trade insight_vol6.no.1 2010

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Special Briefs

for the

16th SAARC

Summit


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BANGLADESH

1. Bangladesh Environmental Lawyers

Association (BELA), Dhaka

2. Unnayan Shamannay, Dhaka

INDIA

1. Citizen consumer and civic Action Group

(CAG), Chennai

2. Consumer Unity & Trust Society (CUTS),Jaipur

3. Development Research and Action Group

(DRAG), New Delhi

NEPAL

1. Society for Legal and Environmental Analysis

and Development Research (LEADERS),

Kathmandu

2. Forum for Protection of Public Interest

(Pro Public), Kathmandu

PAKISTAN

1. Journalists for Democracy and Human Rights

(JDHR), Islamabad

2. Sustainable Development Policy Institute

(SDPI), Islamabad

SRI LANKA1. Institute of Policy Studies (IPS), Colombo

2. Law & Society Trust (LST), Colombo

SAWTEE NETWORK

contents Trade Insight Vol.6, No.1, 2010

Views expressed in Trade Insightare of the authors and editors and do not necessarily

reflect the official position of SAWTEE or its member institutions.

COVER FEATURE 14

SAARC countries will not

benefit from a services

agreement without mak-

ing the regional mar-

ket more attractive for

intra-regional trade and

investment flows.

SAARC SUMMIT 4Climate Change in SAARC

IN THE NEWS 5

TRADE AND CLIMATE CHANGE 8

South Asian LDC Issues inEnvironmental Goods and ServicesLiberalization

COUNTRY CASESBangladeshs Experiencein Services Trade 18

Indias Services Trade in South Asia 20

Services Trade Issues for Nepal 22

Pakistans Potential inTrade in Services 24

Prospects for ServicesTrade in Sri Lanka 26

FOOD SECURITY 28Food Security: A FundamentalHuman Right

NORTH-SOUTH FTA 30Campaign on US-Nepal Trade andInvestment Framework Agreement

CLIMATE CHANGE 35COP15: Let-down through a SecretiveProcess

UNDERSTANDING WTO 36General Agreement onTrade in Services

BOOK REVIEW 38The Sinking of the World Economy

NETWORK NEWS 39

www.thisday.co.tz

CARBON TRADE 11

CARBON TRADE inSouth AsiaSouth Asia

FARMERS RIGHTS 32

the need for a

resource rights approach

Protecon ofsmallholder farmers


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4 Trade Insight Vol.6, No.1, 2010

SAARC summit

The 16th Summit of the SouthAsian Association for Regional

Cooperation (SAARC) is scheduled for2829 April 2010 in Thimpu, Bhutan.The theme of the Summit is ClimateChange, and it is going to take placefour months after climate change talksin Copenhagen.

For SAARC countries, which arefacing a number of common challeng-es due to climate change, the upcom-ing Summit is an opportunity not onlyto recommit for collaborative efforts

to address the challenges, but also tocome up with a meaningful commonagenda for the 16th Session of theConference of Parties to the UnitedNations Framework Convention onClimate Change (UNFCCC) to be heldin Mexico later this year.

The issue of climate change wasfirst taken on board by the SAARCmember countries during the FifthSAARC Summit held in Male in 1990.Noting with alarm the unprecedentedclimatic changes predicted by the

Intergovernmental Panel on ClimateChange, SAARC countries had urgedthe international community to mobi-lize additional finances and to makeavailable appropriate technologies toenable developing countries to facethe new challenges arising from cli-mate change and sea-level rise. Theyhad also agreed that SAARC countriesshould coordinate their positions atinternational forums on this issue. TheSeventh Summit held in Dhaka in 1993recognized that the completion of theRegional Study on the "Greenhouse

climate change

inSAARC

Effect and its Impact on the Region"was a significant step forward inpromoting regional cooperation in thisvital area. However, the recommenda-

tions of the study were not implement-ed in earnest.

SAARC countries adopted a com-mon position prior to the Third Ses-sion of the Conference of Parties to theUNFCCC and welcomed the adoptionof the Kyoto Protocol to the UNFCCCin December 1997. All these show thatclimate change used to remain one ofthe core agendas of SAARC sum-mits until the late 1990s. It lost fervorstarting from the early 2000s, althoughenvironment has remained a core

agenda of discussion since the earlyyears until today.

Of late, the issue of climate changehas gained prominence in South Asiaalong with growing global concernson the subject. The 29th Session of theCouncil of Ministers of SAARC coun-tries held on 7 December 2007 in NewDelhi adopted the SAARC Declarationon Climate Change, following whichthe SAARC Environment Ministersissued the Dhaka Declaration and theSAARC Plan of Action on ClimateChange in July 2008.

As a continuation of their earlierefforts, the Eighth Meeting of SAARCEnvironment Ministers held in NewDelhi on 20 October 2009 also dis-cussed the agenda of climate changeand recalled the earlier declarationsand plan of actions on the subject.Underlying the crucial importance ofclose regional cooperation in the run-up to the 15th Session of the Confer-ence of Parties to the UNFCCC, theMeeting decided to have a commonSouth Asian statement in Copenha-

gen. However, by the time SAARCcountries were in Copenhagen, theywere less interested in the commonstatement than in their individualnational interest.

Climate change is going to havesevere impacts on various aspectsof development and the economy,some of which include food security,

biodiversity and trade. These issueshave a direct bearing on the liveli-hoods of a vast majority of people,mostly the poor and vulnerable,

living in South Asia. Therefore, thetheme Climate Change for the up-coming SAARC Summit is appropri-ate. There are a number of measuresthat South Asian governments canadopt to tackle the challenges posed

by climate change on these differentareas. However, it remains to be seenwhether South Asian governmentswill implement those measures inearnest, or render the commitmentsthat they are going to make in theupcoming 16th Summit mere emptyrhetoric as in the past.

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5Trade Insight Vol.6, No.1, 2010

BRAZIL, South Africa, India andChinathe so-called BASIC grouphave underscored their support for theCopenhagen Accord (CA) produced

by the Copenhagen climate changemeet under the United Nations Frame-work Convention on Climate Change(UNFCCC).

In a joint statement issued aftertheir second meeting, held on 24 Janu-

ary 2010 in New Delhithe first sincethe 15th Session of the Conference ofthe Parties (COP15) to the UNFCCCthe environment ministers of theBASIC group recalled the importantand constructive contributions of thegroup at the COP15 and in the final-ization of the CA, and re-emphasizedtheir commitment to working togetherwith all other countries to ensurean agreed outcome at the COP16 inMexico later this year.

While describing the CA as ahigh-level political agreement, theBASIC ministers underscored thecentrality of the decision in the CA tocarry forward negotiations under thetwo tracks of Ad hoc Working Groupon Long-term Cooperative Actionunder the UNFCCC and the Ad hoc

BASIC countries emphasize two-track

process in climate negotiations

Working Group on Further Commit-ments of Annex I Parties under theKyoto Protocol in 2010 leading up tothe COP16. The ministers of the fouremerging economies reiterated that allnegotiations must be conducted in aninclusive and transparent manner.

The strong backing of the two-track negotiation process by theseeconomies has raised hopes that theprocess would not be abandoned.They also called for the ad hoc work-ing groups to meet at least five times

before the COP16, emphasizing that

these meetings are essential to makeprogress towards an agreed outcomeat the COP16.

On finance, the BASIC environ-ment ministers called on developedcountries for an early flow of thepledged US$10 billion in 2010 with afocus on least-developed countries,small island developing states andAfrican countries, as proof of theircommitment to urgently address theglobal challenge of climate change(Adapted from Trade and Development Moni-

tor, SAWTEE, January 2010).

A CORE Group, formed by theBangladeshi government, hasrecommended that the countrysign bilateral free trade agreements(FTAs) with India, Pakistan and SriLanka on goods in the first phaseand similar deals on services andinvestment in the second phase.

Under the proposed FTAs, theCore Group strongly suggestedthat the government seek zero-dutyfacility for all Bangladeshi exports

to these countries markets and de-

Bangladesh advised to sign bilateral FTAs

mand national treatment at the locallevel to avoid any additional dutiesand charges.

Bangladesh has not been ableto reap benefits from the duty-freeaccess facility offered by India asextra levies like education tax, cen-tral value added tax, special centralvalue added tax and additionalcountervailing duty are levied onproducts originating from Bangla-desh. National treatment at the local

level means no additional duties and

charges will be levied on Bangla-deshi products which are not leviedlikewise on Indian, Pakistani or SriLankan products in their respec-tive markets. Presently, exportsfrom Bangladesh to India, Pakistanand Sri Lanka constitute less than3 percent of its total annual exportearnings while its imports fromthese countries represent about 13percent of its total imports (Adapted

from Financial Express, www.bilaterals.org,

08.12.09).

in the news

http://beta.thehindu.com


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WORLD Trade Organization (WTO)members tacitly dropped a deadlinefor a new trade deal on 26 March, atthe end of a week-long stocktakingexercise among senior trade officialsin Geneva.

The decision to pursue the talksinto an uncertain future came asthe WTO forecast that global tradevolumes would expand by 9.5 percentthis year, after contracting by 12.2percent in 2009, shrugging off haltingprogress on the Doha Round of talks.

When trade ministers announcedat the Seventh WTO Ministerial in late2009held after a four-year hiatusthat there would be a stocktaking inlate March, the unspoken hope wasthat it would be the occasion to clinchan outline deal. The G20 had called on

WTO members quietly drop 20trade ministers to reach a Doha agree-ment by 2010.

The push to finalize a new globaltrade accord by that time had effec-tively died several weeks before thestocktaking. Thanks to the complexi-ties of the global trading system, itwould take WTO members roughlynine months to schedule all of thetariff commitments that would berequired under any new deal. If anagreement were to be in place beforethe end of the year, trade ministerswould need to agree on the broad out-lines of a trade deal before the end ofthe first quarter. So when WTO Direc-tor-General Pascal Lamy announcedin late February that the stocktakingmeeting would be for senior officialsonly, rather than ministers, it became

clear that an agreement on modalitieswas not within immediate reach. Noone who spoke at the opening of thestocktaking made any mention of adeadline, let alone the 2010 deadline.

It was clear from the reportspresented by the chairs of the variousnegotiating groups that serious differ-ences persist. David Walker, the chairof the negotiating group on agricul-ture, said members have not been ableto substantively resolve matters,noting that divisions persist over cot-ton subsidies, sensitive products, tariffcaps, special products and the specialsafeguard mechanism. Likewise, thechair of the industrial goods talks,Luzius Wasescha, provided a similarlydownbeat appraisal of his area ofnegotiations. He said that the main

GERMANY is the top performeramong the 155 economies ranked inthe Logistics Performance Index for2010 (LPI 2010).

The index produced by theWorld Bank Group is based on aworld survey of international freightforwarders and express carriers whoare asked to rate the performance ofcountries in six areas of the currentlogistics environment: efficiency of thecustoms clearance process; quality oftrade and transport-related infrastruc-ture; ease of arranging competitivelypriced shipments; competence andquality of logistics services; abilityto track and trace consignments; andfrequency with which shipments reachthe consignee within the scheduled orexpected time.

The score for each indicator andthe overall index ranges from 1 to 5,with higher score indicating better

performance. According to the LPI2010, high-income economies domi-

Germany tops logistics performancenate the top logistics rankings, withmost of them occupying importantplaces in global and regional supplychains. By contrast, the 10 lowest per-forming countries are almost all fromthe low-income and lower middle-in-come groups.

The report notes that among de-veloping economies, logistics perfor-mance transcends the level of per cap-ita income: Many countries perform

better than what their income levelwould suggest. The 10 most significantover-performers include China (27),India (47), Uganda (66), Vietnam (53),Thailand (35), the Philippines (44), andSouth Africa (28).

Likewise, the countries withsignificant improvements in perfor-mance between the two LPI surveysin 2007 and 2010 are often those whichimplemented comprehensive logisticsand trade facilitation reforms earlier,

such as Colombia, Brazil, and Tuni-sia. In South Asia, the performance

of Afghanistan, Bangladesh, Bhutan,India and Nepal improved in termsof absolute score compared to the LPI2007, while that of Pakistan and SriLanka worsened. India tops SouthAsian countries, followed by Bangla-desh (79), Pakistan (110), Bhutan (128),Sri Lanka (137), Afghanistan (143) andNepal (147).

The score of all South Asiancountries except India is below three.The Maldives is not covered in the

survey (Adapted from www.worldbank.org,27.02.10).

http://picasaweb.google.com

www.hapag-lloyd.com

in the news


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gap is a mismatch in members levelsof ambition. The debate over secto-ralsschemes that would slash tariffson goods across an entire industry

has been particularly fierce (Adaptedfrom www.reuters.com, 26.03.10; Bridges

Weekly Trade News Digest, Vol. 14, No.

11).

WITH sound economic policies,India, Bangladesh and Bhutan areexpected to emerge from the globaleconomic crisis with stronger growthperformances in South Asia, ac-cording to the World Banks Global

Economic Prospects 2010. These threecountries generally have sound eco-nomic policies and greater resilienceof trade, investment and remittances,the report said, noting that growthhas been weakest in countries that en-tered the crisis with large internal andexternal imbalances, such as Pakistan,Sri Lanka and the Maldives.

In general, South Asia appears tohave escaped the worst effects of theglobal economic crisis. The regions

gross domestic product (GDP) growthof 6 percent in 2009 remains un-

Post-crisis prospects forSouth Asia

changed from 2008.The global crisis contributed to de-

celeration in real GDP growth in SouthAsia, from 8.7 percent in 2007 to 6 per-cent in 2009. This was largely driven

by a pronounced decline in investment

growth and private consumption.However, the slowdown in

regional GDP growth was the low-est among all developing regions, thereport noted. Some sectors demon-strated marked resilience during thecrisis, such as readymade garmentsin Bangladesh, Sri Lankas partner-ships with mid-to high-end retailersin the United States and the EuropeanUnion, and Indias information tech-nology industry. Overall, the combi-

nation of a sharp fall in the value ofimports, a less steep decline in exports,

and resilient remittance inflows havemitigated the negative effects.

Remittance, a key source of foreignexchange for South Asia, declinedin 2009 due to decline in economicactivities and rise in unemployment

in migrant host countries. Remittanceinflows, however, remained relativelystrong compared with other sources offoreign exchange, and are above their2007 levels.

Although regional GDP growthis projected to accelerate, a returnto boom-period growth rates is notexpected in near future. The regionalfiscal deficit is projected to narrow onreversal of stimulus measures intro-duced to support demand during the

crisis (Adapted from IANS, http://economic-times.indiatimes.com, 24.02.10).

Brazil, India

for duty-free

schemesBRAZIL and India informed theCommittee on Trade and De-velopment of the World TradeOrganization (WTO) that theyare pushing ahead with commit-ments to provide duty-free andquota-free (DFQF) treatment toimports from the least-developedcountries (LDCs). Brazil said thatan inter-ministerial working group

is finalizing implementation ofthe commitment made by ForeignMinister Celso Amorim at the WTOMinisterial last year for DFQF. Itsaid that the preferential treatmentwill initially cover 80 percent of thetariff lines by mid-2010, and will

be expanded to reach 100 percent.Noting that it was the first devel-oping country to offer DFQF tothe LDCs in 2008, India said it isworking to ensure that the schemeprovides effective market access,covering important LDC productslike cotton, cocoa, cane sugar andreadymade garments (Adapted fromwww.wto.org, 20.03.10).

10 Doha deadline


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Liberalization of environmentalgoods and services (EGS) is partof the single undertaking of the DohaRound of talks at the World TradeOrganization (WTO). Though least-de-veloped countries (LDCs) do not needto make tariff reduction commitments,negotiations on EGS can impact them.

This article identifies EGS issues forSouth Asian LDCs and suggests ne-gotiation strategies based on the casestudies of Bangladesh and Nepal.

Current state of playThere is at present no internationalconsensus on the definition of EGS. Inthe Committee on Trade and Envi-ronment in Special Session (CTESS)of the WTO, a number of membershave referred to the work done by theOrganisation for Economic Co-opera-

tion and Development (OECD) andthe Asia-Pacific Economic Cooperation(APEC) on EGS. The OECD classifica-tion of environmental goods (EGs)includes three broad groups withdifferent categories and sub-categoriescovering 164 environmental products.The APEC list includes 109 itemswithin 10 broad categories.

In addition, of late, the WTO 153list has been at the centre of discus-sions on EGs at the CTESS. The list

was submitted by the Friends ofEGs a group of countries including

Canada, the European Communities,Japan, Korea, New Zealand, Norway,the Separate Customs Territory ofTaiwan, Penghu, Kinmen and Matsu,Switzerland, and the United States(US). The list comprises 12 broad cat-egories of products.

Several approaches have been

proposed for EG liberalization in theWTO. Developed countries are advo-cating a list-based approach whiledeveloping countries are for alterna-tive approaches, particularly thosethat would tie liberalization with EGsassociated with a specific environmen-tal project. The list-based approach has

been criticized on the ground that itmay lead to the liberalization of goodsthat have both environmental andnon-environmental end uses.

Under the project approach

advocated by India, imports of goodsand services at concessional termswould be allowed for environmentalprojects approved by a designatednational authority based on criteriadeveloped by the WTOs Committeeon Trade and Environment. This ap-proach has been criticized by devel-oped countries, however, for failing toprovide predictable, binding and per-manent trade concessions, questioningits consistency with WTO rules.

Another alternative is an integrat-ed approach requiring the CTESS to

multilaterally pre-identify categoriesof environmental projects such thatEGs used under the projects would

benefit from concessions on tariffs andnot face non-tariff barriers (NTBs). Yetanother option is a request-and-offerapproach which would allow eachcountry to propose goods it believes

contribute to the environment and alsogoods for which it is prepared to as-sume liberalization commitments.

In the context of environmentalservices (ES) negotiations, WTO mem-

bers have proposed to categorize ESusing a core and cluster approach.The European Union (EU) has pro-posed, for instance, a classification ofcore services which encompassesthose that can undisputedly be classi-fied as purely environmental. Suchservices can further be categorized

according to the environmental media,i.e., water, noise, solid and hazardouswaste, etc. The EU has also proposedthat services that can be termedconceptual servicessuch as design,engineering, research and develop-ment, and consulting servicesbeconsidered a special cluster since theyhave environmental end use.

South Asian LDCs in EG tradeBased on the data of the Trade Map

of the International Trade Centre, UNComtrade and the World Integrated

LDC trade

South Asian LDC issues in

environmental goods andservices liberalizaon

Fahmida Khatun


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Trade Solution, it is estimated thattotal global exports and imports ofEGsas defined in the WTO 153liststood at US$783.2 billion andUS$753.8 billion, respectively, in 2007.

In 2007, the share of LDC exportsof EGs in total global EG exports was0.08 percent and the share of LDC im-

ports of EGs in total global EG importswas 0.82 percent. Asian LDCs account-ed for 67.8 percent and African LDCs32 percent of total EG exports of LDCs.Asian and African LDCs accounted for26.9 percent and 72.22 percent of totalLDC imports of EGs, respectively.

South Asian LDCs account for awhopping 89.03 percent of total EGexports of Asian LDCs, and 36.55 per-cent of EG imports of the same group(Figure). Bangladesh dominates bothEG exports and imports. In 2007, its

share was 29.38 percent and 82.03 per-cent of total EG exports and imports ofAsian LDCs, respectively.

While jute and other textile fibrescomprise 54.16 percent of Bangla-deshs EG export basket, they do notfeature in Nepals top 10 EG exports.With a share of 45.68 percent in thecountrys total EG exports, tubes,pipes and hollow profiles and iron arethe dominant EG exports of Nepal.Sacks and bags for packaging of

goods, of jute or of other textilefi

bres,are the second important EG exports

of both Bangladesh (23.44 percent) andNepal (30.03 percent).

The top 10 EG exports contributealmost 95 percent of total EG exportsof Bangladesh and 97.63 percent of to-tal EG exports of Nepal, implying thatthey export only a few items on the153 list and their export baskets are

relatively small. Three itemssacksand bags, for packaging of goods, of

jute or of other textile fibres; machinesand mechanical appliances having in-dividual functions; and articles of ironor steelare common to the major EGexport baskets of both countries.

On the import front, machineryand mechanical appliances havingindividual functions, parts of electricmotors, laboratory equipment, staticconverters, air or gas compressors,parts for diesel and semi-diesel en-

gines, filtering or purifying machineryand apparatus for water, and primarycells and primary batteries, etc. domi-nate EG imports of South Asian LDCs.Compared to exports, the import

baskets of Bangladesh and Nepal aremore diversified.

For Bangladesh, the top 10 EGimports comprise 45.51 percent ofits total EG imports, and the shareis 53.78 percent in the case of Nepal.Three EG imports are common to both

countries lists: machines and me-chanical appliances having individual

functions; static converters; and partsof electric motors, generators, generat-ing sets and rotary converters.

The effective applied tariffs inhigh-income countries on EGs that areon the list of the top 10 EG exports ofSouth Asian LDCs are in the range of02 percent, except for twine, cordage,

ropes and cables, of jute or other tex-tile fibres, which face an effective tariffof 9.47 percent (Table, next page).Though tariffs on EGs in developedcountries are very low, South AsianLDCs will benefit from EG liberal-ization since their EG exports aredestined to a number of developingcountries where they face high tariffs.

In developing countries such asChina, India, Mexico, Syria and theUnited Arab Emirates, the major EGexports of Bangladesh and Nepal face

tariffs of 4.730.3 percent. On the otherhand, import tariffs in Bangladesh andNepal are not insignificant. Their topfive EG imports face tariffs rangingfrom 1.67 percent to 9.13 percent.

Strategies for South Asian LDCsAs LDCs are not bound to makeany liberalization commitments inthe Doha Round, South Asian LDCsshould adopt a wait-and-watch strat-egy in EGS negotiations. However,

as liberalization of EGS is part of thesingle undertaking, South Asian LDCs

South Asian LDCs Asian LDCs All LDCs

0

1000

2000

3000

4000

5000

6000

7000

US$million

381.1 428.0 631.1 606.9

1660.6

6180.7

Exports 2007 Imports 2007

Figure

LDC trade in EGs

w

ww.bhmmfz.com

Source: Based on UN Comtrade and ITC Trade Map.


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should participate actively in thediscussions in order to ensure that thenegotiations result in an outcome thatis conducive to their export interestsand sustainable development.

First, since the export interest ofSouth Asian LDCs in EGs lies in envi-

ronmentally preferred products (EPPs)which are agriculture- and natural re-source-based, they should emphasizethat the negotiating list of EG trade inthe WTO include products of their in-terest. Further, in the case of determin-ing EPPs, processes and productionmethods for examining how productsare grown, extracted, manufacturedand provided in a sustainable man-ner in all or some stages of their lifecycle should be reviewed to preventenvironmental protectionism.

Second, South Asian LDCs shouldemphasize the project approach asproposed by India which offers betteropportunities to these countries interms of market access. This approachis supposed to enable technologytransfer which can in turn help im-prove their compliance with techni-cal and sanitary requirements. Thisis important because most industrialunits in LDCs such as Bangladesh andNepal are small and medium enter-

prises (SMEs) which lackfi

nancial andtechnological capability to comply

with developed-country requirements.Third, elimination of NTBs such as

environmental and production regula-tions and standards, certification andsubsidies should be advocated. Theexport interest of Bangladesh andNepal in EGs lies in the area closer to

agricultural goods, which could facethe most harsh forms of NTBs.

Fourth, in order to address the pos-sible preference erosion resulting frommultilateral tariff cuts on EGs, SouthAsian LDCs should demand duty-freeand quota-free market access for allproducts of their export interest im-mediately in all developed countriesas well as in developing countries in aposition to do so. Concurrently, theyshould also demand special and differ-ential treatment for improved marketaccess for their products which haveless negative environmental impactsand which are derived in an environ-ment-friendly way.

Fifth, the issue of affordabilityof essential ES should be a prior-ity. Though commercial presence offoreign enterprises under Mode 3 maycontribute to increased investmentand capital formation, improvementsin the coverage and quality of ES, andtransfer of technology and capacity

building, South Asian LDCs shouldnot make any commitments without

assessing the implications of liber-alization of essential environmentalinfrastructural services such as water.

Sixth, South Asian LDCs should

press for the removal of stringentimmigration and recruitment policiesin developed countries that constrainmarket access of service providersunder Mode 4 (movement of naturalpersons). Commercially meaningfulliberalization of environmental infra-structure services requires market ac-cess in environmental support servicessuch as construction, engineering, andlegal and consulting services. ThoughES exports by South Asian LDCs arenot significant as yet, they have the

potential to reap economic benefits byexporting environment-related profes-sional services in the form of studies,assessments and consultancies. Forexample, LDCs which suffer fromenvironment-related natural disasterssuch as flood, cyclone and drought are

better equipped with the expertise todeal with such catastrophes.

Seventh, South Asian LDCs shoulddemand flexibilities in the Agreementon Trade-Related Aspects of Intellec-tual Property Rights (TRIPS) to enable

them to use patented climate-friendlytechnologies. Article 66.2 of the TRIPSAgreement, which mandates mem-

bers to take measures to encouragetechnology transfer to LDCs, should

be implemented for climate technolo-gies. South Asian LDCs should also bewatchful of any attempts to dump oldtechnologies by developed countriesin the name of technology transfer.

Finally, LDCs should submitproposals to receive support under the

WTOs aid-for-trade initiative. Suchassistance is needed not only for ac-quiring clean technologies but also foraddressing any probable negative im-pacts of liberalization. This is becauseSMEs, which dominate the industrialsector in LDCs, are not in a position topurchase clean technologies to complywith environmental regulations.

The author is Additional Director, Centre

for Policy Dialogue, Dhaka. This article is

based on a study Trade Negotiations on

Environmental Goods and Services in the

LDCs Context conducted by the author for theUNDP, Switzerland.

LDC trade

Product description and HS code Exporter Major export destination and tariff

rates (%)Jute and other textile bast fibres,

raw or retted (530310)

Bangladesh China (6.1); India (9.6); Pakistan (duty-

free)

Sacks & bags, for packg of goods,

of jute or of other textile bast fibres

(630510 )

Bangladesh,

Nepal

India (9.8); Syria (30.3); Sweden (0.8)

Twine, cordage, ropes and

cables, of jute or other textile bast

fibres (560710)

Bangladesh India and Mexico (not available);

Malaysia (duty-free)

Machines & mechanical appli-

ances having individual functions

(847989 )

Bangladesh,

Nepal

Netherlands (0.1); India (3.6); Italy

(0.1); Mexico (11.4); Philippines (0.8);

United Arab Emirates (4.7); Kenya,

Nigeria, Russian Federation (duty-free)

Tubes, pipe & hollow profiles,

iron or welded, of circ cross sect

(730630 )

Nepal India (9.8)

Source: UN Comtrade and ITC Trade Map.

Table

Tariffs on major EG exports of South Asian LDCs by major importers


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Oneof the most spectacular aspectsof the climate agenda has beenthe emergence of carbon markets. To-day, carbon markets are valued at overUS$130 billion. The Clean Develop-

ment Mechanism (CDM) provides anopportunity for developing countriesto participate in carbon markets. Certi-fied Emissions Reductions (CER) fromCDM projects in developing countriescan be used to meet reduction commit-ments in developed countries. Exceptfor India, the benefits from carbonmarkets through CDM have largely

bypassed the South Asian region.Despite some high-profile proj-

ectsNepals biogas programme, forexample, went on to be the prototypefor programmatic CDM and a brickkiln project in Bangladesh went onto help make the Copenhagen talksclimate neutralbroad-based capacityto take advantage of carbon marketopportunities has failed to emerge.Expansion of CDM to allow forprogramme-based approaches couldfacilitate a new wave of opportunitiesthat can help overcome the constraintsthat have limited project developmentthus far.

Excluding India, countries inSouth Asia have been shy to invest

in promoting CDM believing thattheir poverty and development needsrequire them to focus almost entirelyon adaptation. They are wrong.

Promoting CDM and access

to carbon markets are not merelyabout mitigation strategies but alsoabout building alternate gateways tofinancing and technology that could

be leveraged to support the broaderdevelopment objectives. Mitigation ef-forts linked with international carbonmarkets and built around programmesaimed at sustainable growth andenhanced livelihoods must form anintegral part of the climate responsestrategy.

Climate vulnerabilitiesAt the heart of the vulnerability inSouth Asia are the 600 million peoplewho live below the poverty line. Evenminor natural disasters could severelydisrupt their livelihood. Over 70percent of the population derives live-lihoods from agriculture that is largelydependent on natural precipitation.More frequent and intense variationsin rainfall will not only jeopardizelivelihoods but also diminish the

future prospects of agriculture andeconomic growth.

More than 700 million people inSouth Asia depend on the Himalayanecosystem. Climate change is likely toinduce long-term changes in hydro-logical systems that will threaten

water supply and increase the risks ofwater-related conflicts. Furthermore,population growth will compoundthe pressures on an already fragileecosystem, while increased urbaniza-tion in habitations without adequateprotection against natural disasterswill magnify the risks of large-scalecatastrophes.

According to a World Bank report,over the last two decades, naturaldisasters have affected more than halfthe population and resulted in overUS$45 billion in damages in SouthAsia. In many ways, climate changesimply deepens existing vulnerabili-ties that reflect past failures in reduc-ing poverty, diversifying economicactivity and building a robust disastermanagement system.

South Asian countries have placedthe need for adapting to the impactsof climate change at the centre of theirresponse strategy. Adaptation re-quires a two-pronged approach: first,

the ability to predict disasters andrespond quickly when it does strike,

carbon trade

CARBON TRADE in

South Asia

Bishal Thapa

Excluding India, countries in South Asia have been focus-

ing almost entirely on adaptation and shy to invest in

promoting the Clean Development Mechanism, despite its

potential to support broader development objectives.

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and second, the resilience to return tonormalcy quickly after a catastrophehas occurred. But how should invest-ment choices between the first and the

second be made; and which is moreappropriate given the broader devel-opment imperatives?

Broad simple observations of theimpacts that may arise from increasedflooding, droughts, salination of in-land waterways and extreme weatherevents do not provide a sufficient

basis to estimate the cost of buildingadaptive capacity or to facilitate the in-vestments that will be needed. There isan urgent need to translate the globalunderstanding of climate change intodetailed assessments of localizedimpacts and vulnerabilities that canthen form the basis for adaptive policymeasures.

Regional collaboration in SouthAsia is extremely necessary becausemany of the countries are connectedthrough the same regional ecosystemand most issues will have significanttransboundary dimensions. India,Bangladesh and Sri Lanka have al-ready announced networks of climate

research institutes, but without a re-gional institutional framework for co-ordination, studies from such researchcentres will remain piece-meal at bestor, more importantly, could providean incorrect picture of the longer-termimpacts.

Although South Asian countrieshave correctly recognized the nexus

between climate risks and poverty,response strategies should not remainlimited to the standard approach forenhancing livelihoods. The strategies

should also focus around climate re-silience so that even while livelihoodsare temporarily disrupted from theclimate shock, it does not end up erod-ing the gains of poverty reduction.

So far, vulnerabilities to naturaldisasters have largely been dealt withprevention and disaster relief, withoutadequate attention to bringing com-munities, services and systems back tonormal quickly after a natural disaster.As a result, with every disaster, thegains from poverty reduction wereerased and the poor remained forever

vulnerable. Responses to climate risks,therefore, provide a new opportunityto address a systematic failing of pov-erty alleviation approaches in SouthAsia.

For South Asian countries, thereare two primary reasons why an

emphasis on climate resilience willrepresent a new and meaningful frontin the battle against poverty.

First, in parts of the region whereservice delivery and infrastructureconnectivity remain weak or arefailing, building climate resiliencesimply means establishing betterdelivery and infrastructure net-works. Such climate resilient net-works implicitly work as a strongsafety net for the poor and can,

therefore, supplement the broaderdevelopment strategy.

Second, building climate resilientsystems will require significantinvestments that are unlikely to

be sufficient from public fundsalone. Many of these new systemswill require financing models thatallow the private sector to play agreater role, and more importantly,develop the gateways for services,like crop and weather insurance, tomore effectively reach rural com-munities.

International carbon marketsCarbon markets have registeredspectacular growth over the lastdecade and now represent a distinctindustry segment. Despite the reces-sion, the value of carbon marketsincreased to over US$135 billion in

2009. Though carbon prices, measuredby the European Union Allowances(EUA) in the EU Emissions TradingSystem (ETS), lost two thirds of itsvalue and declined to under 10 pertonne in 2009, the overall market valuecontinued to increase on the back ofincreased traded volumes, rising fromapproximately 5 billion tonnes in2008 to over 8 billion tonnes in 2009.The failure of the Copenhagen meetnotwithstanding, the value of carbonmarkets is likely to grow further this

year as prices edge up from the lowsof last year.

Carbon markets have also ma-tured within a short period. Climateexchanges have sprung up across theworld to help enhance the liquidityof the carbon currency. Two of thecommodity exchanges in India alreadytrade CER products. Perhaps the bestillustration of market maturity anddepth is the emergence of carbon pro-curement vehiclesfunds that have

been established to invest in projectsthat generate emissions reductions.

carbon trade

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More than 90 such carbon fundswith secured capital of over 12 bil-lion have already been established.Initially, most carbon funds werepublic funds with a primary interestin wanting to secure emissions creditsfor their sponsors. Over time, private

funds with greater flexibility on theirinvestment models and more activelyseeking capital gains account for amajority of the procurement vehicles.

Carbon markets are connectedto developing countries through theCDM. Under the Kyoto Protocol,CDM allows emissions reductionsfrom projects in developing countriesto be used by developed countriesto meet their reduction obligations.Emissions reductions projects that arevoluntarily implemented, and that are

additional to the baseline and result inreal, verifiable reductions, are able toachieve CER which can then be sold ininternational carbon markets. ExceptIndia, where it has been a successstory and Pakistan to a more limitedextent, CDM has failed to make sig-nificant headway in other South Asiancountries. India has approximately 41million tonnes in annual CER, repre-senting 12 percent of the 349 milliontonnes of total CER expected annually.Other countries in the region accountfor approximately half a percent of the

total annual CER. This is not entirelysurprising.

Carbon markets are tilted in favourof projects that offer large volumereductions. The transaction costs onsmaller projects often do not justify theinvestments. Excluding India, other

countries do not have the capacity togenerate enough large-scale projectsto excite international carbon markets.Even within India, the average reduc-tion volume continues to dampenproject development. An Indian CDMproject offers on average 30,000 tonnesof reductions annually, while the cor-responding figure elsewhere might beclose to 130,000 tonnes.

CDM projects in South Asia havefailed to achieve scale because eachproject is individually too small and

the projects are too scattered. ThoughCDM rules allowed for bundling ofprojects, it provided limited flexibilityto overcome the transaction costs ofdeveloping such projects. With thedesign of new project mechanismsunder programmatic CDM, all of thathas changed now.

Programmatic CDM is a newapproach that allows project devel-opers to register a project design asthe programme. Once registered, theprogramme remains in effect for 30years. Individual projects can then be

registered as a CDM project under theprogramme at any time during the 30-year period so long as the project satis-

fies the guidelines and methodologies

established under the programme.The flexibility of programmatic CDMhelps to reduce the transaction coston the individual project, makes iteasier to bundle scattered projects andhelps achieve the reductions volumethat will be interesting to international

buyers and investors. Programmaticapproach is already being used togreat effect in implementing Indiasflagship energy efficiency programmeseeking to replace incandescent light-

bulbs with compact fluorescent lights.Programmatic CDM provides an

opportunity for project developmentin South Asia for three specific rea-sons. First, it can be written explicitlyinto policy design, as has been done inIndias policies promoting the use ofoff-grid renewable energy generation.Second, programmatic approachesprovide a clear role for the public sec-tor to be involved in the developmentof the project. In most cases, the publicsector will need to lead the devel-

opment of programmatic CDM tohelp overcome the lack of awarenessabout CDM among domestic marketparticipants. Third, and perhaps mostimportantly, programmatic CDM canoffer ready gateways for access totechnology and financing that can then

be used to implement the underlyingpolicy objective on which the pro-gramme is based.

However, the flexibility of pro-grammatic approaches within CDMis not the final magic bullet that could

overcome all existing constraints onproject development. It is just thatgovernments can integrate the benefitsof CDM and carbon markets as a wayto advance their own objectives forsustainable growth and enhancedlivelihoods. Mitigation strategies thatlink to international carbon marketsfor financing and technology andcontribute to sustainable growth must

become an important part of the SouthAsian climate response.

The author is Vice President of ICF

International and based in New Delhi.

Governments

can integrate the

benefits of CDM

and carbon mar-

kets to advance

their objectives for

sustainable growth

and enhanced

livelihoods.


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cover feature

Rupa Chanda

The South Asian Association for

Regional Cooperation (SAA-RC)which includes Bangla-

desh, Bhutan, India, the Maldives, Ne-pal, Pakistan and Sri Lanka, and, morerecently Afghanistanhas been muchcriticized for its failure to promotegreater intra-regional trade and ad-dress key areas that underpin regionalcooperation. Despite the introductionof the SAARC Preferential Trading Ar-rangement (SAPTA) in December 1995and subsequently the Agreement onSouth Asian Free Trade Area (SAFTA)

in January 2006, the share of intra-re-

gional trade increased only marginally

from 2.68 percent in 1990 to 4.8 per-cent in 2008. SAARC remains one ofthe most poorly integrated regions ofthe world. Intra-regional investmentflows also remain limited.

The 14th SAARC Summit Declara-tion (2007) stated the need to integrateservices into SAFTA and called for acollective vision of South Asia witha free flow of goods, services andideas if SAFTA was to realize its fullpotential. It called upon membercountries to work towards an early

conclusion of a SAARC Framework

The growing importance of

services, the higher compar-

ative advantage in services

compared to goods, and

the existence of comple-

mentarities provide a case

for integrating services into

SAFTA.


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tion has been largely stagnant.South Asias services exports have

similarly shown a steady upwardgrowth trend through the 1980s and

1990s, with a compound annualgrowth rate (CAGR) of 23.5 percentduring 20012007, higher than forthe world and other high-growthregions.3 Similarly, there has been anacceleration in services import growthwith a CAGR of 13.6 percent dur-ing 20012007, again higher than forworld services imports.4 As a result,the contribution of services to theregions total trade has increased, con-stituting around one fourth of all tradeflows (merchandise plus services) in

recent years. This is comparable tothe contribution of services to overalltrade in developed regions such asthe European Union. South Asiascontribution to world services exportsand imports has risen from around 1percent to 3 percent and 2 percent, re-spectively, during 19912007, indicat-ing the regions growing integrationwith world services markets, whichpotentially creates opportunities at theintra-regional level as well.

These trends are also refl

ected inSouth Asias growing competitivenessin services. While South Asias re-vealed comparative advantage (RCA)index for services has declined to lessthan 1 in the case of goods in the post-2000 period, it has increased and isclose to 2 in the case of services duringthe same period (Figure 2, page 17).In fact, if one compares RCA indicesacross regions, South Asia emerges asone of only two developing-countryregions which have seen an increase

in the RCA index for services between1995 and 2007 and is the region whichhas experienced the greatest increaseduring the period. Clearly, a sectorthat is experiencing rapid growth intrade, growing participation in worldmarkets and rising competitivenesswarrants serious discussion underSAFTA. It is, however, important tonote that each country exhibits differ-ent trends in competitiveness acrossthe different services sectors, and thereis little overlap. For example, while

India exhibits very high RCA indices

Agreement on Trade in Services (SA-FAS). This point was also echoed atthe subsequent 2008 SAARC SummitDeclaration. In March 2008, the SAFTA

Ministerial Council directed the draft-ing of SAFAS by 2009-end, though thistarget has been missed.

The case for services integrationThe single most important factor isthe dynamism exhibited by servicesin South Asia and the sectors grow-ing importance in overall output,employment, trade and investmentin the region. The services sector hasexperienced higher growth rates thanother sectors in almost all South Asian

countries, and compared to those seenin other parts of Asia and in othercountries with comparable levelsof development. Services constituteclose to 50 percent or more of grossdomestic product (GDP) in all SouthAsian economies. The higher capacityof SAARC countries in producing andtrading in certain services, the avail-ability of high quality services in theregion, and the role of new economicgeography in driving tradability of

certain services create scope for tradeand investment complementaritieswithin the region.1

This potential is further enhancedby the fact that in the past decade,most South Asian countries haveundertaken considerable openingup and deregulation of their servicessectors, and have been focusing on thedevelopment of segments such as tour-ism, telecommunications, transportand energy services. Hence, there is acertain convergence of interests and

approaches to the services sector and,therefore, possibly a greater willing-ness to negotiate regional liberalizationand explore intra-regional collabora-tion possibilities in services.

There is the added benefit of geo-graphic proximity as well as culturaland linguistic ties, as relationship-

based marketing, social networks andcross-border movement of serviceproviders play an important role indriving services trade and investmentflows. The recent entry of some South

Asian countries into extra-regional

economic cooperation that extendsbeyond goods to services furtherhighlights the growing recognition

of the importance of services to theseeconomies and the possibility of real-izing their interests in services throughmore broad-based regional and bilat-eral arrangements.

Let us next consider specific factsand figures which argue for the inclu-sion of services and investment underSAFTA.

Services sector performanceServices have been a key driver of

overall economic growth in SouthAsia since the 1990s. Services haveconsistently outperformed overallGDP growth and helped compensatefor volatility in other sectors (Figure1, page 16).2 The average annualgrowth rate for services outputhas consistently moved upward,from a little under 4.5 percent inthe 1970s to a little over 6 percentin the 1980s, to over 6.5 percent inthe 1990s, and further to 8.3 percentduring 20002007. Although the

manufacturing sector in the regionhas also shown an upward trend ingrowth, its performance has been lesssteady than in the case of services,while agricultural growth has notonly been much lower but also highlyvolatile.

This relatively superior perfor-mance of the services sector over theprevious decades has led to its grow-ing contribution to South Asias GDP,from 36 percent to nearly 50 percentover the 19802006 period. Mean-

while, the industrial sectors contribu-

The contribution of ser-

vices to total trade inSouth Asia is compa-

rable to that in devel-

oped regions such as

the European Union.


16/40


in computer and information services,the Maldives and Nepal exhibit RCAindices over 1 in travel and tourism

services, and Sri Lanka and Pakistanin transport services. 5

Harnessing the asymmetriesA country-wise examination of servic-es trade data shows that South Asiasgrowing competitiveness and penetra-tion of world markets in services islargely driven by Indias performance.India is the only country in the regionto have significantly increased itsshare in world services exports as wellas imports during 19902007 while

the shares of others have remained ataround the same levels. Indias sharein world services exports increasedfrom less than 1 percent in 2000 to 2.5percent in 2007 and, likewise, its sharein world services imports increasedfrom a little over 1 percent in 2000 toover 1.5 percent in 2007. The shares inworld services exports and imports forall others in South Asia have remainednegligible at 00.3 percent throughoutthis period.

Such asymmetries obviously raise

questions as to whether there is a suf-ficient convergence of interest acrossSouth Asian countries to push forservices integration. They also suggestthat any attempts at regional inte-gration in services would obviouslyinvolve asymmetries in trade potentialand interests, and that the dominantplayer, India, would need to play animportant role in driving the intra-re-gional integration process.

However, an examination of the

trends in competitiveness in servicesvis--vis merchandise trade at the

individual country level shows that,notwithstanding such asymmetries,for all the countries, the RCA forservices exceeds that for merchan-dise trade (although only India hasexperienced an increase in RCA forservices, and all countries other than

Bangladesh have remained at similarlevels of competitiveness over the19952007 period). This suggests thatmost South Asian countries may havegreater trade prospects in servicescompared to merchandise where theRCAs are much below 1. Thus, theremay be more scope for intra-regionaltrade in services than in goods from acompetitiveness point of view.

Furthermore, there are possiblecomplementarities across the coun-tries in terms of their services tradestructure. This could provide a basisfor promoting intra-regional trade inservices, particularly through greaterinvestment flows within the region.Consider the trends in the profile ofservices exports and imports.

Indias services export basket hasbecome more diversified over timeand today includes traditional servicessuch as transport and travel as wellas new services such as computer andinformation technology and other

business services. On the other hand,the services export basket for the re-

maining countries is much narrower,with the Maldives and Nepal relyingmainly on travel and tourism services.The composition of services imports inthese countries shows a gradual diver-sification of the import basket between1995 and 2006. Although travel and

transport services are the most impor-tant, services such as business, finan-cial, insurance and communicationservices have increased in importance,reflecting the outcome of services sec-tor liberalization and reforms.

If one juxtaposes these trends inthe composition of services exportsand imports, complementarities andcommonalities emerge. For instance,given the importance of travel andtransport services in exports andimports, tourism services is clearlyone area where all countries have acommon interest and there is scopefor greater intra-regional trade and re-lated cooperation. Likewise, businessand professional services constitutean important export segment for Indiaand an increasingly important importsegment for some other countries.

Related to these categories isthe scope for greater cooperation inair and land transport services, andfacilitation of business and leisure

travel. Another important feature ofthe services trade basket in the region

cover feature

Figure 1

Trends in overall and sectoral growth in South Asia

Note: CAGR = compound annual growth rateSource: Authors calculations based on UN online statistical database.

Services Manufacturing Agriculture Total GDP

CAGR(%)(constant1991prices)

2001-071991-20001981-901971-80

9.08.58.07.57.06.56.05.55.04.54.03.53.02.52.01.51.00.50.0

South Asia is one of

only two developing-

country regions which

have seen an increase

in the RCA index for

services between 1995

and 2007.


17/40


is the significance of governmentservices, i.e., non-commercial services,in some countries. Although sub-clas-sification of government services isnot available, given the significance ofpublic services in South Asias trade

basket, any regional agreement on

services has the potential to explorepossibilities for collaboration, capacity

building, and regulatory cooperationin areas such as health care, energy,education, environment and infra-structure development.

The potential role of intra-regionalinvestment flows is also indicated bythe services trade profile. Growth inareas such as communication, financeand information technology servicesin the region is a reflection of thereforms undertaken in these areas

within SAARC, in particular foreigndirect investment (FDI) liberalization.Overall regional- and country-leveltrends for FDI indicate that FDI in ser-vices in most of the member countriesis growing, with India also emergingas a potential exporter of FDI in areassuch as tourism, telecommunications,energy and health services within theregion. There are many cases of Indiancompanies which have bidden forregional projects or established their

presence through subsidiaries andjoint ventures in the services sector

in the region. Thus, the asymmetrythat exists in favour of India in termsof trade volumes and potential couldactually be harnessed to get Indianinvestment in certain services sectorsin the other member countries. Suchinvestment could in turn help the

other countries to develop their intra-regional and overall export prospectsin areas such as tourism, energy andinformation technology services. Thus,there is scope for exploiting syner-gies in trade and investment flows inservices within South Asia.

ConclusionAll these commonalities, comple-mentarities, asymmetries and syner-gies need not necessarily mean thatcountries in South Asia would want

to trade with one another or investin each others markets. They may bemore interested in markets outsidethe region. The relatively small size ofsome of the South Asian economiesand their low per capita incomes willremain an impediment to intra-region-al services trade and investment flows.

However, this is where the archi-tecture of SAFAS and the negotiatingprocess will be critical for determin-ing progress. It will be important to

address critical issues such as invest-ment regulations, taxes, mobility of

business visitors and professionals,and regulatory cooperation if suchinherent challenges are to be overcome

and the regional market is to be mademore attractive for intra-regional tradeand investment flows. Given the com-plex nature of some of these issues,the negotiating process will need to

be flexible, working through pluri-lateral and bilateral tracks alongsidethe regional track, at least in selectedservices, to achieve progress on criticalissues where regional outcomes would

be difficult to realize, and to providesustained momentum to the servicesnegotiations.

The author is Professor of Economics,Indian Institute of Management, Bangalore.

Notes

1 SATIN. 2008. Regional Trade in SouthAsia: Towards Stronger Linkages andGrowthExecutive Summary andSpecial Focus on adding Services tothe South Asia Free Trade Agreement.Policy Paper. Commonwealth BusinessCouncil and SAARC Chamber of Com-merce and Industry, Kathmandu, July.

2 The sector utilities, i.e. electricity, gas

and water supply, has been includedunder the manufacturing sector. If utilitiesare to be considered as a part of theservices sector, there will accordingly bechanges in the relative shares of manu-facturing and services sectors in SouthAsias GDP.

3 Authors calculations based on UNCTADHandbook of Statistics 2008 (online ver-sion).

4 Authors calculations based on UNCTADHandbook of Statistics 2008 (online ver-sion).

5 Authors calculations for RCA indicesin individual services sectors based on

UNCTAD Handbook of Statistics 2008(online version).

Source: Authors calculations based on UNCTAD Handbook of Statistics (online version).

Figure 2

Trends in RCA indices for merchandise and services

2007

1995

1985

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0.00

Bangladesh India Maldives Nepal Pakistan Sri Lanka

Merchandise

Services

Merchandise

Services

Merchandise

Services

Merchandise

Services

Merchandise

Services

Merchandise

Services

The relatively small size

of some South Asian

economies and their

low per capita in-

comes will affect intra-

regional services trade

and investment flows.


18/40


Global trade in services has beengrowing rapidly, and now ac-counts for nearly 20 percent of globaltrade. The impressive growth of thesector inspired developed countriesand many developing countries to optfor a faster opening of the sector. TheGeneral Agreement on Trade in Ser-vices (GATS) was thus agreed during

the Uruguay Round of negotiationsthat led to the formation of the WorldTrade Organization (WTO), with theaim of progressively liberalizing tradein services through successive roundsof negotiations.

LDCs in services tradeLeast-developed countries (LDCs) areseverely lagging behind in the race to

benefit from services trade. Servicesexports from 49 LDCs were US$16.9

billion in 2008, which accounted formerely 0.45 percent of global ex-ports. Structural problems, scarcityof resources, limited knowledge andexpertise, and complexity of rules andregulations in the importing coun-tries, among others, are hindering thegrowth of services exports from LDCs.Moreover, low level of commitment inGATS under Mode 4 of services sup-ply (temporary movement of naturalpersons) where LDCs have compara-tive advantages also deprived them

of the opportunity to gain much fromservices trade.

LDCs, however, expect to gainfrom the special priority as men-tioned in Article IV: 3 of GATS. As thislegal provision would be in contradic-tion to the WTOs most-favoured-na-tion principle, a proposal was putforward for allowing special prioritythrough a waiver option. Althoughprogress in this area is far behind

the expectations of LDCs, even if it isaccepted, it will not guarantee marketaccess opportunities for them. UnlessLDCs, including Bangladesh, partici-pate in the request-offer negotiations,there is a limited chance of them

benefiting from services negotiations.LDCs should, therefore, be proac-tive in submitting their individual orplurilateral requests for the sectorsand modes of supply where they havecomparative advantages.

Case of BangladeshLike in other LDCs, the services sec-tor dominates Bangladeshs grossdomestic product (GDP). The shareof the services sector in BangladeshsGDP in 2008/09 was 49.62 percent,with five sub-sectorsconstruction;wholesale and retail trade; transport,storage and communications; realestate, renting and business activity;and community social and personalservicescommanding a 28.17 percent

share. Services sector employmenthas been showing a rising trend and

Bangladeshs

in

experience

services tradeSharifa Khanemploying 40.72 percent of the totalwork force, thus steadily keeping pacewith its GDP contribution.

Although the domestic perfor-mance of the sector is satisfactory,commercial services exports have notkept pace with global trends. Com-mercial services exports from Bangla-desh in 2008 were only US$891 million

against imports of US$3.68 billion. Thedeficit of over US$2.79 billion clearlyindicates the inability of the countryto reap benefits from services trade.However, the remittance inflow ofabout US$9.69 billion has contributedsignificantly to reducing the currentaccount deficit, importing foodstuffsfor ensuring food security, purchas-ing raw materials and machinery forindustrial development, and stimulat-ing development efforts.

It should, however, be noted thatmost of the remittances earnings arethe outcome of bilateral agreements orautonomous efforts; the commitmentunder Mode 4 in the WTO has little orno role in ensuring market access forBangladeshi workers. Bangladesh hasabout 49.5 million active population;therefore, market access opportunitiesfor less-skilled and semi-skilled work-ers would yield significant economicgains. These opportunities, however,are severely constrained by, among

others, excuses of security, economicneeds tests, language proficiency tests,

country case


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cumbersome visa procedures, anddiscriminatory wage parity system.The multilateral trading regime hashardly contributed to removing theseobstacles and creating opportunitiesfor less-skilled and semi-skilled ser-vice providers of LDCs.

Bangladesh has so far received re-quests from nine different countries

Singapore, the European Community,Japan, Norway, Korea, Hong Kong(China), Malaysia, Sri Lanka and theUnited Statesto liberalize 10 sectorsand 127 sub-sectors. All these requestswere received before the adoption ofthe LDC modalities in September 2003which provided flexibilities to LDCsin opening up their services sectors.The modalities thus provided some

breathing space in responding to thetechnical requests of WTO members.

Bangladesh has made limitedcommitments in opening its domesticmarkets to foreign services providers.It has undertaken specific commit-ments in two sectorsfive-star hotelunder tourism and travel-relatedservices during the Uruguay Round,and telecommunication services afterthe completion of the Uruguay Round.Its commitments in all four modes ofsupply in both tourism and communi-cation services are quite conservative.

While Bangladesh has not been

able to attract much foreign invest-ment in five-star hotels and the perfor-

mance of the sector in terms of incomeand employment generation is poor,the telecommunication sector boastssome notable achievements. Thesector has so far attracted Tk. 2295.60million (US$1=Tk.69) worth of foreigninvestment, and contributed Tk. 56,390million or 1.46 percent of Bangladeshsnational income. Teledensity has

increased from 7.25 percent in 2005 to31.95 percent in 2009; the number ofmobile phone users has increased to45.8 million; average tariffs per minutehas declined substantially from Tk.11.37 in 2001 to Tk. 3.55 in 2005 to Tk.0.88 in June 2008. This was accom-panied by other social benefitsin-creased number of internet users, easypayment of bills, and improved accessto health care, education and agri-cultural services, among others. It isestimated that an increase of 10 mobilephones per 100 people boosts GDPgrowth by 0.6 percent.

The experience of telecommunica-tions may create a sense that the open-ing of the services sector would resultin tremendous economic benefits tothe country. This is not true for all oth-er sectors, as is evidenced by the open-ing offive-star hotels. The positiveperformance of telecommunicationsis attributable to multi-dimensionaladvantages of technologies associ-

ated with the sector. It is the cheapestmode of communication, requires

minimum investment to get access tovarious essential services, instantlyintegrates domestic sectors with theglobal economy, and can reach thepoorer section of the community at aminimum cost. Moreover, in terms ofprofitability, foreign investors wouldobviously be willing to invest in thissector in a country that offers a market

of 150 million-plus people.In addition, domestic rules and

regulations governing this sector wererevised over the time to attract foreigninvestment. As a result, the countrywent beyond its WTO commitmentwith the intention of benefiting fromdigital technology.

On the flip side, the outflow offoreign exchange from the sector isquite high and adversely affectingthe balance-of-payments position. In2008/09, net outflow from the servicessector was US$1.62 billion, which wasmainly attributable to the telecommu-nications sector.

In conclusion, Bangladesh shouldadopt pragmatic and well-designeddomestic policies and regulations togain from services trade. Domesticpolicies should aim to promote foreigninvestment, but should be backed bysufficient safeguard provisions to pro-tect the balance-of-payments.

The author is Deputy Secretary, WTO

Cell, Ministry of Commerce, Government ofBangladesh.

The multilateral

trading regime has

hardly contributed

to creating opportu-

nities for less-skilled

and semi-skilled

service providers of

LDCs.

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20/40


country case

India, South Asias largest econo-my, has the most diversified andvibrant services sector in the region.It not only dominates the limitedintra-regional services trade but isalso a global player in services trade.Indias share in world services exportsincreased from less than 1 percent in

2000 to 2.5 percent in 2007.

Trends in Indias intra-regionalservices tradeThanks largely to Indias unique geo-graphical positionit shares a borderwith all its South Asian neighboursitaccounts for the bulk of the intra-regional services trade, though it is

below potential.As on 30 November 2007, a total

of 125 branches of Indian banks werespread across 29 countries. Out of

them, 13 branches were located inSouth Asia. While seven brancheswere in Sri Lanka, four were inBangladesh. Afghanistan and theMaldives had one branch each. While

branches of other Indian banks suchas ICICI and UTI are in the pipeline inSri Lanka, India also has a commercialpresence in the insurance business inSri Lanka and Nepal. However, Indiadoes not have any formal trade infinancial services with Pakistan.

Movement of workers (Mode 4)is a major mode of supply of services

traded between India and its neigh-bours. For example, as many as 23million Nepali men and women areworking in India. Though averageearnings of these workers are lowand individual remittances relativelysmall, the aggregate value of moneysent (or brought) back to Nepal from

India has been estimated to be sub-stantialUS$350 million in 2007.

Movement of people betweenthese countries is not unidirectional,however. A treaty between Nepal andIndia provides for national treatmentto each other's citizens with regard tomovement of people, ownership ofproperty and participation in tradeand commerce, among others. Indiannationals are also employed in varioussectors in Nepal in huge numbers.

India is also a popular educational

destination for South Asian students.Bangladesh, Sri Lanka, Nepal andBhutan are major sources of foreignstudents in India. Annually, some50,000 Bangladeshis visit India to seekeducation in India. Nepali candidatesare permitted to approach Indianeducational institutions directly forgeneral courses. As a result, every yearhundreds of Nepali students obtainadmission directly for general under-graduate courses in India. Likewise,Indian human resources and educa-tional companies such as Institute of

Chartered and Financial Analyst ofIndia have entered the Sri Lankanmarket. In the other direction, Indianstudents constitute a major portion ofinternational students in medical col-leges in Nepal.

With regard to healthcare, Indiais an attractive destination for South

Asian countries. For example, about50,000 Bangladeshis visit India everyyear for medical treatment. Likewise,under Mode 3, India's Apollo Group,Asia's largest healthcare group, has apresence in Bangladesh and Sri Lanka,and Escorts in Nepal.

Tourism has also emerged as thedominant sector in bilateral servicestrade between India and three of itsneighboursthe Maldives, Nepal andSri Lanka. India is the largest sourceof tourists in these countries, where

tourism is a mainstay of the economy.In addition, India has a significantcommercial presence in tourism in SriLanka and the Maldives, e.g., the TataGroup's investment in hotels.

The limited intra-regional energytrade is basically between India andBhutan, and India and Nepal. Bhutanexported 5,664 gigawatt hours (GWh)of electricity to India in 2007. The ex-port was from three hydropower proj-ects with a total generating capacity of1,416 megawatts (MW), constructedwith substantial grant assistance

INDIAS SERVICES TRADE

IN SOUTH ASIA

trendsandprospects


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from India. On the other hand, Nepalimported 266.23 GWh from India, andexported 101 GWh to India.

Besides the trade in above-men-tioned services, India has investmentsin other services such as engineeringand construction (Larsen & Toubro,now Aditya Birla Group) in Sri Lanka.

Potentials of intra-regionalservices tradeIndia can play a leading role inincreasing intra-regional trade in ser-vices and particularly contribute to thegrowth of its neighbours, because ofits market size, experience in servicestrade and locational advantage.

A better cooperation on servicessuch as transport and trade facilitationcan address the landlocked problemsof countries such as Bhutan and Ne-

pal, and regions such as North-EasternIndia. While India could be a gatewayfor all South Asian countries to accessone another's market through the landroute, Pakistan and Afghanistan canplay an important role as transit statesfor the rest of South Asia to accessCentral Asias market. Bangladesh canallow transit through its territory toIndia to access the latter's North-East-ern region, while India can provide anunfettered transit facility to Nepal toenable it to access Bangladeshi as wellas overseas markets.

Regional cooperation on energyservices can play an important rolein addressing India's energy deficit.Energy resource-surplus countriessuch as Bhutan, Bangladesh and Nepalcan benefit from energy export-ledgrowth and implementation of large-scale regional projects. Bangladesh is

richly endowed with natural gas, butinfrastructural constraints and politi-cal sensitivities impede energy trade

between Bangladesh and India.Education, health, and informa-

tion technology (IT) services are othersectors where India has comparativeadvantage in exporting to the rest ofSouth Asia. India is ranked high interms of the quality of science andmathematics education, the extent ofstaff training, and the availability ofmanagement education. India has the

globally renowned Indian Instituteof Technology and Indian Institute ofManagement and they, together withother colleges, have generated a criti-cal mass of highly skilled people.

However, as in the case of India,the IT sector has not developed in oth-er South Asian countries and India toohas not been able to help them. Thetop 15 software and related servicescompanies of India have all investedabroad, almost entirely in developedcountries, with not a single one invest-ing in South Asia. In addition, Indian

call centres and business-processoutsourcing companies are settingup foreign affiliates in countries likeMexico and the Philippines, but not inSouth Asia.

In health services, India has astrong comparative advantage byvirtue of its top medical colleges and

hospitals. Indian health institutionssuch as Apollo have set up subsidiar-ies in some South Asian countries.Indian hospitals are also providingservices through Mode 1 to hospitalsin Bangladesh and Nepal. UnderMode 2, patients from Bangladeshand Nepal visit Indian hospitals forspecialized treatments.

ConclusionThough India dominates servicestrade in South Asia, the above trends

and potentials present a strong casefor the liberalization of intra-regionalservices trade. In order to capitalizeon India's growing services trade andharness one another's potentials, it ishigh time that South Asian countriesfinalized the SAARC FrameworkAgreement on Trade in Services andmade efforts to strengthen their tradeties for the collective welfare of theregion.

This article is based on a briefing paper

Services Trade under SAFTA (No. 6, 2008)

published by SAWTEE.

In health services,

India has a strong

comparative advan-

tage by virtue of its

top medical colleges

and hospitals.

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Globally, the nature of trade isevolving. This is reflected in thechanging composition of trade, frommerchandise to services. This dy-

namic is largely driven by technologi-cal revolutions. While the transportrevolution reduced transport costsand facilitated trade in merchandisegoods, the information technologyrevolution has resulted in decreasingcommunication costs and increasingquality levels, thereby causing tradein services to be the fastest-growingcomponent of global trade.1

Given the landlocked nature andextreme geography of Nepal, the

benefits of services trade are especiallypronounced.2 Nepals economy is in

the process of transformation. Whilein the 1970s it was predominantlyagriculture-based, in 2008/2009,services constituted the largest sector

contributing over 48 percent of grossdomestic product (GDP), with theagriculture sector contributing only 36percent. Nonetheless, it is importantto note that the agriculture sector stillemploys 73.9 percent of the currentlyemployed population.3

There has also been a change inthe nation's external orientation, from

being inward-looking to outward-focused. The shift in orientation islargely due to the acknowledgementof the benefits which will accrue fromtrade in terms of spurting economic

Nepals services export potential stems from its natural advantages such as endowment of

natural beauty, sites of cultural and religious importance, and ideal location between two

economic giants, China and India.

Nephil Matangi Maskay

services tradeissues forNepalNepal

growth leading to poverty reduction,as reflected in the continuous processof trade liberalization.4 Suffice it tosay that the country is becoming more

liberal, which is saliently reflected inits 2004 accession to the World TradeOrganization (WTO). In 2008/09 thecontribution of trade to GDP was 36.4percent for merchandise trade. In thesame year, services trade contributedover 8 percent of GDP. The largestservices sector contributing to trade istravel trade, with a 24 percent share in2008/09.

With the composition of foreigntrade dominated by merchandisegoods, the Government of Nepals(GON) trade policy focus thus far has

country case

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been on merchandise goods. However,this focus is changing along with theacknowledgement of the benefits ofservices trade.

Diagnostic studyA diagnostic study to assess Nepalsexport potential in health, educationand high-end retail serviceschosenin part due to their broad impact androle in contributing to poverty reduc-tionwas conducted in 2008.5 Whilethe study explored all the four modesof services delivery6, the commonal-ity of tourism (Mode 2: consumptionabroad) was highlighted. The studyused qualitative (survey, interviews,focus group discussions) and non-qualitative (export potential frame-work) methodology.

Basically, the study highlightedthat Nepal has many natural advan-tages such as endowment of natural

beauty, sites of cultural and religiousimportance, and being ideally located

between two economic giants, Chinaand India. In addition to these naturaladvantages, the three services sectorsare also found to be generally cost ef-

fective. The attraction of these servicesis also due, in part, to a high levelof market integration with northernIndia, attributed to an open border tothe south where both countries sharemany cultural and linguistic ties. Thestudy thus concluded that "the coun-try has comparative advantages forthe export of these services".7 Despitethis rosy conclusion, the study alsohighlighted many disincentives thatimpede the harnessing of the servicestrade potential. The disincentives are

grouped under three broad categories:lack of coordinated effort; poor in-frastructure for trade in services; andunfriendly business environment.

Three issuesTo harness the engine of services tradefor Nepal, the above-mentioned threedisincentives can be re-categorizedmore specifically as three issues.

Political issues

Presently, the situation in Nepal is

quite fluid with the country in the

midst of political transformation. Thecountry is writing a new constitutionand is in the process of state restruc-turing. The process aims at produc-

ing a "New Nepal", with a modernoutlook and vision. This is a transitorystage in the political history of thecountry.

Economic issues

The external orientation of Nepal hasbeen concretized with a favorablepolicy environment; this is reflected inGONs current Three-Year Interim De-velopment Plan (2007/082009/2010)and the enactment of Commerce Pol-icy, 2009. Unfortunately and despite

this favorable policy environment forservices trade, the political fluidity hasresulted in an uncertain and unstableenvironment. This is especially impor-tant in areas like labour laws, propertyand market access rules, and environ-mental protection. All these affect theease of doing business.

Technical issues

Technical issues can be lumped undertrade facilitation issues, including lackof coordinated effort, in part result-

ing from an absence of a clear defini-tion and scope of services trade; poorquality standards; and absence ofnecessary trade infrastructure. Tradefacilitation measures have sloweddown as focus is now on the ongoingprocess of political transformation.

As can be seen, while the abovethree issues are interlinked, at presentthe political issue is spilling over intothe remaining two issues. But it is

expected that the period of politicaltransformation for Nepal is simplytransitory, so it is opportune to pre-pare the foundation for services trade.

ConclusionThe above discussion calls for an ef-fective time-bound road map. Giventhe expectation that Nepal will attainpolitical stability in the near future,this roadmap should be createdinclusively, involving all stakeholdersfor addressing the three issues. While

the starting point for this importantroadmap is unclear, it is suggestedthat this be timed to commence in2011, declared as Visit Nepal Year fortourism promotion.

The author is Director, Nepal Rastra Bank,

Kathmandu, and Visiting Research Economist,

The SEACEN Centre, Malaysia.

Notes

1 www.wto.org

2 Maskay, Nephil Matangi. 2008. Calibrat-ing Nepal's Trade Policy to Harness thePotential of Services Trade. Vikas[AJournal of Development] 28(1): 91110.Kathmandu: National Planning Commis-sion Secretariat, Government of Nepal.

4 Central Bureau of Statistics/Govern-ment of Nepal. 2008. Nepal Labor ForceSurvey. http://www.cbs.gov.np/

3 Karmacharya, Binod Kumar and NephilMatangi Maskay. Nepal - Country Study.In Joseph Francois, Pradumna B Ranaand Ganeshman Wignarajan (eds.). Na-tional Strategies for Regional Integration:South and East Asian Case Studies.

Manila: Asian Development Bank, pp.207275.5 SAWTEE. 2008. Nepals Export Poten-

tial in Services: Health, Education andHigh-end Retail Services. Unpublishedreport submitted to Enhancing Nepal'sTrade Related Capacity of Governmentof Nepal's Ministry of Industry Com-merce and Supplies/UNDP.

6 Using the terminology of the GeneralAgreement on Trade in Services (GATS),services trade takes place through fourmodes namely: Cross-border supply(Mode 1); Consumption abroad (Mode2); Commercial presence (Mode 3);Movement of natural persons (Mode 4).

7 SAWTEE. 2008: p ii. Note 5.

Lack of coordinated

effort, poor infrastruc-

ture for trade in servic-

es, and unfriendly busi-

ness environment have

impeded the realiza-

tion of Nepals services

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Growing at an average annual rateof 5.5 percent during 20002009,the average annual share of Pakistansservices sector in the countrys grossdomestic product (GDP) during theperiod stood at 52 percent. In termsof providing employment, the sectorstands second to agriculture.

In 2008, foreign direct investment(FDI) in the services sector in Pakistantouched US$4 billion. The main sectorsthat attracted this unprecedented levelof FDI included financial business(US$1.9 billion) and telecommunica-tions (US$1.4 billion). Such invest-

ments have led to increasing efficiencygains in these sectors which in turn aregradually embracing the opportunitiesto provide more value added servicesglobally in a cost-efficient manner. Do-mestically too, during 20032008, therewas a real increase of over 100 percentin fixed investment in the services sec-tor in Pakistan.

Pakistans exports of services in2009 stood at US$4 billion, contributedmainly by transportation and govern-ment services (Table). But the import

of services was recorded at US$7.5

billion, implying that Pakistans tradedeficit in services stood at US$3.5

billion. The reasons for such a hugeservices trade deficit vary from sectorto sector.

TransportationGiven its strategic location, Pakistanhas the potential to unleash its com-parative advantage in transportationservices. The country has long been

trade in services

Pakistanspotenal in

Vaqar Ahmed and Hamid Mahmood

Pakistan should expand its trade diplomacy to achieve greater market

access for its services exports.

2005 2009

Export of services 3,319 4,017

Transportation 1,062 1,231

Government services 1,315 1,523

Others 942 1,263

Import of services 6,612 7,488

Transportation 2,280 3,633

Travel 1,172 1,003

Business services 2,502 1,648

Others 658 1,204

Source: State Bank of Pakistan.

Table

Trade in services (US$ million)

regarded as a possible transit route forChina, India, Iran, Afghanistan andCentral Asian economies. However,the sector suffers from inadequateinfrastructure, inadequate invest-ment, low quality of services, less thandesired maintenance of road and railnetworks, archaic cargo and logisticssystems, complex custom proceduresand lack of innovative marketingstrategies.

CommunicationPakistan is the sixth most populouscountry in the world with a rising

middle class. In 2009, the number ofmobile phone subscribers in Pakistanwas around 95 million. The coun-try currently has the highest mobilephone penetration rate in South Asia.Promotion of competition policies,particularly in the telecom sector,has led to increased efficiency gainswhich have increased the quality ofservices as well as consumer surplusin Pakistan.

Foreign and local investments inthe communication sector in Pakistan

have increased in recent years and

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encouraging growth in the domesticmarket. Lately, it is projected thatthe banking sector may see increasedgains given the rise in the inflow of

foreign remittances through officialbanking channels. But the problem isthat the country has been slow in em-

bracing the application of internet-based services in these sectors.

The growth of the private sectorin the insurance market of Pakistanhas been very slow. The governmentowned State Life Insurance Corpora-tion

trade insight_vol6.no.1 2010

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