Non-tariff measures inhibiting South African exports to China and India

Transcription

1 Non-tariff measures inhibiting South African exports to China and India by Ron Sandrey, Lilani Smit, Taku Fundira and Hannah Edinger tralac Working Paper 6 August 2008

2 Copyright tralac, Readers are encouraged to quote and reproduce this material for educational, non-profit purposes, provided the source is acknowledged. All views and opinions expressed remain solely those of the authors and do not purport to reflect the views of tralac. This publication should be cited as: Sandrey, R., Smit, L., Fundira, T. and Edinger, H Non-tariff measures inhibiting South African exports to China and India. tralac Working Paper No 6/2008. [Online]. Available:

3 1 Non-tariff measures inhibiting South African exports to China and India Summary and conclusions The following are the most important non-tariff barriers (NTB) according to South African fruit exporters to China: Sanitary and phytosanitary (SPS) requirements: This refers to the strict SPS standards and high protocol on fruit quality, which are viewed as being unnecessary. Furthermore there is a lack of a phytosanitary agreement between China and South Africa, directing shipments to Hong Kong via the grey channel and thus not following a direct route to China. Cold chain sterilisation requirements: This can probably be viewed as the biggest non-tariff barrier that South African exporters are facing. As discussed in this paper (4.2.1 Sections A and B), products are subjected to very long periods of cold treatment which can arguably damage the quality of the product and the shelf life detrimental in such a highly competitive environment. Costs associated with such requirements are extremely high and are increasing, which in turn affects the profitability of such an export opportunity. We add from interview responses that perhaps cultural differences do not receive enough attention, although this is, of course, a business cost and not an NTB as such. Chinese culture is complex and dissimilar to Western practices. But a better understanding and respect for different customs can be a valuable asset to exporters. Ultimately, more emphasis needs to be placed on this factor. The importance of local intermediaries should not be underestimated in assisting and informing this process. For India, we question whether the major barriers found from the survey and discussed in the report can be seen as non-tariff barriers that are major reasons inhibiting or even curtailing fruit exports from the region to India. Arguably, the high Indian tariffs are the major reason for the low level of export interest from South Africa, and non-tariff barriers are still less significant. The biggest NTB problem identified is the lack of refrigerated infrastructure which makes it impossible to export a high-quality product. Furthermore, companies surveyed indicated a general lack of produce and production output to currently export to India due to the success and

4 2 stability in other markets such as the UK and the US. In the final analysis, India is different from many other markets. While tariffs have been reduced on agricultural imports into India, many are still high. Consequently, tariff protection receives more attention from exporters than potential non-tariff issues that may be exposed when these exporters become more focused on the Indian market. Section 1. Introduction As international tariffs are being reduced, increased attention is being given to the role of non-tariff measures (NTMs), used in this report interchangeably with non-tariff barriers (NTBs) in impeding trade flows. In many cases these NTMs have always existed, but as the tariff barriers have been high, trade has not been extant, and therefore the NTMs have not been visible. In other cases, creative new barriers are being erected to replace the role of tariffs in protecting markets. Either way, the net result is the same: NTMs are important as they are restricting trade. There are differing definitions of exactly what these NTMs (and their quantitative impacts) are, but in general they can be regarded as government measures other than tariffs that restrict trade flows. This covers a range of measures from health and safety measures through to the suite of regulations associated with trade and general matters, such as transport costs and customs and administration procedures that may not be directly under the control of governments but certainly under their influence. The crucial role and importance of NTMs in restricting trade are officially recognised in South Africa: Reducing tariff barriers alone will not succeed in providing genuine market access for developing countries. Non-tariff barriers such as anti-dumping, technical barriers to trade and import licensing in developed countries, often pose significant barriers to developed country exports. Some issues, such as anti-dumping, are currently under discussion in other negotiating groups. Real progress in these areas must be achieved as part of a single undertaking. 1 1 Permanent Mission of South Africa SA on Market Access for Non-agricultural Products. South Africa's comments on the Draft Elements of Modalities for Negotiations on Non-Agricultural Products. 12 August 2003 (excerpt from a report received by the WTO).

5 3 We would agree with these sentiments, and add that NTMs in developing countries are just as important for South African exporters. The uncertainties surrounding quantitative estimates of these NTMs should not preclude a study which, as a minimum, examines and documents measures impeding trade, as a strong qualitative assessment is able to give policy makers and trade negotiators significant information as to where effort should be directed for maximum gain. The objective of this study is to identify NTMs that impede trade between South Africa and its respective trading partners of China and India. It is important to note at the outset that identifying NTMs can be a very subjective business. For instance, a measure that a particular country has imposed for reasons of legitimate health or environmental concern may be perceived in other countries as fundamentally a trade-restricting measure. And, of course, no country ever admits to having NTMs at their own border, therefore all believe that they exclusively are being wronged. After six successive Ministerial Meetings of the World Trade Organisation (WTO), the reduction in barriers to trade has been a particular objective of the various trade negotiations. Since the launch of the Doha Development Agenda at the November 2001 Ministerial Meeting, market access issues on exports of particular interest to developing countries have been given greater prominence. While significant progress has been made in this respect, there nonetheless remains the concern that not all commitments made by the developed countries have been implemented and the expected benefits realised. With tariff reductions and the process of tariffication (conversion of NTBs such as quotas into tariffs) being implemented over time, most countries have concurrently used other forms of protection to restrict imports and employed their creativity to introduce new methods to protect domestic interests. According to the Organisation for Economic and Cooperation Development (OECD) the recorded use of non-tariff

6 4 restrictions on international trade has increased over the last twenty years and accelerated since the Uruguay Round was concluded in 1994 (OECD 2001). This has prompted concerns that tighter restrictions on the use of tariffs may be stimulating the use of non-tariff measures for purposes of trade protection. Developed countries with relatively lower tariffs are, not surprisingly, the more prolific users of NTMs, especially to keep out developing country exports. The proliferation of the use of NTMs was recently acknowledged by the UNCTAD Commission on Trade in Goods and Services, and Commodities in December 2007: The Commission expresses concern about the increased use of non-tariff barriers (NTBs) in international trade that risk neutralizing the gains of tariff liberalization for all countries, but particularly on products of export interest to developing countries. In particular, standards and technical regulations must be developed transparently and applied nondiscriminatorily, and should not pose unnecessary obstacles to trade. (UNCTAD 2007). NTMs can be defined as all measures other than normal tariffs and mainly include trade related procedures, regulations, standards, licensing systems, and even trade defence measures such as anti-dumping duties, which have the effect of restricting trade between nations. NTMs have become the subject of increasing attention among policy makers and trade negotiators. This is because they impose economic costs that exporters are obliged to incur. Consequently, they are a source of legal controversy, with countries holding differing views on what should be considered legitimate. This is mainly because of the existence of legal loopholes in the existing rules and guidelines that govern the conditions under which trade restrictions may be applied. Kulkarni (2005) notes that trade measures that cause an increase in prices prohibit the entry of some products, or increase custom procedures for imports and exports, are legal if they are applied to address issues such as material damage to domestic industry, human and animal health, environmental protection, and national security. Justification of some of these measures could be provided under the provisions or the exceptions provided under the various multilateral agreements governing

7 5 international trade. On the other hand, certain non-tariff measures which cannot be justified under any of these legal provisions are normally termed as NTBs. As noted above, it is important to note that identifying NTMs can be very subjective. For instance, a measure that a particular country has imposed for reasons of legitimate health or environmental concern may be perceived in other countries as fundamentally a trade-restricting measure. Published data sources used in this study include the trade issues reports published by the European Union (EU) 2, the United States of America (US) 3, Japan, the World Trade Organisation (WTO) Trade Policy Review Mechanism (TPRM) reports 4, and several country and/or regional and/or sector-specific reports. 1.2 The way ahead The remainder of the paper is set out as follows: Section 2 groups NTMs into three main categories and provides a short background on the main NTMs within these categories. Section 3 provides a general background of the trade policy setting for both China and India. Section 4 uses a survey to examine the measures impacting on these flows. It concentrates upon fruit exports from the Western Cape. 2 On the web at 3 On the web at 4 On the web at

8 6 Section 2. Descriptions 2.1 NTM categories A useful means of examining NTMs is to place them into categories. The following three (admittedly sometimes arbitrary) broad groupings have been identified. The first grouping is those measures that are put in place to protect the health and safety of both the consumers and the environment in importing countries. When viewed from the exporter s perspective, these measures can be and often are seen as inhibiting trade. The key issues here are unnecessary measures or standards that cannot be justified on scientific grounds. This category is: 1. Health, safety and environment: measures including import and export bans, SPS requirements, and standards and conformance requirements. The second group comprises a wide range of regulations that are in place for a variety of reasons. This category is: 2. Trade policy regulations: broader policy measures including export assistance, export taxes, import licences, import quotas, production subsidies, state trading and import monopolies, tax concessions, trade remedies practices (i.e. antidumping, safeguard, and countervailing duty measures). They also include issues such as tariff escalation and issues associated with regional trading arrangements themselves. The third category entails not generally regulations per se, but rather a wide grouping of procedures and factors that operate in a manner that generally inhibits trade flows. This category is: 3. Administrative disincentives to export: customs clearance delays, lack of transparency and consistency in customs procedures, overly bureaucratic (and often arbitrary) processing and documentation requirements for consignments, high freight transport charges and services that are not user-friendly.

9 7 This section will discuss these NTMs in general terms. It gives a list that is by no means exhaustive. Some of the NTMs discussed in the subsequent analysis may be generic or common across all sectors Health, safety and environment Standards and conformance A general predicament for exporters is the diversity of standards among countries, as the need to adjust production processes to comply with different standards raises production costs. As the major trading nations tend to have at least some differences in standards, the concept of mutual recognition raises the question as to which set of standards one should recognise. Joining the wrong club may have a cost further down the line if the major clubs do not recognise each other s standards. This will impede trade. The WTO Agreement on Technical Barriers to Trade (the TBT Agreement) was one of the Uruguay Round (UR) outcomes. Its objective is to ensure that regulations, standards, testing and certification processes do not create unnecessary obstacles to trade. It does not prevent WTO member countries from adopting the standards they consider appropriate in areas such as product safety, labelling and environmental impacts, but it does encourage them to use international norms. It also sets out a code of good practice. The WTO Disputes Settlement Mechanism exists by which members can consult on matters relating to the agreement and establishes working parties if necessary. Sanitary and phytosanitary measures The WTO SPS Agreement sets out the basic rules for food safety, and animal and plant health standards. Its objective is to protect life and health while preventing unnecessary trade barriers. Importantly, measures should: be applied only to the extent necessary to protect human, animal or plant life or health; not arbitrarily or unjustly discriminate between countries where identical or similar conditions prevail; and

10 8 be based on science and must not be maintained without this scientific justification. Measures must be transparent and not applied in a manner that constitutes a disguised restriction on international trade. Export and Import bans Export restrictions 5 directly influence trade flows. An example is the export of unprocessed logs. While often promulgated for environmental reasons, their effect is to encourage downstream processing through the availability of cheaper raw materials. Logs are diverted from export sales to the home market and a wedge is driven between domestic and imported prices. The case is similar for import bans Trade policy regulations Export and production subsidies Underlying free and fair trade is the concept that countries export the goods in which they have a comparative advantage, and import others. Production subsidies are an incentive given to local producers for a variety of reasons, but the overall impact is that domestic production reaches a higher level than would otherwise be the case. An export subsidy is defined as a subsidy contingent on export performance. Therefore resorting to export subsidies is an indication that the exporting country is not, by definition, internationally competitive in that sector. These export and production subsidies drive down the international price of exports, and make efficient operators in other countries worse off because they face subsidised competitors. This results in trade being distorted. Subsidies are prohibited under WTO rules in manufactured goods, which include the forestry and fisheries sectors. Subsidies have been permitted in agriculture, but an important outcome of the UR Agreement on Agriculture was that some forms of domestic subsidies and all export subsidies were capped at average levels and reduced over the UR implementation period. 5 This section is drawn from the OECD (2003).

11 9 Trade remedies (anti-dumping, countervailing and safeguard measures) Dumping is the introduction of a product to the market of another country at less than the product s normal value. This practice is not allowed under WTO rules, as it undermines the established industry in the importing country. It actually increases trade. Anti-dumping duties may be applied to counter these effects once it has been established that the practice threatens material injury to the domestic sector of the importing country. The mere existence of anti-dumping remedies may have a chilling effect upon trade, although differential pricing is common in many industries (never ask the person sitting next to you on a plane what they paid for their ticket!). Disagreements between WTO members are addressed through the Dispute Settlement Mechanism. Safeguards give temporary relief when imports increase unexpectedly. They are designed to give domestic producers a period of grace in which to become more competitive. They usually take the form of duty increases or quantitative restrictions on imports. The WTO also has a mechanism for addressing challenges to these measures, and this has been globally active in recent years. Countervailing measures in the WTO context are special duties imposed on imports to offset the benefits of prohibited or actionable subsidies to producers or exporters in the exporting country. They can be applied only after an investigation shows that the subsidies are prohibited under WTO rules, that there is material injury to producers in the importing country, and that there is a causal linkage between these imports and the material injury. As with the other two measures in the trade remedies category, the investigations must be conducted in a transparent manner implementing a dispute mechanism. It can be seen that there is a linkage between all three trade remedies measures. As tariffs have reduced, so the use of these measures has become more common. Import quotas and licensing Import quotas are permitted by the WTO for agricultural products and, until recently, for the textile and clothing sectors. Sometimes licences are associated with import quotas, but they may also be applied for purposes such as foreign exchange

12 10 rationing or determining if specific import requirements have been met. In many cases, licences amount to no more than a formality, but in other cases they can and do create an extra cost to traders. Agricultural tariff quotas Quantitative restrictions had long been prohibited under GATT rules for manufactured goods (with the earlier exception of textiles and clothing), but not for agriculture. The Uruguay Round under the old GATT formalised access tariff quotas, bringing agriculture into greater conformity with manufactured goods. These tariff quotas would not be less than the average annual import quantities for the base period and be provided on terms at least equivalent to those which existed during the base period. This protected existing market access opportunities and, in theory, allowed for increases over time. In addition, minimum access opportunities were established for products where no significant imports of the product had occurred during the base period. These tariff quotas were introduced to ensure that the minimum level of market access in all markets represented not less than three percent of corresponding domestic consumption during the base period, expanding to five percent of domestic consumption by the end of the implementation period. It was agreed that minimum access tariff quotas would be implemented on the basis of a quota with a low or minimal tariff rate, although in practice some in-quota tariffs are still relatively high. State trading and government procurement State trading is a procedure under which a government agency has the exclusive right to trade, or has assigned this right to a private monopolist. This situation can apply to either or both imports and exports. Government procurement typically involves a situation in which preference is given to domestic suppliers in public tenders for the supply of goods and services to government agencies. These agencies can operate at state or local level.

13 11 Local content requirements In return for achieving a certain degree of local content, producers are allowed to import a certain amount of equivalent goods or raw materials at lower or even dutyfree prices. This protects domestic suppliers at the cost of importers. Tariff escalation and classification issues On the face of it, these are tariff issues and therefore by definition not NTMs. However, some consideration needs to be given to the subtle way in which tariffs may be applied. In the case of both escalation and classification, a tariff is applied in a manner that distorts trade flows to an extent greater than the tariff. Tariff escalation takes place when further processed goods face higher import duties at foreign borders than those levied on the base raw material. The result is that escalation (sometimes known as cascading) of the duties paid inhibits further processing, and thereby trade in more elaborately transformed merchandise goods. Similarly, tariff classification issues are potentially a concern in the fisheries sector. This happens when a definition of species and its associated tariff classification is set in a manner that favours domestically harvested species over foreign species. Trade is distorted. Regional trade preferences and rules of origin (ROO) The objective of a Free Trade Agreement (FTA) or the Closer Economic Partnership (CEP) agreements is to foster trading and economic relationships between members. This trade is increased through two channels: trade creation and trade diversion. Trade creation is the additional trade that results from such arrangements, while trade diversion is merely the substitution of a preferential source away from a nonpreferential source, thus distorting flows to and from non-members. One area of potential trade diversion is the ROO criteria. These are intended to define where a product is actually made, and in today s increasingly integrated world this is not an easy question to answer. A particular problem is the complexity and potential restrictive nature of different ROO criteria (the so-called spaghetti effect ) 6. 6 See Estvadeordal (2003).

14 12 The ROO can also affect trade between countries when bilateral policies such as anti-dumping and countervailing duties are in place. They are potentially an extra transaction cost for exporters when their country belongs to more than one trade agreement and these have different ROO criteria. Empirical work suggests that recent FTAs have diverted more trade from non-members than they have created among members. This finding is consistent with the observation that many of the provisions needed in preferential arrangements to underpin and enforce their preferential nature such as rules of origin are in practice quite trade restricting. Labour standards A relatively new issue in trade is the concern of developed countries around labour standards and, in particular, child labour in the developing world. In some cases, requesting African exporters to comply with these conditions in the case of child labour may well deprive many poor families of extra income, earned from allowing children to engage in light safe work without interfering with their education or wellbeing. Food miles and carbon footprint With rising fuel prices and ever-worsening greenhouse gas effects accentuating the need to become more ecologically and environmentally friendly there is a new class of potential trade barriers in the form of carbon footprinting and its associated food miles whereby at least some consumers are turning away from imported foods on the basis that their global impacts are more than locally produced foods. The argument is that local food involves less greenhouse gas emissions than food produced farther away, as, by definition, transport costs are lower. It is, however, a partial concept as this takes account of only one of the many activities in producing and delivering food to final consumers. The critical environmental issue is not only emissions in transport, but total emissions from all stages in producing and transporting food. It is of particular concern to distant suppliers like South Africa, but more so, Australia and New Zealand to Europe. But it must be pointed out that agricultural production in Europe is highly energy-intensive and uses much heavier applications of fertilisers and chemicals than southern hemisphere producers (Saunders et al., 2006). Again, it is an example of striking a balance between environmental considerations and achieving the benefits from comparative advantage and trade. While not strictly an

15 13 NTM as defined, it is nonetheless a consumer attitude that is helping to cement the protectionism of local producers. Another semi-related topic that could be perceived as being an NTM is traceability. Consumers have the right to know where a product has originated from and tracing a food quality problem back to its source is sometimes crucial. However, as poorer developing countries often have fragmented and multiple small farm suppliers, is traceability a non-tariff barrier or just another cost of doing business? Exporters that can meet traceability standards do have a competitive advantage in the market place, but where a developing country cannot easily meet the cost of guaranteeing this information it could be viewed as being a discriminatory measure towards that developing country supplier Administrative disincentives to export Excessive customs and administrative procedures Customs procedures can become excessive or inappropriate if they differ too much from international norms. These procedures can result in delays and extra costs (both directly and indirectly) in processing goods at the border. Valuation techniques are sometimes raised as an issue. Naturally, the importer will want to place as low a value as possible upon goods at the border, while the importing government will seek to counter this and raise as much tax as possible. Again, the WTO Customs Agreement operates to promote a fair, uniform and neutral system for the valuation of these goods. This precludes the use of arbitrary or fictitious values. It plays an essential part in ensuring that correct duties are paid, and acts to avoid regimes based upon, for example, minimum values. In summary, the broad categories of NTMs highlighted above give rise to numerous forms of barriers. The barriers of key concern to developing countries have been summarised by UNCTAD as follows: Access and entry to developed countries markets: technical measures and price control measures are the most typical concerns for developing countries; Trade between developing countries: customs and administrative entry procedures, para-tariff measures (e.g. import surcharges and additional

16 14 charges), and other regulatory measures affecting infrastructure, protection of intellectual property rights and institutions are among trade obstacles; Products of export interest to developing countries: such as fisheries, electrical equipment, pharmaceuticals and textiles, are more affected by NTBs than other sectors. In particular, the rise of technical measures in developed countries means additional costs and unnecessary burdens in relation to the access of enterprises in developing countries to international markets. These illustrate the serious implications of NTMs for developing countries' trading performance and prospects, necessitating a greater focus on key technical and policy issues arising from such barriers (UNCTAD, 2007). Section 3. What others are saying This section will review the literature on what others are saying about NTBs into firstly China, and then India. The analysis that follows concentrates upon the agricultural sector. Data from the WTO, US, EU, Australia and New Zealand was examined with respect to reports and associated problems with firstly China, and then India. 3.1 China The WTO - Measures Directly Affecting Agricultural Imports into China 7 The World Trade Organisation (WTO) considers that., by and large, China has continued to gradually liberalise its trade and trade-related policies. In particular, it has eliminated tariff-rate quotas on some items and reduced the number of lines subject to automatic import licensing requirements. Tariff-rate quotas (TRQs) are regulated under the Interim Measures on Administration of Tariff Rate Quota for Importation of Agricultural Products and the Interim Measures on the Administration of Tariff Rate Quota for Importation of Fertilisers. On 1 January 2006, TRQs on soybean oil, palm oil, and rapeseed oil (10 items) were eliminated; these items are currently subject to automatic import licences. As a consequence, in 2007, TRQs were applied to eight 7 This section is a summary of the WTO Trade Policy Review Secretariat Report 2008 and China Government Report 2008.

17 15 categories of imported goods, involving 45 tariff lines at the HS 8-digit level. These were wheat, maize, rice, sugar, wool, wool tops, cotton, and chemical fertilisers. Import prohibitions are maintained on grounds of, inter alia, public interest, environmental protection, or in accordance with international commitments. Prohibitions include some products of animal origin, raw hides, waste of skins and leather, among others. Quantitative restrictions on imports were eliminated on 1 January 2005, and the relevant products were moved into the category of free importation or automatic import licences. The licensing regime applies equally to goods from all countries or customs territories. Products that are not subject to import restrictions, but require import monitoring for statistical purposes, are subject to automatic import licences involving no restriction in terms of import quantity or value. The number of lines fully subject to automatic import licences decreased from 478 in 2006 to 108 in These tariff lines concerned poultry, vegetable oil, and tobacco, among others. State trading has apparently been reduced. Imports of vegetable oil (rapeseed oil, palm oil, and soybean oil) were removed from state trading from 1 January In 2007, China maintained state trading in, inter alia, grain (including wheat, maize, and rice), sugar, tobacco, crude oil and processed oil, chemical fertiliser, and cotton. China s Ministry of Commerce (MOFCOM) issues and adjusts annually the lists of goods subject to state trading and of authorised state trading enterprises (STEs). Legislation on standards includes mainly the Standardisation Law and the Regulations for the Implementation of the Standardisation Law. The Standardisation Administration of China (SAC), under the General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ), administers standardisation work in China. China has been gradually increasing alignment of its national standards with international norms. Currently, 46.4 percent of national standards have been aligned, up from 45.9 percent in 2005, and the authorities aim to align 85 percent by China's current legislation related to its SPS regime includes the Law on the Entry and Exit of Animals and Plant Quarantine, the Food Hygiene Law, the

18 16 Law on Animal Disease Prevention, the Law on Import and Export Commodity Inspection, the Law on Frontier Health and Quarantine, as well as accompanying implementing regulations and rules. With a large number of laws governing SPS measures, the SPS regime remains complex. Labelling requirements are maintained under the Standardisation Law, the Food Hygiene Law, and the Law on Product Quality. Labels must be written in Chinese and state, inter alia, name and trade mark of the product, type of product, the manufacturer's name and address, place of origin, usage instructions, batch number, and the relevant standard code The United States 8 In its annual review of trade restrictions facing US exporters the United States Trade Representative (USTR) opens by stating that when China acceded to the World Trade Organisation on 11 December 2001, it committed to implement a set of sweeping reforms over time that required it to lower trade barriers in virtually every sector of the economy, and provide national treatment and improved market access to goods and services imported from WTO members. China has taken many impressive steps to reform its economy, making progress in implementing a broad set of commitments that required it to reduce tariff rates, eliminate non-tariff barriers, provide national treatment and improved market access to goods and services imported from WTO members and improve transparency. Remaining problems focus on: Excessive Chinese government intervention in the market through an array of trade distorting measures. This is a reflection of China s historic yet unfinished transition from a centrally planned economy to a free-market economy governed by rule of law. Some Chinese government agencies and officials have not yet fully embraced the key WTO principles of market access, nondiscrimination and transparency. Differences in views and approaches 8 See the 2008 National Trade Estimate Report on Foreign Trade Barriers, available at load_file930_14640.pdf.

19 17 between China s central government and China s provincial and local governments have also continued to frustrate economic reform efforts. Arbitrary practices by Chinese customs and quarantine officials can delay or halt shipments of agricultural products into China, while sanitary and phytosanitary standards with questionable scientific bases and a lack of transparency in regulatory regime frequently cause confusion for traders in agricultural commodities. Chinese customs officers have wide discretion in classifying a particular import, and a lack of consistency makes it difficult to anticipate border charges. On valuation, some US exporters are complaining that many Chinese customs officials are still improperly using reference pricing, which usually results in a higher dutiable value. China has emerged as a significant user of anti-dumping measures. China provides preferential import duty and VAT treatment to certain products, often from Russia, apparently even when those products are not confined to frontier traffic as envisioned by Article XXIV of GATT It appears that large operators are still able to take advantage of border trade policies to import bulk shipments across China s land borders into its interior at preferential rates. Application of China s single most important revenue source (VAT) continues to be uneven, and because taxes on imported goods are reliably collected at the border, they are sometimes subject to VAT that their domestic competitors often fail to pay. Other problems include selective and unwarranted inspection requirements for agricultural imports, the use of questionable SPS measures to control import volumes and manipulation of technical regulations and standards to favour domestic industries. On the other hand, prior to its WTO accession in December 2001, China restricted imports through high tariffs and taxes, quotas and other non-tariff measures, and restrictions on trading rights. Beginning in 2002, China significantly reduced tariff rates on many products, decreased the number of goods subject to import quotas, expanded trading rights for Chinese enterprises and increased the transparency of its licensing procedures. Subsequently, China has continued to make progress by

20 18 implementing tariff reductions on schedule, phasing out import quotas and expanding trading rights for foreign enterprises and individuals. As part of its WTO accession, China established large and increasing TRQs for imports of wheat, corn, rice, cotton, wool, sugar, rapeseed oil, palm oil, soybean oil, and fertiliser. China phased out the vegetable oil TRQs in 2006, but currently maintains a TRQ regime on the six agricultural products of wheat, cotton, corn, rice, wool, and sugar. Improvements in the TRQ administration are becoming evident, although transparency continues to be problematic. With regard to Sanitary and Phytosanitary measures, China s inspection and quarantine agency, the General Administration of Quality Supervision, Inspection and Quarantine, has imposed inspection-related requirements that have led to restrictions on imports of many US agricultural goods. Importers need to obtain a Quarantine Inspection Permit (QIP) prior to signing purchase contracts for nearly all traded agricultural commodities, and AQSIQ sometimes slows down or even suspends issuance of QIPs at its discretion. Because of the commercial necessity to contract for commodity shipments when prices are low, combined with delays in having QIPs issued, many cargos of products such as soybeans, meat, and poultry arrive without QIPs, creating delays in discharge and resulting in demurrage bills for Chinese purchasers. China made little progress in 2007 to resolve high profile issues such as its current import suspension of US-origin beef, beef products, and live cattle related to Bovine Spongiform Encephalopathy (BSE). The apparent lack of scientific evidence and transparency for its SPS measures remains a problem. Moreover, China apparently does not apply this same standard to domestic raw poultry and meat. In addition, China continues to block many US processed food products from entering the Chinese market by banning certain food additives that are widely used in other countries and have been approved by the World Health Organisation. The US has registered concerns with a number of standards and labelling requirements on its exports to China. Finally, while WTO membership has increased China s exposure to international best practices and resulted in some overall improvements in transparency, corruption

21 19 remains endemic. Chinese officials themselves admit that corruption is one of the most serious problems the country faces, and China s new leadership has called for an acceleration of the country s anticorruption drive with a focus on closer monitoring of provincial-level officials European Union 9 China s most restrictive SPS measures relate to Med fly, fire blight and Cydia pomonella. China requests that every orchard has to be inspected by its own inspectors prior to export. However, the Chinese authorities proceed so slowly in inspecting the orchards that this in practice results in a barrier to trade. Secondly, these organisms can be effectively killed with cold treatment. In the case of the EU, China insists that cold treatment takes place in the EU and not during transport. For bovines, bovine products and derivates the World Organisation for Animal Health (OIE) Terrestrial Animal Health Code contains standards, guidelines and recommendations to be used by national veterinary authorities to prevent the introduction of infectious agents pathogenic for animals and humans into the importing country during trade of animals and animal products, while avoiding unjustified sanitary barriers. Deboned fresh meat and meat products from cattle can be exported from BSE-affected countries following compliance with certain certification requirements. In September 2004, MoA/AQSIQ notice 407 lifted the ban on certain animal products originating from BSE-affected countries. However, China still bans the import of bovine deboned skeletal muscle meat, regardless of recent amendment of the OIE BSE chapter Australia Another source of the most significant non-tariff measures impacting on Chinese agricultural imports is the report Agriculture in China: Development and significance for Australia (Australian Bureau of Agricultural and Resource Economics (ABARE), 2006:45-58). The main NTBs discussed in that report are: 9 EU Market Access Strategy at

22 20 The tariff quota system implemented not only in China but also among other trading nations. The actual non-tariff barrier is therefore the discrimination of tariffs with regards to the quantity, but more so the strenuous administrative processes that follow, affecting timing and the extent of the quota imports to China. State trading enterprises, which are most notably active in grain trading, restrict the imports of certain agricultural goods in China. This is the case as these enterprises hold the exclusive rights to import particular goods, and domestic firms need to enter into import contracts through such state trading enterprises. These trading enterprises can obtain imports at world prices and as they exclusively control the domestic Chinese import market they can have a monopoly position and their prices, when resold domestically, are higher than world prices. Although the role of state trading enterprises has decreased, ABARE contends that they still dominate the agro-food trade. As part of the WTO SPS Agreement, China sets technical standards (inspection, quarantine, etc.) on imported agricultural products for SPS reasons. Such protocols, even though they should not be trade discriminating, can act as NTBs when, under these SPS measures, products do not meet certain conditions. Chinese regulations have been questioned, and at times it has been reported that Chinese SPS and TBT measures have not complied with those of the WTO. Discrepancies between central and provincial agencies on import requirements subsist, and these involve administrative hold-ups and the lack of technical capacity and drawbacks in standardising testing facilities. Overall, China s import inspection protocols are not consistent with international standards, according to ABARE. All importers of goods into China must pay value-added tax. Rather than being neutral and equitable, VAT has acted as a non-tariff barrier for Chinese agricultural imports, as its application to domestic producers is often not identical to that of imported goods, with administrative complexity clouding the process. Even when the same VAT rate may apply, the way this is calculated differs, with a protective bias on domestic producers. ABARE identified the main specific NTBs for Australian agricultural products entering the Chinese market. These products include wool, grains, meat and other animal

23 21 products, dairy, live animals and genetic material, and cotton. The findings for wool, as well as for horticulture and wine, which have been identified as potential areas for increased South African exports to China are given below: The NTB on wool imports is a tariff quota; however, until 2004 two-thirds of the quota 10 was allocated to non-state trading enterprises with more recently no quota being awarded to state trading enterprises. Traders can simply register for the application to import wool and the registered traders are awarded portions of the tariff quota. The system is based on a first come, first served basis, but older traders are granted larger licences than newer traders, with quota allocations revised on a yearly basis. Imports are further constrained because of the duplication of the inspection and classification process resulting in higher costs of exporting wool as Australian wool exports are re-inspected and reclassified on arrival in China, disregarding testing done by the Australian Wool Testing Authority before shipment. On horticulture and wine exports, the most significant barriers are the SPS measures, residue restrictions and food standards, which limit the pace and quantity of a number of horticultural products into China. Wine NTBs include the time-consuming labelling specifications, internal taxes, and distributional channels in China. As is usually the case for most countries, animal-based products are subject to strict SPS measures, food safety and food standards which include hygiene, labelling and pesticide standards, as well as specific testing and certification requirements which increase the cost of exporting these products to China. The most notable measure is zero tolerance for pathogens in raw meat imports, which, according to the US, is impossible to achieve. Conversely, the same policy is not applied to Chinese domestic meat products. 10 Above quota tariffs were previously at 90% and were reduced to 40% by 2004, and are currently at 38% (OECD, 2005).

24 New Zealand 11 The New Zealand Ministry of Foreign Affairs and Trade warns that China is a tough market for an initial foray into exporting or establishing a physical presence, with market development costly in terms of time, money and resources. To be successful the hiring of managers familiar with the Chinese market and the different business culture and environments is advised. Also, the size and quality of competition in China should not be underestimated, as the government's pro-growth policies have produced a host of business competitors. Other challenges include the uneven application of regulations, local protectionism, indirect subsidies to local industry such as low-interest bank loans, intellectual property violations, and the need to build up closer relationships with business partners than would be usual in New Zealand. SPS barriers are also reported to be a major constraint, and this is evident from a perusal of Chapter 8 of the China FTA which goes into detail on SPS measures. 3.2 India WTO measures directly affecting agricultural imports into India 12 According to the WTO, although protection from imports of agricultural products has declined, India continues to use trade policy to support its overall goals of food selfsufficiency and price stability. Thus, tariffs, the main instrument of trade policy, continue to be adjusted from time to time to ensure sufficient domestic supply of key products. However, other measures are used for particular purposes other than the goals highlighted above. This section looks mainly at the NTMs that directly affect India s agricultural imports. These include, among others, sanitary and phytosanitary measures, labelling, import prohibitions and restrictions, standards, anti-dumping, countervailing and safeguard measures, government procurement and state trading. In highlighting these measures, no determination was made as to how trade restricting these measures are: Sanitary and phytosanitary (SPS) measures are governed and enforced through a number of laws and agencies. The Prevention of Food Adulteration Act, 1954, is the main law on food safety and quality. Imports and quarantine 11 Drawn from 12 This section is summarised from the WTO Trade Policy Review Secretariat Report 2007 and India Government Report 2007.

25 23 are regulated through additional legislation such as the Livestock Importation Act, 1898, which was recently amended in 2001, and the Plant Quarantine (Regulation of Import into India) Order, 2003, issued under the Destructive Insects and Pests Act, 1914, which provides provisions to regulate import of plants and plant materials. Implementation of these acts and subordinate legislation is carried out by different central government ministries, making the system relatively complex. India's enquiry points under the SPS Agreement are the Ministry of Health and Family Welfare for human-health related issues, and the Departments of Animal Husbandry, Dairy and Fisheries and Agriculture and Cooperation in the Ministry of Agriculture, respectively, for animal health and plant health issues. Labelling is governed by the Prevention of Food Adulteration Rules (Part VII) which regulates the packing and labelling of food products. All food product labels must conform to a number of listed requirements. In addition, for products containing artificial flavouring the chemical names of the flavourings should not be used and for products containing natural flavouring substances, the common name of the flavours should be mentioned on the label. More specific labelling requirements are required for other products, such as infant milk substitutes and infant foods, bottled mineral water, and milk products. Furthermore, the Ministry of Health and Family Welfare has recently notified the quantitative ingredient declaration (QUID) requirement as a percentage of the ingredient at the time of manufacture of the food. Import prohibitions and restrictions are contained in the Customs Act, 1962, and the Foreign Trade (Development and Regulation) Act, Such measures can be maintained for a number of reasons including security, prevention of agricultural surpluses, standards, intellectual property, among others. Between 2001 and 2006, India introduced import prohibitions on some livestock and livestock products, including domestic and wild birds, meat and meat products from avian species, and live pigs and pig meat products (except processed pig products) 13. Some 415 tariff lines (around 3.5 percent of the tariff) at the HS 8-digit level are currently subject to import restrictions under 13 Import of domestic and wild birds including captive birds (excluding poultry), processed meat and meat products from avian species including wild birds (except poultry), and semen of domestic and wild birds was prohibited with effect from 11 August This measure was taken in view of the reported outbreak of Highly Pathogenic Avian Influenza (HPAI).