South Asia Watch on Trade, Economics & Environment (SAWTEE)

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Focus on supply side
Published: The Kathmandu Post, 16 April 2004
By: Ratnakar Adhikari

Exactly one week from now, Nepal is going to become the 147th member of the World Trade Organisation (WTO). There is a mixed feeling amongst stakeholders about the eventual accession of the country into the global trade body. Looking at the recent developments in the international trade arena, the timing for Nepal’s membership could not have been better. This is mainly because the international community is sympathetic to the imperatives of the least developed countries’ (LDCs’) integration into the multilateral trading system.

However, one of the major reasons for the failure of the LDCs to integrate themselves into the global economy is their myopia. Their naïve focus on demand side (market access) and tendency to lose sight of the supply side (domestic policy and institutional reforms) have prevented them from converting market access into market entry.

Theoretically speaking, WTO membership is likely to provide enormous market access opportunities because of the in-built mechanisms for ensuring non-discrimination. In order to promote free and unfettered flow of goods across borders and create a level playing field for all the players in the market, WTO envisages the principle of non-discrimination at two levels.

First, the member countries of WTO cannot discriminate between the goods being imported from two different member countries. This principle, known as most favoured nations (MFN), does not only apply in the case of goods, but also in services and intellectual property rights and not only in the case of tariff barriers, but also in the case of para-tariffs and non-tariff barriers.

Secondly, WTO envisages that no member country can discriminate between foreign goods and local goods, after the former have crossed the border of the importing country. This principle known as 'national treatment' mandates all the member countries to apply uniform rate of domestic taxes (such as VAT or excise duty) both for foreign as well as domestic goods. Similarly, while imposing product and quality standards also, foreign goods and local goods should be treated at par.

Moreover, WTO makes it extremely difficult, if not impossible, to impose trade restrictions. It does provide certain exceptions to the above mentioned rules in order to achieve some genuine and legitimate policy objectives such as protection of public morality, protection of plant, animal and human health, national security, and environment.

However, while maintaining trade restrictions, countries have to be cautious not to: a) use them as a disguised restriction on international trade; and b) arbitrary and unjustified discrimination among the countries where similar conditions prevail. This means that member countries cannot violate the two fundamental principles of non-discrimination (MFN and national treatment) while taking any measure to achieve its legitimate policy objectives, even when utilising the exceptions allowed by WTO.

For example, Germany would be able to deny the import of carpets dyed with Azo-dyes because of their carcinogenic effect on human and animal health within its country. However, it would not be able to do so without banning the manufacture and use of such chemicals manufactured by companies like Bayer or Hoechst within its own country (national treatment principle) and without banning such carpets (using the same chemical) imported from other countries such as Iran or Pakistan (MFN principle).

On top of these rules, the LDCs are also provided with some special and privileged market access opportunities, even outside the WTO system. Everything but arms (EBA) initiatives of the European Union, and duty-free quota-free access offered by Canada and New Zealand are a few examples. The continuation of old generalised system of preferences (GSP) is yet another instance of special treatment provided to the LDCs.

However, the question that arises is how many LDCs have been able to take advantage of such opportunities? The answer is 'very limited at best'. While burdensome procedures for availing such preferential market access opportunities including rigid rules of origin requirements are among the major problems, another major problem is the supply side constraints faced by the LDCs to utilise such opportunities. Let us now take Nepal’s example to explain why this is the case.

Lack of linkage between production facilities, service and infrastructure facilities limit Nepal’s potential to specialise in crucial productive sectors and reap the benefit of productivity gain. While poorly developed human resources have led to paucity of managerial, entrepreneurial and technical skills, ability to conduct adaptive research is severely constrained by lack of incentive and entrepreneurial zeal. Similarly, poorly developed infrastructure (e g, transport, power and storage facilities) and support services (e g, telecommunications, financial services and other technical support service institutions) limit the ability of Nepali enterprises to supply even otherwise competitively produced goods to the international market.

Trade facilitation services such as access to business information (particularly on rules and procedure of the export markets), use of information technology, development of new products, advice on standards, packaging, quality control, and marketing as well as distributional channels are virtually non-existent in Nepal. There is a limited political will and paucity of resources to modernise and reform customs and other government agencies participating in trade transactions and simplifying export and import procedures.

According to Mr Purusottam Ojha, a senior joint secretary at the Ministry of Industry, Commerce and Supplies, in order to export a consignment abroad, Nepali entrepreneurs have to prepare 12-14 documents and obtain over 100 signatures! Similarly, as per another estimate, lack of trade facilitation measures has led to a cost increase of 7-10 percent on an average for the Nepali exports.

Likewise, lack of institutional arrangements designed to enhance the quality of new products and ensure conformity assessment have made Nepali products unfit for export. At present there are two major standard related institutions in Nepal – Nepal Bureau of Standards and Metrology and Department of Food Technology and Quality Control. While these two institutions belong to two different ministries, there is some overlap between the functions of these institutions. One common feature among them is that both these institutions lack the quality of infrastructure and human resources to be able to establish themselves as credible quality certification institutions.

Finally, mal-governance, particularly corruption in high offices and utter disregard to transparency norms and rule of law, has contributed to exacerbate the problem. Corruption is a tax on the capacity of a country to trade because it creates several distortions and results in cost escalation of the otherwise competitive exports rendering them uncompetitive at the global market.

Given the scenario discussed above, there is a need for focusing more on supply side. This entails a massive shake up of our policies, laws and institutions. We should try and utilise the existing market access opportunities, rather than focusing on obtaining additional market access opportunities, only to realise that we are not able to use them at all!

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