Indo-Sri Lanka Free Trade Agreement - Surge in Import of copper from Sri Lanka - Regarding - Customs - 073/03

Circular No. 73/2003-Cus., dated 13-8-2003 F.No. 467/69/2002-Cus.V Government of India Ministry of Finance (Department of Revenue) Central Board of Excise Customs, New Delhi Subject : Indo-Sri Lanka Free Trade Agreement - Surge in Import of copper from Sri Lanka - Regarding. I am directed to enclose a copy of letter No. 11/9/2003-RMTR, dated 18-7-2003, received from the Commerce Secretary and letter dated 25-7-2003 received from Director, Department of Commerce on the subject above. During the recent Commerce-Secretary level talks under Indo-Sri Lanka Free Trade Agreement (ISLFTA) on 18th July, 2003 at New Delhi, the surge in copper imports from Sri Lanka and consequent serious injury it is causing to the domestic industry in India came up for discussion. The Sri Lankan side was informed that this rise in exports of copper is not due to genuine value addition of 35% in Sri Lanka, but due to the circumvention of the value addition norms by some unscrupulous traders. The Sri Lankan side has been requested to put an end to the export of 2. copper strips and profiles immediately, and other items of copper (other than copper strips and profiles) within a period of six weeks from 18th July, 2003. However, the Origin certificates issued by Sri Lankan authorities on these items will continue to be honoured till the time further instructions are issued from the Board. Dipak Chatterjee Commerce Secretary Tel. No. 2301 6664 Government of India Ministry of Commerce Industry Department of Commerce Udyog Bhawan, New Delhi-110011 Dated 18th July, 2003 D.O. No. 11/9/2003-RMTR Kindly refer to the discussions held during the Commerce Secretary Level Talks under ISLFTA on 18th July, 2003 in New Delhi. During the talks, the surge in copper exports from Sri Lanka under ISLFTA and consequent serious injury it is causing to the domestic industry in India also came up for discussion. As you are aware, copper exports from Sri Lanka to India have surged from 1775 MT in 2001 to 47430 MT in 2002, thereby implying an unprecedented rise of almost 2700% within one year under ISLFTA. Unfortunately, this rise in exports from Sri Lanka is not due to genuine value addition in Sri Lanka as envisaged in the 'Trade Agreement' between the two countries but due to the circumvention of the provisions of the Agreement in respect of stipulated value addition norms by some unscrupulous traders. The Rules of Origin (ROO) criterion as laid down in the Agreement stipulates that minimum 35% of value addition should take place in Sri Lanka for the exports to enjoy preferential duty concession under the Agreement. As is known, Sri Lanka does not have any known source of copper ore or a concentrator to process the ore body, if any. Sri Lanka also does not have any copper smelter or refinery or continuous cast (cc) rod facility to convert concentrate into metal and metal to cc rod respectively. It has only facility for casting and wire drawing, which means that in Sri Lanka conversion can take place only from one metal product to another metal product. Given the above facts, the maximum value addition, which can take place (metal to metal) in Sri Lanka cannot be more than 10 to 15%. Scrap, which is being used by some traders to make profiles/extrusions, is nothing but conversion from metal to metal. Therefore, even in that case the value addition cannot be more than 10 to 15% as copper is a highly malleable metal. Clearly, Sri Lankan exporters cannot meet the 35% value addition norm under the Rules of Origin criterion. This fact was also demonstrated by the Indian delegation which went to Sri Lanka and the Sri Lankan authorities have also appreciated the truth of the matter. There may be certain doubts in the minds of the Sri Lankan authorities, but as copper is traded on the basis of London Metal Exchange (LME) prices, there is not much scope for this doubt, in our opinion. LME prices are the reference prices for the world wide trading of copper. The international market for copper is highly organized and leaves no room for any major deviation from the pricing norms. Copper products are sold/bought with discount/premium over LME depending upon its position on the value chain. Since the stipulated value addition of 35% under the Rules of Origin criterion is not taking place in Sri Lanka, some traders are resorting to gross under-invoicing of the raw materials at the time of their import into Sri Lanka in order to manipulate fulfilment of the stipulated criterion. As can be seen from your own records, the copper imports in Sri Lanka for home consumption are priced at US$ 1734 per MT whereas the imports under ISLFTA for exports to India are priced at US$ 979 per MT for the same item. Although, Sri Lankan authorities have raised CIF floor price of copper scrap to US$ 1100 per MT, it can be seen that as against IMF average for the relevant period of US$ 1858 the scrap price on CIF basis cannot be lower than US$ 1550-1600 per MT. Therefore, the gross under-invoicing of raw material is being resorted to in a big way to satisfy the requirement of value addition norms through manipulation. The effect of this trade can also be seen from the trade figures of Sri Lanka. In 2002, the copper imports in Sri Lanka rose from 7480 MT in 2001 to 53000 MT out of which copper exports to India were of the magnitude of 47430 MT, thereby becoming almost 800% of domestic consumption of Sri Lanka. It is evident that ISLFTA is being used as a conduit for exports of copper produced in the third country. This is, therefore, in no way helping the Sri Lankan industry. On the other hand, due to the unfair exports under ISLFTA, the domestic sales of copper in India by Indian industry have come down by a huge margin of 23.45% from 252336 MT in 2000-2001 to 193155 MT in 2002-2003 causing serious injury to the Indian industry. Given the above circumstances, we have no other option but to treat it as a 'critical circumstance' and to use our right of withdrawal under Article VIII of the Agreement. However, I would like you to intervene by immediately putting an end to export of copper strips and profiles and to ensure that the entire unscrupulous trade of copper, if any, is stopped within six weeks from now. I shall be grateful for a prompt response. With regards, Your Sincerely Sd/- (Dipak Chatterjee)