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The Devil In The Details

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Five months ago, over 100,000 families engaged in fish farming in West Bengal and Orissa were dealt a rude shock when shipments of their most valuable export — black tiger shrimps — were rejected by Japan, the biggest market for the produce. Japan’s food safety commission had decided to lower the permissible level of ethoxyquin in fish products. A key ingredient of the shrimp feed, ethoxyquin is a preservative that enhances the shelf life of shrimp by weeks.

In 2011-12, India exported marine products worth $456 million to Japan. However, since August 2012, more than 100 Indian shrimp cargoes to Japan have been rejected and dozens of orders cancelled as a result of the lowering of permissible ethoxyquin levels in fish products to 0.01 parts per billion (ppb), causing a 16 per cent fall in shrimp exports. The resultant glut in in the domestic market has led to a 25-30 per cent dip in shrimp prices.

The farmers’ woes have not ended there. Alternative shrimp feeds have added to their costs, besides reducing the shelf life of shrimp and turning their produce less competitive in the price-sensitive global market.

On 28 December, the US International Trade Commission initiated a probe against shrimp exporters from India and six other countries following complaints that the products they were selling in the US had been subsidised by their governments, giving them a cost advantage. According to the Seafood Exporters Association of India (SEAI), if the charges are proved, Indian shrimp exporters may have to cough up as much as 21 per cent of the value of exports as countervailing duties in the US. “An adverse verdict will hit us hard, as the payment can be as high as $1.5 million,” says Sandu Joseph, secretary, SEAI.

These developments can cause a huge setback to India’s export of marine products. Shrimp is a major component of India’s marine exports to Japan and accounts for one fourth of the country’s $1.7 billion marine exports to the US.

Such problems are not confined to marine exports alone. Hundreds of similar measures, in the garb of health safety, environmental protection, adoption of ethical standards, among others, are affecting the growth of exports in dozens of areas, including agriculture, automobiles, pharmaceuticals, chemicals, textiles, information technology (IT), etc. The loss — though no official statistics quantifies it — is expected to be several billion dollars a year.




Already, India is making efforts to arrest the decline in its export growth (export revenues fell 4.17 per cent to $22.3 billion in November 2012, falling seven months in a row). In December, the commerce ministry announced sops to spur growth in exports. But trade experts say these efforts may not prove fruitful unless hidden trade barriers, broadly termed as non-tariff barriers (NTB), are dealt with effectively.

A recent European Union legislation called Registration, Evaluation and Authorisation of Chemicals (REACH), which is meant to address environment and human safety issues, has increased the cost of compliance by `85,000 to `325,000 per chemical. According to the Chemicals Export Promotion Council (Chemexcil), the law has made registration very expensive and, as a result, Indian firms could register only 35 substances out of 312 chemical products covered under REACH in the first phase.

The second phase of registration for 1,084 chemicals is due this year. About 6,000 substances will be covered in the last phase in 2018. Measures such as these are known as technical barriers to trade (TBT).

“Industry has no choice but to go for re-registration of products. But a large number of firms did not go for registration in the first phase due to high costs and many may not go for registration during the second and third phases, which will impact our exports to the EU,” says Satish Wagh, chairman, Chemexcil. Indian exports of chemical and related products were worth over Rs 1.3 lakh crore during April-October 2012.

In May 2012, when the then US secretary of state Hillary Clinton visited New Delhi, the then foreign minister S.M. Krishna conveyed to her India’s IT companies’ concerns over mobility of professionals and protectionist sentiments in the US. Krishna may not have called those as NTBs, but he did express India’s concern over the business lost due to a barrier that discouraged short-term job visas for professionals in the services sector in the US.

Again, if the EU declares India a “data-secure” country, it is estimated that outsourcing from the region could zoom to $50 billion from $20 billion now. Under EU laws, firms that outsource jobs to countries that are not “data secure” have to sign stringent contracts with clients. Such measures increase operating costs of companies and turns such places unattractive.

Roadblocks For Automotives
Over the past six years, the Society of Indian Automobile Manufacturers (SIAM) and its counterparts in Brazil, Canada, EU, Japan, Korea and the US have time and again requested the intervention of the World Trade Organisation (WTO) for ending trade disruptions caused by NTBs. Accordig to a working group of these associations, which represent 85 per cent of the global motor vehicle production, removal of NTBs will give developing countries better access to global markets and secure new investment in product and technology.

“SIAM, along with others, approached the WTO and various groups to underline the importance of addressing NTBs. But nothing has happened till now,” says a senior SIAM official. Inconsistency in custom valuations, discriminatory licensing and quota practices, auto standards and technical regulations, intellectual property issues…, NTBs sighted by the automotive industry are plenty. Perhaps, the reason why vehicles manufactured in India are not seen on the US and European roads.

Most NTMs target agricultural and allied products. The commerce ministry lists about 70 specific instances in the form of sanitary and phytosanitary or SPS measures (broadly, food safety and animal and plant health measures). They include high standards that prevent milk exports to the EU, impractical plant quarantine procedures for flowers in Columbia, biosecurity issues connected with pomegranate exports to New Zealand, and documentation, certification and other issues that restrict tea exports to Iran, Iraq and Libya.

Indian rice exporters regularly face phytosanitary hurdles in the EU, the US, Japan, Russia, and several West Asian countries. In the US, Indian basmati rice faces more hurdles than any other category, giving rise to suspicion that SPS measures are used to “protect domestic producers of high-cost rice, which are often passed-off as basmati”, notes a report by the Centre of WTO Studies at the Indian Institute of Foreign Trade.

The First Victim
The Indian textile sector was the first to be subjected to NTBs. In fact, NTBs began to be introduced only from 1993 onwards, after the WTO founding members decided to end all bilateral quotas within 10 years of the WTO coming into force. Bilateral quotas had been in existence since 1961, and referred to a system whereby developed countries such as the US and Canada fixed quota for import of textile products from each developing country.

The decades-old ‘azo dye’ controversy, where the dye’s use was prohibited by importers on grounds of health concern was an early example. Today, NTBs in textiles is an old story. Importing nations have introduced ever more sophisticated trade barriers that cannot be challenged even under the WTO system, says D.K. Nair, secretary general of trade body Confederation of Indian Textile Industry. “You can only challenge a trade barrier enforced by a government under the WTO system. You are defenceless if the barrier is imposed through individual contracts that an importer signs with his sourcing firm.”
 
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Increasingly, importers are making suppliers sign a code of ethics. If it is uniform for all exporters, it could be reasonable, but problems arise when it is not uniform across exporters. “If there are 10 buyers and 10 codes of ethics, all can be different, and even be contradictory, requiring a large body of regulations to be followed by the exporter, which, in turn, make his produce more expensive and less competitive in the global market,” says Nair. To make matters worse, “same norms are not being followed or enforced across countries by the same companies,” he adds.

Global Scenario
According to the WTO, non-tariff measures (NTM) contribute much more than tariffs to overall trade restrictiveness. Any country can announce NTMs for genuine health or environment safety goals. The WTO allows such restrictions. But the reasons behind such barriers are not always backed by scientific evidence, feel Indian seafood exporters. “They reflect public policy goals, but they may also be designed and applied in a way that unnecessarily frustrates trade,” notes the World Trade Report 2012 by WTO.

Even though there is no single estimate on the financial loss from NTMs to Indian exports, the WTO report drops sufficient hints. For the apparel sector, it says, prices in the US, EU and Canada were higher by 15 per cent, 66 per cent and 25 per cent, respectively, owing to NTMs. Similarly, in South-east Asia, South Asia and Japan, paper products cost 67 per cent, 119 per cent and 199 per cent more, respectively.

The impact of such measures on exports from countries such as India is apparent. Stricter rules mean costlier compliance, turning products more expensive and less competitive in the global market. The TBT and SPS measures prove to be a huge burden for exporters from developing countries. In 2010, almost half of the NTMs perceived as burdensome by exporting firms were TBT or SPS measures.

The Invisible Ones
WTO rules stipulate that every member country has to notify NTMs. The idea is to provide an opportunity for others to see if these measures have been suggested in the right spirit. Countries can raise objections; the member that introduces such measures can defend it. An analysis carried out by the Centre for WTO Studies has revealed that such notifications hide more than what they reveal. The centre has a unique system to track such notifications. It says 90 per cent of such notifications listed at the WTO forum do not provide accurate details of the products they actually target.

According to Murali Kallummal, the brain behind the database analysis system at the Centre for WTO Studies, of the nearly 31,000 NTMs which covered about 212,000 products until March 2012 (from January 1995), only 10 per cent provides meaningful details about the exact target. For the remaining NTMs, it takes special skills and time-consuming research to figure out targets. The centre now scans each such notification to suggest the possible product it might be targeting. “It will be useful to understand issues related to market access. It will help exporters, importers, academics, apex industrial bodies and trade policymakers,” he says.

Kallummal says keeping things vague and unclear is not limited to NTMs alone; it also happens in the case of tariffs, as there are several ways to keep them within WTO compliant levels and still provide higher tariffs for specific products. “Higher product distinction allows a country to apply varying levels of tariffs, while keeping the average tariff at the harmonised level, closer to its WTO-committed level,” he says. The strategy, he explains, is clearly visible in the EU’s product distinction for wine and spirits (based on a 2005 study done by the centre for the UB Group).

In the EU (266 products), the distinction of products for tariff application in the wine and spirits industry was eight times sophisticated than the Indian classification (33 products). Product distinction in wine category is 27 times sophisticated to that of India. “The expansion in the product list has provided the EU with substantial flexibilities by way of application of varying tariff levels, even when the average tariff remains low,” Kallummal says.



Fight Your Way In

In the globalised world of trade, countries that fight such clauses successfully can minimise NTBs, at least the visible ones. A couple of years ago, Indian drug export consignments to Africa and Latin America were being confiscated regularly in Dutch ports on grounds that the drugs violated the EU’s intellectual property laws. These seizures forced Indian drug exporters to ship medicines through longer routes, which raised the cost of shipment and made the drugs costlier. Only after the matter was taken to WTO forums, and the exporting countries, including India, Brazil, South Africa, threatened to take it  to WTO’s dispute settlement forum, that the EU agreed to review its rules and the member countries agreed to amend their IP laws.

Today, India may have to do the same against Japan’s notification on shrimp exports. Such NTBs are being discussed, sorted out and minimised, as countries are entering bilateral and multilateral trade agreements. For instance, the India-EU bilateral trade and investment agreement (BTIA) deals with issues related to services, agricultural market access and disciplining of quality requirements under SPS and TBT.
 
ACCESS DENIED: Stringent visa rules and protectionist sentiments in countries like the US hurt Indian IT
 
The commerce ministry says that problems arising due to NTBs are duly taken up with the authorities of the country concerned. This is done either bilaterally with a view to their early and mutually satisfactory resolution or presented for resolution by the WTO’s Dispute Settlement Mechanism.

That said, the increasing incidence of NTBs signals the need for more diplomatic, political and legal steps that India should take to help its exporters fight the bigger challenge. Perhaps, one should begin closer home. CUTS International — a think tank on trade, regulations and governance issues — estimates that if the existing potential (which considers both tariff and non-tariff barriers) of India-Pakistan trade is harnessed, India will gain about $80 million (about Rs 440 crore).

The gain for Pakistan could be much more, about $1.4 billion (Rs 7,700 crore). “Aviation spirit, light petroleum distillates, gold and silver jewellery and iron ore are some of the prominent items from India that have significant potential for export to Pakistan,” says Bipul Chatterjee, deputy executive director, CUTS. Benefits, thus, can be mutual, and here lies the hope.
 
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(This story was published in Businessworld Issue Dated 04-02-2013)