1. DEMYSTIFYING HONG KONG DUTY FREE QUOTA FREE MARKET ACCESS DECISION Shiv Raj Bhatt

2. S&DT: Background Special and Differential Treatment (S&DT) for developing countries, especially LDCs are important to promote exports hence reduce poverty. Special and Differential Treatment (S&DT) for developing countries, especially LDCs are important to promote exports hence reduce poverty. GATT incorporated provisions to facilitate the growth and development of LDCs by providing special right to protect and access export markets (1960s). GATT incorporated provisions to facilitate the growth and development of LDCs by providing special right to protect and access export markets (1960s). The provisions of S&DT was further broadened and expanded in the agreements, declarations and arrangements of the WTO. The provisions of S&DT was further broadened and expanded in the agreements, declarations and arrangements of the WTO. However, such provisions were not helpful in expanding LDCs exports. However, such provisions were not helpful in expanding LDCs exports. Therefore, LDCs are questioning the enforceability of S&DT and hence the utility and value of these provisions. Therefore, LDCs are questioning the enforceability of S&DT and hence the utility and value of these provisions.

3. S&DT under WTO LDCs put forward the proposal of DFQF market access for their exports in the first WTO Ministerial Meeting in 1996 held in Singapore. LDCs put forward the proposal of DFQF market access for their exports in the first WTO Ministerial Meeting in 1996 held in Singapore. The Singapore Ministerial Declaration agreed on a plan of action in favor of LDCs, that included positive measures such as duty-free access on an autonomous basis for LDCs. The Singapore Ministerial Declaration agreed on a plan of action in favor of LDCs, that included positive measures such as duty-free access on an autonomous basis for LDCs. 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 demand of LDCs. 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 demand of LDCs. In December 2005, during the HK Ministerial, it was agreed to provide DFQF market access to LDCs. In December 2005, during the HK Ministerial, it was agreed to provide DFQF market access to LDCs. …..developed….and developing-country Members ……… agree to implement duty-free and quota-free market access for products originating from LDCs as provided for in Annex F….. (para 47) …..developed….and developing-country Members ……… agree to implement duty-free and quota-free market access for products originating from LDCs as provided for in Annex F….. (para 47)

4. HK Declaration on DFQF Market Access Annex F: We agree that developed-country Members shall, and developing-country 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 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 predictability. (ii) 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 97 per cent of products originating from LDCs, defined at the tariff line level, by 2008 or no later than the start of the implementation period. In addition, these Members shall take steps to progressively achieve compliance with the obligations set out above, taking into account the impact on other developing countries at similar levels of development, and, as appropriate, by incrementally building on the initial list of covered products. (iii) Developing-country Members shall be permitted to phase in their commitments and shall enjoy appropriate flexibility in coverage.

5. Analysis 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 products, the flexibility provided to developed countries to exclude 3% of tariff lines under DFQF initiatives, may curtail any benefits of the provision. Since, exports of most LDCs are concentrated in a few products, the flexibility provided to developed countries to exclude 3% of tariff lines under DFQF initiatives, may curtail any benefits of the provision. The Declaration obliges Members to take steps to progressively achieve obligation of providing DFQF market access to LDCs. The term progressively is not defined clearly, nor is a deadline specified for full obligation of the provision. The Declaration obliges Members to take steps to progressively achieve obligation of providing DFQF market access to LDCs. The term progressively is not defined clearly, nor is a deadline specified for full obligation of the provision. Further, the Declaration urges developing countries to provide DFQF market access to LDCs on a voluntary basis, without any legal effect. Further, the Declaration urges developing countries to provide DFQF market access to LDCs on a voluntary basis, without any legal effect.

6. Value and utility of the proposed DFQF market access agreed in the HK from the perspectives of South Asian LDCs (Bangladesh and Nepal).

7. Export Performance Both countries initiated trade reforms since the mid-1980s. Both countries initiated trade reforms since the mid-1980s. Increasing Trade/GDP ratio Increasing Trade/GDP ratio Satisfactory growth in export performance Satisfactory growth in export performance Share of manufacturing export Increasing Share of manufacturing export Increasing However, both countries have not been successful in diversifying their export structure (carpet and RMG constitute 40% share in Nepals total export; and textile and RMG constitute 80% share in total export of Bangladesh). However, both countries have not been successful in diversifying their export structure (carpet and RMG constitute 40% share in Nepals total export; and textile and RMG constitute 80% share in total export of Bangladesh). Both countries also face market concentration in their exports. Both countries also face market concentration in their exports.

8. Direction of Exports BangladeshNepal Year DevelopedDevelopingDevelopedDeveloping 199075.219.78515 199583.315.489.210.7 200075.99.26236.6 200478.38.74354

9. Year BangladeshNepal EU USA and Canada EU 199035.432.26024 199544.83453.331.6 200040.233.622.533.6 20045026.517.523.4

10. Bangladesh: Distribution of Exports to Developed Country Markets Bangladesh has exported under 98, 239, 265 and 452 tariff lines at 6-digit HS level to Australia, Canada, Japan and the United States respectively in 2003. Bangladesh has exported under 98, 239, 265 and 452 tariff lines at 6-digit HS level to Australia, Canada, 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 than 70% in Canada, Japan and the US markets, and it is more than 90% in Australia. 0.5% tariff lines at 6-digit HS level comprises of more than 70% in Canada, Japan and the US markets, and it is more than 90% in Australia.

11. Bangladesh: Distribution of Exports Products covered AustraliaCanadaJapanUS 3%10099.5199.1698.88 1%98.5589.7690.4987.8 0.50%95.1477.4779.872.17 0.20%89.5252.2258.3646.57 0.10%86.2136.6443.1730.29 No of tariff lines 98239265452

12. Bangladesh: Distribution of Exports With regard to the trade with EU Members, the export structure of Bangladesh is concentrated in a few products. With regard to the trade with EU Members, the export 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, Greece, Ireland, and Portugal), 100% of the exports to 6 countries (Austria, Denmark, Finland, Greece, Ireland, and Portugal), more than 99% in 7 countries (Belgium, France, Germany, Italy, Netherlands, Spain, Sweden) more than 99% in 7 countries (Belgium, France, Germany, Italy, Netherlands, Spain, Sweden) More than 98% in UK. More than 98% in UK. Moreover, only 0.5% of the tariff lines contain more than four-fifth of the exports of Bangladesh in all EU member countries. Moreover, only 0.5% of the tariff lines contain more than four-fifth of the exports of Bangladesh in all EU member countries.

13. Nepal: Distribution of Exports to Developed Country Markets Products covered AustraliaCanadaJapanUS 3%10010099.9199.28 1%99.898.5392.7892.32 0.50%94.2392.5184.1281.28 0.20%81.9976.6767.9159.58 0.10%73.2369.9652.8643.96 No of tariff lines 5587161272

14. Nepal: Distribution of Exports The commodity composition of trade of Nepal with developed countries is more concentrated than that of Bangladesh The commodity composition of trade of Nepal with developed countries is more concentrated than that of Bangladesh Nepal exports less than 100 tariff heading at 6-digit HS level (in all the countries except Japan, US, France, Italy and the UK). Nepal exports less than 100 tariff heading at 6-digit HS level (in all the 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 Australia and Canada and more than 80 percent in Japan and the United States. 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 United States. 3% of the tariff lines include 100% of the exports of Nepal to the all EU member countries. 3% of the tariff lines include 100% of the exports of Nepal to the all EU member countries. 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%. 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%.

15. GSP : An Overview Resolution 21(ii) at UNCTAD II in 1968 called for the establishment of a generalized, non-reciprocal, non- discriminatory system of preferences in favour of the developing countries, including special measures in favour of the least advanced among the developing countries Resolution 21(ii) at UNCTAD II in 1968 called for the establishment of a generalized, non-reciprocal, non- discriminatory system of preferences in favour of the developing countries, including special measures in favour of the least advanced among the developing countries Under GSP schemes, selected products originating in developing countries are granted reduced or zero tariff rates over the MFN rates. Under GSP schemes, selected products originating in developing countries are granted reduced or zero tariff rates over the MFN rates. UNCTAD reports that there are currently 13 national GSP schemes notified to the UNCTAD secretariat by Australia, Belarus, Bulgaria, Canada, Estonia, the European Union, Japan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey and the United States of America. UNCTAD reports that there are currently 13 national GSP schemes notified to the UNCTAD secretariat by Australia, Belarus, Bulgaria, Canada, Estonia, the European Union, Japan, New Zealand, Norway, the Russian Federation, Switzerland, Turkey and the United States of America.

16. Duty Free Market Access and LDC Exports Non-reciprocal preferences along with MFN duty free market access have resulted in lowered import tariffs for LDCs exports. Non-reciprocal preferences along with MFN duty free market access have resulted in lowered import tariffs for LDCs exports. 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 enter duty free). 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 enter duty free). In EU, all imports from LDCs have entered without any duty in 2003 and 97.1% tariff lines attach zero tariffs for LDCs. In EU, all imports from LDCs have entered without any duty in 2003 and 97.1% tariff lines attach zero tariffs for LDCs. 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 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. 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 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. 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. In terms of tariff lines, US provide duty free access to 21.2% under MFN and 63.6% under preferential regime. 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. In terms of tariff lines, US provide duty free access to 21.2% under MFN and 63.6% under preferential regime.

17. GSP Utilization Preference Giving Countries BangladeshNepal Canada Potential cover rate 10.345.4 Utilization Rate 74.277.4 Utility Rate 7.735.1 European Union Potential cover rate 100.0100.0 Utilization Rate 50.871.3 Utility Rate 50.871.3 Japan Potential cover rate 64.599.7 Utilization Rate 76.680.1 Utility Rate 49.479.9 USA Potential cover rate 1.94.7 Utilization Rate 69.090.7 Utility Rate 1.34.2 Total Quad Potential cover rate 57.344.9 Utilization Rate 51.674.1 Utility Rate 29.533.3

18. GSP Utilization of Bangladesh and Nepal Product coverage is defined as the ratio between imports that are covered by a preferential trade arrangement and dutiable imports from the beneficiary countries. Product coverage is defined as the ratio between imports that are covered by a preferential trade arrangement and dutiable imports from the beneficiary countries. Utilization rate is defined as the ratio between imports actually receiving preference and covered imports. Utilization rate is defined as the ratio between imports actually receiving preference and covered imports. Utility rate is defined as the ratio between imports actually receiving preference and all dutiable imports whether it is covered by GSP or not. Utility rate is defined as the ratio between imports actually receiving preference and all dutiable imports whether it is covered by GSP or not. The utility rates for Bangladesh and Nepal differ across exports and markets. The utility rates for Bangladesh and Nepal differ across exports and markets. The total QUAD potential coverage is higher for Bangladesh (57.3 %) than Nepal (44.9%). The total QUAD potential coverage is higher for Bangladesh (57.3 %) than 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 countries. Total value of the preference schemes stand at about one third for both countries.

19. GSP Utilization of Bangladesh and Nepal The coverage is the highest in the EU (100%) but the utilization rate is the highest in Canadian markets for both Bangladesh (74.2%) and Nepal (77.4%). The coverage is the highest in the EU (100%) but the utilization rate is the highest in Canadian markets for both Bangladesh (74.2%) and Nepal (77.4%). 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 also very low (1.3% and 4.2% in Bangladesh and Nepal respectively), despite higher rate of utilization. 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 also very low (1.3% and 4.2% in Bangladesh and Nepal respectively), despite higher rate of utilization.

20. Preferential Market Access in Developing Countries The importance of developing country market is increasing for Nepal (share in total export increased from 15% in 1990 to 54% in 2004). Therefore, preferential market access in these countries is crucial. The importance of developing country market is increasing for Nepal (share in total export increased from 15% in 1990 to 54% in 2004). Therefore, preferential market access in these countries is crucial. Some of the developing countries provide preferential market access to LDC products, however, the depth and coverage of these preference schemes are often limited. Some of the developing countries provide preferential market access to LDC products, however, the depth and coverage of these preference schemes are often limited. Among the preferential schemes, the importance of non-reciprocal preferential market access schemes and the Global System of Trade Preferences (GSTP) has limited utility for Nepal and Bangladesh. Among the preferential schemes, the importance of non-reciprocal preferential market access schemes and the Global System of Trade Preferences (GSTP) has limited utility for Nepal and Bangladesh. But preferential market access granted on a bilateral basis by India bears a significant importance to Nepal. Bilateral trade agreement between Nepal and India provides duty free market access of Nepalese products in Indian market, albeit with some conditions. But preferential market access granted on a bilateral basis by India bears a significant importance to Nepal. Bilateral trade agreement between Nepal and India provides duty free market access of Nepalese products in Indian market, albeit with some conditions. China has also announced in September 2005 to grant duty free treatment to certain products from 39 LDCs. China has also announced in September 2005 to grant duty free treatment to certain products from 39 LDCs.

21. Implications of HK Decision on DFQF Market Access Hong Kong Decision on DFQF market access for LDCs has both commercial and diplomatic values for Bangladesh and Nepal. Hong Kong Decision on DFQF market access for LDCs has both commercial and diplomatic values for Bangladesh and Nepal. It is natural to expect significant trade expansion of these countries after its implementation. It is natural to expect significant trade expansion of these countries after its implementation. But, the Declaration is loaded with conditions and loopholes, forcing us to suspect the intention of the preference-giving countries. But, the Declaration is loaded with conditions and loopholes, forcing us to suspect the intention of the preference-giving countries. Some crucial questions that determine the utility and value of the decision are: Some crucial questions that determine the utility and value of the decision are: What kind of leverage developed countries will have to exclude products under the veil of 3% exclusion? What kind of leverage developed countries will have to exclude products under the veil of 3% exclusion? How such exclusions will change the landscape of real market access situations for LDCs? How such exclusions will change the landscape of real market access situations for LDCs? Why LDC specific decisions takes into consideration export interest of other developing countries rather than focusing on the LDCs? Why LDC specific decisions takes into consideration export interest of other developing countries rather than focusing on the LDCs? What are the modalities of progressively achieving duty free quota free market access? What are the modalities of progressively achieving duty free quota free market access?

22. Implications of HK Decision: Some caveats Exports of Bangladesh and Nepal are highly concentration in few tariff lines. The flexibility provided to developed countries to exclude 3% of tariff lines under DFQF initiatives may exclude virtually all exportable products of the two countries. Exports of Bangladesh and Nepal are highly concentration in few tariff lines. The flexibility provided to developed countries to exclude 3% of tariff lines under DFQF initiatives may exclude virtually all exportable products of the two countries. Merely granting duty free market access to exports originating in LDCs does not ensure that LDCs are effectively utilizing the preferences. The market access should be supplemented by measures that address structural problems of the LDCs such as; rules of origin, competitive tests, safeguard measures and administrative procedures. Merely granting duty free market access to exports originating in LDCs does not ensure that LDCs are effectively utilizing the preferences. The market access should be supplemented by measures that address structural problems of the LDCs such as; rules of origin, competitive tests, safeguard measures and administrative procedures. Developing countries has been emerging as a major market for South Asian LDCs and thus, preferential access in these markets is required for export expansion of these countries. Developing countries has been emerging as a major market for South Asian LDCs and thus, preferential access in these markets is required for export expansion of these countries. Export composition of South Asian LDCs and other developing countries resemble at the product categories but at the more disaggregated level such similarity tends to shrink. Thus granting DFQF market access will not endanger the domestic industry of developing countries Export composition of South Asian LDCs and other developing countries resemble at the product categories but at the more disaggregated level such similarity tends to shrink. Thus granting DFQF market access will not endanger the domestic industry of developing countries

23. Implications of HK Decision In the light of the above caveats and past experience, one has reason to doubt the effectiveness of the Hong Kong Decisions on DFQT market access for LDCs. In the light of the above caveats and past experience, one has reason to doubt the effectiveness of the Hong Kong Decisions on DFQT market access for LDCs. The paper thus argues that DFQF initiatives might not bring desired effects to South Asian LDCs, if their interest is not properly reflected in the design. The paper thus argues that DFQF initiatives might not bring desired effects to South Asian LDCs, if their interest is not properly reflected in the design. If we go along with the existing ambiguities, the HK decision on market access increase the market access of LDCs but may run the risk of rolling back existing preferences. If we go along with the existing ambiguities, the HK decision on market access increase the market access of LDCs but may run the risk of rolling back existing preferences.

24. HK Decision on DFQF Market Access: How to Make it Work? The decision needs to be further corroborated with the following interpretations and explanations: 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 also be capped by the volume of imports (for example, not exceeding 10% of imports at tariff lines). 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 also be capped by the volume of imports (for example, not exceeding 10% of imports at tariff lines). As the landscape of market access has been changing over the period, developing country also should provide DFQF market access for at least half of the tariff lines, comprising of half of the export value. As the landscape of market access has been changing over the period, developing country also should provide DFQF market access for at least half of the tariff lines, comprising of half of the export value. 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 developing countries. 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 developing countries. The rules of origin for preferential market access should incorporate the stage of development of the LDCs and be harmonized for all preference-granting countries. The rules of origin for preferential market access should incorporate the stage of development of the LDCs and be harmonized for all preference-granting countries. 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. 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.

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