I. General Information

1. The Issue:

When the Taliban regime was removed from power in Afghanistan, it was hoped that the new governing council could have provided increased border control and regional stability. Pakistan is a country that is very susceptible to import smuggling and dumping. The goods entering Pakistan go through corrupt border control officials and the proper import duties never paid. It is thought that the smuggling only stopped for 15-20 days during the conflict. This illegal market contains items such as "tea, soaps and detergents, tires, TV sets, telephones, watches, auto parts, cosmetic items, clothes, crockery and cutlery items, shoes, garments and electrical and electronic items" (Latif, 2002). Currently, over 30 million kilograms of tea are smuggled into the country, while another 130 million kilograms is consumed legally. The results of the illegal imports have consequences that can be seen both the government and local tea traders ("Pakistan Tea Association for..., 2003). The impacts are illustrated in the government losing revenue from unpaid duties. Additionally, local tea growers are being hurt economically by the lower cost tea being brought in through illegal channels.

2. Description:

Pakistan is the world’s third largest consumer of tea. Additionally, they are the largest per capita consumer ("Pakistan promises to buy...," 2003). A substantial portion of the tea consumed by the Pakistani people is smuggled into the country. African tea is illegally brought into Pakistan through Afghanistan. Because of high import tariffs and inadequate border controls nearly thirty percent of the tea consumed in Pakistan is illegally brought into the country. This issue is causing increased problems between Pakistan and its neighbors. Additionally, the government is loosing significant amounts of revenue each year. The issue must be addressed on both sides of the problem with lower tariffs and better regulations on the part of India and Afghanistan on their exports in the region.

India & Pakistan

The relationship between India and Pakistan is strained on a variety of different levels, the least of which is trade. These countries have had a nuclear arms race,as well as continual territorial disputes. Over the past few years the situation has become better. Nuclear arms testing have stopped and will hopefully never commence again. In the area of trade, the import duties in Pakistan have slowly been lowered.

A decade ago the duty on imported tea into Pakistan was seventy percent. With such an incredibly high barrier the need for finding alternative means for bring the tea into the country was necessary. This need was heightened by the enormous demand for tea by the Pakistani people. As stated before, Pakistan is the world’s largest per capita consumer of tea. In an effort to obstruct the smuggling industry, General Musharraf’s government lowered the duty to twenty percent in June, 2003. This action was done specifically to help mend the relationship between the two countries (Khan, 2003).

Afghanistan & Pakistan

Furthermore, Pakistan has a problem with tea being imported from Africa through Afghanistan. The government of Pakistan hoped that the recent overthrow of the Taliban regime by the United States would have helped to address this problem. Unfortunately the increase in border security, at least for illegal tea, is no better today. The tea is originating in Kenya and is highly preferred by Pakistanis because of its strong blend (Bokhari, 2003). This situation is based on simple principles of economics. As long as demand is high there is a reason for trying to find a way to meet it with an adequate supply. Logically the Musharraf government would want to take advantage of this by placing tariffs on the product. Because of such a high demand, the duty and tax revenue generated by the purchasing and selling of tea would be substantial.

Unfortunately, the illegal suppliers can avoid paying the duty and the current tax bureau is overrun by corruption, so whatever tea does reach the country legally is not likely to be taxed. Currently, Pakistan is trying to develop its own tea manufacturing industry, but the competition from India and smuggling from Africa is keeping this new industry from growing. So far, the anti-dumping regulations of the WTO are the only actions that can be enforced. Nevertheless, these are hard to prove and the real issue is smuggling, which is already outlawed by the international community.

This is a case largely based on internal corruption by Pakistan and long standing conflicts among its neighbors. While tea imports are not as important, or as deadly, as nuclear weapons and terrorism, the issue remains significant. The increase cooperation should lead to a more controlled tea industry. By solving this problem the two countries will be drawn closer together.

3. Related Cases:

Coffee: (as a closely related product)

Columbian Coffee - (June, 2001) Columbia is the world's second largest producer of coffee. The production of coffee supports many local residents and much of the way of life for Columbia. Due to the volatility in the price of coffee the livelihood of many Columbians is uncertain. Association of Coffee Producing Country (ACPC) and the International Coffee Organization (ICO) are working toward creating more price stability. (****This case study has a broken link from the TED search case file****)

Costa Rican Coffee - Coffee is one of the leading products of Costa Rica. Coffee growers have developed a type of coffee that can be grown in direct sunlight, due the loss of shade from deforestation. This new plant yields three times as much coffee as traditional plants, but there are severe environmental impacts on water pollution, soil erosion, and continued deforestation.

Qat - (July, 1997) This leafy product has gained popularity around Africa and in parts of Britain. Chewing the product causes the felling of euphoria and stimulation due to the presence of cathinone. The US listed cathinone as a Schedule I drug with heroin and cocaine. The categorization of the product in this fashion creates conflict over the production and distribution of the chewing leaves.

Smuggling:

Mohawk - The Mohawk Nation is buying cigarettes at 1/4 the market value and selling them to visitors that come to the reservation. The reservation falls on land in the US and Canada, whereby the Akewesane Reserve is the border between the two countries. The Mohawks do not recognize the distinction of the two different nations. Nevertheless, the Canadian government considers item brought across the US-Canadian border through the reserve to be contraband. The Canadian authorities are taking action to stop the smuggling.

Orchid - Most of the 25,000 varieties of orchids are endangered. These flowers are being protected, but a susceptible to smuggling. There is a large market in the world for orchids, and the debate centers on how best to protect the endangered species. The central question is: Will market access provide adequate measures of protection or are strict protectionist policies the best answer?

Pakistan: Basmati - (June, 1998) A US company, RiceTec, Inc., was awarded a patent in 1997 to market their rice using the name Basmati. This development will have serious consequences on India and Pakistan. The end result will be a loss of revenues for both countries due to decreased exports to the US and parts of Europe.

5. Discourse and Status: Disagreement and In Progress

The case of smuggling tea into Pakistan is not a unique case, but it is not one that would be found under the disputes category of the WTO. Illegal activities involving traded items are looked upon by the international community to be wrong – simply put. Pakistan must correct its internal deficiencies in order to truly reverse the trend of illegal imports.

The basic premise of the WTO has been to lower trade and non-trade barriers throughout the world. Pakistan is working toward developing these principles through the establishment of a WTO cell which coordinates with the Ministry of Commerce. The Pakistani government is pursuing a variety of WTO-related policies in order to create better transparency, more formal agreements and safeguards against dumping, intellectual property rights and other areas ("Pakistan: January 2002," 2002).

By pursuing these bilateral and multilateral agreements on trade, Pakistan will be able to improve its domestic market as well as develop closer ties with other countries in the region. It is plausible to reach the conclusion that as Pakistan and India engage in more formal trade arrangements that the tension between the two countries will slowly start to decline.

6. Forum and Scope: Pakistan and Unilateral

The central problem with the Pakistani tea trading industry is the lack of adequate control of the country's borders. The environment for smugglers to successfully operate is created by the government's shortfall. One of the leading causes of this problem is the high level of tariffs that are placed on goods brought into the country. As a result, the environment to make large profits off of illegal goods is created for smugglers and corrupt border control officers. As the tariffs are lowered, which they have been, the need to smuggle will decrease. The Pakistani government is the single biggest player in this issue because they have they authority and ability to lower tariffs, to enforce stricter border controls and to punish violators.

Mr. Hanif Janoo, chairman of the Pakistan Tea Association (PTA), participated in trade talks with India in an effort to establish limits on imported tea from India. PTA maintained that the tea must be sold at competitive market prices and be of high quality. Mr. L.V. Saptharishi, Additional Secretary for the Commerce Ministry in India, recognized the potential for increased cooperation and trade between the two countries and called on the Indian Tea Association (ITA) to make every effort in order to reach an agreement. Mr. Bharat Bajoria, chairman of ITA, met with the PTA in June of 2003 where an agreement was reached. The two organizations settled on a 10 million kilogram import limit from India into Pakistan (India to export 10..., 2003). This is an increase from only 3.7 million kilograms last year. The provisions require that Indian tea growers maintain a high quality and sell their product at competitive prices ("PPF seminar for journalism...", 2002).

As Pakistan makes more formal agreements in trade, the need for high tariffs will decrease. This philosophy in congruent with that of the WTO and will actually help raise revenue for the government of Pakistan. By eliminating the environment for smugglers and opening up the domestic market to more importers, the consistency of paid, legal import duties will help the government. Additionally, Pakistan has set adequate provisions for protecting the domestic growers while they experiment with their own production of tea. Pakistan is learning how to foster domestic entrepreneurship while liberalizing its market.

7. Decision Breadth: Unilateral

8. Legal Standing: Law

III. Bio-Geographic Clusters

In this case Pakistan is the key importer. They are the center of focus for a variety of different reasons. The current market of Pakistan consumes nearly 150 million kilograms of tea each year (Khan, 2003). The country has a very small, but growing tea industry, which means that the majority of tea is imported. Pakistan is the world’s third largest importer of tea, and the leading importer on a per capita basis. The conflict in this case originates in the area of smuggling from India and Afghanistan.

Where does the tea come from? Kenya is the leading importer for Pakistan. Pakistan buys 24% of their product. The emergence of Kenyan tea in the Pakistani market is a result of rising prices in Sri Lankan tea in 1977 ("Tea Related Information", 2002). India is another avenue for legal imports. In 2002-2003 Pakistan imported only 3.7 million kilograms of tea from India, but under new trade agreements Pakistan will increase their imports to 10 million kilograms (India to export 10..., 2003). This new agreement is an effort to control the quantity and quality of tea from India. Because of loose border controls black tea, which has no real market in Pakistan, has been smuggled into the country. This has hurt local shop owners and growers.

While the local tea growing industry is negligible in comparison to its total consumption, there is a new project underway to cultivate this product. Only 300 acres are being devoted to tea growing, but there is hope that it will be successful and expand to 150,000 acres (Khan, 2003). This is an experimental project in the Northwest Frontier Providence. This would provide for a significant portion of the massive tea market in Pakistan.

Pakistan is a country that is going through a learning process when it comes to import duties and taxes. The country has not had the most stable government in the region and is prone to coups. The current government of General Pervez Musharraf came to power in late 1999 through a military takeover. The level of import duties has ranged from 70% in 1993 to only 20% in 2003. This change over the last decade has not been one of steady decline. There have been periods where the tariffs have risen.

As recently as 2001-2002 the government increased the import duty from 25% to 30% on tea. This action caused a 98% increase in smuggled tea (Khan, 2003). When the import duty increases there is an incentive for an increase in smuggling to take place. These corrupt individuals know that because of the higher price on 'legal' tea there will be more of a demand for cheaper 'illegal' tea. This also has an impact on the amount of legal imports, whereby they dropped by 13.43%. As the government tried to increase its revenues and control the flow of illegal goods, the exact opposite occurred. While the current duty is 20%, Pakistani Tea Association officials are calling for another cut in order to bring the level to 10%.

Tea traders are hoping that this reduction will lower smuggled tea by 5,000 tons, while raising revenues by Rs5 billion. Eventually a balance needs to be reach whereby the government can receive enough money from import duties to be combined with the total government revenues, as well as create a situation where smuggling is no longer profitable.

12. Type of Measure: Import Standards

13. Direct v. Indirect Impacts: Direct

25. Culture:

"Tea smuggling on rise," Dawn, (on-line version), 28 April 2002. http://www.dawn.com/2002/04/28/ebr5.htm

Relevant Literature:

"Indian Tea Delegation For Pakistan," The Hindu, 11 June 2003. http://www.hinduonnet.com/thehindu/2003/06/11/stories/2003061102621600.htm

"Pakistani tea traders seek duty cut," BBC News, 3 April 2002. http://news.bbc.co.uk/1/hi/business/1909084.stm Deeptha Rajkumar, "High import duty hitting tea trade, says Pak team," The Hindu, 26 September 2003. http://www.thehindubusinessline.com/2003/09/27/stories/2003092701121100.htm