Nepal perspective: Trade Facilitation in South Asia

By Madhukar SJB Rana

Professor South Asian Institute of Management

Ironically, despite both India and Pakistan being founding members of GATT/WTO it is in 1993 that India granted Pakistan MFN treatment, which was reciprocated by Pakistan only in 2011!  Now we are told that, with MFN in place, Indo-Pakistan bilateral trade will boom from the current $ 2.6 billion to $ 6.0 billion by 2014.

Let us ask: despite the geographic proximity of the two countries, more specifically the geographic and cultural closeness of the more prosperous sub-regions of the two Punjabs, it will not materialize unless complemented by business-to-business economic diplomacy, two way investments and strong TF measures. Otherwise, what may be impacted is merely the conversion of informal to formal trade.

I submit that unless there is reduction in the  Negative List; clear provisions over rules of origin and customs valuation;  equipment of laboratory facilities for  testing, rules for marking, packaging, labelling and inspection are agreed to it will not suffice to take full advantage of the MFN status.

Informal trade will go on notwithstanding-- unless issues over NTBs, the payments term and conditions, including possibilities for payment in Rs,  which will go along way towards reducing transhipment trade through Singapore and West Asia.

The significant fact from the Indo-Pakistan MFN exchanges is this: SAFTA will get a new lease of life as trade volumes will rise. It will also get a new lease of life since the Wagha entry point can now become the regional dry port for South Asia’s trade to Pakistan, Afghanistan and Central Asia.

Most regional treaties on trade ignore trade facilitation as its integral part. The SAFTA treaty is a remarkable exception. Trade facilitation (TF) is an integral part of SAFTA as per Article 8. It is defined to include:

a) Harmonization of standards, reciprocal recognition of tests and accreditation of testing; laboratories of Contracting States and certification of products;

b) Simplification and harmonization of customs clearance procedure;

c) Harmonization of national customs classification based on HS coding system;

d) Customs cooperation to resolve dispute at customs entry points

e) Simplification and harmonization of import licensing and registration procedures;

f) Simplification of banking procedures for import financing;

g) Transit facilities for efficient intra-SAARC trade, especially for the land-locked Contracting States;

h) Removal of barriers to intra-SAARC investments

i) Macroeconomic consultations;

j) Rules for fair competition and the promotion of venture capital;

k) Development of communication systems and transport infrastructure;

l) Making exceptions to their foreign exchange restrictions, if any, relating to payments for products under the SAFTA scheme, as well as repatriation of such payments without

prejudice to their rights under Article XVIII of the General Agreement on Tariffs and Trade (GATT) and the relevant provisions of Articles of Treaty of the International Monetary Fund (IMF); and

m) Simplification of procedures for business visas.

Thus Article 8, as defined, may be viewed as going beyond the traditional definition of TF. It also includes investment, as well as cross border movement of peoples to conduct trade.

What it does not include, however, is any reference to regional movement of each other’s transportation means and modes within the territories of the signatories, including matters related to survey and insurance for loss, damage and delays as well as packaging and marking standards (keeping in mind the level of development of our packaging industry).

For a broader definition of TF, it must not be visualized as measure to get you into the customs border only. One needs to, I believe, visualize TF much more broadly: to mean “measures to promote production and garner market access”.

In this light, modern customs administration is now looking up to itself as ‘production and trade facilitators’—and not simply as revenue collectors, as in the past.

This lacuna needs to be filled by entering into a new SAARC Treaty on Transit, Transhipment and Transport to Govern Intermodal Traffic and Logistics Management. In this domain, the SAARC Chamber must play a lead role to get the TF actors to, collectively, come up with a draft regional treaty for consideration by the governments for adoption.

Publication and dissemination of all TF related acts, by-laws, regulations and rules are of vital importance which the SAARC CCI must be depository of and keep abreast of changes by the minute, so to speak

I have been arguing that the SAARC Secretariat will have provided yeomen service to trade if they kept such a data base. But alas they have not; and  hence SAARC CCI should step in. It is recommended that national federations should be linked electronically to SAARC CCI through the respective National TF Facilitation Body that probably, will be a part of the national federations of CCI’s.  I am delighted to inform you that just recently the newly founded Nepal Freight Forwarders’ Association (NEFFA) has called upon the government (Nepal International Multimodal Transport Board) to come out with a sectorally integrated Master Plan for Transit and Logistics Management.

Rather than working bottom-up, as is usual practice, I suggest that the SAARC CCI-- in cooperation with UN ESCAP-- draft a Model TF Convention. It could then be handed over to the national CCI federations to deliberate upon and to take up with respective governments to finally negotiate the desired regional treaty: it remains the missing link in SAARCs intention to integrate its economies. Matters would be made easy if they build, holistically, on the already existing SAARC Agreements on Customs (2005) and Standards (2008).

TF measures are so-called ‘beyond border measures’ to advance production, distribution and marketing as well as creating supply chains to integrate our economies. I submit to you, that henceforth, we should adopt a broader, more strategic definition of TF.

It should  incorporate concepts such as post arrival customs audits; bonded warehouses, dry ports, economic corridors; SEZs, EPZs, EVPs, in the context of the proposed Asian Railway, Asian Highway, SAARC Water Ways ; SAARC Energy Grid and Pipelines, and, not least,  SAARC Sub Regional Pax and Cargo Airport Hubs.

The provision of Article 8 seeking to complement SAFTA with venture capital, fdi and portfolio investments would be meaningful if the sorely needed infrastructure required to develop and modernize TF infrastructure could also be part of the investments envisaged by the SAFTA treaty.

A World Bank study has shown that the gains form 5-25% would accrue to regional trade if TFs infrastructure is in place and if there is modernization in administration. Modernization of the administration superstructure is as vital as the modernization of the physical infrastructure for TF and Trade. Also, strong measures to control graft and corruption to cut down on transaction costs are required as they add to the existing burden of the high transportation, distribution and marketing costs in the SAARC region.

Investments in TF infrastructure may be possible using national currencies to fund these projects and devising suitable equity and bond finance for the region in the spirit of people-private-public partnerships. Such barter like arrangements could lad to a new concept of trade—namely a scenario of win-win ‘trade in infrastructure’ where, for example, Bangladesh provides berths, warehouses and rail wagons to Nepal in exchange for water and flood control, as well as transit warehouses for its overland exports and imports to Pakistan, Afghanistan and China (Tibet).

TF does not come cheap. The cost of infrastructure is humongous. So too cost of human development and  TF systems development – one window; modernized administration; e-commerce; e-documentation (ACYCUDA,EDI); development of common standards and norms;; simplification and harmonization of policies, procedures, systems, standards etc.  Trust has to be garnered by and between the SAARC nations. Trust can be enhanced through effective design of TF Security Systems as a specialized service.

A new attitude to planning must also be garnered that seeks to perceive of the South Asian region as an opportunity for inclusive growth and development rather than a threat to national integrity, as in the past. India lying at the centre of SAARC needs to open up fully to TF if it wishes to lead the process of SAARC integration.

The end game of a forward looking TF policy must. We hope, the Asia Pacific Trade Facilitation Forum, being led by Sri Lanka, will underscore its need for SAARC with a call for a lead role by the private sector.

Conclusions:

A forward looking  SAARC TF policy is a must to guide negotiations. The TF must seek to eradicate poverty through trade that includes the poor and the SMEs as beneficiaries. It must seek as its goals: to be efficient as well as other vital objectives like predictability, transparency, accountability, zero transaction costs, and speedy and equitable resolution of trade and TF conflicts.

SAARC CCI must work in close harmony with the SAARC Secretariat to step up the process of regional integration.

Transit is the need of all nations and not just the landlocked countries.

While investments in infrastructure will be challenging to mobilize it may be beneficial to place maximum emphasis to modernize the superstructure through administrative reforms. Better TF management is key.

SAARC is advised to come up with a Regional TF Arrangement using its own conditions befitting its  level of economic and social development --and then only to accede to the conditions sought by the Industrial Countries in the Doha Rounds (undet the WTO framework).

I suggest the DCs should not enter the Doha Round negotiations over TFs unless the ICs withdraw their agricultural subsidies and provide debt write off to meet the needs for investment for the infrastructure meet global TF standards.

The gains of civil service reform can be assessed as follows: whereas in OECD countries they have only 4 documents for export; takes 10 days to export and costs $1069 per container to process, in Afghanistan it costs $ 3000 per container, requiring 12 documents and 74 days to actually export; in Nepal  9 documents, 41 days  and US 1764; in Sri Lanka being the most efficient in SAARC with 8 documents, 21 days and $ 865 per container; and in India 8, 17 and $945.  UNCTAD stydy shows that TF Costs are around 7-10 of CIF prices and can be cut by 25% through improvement in TF policies, institutions and practices.

Finally, World Bank studies show that a 10 % increase in the time delays in exports reduces their volume by about 8 % Further, a 10 % saving of time in exporting increases exports by about 4 percent.

(The author is the former finance minister)

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I agree

Comments

  • Posted on - 2012-08-08    by     hd
  • Very very thorough Professor. But what to do? - Have you seen the blistering baffoons running the show? Do you think Gacchedar the fat ugly thug understands even two sentences of what you write? LOL.
  • Posted on - 2012-08-07    by     puran lama
  • Former Finance Minister Prof Madhukar Shumsher JBR has highlighted that, based on World bank studies, it is possible to gain from trade if the public administration system is improved Is it not high time that PublicAdmin Association got to debate on how this may be achieved in Nepal since investment in infrastructure will be costly and take much time to bear fruit
  • Posted on - 2012-08-02    by     Saurab
  • Excellent piece
  • Posted on - 2012-08-02    by     David in London
  • Provides a new definition of trade facilitation to befit modern trade theory. Has so many policy implications especially that South Asian govts must not succumb to rich nation pressures in the Doha Rounds to universalising TF when it's very expensive and they continue to protect their agri sector.
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