The Financial Express

Rising dispute in Indo-Bangla trade

Rising dispute in Indo-Bangla trade

After a big jump in the bilateral trade in goods between Bangladesh and India, the total trade dropped moderately in the past fiscal year mainly due to a big decline in import from India. At the same time, exports of Bangladeshi goods to India registered robust growth and for the first time crossed $1.0 billion level. As a result, bilateral trade deficit declined by around $1.30 billion to 6.40 billion in FY19 from $7.74 billion in FY18. As export of clothing doubled in the past fiscal year, it contributed significantly to fetch $1.25 billion export earnings from India in FY19. Some 40 per cent of the total exports to India come from readymade garments (RMG).

Being the second largest exporter of clothing globally, it is not very surprising that RMG export from Bangladesh has also been rising in India. The phenomenal increase in export of Bangladeshi RMG in India, however, irks Indian textile and clothing manufacturers. It appears that they are sceptical about the strength and capacity of Bangladeshi clothing industry. That's why they have asked the Indian government to take some measures to curb the import of Bangladeshi apparel items. They allege that Chinese clothing is entering into India through Bangladesh.

Responding to Indian textile lobby, the Indian government has decided to review the provisions of 'rules of origin' under the Customs Act to 'check misuse of FTA route and strengthening provisions relating to safeguard duty,' according to a news published by The Hindu Business Line (HBL). Indian textile lobby argued that by taking the advantage of some flaws in South Asia Free Trade Area (SAFTA) agreement, Chinese RMG is being diverted to India causing the rise in Bangladeshi RMG. HBL report said: "What particularly drew the attention of the Indian textile industry was the absence of the minimum value addition criteria in SAFT. ...Confederation of Indian Textile Industry (CITI) was apprehensive that the loophole might be used for diversion of Chinese man-made fibre-based garments through Bangladesh."

MISINTERPETATION: Allegation of diverting Chinese RMG items due to no value addition criteria in SAFTA is not only misleading but also misinterpretation of relevant provisions in SAFTA agreement. ANNEX-IV of the SAFTA agreement clearly outlined the rules of origin applicable for SAFTA trade. Rule-6 provides the direction regarding 'Not wholly produced or obtained' products. These types of products of any SAFTA member country is eligible for preferential treatment subject to full-filing of certain conditions outlined in Rule-7 and any of the conditions prescribed under Rule-8, Rule-9 or Rule-10.

Clause-i of paragraph-a under Rule-8 allows change in tariff heading (CTH) for non-originating products. Clause-ii of paragraph-a under Rule-8 clearly mentioned the value addition criteria for products. It says: "Products worked on or processed as a result of which the total value of the materials, parts or produce originating from other countries or of undetermined origin used does not exceed 60% of the FOB value of the products produced or obtained and the final process of manufacture is performed within the territory of the exporting Contracting State." It means local value addition requirement for a non-originating product is 40 per cent. Again Rule-10 clearly makes it 30 per cent in case of Least Developed Countries (LDCs). The basic rules of origin for Bangladeshi RMG product is thus CTH-plus 30 per cent DVA or direct value addition.  Unless included in the list of 'product specific rules' under SAFTA rules of origin all other products (except included in the negative list) of Bangladesh are eligible for preferential market access subject to CTH-plus 30 per cent DVA. Thus the allegation, as reported in Indian newspapers, that there is no value addition criteria in SAFTA is wrong and misleading.

Bangladeshi RMG was under the original sensitive list of India where a total of 480 products were included. For non-LDC, the number of products in the list was 848. During the second phase of trade liberalisation programme, India cut down the number of products to only 25 in the revised sensitive list for LDC. These 25 products include alcoholic and tobacco items. Thus, India allowed tariff-free access to Bangladeshi RMG products.  

As a matter of fact, India allowed tariff-free market access to all but 25 Bangladeshi products in 2011. Since then, export of Bangladeshi products to India has increased with a gross fluctuation. One year it increased while another year it dropped.

A major reason for increase in Bangladeshi RMG in India is replacing 12.0 per cent countervailing duty with Goods and Services Tax (GST). The GST rate applicable on most of the apparel clothing items is 5.0 per cent. For the rest of the items, it is 12.0 per cent.

Against this backdrop, Indian government's move to restrain the incremental import of Bangladeshi RMG has a trade implication for Bangladesh.  So far, there is no scope to make any revision in SAFTA agreement in terms of alleged value addition criteria as well as rules of origin. Indian textile lobby has, however, suggested imposition of safeguard duty on Bangladeshi RMG. Article-16 of SAFTA agreement outlines the requirements and steps on safeguard measures. 

It is to be noted that in last year, Indian authorities have informed Bangladesh regarding some 'discrepancies' in the process of exporting RMG.  These were: discrepancies between Free On Board (FOB) value and SAFTA value, re-issuance of country of origin (CoO) certificate after one year of shipment and issuance of dual CoO certificates by the Export Promotion Bureau (EPB).

Thus, it is not possible to entirely rule out the Indian allegations regarding some faulty procedure of Bangladeshi RMG export. Though there is little room to manipulate value addition criteria, procedural flaws is there due to negligence of EPB. In this connection, India may tighten its procedural mechanism by taking some non-tariff measures (NTMs). RMG exporters as well as relevant government bodies have to be more active to contain any flaws to avoid any undue trade restriction.

ANTI-DUMPING DUTY: With rise in export to India, bilateral trade tension has also risen slowly. It is reflected in Indian anti-dumping measures. India slapped the anti-dumping duty on Bangladesh's jute yarn, hessian, and bags back in January 2017 ranging from $19 and $352 a tonne. A similar duty was imposed on the exports of hydrogen peroxide to India, in the range of $27.81-$91.47 per tonne in April the same year. One year later, India imposed anti-dumping duty, at $2.69 per kilogramme, on the shipments of fishing net from Bangladesh.

At a commerce-secretary level trade talk in New Delhi a few months back, Bangladesh requested India to withdraw the anti-dumping duties. Indian side, however, made it clear that there was no scope to do so.  For the last two years, India made similar response to a number of requests of Bangladesh on withdrawing anti-dumping duties especially on jute goods. India argued that anti-dumping duty has been imposed through a quasi-judicial process and the government has nothing to do with this.

Bangladesh at one stage decided to move to the dispute settlement body of the World Trade Organisation (WTO) to challenge the India anti-dumping duties. The Ministry of Commerce has of late asked the WTO cell to recourse to the WTO's dispute settlement procedure following suggestion from the Bangladesh Tariff Commission which earlier said India imposed the anti-dumping duties 'violating the WTO rules'. In fact, without taking legal steps through the WTO, it is impossible to get rid of the anti-dumping duties.

There is, however, a catch. Businesses have to extend their cooperation to the government. It appears that jute industry has some interest to make the legal fight as India is a big market. For the manufacturers of hydrogen peroxide and fishing nets, the trade volume is so small that they do not find it worthy to spend time and money on WTO dispute mechanism.

Nevertheless, the government needs to move ahead considering the country's long-term trade interest. As Bangladesh is in the final phase of graduation from the LDC status, trade partners will try to put more restrictive measures. To fight and overcome such measures, the country needs to strengthen its capacity on the settlement of trade dispute.

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