DEMYSTIFYING HONG DEMYSTIFYING HONG KONG DUTY FREE QUOTA KONG DUTY FREE QUOTA

FREE MARKET ACCESS FREE MARKET ACCESS DECISIONDECISION

Shiv Raj BhattShiv Raj Bhatt

S&DT: BackgroundS&DT: Background

► Special and Differential Treatment (S&DT) for developing Special and Differential Treatment (S&DT) for developing countries, especially LDCs are important to promote exports hence countries, especially LDCs are important to promote exports hence reduce poverty.reduce poverty.

► GATT incorporated provisions to facilitate the growth and GATT incorporated provisions to facilitate the growth and development of LDCs by providing special right to protect and development of LDCs by providing special right to protect and access export markets (1960s).access export markets (1960s).

► The provisions of S&DT was further broadened and expanded in the The provisions of S&DT was further broadened and expanded in the agreements, declarations and arrangements of the WTO.agreements, declarations and arrangements of the WTO.

► However, such provisions were not helpful in expanding LDCs’ However, such provisions were not helpful in expanding LDCs’ exports. exports.

► Therefore, LDCs are questioning the enforceability of S&DT and Therefore, LDCs are questioning the enforceability of S&DT and hence the utility and value of these provisions.hence the utility and value of these provisions.

S&DT under WTOS&DT under WTO► LDCs put forward the proposal of DFQF market access for their LDCs put forward the proposal of DFQF market access for their

exports in the first WTO Ministerial Meeting in 1996 held in exports in the first WTO Ministerial Meeting in 1996 held in Singapore.Singapore.

► The Singapore Ministerial Declaration agreed on a plan of action The Singapore Ministerial Declaration agreed on a plan of action in favor of LDCs, that included positive measures such as duty-in favor of LDCs, that included positive measures such as duty-free access on an autonomous basis for LDCs.free access on an autonomous basis for LDCs.

► Despite, the very low share of LDCs in total world exports (less Despite, the very low share of LDCs in total world exports (less than 0.6%), It took a decade for WTO members to address the than 0.6%), It took a decade for WTO members to address the demand of LDCs. demand of LDCs.

► In December 2005, during the HK Ministerial, it was agreed to In December 2005, during the HK Ministerial, it was agreed to provide DFQF market access to LDCs.provide DFQF market access to LDCs.

► … …..developed….and developing-country Members ……… agree ..developed….and developing-country Members ……… agree to implement duty-free and quota-free market access for products to implement duty-free and quota-free market access for products originating from LDCs as provided for in Annex F…..’ (para 47) originating from LDCs as provided for in Annex F…..’ (para 47)

HK Declaration on DFQF Market Access HK Declaration on DFQF Market Access Annex F:Annex F:We agree that developed-country Members shall, and developing-country We agree that developed-country Members shall, and developing-country

Members declaring themselves in a position to do so should: Members declaring themselves in a position to do so should: (i) Provide duty-free and quota-free market access on a lasting basis, for all (i) Provide duty-free and quota-free market access on a lasting basis, for all

products originating from all LDCs by 2008 or no later than the start of the products originating from all LDCs by 2008 or no later than the start of the implementation period in a manner that ensures stability, security and implementation period in a manner that ensures stability, security and predictability. predictability.

(ii) (ii) Members facing difficulties at this time to provide market access as set Members facing difficulties at this time to provide market access as set out above shall provide duty-free and quota-free market access for at least out above shall provide duty-free and quota-free market access for at least 97 per cent of products originating from LDCs97 per cent of products originating from LDCs, defined at the tariff line , defined at the tariff line level, by 2008 or no later than the start of the implementation period. In level, by 2008 or no later than the start of the implementation period. In addition, addition, these Members shall take steps to progressively achieve these Members shall take steps to progressively achieve compliance with the obligations set out abovecompliance with the obligations set out above, taking into account the , taking into account the impact on other developing countries at similar levels of development, impact on other developing countries at similar levels of development, and, as appropriate, by incrementally building on the initial list of covered and, as appropriate, by incrementally building on the initial list of covered products. products.

(iii) Developing-country Members shall be permitted to phase in their (iii) Developing-country Members shall be permitted to phase in their commitments and shall enjoy appropriate flexibility in coverage.’ commitments and shall enjoy appropriate flexibility in coverage.’

Analysis of HK S&DT ProvisionsAnalysis of HK S&DT Provisions

► The Declaration is loaded with conditions and loopholes.The Declaration is loaded with conditions and loopholes.

► Since, exports of most LDCs are concentrated in a few Since, exports of most LDCs are concentrated in a few products, the flexibility provided to developed countries to products, the flexibility provided to developed countries to exclude 3% of tariff lines under DFQF initiatives, may exclude 3% of tariff lines under DFQF initiatives, may curtail any benefits of the provision.curtail any benefits of the provision.

► The Declaration obliges Members to take steps to The Declaration obliges Members to take steps to progressively achieve obligation of providing DFQF progressively achieve obligation of providing DFQF market access to LDCs. The term ‘progressively’ is not market access to LDCs. The term ‘progressively’ is not defined clearly, nor is a deadline specified for full defined clearly, nor is a deadline specified for full obligation of the provision. obligation of the provision.

► Further, the Declaration urges developing countries to Further, the Declaration urges developing countries to provide DFQF market access to LDCs on a voluntary provide DFQF market access to LDCs on a voluntary basis, without any legal effect. basis, without any legal effect.

Value and utility of the proposed Value and utility of the proposed DFQF market access agreed in DFQF market access agreed in

the HKthe HK

from the perspectives of South from the perspectives of South Asian LDCs (Bangladesh and Asian LDCs (Bangladesh and

Nepal).Nepal).

Export PerformanceExport Performance

►Both countries initiated trade reforms since the Both countries initiated trade reforms since the mid-1980s.mid-1980s. Increasing Trade/GDP ratioIncreasing Trade/GDP ratio Satisfactory growth in export performanceSatisfactory growth in export performance Share of manufacturing export Increasing Share of manufacturing export Increasing However, both countries have not been successful in However, both countries have not been successful in

diversifying their export structure (carpet and RMG diversifying their export structure (carpet and RMG constitute 40% share in Nepal’s total export; and textile constitute 40% share in Nepal’s total export; and textile and RMG constitute 80% share in total export of and RMG constitute 80% share in total export of Bangladesh).Bangladesh).

Both countries also face market concentration in their Both countries also face market concentration in their exports. exports.

Direction of ExportsDirection of Exports

   BangladeshBangladesh NepalNepal

YearYear DevelopedDeveloped DevelopingDeveloping DevelopedDeveloped DevelopingDeveloping

19901990 75.275.2 19.719.7 8585 1515

19951995 83.383.3 15.415.4 89.289.2 10.710.7

20002000 75.975.9 9.29.2 6262 36.636.6

20042004 78.378.3 8.78.7 4343 5454

Direction of ExportsDirection of Exports

YearYear   BangladeshBangladesh NepalNepal

EUEU USA and CanadaUSA and Canada EUEU USA and CanadaUSA and Canada

19901990 35.435.4 32.232.2 6060 2424

19951995 44.844.8 3434 53.353.3 31.631.6

20002000 40.240.2 33.633.6 22.522.5 33.633.6

20042004 5050 26.526.5 17.517.5 23.423.4

Bangladesh: Distribution of Exports Bangladesh: Distribution of Exports to Developed Country Marketsto Developed Country Markets

► Bangladesh has exported under 98, 239, 265 and 452 Bangladesh has exported under 98, 239, 265 and 452 tariff lines at 6-digit HS level to Australia, Canada, tariff lines at 6-digit HS level to Australia, Canada, Japan and the United States respectively in 2003. Japan and the United States respectively in 2003.

► 3% tariff lines constitute almost 100% in all markets. 3% tariff lines constitute almost 100% in all markets.

► 0.5% tariff lines at 6-digit HS level comprises of more 0.5% tariff lines at 6-digit HS level comprises of more than 70% in Canada, Japan and the US markets, and it than 70% in Canada, Japan and the US markets, and it is more than 90% in Australia. is more than 90% in Australia.

Bangladesh: Distribution of Bangladesh: Distribution of ExportsExports

Products covered Products covered Australia Australia Canada Canada Japan Japan USUS

3%3% 100100 99.5199.51 99.1699.16 98.8898.88

1%1% 98.5598.55 89.7689.76 90.4990.49 87.887.8

0.50%0.50% 95.1495.14 77.4777.47 79.879.8 72.1772.17

0.20%0.20% 89.5289.52 52.2252.22 58.3658.36 46.5746.57

0.10%0.10% 86.2186.21 36.6436.64 43.1743.17 30.2930.29

No of tariff linesNo of tariff lines 9898 239239 265265 452452

Bangladesh: Distribution of Bangladesh: Distribution of ExportsExports

► With regard to the trade with EU Members, the export With regard to the trade with EU Members, the export structure of Bangladesh is concentrated in a few products. structure of Bangladesh is concentrated in a few products.

► 3% of the tariff lines covers:3% of the tariff lines covers: 100% of the exports to 6 countries (Austria, Denmark, Finland, 100% of the exports to 6 countries (Austria, Denmark, Finland,

Greece, Ireland, and Portugal), Greece, Ireland, and Portugal), more than 99% in 7 countries (Belgium, France, Germany, Italy, more than 99% in 7 countries (Belgium, France, Germany, Italy,

Netherlands, Spain, Sweden) Netherlands, Spain, Sweden) More than 98% in UK. More than 98% in UK.

► Moreover, only 0.5% of the tariff lines contain more than Moreover, only 0.5% of the tariff lines contain more than four-fifth of the exports of Bangladesh in all EU member four-fifth of the exports of Bangladesh in all EU member countries. countries.

Nepal: Distribution of Exports to Nepal: Distribution of Exports to Developed Country MarketsDeveloped Country Markets

Products Products covered covered

AustraliAustralia a

Canada Canada JapaJapan n

USUS

3%3% 100100 100100 99.9199.91 99.299.288

1%1% 99.899.8 98.5398.53 92.7892.78 92.392.322

0.50%0.50% 94.2394.23 92.5192.51 84.1284.12 81.281.288

0.20%0.20% 81.9981.99 76.6776.67 67.9167.91 59.559.588

0.10%0.10% 73.2373.23 69.9669.96 52.8652.86 43.943.966

No of tariff linesNo of tariff lines 5555 8787 161161 272272

Nepal: Distribution of ExportsNepal: Distribution of Exports► The commodity composition of trade of Nepal with developed The commodity composition of trade of Nepal with developed

countries is more concentrated than that of Bangladesh countries is more concentrated than that of Bangladesh

► Nepal exports less than 100 tariff heading at 6-digit HS level (in all the Nepal exports less than 100 tariff heading at 6-digit HS level (in all the countries except Japan, US, France, Italy and the UK).countries except Japan, US, France, Italy and the UK).

► In terms of tariff lines, 3% of the tariff lines covers:In terms of tariff lines, 3% of the tariff lines covers: 100% of the exports in Australia and Canada.100% of the exports in Australia and Canada. More than 99% in Japan and the USA. More than 99% in Japan and the USA. Just 0.5% of the tariff lines comprises of more than 90% in Just 0.5% of the tariff lines comprises of more than 90% in

Australia and Canada and more than 80 percent in Japan and the Australia and Canada and more than 80 percent in Japan and the United States. United States.

► 3% of the tariff lines include 100% of the exports of Nepal to the all 3% of the tariff lines include 100% of the exports of Nepal to the all EU member countries. EU member countries.

► Moreover, 0.5% of the tariff lines contain 100% exports in five EU Moreover, 0.5% of the tariff lines contain 100% exports in five EU members, for rest of the countries the share is more than 80%. members, for rest of the countries the share is more than 80%.

GSP : An Overview GSP : An Overview

► Resolution 21(ii) at UNCTAD II in 1968 called for the Resolution 21(ii) at UNCTAD II in 1968 called for the establishment of a ‘generalized, non-reciprocal, non-establishment of a ‘generalized, non-reciprocal, non-discriminatory system of preferences in favour of the discriminatory system of preferences in favour of the developing countries, including special measures in favour developing countries, including special measures in favour of the least advanced among the developing countries of the least advanced among the developing countries

► Under GSP schemes, selected products originating in Under GSP schemes, selected products originating in developing countries are granted reduced or zero tariff rates developing countries are granted reduced or zero tariff rates over the MFN rates. over the MFN rates.

► UNCTAD reports that there are currently 13 national GSP UNCTAD reports that there are currently 13 national GSP schemesschemes notified to the UNCTAD secretariat by Australia, notified to the UNCTAD secretariat by Australia, Belarus, Bulgaria, Canada, Estonia, the European Union, Belarus, Bulgaria, Canada, Estonia, the European Union, Japan, New Zealand, Norway, the Russian Federation, Japan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey and the United States of America. Switzerland, Turkey and the United States of America.

Duty Free Market Access and LDC Duty Free Market Access and LDC ExportsExports

► Non-reciprocal preferences along with MFN duty free market access have Non-reciprocal preferences along with MFN duty free market access have resulted in lowered import tariffs for LDCs’ exports. resulted in lowered import tariffs for LDCs’ exports.

► Canada provides duty free access to 93% of tariff lines, but LDCs trade only Canada provides duty free access to 93% of tariff lines, but LDCs trade only with the products of about 14% tariff lines (almost all imports from LDCs with the products of about 14% tariff lines (almost all imports from LDCs enter duty free). enter duty free).

► In EU, all imports from LDCs have entered without any duty in 2003 and In EU, all imports from LDCs have entered without any duty in 2003 and 97.1% tariff lines attach zero tariffs for LDCs. 97.1% tariff lines attach zero tariffs for LDCs.

► In Japan, more than 93% of LDC exports have entered MFN duty free, and In Japan, more than 93% of LDC exports have entered MFN duty free, and the remaining 7% is divided roughly equally between duty free preferential the remaining 7% is divided roughly equally between duty free preferential access and MFN dutiable trade with no preference. However, only about half access and MFN dutiable trade with no preference. However, only about half of the tariff lines attach duty free for LDCs in the Japanese market. of the tariff lines attach duty free for LDCs in the Japanese market.

► In the United States, out of 99.9% of the total imports from LDCs which In the United States, out of 99.9% of the total imports from LDCs which enter duty free, 81.5% is MFN duty free and 18.4% is preferential duty free. enter duty free, 81.5% is MFN duty free and 18.4% is preferential duty free. In terms of tariff lines, US provide duty free access to 21.2% under MFN In terms of tariff lines, US provide duty free access to 21.2% under MFN and 63.6% under preferential regime.and 63.6% under preferential regime.

GSP Utilization GSP Utilization

Preference Giving Preference Giving Countries Countries

BangladeBangladeshsh

NepalNepal

Canada Canada Potential cover Potential cover raterate

10.310.3 45.445.4

Utilization RateUtilization Rate 74.274.2 77.477.4

Utility RateUtility Rate 7.77.7 35.135.1

European Union European Union Potential cover Potential cover raterate

100.0100.0 100.0100.0

Utilization RateUtilization Rate 50.850.8 71.371.3

Utility RateUtility Rate 50.850.8 71.371.3

JapanJapan Potential cover Potential cover raterate

64.564.5 99.799.7

Utilization RateUtilization Rate 76.676.6 80.180.1

Utility RateUtility Rate 49.449.4 79.979.9

USA USA Potential cover Potential cover raterate

1.91.9 4.74.7

Utilization RateUtilization Rate 69.069.0 90.790.7

Utility RateUtility Rate 1.31.3 4.24.2

Total QuadTotal Quad Potential cover Potential cover raterate

57.357.3 44.944.9

Utilization Utilization RateRate

51.651.6 74.174.1

Utility RateUtility Rate 29.529.5 33.333.3

GSP Utilization of Bangladesh and GSP Utilization of Bangladesh and NepalNepal

Product coverage is defined as the ratio between imports that are covered by a Product coverage is defined as the ratio between imports that are covered by a preferential trade arrangement and dutiable imports from the beneficiary preferential trade arrangement and dutiable imports from the beneficiary countries.countries.

Utilization rate is defined as the ratio between imports actually receiving Utilization rate is defined as the ratio between imports actually receiving preference and covered imports. preference and covered imports.

Utility rate is defined as the ratio between imports actually receiving preference Utility rate is defined as the ratio between imports actually receiving preference and all dutiable imports whether it is covered by GSP or not. and all dutiable imports whether it is covered by GSP or not.

► The utility rates for Bangladesh and Nepal differ across exports and The utility rates for Bangladesh and Nepal differ across exports and markets.markets.

► The total QUAD potential coverage is higher for Bangladesh (57.3 %) than The total QUAD potential coverage is higher for Bangladesh (57.3 %) than Nepal (44.9%).Nepal (44.9%).

► Utilization rate is higher for Nepal (74.1%) than Bangladesh (51.6%). Utilization rate is higher for Nepal (74.1%) than Bangladesh (51.6%).

► Total value of the preference schemes stand at about one third for both Total value of the preference schemes stand at about one third for both countries. countries.

GSP Utilization of Bangladesh and GSP Utilization of Bangladesh and NepalNepal

► The coverage is the highest in the EU (100%) but the utilization The coverage is the highest in the EU (100%) but the utilization rate is the highest in Canadian markets for both Bangladesh rate is the highest in Canadian markets for both Bangladesh (74.2%) and Nepal (77.4%). (74.2%) and Nepal (77.4%).

► In the US market, the coverage is quite low (1.9% and 4.7% for In the US market, the coverage is quite low (1.9% and 4.7% for Bangladesh and Nepal respectively), as a result utility rate is Bangladesh and Nepal respectively), as a result utility rate is also very low (1.3% and 4.2% in Bangladesh and Nepal also very low (1.3% and 4.2% in Bangladesh and Nepal respectively), despite higher rate of utilization. respectively), despite higher rate of utilization.

Preferential Market Access in Preferential Market Access in Developing CountriesDeveloping Countries

► The importance of developing country market is increasing for Nepal (share in The importance of developing country market is increasing for Nepal (share in total export increased from 15% in 1990 to 54% in 2004). Therefore, total export increased from 15% in 1990 to 54% in 2004). Therefore, preferential market access in these countries is crucial. preferential market access in these countries is crucial.

► Some of the developing countries provide preferential market access to LDC Some of the developing countries provide preferential market access to LDC products, however, the depth and coverage of these preference schemes are products, however, the depth and coverage of these preference schemes are often limited. often limited.

► Among the preferential schemes, the importance of non-reciprocal preferential Among the preferential schemes, the importance of non-reciprocal preferential market access schemes and the Global System of Trade Preferences (GSTP) has market access schemes and the Global System of Trade Preferences (GSTP) has limited utility for Nepal and Bangladesh.limited utility for Nepal and Bangladesh.

► But preferential market access granted on a bilateral basis by India bears a But preferential market access granted on a bilateral basis by India bears a significant importance to Nepal. Bilateral trade agreement between Nepal and significant importance to Nepal. Bilateral trade agreement between Nepal and India provides duty free market access of Nepalese products in Indian market, India provides duty free market access of Nepalese products in Indian market, albeit with some conditions. albeit with some conditions.

► China has also announced in September 2005 to grant duty free treatment to China has also announced in September 2005 to grant duty free treatment to certain products from 39 LDCs. certain products from 39 LDCs.

Implications of HK Decision on DFQF Implications of HK Decision on DFQF Market Access Market Access

► Hong Kong Decision on DFQF market access for LDCs has both Hong Kong Decision on DFQF market access for LDCs has both commercial and diplomatic values for Bangladesh and Nepal. commercial and diplomatic values for Bangladesh and Nepal.

► It is natural to expect significant trade expansion of these countries after its It is natural to expect significant trade expansion of these countries after its implementation.implementation.

► But, the Declaration is loaded with conditions and loopholes, forcing us to But, the Declaration is loaded with conditions and loopholes, forcing us to suspect the intention of the preference-giving countries. suspect the intention of the preference-giving countries.

► Some crucial questions that determine the utility and value of the decision Some crucial questions that determine the utility and value of the decision are: are: What kind of leverage developed countries will have to exclude products What kind of leverage developed countries will have to exclude products

under the veil of 3% exclusion?under the veil of 3% exclusion? How such exclusions will change the landscape of real market access How such exclusions will change the landscape of real market access

situations for LDCs?situations for LDCs? Why LDC specific decisions takes into consideration export interest of Why LDC specific decisions takes into consideration export interest of

other developing countries rather than focusing on the LDCs? other developing countries rather than focusing on the LDCs? What are the modalities of progressively achieving duty free quota free What are the modalities of progressively achieving duty free quota free

market access? market access?

Implications of HK Decision: Some Implications of HK Decision: Some caveats caveats

► Exports of Bangladesh and Nepal are highly concentration in few tariff Exports of Bangladesh and Nepal are highly concentration in few tariff lines. The flexibility provided to developed countries to exclude 3% of lines. The flexibility provided to developed countries to exclude 3% of tariff lines under DFQF initiatives may exclude virtually all exportable tariff lines under DFQF initiatives may exclude virtually all exportable products of the two countries. products of the two countries.

► Merely granting duty free market access to exports originating in LDCs Merely granting duty free market access to exports originating in LDCs does not ensure that LDCs are effectively utilizing the preferences. The does not ensure that LDCs are effectively utilizing the preferences. The market access should be supplemented by measures that address market access should be supplemented by measures that address structural problems of the LDCs such as; rules of origin, competitive structural problems of the LDCs such as; rules of origin, competitive tests, safeguard measures and administrative procedures. tests, safeguard measures and administrative procedures.

► Developing countries has been emerging as a major market for South Developing countries has been emerging as a major market for South Asian LDCs and thus, preferential access in these markets is required for Asian LDCs and thus, preferential access in these markets is required for export expansion of these countries. export expansion of these countries.

► Export composition of South Asian LDCs and other developing countries Export composition of South Asian LDCs and other developing countries resemble at the product categories but at the more disaggregated level resemble at the product categories but at the more disaggregated level such similarity tends to shrink. Thus granting DFQF market access will such similarity tends to shrink. Thus granting DFQF market access will not endanger the domestic industry of developing countriesnot endanger the domestic industry of developing countries

Implications of HK DecisionImplications of HK Decision

► In the light of the above caveats and past experience, one has In the light of the above caveats and past experience, one has reason to doubt the effectiveness of the Hong Kong Decisions on reason to doubt the effectiveness of the Hong Kong Decisions on DFQT market access for LDCs.DFQT market access for LDCs.

► The paper thus argues that DFQF initiatives might not bring The paper thus argues that DFQF initiatives might not bring desired effects to South Asian LDCs, if their interest is not desired effects to South Asian LDCs, if their interest is not properly reflected in the design. properly reflected in the design.

► If we go along with the existing ambiguities, the HK decision on If we go along with the existing ambiguities, the HK decision on market access increase the market access of LDCs but may run market access increase the market access of LDCs but may run the risk of rolling back existing preferences. the risk of rolling back existing preferences.

HK Decision on DFQF Market Access: HK Decision on DFQF Market Access: How to Make it Work?How to Make it Work?

The decision needs to be further corroborated with the following interpretations The decision needs to be further corroborated with the following interpretations and explanations:and explanations: The flexibility provided to developed countries to exclude from DFQF market The flexibility provided to developed countries to exclude from DFQF market

access should be interpreted as 3% of existing non-zero tariff lines and should access should be interpreted as 3% of existing non-zero tariff lines and should also be capped by the volume of imports (for example, not exceeding 10% of also be capped by the volume of imports (for example, not exceeding 10% of imports at tariff lines).imports at tariff lines).

As the landscape of market access has been changing over the period, As the landscape of market access has been changing over the period, developing country also should provide DFQF market access for at least half developing country also should provide DFQF market access for at least half of the tariff lines, comprising of half of the export value. of the tariff lines, comprising of half of the export value.

LDCs should be allowed to designate specific percentage of tariff lines, e.g. LDCs should be allowed to designate specific percentage of tariff lines, e.g. 0.5 per cent in the case of developed countries and 0.1 per cent in the case of 0.5 per cent in the case of developed countries and 0.1 per cent in the case of developing countries. developing countries.

The rules of origin for preferential market access should incorporate the stage The rules of origin for preferential market access should incorporate the stage of development of the LDCs and be harmonized for all preference-granting of development of the LDCs and be harmonized for all preference-granting countries.countries.

Product originating in any of the LDCs or any of the regional trading partners Product originating in any of the LDCs or any of the regional trading partners should be considered as a product originating in the exporting LDC.should be considered as a product originating in the exporting LDC.

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