tariff and non tariff
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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
httpwwwtwnsideorgsgtitle5421ahtm
httpwwwficcicompress230press6htm
httpwwwindialawsinfoencyclopedialearnlawaspxID=306
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
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