CHAPTER 1 INTRODUCTION

This report examines tariff and non-tariff policies that restrict trade between

countries in agricultural commodities Many of these policies are now subject to

important disciplines under the 1994 GATT agreement that is administered by the World

Trade Organization (WTO) The paper is organized as follows First tariffs import

quotas and tariff rate quotas are discussed Then a series of non-tariff barriers to trade

are examined including voluntary export restraints technical barriers to trade domestic

content regulations import licensing the operations of import State Trading Enterprises

(STEs) and exchange rate management policies Finally the precautionary principle an

environment-related rationale for trade restrictions and sanitary and phytosanitary

barriers to trade are discussed

11 BACKGROUND

Tariffs and Tariff Rate Quotas

Tariffs which are taxes on imports of commodities into a country or region are

among the oldest forms of government intervention in economic activity They are

implemented for two clear economic purposes First they provide revenue for the

government Second they improve economic returns to firms and suppliers of resources

to domestic industry that face competition from foreign imports

Tariffs are widely used to protect domestic producersrsquo incomes from foreign competition

This protection comes at an economic cost to domestic consumers who pay higher prices

for importcompeting goods and to the economy as a whole through the inefficient

allocation of resources to the import competing domestic industry Therefore since

1

1948 when average tariffs on manufactured goods exceeded 30 percent in most

developed economies those economies have sought to reduce tariffs on manufactured

goods through several rounds of negotiations under the General Agreement on Tariffs

Trade (GATT) Only in the most recent Uruguay Round of negotiations were trade and

tariff restrictions in agriculture addressed In the past and even under GATT tariffs

levied on some agricultural commodities by some countries have been very large When

coupled with other barriers to trade they have often constituted formidable barriers to

market access from foreign producers In fact tariffs that are set high enough can block

all trade and act just like import bans

A tariff-rate quota (TRQ) combines the idea of a tariff with that of a quota The typical

TRQ will set a low tariff for imports of a fixed quantity and a higher tariff for any

imports that exceed that initial quantity In a legal sense and at the WTO countries are

allowed to combine the use of two tariffs in the form of a TRQ even when they have

agreed not to use strict import quotas In the United States important TRQ schedules are

set for beef sugar peanuts and many dairy products In each case the initial tariff rate is

quite low but the over-quota tariff is prohibitive or close to prohibitive for most normal

trade Explicit import quotas used to be quite common in agricultural trade They allowed

governments to strictly limit the amount of imports of a commodity and thus to plan on a

particular import quantity in setting domestic commodity programs Another common

non-tariff barrier (NTB) was the so-called ldquovoluntary export restraintrdquo (VER) under

which exporting countries would agree to limit shipments of a commodity to the

importing country although often only under threat of some even more restrictive or

onerous activity In some cases exporters were willing to comply with a VER because

2

they were able to capture economic benefits through higher prices for their exports in the

importing countryrsquos market

12 ISSUES

In the Uruguay round of the GATTWTO negotiations members agreed to drop the use

of import quotas and other non-tariff barriers in favor of tariff-rate quotas Countries also

agreed to gradually lower each tariff rate and raise the quantity to which the low tariff

applied Thus over time trade would be taxed at a lower rate and trade flows would

increase

Given current US commitments under the WTO on market access options are limited

for US policy innovations in the 2002 Farm Bill vis a vis tariffs on agricultural imports

from other countries Providing higher prices to domestic producers by increasing tariffs

on agricultural imports is not permitted In addition particularly because the US is a net

exporter of many agricultural commodities successive US governments have generally

taken a strong position within the WTO that tariff and TRQ barriers need to be reduced

Non-Tariff Trade Barriers

Countries use many mechanisms to restrict imports A critical objective of the Uruguay

Round of GATT negotiations shared by the US was the elimination of non-tariff

barriers to trade in agricultural commodities (including quotas) and where necessary to

replace them with tariffs ndash a process called tarrification Tarrification of agricultural

commodities was largely achieved and viewed as a major success of the 1994 GATT

3

agreement Thus if the US honors its GATT commitments the utilization of new non-

tariff barriers to trade is not really an option for the 2002 Farm Bill

Domestic Content Requirements

Governments have used domestic content regulations to restrict imports The intent is

usually to stimulate the development of domestic industries Domestic content

regulations typically specify the percentage of a productrsquos total value that must be

produced domestically in order for the product to be sold in the domestic market

(Carbaugh) Several developing countries have imposed domestic content requirements to

foster agricultural automobile and textile production They are normally used in

conjunction with a policy of import substitution in which domestic production replaces

imports

Domestic content requirements have not been as prevalent in agriculture as in some other

industries such as automobiles but some agricultural examples illustrate their effects

Australia used domestic content requirements to support leaf tobacco production In order

to pay a relatively low import duty on imported tobacco Australian cigarette

manufacturers were required to use 57 percent domestic leaf tobacco Member countries

of trade agreements also use domestic content rules to ensure that nonmembers do not

manipulate the agreements to circumvent tariffs For example North American Free

Trade Agreement (NAFTA) rules of origin provisions stipulate that all single-strength

citrus juice must be made from 100 percent NAFTA origin fresh citrus fruit

4

Again as is the case with other trade barriers it seems unlikely that introducing domestic

content rules to enhance domestic demand for US agricultural commodities is a viable

option for the 2002 Farm Bill

13 IMPORT LICENSES

Import licenses have proved to be effective mechanisms for restricting imports Under an

importlicensing scheme importers of a commodity are required to obtain a license for

each shipment they bring into the country Without explicitly utilizing a quota

mechanism a country can simply restrict imports on any basis it chooses through its

allocation of import licenses Prior to the implementation of NAFTA for example

Mexico required that wheat and other agricultural commodity imports be permitted only

under license Elimination of import licenses for agricultural commodities was a critical

objective of the Uruguay Round of GATT negotiations and thus the use of this

mechanism to protect US agricultural producers is unlikely an option for the 2002 Farm

Bill

Import State Trading Enterprises

Import State Trading Enterprises (STEs) are government owned or sanctioned agencies

that act as partial or pure single buyer importers of a commodity or set of commodities in

world markets They also often enjoy a partial or pure domestic monopoly over the sale

of those commodities Current important examples of import STEs in world agricultural

commodity markets include the Japanese Food Agency (barley rice and wheat) South

Korearsquos Livestock Products Marketing Organization and Chinarsquos National Cereals Oil

5

and Foodstuffs Import and Export Commission (COFCO) STEs can restrict imports in

several ways First they can impose a set of implicit import tariffs by purchasing imports

at world prices and offering them for sale at much higher domestic prices The difference

between the purchase price and the domestic sales price simply represents a hidden tariff

Import STEs may also implement implicit general and targeted import quotas or utilize

complex and costly implicit import rules that make importing into the market

unprofitable Recently in a submission to the current WTO negotiations the United

States targeted the trade restricting operations of import and export STEs as a primary

concern A major problem with import STEs is that it is quite difficult to estimate the

impacts of their operations on trade because those operations lack transparency STEs

often refuse to provide the information needed to make such assessments claiming that

such disclosure is not required because they are quasi-private companies In spite of these

difficulties the challenges provided by STEs will almost certainly continue to be

addressed through bilateral and multilateral trade negotiations rather than in the context

of domestic legislation through the 2002 Farm Bill

14 TECHNICAL BARRIERS TO TRADE

All countries impose technical rules about packaging product definitions labeling etc

In the context of international trade such rules may also be used as non-tariff trade

barriers For example imagine if Korea were to require that oranges sold in the country

be less than two inches in diameter Oranges grown in Korea happen to be much smaller

than Navel oranges grown in California so this type of ldquotechnicalrdquo rule would effectively

ban the sales of California oranges and protect the market for Korean oranges Such rules

6

violate WTO provisions that require countries to treat imports a nd domestic products

equivalently and not to advantage products from one source over another even in indirect

ways

Again however these issues will likely be dealt with through bilateral and multilateral

trade negotiations rather than through domestic Farm Bill policy initiatives

15 EXCHANGE RATE MANAGEMENT POLICIES

Some countries may restrict agricultural imports through managing their exchange rates

To some degree countries can and have used exchange rate policies to discourage

imports and encourage exports of all commodities The exchange rate between two

countriesrsquo currencies is simply the price at which one currency trades for the other For

example if one US dollar can be used to purchase 100 Japanese yen (and vice versa)

the exchange rate between the US dollar and the Japanese yen is 100 yen per dollar If

the yen depreciates in value relative to the US dollar then a dollar is able to purchase

more yen A 10 percent depreciation or devaluation of the yen for example would mean

that the price of one US dollar increased to 110 yen One effect of currency depreciation

is to make all imports more expensive in the country itself If for example the yen

depreciates by 10 percent from an initial value of 100 yen per dollar and the price of a

ton of US beef on world markets is $2000 then the price of that ton of beef in Japan

would increase from 200000 yen to 220000 yen A policy that deliberately lowers the

exchange rate of a countryrsquos currency will therefore inhibit imports of agricultural

commodities as well as imports of all other commodities Thus countries that pursue

7

deliberate policies of undervaluing their currency in international financial markets are

not usually targeting agricultural imports

Some countries have targeted specific types of imports through implementing multiple

exchange rate policy under which importers were required to pay different exchange rates

for foreign currency depending on the commodities they were importing The objectives

of such programs have been to reduce balance of payments problems and to raise

revenues for the government Multiple exchange rate programs were rare in the 1990s

and generally have not been utilized by developed economies Finally exchange rate

policies are usually not sector-specific In the United States they are clearly under the

purview of the Federal Reserve Board and as such will not likely be a major issue for

the 2002 Farm Bill There have been many calls in recent congressional testimony

however to offset the negative impacts caused by a strengthening US dollar with

counter-cyclical payments to export dependent agricultural products

The Precautionary Principle and Sanitary and Phytosanitary Barriers to Trade

The precautionary principle or foresight planning has recently been frequently proposed

as a justification for government restrictions on trade in the context of environmental and

health concerns often regardless of cost or scientific evidence It was first proposed as a

household management technique in the 1930s in Germany and included elements of

prevention cost effectiveness and ethical responsibility to maintain natural systems

(OrsquoRiordan and Cameron) In the context of managing environmental uncertainty the

principle enjoyed a resurgence of popularity during a meeting of the UN World Charter

for Nature (of which the US is only an observer) in 1982 Its use was re-endorsed by the

8

UN Convention on Bio-diversity in 1992 and again in Montreal Canada in January

2000 The precautionary principle has been interpreted by some to mean that new

chemicals and technologies should be considered dangerous until proven otherwise It

therefore requires those responsible for an activity or process to establish its harmlessness

and to be liable if damage occurs

Most recent attempts to invoke the principle have cited the use of toxic substances

exploitation of natural resources and environmental degradation Concerns about species

extinction high rates of birth defects learning deficiencies cancer climate change

ozone depletion and contamination with toxic chemicals and nuclear materials have also

been used to justify trade and other government restrictions on the basis of the

precautionary principle Thus countries seeking more open trading regimes have been

concerned that the precautionary principle will simply be used to justify nontariff trade

barriers For example rigid adherence to the precautionary principle could lead to trade

embargoes on products such as genetically modified oil seeds with little or no reliance on

scientific analysis to justify market closure

Sometimes restrictions on imports from certain places are fully consistent with

protecting consumers the environment or agriculture from harmful diseases or pests that

may accompany the imported product The WTO Sanitary and Phytosanitary (SPS)

provisions on technical trade rules specifically recognize that all countries feel a

responsibility to secure their borders against the importation of unsafe products Prior to

1994 however such barriers were often simply used as excuses to keep out a product for

which there was no real evidence of any problem

9

These phony technical barriers were just an excuse to keep out competitive products The

current WTO agreement requires that whenever a technical barrier is challenged a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achieve its scientific objectives This requirement has resulted

in a number of barriers being relaxed around the world

10

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

1948 when average tariffs on manufactured goods exceeded 30 percent in most

developed economies those economies have sought to reduce tariffs on manufactured

goods through several rounds of negotiations under the General Agreement on Tariffs

Trade (GATT) Only in the most recent Uruguay Round of negotiations were trade and

tariff restrictions in agriculture addressed In the past and even under GATT tariffs

levied on some agricultural commodities by some countries have been very large When

coupled with other barriers to trade they have often constituted formidable barriers to

market access from foreign producers In fact tariffs that are set high enough can block

all trade and act just like import bans

A tariff-rate quota (TRQ) combines the idea of a tariff with that of a quota The typical

TRQ will set a low tariff for imports of a fixed quantity and a higher tariff for any

imports that exceed that initial quantity In a legal sense and at the WTO countries are

allowed to combine the use of two tariffs in the form of a TRQ even when they have

agreed not to use strict import quotas In the United States important TRQ schedules are

set for beef sugar peanuts and many dairy products In each case the initial tariff rate is

quite low but the over-quota tariff is prohibitive or close to prohibitive for most normal

trade Explicit import quotas used to be quite common in agricultural trade They allowed

governments to strictly limit the amount of imports of a commodity and thus to plan on a

particular import quantity in setting domestic commodity programs Another common

non-tariff barrier (NTB) was the so-called ldquovoluntary export restraintrdquo (VER) under

which exporting countries would agree to limit shipments of a commodity to the

importing country although often only under threat of some even more restrictive or

onerous activity In some cases exporters were willing to comply with a VER because

2

they were able to capture economic benefits through higher prices for their exports in the

importing countryrsquos market

12 ISSUES

In the Uruguay round of the GATTWTO negotiations members agreed to drop the use

of import quotas and other non-tariff barriers in favor of tariff-rate quotas Countries also

agreed to gradually lower each tariff rate and raise the quantity to which the low tariff

applied Thus over time trade would be taxed at a lower rate and trade flows would

increase

Given current US commitments under the WTO on market access options are limited

for US policy innovations in the 2002 Farm Bill vis a vis tariffs on agricultural imports

from other countries Providing higher prices to domestic producers by increasing tariffs

on agricultural imports is not permitted In addition particularly because the US is a net

exporter of many agricultural commodities successive US governments have generally

taken a strong position within the WTO that tariff and TRQ barriers need to be reduced

Non-Tariff Trade Barriers

Countries use many mechanisms to restrict imports A critical objective of the Uruguay

Round of GATT negotiations shared by the US was the elimination of non-tariff

barriers to trade in agricultural commodities (including quotas) and where necessary to

replace them with tariffs ndash a process called tarrification Tarrification of agricultural

commodities was largely achieved and viewed as a major success of the 1994 GATT

3

agreement Thus if the US honors its GATT commitments the utilization of new non-

tariff barriers to trade is not really an option for the 2002 Farm Bill

Domestic Content Requirements

Governments have used domestic content regulations to restrict imports The intent is

usually to stimulate the development of domestic industries Domestic content

regulations typically specify the percentage of a productrsquos total value that must be

produced domestically in order for the product to be sold in the domestic market

(Carbaugh) Several developing countries have imposed domestic content requirements to

foster agricultural automobile and textile production They are normally used in

conjunction with a policy of import substitution in which domestic production replaces

imports

Domestic content requirements have not been as prevalent in agriculture as in some other

industries such as automobiles but some agricultural examples illustrate their effects

Australia used domestic content requirements to support leaf tobacco production In order

to pay a relatively low import duty on imported tobacco Australian cigarette

manufacturers were required to use 57 percent domestic leaf tobacco Member countries

of trade agreements also use domestic content rules to ensure that nonmembers do not

manipulate the agreements to circumvent tariffs For example North American Free

Trade Agreement (NAFTA) rules of origin provisions stipulate that all single-strength

citrus juice must be made from 100 percent NAFTA origin fresh citrus fruit

4

Again as is the case with other trade barriers it seems unlikely that introducing domestic

content rules to enhance domestic demand for US agricultural commodities is a viable

option for the 2002 Farm Bill

13 IMPORT LICENSES

Import licenses have proved to be effective mechanisms for restricting imports Under an

importlicensing scheme importers of a commodity are required to obtain a license for

each shipment they bring into the country Without explicitly utilizing a quota

mechanism a country can simply restrict imports on any basis it chooses through its

allocation of import licenses Prior to the implementation of NAFTA for example

Mexico required that wheat and other agricultural commodity imports be permitted only

under license Elimination of import licenses for agricultural commodities was a critical

objective of the Uruguay Round of GATT negotiations and thus the use of this

mechanism to protect US agricultural producers is unlikely an option for the 2002 Farm

Bill

Import State Trading Enterprises

Import State Trading Enterprises (STEs) are government owned or sanctioned agencies

that act as partial or pure single buyer importers of a commodity or set of commodities in

world markets They also often enjoy a partial or pure domestic monopoly over the sale

of those commodities Current important examples of import STEs in world agricultural

commodity markets include the Japanese Food Agency (barley rice and wheat) South

Korearsquos Livestock Products Marketing Organization and Chinarsquos National Cereals Oil

5

and Foodstuffs Import and Export Commission (COFCO) STEs can restrict imports in

several ways First they can impose a set of implicit import tariffs by purchasing imports

at world prices and offering them for sale at much higher domestic prices The difference

between the purchase price and the domestic sales price simply represents a hidden tariff

Import STEs may also implement implicit general and targeted import quotas or utilize

complex and costly implicit import rules that make importing into the market

unprofitable Recently in a submission to the current WTO negotiations the United

States targeted the trade restricting operations of import and export STEs as a primary

concern A major problem with import STEs is that it is quite difficult to estimate the

impacts of their operations on trade because those operations lack transparency STEs

often refuse to provide the information needed to make such assessments claiming that

such disclosure is not required because they are quasi-private companies In spite of these

difficulties the challenges provided by STEs will almost certainly continue to be

addressed through bilateral and multilateral trade negotiations rather than in the context

of domestic legislation through the 2002 Farm Bill

14 TECHNICAL BARRIERS TO TRADE

All countries impose technical rules about packaging product definitions labeling etc

In the context of international trade such rules may also be used as non-tariff trade

barriers For example imagine if Korea were to require that oranges sold in the country

be less than two inches in diameter Oranges grown in Korea happen to be much smaller

than Navel oranges grown in California so this type of ldquotechnicalrdquo rule would effectively

ban the sales of California oranges and protect the market for Korean oranges Such rules

6

violate WTO provisions that require countries to treat imports a nd domestic products

equivalently and not to advantage products from one source over another even in indirect

ways

Again however these issues will likely be dealt with through bilateral and multilateral

trade negotiations rather than through domestic Farm Bill policy initiatives

15 EXCHANGE RATE MANAGEMENT POLICIES

Some countries may restrict agricultural imports through managing their exchange rates

To some degree countries can and have used exchange rate policies to discourage

imports and encourage exports of all commodities The exchange rate between two

countriesrsquo currencies is simply the price at which one currency trades for the other For

example if one US dollar can be used to purchase 100 Japanese yen (and vice versa)

the exchange rate between the US dollar and the Japanese yen is 100 yen per dollar If

the yen depreciates in value relative to the US dollar then a dollar is able to purchase

more yen A 10 percent depreciation or devaluation of the yen for example would mean

that the price of one US dollar increased to 110 yen One effect of currency depreciation

is to make all imports more expensive in the country itself If for example the yen

depreciates by 10 percent from an initial value of 100 yen per dollar and the price of a

ton of US beef on world markets is $2000 then the price of that ton of beef in Japan

would increase from 200000 yen to 220000 yen A policy that deliberately lowers the

exchange rate of a countryrsquos currency will therefore inhibit imports of agricultural

commodities as well as imports of all other commodities Thus countries that pursue

7

deliberate policies of undervaluing their currency in international financial markets are

not usually targeting agricultural imports

Some countries have targeted specific types of imports through implementing multiple

exchange rate policy under which importers were required to pay different exchange rates

for foreign currency depending on the commodities they were importing The objectives

of such programs have been to reduce balance of payments problems and to raise

revenues for the government Multiple exchange rate programs were rare in the 1990s

and generally have not been utilized by developed economies Finally exchange rate

policies are usually not sector-specific In the United States they are clearly under the

purview of the Federal Reserve Board and as such will not likely be a major issue for

the 2002 Farm Bill There have been many calls in recent congressional testimony

however to offset the negative impacts caused by a strengthening US dollar with

counter-cyclical payments to export dependent agricultural products

The Precautionary Principle and Sanitary and Phytosanitary Barriers to Trade

The precautionary principle or foresight planning has recently been frequently proposed

as a justification for government restrictions on trade in the context of environmental and

health concerns often regardless of cost or scientific evidence It was first proposed as a

household management technique in the 1930s in Germany and included elements of

prevention cost effectiveness and ethical responsibility to maintain natural systems

(OrsquoRiordan and Cameron) In the context of managing environmental uncertainty the

principle enjoyed a resurgence of popularity during a meeting of the UN World Charter

for Nature (of which the US is only an observer) in 1982 Its use was re-endorsed by the

8

UN Convention on Bio-diversity in 1992 and again in Montreal Canada in January

2000 The precautionary principle has been interpreted by some to mean that new

chemicals and technologies should be considered dangerous until proven otherwise It

therefore requires those responsible for an activity or process to establish its harmlessness

and to be liable if damage occurs

Most recent attempts to invoke the principle have cited the use of toxic substances

exploitation of natural resources and environmental degradation Concerns about species

extinction high rates of birth defects learning deficiencies cancer climate change

ozone depletion and contamination with toxic chemicals and nuclear materials have also

been used to justify trade and other government restrictions on the basis of the

precautionary principle Thus countries seeking more open trading regimes have been

concerned that the precautionary principle will simply be used to justify nontariff trade

barriers For example rigid adherence to the precautionary principle could lead to trade

embargoes on products such as genetically modified oil seeds with little or no reliance on

scientific analysis to justify market closure

Sometimes restrictions on imports from certain places are fully consistent with

protecting consumers the environment or agriculture from harmful diseases or pests that

may accompany the imported product The WTO Sanitary and Phytosanitary (SPS)

provisions on technical trade rules specifically recognize that all countries feel a

responsibility to secure their borders against the importation of unsafe products Prior to

1994 however such barriers were often simply used as excuses to keep out a product for

which there was no real evidence of any problem

9

These phony technical barriers were just an excuse to keep out competitive products The

current WTO agreement requires that whenever a technical barrier is challenged a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achieve its scientific objectives This requirement has resulted

in a number of barriers being relaxed around the world

10

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

they were able to capture economic benefits through higher prices for their exports in the

importing countryrsquos market

12 ISSUES

In the Uruguay round of the GATTWTO negotiations members agreed to drop the use

of import quotas and other non-tariff barriers in favor of tariff-rate quotas Countries also

agreed to gradually lower each tariff rate and raise the quantity to which the low tariff

applied Thus over time trade would be taxed at a lower rate and trade flows would

increase

Given current US commitments under the WTO on market access options are limited

for US policy innovations in the 2002 Farm Bill vis a vis tariffs on agricultural imports

from other countries Providing higher prices to domestic producers by increasing tariffs

on agricultural imports is not permitted In addition particularly because the US is a net

exporter of many agricultural commodities successive US governments have generally

taken a strong position within the WTO that tariff and TRQ barriers need to be reduced

Non-Tariff Trade Barriers

Countries use many mechanisms to restrict imports A critical objective of the Uruguay

Round of GATT negotiations shared by the US was the elimination of non-tariff

barriers to trade in agricultural commodities (including quotas) and where necessary to

replace them with tariffs ndash a process called tarrification Tarrification of agricultural

commodities was largely achieved and viewed as a major success of the 1994 GATT

3

agreement Thus if the US honors its GATT commitments the utilization of new non-

tariff barriers to trade is not really an option for the 2002 Farm Bill

Domestic Content Requirements

Governments have used domestic content regulations to restrict imports The intent is

usually to stimulate the development of domestic industries Domestic content

regulations typically specify the percentage of a productrsquos total value that must be

produced domestically in order for the product to be sold in the domestic market

(Carbaugh) Several developing countries have imposed domestic content requirements to

foster agricultural automobile and textile production They are normally used in

conjunction with a policy of import substitution in which domestic production replaces

imports

Domestic content requirements have not been as prevalent in agriculture as in some other

industries such as automobiles but some agricultural examples illustrate their effects

Australia used domestic content requirements to support leaf tobacco production In order

to pay a relatively low import duty on imported tobacco Australian cigarette

manufacturers were required to use 57 percent domestic leaf tobacco Member countries

of trade agreements also use domestic content rules to ensure that nonmembers do not

manipulate the agreements to circumvent tariffs For example North American Free

Trade Agreement (NAFTA) rules of origin provisions stipulate that all single-strength

citrus juice must be made from 100 percent NAFTA origin fresh citrus fruit

4

Again as is the case with other trade barriers it seems unlikely that introducing domestic

content rules to enhance domestic demand for US agricultural commodities is a viable

option for the 2002 Farm Bill

13 IMPORT LICENSES

Import licenses have proved to be effective mechanisms for restricting imports Under an

importlicensing scheme importers of a commodity are required to obtain a license for

each shipment they bring into the country Without explicitly utilizing a quota

mechanism a country can simply restrict imports on any basis it chooses through its

allocation of import licenses Prior to the implementation of NAFTA for example

Mexico required that wheat and other agricultural commodity imports be permitted only

under license Elimination of import licenses for agricultural commodities was a critical

objective of the Uruguay Round of GATT negotiations and thus the use of this

mechanism to protect US agricultural producers is unlikely an option for the 2002 Farm

Bill

Import State Trading Enterprises

Import State Trading Enterprises (STEs) are government owned or sanctioned agencies

that act as partial or pure single buyer importers of a commodity or set of commodities in

world markets They also often enjoy a partial or pure domestic monopoly over the sale

of those commodities Current important examples of import STEs in world agricultural

commodity markets include the Japanese Food Agency (barley rice and wheat) South

Korearsquos Livestock Products Marketing Organization and Chinarsquos National Cereals Oil

5

and Foodstuffs Import and Export Commission (COFCO) STEs can restrict imports in

several ways First they can impose a set of implicit import tariffs by purchasing imports

at world prices and offering them for sale at much higher domestic prices The difference

between the purchase price and the domestic sales price simply represents a hidden tariff

Import STEs may also implement implicit general and targeted import quotas or utilize

complex and costly implicit import rules that make importing into the market

unprofitable Recently in a submission to the current WTO negotiations the United

States targeted the trade restricting operations of import and export STEs as a primary

concern A major problem with import STEs is that it is quite difficult to estimate the

impacts of their operations on trade because those operations lack transparency STEs

often refuse to provide the information needed to make such assessments claiming that

such disclosure is not required because they are quasi-private companies In spite of these

difficulties the challenges provided by STEs will almost certainly continue to be

addressed through bilateral and multilateral trade negotiations rather than in the context

of domestic legislation through the 2002 Farm Bill

14 TECHNICAL BARRIERS TO TRADE

All countries impose technical rules about packaging product definitions labeling etc

In the context of international trade such rules may also be used as non-tariff trade

barriers For example imagine if Korea were to require that oranges sold in the country

be less than two inches in diameter Oranges grown in Korea happen to be much smaller

than Navel oranges grown in California so this type of ldquotechnicalrdquo rule would effectively

ban the sales of California oranges and protect the market for Korean oranges Such rules

6

violate WTO provisions that require countries to treat imports a nd domestic products

equivalently and not to advantage products from one source over another even in indirect

ways

Again however these issues will likely be dealt with through bilateral and multilateral

trade negotiations rather than through domestic Farm Bill policy initiatives

15 EXCHANGE RATE MANAGEMENT POLICIES

Some countries may restrict agricultural imports through managing their exchange rates

To some degree countries can and have used exchange rate policies to discourage

imports and encourage exports of all commodities The exchange rate between two

countriesrsquo currencies is simply the price at which one currency trades for the other For

example if one US dollar can be used to purchase 100 Japanese yen (and vice versa)

the exchange rate between the US dollar and the Japanese yen is 100 yen per dollar If

the yen depreciates in value relative to the US dollar then a dollar is able to purchase

more yen A 10 percent depreciation or devaluation of the yen for example would mean

that the price of one US dollar increased to 110 yen One effect of currency depreciation

is to make all imports more expensive in the country itself If for example the yen

depreciates by 10 percent from an initial value of 100 yen per dollar and the price of a

ton of US beef on world markets is $2000 then the price of that ton of beef in Japan

would increase from 200000 yen to 220000 yen A policy that deliberately lowers the

exchange rate of a countryrsquos currency will therefore inhibit imports of agricultural

commodities as well as imports of all other commodities Thus countries that pursue

7

deliberate policies of undervaluing their currency in international financial markets are

not usually targeting agricultural imports

Some countries have targeted specific types of imports through implementing multiple

exchange rate policy under which importers were required to pay different exchange rates

for foreign currency depending on the commodities they were importing The objectives

of such programs have been to reduce balance of payments problems and to raise

revenues for the government Multiple exchange rate programs were rare in the 1990s

and generally have not been utilized by developed economies Finally exchange rate

policies are usually not sector-specific In the United States they are clearly under the

purview of the Federal Reserve Board and as such will not likely be a major issue for

the 2002 Farm Bill There have been many calls in recent congressional testimony

however to offset the negative impacts caused by a strengthening US dollar with

counter-cyclical payments to export dependent agricultural products

The Precautionary Principle and Sanitary and Phytosanitary Barriers to Trade

The precautionary principle or foresight planning has recently been frequently proposed

as a justification for government restrictions on trade in the context of environmental and

health concerns often regardless of cost or scientific evidence It was first proposed as a

household management technique in the 1930s in Germany and included elements of

prevention cost effectiveness and ethical responsibility to maintain natural systems

(OrsquoRiordan and Cameron) In the context of managing environmental uncertainty the

principle enjoyed a resurgence of popularity during a meeting of the UN World Charter

for Nature (of which the US is only an observer) in 1982 Its use was re-endorsed by the

8

UN Convention on Bio-diversity in 1992 and again in Montreal Canada in January

2000 The precautionary principle has been interpreted by some to mean that new

chemicals and technologies should be considered dangerous until proven otherwise It

therefore requires those responsible for an activity or process to establish its harmlessness

and to be liable if damage occurs

Most recent attempts to invoke the principle have cited the use of toxic substances

exploitation of natural resources and environmental degradation Concerns about species

extinction high rates of birth defects learning deficiencies cancer climate change

ozone depletion and contamination with toxic chemicals and nuclear materials have also

been used to justify trade and other government restrictions on the basis of the

precautionary principle Thus countries seeking more open trading regimes have been

concerned that the precautionary principle will simply be used to justify nontariff trade

barriers For example rigid adherence to the precautionary principle could lead to trade

embargoes on products such as genetically modified oil seeds with little or no reliance on

scientific analysis to justify market closure

Sometimes restrictions on imports from certain places are fully consistent with

protecting consumers the environment or agriculture from harmful diseases or pests that

may accompany the imported product The WTO Sanitary and Phytosanitary (SPS)

provisions on technical trade rules specifically recognize that all countries feel a

responsibility to secure their borders against the importation of unsafe products Prior to

1994 however such barriers were often simply used as excuses to keep out a product for

which there was no real evidence of any problem

9

These phony technical barriers were just an excuse to keep out competitive products The

current WTO agreement requires that whenever a technical barrier is challenged a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achieve its scientific objectives This requirement has resulted

in a number of barriers being relaxed around the world

10

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

agreement Thus if the US honors its GATT commitments the utilization of new non-

tariff barriers to trade is not really an option for the 2002 Farm Bill

Domestic Content Requirements

Governments have used domestic content regulations to restrict imports The intent is

usually to stimulate the development of domestic industries Domestic content

regulations typically specify the percentage of a productrsquos total value that must be

produced domestically in order for the product to be sold in the domestic market

(Carbaugh) Several developing countries have imposed domestic content requirements to

foster agricultural automobile and textile production They are normally used in

conjunction with a policy of import substitution in which domestic production replaces

imports

Domestic content requirements have not been as prevalent in agriculture as in some other

industries such as automobiles but some agricultural examples illustrate their effects

Australia used domestic content requirements to support leaf tobacco production In order

to pay a relatively low import duty on imported tobacco Australian cigarette

manufacturers were required to use 57 percent domestic leaf tobacco Member countries

of trade agreements also use domestic content rules to ensure that nonmembers do not

manipulate the agreements to circumvent tariffs For example North American Free

Trade Agreement (NAFTA) rules of origin provisions stipulate that all single-strength

citrus juice must be made from 100 percent NAFTA origin fresh citrus fruit

4

Again as is the case with other trade barriers it seems unlikely that introducing domestic

content rules to enhance domestic demand for US agricultural commodities is a viable

option for the 2002 Farm Bill

13 IMPORT LICENSES

Import licenses have proved to be effective mechanisms for restricting imports Under an

importlicensing scheme importers of a commodity are required to obtain a license for

each shipment they bring into the country Without explicitly utilizing a quota

mechanism a country can simply restrict imports on any basis it chooses through its

allocation of import licenses Prior to the implementation of NAFTA for example

Mexico required that wheat and other agricultural commodity imports be permitted only

under license Elimination of import licenses for agricultural commodities was a critical

objective of the Uruguay Round of GATT negotiations and thus the use of this

mechanism to protect US agricultural producers is unlikely an option for the 2002 Farm

Bill

Import State Trading Enterprises

Import State Trading Enterprises (STEs) are government owned or sanctioned agencies

that act as partial or pure single buyer importers of a commodity or set of commodities in

world markets They also often enjoy a partial or pure domestic monopoly over the sale

of those commodities Current important examples of import STEs in world agricultural

commodity markets include the Japanese Food Agency (barley rice and wheat) South

Korearsquos Livestock Products Marketing Organization and Chinarsquos National Cereals Oil

5

and Foodstuffs Import and Export Commission (COFCO) STEs can restrict imports in

several ways First they can impose a set of implicit import tariffs by purchasing imports

at world prices and offering them for sale at much higher domestic prices The difference

between the purchase price and the domestic sales price simply represents a hidden tariff

Import STEs may also implement implicit general and targeted import quotas or utilize

complex and costly implicit import rules that make importing into the market

unprofitable Recently in a submission to the current WTO negotiations the United

States targeted the trade restricting operations of import and export STEs as a primary

concern A major problem with import STEs is that it is quite difficult to estimate the

impacts of their operations on trade because those operations lack transparency STEs

often refuse to provide the information needed to make such assessments claiming that

such disclosure is not required because they are quasi-private companies In spite of these

difficulties the challenges provided by STEs will almost certainly continue to be

addressed through bilateral and multilateral trade negotiations rather than in the context

of domestic legislation through the 2002 Farm Bill

14 TECHNICAL BARRIERS TO TRADE

All countries impose technical rules about packaging product definitions labeling etc

In the context of international trade such rules may also be used as non-tariff trade

barriers For example imagine if Korea were to require that oranges sold in the country

be less than two inches in diameter Oranges grown in Korea happen to be much smaller

than Navel oranges grown in California so this type of ldquotechnicalrdquo rule would effectively

ban the sales of California oranges and protect the market for Korean oranges Such rules

6

violate WTO provisions that require countries to treat imports a nd domestic products

equivalently and not to advantage products from one source over another even in indirect

ways

Again however these issues will likely be dealt with through bilateral and multilateral

trade negotiations rather than through domestic Farm Bill policy initiatives

15 EXCHANGE RATE MANAGEMENT POLICIES

Some countries may restrict agricultural imports through managing their exchange rates

To some degree countries can and have used exchange rate policies to discourage

imports and encourage exports of all commodities The exchange rate between two

countriesrsquo currencies is simply the price at which one currency trades for the other For

example if one US dollar can be used to purchase 100 Japanese yen (and vice versa)

the exchange rate between the US dollar and the Japanese yen is 100 yen per dollar If

the yen depreciates in value relative to the US dollar then a dollar is able to purchase

more yen A 10 percent depreciation or devaluation of the yen for example would mean

that the price of one US dollar increased to 110 yen One effect of currency depreciation

is to make all imports more expensive in the country itself If for example the yen

depreciates by 10 percent from an initial value of 100 yen per dollar and the price of a

ton of US beef on world markets is $2000 then the price of that ton of beef in Japan

would increase from 200000 yen to 220000 yen A policy that deliberately lowers the

exchange rate of a countryrsquos currency will therefore inhibit imports of agricultural

commodities as well as imports of all other commodities Thus countries that pursue

7

deliberate policies of undervaluing their currency in international financial markets are

not usually targeting agricultural imports

Some countries have targeted specific types of imports through implementing multiple

exchange rate policy under which importers were required to pay different exchange rates

for foreign currency depending on the commodities they were importing The objectives

of such programs have been to reduce balance of payments problems and to raise

revenues for the government Multiple exchange rate programs were rare in the 1990s

and generally have not been utilized by developed economies Finally exchange rate

policies are usually not sector-specific In the United States they are clearly under the

purview of the Federal Reserve Board and as such will not likely be a major issue for

the 2002 Farm Bill There have been many calls in recent congressional testimony

however to offset the negative impacts caused by a strengthening US dollar with

counter-cyclical payments to export dependent agricultural products

The Precautionary Principle and Sanitary and Phytosanitary Barriers to Trade

The precautionary principle or foresight planning has recently been frequently proposed

as a justification for government restrictions on trade in the context of environmental and

health concerns often regardless of cost or scientific evidence It was first proposed as a

household management technique in the 1930s in Germany and included elements of

prevention cost effectiveness and ethical responsibility to maintain natural systems

(OrsquoRiordan and Cameron) In the context of managing environmental uncertainty the

principle enjoyed a resurgence of popularity during a meeting of the UN World Charter

for Nature (of which the US is only an observer) in 1982 Its use was re-endorsed by the

8

UN Convention on Bio-diversity in 1992 and again in Montreal Canada in January

2000 The precautionary principle has been interpreted by some to mean that new

chemicals and technologies should be considered dangerous until proven otherwise It

therefore requires those responsible for an activity or process to establish its harmlessness

and to be liable if damage occurs

Most recent attempts to invoke the principle have cited the use of toxic substances

exploitation of natural resources and environmental degradation Concerns about species

extinction high rates of birth defects learning deficiencies cancer climate change

ozone depletion and contamination with toxic chemicals and nuclear materials have also

been used to justify trade and other government restrictions on the basis of the

precautionary principle Thus countries seeking more open trading regimes have been

concerned that the precautionary principle will simply be used to justify nontariff trade

barriers For example rigid adherence to the precautionary principle could lead to trade

embargoes on products such as genetically modified oil seeds with little or no reliance on

scientific analysis to justify market closure

Sometimes restrictions on imports from certain places are fully consistent with

protecting consumers the environment or agriculture from harmful diseases or pests that

may accompany the imported product The WTO Sanitary and Phytosanitary (SPS)

provisions on technical trade rules specifically recognize that all countries feel a

responsibility to secure their borders against the importation of unsafe products Prior to

1994 however such barriers were often simply used as excuses to keep out a product for

which there was no real evidence of any problem

9

These phony technical barriers were just an excuse to keep out competitive products The

current WTO agreement requires that whenever a technical barrier is challenged a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achieve its scientific objectives This requirement has resulted

in a number of barriers being relaxed around the world

10

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

Again as is the case with other trade barriers it seems unlikely that introducing domestic

content rules to enhance domestic demand for US agricultural commodities is a viable

option for the 2002 Farm Bill

13 IMPORT LICENSES

Import licenses have proved to be effective mechanisms for restricting imports Under an

importlicensing scheme importers of a commodity are required to obtain a license for

each shipment they bring into the country Without explicitly utilizing a quota

mechanism a country can simply restrict imports on any basis it chooses through its

allocation of import licenses Prior to the implementation of NAFTA for example

Mexico required that wheat and other agricultural commodity imports be permitted only

under license Elimination of import licenses for agricultural commodities was a critical

objective of the Uruguay Round of GATT negotiations and thus the use of this

mechanism to protect US agricultural producers is unlikely an option for the 2002 Farm

Bill

Import State Trading Enterprises

Import State Trading Enterprises (STEs) are government owned or sanctioned agencies

that act as partial or pure single buyer importers of a commodity or set of commodities in

world markets They also often enjoy a partial or pure domestic monopoly over the sale

of those commodities Current important examples of import STEs in world agricultural

commodity markets include the Japanese Food Agency (barley rice and wheat) South

Korearsquos Livestock Products Marketing Organization and Chinarsquos National Cereals Oil

5

and Foodstuffs Import and Export Commission (COFCO) STEs can restrict imports in

several ways First they can impose a set of implicit import tariffs by purchasing imports

at world prices and offering them for sale at much higher domestic prices The difference

between the purchase price and the domestic sales price simply represents a hidden tariff

Import STEs may also implement implicit general and targeted import quotas or utilize

complex and costly implicit import rules that make importing into the market

unprofitable Recently in a submission to the current WTO negotiations the United

States targeted the trade restricting operations of import and export STEs as a primary

concern A major problem with import STEs is that it is quite difficult to estimate the

impacts of their operations on trade because those operations lack transparency STEs

often refuse to provide the information needed to make such assessments claiming that

such disclosure is not required because they are quasi-private companies In spite of these

difficulties the challenges provided by STEs will almost certainly continue to be

addressed through bilateral and multilateral trade negotiations rather than in the context

of domestic legislation through the 2002 Farm Bill

14 TECHNICAL BARRIERS TO TRADE

All countries impose technical rules about packaging product definitions labeling etc

In the context of international trade such rules may also be used as non-tariff trade

barriers For example imagine if Korea were to require that oranges sold in the country

be less than two inches in diameter Oranges grown in Korea happen to be much smaller

than Navel oranges grown in California so this type of ldquotechnicalrdquo rule would effectively

ban the sales of California oranges and protect the market for Korean oranges Such rules

6

violate WTO provisions that require countries to treat imports a nd domestic products

equivalently and not to advantage products from one source over another even in indirect

ways

Again however these issues will likely be dealt with through bilateral and multilateral

trade negotiations rather than through domestic Farm Bill policy initiatives

15 EXCHANGE RATE MANAGEMENT POLICIES

Some countries may restrict agricultural imports through managing their exchange rates

To some degree countries can and have used exchange rate policies to discourage

imports and encourage exports of all commodities The exchange rate between two

countriesrsquo currencies is simply the price at which one currency trades for the other For

example if one US dollar can be used to purchase 100 Japanese yen (and vice versa)

the exchange rate between the US dollar and the Japanese yen is 100 yen per dollar If

the yen depreciates in value relative to the US dollar then a dollar is able to purchase

more yen A 10 percent depreciation or devaluation of the yen for example would mean

that the price of one US dollar increased to 110 yen One effect of currency depreciation

is to make all imports more expensive in the country itself If for example the yen

depreciates by 10 percent from an initial value of 100 yen per dollar and the price of a

ton of US beef on world markets is $2000 then the price of that ton of beef in Japan

would increase from 200000 yen to 220000 yen A policy that deliberately lowers the

exchange rate of a countryrsquos currency will therefore inhibit imports of agricultural

commodities as well as imports of all other commodities Thus countries that pursue

7

deliberate policies of undervaluing their currency in international financial markets are

not usually targeting agricultural imports

Some countries have targeted specific types of imports through implementing multiple

exchange rate policy under which importers were required to pay different exchange rates

for foreign currency depending on the commodities they were importing The objectives

of such programs have been to reduce balance of payments problems and to raise

revenues for the government Multiple exchange rate programs were rare in the 1990s

and generally have not been utilized by developed economies Finally exchange rate

policies are usually not sector-specific In the United States they are clearly under the

purview of the Federal Reserve Board and as such will not likely be a major issue for

the 2002 Farm Bill There have been many calls in recent congressional testimony

however to offset the negative impacts caused by a strengthening US dollar with

counter-cyclical payments to export dependent agricultural products

The Precautionary Principle and Sanitary and Phytosanitary Barriers to Trade

The precautionary principle or foresight planning has recently been frequently proposed

as a justification for government restrictions on trade in the context of environmental and

health concerns often regardless of cost or scientific evidence It was first proposed as a

household management technique in the 1930s in Germany and included elements of

prevention cost effectiveness and ethical responsibility to maintain natural systems

(OrsquoRiordan and Cameron) In the context of managing environmental uncertainty the

principle enjoyed a resurgence of popularity during a meeting of the UN World Charter

for Nature (of which the US is only an observer) in 1982 Its use was re-endorsed by the

8

UN Convention on Bio-diversity in 1992 and again in Montreal Canada in January

2000 The precautionary principle has been interpreted by some to mean that new

chemicals and technologies should be considered dangerous until proven otherwise It

therefore requires those responsible for an activity or process to establish its harmlessness

and to be liable if damage occurs

Most recent attempts to invoke the principle have cited the use of toxic substances

exploitation of natural resources and environmental degradation Concerns about species

extinction high rates of birth defects learning deficiencies cancer climate change

ozone depletion and contamination with toxic chemicals and nuclear materials have also

been used to justify trade and other government restrictions on the basis of the

precautionary principle Thus countries seeking more open trading regimes have been

concerned that the precautionary principle will simply be used to justify nontariff trade

barriers For example rigid adherence to the precautionary principle could lead to trade

embargoes on products such as genetically modified oil seeds with little or no reliance on

scientific analysis to justify market closure

Sometimes restrictions on imports from certain places are fully consistent with

protecting consumers the environment or agriculture from harmful diseases or pests that

may accompany the imported product The WTO Sanitary and Phytosanitary (SPS)

provisions on technical trade rules specifically recognize that all countries feel a

responsibility to secure their borders against the importation of unsafe products Prior to

1994 however such barriers were often simply used as excuses to keep out a product for

which there was no real evidence of any problem

9

These phony technical barriers were just an excuse to keep out competitive products The

current WTO agreement requires that whenever a technical barrier is challenged a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achieve its scientific objectives This requirement has resulted

in a number of barriers being relaxed around the world

10

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

and Foodstuffs Import and Export Commission (COFCO) STEs can restrict imports in

several ways First they can impose a set of implicit import tariffs by purchasing imports

at world prices and offering them for sale at much higher domestic prices The difference

between the purchase price and the domestic sales price simply represents a hidden tariff

Import STEs may also implement implicit general and targeted import quotas or utilize

complex and costly implicit import rules that make importing into the market

unprofitable Recently in a submission to the current WTO negotiations the United

States targeted the trade restricting operations of import and export STEs as a primary

concern A major problem with import STEs is that it is quite difficult to estimate the

impacts of their operations on trade because those operations lack transparency STEs

often refuse to provide the information needed to make such assessments claiming that

such disclosure is not required because they are quasi-private companies In spite of these

difficulties the challenges provided by STEs will almost certainly continue to be

addressed through bilateral and multilateral trade negotiations rather than in the context

of domestic legislation through the 2002 Farm Bill

14 TECHNICAL BARRIERS TO TRADE

All countries impose technical rules about packaging product definitions labeling etc

In the context of international trade such rules may also be used as non-tariff trade

barriers For example imagine if Korea were to require that oranges sold in the country

be less than two inches in diameter Oranges grown in Korea happen to be much smaller

than Navel oranges grown in California so this type of ldquotechnicalrdquo rule would effectively

ban the sales of California oranges and protect the market for Korean oranges Such rules

6

violate WTO provisions that require countries to treat imports a nd domestic products

equivalently and not to advantage products from one source over another even in indirect

ways

Again however these issues will likely be dealt with through bilateral and multilateral

trade negotiations rather than through domestic Farm Bill policy initiatives

15 EXCHANGE RATE MANAGEMENT POLICIES

Some countries may restrict agricultural imports through managing their exchange rates

To some degree countries can and have used exchange rate policies to discourage

imports and encourage exports of all commodities The exchange rate between two

countriesrsquo currencies is simply the price at which one currency trades for the other For

example if one US dollar can be used to purchase 100 Japanese yen (and vice versa)

the exchange rate between the US dollar and the Japanese yen is 100 yen per dollar If

the yen depreciates in value relative to the US dollar then a dollar is able to purchase

more yen A 10 percent depreciation or devaluation of the yen for example would mean

that the price of one US dollar increased to 110 yen One effect of currency depreciation

is to make all imports more expensive in the country itself If for example the yen

depreciates by 10 percent from an initial value of 100 yen per dollar and the price of a

ton of US beef on world markets is $2000 then the price of that ton of beef in Japan

would increase from 200000 yen to 220000 yen A policy that deliberately lowers the

exchange rate of a countryrsquos currency will therefore inhibit imports of agricultural

commodities as well as imports of all other commodities Thus countries that pursue

7

deliberate policies of undervaluing their currency in international financial markets are

not usually targeting agricultural imports

Some countries have targeted specific types of imports through implementing multiple

exchange rate policy under which importers were required to pay different exchange rates

for foreign currency depending on the commodities they were importing The objectives

of such programs have been to reduce balance of payments problems and to raise

revenues for the government Multiple exchange rate programs were rare in the 1990s

and generally have not been utilized by developed economies Finally exchange rate

policies are usually not sector-specific In the United States they are clearly under the

purview of the Federal Reserve Board and as such will not likely be a major issue for

the 2002 Farm Bill There have been many calls in recent congressional testimony

however to offset the negative impacts caused by a strengthening US dollar with

counter-cyclical payments to export dependent agricultural products

The Precautionary Principle and Sanitary and Phytosanitary Barriers to Trade

The precautionary principle or foresight planning has recently been frequently proposed

as a justification for government restrictions on trade in the context of environmental and

health concerns often regardless of cost or scientific evidence It was first proposed as a

household management technique in the 1930s in Germany and included elements of

prevention cost effectiveness and ethical responsibility to maintain natural systems

(OrsquoRiordan and Cameron) In the context of managing environmental uncertainty the

principle enjoyed a resurgence of popularity during a meeting of the UN World Charter

for Nature (of which the US is only an observer) in 1982 Its use was re-endorsed by the

8

UN Convention on Bio-diversity in 1992 and again in Montreal Canada in January

2000 The precautionary principle has been interpreted by some to mean that new

chemicals and technologies should be considered dangerous until proven otherwise It

therefore requires those responsible for an activity or process to establish its harmlessness

and to be liable if damage occurs

Most recent attempts to invoke the principle have cited the use of toxic substances

exploitation of natural resources and environmental degradation Concerns about species

extinction high rates of birth defects learning deficiencies cancer climate change

ozone depletion and contamination with toxic chemicals and nuclear materials have also

been used to justify trade and other government restrictions on the basis of the

precautionary principle Thus countries seeking more open trading regimes have been

concerned that the precautionary principle will simply be used to justify nontariff trade

barriers For example rigid adherence to the precautionary principle could lead to trade

embargoes on products such as genetically modified oil seeds with little or no reliance on

scientific analysis to justify market closure

Sometimes restrictions on imports from certain places are fully consistent with

protecting consumers the environment or agriculture from harmful diseases or pests that

may accompany the imported product The WTO Sanitary and Phytosanitary (SPS)

provisions on technical trade rules specifically recognize that all countries feel a

responsibility to secure their borders against the importation of unsafe products Prior to

1994 however such barriers were often simply used as excuses to keep out a product for

which there was no real evidence of any problem

9

These phony technical barriers were just an excuse to keep out competitive products The

current WTO agreement requires that whenever a technical barrier is challenged a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achieve its scientific objectives This requirement has resulted

in a number of barriers being relaxed around the world

10

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

violate WTO provisions that require countries to treat imports a nd domestic products

equivalently and not to advantage products from one source over another even in indirect

ways

Again however these issues will likely be dealt with through bilateral and multilateral

trade negotiations rather than through domestic Farm Bill policy initiatives

15 EXCHANGE RATE MANAGEMENT POLICIES

Some countries may restrict agricultural imports through managing their exchange rates

To some degree countries can and have used exchange rate policies to discourage

imports and encourage exports of all commodities The exchange rate between two

countriesrsquo currencies is simply the price at which one currency trades for the other For

example if one US dollar can be used to purchase 100 Japanese yen (and vice versa)

the exchange rate between the US dollar and the Japanese yen is 100 yen per dollar If

the yen depreciates in value relative to the US dollar then a dollar is able to purchase

more yen A 10 percent depreciation or devaluation of the yen for example would mean

that the price of one US dollar increased to 110 yen One effect of currency depreciation

is to make all imports more expensive in the country itself If for example the yen

depreciates by 10 percent from an initial value of 100 yen per dollar and the price of a

ton of US beef on world markets is $2000 then the price of that ton of beef in Japan

would increase from 200000 yen to 220000 yen A policy that deliberately lowers the

exchange rate of a countryrsquos currency will therefore inhibit imports of agricultural

commodities as well as imports of all other commodities Thus countries that pursue

7

deliberate policies of undervaluing their currency in international financial markets are

not usually targeting agricultural imports

Some countries have targeted specific types of imports through implementing multiple

exchange rate policy under which importers were required to pay different exchange rates

for foreign currency depending on the commodities they were importing The objectives

of such programs have been to reduce balance of payments problems and to raise

revenues for the government Multiple exchange rate programs were rare in the 1990s

and generally have not been utilized by developed economies Finally exchange rate

policies are usually not sector-specific In the United States they are clearly under the

purview of the Federal Reserve Board and as such will not likely be a major issue for

the 2002 Farm Bill There have been many calls in recent congressional testimony

however to offset the negative impacts caused by a strengthening US dollar with

counter-cyclical payments to export dependent agricultural products

The Precautionary Principle and Sanitary and Phytosanitary Barriers to Trade

The precautionary principle or foresight planning has recently been frequently proposed

as a justification for government restrictions on trade in the context of environmental and

health concerns often regardless of cost or scientific evidence It was first proposed as a

household management technique in the 1930s in Germany and included elements of

prevention cost effectiveness and ethical responsibility to maintain natural systems

(OrsquoRiordan and Cameron) In the context of managing environmental uncertainty the

principle enjoyed a resurgence of popularity during a meeting of the UN World Charter

for Nature (of which the US is only an observer) in 1982 Its use was re-endorsed by the

8

UN Convention on Bio-diversity in 1992 and again in Montreal Canada in January

2000 The precautionary principle has been interpreted by some to mean that new

chemicals and technologies should be considered dangerous until proven otherwise It

therefore requires those responsible for an activity or process to establish its harmlessness

and to be liable if damage occurs

Most recent attempts to invoke the principle have cited the use of toxic substances

exploitation of natural resources and environmental degradation Concerns about species

extinction high rates of birth defects learning deficiencies cancer climate change

ozone depletion and contamination with toxic chemicals and nuclear materials have also

been used to justify trade and other government restrictions on the basis of the

precautionary principle Thus countries seeking more open trading regimes have been

concerned that the precautionary principle will simply be used to justify nontariff trade

barriers For example rigid adherence to the precautionary principle could lead to trade

embargoes on products such as genetically modified oil seeds with little or no reliance on

scientific analysis to justify market closure

Sometimes restrictions on imports from certain places are fully consistent with

protecting consumers the environment or agriculture from harmful diseases or pests that

may accompany the imported product The WTO Sanitary and Phytosanitary (SPS)

provisions on technical trade rules specifically recognize that all countries feel a

responsibility to secure their borders against the importation of unsafe products Prior to

1994 however such barriers were often simply used as excuses to keep out a product for

which there was no real evidence of any problem

9

These phony technical barriers were just an excuse to keep out competitive products The

current WTO agreement requires that whenever a technical barrier is challenged a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achieve its scientific objectives This requirement has resulted

in a number of barriers being relaxed around the world

10

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

deliberate policies of undervaluing their currency in international financial markets are

not usually targeting agricultural imports

Some countries have targeted specific types of imports through implementing multiple

exchange rate policy under which importers were required to pay different exchange rates

for foreign currency depending on the commodities they were importing The objectives

of such programs have been to reduce balance of payments problems and to raise

revenues for the government Multiple exchange rate programs were rare in the 1990s

and generally have not been utilized by developed economies Finally exchange rate

policies are usually not sector-specific In the United States they are clearly under the

purview of the Federal Reserve Board and as such will not likely be a major issue for

the 2002 Farm Bill There have been many calls in recent congressional testimony

however to offset the negative impacts caused by a strengthening US dollar with

counter-cyclical payments to export dependent agricultural products

The Precautionary Principle and Sanitary and Phytosanitary Barriers to Trade

The precautionary principle or foresight planning has recently been frequently proposed

as a justification for government restrictions on trade in the context of environmental and

health concerns often regardless of cost or scientific evidence It was first proposed as a

household management technique in the 1930s in Germany and included elements of

prevention cost effectiveness and ethical responsibility to maintain natural systems

(OrsquoRiordan and Cameron) In the context of managing environmental uncertainty the

principle enjoyed a resurgence of popularity during a meeting of the UN World Charter

for Nature (of which the US is only an observer) in 1982 Its use was re-endorsed by the

8

UN Convention on Bio-diversity in 1992 and again in Montreal Canada in January

2000 The precautionary principle has been interpreted by some to mean that new

chemicals and technologies should be considered dangerous until proven otherwise It

therefore requires those responsible for an activity or process to establish its harmlessness

and to be liable if damage occurs

Most recent attempts to invoke the principle have cited the use of toxic substances

exploitation of natural resources and environmental degradation Concerns about species

extinction high rates of birth defects learning deficiencies cancer climate change

ozone depletion and contamination with toxic chemicals and nuclear materials have also

been used to justify trade and other government restrictions on the basis of the

precautionary principle Thus countries seeking more open trading regimes have been

concerned that the precautionary principle will simply be used to justify nontariff trade

barriers For example rigid adherence to the precautionary principle could lead to trade

embargoes on products such as genetically modified oil seeds with little or no reliance on

scientific analysis to justify market closure

Sometimes restrictions on imports from certain places are fully consistent with

protecting consumers the environment or agriculture from harmful diseases or pests that

may accompany the imported product The WTO Sanitary and Phytosanitary (SPS)

provisions on technical trade rules specifically recognize that all countries feel a

responsibility to secure their borders against the importation of unsafe products Prior to

1994 however such barriers were often simply used as excuses to keep out a product for

which there was no real evidence of any problem

9

These phony technical barriers were just an excuse to keep out competitive products The

current WTO agreement requires that whenever a technical barrier is challenged a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achieve its scientific objectives This requirement has resulted

in a number of barriers being relaxed around the world

10

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

UN Convention on Bio-diversity in 1992 and again in Montreal Canada in January

2000 The precautionary principle has been interpreted by some to mean that new

chemicals and technologies should be considered dangerous until proven otherwise It

therefore requires those responsible for an activity or process to establish its harmlessness

and to be liable if damage occurs

Most recent attempts to invoke the principle have cited the use of toxic substances

exploitation of natural resources and environmental degradation Concerns about species

extinction high rates of birth defects learning deficiencies cancer climate change

ozone depletion and contamination with toxic chemicals and nuclear materials have also

been used to justify trade and other government restrictions on the basis of the

precautionary principle Thus countries seeking more open trading regimes have been

concerned that the precautionary principle will simply be used to justify nontariff trade

barriers For example rigid adherence to the precautionary principle could lead to trade

embargoes on products such as genetically modified oil seeds with little or no reliance on

scientific analysis to justify market closure

Sometimes restrictions on imports from certain places are fully consistent with

protecting consumers the environment or agriculture from harmful diseases or pests that

may accompany the imported product The WTO Sanitary and Phytosanitary (SPS)

provisions on technical trade rules specifically recognize that all countries feel a

responsibility to secure their borders against the importation of unsafe products Prior to

1994 however such barriers were often simply used as excuses to keep out a product for

which there was no real evidence of any problem

9

These phony technical barriers were just an excuse to keep out competitive products The

current WTO agreement requires that whenever a technical barrier is challenged a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achieve its scientific objectives This requirement has resulted

in a number of barriers being relaxed around the world

10

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

These phony technical barriers were just an excuse to keep out competitive products The

current WTO agreement requires that whenever a technical barrier is challenged a

member country must show that the barrier has solid scientific justification and restricts

trade as little as possible to achieve its scientific objectives This requirement has resulted

in a number of barriers being relaxed around the world

10

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

CHAPTER 2 NON TARIFF TRADE BARRIERS AND

NEW PROTECTIONISM LEARNING OUTCOMES

21 ARGUMENTS FOR FREE TRADE

The important arguments in favour of free trade are as follows

(i) Free trade leads to the most economic utilisation of the productive resources of the

world because under free trade each country will specialise in the production of those

goods for which it is best suited and will import from other countries those goods which

can be produced domestically only at a comparative disadvantage

(Iii) As there will be intense competition under free trade the inefficient producers are

compelled either to improve their efficiency or to quit

(Iv) Free trade helps to break domestic monopolies and free the consumers from

exploitation

(v) Free trade benefits the consumersin different ways It enables them to obtain goods

from the cheapest source Free trade also makes available large varieties of goods

(v i) Further under free trade there is no much scope for corruption which is rampant

under protection 1048766 Know Non tariff Trade Barriers and Protectionism 1048766 Identify the fall

and rise of protectionism Free Trade Versus Protection Free trade refers to the trade

that is free from all artificial barriers to trade like tariffs quantitative restrictions

exchange controls etc Protection on the other hand refers to the government policy of

according protection to the domestic industries from foreign competition There are a

number of arguments for and against both free trade and protection (ii) Under free trade

division of labour occurs on an international scale leading to greater specialisation

efficiency and economy in production

11

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

22 ARGUMENTS FOR PROTECTION

Theoretically speaking free trade has certain virtues as we have seen above But in

reality government are encouraged to resort to some manner of protective measures of

safeguard the national interest There are a number of arguments put forward in favour of

protection Some of these arguments are very valid while some others are not We

provide below the gist of the popular arguments for protection

(i) Infant Industry Argument The infant industry argument advanced by Alexander

Hamilton Frederick List and others asserts that a new industry having a potential

comparative advantage may no_ get started in a country unless it is given temporary

protection against foreign competition An established industry is normally much more

stronger than an infant one because of the advantageous position of the established

industry like its longstanding experience internal and external economies resource

position market power etc Hence if the infant is to compete with such a powerful

foreign competitor it will be a competition between unequals and this would result in the

ruin of the infant industry Therefore if a new industry having a potential comparative

advantage is not protected against the competition of an unequally powerful foreign

industry it will be denying the country the chance to develop the industry for which it

has sufficient potential The intention is not to give protection for ever but only for a

period to enable the new industry to overcome its teething troubles The policy of

protection has been well expressed in the following words Nurse the baby Protect the

child and Free the adult

The infant industry argument however has not been received favourably by some

economists They argue that an infant will always be an infant if it is given protection

12

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

Further it is very difficult for a government to identify an industry that deserves infant

industry protection The infant industry argument boils down to a case for the removal

of obstacles to the growth of the infants It does not demonstrate that a tariff is the most

efficient means of attaining the objective J

(ii) Diversification Argument It is necessary to have a diversified industrial structure for

an economy to be strong and reasonably self-sufficient An economy that depends on a

very limited number of industries is subject to many risks A depression or recession in

these industries will seriously affect the economy A country relying too much on

foreign countries runs a number of risks Changes in political relations and international

economic conditions may put the country into difficulties Hence a diversified industrial

structure is necessary to maintain stability and acquire strength It is therefore advised to

develop a range of industries by according protection to those which require it

(iii) Improving the Terms of Trade It is argued that the terms of trade can be improved by

imposing import duty or quota By imposing tariff the country expects to obtain larger

quantity of imports for a given amount of exports or conversely to part with a lesser

quantity of exports for a given amount ofim-ports But the terms of trade could be

expected to improve only if the foreign supply is inelastic If the foreign supply is very

much elastic a tariff or a quota is unlikely to improve the terms of trade there is also the

possibility that the foreign countries will retaliate by imposing counter tariffs und quotas

The validity of this argument is therefore questionable

(v) Anti-Dumping Protection is also resorted to as an anti-dumping measure Dumping

certainly can do harm to the domestic industry the relief the consumers get will only be

temporary It is possible that after ruining the domestic industry by dumping the foreign

13

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

firms will obtain monopoly powers and exploit the home market Sometimes dumping

represents a transmission of the recession abroad to the home country These factors point

out the need to protect domestic industries against dumping

(vi) Bargaining It is argued that a country which already has a tariff can use it as a means

of bargaining to obtain from other countries lower duties on its exports It has been

pointed out however that the bargaining lever instead of being used to gain tariff

concessions from foreign powers may be employed by others to extract additional

protection from the home government

(vii) Employment Argument Protection has been advocated also as a measure to stimulate

domestic economy and expand employment opportunities Restric-tion of imports will

stimulate import competing industries and its spread effects will help the growth of other

industries These naturally create more employment opportunities

This method of employment generation however has some problems First when we

reduce imports from foreign countries employment and income will shrink abroad and

this is likely to lead to a fall in the demand for our exports Secondly the foreign

countries will be tempted to retaliate in order to protect their employment

(viii) National Defense Even if purely economic factors do not justify such a course of

action certain industries will have to be developed domestically due to strategic reasons

Depending on foreign countries for our defense requirements is rather foolish because

factors like change in political relations can do serious damage to a countrys defense

interest Hence it is advisable to develop defense and other industries of strategic

importance by providing protection if they cannot survive without protection

14

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

(ix) Key Industry Argument It is also argued that a country should develop its own key

industries because the development of other industries and the economy depends a lot on

the output of the key industries Hence if we 40 not have our own source of supply of

key inputs we will be placing ourselves at the mercy of the foreign suppliers The key

industries should therefore be given protection if that is necessary for their growth and

survival (iv) Improving Balance of Payments This is a very common ground for

protection By restricting imports a country may try to improve its balance of payments

position The developing countries especially may have the problem of foreign

exchange shortage Hence it is necessary to control imports so that the limited foreign

exchange will be available for importing the necessary items In developing countries

generally there is a preference for foreign goods Under such circumstances it is

necessary to control unnecessary imports lest the balance ofi payments position become

critical The arguments mentioned above have been generally regarded as serious There

are however a number of other arguments also which have been branded as nonsense

fallacious special interest etc Common among them are the following (xi) The

Pauper Labour Argument The essence of this argument is that if in the home country the

wage level is substantially high compared to foreign countries the foreign producers will

dominate the home market because the cheap labour will allow them to sell goods

cheaper than the domestic goods and this will affect the interests of the domestic labour

This argument does not recognize the fact that high wages are usually associated with

high productivity Further labour cost differences may not be a determining factor

15

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

(x) Keeping Money at Home This argument is well expressed in the form of a remark

falsely attributed to Abraham Lincoln I do not know much about the tariff but I know

this much When we buy manufactured goods abroad we get the goods and the foreigner

gets money When we buy the manufactured goods at home we get both the goods and

the money As Beveridge rightly reacted this argument has no merits the only

sensible words in it are the firsteight word The fact that imports are ultimately paid for

by exports clearly shows that the keeping money at home argument for protection has no

sense in it

(xii) Size of the Home Market It is argued that protection will enlarge the market for

agricultural products because agriculture derives large benefits not only directly from the

protective duties levied on competitive farn1 products of foreign origin but also

indirectly from the increase in the purchasing power of the workers employed in

industries similarly protected It may be pointed out against this that protection of

agriculture will harm the non-agriculturists due to the high prices of agricultural products

and the protection of industries will harm agriculturists and other consumers due to high

prices encouraged by protection

(xiii) Equalisation of Costs of Production Some protectionists have advocated import

duties to equalise the costs of production between foreign and domestic producers and to

neutralise any advantage the foreigner may have over the domestic producers in terms of

lower taxes cheaper labour or other costs This argument allegedly implies a spirit of

fair competition not the exclusion of imports When however by reason of actual cost

structure or artificial measures costs of production become identical the very basis of

international trade disappears The logical consequence of this pseudo-scientific method

16

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

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httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

is the elimination of trade between nations Thus the equalisation of costs of production

argument for protection is utterly fallacious and is one of the most deceitful ever

advanced in support of protection

(xiv) Strategic Trade Policy Strategic trade policy which advocates protection and

government cooperation to certain high-tech industries in the developed countries is

somewhat similar to the infant industry argument applied to the developing countries

The argument is that government support should be ac-corded to gain comparative

advantage in the high technology industries which are crucial to the future of the nation

such as semiconductors computers telecommunications etc It is also argued that State

support to certain industries become essential to prevent market monopolisation For

example outside the former Soviet Union only three firms build large passenger jets If

European governments do not subsidise the Airbus Industries only the two American

companies Boeing Company and Mc-Donnell-Douglas Corporation will remain

The oft cited examples of industries developed with the support of the strategic trade

policy include the steel industry in Japan in the 1950s semiconductors in the 1970s _nd

1980s and the development of the supersonic aircraft Concorde in Europe in the 1970s

and the development of the Airbus aircraft in the 1980s

As Salvatore observes while strategic trade policy can theoretically improve the market

outcome in oligopolistic markets subject to extensive economies and increase the nations

growth and welfare even the originators and popularisers of this theory recognise the

serious difficulties in carryingl it out The following difficultes are pointed out in

particular First it is extremely difficult to choose the wimiers (ie choose the industries

that will provide large externaly economies in the future) and devise appropriate policies

17

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

to successfully nlrture them Secondly since most leading nations undertake strategic

trade policies at the same time their efforts are largely neutralised so that the potential

benefits to each may be small Thirdly when a country does achieve substantial success

with strategic trade policy this comes at the expense of other countries (ie it is a

beggar-thy-neighbour policy) and so other countries are likely to retaliate

The following defects are generally attributed to protection

(i) Protection is against the interest of consumers as it increases price and reduces variety

and choice

(ii) Protection makes producers and sellers less quality conscious

(iii) It encourages domestic monopolies

(iv) Even inefficient firms may feel secure under protection and it discourages

innovation

(v) Protection leaves the arena open to corruption

(vi) It reduces the volume of foreign trade

23 FALL AND RISE OF PROTECTIONISM

The period of over two-and-a-half decades until the early 1970s witnessed rapid

expansion of the world output and trade World trade in fact grew much faster than the

output After the Second World War there was a progressive trade liberalisation until the

early seventies Thanks to the efforts of GATT the tariff reductions in the industrial

countries continued even after this The average levels of tariff on manufactures in

industrial countries is now about 3 per cent compared to 40 per cent in 1947

18

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

24 DEMERITS OF PROTECTION

(vii) Protection leads to uneconomic utilisation of worlds resources Although the period

until the early 1970s was characterised by trade liberalisation in general there were

several exceptions In the developed countries heavy protection was given to the

agricultural sector through import restrictions and domestic subsidies Further in

manufactured goods textiles and clothe ing were subject to heavy protection There was

also protection associated with regional trade agreements like the EEC Imports to

developing countries were in general highly restrictive due to reasons such as balance of

payments problems and the need to protect infant industries In the industrial countries

anti dumping and counterveiling duties began to assume more importance since the mid-

sixties The overall trend in the industrial countries however was one of liberalisation

This trend was reversed in the seventies

Since about the mid-seventies protectionism has grown alanllingly in the developed

countries This has taken mainly the fonn of non-tariff barriers (NTBs)

The main reason for the growing protectionism in industrialised countries is the

increasing competition they face from Japan and developing countries like for example

the South-East Asian countries Due to the fact that the competition has been very severe

in the case of labour intensive products the import competing industries in the advanced

countries have been facing the threat of large retrenchments Several other industries like

the automobile industry in the US have also been facing similar problems The demand

for protection has therefore grown in the industrial countries in order to protect

employment Protective measures have also been employed to pressurise Japan and the

19

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

developing countries to open up their markets for goods services and investments of the

industrial countries

As mentioned earlier the NTBs affect the exports of developing countries much more

than those of the developed ones In other words the main target of the developed

country import restrictions in the last two decades or so has been the developing

countries By 1987 NTBs were estimated to have affected almost a third of OECD

imports from developing countries4 While developing countries as a group now face

tariffs 10 per cent higher than the global average the least developed countries face

tariffs 30 per cent higher-because tariffs remain higher on the goods with greatest

potential for the poorest countries such as textiles leather and agricultural commodities

Labour intensive products like textiles clothing and footwear are among the most highly

protected imports The restriction on the textiles and clothing which account for nearly

one-fourth of the developing country exports has been exercised mainly by the Multi-

Fibre Arrangement (MFA) which denies the developing countries an estimated $ 24

billion a year in terms of export earnings Tariff escalation (ie increase in tariffs with the

level of processing) is yet another important factor which discourages developing

countries manufactured goods For example while the tariff on raw sugar is less than 2

per cent it is around 20 per cent for processed sugar products The tariff escalation

discourages the developing countries graduation as exporters of manufactured goods

from commodity exporters Tariff escalation affects a wide variety of products such as

jute spices vegetables vegetable oils tropical fruits beverages etc

20

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

As the industrial countries face more competition they increase protectionism This

encourages one to think that they wanted free trade only as long as they enjoyed a

dominant position when their dominance is challenged they increase the trade barriers

giving one or another reason One should not be surprised if tomorrow they restrict the

imports from developing countries arguing that the cost advantage of the developing

countries is because of the injustice done to the labour by paying wages lower than that

in the US or other industrial countries Ironically industrial countries are increasing trade

restrictions while the developing countries are liberalising trade

Trade restrictions prove costly not only for the affected exporting country but also for the

importing country restricting the trade The consumers often pay a heavy price for

protection It is estimated that overall the American consumers pay as much as $ 75

billion a year more for goods on account of import fees and restrictions-a sum roughly

equivalent to about a sixth of the US import bill In Canada every dollar earned by

workers who continue to hold their jobs because of protection of the textile and clothing

industries costs society an estimated $ 70 In the United States consumers paid $

114000 a year for each job saved in thc steel industry

21

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

CHAPTER 3 DOHA ROUND OF NEGOTIATIONS

The Doha Development Agenda (DDA) of the World Trade Organisation (WTO) was

launched in 2001 at Doha Qatar to be completed by December 2004 But the

Development Round could not be completed by the targetted date as member countries

failed to arrive at a consensus on core issues in the Round The Hong Kong Ministerial

meeting of the WTO in December 2005 ended with a new deadline of completing the

Doha Round by December 2006 The negotiations were however deadlocked in July

2006 In January 2007 at Davos Switzerland 30 trade ministers including India met and

decided to take the Doha Agenda forward and get back to the negotiating table

Negotiations then began from February 2007 and major players commenced intense

discussions in the core areas of agriculture industrial goods and services besides

discussions on rules and trade facilitation Since January 2008 there has been a sense of

urgency among the negotiators to conclude the Round this year since they believe that

this is the last window of opportunity available if they want the Doha Round to succeed

Any delay now may lead to the Round being suspended for atleast a couple of years

Since March-April 2008 there has been significant progress in the negotiations and

countries seem to be interested in striking a deal The Director General of WTO Mr

Pascal Lamy has used all platforms available to him to push the key member countries

towards a consensus There are indications that Mr Lamy may convene a Ministerial

meeting in end-May 2008 to finalize a deal

22

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

31 CII AND THE DOHA ROUND

CII supports the negotiations for liberalizing trade under the DDA and urges negotiators

to complete the Round at the earliest The DDA is a Development Round CII endorses

the view that success and ambition in the Doha Round will be measured by real market

access provided to developing and least developed countries by the advanced countries

Negotiators will have to take care that the main pillars of the Development Round namely

ldquoSpecial and Differential Treatmentrdquo and ldquoLess than Full Reciprocityrdquo available to

developing countries are fully reflected in the modalities in all the pillars of the DDA

32 NON-AGRICULTURAL MARKET ACCESS (NAMA)

Reducing tariffs and non-tariff barriers (NTBs) on industrial goods was at the core of

multilateral trade negotiations under the GATT and remains central to the objectives

agreed in Doha The DDA focuses on two main issues under NAMA negotiations

1 Tariff reduction commitments

2 Elimination of Non-Tariff barriers

According to Doha Agenda tariff reductions will take place according to a general

formula but sectoral agreements to further harmonise or eliminate tariffs could also be

reached Practically all products should be covered by these reductions which will be

made from existing bound tariffs rates (Furthermore developed countries are encouraged

to eliminate low duties (so called nuisance duties)

Non ad valorem duties are to be converted to ad valorem equivalents The final duties

should be based on the Harmonized System (2002) The reference period for import data

will be 1999-2001

23

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

The DDA is very explicit on the principle of ldquoless than full reciprocityrdquo commitments and

ldquoSpecial and Differential Treatmentrdquo that is available to developing countries and it is an

important component of the negotiations on NAMA They may exempt up to 10 percent

of their tariff lines from the agreed reductions or keep up to five percent of their tariff

lines unbound The least developed countries do not have to make any tariff reductions at

all but are expected to substantially increase their level of binding Industrial countries

are in return to remove tariffs and quotas for all industrial goods from the least developed

countries

Since the Hong Kong Ministerial meeting in December 2005 member countries of WTO

have agreed on the following main areas in NAMA

1048729 All member countries would adopt a Swiss Formula with different coefficients for

developed and developing countries As per the formula the coefficient adopted for a

country will be the tariff level of that country

The coefficients that have been discussed as per the last paper in February 2008 from the

chairperson of the negotiating group Mr Don Stephenson the developed countries would

have a coefficient of 8-9 and developing countries would have a coefficient of 19-23

1048729 Members agreed that lsquoSpecial and Differentialrsquo treatment for developing countries

including flexibilities and lsquoless than full reciprocityrsquo in tariff reductions will be an

integral part of the modalities

1048729 It was decided to extend duty and quota free access for at least 97 percent of products

for the least developed countries (LDCs) by 2008

1048729 Members also agreed to declare sectoral initiatives as non- ndash mandatory

24

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

This means that the countries decided that any initiative to eliminate customs duties on

specific sectors should not be binding on countries However it was also decided that

sectorals would be decided on the basis of a critical mass of countries joining these

negotiations Critical mass would mean that all countries which constitute about 90 of

global trade in that sector would be part of the negotiations

1048729 The efforts to eliminate non-tariff barriers (NTBs) are to be accelerated At the Hong

Kong ministerial all member states were asked to submit negotiating proposals as soon

as possible Negotiations will include requestoffer and horizontal or vertical (sectoral)

approaches

1048729 A US paper was tabled in early 2008 requesting of negotiations on remanufactured

goods There have been several rounds of discussions on this issue and most countries do

not

CII POSITION

1048729 CII strongly believes that flexibilities and S and D treatment for developing countries

should be reflected in the final outcome of the NAMA negotiation This means

developing countries like India should have longer implementation periods for cutting

tariffs and should be subjected to lower percentage cuts in tariffs when compared to

developed country members

1048729 CII is of the view that developing country members should have the flexibility of

keeping at least five to seven per cent of their sensitive tariff lines unbound

1048729 CII supports having a coefficient in the Swiss formula for cutting industrial tariffs

which respects the ldquoless than full reciprocityrdquo principle in Doha Development Agenda for

25

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

developing countries CII is of the view that there should be a 25-point difference

between the coefficients of developed and developing countries

1048729 CII will like to see some real market access commitments from developed country

members in areas of interest to developing countries with a view to remove tariff

escalation and tariff peaks Textiles and Clothing is one important sector for Indian

industry

1048729 Developed countries should consider abolishing ldquoNuisance tariffsrdquo of less than 3

percent

1048729 CII supports elimination of all non-tariff barriers to trade in goods around the world A

mechanism of national contact points for consultation and mediation should be set up to

solve NTB implementation problems

1048729 CII does not support sectoral negotiations and is of the view that any discussion on this

issue should be after the coefficients are decided

1048729 CII does not support the US paper on re-manufactured goods which calls for equating

remanufactured goods with new goods

33 SERVICES

The General Agreement on Trade in Services (GATS) contains a ldquobuilt-in agendardquo

(Article 19) mandating Members to initiate market access liberalization negotiations on

services The Doha Ministerial Declaration refers to these guidelines as ldquothe basis for

continuing the negotiationsrdquo

Members have followed a request-offer approach to these negotiations for market access

26

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

However the offers on the table for liberalizing the services regime in most countries

especially the developed ones have been mainly below expectations

This is one area of negotiations that has not witnessed progress despite several reminders

and statements by ministers and senior negotiating officials

During the negotiations it has been decided that

1048729 Progressive liberalisation will be achieved through negotiation with appropriate

flexibility for members

1048729 There will be plurilateral requests in addition to the bilateral request-offer approach

1048729 Groups of Members presenting plurilateral requests to other Members should submit

such requests by 28 February 2006 or as soon as possible thereafter

CII Position

1048729 Mode 4 (movement of professionals) and Mode 1 (trans-border supply) is of particular

interest to CII and it will like higher commitments from developed country members in

these modes of supply of services

1048729 Member countries of WTO need to address market access issues related to domestic

regulation and address issues such as economic need tests for granting work permits

under Mode 4 ie for temporary movement of persons

1048729 Mode 4 should not be related to immigration issues and should be looked upon as

short-term visas for delivering contractual services

1048729 CII feels that wage parity should not be a pre-condition of entry for contractual service

providers and independent professionals

27

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

1048729 Greater emphasis needs to be laid on mutual recognition of professional degrees by

countries

1048729 Simplification and harmonisation of national regulations should be targeted

1048729 CII will like to see more access for independent professionals and not just inter-

company transfers

1048729 Electronic commerce should remain duty-free and should not be discriminated against

as compared to other modes of delivery

34 AGRICULTURE

Agriculture is the main driver of the negotiations under the DDA These negotiations

assume tremendous importance since it involves the two critical issues for development ndash

food security and livelihood concerns in developing and least developed countries

The DDA focuses on three important areas for liberalizing trade in agriculture goods and

commodities across the globe

1048729 Tariff reductions

1048729 Substantial reductions in domestic support

1048729 Elimination of exports subsidy

CII Position

1048729 CII calls for elimination of all distortions in trade in agricultural goods and

commodities

1048729 CII urges developed country members to remove all high tariffs in agricultural

products

28

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

1048729 CII will like to see substantial reduction in all domestic support (regardless of box

classification) provided by developed country members by 2010

1048729 CII believes that support in any form or colour is not entirely free from having some

element of trade distortion

1048729 CII urges developed countries to offer deeper cuts to its farm tariff and designate only

1 of tariff lines as sensitive

1048729 CII urges member countries to protect the food security and livelihood concerns of

farmers in developing and least developed countries

1048729 CII will like to see the components of sensitive and special products strengthened for

developing country members to address the problems of small and subsistence farmers

1048729 CII believes that the designation of special products by developing countries would

require maximum flexibility

1048729 Developing countries may be given special and differential treatment for border

protection and internal support measures in order to secure domestic food supply

35 TRADE FACILITATION

The Trade Facilitation Agreement is the only Singapore issue that has survived in the

Doha Round In the WTO agreement of July 2004 it was decided that trade facilitation

will be a new item of negotiations on the Doha agenda The objectives of the negotiations

are ldquoto clarify and improve relevant aspects of Articles V VIII and X of the GATT 1994

with a view to further expediting the movement release and clearance of goods

including goods in transitrdquo

29

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

The negotiations are to ensure special efforts to support capacity building in developing

countries and to promote cooperation between customs and other authorities Developing

countries are expected to make reasonable contributions and the least developed countries

are only to be required to make contributions consistent with their own needs and

capabilities The negotiations have come off to a good start and there is good hope of

having a substantial agreement on trade facilitations as a substantial part of the Doha

Round package

The trade facilitation agreement is important to the establishment of an improved and

more efficient management process for international trade in goods on a global basis

CII Position

1048729 CII supports the on-going negotiations on Trade Facilitation and urges negotiators to

quickly identify ways and means to simplify procedures for easier movement of goods

through customs and border controls

1048729 Information submitted in one system including approved internal company systems

should automatically be used also for other systems and so-called Single Window

systems should be introduced

1048729 A WTO Agreement on Trade Facilitation should include provisions to achieve the

objectives of increased transparency predictability and speed

1048729 Internet-based information and clearance procedures should be promoted

1048729 A WTO agreement must also allow for efficient payment systems to be used and

customs valuation should be based on the invoice price

30

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

CHAPTER 4 TARIFF AND NON-TARIFF BARRIERS

BENEFIT DEVELOPING COUNTRIES - NEW STUDY

There is considerable evidence for the hypothesis that under certain conditions

restrictions on trade can promote growth especially of developing countries according to

a study published in the Journal of Development Economics

The study by Halit Yanikkaya an academic at the College of Business and

Administrative Services Celal Bayar University (Turkey) has examined the growth

effects on 108 economies of a large number of measures of trade openness using the

same yardsticks or measures of openness and over the same periods and applying

econometric models and regressions The study has used two broad categories measures

of trade volumes and measures of trade restrictions and measures their effects on growth

in the 108 economies

The study and the results of the data analysed challenges what the author calls ldquothe

unconditional optimism in favour of trade openness among the economic profession and

policy circlesrdquo

It finds that on the basis of trade volumes there is a positive and significant association

between trade openness and growth

According to the conventional view and studies on the growth and trade restrictions trade

restrictions have an ldquoadverse association between trade barriers and growthrdquo

31

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

The study finds a contrary evidence and says ldquoour estimation results from most

specifications (of tariff and trade barriers) show a positive and significant relationship

between trade barriers and growthrdquo

ldquoEqually importantrdquo the study adds ldquothese results are essentially driven by developing

countries and thus consistent with the predictions of the theoretical growth literature that

certain conditions developing countries can actually benefit from trade restrictionsrdquo

Several empirical studies of the lsquo80s and lsquo90s provided an affirmative answer for the

view that ldquoopen economiesrdquo grew faster than closed ones and that ldquooutward-orientedrdquo

economies have consistently higher growth rates than ldquoinward-orientedrdquo ones These led

to a strong bias in favour of trade liberalisation and under-pinned the World BankIMF

policy conditionalities and advice to developing countries and the Washington Consensus

of the 1990s

Yanikkaya says that this strong bias in favour of trade liberalization was partly due to the

tragic failures of the import substitution strategies especially in the 1980s and the

overstated expectations from trade liberalization The World Bank- sponsored studies by

Dollar and others said they had found positive correlations between open economies and

faster growth across countries

The first major challenge from academia came from Dani Rodrik and followed by a

cross-country empirical analysis using the same measures of lsquoopennessrsquo across a range

of countries which brought out that these studies had reached the conclusion of open

economies growing faster because they used different yardsticks for countries and over

32

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

different time-periods But when the same yardsticks were used and over the same time-

periods the results showed that fast growth had taken place in some of the countries with

higher trade restrictions (India and China) but which had adopted a measured approach

to trade liberalization (after creating capacity domestically and calibrating liberalization

measures)

Since then a number of studies have come out challenging the view that liberalization of

trade and investments is always a plus and there is growth in the long-run These studies

have brought out that openness to external trade and trade liberalization are two different

concepts and that the latter promoted growth (and brought in foreign direct investment

and associated technology) only under certain conditions and when the host-country

State played an active role

The Yanikkaya study notes that while there is a near consensus about the positive

correlation between trade flows and growth the theoretical growth literature (which

studied growth effects of trade restrictions) came to the view that the effects were very

complicated in the most general case and mixed in how trade policies play a special role

in economic growth

This the author attributes to the way lsquoopennessrsquo is described very differently in various

studies making classification of countries on basis of lsquoopennessrsquo a formidable task

Hence using different measures of openness produces differing results

The Yanikkaya study looks at the growth effects on a large number of measures of trade

openness Two broad measures of trade openness are used and studied one is on effect of

33

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

various measures on trade volumes which indicate a positive and significant association

between openness and growth and is in line with conclusions of empirical and theoretical

growth literature

However the estimation results for various measures for trade barriers contradicts the

conventional view on the growth effects of restrictions and suggests ldquoan adverse

association between trade barriers and growth The estimation results from most

measures of trade restrictions show a positive relationship between trade barriers and

growth a result driven by developing countries

These results are consistent with the predictions of theoretical growth literature namely

that under certain conditions developing countries can actually benefit from trade

restrictions

In a survey of the literature the study finds that international trade theory (based on static

trade gains) provides little guidance to the effects of international trade on growth and

technical progress the new trade theory argues that gains from trade can arise from

several fundamental sources differences in comparative advantage and economy-wide

increasing returns

While there are many studies about the effects of trade policies on growth - during the

failed import substitution strategies of the 1980s and the export-promotion policies - there

is a lack of clear definition of lsquotrade liberalizationrsquo or lsquoopennessrsquo

The most difficult has been measuring lsquoopennessrsquo An ideal one would be an index that

includes all trade barriers distorting international trade such as average tariff rates and

34

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

indices of non-trade barriers Such an index incorporating effects of both tariff and non-

tariff measures has been developed by JEAnderson and JPNeary But it is not available

for a large number of economies Other studies like those by Dollar and Sachs and

Warner used available data

If the growth engine is driven by innovation and introduction of new products then

developing countries should benefit more by trading with developed countries than with

other developing countries However the Yanikkaya study results do not support this

both providing growth regressions positively and significantly

The study finds that a developing country benefits through technology diffusion by

trading with a developed country and since the US is the leader in technology

developing countries benefit through this bilateral trade Also countries with higher

population densities tend to grow faster than those with lower densities

In using measures of trade restrictions - several of whom it acknowledges are not free

from measurement errors - the study reaches some very different conclusions than

conventional trade theory suggests Thus it finds that trade barriers in the form of tariffs

can actually be beneficial for economic growth

In the current context (of the Doha Round and the drive of Europe and the US to tear

down and harmonise developing country tariffs) this is a significant and telling result

providing support for the viewpoint of developing countries in these talks The

framework for modalities for tariff liberalisation in industrial products in the NAMA

negotiations put forward by the chairman (and WTO secretariat) is misguided and needs

35

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

to be opposed and jettisoned When export taxes and total taxes on international trade are

used as a measure of trade restrictions the study finds that save for fixed effect estimates

there is a ldquosignificant and positive associationrdquo between trade barriers and growth This is

similar to the results for average tariffs

On non-tariff barriers there are difficulties of estimation because of data limitations

hence these are excluded in most empirical studies But studies by JEdwards (cited in the

Yanikkaya study) found such restrictions having an insignificant relationship with

growth and came to the view that NTBs are poor indicators of trade orientation since a

broad coverage of NTBs did not necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo The study makes clear that

it has no intention of establishing a simple and straightforward positive association

between trade barriers and growth but rather to show that ldquothere is no such relationship

between trade restrictions and growthrdquo Such a relationship depends mostly on the

characteristics of a country Restrictions can benefit a country depending on whether it is

developed or developing (a developed one seems to lose) whether it is a big or small

country and whether it has comparative advantage in sectors receiving protection

36

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

CHAPTER 5 CASE STUDY

NON-TARIFF BARRIERS STUMP PHARMA EXPORTS TO CHINA

FICCI

Indiarsquos exports of pharmaceuticals could make a significant dent in the Chinese market

and help meet overall trade expectations of US$ 30 billion by 2009 provided Non Tariff

Barriers in the shape of procedural legal and cultural barriers that hinder market access

are removed according to FICCI

Based on feedback received from pharma exporting companies FICCI has called for

urgent steps to streamline customs procedures as well as efficient and effective use of

technology for electronic data interface in customs administration and information

exchange A bilateral pre-shipment inspection agreement would also benefit both

countries

FICCI has suggested that recognition agreements on standards should be arrived at and

full details of standards should be made easily available It has recommended that the

various non-tariff barriers be identified and addressed and both countries act to remove

them in a time bound framework Easier trade financing and greater cooperation between

the EXIM banks of the two countries would also work to the benefit trade between the

two countries

In this context it is important to note that Indian exports of drug pharmaceuticals and

fine chemicals to markets such as the US Europe Africa and South America have grown

by 19 year-on-year in the last three years while the world average growth rate for this

37

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

sector is about 6 In contrast in the last three years Indiarsquos exports to China have grown

at just 3 From US$ 94 million in 2002-03 Chinese imports from India have grown to

US$ 106 million in 2003-04 to US$ 109 million in 2004-05 This accounts for barely 2-

3 of Indian exports of drugs and pharmaceuticals to the world This indicates that the

high-performing Indian pharma sector has not found the environment conducive for

achieving similar growth with China

The Non-Tariff Barriers identified by FICCI in pushing pharma exports to China include

Procedures for product and company registration and for procuring Import Drug

License are expensive and time consuming Over and above the official cost of

US 7000 per product they can cost anywhere between US$ 20000 to $40000 per

product Besides it may take 18 months to three years to procure an Import Drug

Licence These licences and registration are essential for beginning to export or

ship goods even to factories owned by the companies that are situated in China

This is a considerable deterrent for Indian entrepreneurs to initiate exports to

China

Long customs procedures re-inspections and discriminatory packaging amp

labelling regulations that even specify the colour used for packaging result in

delays and higher costs and most of all consume energy and patience

The banking procedures for foreign players particularly for remittance of foreign

exchange are tough and tedious Even the sight payments are remitted after a

38

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

minimum of 30 to 45 days due to the foreign exchange declaration system of

Chinese banks

Once in the Chinese market the drug distribution is mostly through hospitals In

practice locally produced drugs are preferred and this manifests in the form of red

tape for Indian pharma products

Intellectual Property Rights acts as another restrictive non-tariff trade barrier

China surpassed the US as the worldrsquos most litigious country for IP disputes in

2005 with 13424 cases filed with Chinese courts compared to 10905 cases filed

in the US during the same period International companies were involved in only

268 of the IP cases filed in China last year which represents an increase of 76

over the number in 2004 This overly cautious approach in seeking IP

enforcement by international companies in China is partly due to their

unfamiliarity with Chinese civil litigation

Lack of transparency in information about local markets and trade statistics add to

the low awareness of foreign businesses in China This lack of transparency

clouds insight into the Chinese market and hampers marketing strategies of Indian

pharma companies in China

In all of the above language is a major barrier to trade There are very few

Chinese-speaking people in India that can be resourced as interpreters Although

the number of Chinese who are learning English is growing communication

remains a major impediment to trade

While China has consistently complained about anti-dumping cases in India India has

responded by delivering on its words and this is no longer a bone of contention between

39

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

the two nations It is for the Chinese now to set the ground rules right and ensure that all

non-tariff barriers are removed At the same time China needs to ensure that the quality

standards are maintained in pharmaceutical products India has the largest number of

USFDA approved plants outside the US There more than 75 plants which are also WHO

GMP (Good Manufacturing Practices) certified and could easily cater to the demand for

high quality pharma products

40

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

CONCLUSION

When export taxes and total taxes on international trade are used as a measure of

trade restrictions the study finds that save for fixed effect estimates there is a

ldquosignificant and positive associationrdquo between trade barriers and growth This is similar

to the results for average tariffs On non-tariff barriers there are difficulties of estimation

because of data limitations hence these are excluded in most empirical studies Such

restrictions having an insignificant relationship with growth and came to the view that

NTBs are poor indicators of trade orientation since a broad coverage of NTBs did not

necessarily mean a higher distortion level

Using several new measures of trade openness and restrictions now available and

applying them on a framework model explained in details (but needs econometric

knowledge for the lay trade person to test and see) the Yanikkaya study says that there is

ldquoconsiderable evidence for the hypothesis that trade restrictions can promote growth

especially in developing countries under certain conditionsrdquo

The study makes clear that it has no intention of establishing a simple and

straightforward positive association between trade barriers and growth but rather to show

that ldquothere is no such relationship between trade restrictions and growthrdquo

Such a relationship depends mostly on the characteristics of a country

Restrictions can benefit a country depending on whether it is developed or developing (a

developed one seems to lose) whether it is a big or small country and whether it has

comparative advantage in sectors receiving protection

41

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42

REFERENCES AND SUGGESTED READINGS

BOOKS AND JOURNALS

Carbaugh Robert J International Economics South-Western 1995

Cross Frank B ldquoParadoxical Perils of the Precautionary Principlerdquo Revision

851

Washington and Lee Home Page Volume 533 1996

ldquoNew Principle to Protect Human Health and the Environmentrdquo Health Alert

Earth Guardian CQS 1999

OrsquoRiordan Tim and James Cameron ldquoInterpreting the Precautionary

Principlerdquo Earthscan Publications Ltd Island Press 1994

INTERNET WEBSITES

httpwwwfarmfoundationorg2002_farm_billsumnerpdf

httpwwwgiftsocietyorgdocsIJGBC_Issue2_2006IJGBC_2_Paper2pdf

httpwwwanndorgReflections20by20ANNDDocuments1942005

CSOs_and_Regional_and_International_Blockspdf

httpwwwtwnsideorgsgtitle5421ahtm

httpwwwficcicompress230press6htm

httpwwwindialawsinfoencyclopedialearnlawaspxID=306

httpwwwrocwraifoundationorgmanagementmbamanagrial_economics

lecture-noteslecture-34pdf

httpciiindocumentsWTOcii_positionpdf

42