The Hindu Business Line : Trade facilitation: A paramount need

SIGNALLING the shift to a new paradigm of export-optimism, the annual supplement to the five-year foreign trade policy hiked the export target from $80 billion to $92 billion for 2005-06.

One paramount responsibility that rests with the government is to facilitate trade by creating a congenial environment, convenient procedures, and infrastructure support.

Exporting demands international norms of efficiency, productivity and cost. The cost of moving goods across borders is a critical determinant of a country's competitiveness. According to a recent study by the Organisation for Economic Cooperation and Development (OECD), the cost of poor border procedures could vary between 2 per cent and 15 per cent of the total transaction value.

The Singapore Ministerial Declaration, 1996, defined trade facilitation as the "simplification and harmonisation of trade procedures", procedures being further defined as "activities, practices and formalities involved in collecting, presenting, communicating and processing data required for the movement of goods in international trade".

Trade facilitation essentially relates to a variety of activities, such as import and export procedures, including administrative procedures, transportation and shipping; insurance, payment mechanisms and other financial requirements.

As the former World Bank President, Mr James Wolfensohn, said: "Reducing port and Customs transit times by one day has nearly the same value as reducing tariffs by 1 per cent."

The two crucial elements of competitiveness are price and time. The comparative efficiency of a country's trade logistics chain is of vital importance in attracting investments and enhancing competitiveness of its industry and commerce. The reliability of delivery schedules permits companies to reduce substantial inventory carrying costs. Inefficient and unreliable transport and logistics have made India's exports less competitive. Good governance is essential for trade facilitation. Greater the scope for interpretation of regulations, more the chances for corruption.

The Asia-Pacific Economic Cooperation (APEC) forum has sought to leverage trade for economic growth and it tabled, at the Shanghai Ministerial in October 2001, a proposal for a five per cent reduction in transaction costs of trade by 2006.

A recent study by the World Bank (John S. Wilson, Catherine Mann and Tsunehiro Otsuki) examined the relationship between trade facilitation and trade flows in the 19-member APEC. It is estimated that a programme to raise capacity, half way to the APEC average, in all areas among those below average, would yield an increase in intra-APEC trade of about $254 billion, a $117-billion gain from improvement in port efficiency, $139 billion from improvements at the border in port efficiency and customs environment, and an additional $116 billion from improvements in regulatory harmonisation and e-business usage.

At the centre of trade facilitation is the role of Customs and other controlling government bodies. The study put forth three APEC case studies of trade facilitation: Taiwan, Peru, and the Republic of Korea.

The Taiwanese Customs created three task forces to raise efficiency, one each for manifest review, cargo selectivity, and post-import/export audit. The average clearance time for air cargo was reduced to 21 minutes; over three-fourths of entries bypassed customs; while average time for sea cargo clearance declined to one hour and 52 minutes, with over 51 per cent of entries by passed.

In the case of Peru, antiquated Customs procedures, followed in the beginning of 1990s, resulted in clearance times ranging from 15-30 days. Lack of conformance among officers working in the 19 ports, absence of transparent guidelines, and extensive individual discretion of staff, created ample opportunity for corruption.

Customs inducted new skills and knowledge through external recruitment of mid-professionals; introduced information-based pre-processing and post-audit techniques. Staffing was reduced by about 30 per cent, from 3800 to 2600 persons; release times went down from 15-30 days to a range of two days to two hours; import value increased nearly 100 per cent, from $4 billion in 1990 to $7.5 billion in 1996; Customs revenue increased four times from $626 million to $2723 million. Starting in August 1999, the Korean Customs Service offered the option of e-mail notice of cargo arrival to all importers, which reduced the time from the submission of a declaration to acceptance by relevant authorities from almost three hours to just 45 minutes.

Korean Customs abolished verification requirements at the clearance stage, and developed software and distributed it free of charge.

In terms of concepts, Indian Customs administration is in sync with the world's best practices and postulates: it has propounded the Citizens'Charter, Vision 2000, Fast Track, Green Channel, and Ice Gate (Indian Customs and Excise Gateway). The reality on the ground leaves much to be desired. The Central Board of Excise and Customs (CBEC) lays down standard processing times in its Citizens' Charter, and likewise the Director-General of Foreign Trade in the Exim Policy lays down a time schedule to be followed to dispose off applications regarding Import-Export Code number, advance licence, etc.

India introduced automation, Electronic Data Interchange as early as 1995, and considerable changes have taken place since then. The Customs Gateway Project will, on completion, enable connectivity between all Customs locations and will link Customs with all partners and stakeholders. However, there is a lot that needs to be done — and really fast — for appropriate EDI structure to permeate to all relevant players and participants.

Trade facilitation is a relatively new issue at the multilateral trade negotiations, added to the WTO agenda in December 1996 at the Singapore Ministerial. Within the WTO, the advocates of formal trade facilitation rules are known as the Friends of Trade Facilitation or the "Colorado Group".

Other members, collectively known as India and the like-minded group in developing countries, are reluctant to negotiate a multilateral agreement of trade facilitation commitments. They maintain that they do not have the resources necessary to, update and upgrade their Customs procedures. Additional legal obligations may increase their exposure to disputes.

India, among other countries, even suggested that trade facilitation remain a national, bilateral, or regional concern. In fact, viewed in a larger perspective, trade facilitation negotiations at the multilateral level will be conducive to the pace of reforms.

A common misconception that all trade facilitatory reforms are dependent on advanced technology, vast monetary inputs, or major infrastructural changes persists.

World Bank's "Doing Business 2004" describes the India's Centre and State bureaucracy as wreaking havoc on enterprises. Its database shows that India's manufacturing companies face fewer tax and regulatory inspections than firms in China and Brazil, that it takes fewer days in India to clear Customs.

On the contrary, the average time taken in China to secure the necessary clearances for a start up, or to complete a bankruptcy procedure is much shorter than in India.

Energy prices for industry are considerably higher in India. Inefficient land markets have driven up business costs in India — more than they do elsewhere in East Asia. Finance has also been a significant growth bottleneck for the Indian industry. India continues to spend nearly 13 per cent of its GDP on logistics, in comparison to an average of 10 per cent for the global developing economies.

India has high cost of transaction, transportation, real estate and business infrastructure, power, and high costs because of delays, bottlenecks and corruption.

Improvement of port facilities and throughputs must come up faster than the two-way trade growth. The persistent congestion at the Jawaharlal Nehru Port, with import as well as export cargoes stranded, is a nightmare; it has exposed wide chinks in the basic support system, inimical to smooth and rapid rise in India's external trade. It is a potent dampener for those who otherwise would like to source supplies in larger volumes.

Adequate landside facilities need to be duly complemented with connectivity by rail and road for speedy and efficient evacuation of inland traffic. All short-term projects for enhancing capacity at terminals and on corridors for rail, roads, ports and customs need to be executed on a war-footing, simultaneously with improvisations in place by way of immediate palliatives.

Simple and ingenious mechanisms, if devised and sincerely executed, can help. The CBEC may revise its manual and supplementary instructions and notifications on an annual basis; they may issue a new master circular, which eliminates the need to refer to previous circulars on the same subject for uniform and transparent follow-up at different locations.

The suggestion of a single, one-time presentation to one agency for clearance of goods, using a single administrative data set for export and import, and the adoption of a uniform domestic customs code are some other important suggestions.

In the modern business environment of JIT (just-in-time) production and delivery, traders need fast and predictable release of goods. Very often, countries land in a trap — engaging additional manpower on the mistaken belief that the more the persons, the better it would be for trade.

The reality is just the opposite. The larger the number, the slower the process; more diffused the responsibility, more the corruption. There are numerous vital aspects are to help improve matters through low-cost investments and no-cost essential innovations and ingenuities.

(The author is former managing director, Container Corporation of India Ltd.)

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
EPF mismatch

China and India — Musings on recent economic history

Trade facilitation: A paramount need

Patent law: Whither the incentive to innovate

Monetary policy: Transparent and responsible

`We will turn zero-debt by 2005-06 end' — Mr B. Anantharaman, JMD, Max India

Trains crash, while politicians clash

Travails of small depositors

A damp squib

Encouraging creativity