02 January 2014

The Trade Facilitation Agreement - Understanding the nuances

by R. Subhashree

In The Trade Facilitation Agreement (TFA) was signed at Bali eliciting congratulations and relief, apparently lending credibility to the World Trade Organisation (WTO). As always the statistics look promising - reduction in cost by 10% in developed countries and upto 15 % in developing countries. However, what the agreement seeks to achieve rather impose (since it is binding on the WTO members and can be subject of dispute settlement process) has to be studied with reference to the draft available.

The requirements under TFA can be divided into those relating to information-sharing, aid in understanding applicable laws, procedures including documentation, fees and charges, cooperation between agencies of members and those relating to special and differential treatment. As per Section II developing and Least Developed Countries (LDCs) are required to classify the provisions into A (entering into force immediately), B (requiring transitional period) and C (requiring capacity building) and communicate the same.

The TFA creates extra binding force for certain obligations already present in GATT.  There is of course a moratorium declared on claims or dispute settlement under the rules. Application of Article XXII (Consultation) and XXIII (Non-violation or Nullification of benefits clause) to developing and LDCs is relaxed for A, B and C categories. However, transition period provided may not be sufficient to these countries.


Information sharing and opportunity to comment

Article 1 of the agreement requires publication of information available through the internet preferably in one of the official languages of the WTO, on applicable laws and regulation relating to import /export and, on the form, documents as also contact information on enquiry points. Also members are encouraged not to require payment of fee for answering enquiries. Much of the requirement on information is already part of GATT Article X. However, the TFA goes beyond merely asking for information to be made available.  By Article 2 it enjoins granting an opportunity to traders and ‘other interested parties’ to comment on proposed amendment or introduction of laws.


Aid in understanding the law

Members shall issue advance rulings on goods tariff classification and origin of the goods and preferably on requirements for quotas and appropriate method or criteria for determining the customs value. The applicant may be an exporter, an importer or any person with a justifiable cause or a representative thereof. This definition is wide and vague. For instance, if we look at the current tax provisions in India, an applicant seeking advance ruling has to be either non-resident engaging in business activity in India, residents collaborating with non-residents or specified residents engaging in business activity. The TFA makes members answerable to an amorphous entity - person with justifiable cause which is neither easy to define nor immune from subjectivity. A more practical question would be the affordability of compliance cost in administering such provisions by developing countries and LDCs.


Procedures including documentation and fees

Attracting criticism that the agreement goes far beyond trade and policy and extends to rule making, the TFA requires members to grant opportunity of second test in case of adverse results during first test on samples drawn in respect of goods entered for import and provide details of approved laboratory for the same. TFA will not diminish the rights and obligations of members under other agreements like Sanitary and Phytosanitary Measures (SPS) and Technical Barriers to Trade (TBT). Going by the debates on application of SPS wherein the injured party always complains of lack of scientific basis, perhaps this provision may provide an additional tool to foreign exporters to question the importing member.

GATT Article VIII deals with fees and formalities connected with importation and exportation and requires non-imposition of penalty by a member-country for minor, non-wilful infractions. Going beyond the requirement that fees and charges should approximate to cost of services rendered by the member-country, the TFA requires members to publish information on, reason for fees and accord adequate time period before changes are effected. The fees and charges cannot be applied until they have been published and shall be reviewed periodically to reduce number and diversity.

On penalties, it imposes a condition of furnishing an explanation in writing for the imposition and wherever a person voluntarily discloses the circumstances (not breach itself) of the breach, it should be a mitigating factor in establishing penalty.  In tax law and in case of civil breach penalty is usually automatic.

TFA emphasises importance of electronic records, submission of documents, payment of duties, etc., so that processing of documents can begin before arrival of goods.  Measures like Risk Management System and Post-Clearance Audit [envisaged in Kyoto Convention of World Customs Organisation (WCO)] are also prescribed for implementation. Members shall also afford possibility to negotiate for mutual recognition of Authorised Economic Operators. Article 8 of TFA requires members to provide for lesser documentation, permit submission of information in advance for expedited shipments and require (allow) applicant for expedited shipments to use tracking technology from pickup to delivery. It also encourages provision of de minimis shipment or dutiable value for which customs duties and taxes will not be collected.

Article 10 asks the members to make arrangement to get paper or electronic copies of supporting documents for import, export or transit formalities from the agency holding the original. A member shall also not require original or copy of the export declaration submitted to the customs authority of exporting member as a requirement for importation.

It also requires creation of a single window for submitting documents, obtaining clearance, etc., and forbids request for same documents or data by other participating agencies.

Article 11 of TFA enhances the provisions under Article V of GATT on freedom of transit. Once goods have been put under transit procedure and authorised to proceed, they cannot be subject to any customs charges or unnecessary delays or restrictions.


On cooperation

A committee on trade facilitation has been established and national committees shall be established to coordinate on the domestic front and also ensure implementation of TFA. Provisions are set out to encourage exchange of information and also deal with confidentiality and administrative or cost constraints.


The criticisms

It has been argued that despite the promise of donation from members and aid to build capacity, the compliance cost is a burden for developing and LDC members. Most of the developed countries do not have to take extra efforts to meet obligations under this agreement. As per OECD’s study on trade facilitation indicators, India performs poorly on fees and charges and streamlining of procedures, China, Argentina have to improve on border agency cooperation, Antigua on information availability, involvement of the trade community, advance rulings and automation and Malawi has to improve in respect of advance rulings and harmonisation and simplification of documents. OECD countries like US have to better simplification and harmonisation of documents and Japan has to improve on involvement of trade community.

TFA is more about reducing costs, making exports profitable rather than possible.  It leaves an importing country with little choice. Tariffs cannot be increased, charges have to be lowered and yet a country has to find resources to meet its obligations on infrastructure, publish data etc.

Governments are sovereign as regards power to tax. With reduced role for government in business, taxes and other duties, charges collected are an important source of revenue. As such, between DTAAs, bilateral agreements and concessions to business, the tax domain whether on economic activity/ income has been shrinking. TFA insists that charges shall not be more than cost of services rendered. This makes an exporter more than equal. Even a citizen cannot challenge the quantum of levy once the government has the statutory power to tax. At best the challenge would be to power to levy on the ground of violation of certain guarantees enshrined in supreme legal documents like the constitution.

One of the significant factors aiding in export of goods from developing and LDC members is the cost advantage enjoyed by the members as compared to a developed country. If a government’s hands are tied as regards imports, it has no option but to increase other taxes. Also with reduced charges imports may be more competitive than local goods.

To conclude, in fairness the TFA seems as difficult as customs valuation provisions in GATT would have been at the time of signing. The WTO is about multilateralism and every member will have to find its own balance between yielding and reaping benefits.            

[ The author is a Manager, Knowledge Management Team, Lakshmikumaran & Sridharan, New Delhi ]  


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