FOREIGN TRADE POLICY

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1 Learning objectives: This Chapter will provide you with the guidance in your Import & Export Transactions as brought out in the Foreign Trade Policy in India and the applicable Trade Barriers you will have to face.

2 1.1 FOREIGN TRADE POLICY The three most important aspects of Foreign Trade Policies are tariffs, import quotas, and export subsidies. Tariffs and import quotas are designed to discourage imports and export subsidies are designed to encourage exports. The general goal of these Foreign Trade Policies is to create or increase a country s Balance of Trade surplus, that is to increase net exports. By increasing net exports and creating a more favorable balance of trade, the industrial production of a nation increases, which then increases the National income and by generating more employment opportunities.

3 While Foreign Trade Policies can be beneficial to the National Economy of the Country, they tend to be most beneficial, and thus commonly promoted by the local industries who have to face competition from foreign imports. The local industries tend to benefit with higher sales, greater profits, and more income to their resources. However by increasing domestic prices and restricting accessing to imports, foreign trade policies also tend to be harmful to the consumers who have to pay more for their consumption and also sometimes faces shortages or are forced to buy sub-standard products.

4 Tariffs: The first of the three aspects of the Foreign Trade Policies, designed to restrict imports and promote exports is tariffs on imports. Tariffs are simply taxes placed on imports. They work like any other taxes. A tariff is added to the price of the imported goods in the form of duties and taxes by the Country. The resulting price of the import is thus higher, which tend to decrease the quantity purchased. And if fewer imports are purchased, then more domestic production is sold. Domestic producers benefit from tariffs, domestic consumers tend to suffer. They pay higher prices for both imports and domestic production a also the risk of shortages and sub-standard products in the market.

5 Import Quotas: The second of the three aspects of Foreign Trade Policies, designed to restrict imports and promote exports is quotas on imports. In general a quota is simply a quantity restriction placed on import of goods services or activity. Import quotas are then merely legal restrictions on the quantities of imports that are imposed by the Government. Import quota can be established as a simple aggregate, presumably satisfied on a first-come-first serve basis. Once the total import is reached then no more imports of the particular goods are allowed. Alternatively the total quota can be divided among foreign producers perhaps pro-rated based on past imports.

6 Import quotas are harmful to consumers. With fewer imports available, consumers have fewer choices and those choices more often than not come at higher prices and with a continued risk of shortages and sub-standard goods.

7 Export Subsidies: The third of the three aspects of Foreign Trade Policies is export subsidies. In general a subsidy is a payment made by the Government, either to a business or consumer, with no expectations of receiving any production in exchange. An export subsidy is a subsidy paid to the local industries to encourage exports of production to the foreign sector. This export subsidization effectively increases the overall revenue received by the respective firms when exporting production, which is bound to encourage exports. Export subsidies are usually justified as a means of helping the local industries to compete with the lower cost imports. While imports might have lower costs due to comparative advantage, they also might be subsidized by Foreign Governments.

8 Unlike tariff and import quotas, domestic consumers, like domestic producers, tend to benefit from lower prices of both imports and domestic production. However, taxpayers of the Country end up paying for thus subsidization.

9 In India the revolutionary Liberalization policy of 1992 was the first major step to breaking down the international barriers. This was followed by computerization program in The objective of the Government was very clearly defined towards seamless trading.

10 1.2 WORLD TRADE ORGANIZATION: The World Trade Organization (WTO) is an organization that intends to supervise and liberalize international trade. The organization officially commenced on 1 January 1995 under the Marrakech Agreement, replacing the General Agreement on Tariffs and Trade (GATT), which commenced in The organization deals with regulation of trade between participating countries by providing a framework for negotiating and formalizing trade agreements and a dispute resolution process aimed at enforcing participants' adherence to WTO agreements, which are signed by representatives of member governments and ratified by their parliaments.

11 The topmost decision-making body of the WTO is the Ministerial Conference, which usually meets every two years. It brings together all members of the WTO, all of which are countries or customs unions. The Ministerial Conference can take decisions on all matters under any of the multilateral trade agreements.

12 Functions of WTO Among the various functions of the WTO, these are regarded by analysts as the most important: (a) It oversees the implementation, administration and operation of the covered agreements. (b) It provides a forum for negotiations and for settling disputes. Additionally, it is the WTO's duty to review and propagate the national trade policies, and to ensure the coherence and transparency of trade policies through surveillance in global economic policy-making. Another priority of the WTO is the assistance of developing, least-developed and low-income countries in transition to adjust to WTO rules and disciplines through technical cooperation and training

13 The WTO is also a center of economic research and analysis: regular assessments of the global trade picture in its annual publications and research reports on specific topics are produced by the organization. Finally, the WTO cooperates closely with the two other components of the Bretton Woods system, the IMF and the World Bank.

14 The WTO launched the current round of negotiations, the Doha Development Round, at the fourth ministerial conference in Doha, Qatar in November This was to be an ambitious effort to make globalization more inclusive and help the world's poor, particularly by slashing barriers and subsidies in farming. The initial agenda comprised both further trade liberalization and new rule-making, underpinned by commitments to strengthen substantial assistance to developing countries. Countries agreed to phase out al their agricultural export subsidies by the end of Further concessions to developing countries included an agreement to introduce duty free, tariff free access for goods from the Least Developed Countries. The WTO failed to implement its first landmark deal since its inception in 1995 as the deadline for signing the Trade Facilitation Agreement ended on 31 st July 2014, where India did not sign on it.

15 1.3 INDIAN REGULATORY FRAMEWORK: In India, all Foreign Trade is under the overall control of the Ministry of Commerce & Industry. The legislative control is through the Foreign Trade(Development)Act, The Director General of Foreign Trade is appointed under this Act to lay down the Foreign Trade Policy for five years from 1992 onwards. The Policy and Procedures are announced through Notifications/Public Notices/Circulars in the Government Gazette.

16 The objective of the Foreign trade Policy is to implement provisions of Foreign Trade (Development & Regulation)Act, Rules and Orders made thereunder by laying down simple transparent and EDI compatible procedures, which are easy to comply with and administer, for efficacious management of foreign trade. The Board of Trade has been constituted by the Government.

17 BOARD OF TRADE: The Board of Trade has a clear and dynamic role in advising government on relevant issues connected with Foreign Trade Policy. Commerce and Industry Minister is the Chairman of the Board of Trade. Government also nominates eminent persons or experts on trade policy. In addition, Chairmen of recognized Export Promotion Councils and President or Secretary- Generals of National Chambers of Commerce will be ex-officio members.

18 Board of Trade meets at least once every quarter and has the following terms of reference: To advise the Government on Policy measures for preparation and implementation of both short and long term plans for increasing exports in the light of emerging national and international economic scenarios; To review export performance of various sectors, identify constraints and suggest industry specific measures to optimize export earnings; To examine the existing institutional framework for imports & exports and suggest practical measures for further streamlining to achieve the desired objectives; To review the policy instruments and procedures for imports & exports and suggest steps to rationalize and channelise such schemes for optimum use; To examine issues which are considered relevant for promotion of India s foreign trade, and to strengthen the international competitiveness of Indian goods and services. To commission studies for furtherance of the above objectives.

19 1.4 POLICY GUIDELINES: Trade facilitation through EDI initiatives: It is endeavor of Government to work towards greater simplification, standardization and harmonization of trade documents using international best practices. As a step in this direction, DGFT shall move towards an automated environment for electronic filing, retrieval and authentication of documents based on agreed protocols and message exchange with other community partners including Customs and Banks. DGCI&S Commercial Trade Data: To enable users to make commercial decisions in a more professional manner DGCI&S trade data shall be made available with a minimum time lag in a query based structured format on a commercial criteria. Single Common Document: Pending finalization of Single Common Document (SCD) for international trade, Government Departments dealing with exports and imports will honour Authorisation issued by other Government departments based on verification of export documents Like shipping bill, bank realization certificate, Packing list, bill of lading etc. and will not insist upon fresh submission of these documents.

20 IMPORTER / EXPORTER CODE IEC: No export/import is permitted without IEC. It is granted on an application and is valid for lifetime unless cancelled/withdrawn by the authority granting the same. Banks which issued Bank certificate for obtaining IEC, also gets a copy of IEC directly from the Regional Authority who granted the IEC. All IECs are linked to Income Tax PAN. No person / firm/ company can have more than one IEC against one PAN. DENOMINATION OF EXPORT CONTRACTS: All export contracts and invoices shall be denominated either in freely convertible currency or Indian rupees but the export proceeds shall be realised in freely convertible currency.

21 However export proceeds against specific exports may also be realized in rupees provided it is through a freely convertible Vostro account of a non resident bank situated in any country other than a member country of ACU or Nepal or Bhutan. Additionally, the rupee payment through the Vostro account must be against payment in free foreign currency by the buyer in his non resident bank account. The free foreign exchange remitted by the buyer to his non resident bank (after deducting the bank service charges) on account of this transaction would be taken as the export realization under the export promotion schemes of FTP. Contracts for which payments are received through the Asian Clearing Union (ACU) shall be denominated in ACU Dollar. The Central Government may relax the provisions of this paragraph in appropriate cases. Export contracts and Invoices can be denominated in Indian rupees against EXIM Bank/ Government of India line of credit.

22 1.5 CATEGORIES OF IMPORT AND EXPORT Free Items: Exports and Imports shall be free, except where regulated by FTP or any other law in force. The item wise export and import policy shall be, as specified in ITC (HS) notified by DGFT, as amended from time to time. Restricted Items: Any goods, export or import of which is restricted under ITC(HS) may be exported or imported only in accordance with an Authorisation or in terms of a public notice issued in this regard.

23 Principles of Restriction DGFT may, through a notification, adopt and enforce any measure necessary for: - i Protection of public morals. ii Protection of human, animal or plant life or health. iii Protection of patents, trademarks and copyrights and the prevention of deceptive practices. iv Prevention of use of prison labour. v Protection of national treasures of artistic, historic or archaeological value. vi Conservation of exhaustible natural resources. vii Protection of trade of fissionable material or material from which they are derived; and viii Prevention of traffic in arms, ammunition and implements of war.

24 PROHIBITED ITEMS: The prohibited items are not permitted to be exported. Import / exports of goods may be prohibited: (a) In compliance of UN Security Council Resolutions (b) Import/Export of arms and related material from/to Iraq (c) Import/Export of UN Security Council Document listed items of goods and technology which could contribute to the nuclear related, ballistic-missile related or other weapons of mass destruction-related program of Democratic People s Republic of Korea. (d) Import/Export of UN Security Council Document listed items of goods and technology which could contribute to enrichment-related, reprocessing or heavy water-related activities or to development of nuclear weapons delivery-related systems of Iran (e) Any other compliance of International Resolution or Convention.

25 STATE TRADING ENTERPRICES ITEMS: Any goods, import or export of which is governed through exclusive or special privileges granted to State Trading Enterprises viz State Trading Corporation of India, Food Corporation of India, Minerals and Metals Trading Corporation of India etc may be imported or exported by State Trading Enterprises. DGFT may grant an authorization to any other person to import or export any of these goods. Such State Trading Enterprises shall make any such purchases or sales involving imports or exports solely in accordance with commercial considerations, including price, quality, availability, marketability, transportation and other conditions of purchase or sale in a non discriminatory manner and shall afford enterprises of other countries adequate opportunity, in accordance with customary business practices to compete for participation in such purchases or sales.

26 1.6 EXPORT PROMOTION SCHEMES: DUTY EXEMPTION SCHEMES: Duty exemption schemes enable duty free import of inputs required for export production with actual user conditions. Authorisations are exempted from payment of basic customs duty, additional customs duty, education cess, anti-dumping duty and safeguard duty if any. It will not be transferable even after completion of export obligation. However authorisation holders will have option to dispose off products manufactured out of duty free inputs once obligation is completed. Duty Exemption Schemes consist of : (a) Advance Authorisation Scheme (b) Duty Free Import Authorisation Scheme

27 Duty Remission Schemes: A Duty Remission Scheme enables post export replenishment/remission of duty on inputs used in export product. The main objective is to neutralize all incidence of duties on the export products. Duty Remission Schemes are in the form of Duty Drawback.

28 EXPORT PROMOTION CAPITAL GOODS: (a) Zero duty EPCG scheme allows import of capital goods for pre production, production and post production at Zero Customs duty, subject to an export obligation equivalent to 6 times of duty saved on capital goods imported under EPCG scheme, to be fulfilled in 6 years reckoned from Authorisation issue date. The scheme will be available for exporters of engineering & electronic products, basic chemicals & pharmaceuticals, apparels & textiles, plastics, handicrafts, chemical and allied products and leather and leather products. (b) Concessional 3% duty EPCG scheme allows import of capital goods for pre production, production and post production at 3% Customs dutysubject to an export obligation equivalent to 8 times of duty saved on capital goods imported under EPCG scheme, to be fulfilled in 8 years reckoned from Authorisation issue date.

29 Export of Imported Goods: Goods imported in accordance with FTP may be exported in same or substantially same form without an Authorization provided that item to be imported or exported is not restricted for import or export in. Export of such goods imported against payment in freely convertible currency would be permitted against payment in freely convertible currency. Goods including those mentioned as restricted for import may be imported under Customs Board for export in freely convertible currency without an Authorization provided that item is freely exportable without any conditionality/requirement of License / permission.

30 Export Oriented Units(EOUs), Electronic Hardware Technology Parks(EHTP), Software Technology Parks(STPs) and Bio Technology Parks(BTPs): Units undertaking to export production of goods and services (except permissible sales in DTA), may be set up under the EOU scheme, EHTP scheme, STP scheme, BTP scheme for manufacture of goods, including repair, re-making, reconditioning, reengineering and rendering of services. Trading units are not covered under these schemes.

31 EXPORT AND TRADING HOUSE: Export House Export Turnover Rs.20 cr. Star Export House Export Turnover Rs.100 cr. Trading House Export Turnover Rs.500 cr. Star Trading House Export Turnover Rs.2500 cr. Premier Trading House Export Turnover Rs.7500 cr.

32 SERVICES EXPORTS: Services exports include all 6 tradable services covered under General Agreement on Trade in Services (GATS) where payment for such services is received in free foreign exchange. All provisions of this Policy shall apply mutatis mutandis to export of services as they apply to goods.

33 1.7 REWARD / INCENTIVE SCHEMES IN DGFT: 1. Assistance to States for Developing Export Infrastructure and Allied Activities(ASIDE) 2. Market Access Initiative(MAI) 3. Market Development Assistance(MDA) 4. Towns of Export Excellence (TEE) 5. Served from India Scheme(SFIS) 6. Vishesh Krishi & Gram Udyog Yojana(VKGUY) 7. Focus Market Scheme(FMS) 8. Focus Product Scheme(FPS) 9. Market Linked Focus Products Scrip(MLFPS) 10. Status Holders Incentive Scrip

34 For VKGUY, FMS, FPS and Status Holders Incentive Scrip, the following exports categories/sectors shall be ineligible for Duty Credit Scrip entitlement: (1) EOUs/EHTPs/BTPs who are availing direct tax benefits/exemption (2) Export of imported goods covered under certain para of FTP (3) Exports through transshipment, meaning thereby that exports originating in third country but transshipped through India (4) Deemed Exports (5) Export made by SEZ units or SEZ products exported through DTA units (6) Items, which are restricted or prohibited for export under Schedule of Export Policy in ITC(HS)

35 1.8 EXPECTATIONS FROM THE NEW FOREIGN POLICY: The new foreign trade policy will be applicable for The foreign trade policy is made product wise and location wise and tried to maximize the foreign trade from the country.

36 1.9 SUMMARY AND CONCLUSIONS: By implementing Foreign Trade Policy, , the India s share in world trade is expected to double from the present level of 3% by the year By taking measures for import substitution at one side, the forthcoming Foreign Trade Policy focuses on increasing exports at the present scenario of increasing Current Account Deficit. The new Foreign Trade Policy is also expected to boost productivity and earn exportable surplus at competitive rates in exports.

37 1.9 SUMMARY AND CONCLUSIONS: contd. In the era of global competitiveness, there is an imperative need for Indian exporters to upgrade their technology and reduce their costs. Accordingly, an important element of Foreign Trade Policy is to help exporters for technological upgradation. Technological upgradation of exports is sought to be achieved by promoting imports of capital goods for certain sectors.

38 We have completed Chapter 9 Next we move to Chapter 10 FOREIGN TRADE COMMERCIAL REQUIREMENTS