Published: Thursday, Apr 28, 2016
Posted : 28 Apr, 2016 00:00:00
Traversing asymmetric markets: The case of NTMs in Bangladesh-India trade
In an age of ever globalizing markets with value chains linking regions to form production lines across countries, Bangladesh stands to reap the benefits from South Asian intra-regional market connectivity provided internal policies are aligned to facilitate such linkages. Bangladesh took bold steps towards trade liberalization in the mid-1990s. The quantitative restrictions' slate has been pretty much wiped clean since fiscal year (FY) 2004-15 (or FY 2015), leaving tariffs as the main instrument of trade policy and protection.
Under the auspices of the South Asian Free Trade Agreement (SAFTA), tariff barriers with regional partners have been further scaled down to facilitate intra-regional trade and linkages. In spite of these efforts, the volume of goods traded remains at around 5.0% of the region's overall trade with the outside world. The presumption from this evidence would be that there may be other significant impediments to trade which may include non-tariff barriers (NTBs).
One of the biggest bilateral trading blocs in the region is Bangladesh and India, which has risen in tandem with global trade, accounting for some US$6.0 billion in FY2012-13 or about 10% of total trade and 15% of imports into Bangladesh. In terms of official trade, India ranks second only to China, which supplied imports of US$6.3 billion in FY2012-13 making up 20% of Bangladesh imports. The balance of trade is overwhelmingly tilted in India's favour. Additionally, since India has led the way in scaling down tariffs to 0-5.0% (except for sensitive lists) for the least developed country (LDC)-members of SAARC, the onus is on the prevalence of significant NTBs as the cause for the weak export penetration into the Indian market.
This scenario often gives rise to the notion that while Bangladesh has opened its doors to imports from India, India has not reciprocated. This notion is bolstered by the fact that Bangladesh's exports have relatively greater penetration into world markets than in the Indian market. India is still a leading source of imports, bulk of which is made up of capital and intermediate goods that feed into the industrial and service sectors of the economy. However, while Bangladesh export performance for over two decades has been exemplary, exports to India have remained miniscule, at around 2.0% of total exports. Table 1 provides a summary of Sanitary and Phyto-Sanitary (SPS) and Technical Barriers to Trade (TBT) measures applicable to exports to India and imports from India.
So, what are these non-tariff barriers (NTBs)? How do they impinge on India-Bangladesh trade in particular? A standard definition of non-tariff measures (NTMs), as the United Nations Conference on Trade and Development (UNCTAD) states, is that such "measures are policy measures, other than ordinary customs tariffs, that can potentially have an economic effect on international trade in goods, changing quantities traded, or prices, or both".
Under the auspices of the World Bank's regional integration programme, Policy Research Institute of Bangladesh (PRI) conducted a firm level survey of Bangladeshi exporters and importers trading with India with a view to understanding the nature of constraints to import-export trade between India and Bangladesh. The survey covered 100 firms comprising of readymade garment (RMG) exporters, agro-processed food (APF) exporters, jute bag (JB) exporters, and importers of pharmaceutical products (PRM), mostly active pharmaceutical ingredients called API. The study proposed to examine the nature of application of non-tariff measures (NTMs which are mostly World Trade Organisation or WTO-compliant) including process standards, labelling, testing, certification, registration, packaging, and environmental standards, with a careful scrutiny of the manner in which relevant authorities applied the NTMs to see if they were impeding trade facilitation or taking the form of NTBs. When these measures are considered in the context of Bangladesh and India trade, the real picture of the trade barriers behind the scene emerges from the findings of the study
Even though India and Bangladesh are contiguous countries, transport infrastructure (road, rail, and river) is fragmented by political borders thus raising the transaction costs of trade. There is clear lack of harmonization of customs processes and practices, an absence of truck and container throughput, non-existence of regional carrier licenses, all of which add time and cost to trade between the two countries. In addition, there are WTO-compliant NTMs due to SPS and TBT requirements which involve government and non-government agencies in the testing and certification processes that can take time and incur costs on either side of the trade transaction.
Often, regulatory agencies are ill-equipped to efficiently handle certification procedures. Consequently, even WTO-compliant NTMs could impose 'collateral damage' if inefficiently handled and become NTBs to trade. Finally, there have been instances where, by design or default, NTMs could have inappropriate uses such as in furthering the objective of hidden protectionism. Therefore, the challenge for these two South Asian governments is to design NTMs so as to maximize their effectiveness in responding to consumer concerns while minimizing the induced economic inefficiency.
Not surprisingly, exports in the agro-processed food category are subject to the most comprehensive coverage of SPS measures as these edible products have to meet very stringent food safety and health standards laid down under India's Food Safety and Standards (Packaging and Labelling) Regulations of 2011. A perception that emerges from the survey is that while the applicable regulations are WTO compliant, process and procedures are cumbersome, which causes delay and raises transaction costs such that only large firms can engage in exporting activity while small firms are left out.
In contrast, RMG exporters find themselves held to very high standards with 17 TBT measures applied on their exports. However, thanks to their international experience in exporting to European Union (EU) and North America, the tabulation shows RMG firms are quite at ease with much of the regulatory requirements by Indian authorities.
Jute bag (JB) exporters and pharmaceutical (API) importers are subject to 11 TBT measures each. While JB exporters face limited but manageable competition in India, they have occasionally complained about importers insisting on unnecessary labeling requirement not mandated by TBT rules. Pharmaceutical imports, which are tightly controlled by the Director General of Drug Administration (DGDA), are subject to several approval processes, from list of drugs permissible for import to registration and certification requirements. But importers by and large have come to terms with some delays and transaction costs arising from the cumbersome processes involved.
In particular, the emphasis, on the Bangladesh side, was on examining the regulatory regime and processes and procedures that exports and imports were subjected to in order to ascertain whether NTBs were significant enough to impede the growth of exports and imports. In explaining this instability in exports to India, development practitioners and business representatives have pointed to a number of constraints: poor cross-border trade infrastructure, cumbersome customs clearing processes and lack of harmonization of regulations and practices, as well as the prevalence of NTMs that are in effect significant NTBs. The Indian market's importance for Bangladesh lies beyond its large domestic market and proximity. The Indian market serves as a learning ground for Bangladeshi exporters as they venture to developed markets where they are likely to face stricter rules for exporting.
An assessment of the reported trade obstacles that are faced by the survey firms, shows that exporters are generally comfortable with SPS-TBT requirements which they are able to meet without much difficulty. RMG exporters, with their global exporting experience, seem to be in a much stronger position to meet regulatory standards in India. They had more complaints related to inefficiencies at in customs procedures that result in delays and higher transaction costs. APF exporters' largest hurdle is that BSTI certification is not recognized by the Indian Customs as Bangladesh Standards & Testing Institution's (BSTI's) accreditation has not been officially acknowledged by the relevant Indian authorities. This creates close to a month's delay as samples are sent to BIS laboratories in Delhi or Kolkata by normal post for retesting. APF exporters have stated that Indian buyers often require too many details to be printed on the product body; often times the wrappers do not have enough space to display all the required information (e.g., candies and lollipops). Such stringent conditions are in violation of the national treatment decree under the WTO as local firms producing similar products are not mandated to follow these rules.
One of the major problems for JB manufactures arises in the case of labelling requirement. On the Indian side, it is mandatory that every imported JB and bale to be sealed with the label, 'Made in Bangladesh' as notified by the Officer of the Indian Jute Commissioner. However, majority of the JB exporters have mentioned that Indian buyers specify that they do not want any labelling on the bags. This is because these bags are used to pack Indian products for export with the seal of the Indian company being labelled on the bag. Speed money is also required at times to clear JB consignment at the port if Indian Customs demand to retest for JBO despite mandatory testing and certification being already cleared. PRM importers have the largest complaint against the cumbersome approval processes with DGDA leading to substantial delays. Due to delays in weekly DGDA meetings, firms face substantial delays in getting the mandatory registration and approval done in time to open import LCs. In some cases, respondents have stated that they have had to make informal payment in order to facilitate the registration process forward.
These instances reflect how non-transparency and rigidity in NTM, SPS and TBT rules, in their application, do not always adhere to the WTO obligations, harbouring non-accountability, rent-seeking and undue protection inhibiting India-Bangladesh trade. There is a strong linkage between standards and NTBs. In this regard, harmonization of regional standards and customs procedures can reduce the barriers to intra-regional trade, facilitating further integration and creating robust regional value chains.
Finally, the economics of India- Bangladesh trade and subsequent export stagnation on Bangladesh's side, reflect distorted incentives arising from higher relative protection in Bangladesh in comparison to that of India. This renders domestic sales to be more profitable than exporting to India, creating, in effect, market distortion in the nature of anti-export bias. Bangladesh exports to India are unlikely to pick up unless this distortion of incentives is eliminated through a process of rationalization of high protective tariffs on the one hand, and making export production relatively more profitable, on the other.
(The writer is an Economist at Policy Research Institute and can be reached at firstname.lastname@example.org)