non-tariff measures inhibiting south african exports to...
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Non-tariff measures inhibiting South African exports to China and India
by
Ron Sandrey, Lilani Smit, Taku Fundira
and Hannah Edinger
tralac Working Paper 6 August 2008
Copyright © tralac, 2008.
Readers are encouraged to quote and reproduce this material for educational, non-profit
purposes, provided the source is acknowledged. All views and opinions expressed remain
solely those of the authors and do not purport to reflect the views of tralac.
This publication should be cited as: Sandrey, R., Smit, L., Fundira, T. and Edinger, H. 2008.
Non-tariff measures inhibiting South African exports to China and India.
tralac Working Paper No 6/2008. [Online]. Available: www.tralac.co.za.
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Non-tariff measures inhibiting South African exports to China and India
Summary and conclusions
The following are the most important non-tariff barriers (NTB) according to South
African fruit exporters to China:
• Sanitary and phytosanitary (SPS) requirements: This refers to the strict SPS
standards and high protocol on fruit quality, which are viewed as being
unnecessary. Furthermore there is a lack of a phytosanitary agreement
between China and South Africa, directing shipments to Hong Kong via the grey
channel and thus not following a direct route to China.
• Cold chain sterilisation requirements: This can probably be viewed as the
biggest non-tariff barrier that South African exporters are facing. As discussed in
this paper (4.2.1 Sections A and B), products are subjected to very long periods
of cold treatment which can arguably damage the quality of the product and the
shelf life – detrimental in such a highly competitive environment. Costs
associated with such requirements are extremely high and are increasing, which
in turn affects the profitability of such an export opportunity.
• We add from interview responses that perhaps cultural differences do not
receive enough attention, although this is, of course, a business cost and not an
NTB as such. Chinese culture is complex and dissimilar to Western practices.
But a better understanding and respect for different customs can be a valuable
asset to exporters. Ultimately, more emphasis needs to be placed on this factor.
The importance of local intermediaries should not be underestimated in
assisting and informing this process.
For India, we question whether the major barriers found from the survey and
discussed in the report can be seen as non-tariff barriers that are major reasons
inhibiting or even curtailing fruit exports from the region to India. Arguably, the high
Indian tariffs are the major reason for the low level of export interest from South
Africa, and non-tariff barriers are still less significant. The biggest NTB problem
identified is the lack of refrigerated infrastructure which makes it impossible to export
a high-quality product. Furthermore, companies surveyed indicated a general lack of
produce and production output to currently export to India due to the success and
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stability in other markets such as the UK and the US. In the final analysis, India is
different from many other markets. While tariffs have been reduced on agricultural
imports into India, many are still high. Consequently, tariff protection receives more
attention from exporters than potential non-tariff issues that may be exposed when
these exporters become more focused on the Indian market.
Section 1. Introduction
As international tariffs are being reduced, increased attention is being given to the
role of non-tariff measures (NTMs), used in this report interchangeably with non-tariff
barriers (NTBs) in impeding trade flows. In many cases these NTMs have always
existed, but as the tariff barriers have been high, trade has not been extant, and
therefore the NTMs have not been visible. In other cases, ‘creative’ new barriers are
being erected to replace the role of tariffs in protecting markets. Either way, the net
result is the same: NTMs are important as they are restricting trade. There are
differing definitions of exactly what these NTMs (and their quantitative impacts) are,
but in general they can be regarded as ’government measures other than tariffs that
restrict trade flows’. This covers a range of measures from health and safety
measures through to the suite of regulations associated with trade and general
matters, such as transport costs and customs and administration procedures that
may not be directly under the control of governments but certainly under their
influence.
The crucial role and importance of NTMs in restricting trade are officially recognised
in South Africa:
Reducing tariff barriers alone will not succeed in providing genuine market
access for developing countries. Non-tariff barriers such as anti-dumping,
technical barriers to trade and import licensing in developed countries,
often pose significant barriers to developed country exports. Some issues,
such as anti-dumping, are currently under discussion in other negotiating
groups. Real progress in these areas must be achieved as part of a single
undertaking.1
1 Permanent Mission of South Africa. 2003. SA on Market Access for Non-agricultural Products. South Africa's comments on the Draft Elements of Modalities for Negotiations on Non-Agricultural Products. 12 August 2003 (excerpt from a report received by the WTO).
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We would agree with these sentiments, and add that NTMs in developing countries
are just as important for South African exporters.
The uncertainties surrounding quantitative estimates of these NTMs should not
preclude a study which, as a minimum, examines and documents measures
impeding trade, as a strong qualitative assessment is able to give policy makers and
trade negotiators significant information as to where effort should be directed for
maximum gain.
The objective of this study is to identify NTMs that impede trade between
South Africa and its respective trading partners of China and India. It is important to
note at the outset that identifying NTMs can be a very subjective business. For
instance, a measure that a particular country has imposed for reasons of legitimate
health or environmental concern may be perceived in other countries as
fundamentally a trade-restricting measure. And, of course, no country ever admits to
having NTMs at their own border, therefore all believe that they exclusively are being
wronged.
After six successive Ministerial Meetings of the World Trade Organisation (WTO), the
reduction in barriers to trade has been a particular objective of the various trade
negotiations. Since the launch of the Doha Development Agenda at the November
2001 Ministerial Meeting, market access issues on exports of particular interest to
developing countries have been given greater prominence. While significant progress
has been made in this respect, there nonetheless remains the concern that not all
commitments made by the developed countries have been implemented and the
expected benefits realised.
With tariff reductions and the process of tariffication (conversion of NTBs such as
quotas into tariffs) being implemented over time, most countries have concurrently
used other forms of protection to restrict imports and employed their creativity to
introduce new methods to protect domestic interests. According to the Organisation
for Economic and Cooperation Development (OECD) the recorded use of non-tariff
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restrictions on international trade has increased over the last twenty years and
accelerated since the Uruguay Round was concluded in 1994 (OECD 2001). This
has prompted concerns that tighter restrictions on the use of tariffs may be
stimulating the use of non-tariff measures for purposes of trade protection.
Developed countries with relatively lower tariffs are, not surprisingly, the more prolific
users of NTMs, especially to keep out developing country exports.
The proliferation of the use of NTMs was recently acknowledged by the UNCTAD
Commission on Trade in Goods and Services, and Commodities in December 2007:
The Commission expresses concern about the increased use of non-tariff
barriers (NTBs) in international trade that risk neutralizing the gains of
tariff liberalization for all countries, but particularly on products of export
interest to developing countries. In particular, standards and technical
regulations must be developed transparently and applied non-
discriminatorily, and should not pose unnecessary obstacles to trade….
(UNCTAD 2007).
NTMs can be defined as all measures other than normal tariffs and mainly include
trade related procedures, regulations, standards, licensing systems, and even trade
defence measures such as anti-dumping duties, which have the effect of restricting
trade between nations. NTMs have become the subject of increasing attention
among policy makers and trade negotiators. This is because they impose economic
costs that exporters are obliged to incur. Consequently, they are a source of legal
controversy, with countries holding differing views on what should be considered
legitimate. This is mainly because of the existence of legal loopholes in the existing
rules and guidelines that govern the conditions under which trade restrictions may be
applied.
Kulkarni (2005) notes that trade measures that cause an increase in prices prohibit
the entry of some products, or increase custom procedures for imports and exports,
are legal if they are applied to address issues such as material damage to domestic
industry, human and animal health, environmental protection, and national security.
Justification of some of these measures could be provided under the provisions or
the exceptions provided under the various multilateral agreements governing
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international trade. On the other hand, certain non-tariff measures which cannot be
justified under any of these legal provisions are normally termed as NTBs.
As noted above, it is important to note that identifying NTMs can be very subjective.
For instance, a measure that a particular country has imposed for reasons of
legitimate health or environmental concern may be perceived in other countries as
fundamentally a trade-restricting measure.
Published data sources used in this study include the trade issues reports published
by the European Union (EU)2, the United States of America (US)3, Japan, the World
Trade Organisation (WTO) Trade Policy Review Mechanism (TPRM) reports4, and
several country and/or regional and/or sector-specific reports.
1.2 The way ahead
The remainder of the paper is set out as follows:
Section 2 groups NTMs into three main categories and provides a short background
on the main NTMs within these categories.
Section 3 provides a general background of the trade policy setting for both China
and India.
Section 4 uses a survey to examine the measures impacting on these flows. It
concentrates upon fruit exports from the Western Cape.
2 On the web at www.mkaccdb.eu.int. 3 On the web at www.ustr.gov. 4 On the web at www.wto.org.
6
Section 2. Descriptions
2.1 NTM categories
A useful means of examining NTMs is to place them into categories. The following
three (admittedly sometimes arbitrary) broad groupings have been identified.
The first grouping is those measures that are put in place to protect the health and
safety of both the consumers and the environment in importing countries. When
viewed from the exporter’s perspective, these measures can be and often are seen
as inhibiting trade. The key issues here are unnecessary measures or standards that
cannot be justified on scientific grounds. This category is:
1. Health, safety and environment: measures including import and export bans,
SPS requirements, and standards and conformance requirements. The second group
comprises a wide range of regulations that are in place for a variety of reasons. This
category is:
2. Trade policy regulations: broader policy measures including export
assistance, export taxes, import licences, import quotas, production subsidies, state
trading and import monopolies, tax concessions, trade remedies practices (i.e. anti-
dumping, safeguard, and countervailing duty measures). They also include issues
such as tariff escalation and issues associated with regional trading arrangements
themselves. The third category entails not generally regulations per se, but rather a
wide grouping of procedures and factors that operate in a manner that generally
inhibits trade flows. This category is:
3. Administrative disincentives to export: customs clearance delays, lack of
transparency and consistency in customs procedures, overly bureaucratic (and often
arbitrary) processing and documentation requirements for consignments, high freight
transport charges and services that are not user-friendly.
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This section will discuss these NTMs in general terms. It gives a list that is by no
means exhaustive. Some of the NTMs discussed in the subsequent analysis may be
generic or common across all sectors.
2.2. Health, safety and environment
Standards and conformance
A general predicament for exporters is the diversity of standards among countries,
as the need to adjust production processes to comply with different standards raises
production costs. As the major trading nations tend to have at least some differences
in standards, the concept of mutual recognition raises the question as to which set of
standards one should recognise. Joining the wrong ‘club’ may have a cost further
down the line if the major clubs’ do not recognise each other’s standards. This will
impede trade.
The WTO Agreement on Technical Barriers to Trade (the TBT Agreement) was one
of the Uruguay Round (UR) outcomes. Its objective is to ensure that regulations,
standards, testing and certification processes do not create unnecessary obstacles to
trade. It does not prevent WTO member countries from adopting the standards they
consider appropriate in areas such as product safety, labelling and environmental
impacts, but it does encourage them to use international norms. It also sets out a
code of good practice. The WTO Disputes Settlement Mechanism exists by which
members can consult on matters relating to the agreement and establishes working
parties if necessary.
Sanitary and phytosanitary measures
The WTO SPS Agreement sets out the basic rules for food safety, and animal and
plant health standards. Its objective is to protect life and health while preventing
unnecessary trade barriers. Importantly, measures should:
• be applied only to the extent necessary to protect human, animal or plant life or
health;
• not arbitrarily or unjustly discriminate between countries where identical or
similar conditions prevail; and
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• be based on science and must not be maintained without this scientific
justification.
Measures must be transparent and not applied in a manner that constitutes a
disguised restriction on international trade.
Export and Import bans
Export restrictions 5 directly influence trade flows. An example is the export of
unprocessed logs. While often promulgated for environmental reasons, their effect is
to encourage downstream processing through the availability of cheaper raw
materials. Logs are diverted from export sales to the home market and a wedge is
driven between domestic and imported prices. The case is similar for import bans.
2.3. Trade policy regulations
Export and production subsidies
Underlying free and fair trade is the concept that countries export the goods in which
they have a comparative advantage, and import others. Production subsidies are an
incentive given to local producers for a variety of reasons, but the overall impact is
that domestic production reaches a higher level than would otherwise be the case.
An export subsidy is defined as a subsidy contingent on export performance.
Therefore resorting to export subsidies is an indication that the exporting country is
not, by definition, internationally competitive in that sector. These export and
production subsidies drive down the international price of exports, and make efficient
operators in other countries worse off because they face subsidised competitors.
This results in trade being distorted.
Subsidies are prohibited under WTO rules in manufactured goods, which include the
forestry and fisheries sectors. Subsidies have been permitted in agriculture, but an
important outcome of the UR Agreement on Agriculture was that some forms of
domestic subsidies and all export subsidies were capped at average 1986 – 1990
levels and reduced over the UR implementation period.
5 This section is drawn from the OECD (2003).
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Trade remedies (anti-dumping, countervailing and safeguard measures)
Dumping is the introduction of a product to the market of another country at less
than the product’s ‘normal value’. This practice is not allowed under WTO rules, as it
undermines the established industry in the importing country. It actually increases
trade. Anti-dumping duties may be applied to counter these effects once it has been
established that the practice threatens material injury to the domestic sector of the
importing country. The mere existence of anti-dumping remedies may have a ‘chilling’
effect upon trade, although differential pricing is common in many industries (never
ask the person sitting next to you on a plane what they paid for their ticket!).
Disagreements between WTO members are addressed through the Dispute
Settlement Mechanism.
Safeguards give temporary relief when imports increase unexpectedly. They are
designed to give domestic producers a period of grace in which to become more
competitive. They usually take the form of duty increases or quantitative restrictions
on imports. The WTO also has a mechanism for addressing challenges to these
measures, and this has been globally active in recent years.
Countervailing measures in the WTO context are special duties imposed on imports
to offset the benefits of prohibited or actionable subsidies to producers or exporters in
the exporting country. They can be applied only after an investigation shows that the
subsidies are prohibited under WTO rules, that there is material injury to producers in
the importing country, and that there is a causal linkage between these imports and
the material injury. As with the other two measures in the trade remedies category,
the investigations must be conducted in a transparent manner implementing a
dispute mechanism.
It can be seen that there is a linkage between all three trade remedies measures. As
tariffs have reduced, so the use of these measures has become more common.
Import quotas and licensing
Import quotas are permitted by the WTO for agricultural products and, until recently,
for the textile and clothing sectors. Sometimes licences are associated with import
quotas, but they may also be applied for purposes such as foreign exchange
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rationing or determining if specific import requirements have been met. In many
cases, licences amount to no more than a formality, but in other cases they can and
do create an extra cost to traders.
Agricultural tariff quotas
Quantitative restrictions had long been prohibited under GATT rules for
manufactured goods (with the earlier exception of textiles and clothing), but not for
agriculture. The Uruguay Round under the old GATT formalised access tariff quotas,
bringing agriculture into greater conformity with manufactured goods. These tariff
quotas would not be less than the average annual import quantities for the 1986 –
1988 base period and be provided on terms at least equivalent to those which
existed during the base period. This protected existing market access opportunities
and, in theory, allowed for increases over time.
In addition, minimum access opportunities were established for products where no
significant imports of the product had occurred during the base period. These tariff
quotas were introduced to ensure that the minimum level of market access in all
markets represented not less than three percent of corresponding domestic
consumption during the base period, expanding to five percent of domestic
consumption by the end of the implementation period. It was agreed that minimum
access tariff quotas would be implemented on the basis of a quota with a low or
minimal tariff rate, although in practice some in-quota tariffs are still relatively high.
State trading and government procurement
State trading is a procedure under which a government agency has the exclusive
right to trade, or has assigned this right to a private monopolist. This situation can
apply to either or both imports and exports. Government procurement typically
involves a situation in which preference is given to domestic suppliers in public
tenders for the supply of goods and services to government agencies. These
agencies can operate at state or local level.
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Local content requirements
In return for achieving a certain degree of local content, producers are allowed to
import a certain amount of equivalent goods or raw materials at lower or even duty-
free prices. This protects domestic suppliers at the cost of importers.
Tariff escalation and classification issues
On the face of it, these are tariff issues and therefore by definition not NTMs.
However, some consideration needs to be given to the subtle way in which tariffs
may be applied. In the case of both escalation and classification, a tariff is applied in
a manner that distorts trade flows to an extent greater than the tariff. Tariff escalation
takes place when further processed goods face higher import duties at foreign
borders than those levied on the base raw material. The result is that ‘escalation’
(sometimes known as cascading) of the duties paid inhibits further processing, and
thereby trade in more elaborately transformed merchandise goods. Similarly, tariff
classification issues are potentially a concern in the fisheries sector. This happens
when a definition of species and its associated tariff classification is set in a manner
that favours domestically harvested species over foreign species. Trade is distorted.
Regional trade preferences and rules of origin (ROO)
The objective of a Free Trade Agreement (FTA) or the Closer Economic Partnership
(CEP) agreements is to foster trading and economic relationships between members.
This trade is increased through two channels: trade creation and trade diversion.
Trade creation is the additional trade that results from such arrangements, while
trade diversion is merely the substitution of a preferential source away from a non-
preferential source, thus distorting flows to and from non-members.
One area of potential trade diversion is the ROO criteria. These are intended to
define where a product is actually made, and in today’s increasingly integrated world
this is not an easy question to answer. A particular problem is the complexity and
potential restrictive nature of different ROO criteria (the so-called ‘spaghetti effect’)6.
6 See Estvadeordal (2003).
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The ROO can also affect trade between countries when bilateral policies such as
anti-dumping and countervailing duties are in place. They are potentially an extra
transaction cost for exporters when their country belongs to more than one trade
agreement and these have different ROO criteria. Empirical work suggests that
recent FTAs have diverted more trade from non-members than they have created
among members. This finding is consistent with the observation that many of the
provisions needed in preferential arrangements to underpin and enforce their
preferential nature – such as rules of origin – are in practice quite trade restricting.
Labour standards
A relatively new issue in trade is the concern of developed countries around labour
standards and, in particular, child labour in the developing world. In some cases,
requesting African exporters to comply with these conditions in the case of child
labour may well deprive many poor families of extra income, earned from allowing
children to engage in light safe work without interfering with their education or well-
being.
Food miles and carbon footprint
With rising fuel prices and ever-worsening greenhouse gas effects accentuating the
need to become more ecologically and environmentally friendly there is a new class
of potential trade barriers in the form of carbon footprinting and its associated food
miles whereby at least some consumers are turning away from imported foods on the
basis that their global impacts are more than locally produced foods. The argument is
that local food involves less greenhouse gas emissions than food produced farther
away, as, by definition, transport costs are lower. It is, however, a partial concept as
this takes account of only one of the many activities in producing and delivering food
to final consumers. The critical environmental issue is not only emissions in transport,
but total emissions from all stages in producing and transporting food. It is of
particular concern to distant suppliers like South Africa, but more so, Australia and
New Zealand to Europe. But it must be pointed out that agricultural production in
Europe is highly energy-intensive and uses much heavier applications of fertilisers
and chemicals than southern hemisphere producers (Saunders et al., 2006). Again, it
is an example of striking a balance between environmental considerations and
achieving the benefits from comparative advantage and trade. While not strictly an
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NTM as defined, it is nonetheless a consumer attitude that is helping to cement the
protectionism of local producers.
Another semi-related topic that could be perceived as being an NTM is traceability.
Consumers have the right to know where a product has originated from and tracing a
food quality problem back to its source is sometimes crucial. However, as poorer
developing countries often have fragmented and multiple small farm suppliers, is
traceability a non-tariff barrier or just another cost of doing business? Exporters that
can meet traceability standards do have a competitive advantage in the market place,
but where a developing country cannot easily meet the cost of guaranteeing this
information it could be viewed as being a discriminatory measure towards that
developing country supplier.
2.4. Administrative disincentives to export
Excessive customs and administrative procedures
Customs procedures can become excessive or inappropriate if they differ too much
from international norms. These procedures can result in delays and extra costs
(both directly and indirectly) in processing goods at the border. Valuation techniques
are sometimes raised as an issue. Naturally, the importer will want to place as low a
value as possible upon goods at the border, while the importing government will seek
to counter this and raise as much tax as possible. Again, the WTO Customs
Agreement operates to promote a fair, uniform and neutral system for the valuation of
these goods. This precludes the use of arbitrary or fictitious values. It plays an
essential part in ensuring that correct duties are paid, and acts to avoid regimes
based upon, for example, minimum values.
In summary, the broad categories of NTMs highlighted above give rise to numerous
forms of barriers. The barriers of key concern to developing countries have been
summarised by UNCTAD as follows:
• Access and entry to developed countries’ markets: – technical measures and
price control measures are the most typical concerns for developing countries;
• Trade between developing countries: – customs and administrative entry
procedures, para-tariff measures (e.g. import surcharges and additional
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charges), and other regulatory measures affecting infrastructure, protection of
intellectual property rights and institutions are among trade obstacles;
• Products of export interest to developing countries: – such as fisheries,
electrical equipment, pharmaceuticals and textiles, are more affected by NTBs
than other sectors. In particular, the rise of technical measures in developed
countries means additional costs and unnecessary burdens in relation to the
access of enterprises in developing countries to international markets.
These illustrate the serious implications of NTMs for developing countries' trading
performance and prospects, necessitating a greater focus on key technical and policy
issues arising from such barriers (UNCTAD, 2007).
Section 3. What others are saying
This section will review the literature on what others are saying about NTBs into firstly
China, and then India. The analysis that follows concentrates upon the agricultural
sector. Data from the WTO, US, EU, Australia and New Zealand was examined with
respect to reports and associated problems with firstly China, and then India.
3.1 China
3.1.1 The WTO - Measures Directly Affecting Agricultural Imports into China7
The World Trade Organisation (WTO) considers that., by and large, China has
continued to gradually liberalise its trade and trade-related policies. In particular, it
has eliminated tariff-rate quotas on some items and reduced the number of lines
subject to automatic import licensing requirements.
• Tariff-rate quotas (TRQs) are regulated under the Interim Measures on
Administration of Tariff Rate Quota for Importation of Agricultural Products and
the Interim Measures on the Administration of Tariff Rate Quota for Importation
of Fertilisers. On 1 January 2006, TRQs on soybean oil, palm oil, and rapeseed
oil (10 items) were eliminated; these items are currently subject to automatic
import licences. As a consequence, in 2007, TRQs were applied to eight
7 This section is a summary of the WTO Trade Policy Review – Secretariat Report 2008 and China Government Report 2008.
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categories of imported goods, involving 45 tariff lines at the HS 8-digit level.
These were wheat, maize, rice, sugar, wool, wool tops, cotton, and chemical
fertilisers.
• Import prohibitions are maintained on grounds of, inter alia, public interest,
environmental protection, or in accordance with international commitments.
Prohibitions include some products of animal origin, raw hides, waste of skins
and leather, among others.
• Quantitative restrictions on imports were eliminated on 1 January 2005, and
the relevant products were moved into the category of free importation or
automatic import licences. The licensing regime applies equally to goods from
all countries or customs territories. Products that are not subject to import
restrictions, but require import monitoring for statistical purposes, are subject to
automatic import licences involving no restriction in terms of import quantity or
value. The number of lines fully subject to automatic import licences decreased
from 478 in 2006 to 108 in 2007. These tariff lines concerned poultry, vegetable
oil, and tobacco, among others.
• State trading has apparently been reduced. Imports of vegetable oil (rapeseed
oil, palm oil, and soybean oil) were removed from state trading from 1 January
2006. In 2007, China maintained state trading in, inter alia, grain (including
wheat, maize, and rice), sugar, tobacco, crude oil and processed oil, chemical
fertiliser, and cotton. China’s Ministry of Commerce (MOFCOM) issues and
adjusts annually the lists of goods subject to state trading and of authorised
state trading enterprises (STEs).
• Legislation on standards includes mainly the Standardisation Law and the
Regulations for the Implementation of the Standardisation Law. The
Standardisation Administration of China (SAC), under the General
Administration of Quality Supervision, Inspection and Quarantine (AQSIQ),
administers standardisation work in China. China has been gradually increasing
alignment of its national standards with international norms. Currently, 46.4
percent of national standards have been aligned, up from 45.9 percent in 2005,
and the authorities aim to align 85 percent by 2010.
• China's current legislation related to its SPS regime includes the Law on the
Entry and Exit of Animals and Plant Quarantine, the Food Hygiene Law, the
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Law on Animal Disease Prevention, the Law on Import and Export Commodity
Inspection, the Law on Frontier Health and Quarantine, as well as
accompanying implementing regulations and rules. With a large number of laws
governing SPS measures, the SPS regime remains complex.
• Labelling requirements are maintained under the Standardisation Law, the
Food Hygiene Law, and the Law on Product Quality. Labels must be written in
Chinese and state, inter alia, name and trade mark of the product, type of
product, the manufacturer's name and address, place of origin, usage
instructions, batch number, and the relevant standard code.
3.1.2 The United States8
In its annual review of trade restrictions facing US exporters the United States Trade
Representative (USTR) opens by stating that when China acceded to the World
Trade Organisation on 11 December 2001, it committed to implement a set of
sweeping reforms over time that required it to lower trade barriers in virtually every
sector of the economy, and provide national treatment and improved market access
to goods and services imported from WTO members. China has taken many
impressive steps to reform its economy, making progress in implementing a broad
set of commitments that required it to reduce tariff rates, eliminate non-tariff barriers,
provide national treatment and improved market access to goods and services
imported from WTO members and improve transparency. Remaining problems focus
on:
• Excessive Chinese government intervention in the market through an array of
trade distorting measures. This is a reflection of China’s historic yet unfinished
transition from a centrally planned economy to a free-market economy
governed by rule of law. Some Chinese government agencies and officials
have not yet fully embraced the key WTO principles of market access,
nondiscrimination and transparency. Differences in views and approaches
8 See the 2008 National Trade Estimate Report on Foreign Trade Barriers, available at http://www.ustr.gov/assets/Document_Library/Reports_Publications/2008/2008_NTE_Report/asset_upload_file930_14640.pdf.
17
between China’s central government and China’s provincial and local
governments have also continued to frustrate economic reform efforts.
• Arbitrary practices by Chinese customs and quarantine officials can delay or
halt shipments of agricultural products into China, while sanitary and
phytosanitary standards with questionable scientific bases and a lack of
transparency in regulatory regime frequently cause confusion for traders in
agricultural commodities.
• Chinese customs officers have wide discretion in classifying a particular import,
and a lack of consistency makes it difficult to anticipate border charges. On
valuation, some US exporters are complaining that many Chinese customs
officials are still improperly using ‘reference pricing’, which usually results in a
higher dutiable value.
• China has emerged as a significant user of anti-dumping measures.
• China provides preferential import duty and VAT treatment to certain products,
often from Russia, apparently even when those products are not confined to
frontier traffic as envisioned by Article XXIV of GATT 1994. It appears that large
operators are still able to take advantage of border trade policies to import bulk
shipments across China’s land borders into its interior at preferential rates.
• Application of China’s single most important revenue source (VAT) continues to
be uneven, and because taxes on imported goods are reliably collected at the
border, they are sometimes subject to VAT that their domestic competitors
often fail to pay.
• Other problems include selective and unwarranted inspection requirements for
agricultural imports, the use of questionable SPS measures to control import
volumes and manipulation of technical regulations and standards to favour
domestic industries.
On the other hand, prior to its WTO accession in December 2001, China restricted
imports through high tariffs and taxes, quotas and other non-tariff measures, and
restrictions on trading rights. Beginning in 2002, China significantly reduced tariff
rates on many products, decreased the number of goods subject to import quotas,
expanded trading rights for Chinese enterprises and increased the transparency of its
licensing procedures. Subsequently, China has continued to make progress by
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implementing tariff reductions on schedule, phasing out import quotas and expanding
trading rights for foreign enterprises and individuals. As part of its WTO accession,
China established large and increasing TRQs for imports of wheat, corn, rice, cotton,
wool, sugar, rapeseed oil, palm oil, soybean oil, and fertiliser. China phased out the
vegetable oil TRQs in 2006, but currently maintains a TRQ regime on the six
agricultural products of wheat, cotton, corn, rice, wool, and sugar. Improvements in
the TRQ administration are becoming evident, although transparency continues to be
problematic.
With regard to Sanitary and Phytosanitary measures, China’s inspection and
quarantine agency, the General Administration of Quality Supervision, Inspection and
Quarantine, has imposed inspection-related requirements that have led to restrictions
on imports of many US agricultural goods. Importers need to obtain a Quarantine
Inspection Permit (QIP) prior to signing purchase contracts for nearly all traded
agricultural commodities, and AQSIQ sometimes slows down or even suspends
issuance of QIPs at its discretion. Because of the commercial necessity to contract
for commodity shipments when prices are low, combined with delays in having QIPs
issued, many cargos of products such as soybeans, meat, and poultry arrive without
QIPs, creating delays in discharge and resulting in demurrage bills for Chinese
purchasers.
China made little progress in 2007 to resolve high profile issues such as its current
import suspension of US-origin beef, beef products, and live cattle related to Bovine
Spongiform Encephalopathy (BSE). The apparent lack of scientific evidence and
transparency for its SPS measures remains a problem. Moreover, China apparently
does not apply this same standard to domestic raw poultry and meat. In addition,
China continues to block many US processed food products from entering the
Chinese market by banning certain food additives that are widely used in other
countries and have been approved by the World Health Organisation. The US has
registered concerns with a number of standards and labelling requirements on its
exports to China.
Finally, while WTO membership has increased China’s exposure to international best
practices and resulted in some overall improvements in transparency, corruption
19
remains endemic. Chinese officials themselves admit that corruption is one of the
most serious problems the country faces, and China’s new leadership has called for
an acceleration of the country’s anticorruption drive with a focus on closer monitoring
of provincial-level officials.
3.1.3 European Union9
China’s most restrictive SPS measures relate to Med fly, fire blight and Cydia
pomonella. China requests that every orchard has to be inspected by its own
inspectors prior to export. However, the Chinese authorities proceed so slowly in
inspecting the orchards that this in practice results in a barrier to trade. Secondly,
these organisms can be effectively killed with cold treatment. In the case of the EU,
China insists that cold treatment takes place in the EU and not during transport.
For bovines, bovine products and derivates the World Organisation for Animal Health
(OIE) Terrestrial Animal Health Code contains standards, guidelines and
recommendations to be used by national veterinary authorities to prevent the
introduction of infectious agents pathogenic for animals and humans into the
importing country during trade of animals and animal products, while avoiding
unjustified sanitary barriers. Deboned fresh meat and meat products from cattle can
be exported from BSE-affected countries following compliance with certain
certification requirements. In September 2004, MoA/AQSIQ notice 407 lifted the ban
on certain animal products originating from BSE-affected countries. However, China
still bans the import of bovine deboned skeletal muscle meat, regardless of recent
amendment of the OIE BSE chapter.
3.1.4 Australia
Another source of the most significant non-tariff measures impacting on Chinese
agricultural imports is the report ’Agriculture in China: Development and significance
for Australia’ (Australian Bureau of Agricultural and Resource Economics (ABARE),
2006:45-58). The main NTBs discussed in that report are:
9EU Market Access Strategy at http://ec.europa.eu/trade/issues/sectoral/mk_access/.
20
• The tariff quota system implemented not only in China but also among other
trading nations. The actual non-tariff barrier is therefore the discrimination of
tariffs with regards to the quantity, but more so the strenuous administrative
processes that follow, affecting timing and the extent of the quota imports to
China.
• State trading enterprises, which are most notably active in grain trading, restrict
the imports of certain agricultural goods in China. This is the case as these
enterprises hold the exclusive rights to import particular goods, and domestic
firms need to enter into import contracts through such state trading enterprises.
These trading enterprises can obtain imports at world prices and as they
exclusively control the domestic Chinese import market they can have a
monopoly position and their prices, when resold domestically, are higher than
world prices. Although the role of state trading enterprises has decreased,
ABARE contends that they still dominate the agro-food trade.
• As part of the WTO SPS Agreement, China sets technical standards (inspection,
quarantine, etc.) on imported agricultural products for SPS reasons. Such
protocols, even though they should not be trade discriminating, can act as
NTBs when, under these SPS measures, products do not meet certain
conditions. Chinese regulations have been questioned, and at times it has been
reported that Chinese SPS and TBT measures have not complied with those of
the WTO. Discrepancies between central and provincial agencies on import
requirements subsist, and these involve administrative hold-ups and the lack of
technical capacity and drawbacks in standardising testing facilities. Overall,
China’s import inspection protocols are not consistent with international
standards, according to ABARE.
• All importers of goods into China must pay value-added tax. Rather than being
neutral and equitable, VAT has acted as a non-tariff barrier for Chinese
agricultural imports, as its application to domestic producers is often not
identical to that of imported goods, with administrative complexity clouding the
process. Even when the same VAT rate may apply, the way this is calculated
differs, with a protective bias on domestic producers.
ABARE identified the main specific NTBs for Australian agricultural products entering
the Chinese market. These products include wool, grains, meat and other animal
21
products, dairy, live animals and genetic material, and cotton. The findings for wool,
as well as for horticulture and wine, which have been identified as potential areas for
increased South African exports to China are given below:
• The NTB on wool imports is a tariff quota; however, until 2004 two-thirds of the
quota10 was allocated to non-state trading enterprises with more recently no
quota being awarded to state trading enterprises. Traders can simply register
for the application to import wool and the registered traders are awarded
portions of the tariff quota. The system is based on a ‘first come, first served’
basis, but older traders are granted larger licences than newer traders, with
quota allocations revised on a yearly basis. Imports are further constrained
because of the duplication of the inspection and classification process resulting
in higher costs of exporting wool as Australian wool exports are re-inspected
and reclassified on arrival in China, disregarding testing done by the Australian
Wool Testing Authority before shipment.
• On horticulture and wine exports, the most significant barriers are the SPS
measures, residue restrictions and food standards, which limit the pace and
quantity of a number of horticultural products into China. Wine NTBs include
the time-consuming labelling specifications, internal taxes, and distributional
channels in China.
• As is usually the case for most countries, animal-based products are subject to
strict SPS measures, food safety and food standards which include hygiene,
labelling and pesticide standards, as well as specific testing and certification
requirements which increase the cost of exporting these products to China. The
most notable measure is zero tolerance for pathogens in raw meat imports,
which, according to the US, is impossible to achieve. Conversely, the same
policy is not applied to Chinese domestic meat products.
10 Above quota tariffs were previously at 90% and were reduced to 40% by 2004, and are currently at
38% (OECD, 2005).
22
3.1.5 New Zealand11
The New Zealand Ministry of Foreign Affairs and Trade warns that China is a tough
market for an initial foray into exporting or establishing a physical presence, with
market development costly in terms of time, money and resources. To be successful
the hiring of managers familiar with the Chinese market and the different business
culture and environments is advised. Also, the size and quality of competition in
China should not be underestimated, as the government's pro-growth policies have
produced a host of business competitors. Other challenges include the uneven
application of regulations, local protectionism, indirect subsidies to local industry such
as low-interest bank loans, intellectual property violations, and the need to build up
closer relationships with business partners than would be usual in New Zealand. SPS
barriers are also reported to be a major constraint, and this is evident from a perusal
of Chapter 8 of the China FTA which goes into detail on SPS measures.
3.2 India
3.2.1 WTO – measures directly affecting agricultural imports into India12
According to the WTO, although protection from imports of agricultural products has
declined, India continues to use trade policy to support its overall goals of food self-
sufficiency and price stability. Thus, tariffs, the main instrument of trade policy,
continue to be adjusted from time to time to ensure sufficient domestic supply of key
products. However, other measures are used for particular purposes other than the
goals highlighted above. This section looks mainly at the NTMs that directly affect
India’s agricultural imports. These include, among others, sanitary and phytosanitary
measures, labelling, import prohibitions and restrictions, standards, anti-dumping,
countervailing and safeguard measures, government procurement and state trading.
In highlighting these measures, no determination was made as to how trade
restricting these measures are:
• Sanitary and phytosanitary (SPS) measures are governed and enforced
through a number of laws and agencies. The Prevention of Food Adulteration
Act, 1954, is the main law on food safety and quality. Imports and quarantine
11Drawn from www.chinafta.govt.nz.
12 This section is summarised from the WTO Trade Policy Review – Secretariat Report 2007 and India
Government Report 2007.
23
are regulated through additional legislation such as the Livestock Importation
Act, 1898, which was recently amended in 2001, and the Plant Quarantine
(Regulation of Import into India) Order, 2003, issued under the Destructive
Insects and Pests Act, 1914, which provides provisions to regulate import of
plants and plant materials. Implementation of these acts and subordinate
legislation is carried out by different central government ministries, making the
system relatively complex. India's enquiry points under the SPS Agreement are
the Ministry of Health and Family Welfare for human-health related issues, and
the Departments of Animal Husbandry, Dairy and Fisheries and Agriculture and
Cooperation in the Ministry of Agriculture, respectively, for animal health and
plant health issues.
• Labelling is governed by the Prevention of Food Adulteration Rules (Part VII)
which regulates the packing and labelling of food products. All food product
labels must conform to a number of listed requirements. In addition, for
products containing artificial flavouring the chemical names of the flavourings
should not be used and for products containing natural flavouring substances,
the common name of the flavours should be mentioned on the label. More
specific labelling requirements are required for other products, such as infant
milk substitutes and infant foods, bottled mineral water, and milk products.
Furthermore, the Ministry of Health and Family Welfare has recently notified the
quantitative ingredient declaration (QUID) requirement as a percentage of the
ingredient at the time of manufacture of the food.
• Import prohibitions and restrictions are contained in the Customs Act, 1962,
and the Foreign Trade (Development and Regulation) Act, 1992. Such
measures can be maintained for a number of reasons including security,
prevention of agricultural surpluses, standards, intellectual property, among
others. Between 2001 and 2006, India introduced import prohibitions on some
livestock and livestock products, including domestic and wild birds, meat and
meat products from avian species, and live pigs and pig meat products (except
processed pig products)13. Some 415 tariff lines (around 3.5 percent of the
tariff) at the HS 8-digit level are currently subject to import restrictions under
13 Import of domestic and wild birds including captive birds (excluding poultry), processed meat and
meat products from avian species including wild birds (except poultry), and semen of domestic and wild birds was prohibited with effect from 11 August 2005. This measure was taken in view of the reported outbreak of Highly Pathogenic Avian Influenza (HPAI).
24
Articles XX and XXI of the GATT. India also monitors imports of some 300
items that are considered to be sensitive. The products, which are monitored,
include edible oil, cotton, silk, milk and milk products, cereals, fruit and
vegetables, spices, tea, coffee, alcoholic beverages and products produced by
the small-scale industry.
• Standards are set by the Bureau of Indian Standards (BIS), which is
responsible for formulating and enforcing standards for 14 sectors14. Division
Councils are then set up to oversee the standards in each of these 14 sectors.
Standards are also reviewed and updated on a regular basis.
• Anti-dumping, countervailing and safeguard measures are contained in the
Customs Tariff Act, 1975, and its respective chapters and sections, as
amended by the Customs Tariff (Amendment) Act, 1995. Furthermore for anti-
dumping, the Customs Tariff Rules, 1995, will apply, while countervailing
measures may be imposed under the Customs Tariff Rules, 1995.
• India is currently not a signatory to the WTO Agreement on Government
Procurement (GPA) 15 , and the procurement system is decentralised,
comprising a multiplicity of entities at the central, state, and local levels in
addition to numerous public sector enterprises.
• India last notified the WTO on state trading in October 2001, citing food
security, better marketing and pricing of state traded products, ensuring steady
domestic supply, and conservation and proper utilisation of some metal ores
and rare earths for export as reasons for maintaining state trading16 . The
current list of products subject to state tendering includes petroleum products,
urea, coconut oil and products, and some cereals.
• Other measures include the fact that as India has a decentralised governance
system there are some measures which are specific to certain states, thus
making it difficult for exporters to apply the same procedures to any state, in
turn raising costs when marketing to certain markets in some states. Also Tariff
14 For the full list refer to http://www.bis.org.in/sf/sfp1.htm [4 June 08].
15 The Agreement on Government Procurement provides a vehicle for the progressive opening of
parties' markets to international competition through legally enforceable provisions on non-discrimination, which apply to procurements ’covered’ by the agreement (i.e. those set out in each party's schedules). In addition, various provisions of the agreement relating to the provision of information to potential suppliers, contract awards, qualification of suppliers and other elements of the procurement process aim to ensure transparency and non-discriminatory conditions of competition between suppliers. 16 See WTO document G/STR/N/7/IND, 8 October 2001.
25
Rate Quotas are maintained on milk powder, maize, sunflower seed and
sunflower oil, and rape, colza or mustard oil (14 tariff lines at the HS 8-digit
level). The WTO regards the import licences as to have been issued to support
India’s policy of food self-sufficiency and price stability: for example, imports of
wheat, normally restricted to state trading, have also been permitted by private
importers recently.
3.2.2 The United States17
The USTR considers that US exporters to India continue encountering tariff and non-
tariff barriers impeding their exports despite the Indian government’s ongoing
economic reform efforts. In particular, India’s WTO-bound agricultural tariffs are
among the highest in the world, ranging from 100 percent to 300 percent, with an
average bound tariff of 114 percent. While many Indian applied tariff rates are lower,
they still represent a significant barrier to trade in agricultural goods and processed
foods. Further, given the fact that there are large disparities between bound and
applied rates, they become an NTM in that US exporters face greater risk of market
closure because India has the ability to raise its applied rates to bound levels in an
effort to manage prices and supply.
With the exception of wine, spirits, and other alcoholic beverages, the government
applies an ‘additional duty’ at a rate equal to the Central Excise Tax rate applicable to
like domestic products. Imports also are subject to state-level value-added or sales
taxes and the Central Sales Tax as well as various local taxes and charges. Also, in
March 2006 the government established a 4 percent ad valorem ‘extra additional
duty’ which applies to all imports except those exempted from the duty pursuant to a
customs notification. The extra additional duty is applied in addition to, and calculated
on top of, the basic customs duty (i.e. tariff) and additional duty. Importers can apply
for a rebate on this latter duty, but refund procedures are cumbersome and time-
consuming. Although the government publishes tariff and other customs duty rates
applicable to imports, there is no official publication or searchable database setting
out these rates, and importers must consult separate customs and excise tax
17 See the 2008 National Trade Estimate Report on Foreign Trade Barriers, available on
http://www.ustr.gov/assets/Document_Library/Reports_Publications/2008/2008_NTE_Report/asset_upload_file930_14640.pdf.
26
schedules and cross-reference these schedules. Such a system lacks transparency
and imposes significant burdens on importers.
For import licensing, India maintains a negative import list. This list is currently
divided into three categories: banned or prohibited items (e.g. tallow, fat, and oils of
animal origin), restricted items that require an import licence (e.g. livestock products);
and ‘canalised’ items (e.g. bulk grains) importable only by government trading
monopolies subject to cabinet approval regarding timing and quantity.
The Indian government appears to apply discretionary customs valuation criteria to
import transactions. Valuation procedures allow India’s customs to reject the
declared transaction value of an import, and US exporters have reported that India’s
valuation methodologies do not reflect actual transaction values, and therefore
effectively increase tariff rates. In addition, India’s complex tariff structure and
multiple exemptions generally require extensive documentation, which often inhibits
the free flow of trade and leads to frequent processing delays. However, this seems
to be improving according to the World Bank. Over the past two years, the number of
days needed to complete an import or export transaction with India has been halved,
while there have also been smaller reductions in the number of required documents.
Overall, there are 68 specific commodities (including milk powder, infant milk, foods
and packaged drinking water) that the Bureau of Indian Standards must certify before
the products are allowed to enter the country. Foreign companies can receive
automatic certification for imported products, provided BIS has first inspected and
licensed the production facility. However, US industry alleges that inspection and
licensing costs imposed on foreign manufacturers are so high that these may restrict
trade in these items.
For SPS measures, India continues to maintain regulations that block all imports of
US poultry, poultry products, pet food, pork, and most imports of US dairy products,
and fumigation requirements threaten existing US exports of pulses and new market
access for barley. Sales of US wheat to India are blocked by strict tolerances for
weed seeds and impractical sampling procedures, and India maintains more
27
stringent maximum residue levels on imported dairy products than it does for
domestic products.
Under India’s biotechnology regulations, the Genetic Engineering Approval
Committee (GEAC) must approve all biotechnology food/agricultural products or
products derived from biotechnology plants/organisms prior to import, and the
importer must notify officials if a consignment contains a biotechnology trait. As a
result of India’s biotechnology regulations, US exports of products derived from
genetically engineered commodities are strictly prohibited, except for soybean oil
derived from Round-Up Ready soybeans for refining prior to consumption. In the
opinion of the USTR, India’s evolving biotechnology regulatory process does not
appear to be entirely science-based and despite recent efforts to make it more so.
While the tax exemption for profits from export earnings has been completely phased
out, tax holidays continue for Export Oriented Units and exporters in Special
Economic Zones (SEZ), and India continues to maintain several duty drawback
programmes that appear to allow for drawbacks in excess of duties levied on
imported inputs.
3.2.3 European Union18
• Both Indian importers and EU exporters of food products have complained that
they are facing growing difficulties with customs clearance of food products.
Earlier, Indian authorities released these goods on the basis of health
certificates provided by the countries of origin. The long period of time taken to
issue the certificates, as well as the limited number of designated labs available,
are the main sources of concern for the operators. The goods have to be
detained for a long time in the customs warehouses leading to heavy damages
and demurrage charges. Moreover, the temperature in the customs
warehouses is said not to be conducive to the preservation of perishable goods.
Also, sometimes the accredited laboratory wrongly classifies and analyses the
product under different standards, thus generating uncertainty.
18 EU Market Access Strategy at http://ec.europa.eu/trade/issues/sectoral/mk_access/.
28
• The EU is concerned about India imposing a federal Additional Duty on
imported wines and spirits to compensate for excise duties levied at state level
on domestic products, as this duty appears to exceed the level of excise duties
(and other indirect taxes) applied in most Indian states. In addition, some Indian
States appear not to have adopted any policy for the taxation and licensing for
(retail) sale of imported wines and spirits, which restricts importation and sale.
3.2.4 Australia19
Reforms by India in opening up its economy have greatly improved trade prospects –
but major barriers still exist, with tariff rates among the highest in the world. The
Indian Government continues to impose relatively high tariffs on imports, and to
maintain non-tariff barriers. Import tariffs on most consumer food products range from
31 percent to 52 percent, while sensitive items such as alcoholic beverages continue
to attract much higher duties (143-592 percent). India also has various duties,
including safeguard and anti-dumping fees, and non-tariff restrictions such as import
bans. To encourage future trade growth, the International Monetary Fund is urging
continued tariff reduction and the lowering of administrative barriers.
Agrifood imports into India are subject to a range of duties, which include the basic
customs duty and an additional duty or countervailing duty that is equal to the excise
charged on similar domestic products (usually about 16 percent), plus an Education
Cess (a special two percent surcharge on all direct and indirect taxes). The duties
have a cumulative effect, with the Education Cess being applied at each step. This
means that the basic import duty is applied to the CIF (cost, insurance and freight)
value of the product when it arrives at the Indian port, the Education Cess is applied
to the value plus duty, the countervailing duty is then applied to the total, and finally
the Education Cess is applied again. Calculation of countervailing duty on packaged
goods can sometimes be complex and open to interpretation. It is based on the
maximum retail price minus the abatement notified for similar domestic goods in India.
19 This section is drawn from: 8 Steps to India: Helping Australian food companies export to India,
available: http://www.nfis.com.au/india/expertise_advice.html.
29
Section 4: The survey of exporters
4.1 Edinger survey
In October 2007, Ron Sandrey, from the Trade Law Centre of Southern Africa (tralac)
and Hannah Edinger, from the Centre for Chinese Studies (CCS) at the University of
Stellenbosch, compiled a paper for the Nordic Africa Institute in Uppsala, Sweden,
examining the South African-China agricultural trading relationship. Section 5 of that
paper provided the results of a survey taken to identify barriers that inhibit fruit and
vegetable exports from South Africa’s Western Cape Province to the Chinese market.
The main products exported to the Chinese market by the respondents included
citrus products (including oranges, easy peelers such as clementines and nartjies,
and lemons), grapes, pears, plums and wine.
The following is a summary of the non-tariff measures that emerged from the study.
The findings of the survey were categorised into the cost of doing business in China
as experienced by the respondents, the non-tariff barriers when exporting to China,
and other constraints and general comments made by the respondents.
The main cost of doing business with China and the key constraints for South African
fruit exporters to access the Chinese market according to the survey responses
included the following:
a. More costly logistics: In comparison to other countries, exporting to China
comes in at a higher cost, both for shipping and transport requirements and
cold chain management of the goods to China. Current port facilities in South
Africa were also reported to hamper trade with China, but overall, the
geographical location of countries like Australia places South Africa at a
disadvantage.
b. A lack of distribution channels within China: Whereas some exporters have
established their own distribution centers in China, distribution channels within
the Chinese market are generally difficult to obtain. There is also a lack of local
intermediaries in China which are important for exporters to be effective.
Furthermore, a lack of understanding of the Chinese market, cultural
30
differences and the difficulty of finding creditworthy customers pose additional
challenges to South African exports penetrating the Chinese market.
c. Accreditation period: For grape producers the accreditation currently takes
place every three years. This hampers new grape growers from accessing the
market, who must wait for years to be accredited by China.
d. High import tariffs: Survey respondents indicated that one of the main
reasons for the small market presence in China is due to the high import tariffs
levied on fruit products.
e. More experienced competing players: Players such as Australia and New
Zealand have been penetrating the Chinese market for longer and are more
familiar with this market than South Africa. South African exporters also find it
difficult to enter the Chinese market due to a general lack of government
support. Major competitors for South Africa in China include countries that
receive agricultural subsidies and those that have or are currently negotiating
FTAs with China.
f. Other constraints:
• Exchange rate fluctuations
• Chinese tax laws and the dire prospects for proper reform
• IP issues on trademarks
• Seasonality of South African products
• Limited trade due to bad payments and bad debt.
While some but not all of the above constraints can act as non-tariff measures, the
following were identified as the main non-tariff barriers to market access.
• Generally high phytosanitary standards and strict protocol: Strict SPS
standards and high protocols on fruit quality – which are regarded as
unnecessary at times by survey respondents – were seen as the main
barrier and a disincentive for South African fruit exporters to export to China.
The lack of a phytosanitary agreement between South Africa and China for
specific products further inhibits exporters from penetrating the Chinese
market. Respondents also felt that due to this lack of phytosanitary
agreements between South Africa and China, a lot of the shipments
31
destined for China do not follow a direct route to China but instead are
routed through Hong Kong. This channel (the gray channel) has given rise
to smuggling and poses challenges to exporters who adhere to legal
procedures and channels. In particular, the phytosanitary import
requirements make it difficult for citrus varieties to be exported to China.
• Logistics and cold sterilisation requirements: Official exporting channels
to China require the cold treatment of fruits, and exporters considered that
some aspects of this prerequisite unnecessarily increase the cost of the
logistics chain. The process is essential to keep the freshness of the product
from producer to retailer, to maximise product quality in the final market, and
to control certain pests such as the fruit fly. The drawback of the transit cold
treatment process (in addition to the increased cost of exporting and the
necessary paper work and data collection) is to have fruit that is strong
enough to handle the required cold treatment. Overall, cold sterilisation
hampers the quality of fruits, and some products such as soft citrus (easy
peelers) are more temperature sensitive.
• Registration of the orchards and associated documentation: Any citrus
fruit that originates from an unapproved orchard, production unit or packing
house, storage facility or cold treatment facility is prohibited to enter China
at the first port of entry. The registration process is annual and has to be
approved by the South African Department of Agriculture.
4.2 Smit survey
In 2008 the University of Stellenbosch (in the person of Lilani Smit) in collaboration
with tralac extended the earlier analysis undertaken. The current study also focuses
on NTBs facing fruit exports in the Western Cape to China, but has been extended to
determine if there are any major NTBs that restrict or inhibit doing business with India.
The questionnaire used by Edinger in Sandrey and Edinger was adjusted to better
suit the extended study. The questions posed remained the same, but were
expanded to include India, and restructured in a different layout, with different
possible multi-choice answers and the opportunity for respondents to make additional
comments. The answer could also be applied as a general problem, or regarded as
specific to India or China only. Rather than a mail survey, as conducted by Edinger,
individual face-to-face interviews were held. (See appendix A for the questionnaire.)
32
The main findings from the current report are now discussed, starting with China and
concluding with India.
4.2.1 China
Table 1 is a summary of the results obtained by the questionnaire. The different non-
tariff barriers obtained from the survey are categorised as being ‘significant’,
‘mentioned’ or ‘insignificant’ barriers depending on their frequency of appearance.
Table 1: Non-tariff barriers in China
Source: survey results
NON-TARIFF BARRIER CHINA
Significant Mentioned Insignificant
Sanitary and phytosanitary requirements ×
Costly logistics ×
Lack of cold storage infrastructure ×
Port congestion ×
Logistics ×
Road infrastructure ×
Culture ×
High Import tariffs ×
Lack of knowledge and understanding of how the markets work ×
Having enough fruit that is strong enough to handle the cold treatment required
×
Exchange rate fluctuations ×
Registration of orchards ×
Carbon footprint ×
Long shipping time ×
Product quality ×
Gray channel v official channel ×
Finding creditworthy customers ×
Lack of distribution channels ×
Lack of support from SA government ×
Trust factor problem ×
Subsidised farmers/Minimum price protection ×
High expectations from overseas buyers ×
33
A: Sanitary and Phytosanitary (SPS) Measures
Following Henson and Loader (2005: 310-312) there are three elements of the SPS
Agreement where it could be argued that the Chinese SPS protocol is discriminatory
towards South Africa:
• Equivalence: members are required to accept the SPS measures of other
members where they can be demonstrated to be equivalent and offer the same
level of protection. This protects exporting countries from unjustified trade
restrictions, even when these products are produced under qualitatively
different SPS requirements. In practice, however, the right of the importing
country to test imported products limits the right of equal treatment.
• Differing regional conditions: Article 6 requires WTO members to recognise that
pests and diseases occur in distinct regions and do not necessarily inflict all
areas of a country. For example, a member would most likely violate its WTO
obligations if it prevented imports of all fruit from the United States due to the
presence of the Mediterranean fruit fly in only one state, Hawaii. According to
Article 6.1, members should take into consideration the guidelines of the
‘relevant international organisations’ in determining pest- and disease-free
areas.
• Transparency: Annex B of the SPS Agreement states that if a member’s
proposed SPS measure deviates from an international standard, guideline, or
recommendation, or if no such international standard exists, and if the measure
has a major impact on trade, the member must notify other countries of this
proposed measure ‘at an early stage’. If requested, the member must explain to
other members how the proposed measure varies from international standards,
guidelines or recommendations.
A particular problem is that in June 2005 the California Department of Food and
Agriculture (CDFA) inspectors found one live and one dead larva identified as False
Codling Moth (FCM) on a shipment of South African clementines at the California
border, with a second larva later intercepted on a separate shipment in California.
The US Department of Agriculture then changed the treatment protocol for future
imports of South African clementine oranges. The earlier treatment protocols
required fruit to be held in cold treatment (31°F/-0.56°C) for a 22-day period in its
34
country of origin, or in transit, prior to arrival in the US, while the new protocols
required shipments to undergo a three-day pre-chilling period in South Africa and a
24-day cold treatment period. The temporary ban was then lifted on 1 July 2005 due
to increased cold treatment protocol compliance by South Africa Shippers. This was
consistent with the SPS Agreement since the change in protocol was based on
scientific proof and was transparent. The problem, however, was that this protocol
was adopted by China, simply based on what had occurred in the US, without basing
the protocol adoption on any scientific proof. This, in turn, affects the product quality
of South Africa’s citrus exports, as fruit that undergoes such stringent cold treatment
(a) is not viewed to be as fresh as citrus that had not been exposed to this specific
cold treatment and (b) the shelf life is shortened.
Furthermore, the exporter faces the risk of losing a shipment before it is even loaded.
South African officials, under the zero tolerance approach, can reject the fruit after it
has been packed and transported to the harbour prior to loading. This action can
happen if live larva (like the codling moth) is found in the shipment. However, this
inspection is prior to the cold treatment of 24 days as well as a three-day chilling
period, and is clearly discriminatory to the exporting company/country since no
opportunity is given to apply the stringent cold treatment requirements.
B: Logistics and the cold chain
When exporting to both India and China, exporters are faced with logistical problems
such as inadequate road infrastructure, long shipping time, port congestion, costly
cold chain management and, in the case of India, a lack of refrigerating facilities.
According to Sandrey and Edinger, South African citrus producers consider exporting
to China relatively more expensive than shipping to other comparable countries, both
for shipping/transport requirements and cold chain management. These problems
(road infrastructure, long shipping times and port congestion) are barriers that the
South African exporter cannot necessarily control, and could be construed as NTMs.
For example, Brazil can now ship much bigger freight of up to 5000 containers more
through the new, improved Panama Canal, and this is slightly changing their
competitive advantage over South Africa.
35
Cold chain management is a more complicated barrier for South African exporters.
This is a worldwide supply chain that moves perishables from supply to demand and
refers to the management of perishable products in order to maintain quality and
safety from the point of slaughter or harvest through the distribution chain to the final
consumer. It ensures that perishable products are safe and of a high quality at the
point of consumption; failure to maintain product quality leads to customer
dissatisfaction, lower demand, and public health problems. As in any chain, it is only
as strong as its weakest link, and breaks may occur just as easily on a warehouse
dock as they do on a supermarket floor.
All products and containers that are exported to foreign countries must therefore be
certified by the Perishable Products Export Control Board (PPECB) before leaving
the country. This chain becomes a form of NTB for the South African exporter
because of various reasons including the following:
• The cold chain is a costly management process.
• In some cases there are not enough products in South Africa that can handle
the cold treatment requirements.
• China requires extra cold treatment of the imported product, which can possibly
harm the product but may also expose the exporter to the risk of missing
opportunities in the market or exposing the exporter to the risk of price changes
and exchange rate fluctuations. However, this can be avoided when the
exporter makes use of the gray channel via Hong Kong rather than the official
channel since extra cold treatment is not required through the gray channel.
• India has a lack of proper refrigerating facilities, automatically exposing the
exporter to the risk of a poor quality product.
C: Product quality
The South African deciduous fruit industry has faced increased globalisation of
markets, trade liberalisation, deregulation, advances in technology, changes in
consumer preferences, over-supply of deciduous fruit in South Africa’s traditional
markets, and increased global competition. Therefore, with global deciduous fruit
markets becoming more competitive and the local industry being largely deregulated,
producers and processors are consistently challenged to position themselves as
36
capable competitors in the global free trading market environment. While South
Africa’s deciduous fruit supply chains are shown to be competitive internationally,
countries like Chile’s deciduous fruit supply chains are at a ‘strongly internationally
competitive’ level (Mashabela and Vink, 2008: 240-241). It is thus of the utmost
importance to have a product with impeccable quality that meets the high
expectations of the overseas buyer. While South Africa’s fruit is seen to be of good
quality, a problem arises with the cold treatment requirements as discussed in
section A. These SPS requirements for exporting to China include a three-day pre-
chilling period, 24 days in-transit cold treatment and an extra cold treatment chain at
the harbour in China. As already mentioned this affects quality of the product and
shortens the shelf life.
D: The Chinese culture and market
Some exporters consider that the culture of China can become a barrier to export for
the South African exporter, as they are unfamiliar with Chinese culture, customs,
business practices and etiquette. Chinese counterparts, for example, were seen as
reluctant to engage in business with strangers and more willing to make frequent use
of intermediaries known by both sides (notwithstanding the lack of local
intermediaries) to overcome obstacles posed by differences in peoples and cultures.
Given cultural and language barriers, a generally low-trust Chinese society and
highly bureaucratic market environment in China, South African exporters consider
the general lack of knowledge and understanding of the Chinese culture as a
potential trade barrier. Furthermore, it is also difficult for the exporting country to find
creditworthy customers, and a complicated matter to obtain distribution channels
within the Chinese market. This can again be linked to the lack of knowledge of the
Chinese market. However, the counter argument is that understanding the cultural
and business practices of a country is a necessary first step for doing business there.
In addition, the marketing channel for fruit in China can range from modern retail
outlets to more traditional formats such as fruit shops, open-air stalls and moving
street vendors on tricycles. Exporters say that most of the domestic fruit is moved
through fruit shops and open-air stalls, but most imported fruit is found in
hypermarkets and supermarket outlets where they have been cold stored for longer
shelf life. Imported fruit is not regarded as being as fresh as the domestically
37
produced fruit. From the exporter’s side, the trust factor is also regarded as an
obstacle to doing business with both China and India because of the lack of
knowledge about each other and because of previous experiences where payment
was not received on time. It is therefore crucial for the South African exporter to
better understand the Chinese market and consumer in order to be successful.
Below is a summary of the different factors concerning the cultural differences and
barriers faced by South African exporters (as learnt from the interviews).
• Cultural differences in terms of business ethics.
• Only one decision maker – the person at the top.
• Guanxi (not what you know but who you know), relationship first, then business.
• The fear of losing face – one cannot be too direct or cause embarrassment. The
word ‘cannot do’ or ‘no’ are not used, so one has to be very careful in
misinterpreting an answer to a question.
• Access to the market is not a problem but lack of knowledge about the dynamics
of the city or regions which vary drastically can be a barrier.
• Lack of decision-making power by Chinese employees – each request has to be
referred upwards and cleared before a decision can be taken or reacted upon.
• Constant restructuring of departments or employees that are moved between
departments. Building relationships takes time, and business commences only
once trust has been established; but the constant moving of employees means
that the relationship-building process continues without progress beyond this.
• The first thing mentioned at every meeting is that a long-term relationship is
desired, but, in fact, exporters reported this to be a one-sided relationship that
does not seem to develop fully.
• While of lot of China’s agreements especially towards Africa and the developing
world are based on ‘mutual benefit’ and ’win-win’ rhetoric, the perception exists
that a key reason for the relationship is gaining expertise by the Chinese partner
and manufacturing similar products in China (Chinese ‘knock-offs’).
• Although the Chinese are looking for imported brands, the mass market still
prefers and trusts Chinese products.
• Chinese packaging must be developed specifically for the market.
38
• There is the perception amongst South African exporters that the communistic
influence is still so strong, that while the capitalistic ideal is yearned for, the
influence of communism does not allow the Chinese to look at a viable business
opportunity and understand the win-win scenario.
• The market has extremely high expectations for imported fresh produce
(especially for appearance of the fruit), much more than is the case in other Asian
countries. Coupled with the market conditions and various risk factors, the quality
requirement discourages South African growers to pack fruit for the Chinese
market.
E: Gray channel versus official channel
The informal importing channel into China is called ‘gray channel’ trade, but it is
difficult to obtain a clear definition of this gray channel. Essentially, importers in China
can receive goods through the gray channel without the hassle that accompanies the
required permitting procedures. A permit to import a product in China requesting the
product quantity and port of delivery is usually required. Although it is a relatively
straightforward process to acquire the permit, the time taken to issue such a permit
can be lengthy and quantities/amounts requested under such permits initially are
never met. This can result in requesting permit after permit and can be a tedious and
time-consuming process. Conversely, through the gray channel, a person or
company handles the import issues and delivers the goods for a fee. It is not
necessarily the cheapest option, but commonly the simpler one.
F: Other
The following section refers to other costs of doing business in China. These are not
necessarily non-tariff barriers but in some cases they can be argued to be a
constraint or a form of discrimination to especially developing countries when
exporting their products. It should be noted that some of these factors were not
mentioned in the actual survey form but were added following discussions held with
key players in the industry.
• Exchange rate fluctuations: Just like the trust factor problem or the need for
local intermediaries, exchange rate fluctuations cannot be regarded as a non-
tariff barrier affecting exports to China but do, however, act as a significant
39
expense of doing business with Chinese parties. It can be argued that since
cold-treatment protocol for China is such a long and time-consuming process it
makes for extra time to which the exporting company is exposed to changes in
the exchange rate.
• Carbon footprint: This refers to the measure of the impact human activities
have on the environment in terms of the amount of greenhouse gas emissions,
measured in units of carbon dioxide. The argument behind this is that imported
goods must have a more damaging footprint as they travel farther. Again, this
cannot be referred to as a non-tariff barrier but carbon footprinting is a problem
that requires more and more attention. Currently, the EU is emphasising the
importance of carbon footprints to the extent to which these can affect doing
business. It can be argued that it is only a matter of time for carbon footprinting
to spill over to the rest of the world and it can become a major issue
contributing to the cost of doing business. Therefore there is a need to take
cognisance of it existence.
4.2.2 Comparison of the Edinger and the Smit studies
Table 3 presents a comparison of the survey research undertaken by Hannah
Edinger of the Centre for Chinese Studies in late 2007 and the extended study done
by Lilani Smit, graduate student at the University of Stellenbosch, as applied to China.
Note that although a number of non-tariff barriers were mentioned, only the
significant barriers as discussed above are applied in the following comparison.
Table 3: Non-tariff barriers
Smit Edinger
Sanitary and phytosanitary requirements Sanitary and phytosanitary requirements Logistics and the cold chain Logistics and cold chain sterilisation requirements Product quality Registration of the orchards and documentation Chinese culture and market Gray channel Gray channel
Tariff quotas
State trading enterprises
Value added tax
40
Cost of doing business and key constraints
Smit Edinger
Exchange rate fluctuations Exchange rate fluctuations Carbon footprint Lack of distribution channels Food miles Accreditation period Traceability High import tariffs Costly logistics More costly logistics Trust factor problem More experienced competing players Limited trade due to bad payments and bad debt
Source: Sandrey and Edinger (Edinger) and present (Smit) surveys
4.2 India
Table 4 is a summary of the results obtained by the questionnaire as they relate to
doing business in India. The different non-tariff barriers obtained from the survey are
categorised as ‘significant’, ‘mentioned’ or ‘insignificant’ barriers depending on their
frequency of appearance.
Table 4: Non-tariff barriers in India
Source: Questionnaire results
NON-TARIFF BARRIER INDIA
Significant Mentioned Insignificant
Sanitary and Phytosanitary requirements
×
Costly logistics ×
Lack of cold storage infrastructure ×
Port Congestion ×
Not enough volume to market the product
×
Logistics ×
Road infrastructure ×
Culture ×
Lack of knowledge and understanding of how the markets work
×
Exchange rate fluctuations ×
Carbon footprint ×
Finding creditworthy customers ×
Lack of distribution channels ×
Trust factor problem ×
Subsidised farmers/Minimum price protection
×
High expectations from overseas buyers
×
41
Following the same format as for China we present a discussion of the different
identified non-tariff barriers identified by respondents to the questionnaire. Although
agricultural and horticultural exports to India are very limited, the purpose of this
survey was to determine whether major non-tariff barriers exist that could be reasons
for not doing business with India.
The significant barriers as can be seen in Table 4 are:
• The Indian culture
• Exchange rate fluctuations
• Finding creditworthy customers
• Trust factor problem
• Lack of distribution channels
A brief description of these barriers (or perceived barriers) follows below:
Indian culture and market
Population growth in India is currently two percent per year, and varies from state to
state. The states with the highest per capita fruit consumption are usually those with
lower population growth rates. Significant potential exists to expand fruit consumption
in rural areas, in states with currently low per capita consumption rates, and in
growing urban areas. Higher levels of per capita fruit consumption are increasingly
evident in urban areas for virtually all income groups, with the higher income levels
showing the highest per capita consumption rates. Real annual Gross Domestic
Product (GDP) growth rates have averaged 4.7 percent over the period, despite the
Asian economic crisis and slow industrial growth in the past five years. Real per
capita income levels increased 3.4 percent per year from 1981 to 1998, with
household expenditure for fruits and vegetables estimated to have increased 5
percent per year over the same period. Consequently, annual per capita fruit
consumption also increased, from 25 kg in 1981 to 31 kg in 1998 (FAO, 2001).
There is a significant positive relationship between income and fruit consumption,
with the consumption of tropical and other fruits related to income. Data from the
42
Indian Agriculture Research Institute indicate that the richest income group
consumes six times more fruit than the lowest income group, in both rural and urban
areas, with per capita consumption in urban areas almost twice that of rural areas.
Given this relationship between income and demand, lower income groups are likely
to account for most of the future growth of the market in India, although high income
groups may increasingly substitute tropical fruit for other fresh fruits as fruit
consumption in these groups approaches saturation. A substantial price differential
exists between wholesale and retail prices, primarily due to the margins captured by
intermediate buyers and sellers, perishability of product, and long distances between
wholesale and retail markets. These high retail prices for fresh tropical fruit are one of
the primary constraints in increasing consumption, particularly among middle- to low-
income households. However, consumers in India have become increasingly aware
of the positive health aspects of fruit consumption, particularly in urban areas, and a
more diversified diet and interest in healthier eating have led to increased
consumption of all fruits.
Doing business in India can be a complex and multi-layered operation, and the
following is a summary of comments made by respondents in the survey as to why it
is difficult to do business in India:
• India has an extreme lack of sophistication regarding modern retail outlets as
we know them, and it is only over the last few years that concerted
development has started in this direction.
• Traditionally, Indians shop from outlets in the immediate vicinity and new
shopping malls and supermarkets enjoy most success in bigger cities and
metropoles.
• Small shop owners also regard the new development with skepticism leading to
incidents of organised protest and arson in some regional cities.
• Shopping for an affluent family was traditionally relegated to servants, and
respondents commented that a shift in procurement patterns and traditions is
forming part of the market evolution in that country.
• Although the growing middle class with disposable income numbers some 250
million people, over 700 million Indians still subsist on less that US$1 per day.
43
• Traditionally, fresh fruit is available to be picked from trees, very often in the
backyard or close by. The concept of long-life juice or processed fruit is
therefore unfamiliar to the masses, and the important urban market increasingly
views this development as convenient.
• Seasonally, India is producing surplus fruit at the same time as South Africa,
thus creating a narrow window for exporters marketing their products.
Finding creditworthy customers and the trust factor problem refer to situations
where exporters did not receive payment on time, therefore creating a trust factor
problem. This problem can be eliminated where it is possible to penetrate
supermarkets which are more effective in keeping the supplier (and thus the client)
happy and which also act as effective local intermediaries. This is not a prominent
non-tariff barrier but rather a cost of doing business since it will take time, effort and
money to build a strong relationship and trust with retailers.
As in the case of China, the following comments refer to the cost of doing business
with India:
Exchange rate fluctuations – just like the trust factor problem or finding
creditworthy customers, exchange rate fluctuations cannot be defined as a non-tariff
barrier affecting exports to India. Exporters do, however, consider these fluctuations
to be a significant cost of doing business with India, as exposure to changes in the
exchange rate while a product is being shipping to market can negatively affect profit
margins.
Lack of distribution channels and lack of cold storage infrastructure are
probably the biggest problems faced when exporting fruit to India. The lack of
appropriate facilities and necessary infrastructure to secure the existence of high
quality products is pertinent. When leaving the refrigerated containers at the harbour,
the product is exposed to high temperatures until it reaches retail outlets, influencing
the quality of the product as well as its shelf life.
In summary: can the major barriers found from the survey and discussed above be
seen as non-tariff barriers that are major reasons inhibiting or even curtailing fruit
44
exports from the region to India? Arguably, current high Indian tariffs are the major
reason for the low level of export interest from South Africa, and non-tariff barriers
are still less significant. The biggest NTB problem is identified as the lack of
refrigerated infrastructure making it impossible to export a high-quality product.
Furthermore, companies surveyed indicated a general lack of produce and
production output to currently export to India on account of the success and stability
in other markets such as the UK and the US. In the final analysis, India is different
from many other markets. While tariffs have been reduced on agricultural imports into
India, many are still high. Consequently, tariff protection is gaining more attention
from exporters than potential non-tariff barriers that may be exposed when these
exporters become more focused on the Indian market.
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