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Non-Tariff Measures Hinders Trade: A Case of Nepal, South Asia and European Union

International trade for Nepal, like any other country, is always favorable. Consumers get choices and lower prices, and firms get introduced to better technologies, and cheaper and better factors of production; altogether it is a win-win for all. The freer the trade regime, the more the participating countries can benefit from trade.

However, the math does not seem to be resonating with too many countries. Countries, even those that have ratified free trade conventions and agreements, have been seen favoring one form or another of non-tariff measures. Sometimes, the argument is protection and promotion of domestic industries, at other times, it is minimization of risks to human health, national security; sometimes it is prevention of deceptive trade practices. In recent times, the agenda of protection of human, plant and animal lives has seen itself rise as one of the most politically sound arguments for these non-tariff measures – some tools include standardization and quality control. However, they can still equally hurt trade competitiveness and lead to rise in cost of goods and services – something that nobody wants.

Situation in Nepal — Problem while Exporting

Border compliances include obtaining, preparing and submitting documents during port or border handling, customs clearance and inspection procedures. Nepal majorly exports agricultural products to India. But these sets of exports require standardized tests and certification mechanism, in which there is absence of Mutual Recognition Agreement (MRA) between India and Nepal. In other words the Bureau of Indian Standards (BIS) does not accredit the tests done by the Nepal Bureau of Standards and Metrology (NBSM) and Department of Food Technology and Quality Control (DFTQC). A major burden to exporters therefore is more time and higher cost since samples have to be sent to Kolkata, Delhi or Lucknow for certification.

What about South Asia?
A study done by CUTS (Consumer Unity & Trust Society) International India in 2012 found out the most cited non-tariff barriers in South Asia are lack of transit arrangements, poor trade infrastructure at border and ports, procedural delays on security measures and costs (both monetary and time) associated with documentation for import and export and rules of origin criteria.

Research studies have also shown that a 50% reduction in time of export can generate benefits equal to 4% of GDP of South Asia’s Least Developed Countries.

European Union

After economic integration was launched in Europe in the 1960s, and since the introduction of the Euro (currency) in 1999, how well has Europe performed in pursuing free trade? A study done by Warwick Research Institute, which examined 166 manufacturing industries in 11 member states over the period 1999-2003, found out that significant trade barriers still remains, and apart from the inevitable transport costs, the most substantial costs are technical barriers— pre-shipment inspection, sanitary and phyto-sanitary among others.

What do we learn?

Arguments for non-tariff measure might be politically sound, but in the end of the day, these measures can tantamount to rise in costs of goods and services and hurt trade competitiveness. One way forward for Nepal is sorting out the MRA with India. The government can upgrade its standardization facilities so that the Indian side accredits it. In addition, Nepal also needs to invest in ports, and infrastructures needed for international trade; improve on procedural delays and re-evaluate its document compliances. Example of Nepal – problems while exporting (standardization); South Asia’s procedural delays, poor infrastructures, etc; difficulty in trade in Europe despite having free trade agreements; shows just how it is important to limit such non-tariff measures in international trade.

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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Across Borders

In light of the economic blockade faced by the country, trading across border has become a major topic for discussion among the Nepali people. However, even without the blockade, doing business across border is difficult in Nepal. In a recently released report by the World Bank titled ‘Doing Business 2016: Measuring Regulatory Quality and Efficiency’, Nepal ranked 99 out of 189 countries for ease of doing business. This, coupled with its poor performance in trading across border, shows that it is challenging for Nepali entrepreneurs to do business internationally, regardless of the economic blockade. The border and document compliance costs are high, ample amount of time is wasted at ports, and in contrast to other countries, Nepal’s performance is very poor.

Ongoing scenario

Amidst the current embargo, it is taking many days for the shipments to reach their destination, while a lot of them are stuck at the border for months now. But even before India’s unofficial blockade, one can argue that on-time delivery of shipments was not our strong suit. Ideally, to fulfil all the border compliances, it takes 60 hours for exports and only 30 hours for imports. These compliances include obtaining, preparing and submitting documents during port or border handling, customs clearance and inspection procedures. A number of factors contribute to this delay, but especially for goods that are being exported, one of the reasons is the non-accreditation of the Nepal Bureau of Standards and Metrology (NBSM) approved tests by the Bureau of Indian Standards (BIS). This obstacle has led to increased time and cost, as samples have to be sent to labs abroad for approval. If the Indian side, regardless of the present blockade, has not been accrediting our tests, then NBSM should improve its standardised tests to meet Indian standards.

The goodwill of any business largely depends on its ability to deliver goods on time. The government obviously would want to promote exports, but the existing strenuous domestic compliances on exports, that do nothing but delay the delivery, is unreasonable.  Ten different documents are obligatory for international trade in Nepal, while other countries such as Serbia, Botswana, Japan, two of which are landlocked countries, require much less. Also, it is no surprise that to comply with all the documents required for trade, it takes 19 hours for exports and 48 hours for imports (as per the latest Doing Business report), probably owing to the lack of clarity in roles and responsibilities among ministries, departments and implementing agencies.

Other countries that export at a larger volume or have more variety of trading products have lower compliance costs. For instance, compliance costs in Sweden and Netherlands are only $55 and $0 respectively. One cannot expect Nepal to be at a par with them, but the current cost of almost $311 for exports from Nepal is huge.

Being a landlocked country, Nepal relies heavily on imports. If the required volume of essential commodities does not reach the country for some reason, shortages loom and prices rise. Also, when the cost of doing business through official channels is high, it is likely that unofficial channels would be used, which boosts the underground economy, or black marketeering. Lower cost of trade would encourage people do to business through official channels.

Overcoming challenges

One might argue that even if the government makes favourable policies for international trade, Nepal, being a landlocked country, does not have access to sea. Nor does it have railway systems or efficient airports. And thus, its performance gets adversely affected. But other landlocked countries such as Serbia, Bhutan and Czech Republic fare better than Nepal. Bhutan, for instance has a similar transport system as Nepal. It has one international airport, no railway system, and international trade takes place via road, just like in Nepal. However, in these countries, border compliances are more lenient and only four documents need to be submitted which takes far less time than in Nepal.

The quantitative indicators, as presented in the Doing Business report, reflect how a country performs in ten different components. Our performance in trading across borders shows that, regardless of the current embargo, there are some policy loopholes that need to be addressed. First, redundant documents required for international trade can be removed or combined if possible. Also, a one-window policy for some, if not all, documents would reduce the time and effort taken for document compliance. In addition, an integrated database system, interlinked between ministries, departments and related agencies can also be a viable option to improve coordination. The costs incurred during trading across borders need to be re-evaluated. This would make trade cheaper and encourage businesses to expand. In addition, creating mechanisms that aid in reducing border compliance time would make trade more professional. Policies that incentivise businesses in delivering their products on time would smoothen and boost trade across borders. There are landlocked countries that have strong economies and are competitive in the world market; if they can do it so can we!

This article was originally published in The Kathmandu Post on the 14th of January, 2016. The article was authored by Abyaya Neopane. For the original version of the article, please click here

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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Three ways how GoN has complicated international trade

Last week, Samriddhi Foundation launched the Economic Freedom Country Audit Report. The country audit delved into six areas of economic freedom based on the forty-two components and sub-components of Economic Freedom of the World Report, 2015 produced by the Canadian think-tank, Fraser Institute.

As per the latest economic freedom of the world update, Nepal ranks 117th in the category “Freedom to Trade Internationally” with a score of 6.4 out of 10. Here are some of the problems areas within Nepal’s international trade sector as identified by the country audit.

1) High Tariffs

Nepal imposes duties on both imports and exports. Take imported vehicles for example; Brace YourselvesNepalese customs levies up to 241 per cent tax and duties, which means, a TATA Nano which costs 170,000 INR (272,000 NPR at prevailing exchange rate) in India will cost you 1.18 million NPR in Nepal after imposing duties and taxes.

The government might have numerous arguments for imposing high duties but when the cost of doing business through official channels is high, it is likely that unofficial ways will be used. Taxing international trade implies discouraging it. This is a counter-intuitive move, especially for a poor country like Nepal, where international trade can prove to be the engine of growth.

2) Excessive Regulatory Trade Barriers

Import and export has never been easy in Nepal. The traders have to submit 11 different documents while trading internationally. Certificate of origin, permission for financial transactions, foreign exchange provision, are some of the many documents that need to be submitted. If we compare the number of documents to required for international trade in other land locked countries such as Luxembourg (4), Switzerland (4) Czech Republic (6), we can see that the number of required documents is much more in Nepal.

In addition to this, lack of clarity of roles and responsibilities among ministries, departments and implementing agencies are few of the institutional barriers that discourage international trade.

What If I Told YouNepal, being a land-locked country, does not have access to sea transport. Nor does it have railway systems or efficient airports. All of this already makes international trade a challenging business for Nepal. Road transport thus remains the only viable option. It is unfortunate that we have such weak economic diplomacy and regulatory regime along with incoordination between various government agencies that the only possible mode of international trade for us takes 40 days to complete an import or export process (Doing business Report 2015, World Bank).

3) Movement of Capital and People

Nepal imposes control on flow of money outside and inside the country, creating a restrictive environment for foreign investors. Foreign investors, for example need approval for direct investments, technology transfers and/or providing credit. Also, foreigners cannot own land in Nepal and have to go through stressful immigration process to acquire a business visa. Additionally, there is a minimum investment requirement of USD $50,000 which discourages FDI in Nepal. Companies, which don’t require more than $10,000 as capital, such as some software companies, will be discouraged from entering Nepalese market because of such cut-offs. Similarly, there is practically no outflow of capital as Nepal Rastra Bank imposes restrictions on Nepalese to invest abroad.

The policies for foreign employment in Nepal are also discouraging. Nepal’s Foreign Investment Policy (2014) sets a condition Too Damn Highthat as long as a Nepalese citizen can do a particular job; he/she has to be preferred to an expatriate. Foreign workers may only be hired if individuals with such skills are not available in Nepal. Such approval is to be secured from the Ministry of Labor (MoL). After hiring a foreign worker, the investor also needs to guarantee that such expertise is transferred to a Nepalese citizen so that a domestic worker may replace the foreign worker within five years. The same policy of preferring Nepalese to expatriate was originally stipulated in the Labor Act, 1992, the governing labor Act as of now. Such terms and conditions not only dissuade foreigners from undertaking employment in Nepal, but also discourage foreign investment.

The Way Forward

The phrase “making a prosperous Nepal” has never been as frequently used as since the promulgation of the new constitution. You can find the word ‘prosperity’ all over the constitution. But how exactly is Nepal planning to achieve it? Perhaps working towards a higher degree of economic freedom is the right way to go. Given that countries with high levels of economic freedom are also the ones with some of the highest economic growth, per capita income and life expectancy, it is perhaps through economic freedom that Nepal will also be able to attain this “prosperity.”

International trade can be encouraged by rationalizing the tariff regime, removing the revenue dependence on tariff and by moving away from para-tariffs. Another solution is simplifying regulatory regimes by removing requirements to contact multiple government agencies for permits and authorizations to trade, which would help resolve coordination failures amongst government agencies. Furthermore, as for the movement of capital, it can remove capital controls and facilitate foreign investment both inward and outward such that it can become a credible player in the international market.

For more details on the 2015 Economic Freedom Country Audit Report Nepal, please click here

Abyaya Neopane

About Abyaya Neopane

Abyaya Neopane is an independent researcher. He comes from an Economics background.

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Would you give up your job to make the rest happy?

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Ford Motors announced that it will shut down all its manufacturing plants in Australia by October 2016, after 85 years in operation. The automotive giant incurred a loss of AUD$ 600 million from its operations in Australia in the last five years.  Two remaining automotive manufactures in Australia will be the General Motors subsidiary Holden and the Japanese Giant Toyota.

Bob Graziano, chief executive of Ford Australia has pointed towards a “… increasing challenging market conditions…” as the reason for shut down. Weak demand, high costs and a strong Australian dollar have all contributed to the non-feasibility of Ford manufacturing in Australia. The two factories that are to be shut down would result in 1,200 job losses and of course it would have further ramifications in the economy.

Looking at this case as a subset of the bigger international trade discourse, this move by Ford seems to be the correct way to go. It’s a matter of comparative advantage; the core of the argument is pretty simple: if Australia is not good at making cars, then it should not make cars. Ford manufacturing in Europe costs half as much as in Australia and Ford manufacturing in Asia churns out same product for a quarter of the cost. In other words, for every car Fords builds and sells in Australia is loses out on three cars.But this is not a loss just to Ford Motors but it’s a loss to all of humanity. For every utility (happiness) derived from a Australian made Ford, three times the utility is lost to all of humanity!

Producing along the lines of comparative advantage benefits all of humanity. So following this line of logic, we could argue that the world as a whole would be better off if both Holden and Toyota followed Ford and shut down their manufacturing plants in Australia and started manufacturing in Asia. But of course things are not this simple.

How could we justify this to the thousands of Australians that would lose their means to live hood if these automotive giants pulled out of Australia? And then there are those in the respective complementary industries (for example those that distribute parts) that would be severelyaffected by the move. Would their “sacrifice” for the “greater good” be justifiable to them?

But there is another side to the coin. These jobs are not “lost”; they are mainly being transferred from one place to another. How about all the new jobs created, say in the Asian plants, from increased production. Would this new means of livelihood created for, say Ford’s new Asian employees, offset the loss to its Australian employees? If we add into the equation the increased utility for humanity as a whole from increased productivity, would that be justifiable to the Australian worker?  But if Ford was to continue its production in Australia, would that be justifiable to the unemployed Asian worker whose improved livelihood never came to be? Would it be justifiable to humanity as a whole?

How do we include these sufferings into the cold calculations of comparative advantage? This is the question I want to leave you with. Being completely impartial to all affected parties, and looking at the implications at an aggregate level, we might be able to justify the mathematics of international trade. But who in this world is completely impartial. Our interests are not just aligned to that of self but also that of our community and nation.

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