eds). "South Asia and the WTO". University o f Michigan Press. Also available as World Bank ResearchWorking Paper. Kathuria, Sanjay, Will Martin and Anjali Bhardwaj (November 2001). "Implications for South Asian Countries o f Abolishing the Multi-Fiber Arrangement." Policy Research Worlung Paper No. 2721. World Bank, Washington DC. Kelegama and Foley (1999). "Implications to Promoting Backward Linkages from the garment Industry inSriLanka." WorldDevelopment, Vol27, N o 8. Kelegama, Saman. (2003). "Post-WTO Tariff and Institutional Reform in the Agriculture Sector in Sri Lanka". Paper presented at the RegionalWorkshop on Trade Policies in South Asia, Colombo, 2- 3 October 2003. Kemal, A.R. (August 2003). "Comments on `Trade Policies in South Asia: An Overview"'. Paper presented at the Workshop on Trade Policies inSouthAsia, Islamabad. 26 September 2003. Khanna, S.R. (1993). The Challenge of Global Competition inthe 1990s: An Agenda for Enhancing the Competitive Position o f the Indian Textiles and Clothing Industry>" Mimeo, ICRIER. New Delhi. Kheir-El-Din, Hanaa (2002). "Implementing the Agreement on Textiles and Clothing" in Hoekman, Bernard, Aaditya Mattoo and Phillip English (eds). "Development, Trade and the WTO: A Handbook inDevelopment, Trade and the WTO". The World Bank, Washington. Kraay, Art and D.Dollar. (2001). "Trade, Growth and Poverty". Policy Research Worlung Paper. World Bank, Washington DC. Lardy, Nicholas. (May 9, 2001). "Issues in China's WTO Accession: The US- China Security Review Commission". Foreign Policy Studies. www.brrok.edu/views/testimony/lardy/20010509.htm. Majumdar, (March 1996). "The MFA Phase out and EUClothing Sourcing. Forecasts for 2005". Textile Outlook International. Maldives Customs Service. www.customs.gov.mv Maldives Monetary Authority. (2003). "Statistical Yearbook o f Maldives". Martin, Will. (January 2002). "Textiles and Clothing in Pakistan's Exports". Draft. World Bank. Washington DC. Mattoo, A. and Subramaniam, Q. "India and the Multilateral Trading System. Post Seattle: Defensive or Proactive?" World Bank Mimeo. Maxwell Stamp PLC (February 2002). "Review o f Relative Protection (first draft report)". Prepared for the Bangladesh Tariff Commission. Maxwell, Tom. "Issues inTariff Reform inPakistan". Mimeo draft, December 11, 1996. 171 Trade Policiesin South Asia : An Overview Maxwell, Tom. "Tariffs inPakistan". Mimeo draft, June 25, 2000. Maxwell, Tom. "Improving the Export EnvironmentinPakistan". Mimeo draft, July 4, 2000. Morris, David (2000). Fibers and Textile Industries at the Turn of the Century. Some Observations, (Geneva). InternationalTrade Center. UNCTAD/WTO. Mukherji,I.N.(2000). "Charting aFree Trade Area inSouthAsia: InstrumentsandModalities". Paperpresented at second conference of the South Asia Network o f Economic ResearchInstitutes (SANEI), August 26-29, Kathmandu. Mukherji, I.N.(October 2003). "Comments on Regional Trade and Regional Trading Arrangements". Paper presented at the Regional Workshop on Trade Policies in South Asia, Colombo. 2-3 October 2003. Murshid,K.A.S.(October 1999). "Liberalization andFoodGrainImports: The Evolution and Conduct of the Border Trade with India". Food Management and Research Support Project. Ministry of Food (Bangladesh) and IFPRI. FMRSP WorkingPaperNo. 11. National Seminar on Nepalese Garment Industry under Changing Global Trading Environment." Organized by WTO Cell. Garment Association- Nepal (GAN). Nepal, Department of Customs (2001). Customs Tariff. Nepal Ministry of Finance. Nepal, Ministry of Agriculture and Co-operatives and Asian Development Bank (2001). Agriculture Sector Performance Review: InterimReport. Preliminary draft 2001. Nepal Rastra Bank, Quarterly Economic Bulletin(2002). Pandey, Mihir. (October 2003). "Non-TariffBarriers and Anti-Dumping". Paper presentedat Workshop on Trade Policies of the South Asian Countries, New Delhi. 16-17 October 2003. Pakistan Export Promotion Bureau (2002). http.www.epb.gov.pk Pakistan, Ministry of Commerce (July 2001). Palustan Trade Review. Pahstan Trade Policy 2002-2003. http.www.epb.gov.pk Panagariya, Ahmed. (October 2003). "India: External Sector Reforms in the 1990s and their Impact". Paperpresented at the Workshop on Trade Policies o f the South Asian Countries, NewDelhi. 16- 17 October 2003. Perrira, R. (1997). "A Note on the Textile Industryof Sri Lanka". Institute o f Policy Studies, Colombo. Pitigala, Nihal. (1998). "BO1 Catalysts for Development". Mimeo, Board of Investment,Sri Lanka. Prasad, H.A.C. (September 2003). "Comments on the Draft Report of the World Bank Report on `Trade Policies i n South Asia: An Ovewiew I". Paper presentedat the Regional Workshop on Trade Policies inSouth Asia, Colombo. 2-3 October 2003. 172 Bibliography Press Release, USTR, "U.S. Cambodian Textile Agreement Increasing Trade with Improving Workers Rights," January 8, 2002, available at http://www.ustr.~ov/releases/2002/O1/01-03 .htm. Pujari, Anup. (October 2003). "Variety is not a Synonym for Complexity". Paper presented at the Regional Workshop on Trade Policies in South Asia, Colombo. 2-3 October 2003. Pursell, G. (1996). "Indian Trade Policies since the 1991/92 Reforms" World Bank Mimeo. Pursell, G. and N.Pitigala (August 2001). "Trade Agreements in the South Asia Region". World Bank Mimeo. Qureshi, Sarfraz Khan (January 2001). "Agriculture and the New Trade Agenda Negotiations: Economic Issues and Policy Options for Pakistan". Paper presented at workshop on the new trade round and agriculture. New Delhi. January 2001. Ram, Takhat (ed) (fortnightly). Impex Times. New Delhi. Ramaswamy, K.V and Gereffi, Gary (2000). "India's Apparel Exports: The Challenge of Global Markets." TheDevelopingEconomies. 38(2 June): 186-210. Ranaweera, N.F.C. (2003). "Agricultural Trade Policies and Fertilizer Subsidies - Its Impact in Sri Lanka". Paper presentedat the Regional Workshop on Trade Policies inSouth Asia, Colombo, 2- 3 October, 2003. Rao, V.L., R. Baruah and U.Das. (1996). "India's Border Trade with SelectedNeighboring Countries". Mimeo, RIS. New Delhi. Schiff, M. and A. Valdes (1992). "The Political Economy o f Agricultural Pricing - Volume 4: A Synthesis.. .inDeveloping Countries". Johns Hopluns University Press for the World Bank. Shilpi, Forhad (June 2001). "Palustan: The Agriculture Sector Strategy". World Bank Mimeo: South Asia Rural DevelopmentUnit. Shilpi, Forhad (August 1998). "Policy Incentives and Comparative Advantage of Bangladesh Agriculture". Draft. World Bank Mimeo. Shilpi, Forhad (27 April 1995). "Policy Incentive, Diversification and Comparative Advantage o f Non- PlantationCrops in Sri Lanka". World Bank Mimeo. Spinanger, Dean (Sept 2000). "The WTO, ATC and Clothing in a Global Perspective. What's in it for Bangladesh?" Center for Policy Dialogue Paper, Paper N o 8, Dhaka, Bangladesh. Srinivasan, T.N. (ed.). (2002). "Trade, Finance and Investment in South Asia". Social Science Press. New Delhi. Textiles and Clothing inWTO Website. www.wto.org Textile and Garments, InternationalTrade Forum, The Quarterly Magazine of the Intemet. Textile Vision-2005. "Reflections and Future Direction. Government o f Palustan. 173 Trade Policies in SouthAsia : An Overview The US- Caribbean Trade Partnership Act (2000). http://www.iipa.codrbi/2001 .septl4. CBERA. Act The Vietnam- U S Textile Agreement Debate: Trade Patterns, Interests, and Labor Rights (June 21,2002). Report for Congress. Nicholas, Sayers. www.us-asean.ordvietnandcrs.Textile.pdf Uchikawa, Shuji. (1998). Indian Textile Industry: State Policy, Liberalization and Growth, New Delhi, Manohar Publishers. UNCTAD (May 2001). "Product Profile: Textiles and Garments". Third UN Conference on the Least Developed Countries. Business Sector RoundTable. DiscussionDocument, Brussels. UNCTAD(2002). Handbook o f the GSP Scheme of the European Community. Rules o f Origin Under the EC GSP Scheme". Website. www.unctad.orrz/gs~/eu/euhtml/part2.asp. US-Cambodia Bilateral Trade Agreement i s available on the website of the Office o f Textiles and Apparel, International Trade Administration, U S Department o f Commerce at http://web.ita.doc,gov/otexa/ U S Customs Service (2001). U S Customs Service Textile Status Report, U S Customs Service, Washington DC. U S Harmonized Customs Service Schedule (2002) (Rev 4). www,dataweb.usitc,gov/script/tariff U S Customs Service (1996). Textiles and Apparels. Rules o f Origin. www.customs.ustreas.~ov/im~- exp1/complv/texorirzin.htm United States Caribbean Trade Partnership Act (2000). Website: http: www.mac.doc.aov/cbi/faq U S Department o f State, Bureau of South Asian Affairs, (March 2000) "Background Note: Bangladesh" Venables, A. (1999). "Integration Agreements: A Force for Convergence or Divergence?" Proceedings o f World Bank ABCDE Conference. Policy Research Worhng Paper Series No. 2260. World Bank, Washington DC. Weerakoon, Dushni. (2001). "Indo-Sri Lanka Free Trade Agreement: H o w Free I s It?". Economic and Political Weekly. 24 February 2001. Weerakoon, Dushniand Janaka Wijayasiri. (March 2000) " Textile and Clothing Sector in Sri Lanka". Institute o fPolicy Studies. Colombo, Sri Lanka. Wells, Gary (1999). "Trade Agreements: A Pro/Con Analysis o f Including Core Labor Standards". World Bank (April 1999). "Bangladesh: K e y Challenges for the Next Millenium". World Bank. World Bank (October 1996). "Bangladesh: Trade Policy Reform for Improving the Incentive Regime" South Asia Region ReportNo. 15900-BD. World Bank (November 1999). "Bangladesh Trade Liberalization: Its Pace and Impacts". PREM Unit. South Asia Region ReportNo. 19591-BD. 174 Bibliography World Bank. (October 1996). Bangladesh.Trade Policy Reform for Improvingthe Incentive Regime, World Bank,WashingtonDC. WorldBank.(14 June 2002). Bhutan:PrivateSector Survey. WorldBank, WashingtonDC. World Bank 2000. India Cotton and Textile Industries Reforming to Compete. India Commodities. SouthAsia RuralDevelopment Series, WorldBank,WashingtonDC. World Bank (August 1999). "India: FoodgrainMarketingPolicies: Reformingto Meet Food Security Needs". Two volumes. RuralDevelopment Sector Unit. SouthAsia RegionReportNo. 18329- IN. WorldBank(2002). NepalDevelopmentForum, EconomicUpdate World Bank. (March 2004). "Palustan Tariff RationalizationStudy". Study preparedby Philip Schuler, InternationalTrade Department. World Bank (2 May 2002). "Sri Lanka: PromotingAgricultural and Rural Non-FarmSector Growth". SouthAsia RuralDevelopmentUnit. Draft mimeo. WorldBank(2000). "Trade Blocs". WorldBankPolicyResearchReport. WTO Annual Report2002 andTextilesandClothinginWTO Website: http: www.wto.org WTO (1994). "Results ofthe UruguayRoundofthe MultilateralTradeNegotiations:The LegalTexts". WTO Trade PolicyReviewReportonBangladesh. 2000. WTO Trade PolicyReviewReporton India. 2000. WTO Trade PolicyReviewReportonMaldives. 2002. WTO Trade PolicyReviewReportonPakistan. 2002. WTO Trade PolicyReviewReporton Sri Lanka. 1995. 175