Let’s trade

The hope lies with the WTO and its capacity to act as a levelling factor.

The major focus of the economic liberalisation process South Asian countries have undertaken in the past decade or so has been trade. In a way, this is reflected in the three-fold increase (from USD 37.9 billion to USD 110 billion) and the four-fold rise (from USD 1.2 billion to USD 4.44 billion) in South Asia´s global and intra-regional trade respectively over 1980-1996. The share of intra-regional trade as a share of South Asia´s global trade has also recorded a marginal increase from 3.19 percent in 1980 to 4 percent in 1996. This is an encouraging sign because India´s share in Pakistan´s total trade is not even 1 percent, and till very recently, 78 percent of Nepal´s trade used to be with countries outside South Asia, and Sri Lanka´s (60 percent) and Bangladesh´s (52 percent) major trading partners were located in industrial countries. All these defied the primary logic of trade based on lower transport cost.

This significant increase in the share of intra-regional trade is adequately manifested by the multifold growth in India´s bilateral trade with its neighbours in the last six to eight years. Since there has been a parallel and simultaneous process of trade liberalisation under the World Trade Organisation (WTO) and SAARC Preferential Trading Arrangements (SAPTA), one cannot actually pinpoint what really triggered off this jump in intra-regional trade.

Given the slow, tardy and highly cumbersome process with which SAPTA has been moving since it was operationalised in December 1995, the overwhelming portion of this increase has been attributed to the general trade liberalisation in the region. But trade cooperation is still moving at snail´s pace.

The low level of trade within the region can broadly be attributed to: i) politico-strategic-hegemonic impressions and fear emanating from India´s sheer size and economic might based on its diverse industrial base; ii) extremely limited export basket and relatively inefficient and uncompetitive production structure in neighbouring countries; iii) destination diversification triggered by both domestic compulsions and foreign aid/investment binding arrange-ments; and, iv) trade barriers and the expanding informal/illegal trade across unmanned borders.

Since SAPTA provisions partially address only the fourth inhibiting factor, its outreach and efficacy has been expectedly dismal. Factors inhibiting trade are, in fact, more complex and intriguing in terms of variety and depth. The "frequently addressed" tariff and non-tariff barriers are simply the tip of the iceberg. The hope, therefore, lies in WTO and its capacity to act as a levelling factor.

Not Kashmir, but MNCs
There are many layers of trade players, and each has its own agenda. Many of them thrive on adverse situations and have tremendous ability to influence national and local institutions that deal with trade liberalisation. One can cite the example of multinationals in Pakistan and Sri Lanka. Pakistan´s share of 11 percent of the total world tea imports places it among the top three importers of tea. However, South Asia, despite its distinction of being the highest producer, exporter and consumer of tea in the world, contributes a mere 13 percent to Pakistan´s tea imports (Sri Lanka 7.4, India 1.2 percent and Bangladesh 4.4 percent). Sixty percent of its tea comes from Kenya, and at a much higher price, causing a loss of USD 110 million (1992-94 estimates) to Pakistan.

This is despite the fact that Pakistan has placed tea at the top of the freely importable list of 608 items from India since 1988. The "Kashmir problem" is often blamed for this negligible import from India. However, a study by this writer based on extensive visits to Pakistan and all the tea-producing countries in the region, broadly concluded that it is the actions of multinationals like Lever Brothers which have led to this piquant situation.

After Brooke Bond and Lipton merged under the banner of Lever Brothers in 1997, this group gained control over 70 percent of the tea market in Pakistan. The company has a huge stakeholding in tea gardens in Kenya and hence they use Pakistan as a captive market. It is a case of captive market perpetuation and what Perroux calls the "domination effect" where a large transnational enterprise exerts its influence on the economy through market (Operations or by more direct means, to serve its own purposes. The overwhelming dependence on Kenya has made Pakistan susceptible to fluctuations in production and prices of Kenyan tea, besides offering a poor choice in quality.

Again, Kashmir certainly does not explain Pakistan´s steady decline in tea imports from Sri Lanka from 34.7 million kg in 1975 to 8.1 million kg in 1998. In fact, Sri Lanka has been the worst hit tea exporter as a consequence of the MNC consolidation in Pakistan in the last 25 years. Hasitha de Alwis, director at the Sri Lanka Tea Promotion Bureau, still believes that "Pakistan is one of our best hopes to get the market out of the present problems".

The recent withdrawal of India´s National Dairy Development Board (the institution behind the successful Operation Flood programme) from Sri Lanka´s "milk kiriya" project is also largely attributed to protests engineered by another MNC, Nestle, which has had a monopoly on the highly import-intensive milk market of Sri Lanka.

As for the role of Kashmir, India-Pakistan trade is akin to the snake-and-ladder game, where the "Kashmir Problem" is dotted on square 99 as a snakehead. Unfortunately, since the dice has 1 written on all six sides, it not only takes a long time to reach 100, but when the counter reaches 99, it slides down the snake´s tail and begins again. The question is how do we avoid 99 and how do we insert 16 numbers on the dice?

This is not to say that MNCs don´t play a positive sum-game at all. The proposal to sell surplus power generated in Pakistan and the protracted deliberations on the gas supplies by Bangladesh to India, both have MNCs as strategic actors. If it is Hubco, Japan Power, Davis Energen and Rousch in Pakistan, it is Cairn, Rexwood-Okland, United Meridian and Occidental in Bangladesh. In fact, if these agreements take off, they could transform the entire export basket of these countries. This could also be the single most vital confidence-building measure between India and Pakistan for this will represent a venture with positive stakeholding for the first time.

Trading places
A fast emerging dominant paradigm is bilateral free trade regimes. Even if India extends unilateral free trade regimes (like it has with Bhutan and Nepal) to all its South Asian neighbours, given the present structure, composition and quantum of intra-regional trade, India will lose about INR 1500 million (USD 33 million) in customs revenue, which is not even 1 percent of the total annual customs revenue it mobilises.

On the other hand, after India and Sri Lanka signed a free trade agreement in 1998, possibilities for more of these agreements exist in the region. Sri Lanka is already negotiating the same with Pakistan. However, free trade alone may not really boost regional trade. The core issue of limited items in the export basket of countries other than India, and thereby the staggering balance of trade deficit vis-s-vis India, remains intact.

Trade may also be beset by non-trade issues. For example, import of sugar from Pakistan and tea from Sri Lanka has been fiercely and unduly resisted by pressure groups in India. In fact, the economic lobbies have taken full advantage of a weak central government in India to oppose open trade.

There is also understandable apprehension among neighbouring countries that free trade through customs losses may eat into their fragile national revenue base. The provision of a regional compensatory fund as suggested by the Eminent Persons Group (EPG) of SAARC for countries in transition may cushion the impact initially. Equally vital is the size of the negative list in the free trade agreement. The bigger it is, the more farcical and restrictive free trade becomes.

Liberalisation should also entail institutional freedom. It is not the case at least in Pakistan, where the trading society finds it very difficult to take any independent collective action. To cite an example, in July 1997, the Punjab, Haryana and Delhi Chambers of Commerce and Industry signed a major agreement with the Pakistani Chamber of Commerce and Industry. But within days, the signatory from the Pakistani side withdrew unilaterally. When asked why he had to take such a decision, he said the Pakistan government and political leaders had asked him as to who had given him permission to sign such agreements.

Rules of Origin There is another category of products primarily deflected by its character and content. Deflection could take place in both forms, diversion to another country while on transit and re-export without any appreciable value added. Nepal´s vanaspati export to India is a glowing example. Taking advantage of relatively higher tariff barriers in India, currency depreciation-led price slide in Malaysian exports and the clause related to free access to Indian market of manufactured products under the India-Nepal Trade Treaty of 1996, pariah entrepreneurs in Nepal cleverly resorted to importing huge quantities of vanaspati/ palm oil from Malaysia and redirecting them to India. The adverse impact on the Indian mustard/rapeseed oil farmers was immediate.

This was only a repeat of the past "bonus voucher" and "export entitlement" schemes by the same players. Under these schemes, the exporters were allowed to retain an overwhelming portion of foreign exchange from their overseas exports which they could spend on the import of goods of their choice. This brought so many products to Nepal which ultimately found way into India. The only difference being the product profile.

One way to look at it is to further dismantle the existing trade barriers in India as it is because of the inter-country discrepancy of these barriers that this type of deflection thrives. It is also true that regardless of a country´s position, products will flow wherever there is a market.

The Rules of Origin, primarily used to identify the country of origin of internationally-traded goods is the most critical issue here. If these free trade agreements are to be effectively sustained, partner countries will have to work on the rules of origin more seriously. Otherwise, they will not be able to determine which goods should benefit from preferential trade agreements and how to discriminate products that´ originate in third countries. Other regional trading arrangements such as NAFTA, EU and MERCOSUR have all relatively more scientific and strict rules of origin criteria based on varieties of effective arrangements like change in tariff heading, substantial transformation, value added and specified process. This, in fad, minimises the negative aspects of discretionary powers at the hands of national authorities implementing these rules.

Given the extent of demand-supply gaps in the region, the increased internalisation of production, the nature of border management and the spread of cross-border stakeholders, the possibility of deflection and dumping of third-country goods will continue to remain very high—unless there is a sound and scientific basis for determining rules of origin. This could, and has, become a major bone of contention particularly if it enters the unwanted domain of trader-politician nexuses.

Most critically, who really benefits from such trade? Is it the consumers, traders or the national exchequers? The answer is obvious. It is the few merchant capitalists with linkages with powerbrokers, both within and outside the government, who have optimally gained from such trade practices. The consumers, supposed to be the main target beneficiary of free trade then become only the means of such rent-seeking conglomerates. In South Asia, interestingly, many of these stakeholders have cross-national identities with a magnificent capacity to transfer gains from trade to ´safe havens´ thereby siphoning off the cream of development from one country to another.

This obviously is harmful for the importing country as it uproots the local industries, and more so for the smaller entrepot countries where it literally pre-empts any meaningful industrial ventures. More importantly, if bilateral relations hit the trough because of such issues, it is the country and its innocent citizens which suffer and not these miniscule stakeholders. Any country regardless of size and system can fall prey to these merchant capitalist-led game theoretic. That is why there should be unbiased and effective implementation of commercial policies like quantitative import restriction, a safeguard action, or anti-dumping, or countervailing duties.

Fifteen years after it was established, SAARC is still characterised by shallow regionalism. The organisation hopes to have a South Asia Free [Trade Area (SAFTA) in place by 2003, but there is no political will, interdependence culture, core competence and instruments to fulfill this magnificent vision. Extreme bureaucratisation has only politicised a pure economic exchange like trade. Had it not been for the active participation of the SAARC Chambers of Commerce and Industry (SCCI), trade liberalisation under SAARC would have remained far away from the reality and humdrum of trade matrices.

Hope still lies in strengthening and pushing forward the SAARC process, which is the only regional mechanism where even seemingly incompatible nation-states tend to shed their differences. What is required at this critical juncture is for member countries to agree on instruments of negotiation like the Common Effective Preferential Tariff (CEPT) as adopted by ASEAN, and its strict time-bound implementation. In the layers of official teams viz., Inter –  Governmental Group, Inter Governmental Ex-pert Group, Group on Customs Cooperation and Committee of Participants for trade liberalisation, there should be adequate space for the SCCI and other stakeholders to interact with the SAARC machinery. The vast amount of independent research studies undertaken in different countries in this field should also be intensively used to determine the future course of action.

Policy measures that clearly link investment and trade are vital. This is what sustains regional trade. Without it, even if some countries have no comparative advantage in their exports, they will be forced to import from the region, leading to a skewed distribution of  gains and burden of trade benefits and deficits. The first step should be to automatically exempt products of regional joint ventures from any duties within the region, and to let them enjoy the benefits of free trade environment without having to wait for SAFTA.

Rehman Sobhan, a Bangladeshi member of the EPG, emphatically states that "since the production base of Bangladesh and Sri Lanka remains narrow, the scope for deriving significant benefits from SAPTA remains limited. However, a trade regime which provides for unrestricted access to the Indian market for all goods produced in these respective countries will enable domestic, regional and international investors targetting these two countries to make their investment decisions on the assumption that they have free access not just to the local market but to the entire India market."

"To try to resist such restructuring on the plea that our industries will be swamped by Indian goods is counter productive"says S.M. Naseem, a leading Pakistani economist. Since there is no option to liberalisation, South Asian countries need to rapidly reposition themselves to face the extreme competitiveness.

This has to be done by strengthening the activities under the Integrated Programme of Action (IPA) of SAARC which includes areas like energy, agriculture, science and technology, tourism etc, by promoting regional investments and harmonising the intra-regional financial and monetary policies, including the consolidation of export financing and payments arrangement measures and strengthening the regional physical infrastructures. The challenges are multiple, so the strategies should also be multi-pronged.

–Mahendra P. Lama is an associate professor with the South Asia Centre at Jawaharlal Nehru University in New Delhi and a member of the Independent Expert Group set upon by the SAARC Secretariat.

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