20‐Apr‐15

Country Report on and Potential Benefits of Bhutan’s Accession to APTA Presented at National Workshop on Trade Policy Choices: Accession to WTO and APTA

Organised by Ministry of Economic Affairs (RGOB) & UN ESCAP Presented By Indra Nath Mukherji Consultant, UNESCAP Thimpu 8‐10 December 2014

Plan of Presentation • Background • Scope, objectives & methodology • Bhutan’s domestic economy • Bhutan’s external sector • Bhutan’s current engagements with other preferential trading arrangements • Bhutan's trade with APTA Participating States • Bhutan’s additional market access frontier with select APTA participating states • Fourth Round concessions: Implications for Bhutan • FA on Trade Facilitation : Implications for Bhutan • FA on the Promotion, Protection and Liberalisation of Investment: Implications for Bhutan • FA on the Promotion and Liberalisation of Trade in Services: implications for Bhutan. • Summing up: opportunities for Bhutan

1 20‐Apr‐15

Background

• The Asia‐Pacific Trade Agreement (APTA), earlier named the Bangkok Agreement, was signed in 1975 as an initiative of ESCAP. APTA aims to promote economic development through the adoption of mutually beneficial trade and investment liberalisation measures that will contribute to intra‐regional trade expansion and provides for economic integration through coverage of trade in merchandise goods and services, investment liberalisation, and trade facilitation.(UNESCAP). • The Participating States (PSs) have also signed the following Framework Agreements (FA): • Framework Agreement on Trade Facilitation (15 December 2009); • Framework Agreement on the Promotion, Protection and Liberalisation of Investment; • Framework Agreement on the Promotion and Liberalisation of Trade in Services.

Scope, Objectives and Methodology

• This study seeks to analyse the benefits for Bhutan for acceding to APTA a) not only in in terms of goods, but also in services, investments underlying the Framework Agreement (FA) on these items; • b) Examines other bilateral and plurilateral agreements that APTA Participating States (PSs) have with Bhutan including duty‐free quota‐free schemes; • c) Evaluates the benefits to Bhutan from availing the Fourth Round concessions and beyond and • Examines the advantages from liberalisation of foreign direct investment (FDI) both in manufacturing and services for both Bhutan and APTA PSs under the FA.

2 20‐Apr‐15

Scope, Objectives and Methodology

• In this study an attempt has been made to examine Bhutan’s Additional Market Access Potential (AMAF) with , and Korea Rep. on all products in which Bhutan’s world exports match with the world imports of the three APTA PSs. This is with a view to examining Bhutan’s export potential in these markets whether or not any concession has been offered on these products. • This has been done keeping in mind that in the event of Bhutan acceding, it could seek concessions on these products in the forthcoming Fifth Round. • Noting the linkage between trade and investment, Bhutan’s intra‐industry trade (IIT) is examined with respect to only as this is absent with other PSs

Data Source: WITS Availability

Country 2013 2012 2011 2010 2009 2008 2007 HS 2012 ChinaYESYESNONONONONO India YES Korea REPYESYESNONONONONO Mongolia YESNONONONONONO Sri Lanka YES NO NO NO NO NO NO HS 2007 Bangladesh NO NO YES YES YES YES NO Bhutan NO NO YES YES YES YES YES China YES YES YES YES YES YES YES India YES YES YES YES YES No No Korea, Rep. YES YES YES YES YES YES YES Lao PDRNONONONONONONO MyanmarNONONONONONONO Mongolia NO NO YES YES YES No No Sri Lanka YES YES YES YES YES YES No

3 20‐Apr‐15

Data Source: WITS Availability • HS‐2012 data was available only for China, Korea rep(2012/13; India (2013). Hs‐2007 classification offered better data availability (Bhutan 2007‐11). • In order to provide more recent data for Bhutan, an attempt was made to use mirror data for Bhutan using China Korea Rep and India as reporters. However the comparing Bhutan's reporting data of 2011 and mirror data for the subsequent years the discrepancy in terms of underestimation appeared to be more than 50 %. Hence for detailed analysis at product level, it was decided in favour of using Bhutan’s 2011 data. For overall trade, HS‐2007 data was used. Using concordance used in WITS, this data was converted to HS 2012 classification‐the same under which APTA Fourth Round concessions have been offered. • Another problem encountered was that the Fourth Round data was presented at different levels of aggregation: china at 8‐digit, Korea rep at 8‐digit, India, Bangladesh at 6‐digit. For products with disaggression above 6‐digit level, the products were harmonised at 6‐digit which brought down the number of products on offer considerably for these countries.

Some measures for analysis • Additional Market Access Frontier (AMAF) for product i:

Where: SEi = Supplier’s (Bhutan’s) Global Exports; MIi = Market’s (Participating State’s) Global Imports; ETi = Supplier’s (Bhutan’s) Existing Exports to Participating State

4 20‐Apr‐15

Some measures for analysis‐contd.

• The Grubel–Lloyd index of Intra‐industry Trade

Some measures for analysis‐contd • Revealed Comparative Advantage

5 20‐Apr‐15

Bhutan’s Domestic Economy

• Bhutan’s growth story has been one of relative success when comparisons are made with peer group of least developed countries. The country’s average rate of growth of around 6 % during 1993‐2002 increased to a higher trajectory of 8.7 % over the next ten years. • The commissioning of the 1020 MW Tala Hydropower project in 2006‐07 drove up the growth rate substantially. As the reached its peak production capacity, the growth rate fell substantially. (IMF 2014). • After policy engendered slowdown in 2012, Bhutan’s growth rate fell to 4.8 %. Bhutan’s economy is expected to rebound to 6.5 % in 2014. (WB: 2014).The macroeconomic projection for 2014 sets GDP growth at 7.3 %, stemming from new projects, tourism receipts, easier credit conditions and the effects of economic stimulus package.(ibid). • Bhutan’s success in reducing absolute poverty is noteworthy with poverty rate falling 23% in 2007 to 12‐13% in 2012 across all poverty deciles. Further, the structure of Bhutanese economy shows a steady transition away from and towards manufacturing and services as may be seen in Figure 1 below. (ibid).

: The share of Agriculture, Industry and Services in Bhutan’s Economy Considerable structural changes in the domestic economy of Bhutan may be seen with the shares of agriculture and related activities declining and those of industry and services increasing since 1980.

6 20‐Apr‐15

Bhutan’s Balance of Payments as Per cent of GDP

Bhutan suffers from very large trade and current account deficits, even though it retains an overall balance of payment surplus due to inflows of external development assistance , coming mainly from India. This reflects considerable dissaving in the Bhutanese economy.

Bhutan’s current engagements in RTAs

• Bhutan is currently engaged in two bilateral and three regional trading arrangements. At the bilateral level the oldest and most important is one with India under Agreement on Trade, Commerce and Transit between the Government of the Republic of India and the Royal Government of Bhutan revised on 28 July 2006. • Bhutan also has a bilateral trade agreement Bangladesh. Trade between the Royal Government of Bhutan and the Government of Peoples’ Republic of Bangladesh was signed on 7 November, 2009. • At the regional level Bhutan’s most significant trade agreement is under South Asian Free Trade Area. All countries, including Bhutan have taken action on TLP till the end of 2013. At the end of Phase‐II, the number of products in the revised sensitive list of Bhutan was 156. • Bhutan, along with other Member States of South Asian Association for Regional Cooperation (SAARC), is also a member of SAARC Agreement on Trade in Services(SATIS )which was signed on 29 April, 2010 at the Sixteenth SAARC Summit. However the final outcome of negotiations as in November 2014 is still awaited.

7 20‐Apr‐15

Bhutan’s current engagements in RTAs (Contd)

• Bhutan is also a member of the Bay of Bengal initiative for Multi‐Sectoral Technical and Economic Cooperation (BIMSTEC) along with Bangladesh, India, Myanmar, Nepal, Sri Lanka, and . The First Summit Meeting was held in Bangkok in July 2004. In its Declaration at Third BIMSTEC Summit held in Nay Pyi Taw, Myanmar on 4 March 2014 the organisation decided to “to expedite its work for the conclusion of the Agreement on Trade in Goods by the end of 2014, and to continue its efforts for early finalization of the Agreement on Services and Investments. • RecognisingthatmarketaccessisacrucialfactorinLDCcountriesto participate in regional and global trade, a number of particular initiatives within the multilateral trading system have been introduced to improve market access for developing countries and for LDCs in particular. • lines. In 2010, around 45 % of AP LDC imports were entering the Korean market DFQF

Bhutan’s current engagements in RTAs (Contd)

• India launched Duty‐Free Tariff Preference Scheme for LDCs in 2008. However since Bhutan gets duty‐free access to the Indian market both under its bilateral trade agreement with India and under SAFTA, this is not relevant. • China’sDFQFmarketaccessschemeforLDCs came into effect on 1 January 2011. Currently the scheme covers around 60 % of all tariff lines. In 2010 95% of all imports by value from LDCs were covered by the scheme. • The Korean scheme was introduced in 2000 and as of 2011, 95% of all tariff

8 20‐Apr‐15

The per cent share of APTA 120 Participating States in Bhutan’s world trade (%) 100 98 97 92 87 A preponderant share of 82

83 82 Bhutan's world trade is 80 80 79 79 77 82 with APTA PSs. Its import 73 80 share declined only marginally from 92% to 60 82% while its export share remained stable around 80% between 40 2005 to 2011.

This points to very high 20 geographic concentration of Bhutan's world trade 0 2005 2006 2007 2008 2009 2010 2011

Share of APTA in Bhutan's World Exports Share of APTA in Bhutan's World Imports

Bhutan’s Trade with all APTA 900 846 Participating States and 800 excluding India (US $ Million) During 2005‐2011 while 700 702 Bhutan's imports from APTA 600 PSs increased from USD 301 562 million to USD 846 million in 500 511 479 2011, its exports to this 431 433 400 region declined from USD 562 384 361 370 million to USD 370 million 330 300 304 during 2007 to 2011, 306 239 reflecting growing trade 200 imbalance with APTA PSs. 86 100 61 Bhutan’s high geographical 15 16 13 10 11 concentration of trade Bhutan's Export to APTA 27 0 29 13 18 19 20 20 2005 2006 2007 2008 2009 2010 2011 becomes further apparent Bhutan's Import from APTA when we note that its trade with PSs excluding India is Bhutan Export to APTA Excluding India miniscule. Bhutan's Import from APTA Excluding India

9 20‐Apr‐15

Bhutan's exports to APTA PSs by economic categories Bhutan’s exports to APTA PSs (mainly to India) has been in intermediate goods and raw materials. Exports in consumer goods have been marginal (except in 2008) and nil in capital goods. Hence there is scope for value addition in most of the products Bhutan exports, either by domestic investment or aided by FDI is possible.

Bhutan's Exports to APTA PSs excluding India

As noted earlier, Bhutan’s exports to APTA PSs other than India is marginal. Its main exports are raw materials. Here again the processing of raw materials for exports is a possibility to be explored.

10 20‐Apr‐15

Top 10 products of Bhutan having Additional Market Access Frontier with Bangladesh (US $ Thousand)

BHU‐X‐ BGD‐M‐ BHU‐EE‐ HS Code Description AMAF RCA WD WD BGD min(Supply, Demad)‐ Existing Existing Supply Demand exports exports 252010 ‐ Gypsum; anhydrite 10,558 19,791 351 10,208 81 441011 ‐‐ Particle board 5,496 3,714 0 3,714 4 720719 ‐‐ Other 3,526 3,221 0 3,221 10 090831 ‐‐ Neither crushed nor ground 8,271 17,701 5,395 2,877 57 252329 ‐‐ Other 21,990 2,051 0 2,051 10 284910 ‐ Of calcium 19,863 2,043 0 2,043 144 252020 ‐ Plasters 1,544 2,094 0 1,544 9 720410 ‐ Waste and scrap of cast iron 1,378 1,676 0 1,378 2 740819 ‐‐ Other 42,940 1,270 0 1,270 37 391740 ‐ Fittings 999 1,500 0 999 1 Top 10 products 116,566 55,060 5,746 29,305 All matched products (183 products 183at HS of‐6) Bhutan's world exports matches 250,075 Bangladesh’s 4,104,854 15,319world imports. 42,674 The AMAF on these is USD 43 million. Existing exports are USD 15 million All matched products of Bhutan have RCA >1

Top 10 products of Bhutan having Additional Market Access Frontier with China (US $ Thousand)

BTN‐X‐ CHN‐M‐ BHU‐EE‐ HS Code Description AMAF RCA WLD WLD CHN min(Supply , Demad)‐ Existing Existing Description Supply Demand exports exports 740819 ‐‐ Other 42,940 661,650 0 42,940 37 252329 ‐‐ Other 21,990 37,074 0 21,990 10 720221 ‐‐ Containing by weight more than 55 % of silicon 130,921 20,102 0 20,102 106 251810 ‐ Dolomite, not calcined or sintered 16,508 17,330 0 16,508 292 284920 ‐ Of silicon 11,073 14,497 0 11,073 25 Manganese and articles thereof, including waste 811100 and scrap. 13,419 10,391 0 10,391 43 080510 ‐ Oranges 7,055 108,743 0 7,055 5 720610 ‐ Ingots 6,023 8,342 0 6,023 51 441011 ‐‐ Particle board 5,496 51,128 0 5,496 4 392099 ‐‐ Of other plastics 4,756 1,363,836 0 4,756 3 Top 10 products 260,182 2,293,093 0 146,334 152,429,89 All matched products (213 products at HS‐6) 452,957 1 133 199,717 213 of Bhutan's world exports matches Bangladesh’s world imports. The AMAF on these is USD 199 million. Existing exports are USD 133 thousand All matched products of Bhutan have RCA >1

11 20‐Apr‐15

Top 10 products of Bhutan having Additional Market Access Frontier with Korea (US $ Thousand)

BTN‐X‐ KOR‐M‐ BHU‐ HS Code Description AMAF RCA WLD WLD EE‐KOR min(Suppl y, Existin Demad)‐ g Existing Supply Demand exports exports 720221 ‐‐ Containing by weight more than 55 % of silicon 130,921 430,799 0 130,921 106 252329 ‐‐ Other 21,990 30,698 0 21,990 10 Manganese and articles thereof, including waste and 811100 scrap. 13,419 381,138 0 13,419 43 852380 ‐ Other 71,906 12,815 0 12,815 93 284920 ‐ Of silicon 11,073 116,392 0 11,073 25 252010 ‐ Gypsum; anhydrite 10,558 16,214 0 10,558 81 740819 ‐‐ Other 42,940 8,386 0 8,386 37 080510 ‐ Oranges 7,055 170,177 0 7,055 5 Limestone flux; limestone and other calcareous stone, of a 252100 kind used for the manufacture of lime or cement. 6,326 44,081 0 6,326 67 720610 ‐ Ingots 6,023 62,244 0 6,023 51 Top 10 products 322,212 1,272,945 0 228,567 32,923,42 All matched products (208 products at HS‐6) 452,855 5 11 291,354 208 of Bhutan's world exports matches Bangladesh’s world imports. The AMAF on these is USD 291 million. Existing exports are USD 11 thousand All matched products of Bhutan have RCA >1

Implications for concessions offered by Bangladesh for Bhutan

No. of products Bhutan's (HS‐2012‐6 Export to Average Item No. Description digit) World MoP 1 Bhutan has export capability in 213 452,957 n/a 2 Bangladesh has offered MoP in General List (2,191 at HS‐8) 544 n/a n/a 3 Bangladesh has offered MoP in LDC List (3 at HS‐8) 2 n/a n/a 4 No. of products benefiting from Bangladesh's General List 18 23,414 n/a 5 No. of products benefiting from Bangladesh's LDC List 0 0 n/a 6 No. of products benefiting from either list of Bangladesh 18 23,414 n/a 7 Bangladesh does not import from world (out of the above ‐ item no. 6) 8 14,599 n/a 8 Effective benefit to Bhutanese products in Bangladesh's. market 10 8,815 n/a 9 Existing exportsBangladesh in products has under offered item MoP 8 in General List on HS‐6 digit 544 2 products 5,611 n/a Bangladesh has offered MoP in LDC List on HS‐6 digit 2 products 10 Average MoP for products under item 8 n/a n/a 18%

No. of products benefiting Bhutan on BGD’s General List 18 valued at USD 23 million. Of the 18 products Bangladesh did not import any from world 8 products. Valued at USD 14.6 million. Hence effective market access to Bhutan on 10 products is USD 8.8 million with average MoP 18 %. Of these 10 products Bhutan is already exporting 2 products valued at USD 5.6 million

12 20‐Apr‐15

Implications for concessions offered by China for Bhutan

Item No. of products Bhutan’s export Average No. Description (HS 2012‐6 digit to world MoP 1 Bhutan has export capability in 213 452,957 n/a

2 China has offered MoP in General List (2,191 at HS‐8) 1,331 n/a n/a 3 China has offered MoP in LDC List (181 at HS‐8) 132 n/a n/a 4 No. of products benefiting from China's General List 53 116,256 n/a 5 No. of products benefiting from China's LDC List 5 941 n/a 6 No. of products benefiting from either list of China 56 116,261 n/a

China does not import from world (out of the above ‐ item 7 no. 6) 4 59 n/a

8 Effective benefit to Bhutanese products in China's market 52 116,202 n/a 9 Existing exports in products under item 8 1 133 n/a

10 Average MoP for products under item 8 n/a n/a 44.1% No. of products benefiting Bhutan on CHN’s General & LDC List 56 valued at USD 116 million. Of the 56 products CHN did not import any from world 4 products. Valued at USD 59 thousand. Hence effective market access to Bhutan on 52 products is USD 116 million with average MoP 44.1 %. Of these 52 products Bhutan is already exporting 2 products valued at USD 133 thousand.

Implications for concessions offered by Korea Rep for Bhutan

Item No. of products (HS BTN‐X‐ Average No. Description 2012‐6 digit) W MoP 1 Bhutan has export capability in 213 452,957 n/a Korea Rep. has offered MoP in General List (2,796 at HS‐ 2 10) 1,390 n/a n/a

3 Korea Rep. has offered MoP in LDC List n/a n/a n/a

4 No. of products benefiting from Korea Rep.'s General List 39 90,653 n/a 5 No. of products benefiting from Korea Rep.'s LDC List n/a n/a n/a 6 No. of products benefiting from either list of Korea Rep. 39 90,653 n/a

Korea Rep. does not import from world (out of the above 7 ‐ item no. 6) 0 0 n/a

Effective benefit to Bhutanese products in Korea Rep.'s 8 market 39 90,653 n/a 9 Existing exports in products under item 800n/a 10 Average MoP for products under item 8 n/a n/a 33.2% RoK has offered concessions on 1390 (HS‐6 digit) products to Bhutan No. of products benefiting Bhutan on RoK’s General & LDC List is 39 valued at USD 90 million. RoK imports all the products from world Hence effective market access to Bhutan on ‘39 products is USD 90 million with average MoP 33.2 %. Of these 39 products bhutan does not export any to RoK.

13 20‐Apr‐15

Summary: Effective market access to Bhutanese products in APTA partner market (US $ Thousand)

Existin g Existing Export Export Bhutan's Partner's to Average No. of (No. of Exports to Imports from Partne Effective APTA Market/Partner products products) World World r MoP

Bangladesh 10 2 8,815 118,719 5,611 18.0%

China 52 1 116,202 29,196,761 133 44.1%

Korea, Rep. 39 0 90,653 2,229,193 0 33.2%

FDI flows in Bhutan by geographical origin (US $ Million)

Region/Economy 2006 2007 2008 2009 2010 2011 2012

World 71 ‐75 ‐125265551

Europe 7874

Developing 71 ‐75 ‐118184713 Economies

Asia 71 ‐75 ‐118184213

Southeast Asia 70 ‐76 ‐4143 22‐1

Singapore 70 ‐76 ‐414‐121‐2

Thailand 411

South Asia 1 1 2 3 16 20 14

India 1 1 2 3 16 20 14

Samoa 4

Unspecified 233

14 20‐Apr‐15

Bhutan’s Inward Investment Position: End‐2012

of which total Inward DI with Fellow Enterprises abroad Inward Debt Instruments Positions

Net Debt Gross Debt Instruments Total Equity and Debt

Inward Inward Inward Inward Inward Debt Inward Direct Equity Debt: Inward Inward Debt Instrume DI with Investment Positions Resident (Net DI with (Net) Debt: Instrume nts Fellow Positions (Net) Enterprise ) Fellow Resident nts Assets of Enterpri s that are Enterpri Financial Liabilitie DIE in DI ses not ses Intermedi s of DIE (Gross) (Gross Financial (Gross aries (Net) to DI (Reverse Liabilitie Intermedi Assets) Investment (Gross) Investm s) aries (Net) from: ent) Total 143 116 28 28 0 Investment India 51 51 0 0 0 21 9 12 12 0 United States 660 00 United 330 00 Kingdom 110 00 Others 61 56

FDI flows as % gross FDIstocksas%ofgross FDI Indicators fixed capital formation domestic product

Bhutan’s FDI flows as % of gross fixed capital 1995 2008 2009 2010 1995 2008 2009 2010 as also FDI stocks as % ‐ of gross domestic 2004 product has been quite modest. 0.6 5.7 2.8 2.0 0.9 10.7 11.0 10.9

Source: UNCTAD, World Investment Report 2011; www.unctad.org/wir or www.unctad.org/fdistatistics.

15 20‐Apr‐15

APTA Participating States outward investment (US $ APTA Foreign Direct Investment Affiliates Million) Participating States Outward Year Outward Year Chang Numb Numb APTA PSs, particularly Flow Stock ep.a.er of er Since Parent from China, Korea Rep, 2009 s and India’s outward flow and stock of FDI as also their growth China 74,654 2011 424,780 2011 31.50 152 305 rates during 2011/12 has been quite Korea Rep 33,129 2012 196,410 2012 17.70 1064 2185 impressive. They have a large number of India 8,583 2012 118,166 2012 13.50 669 1288 affiliates /parents operating globally Sri Lanka 80 2012 520 2012 15.80 9 16

Bangladesh 53 2012 159 2012 10.10 4 4

Lao PDR ‐21 2011 12 2011 ‐1.50 0 0

Source: ITC: Investment Map

Outward direct investment positions, end‐2012 (US $ millions) APTA Outward Outward Outward Members direct equity debt Similarly these investment positions instruments countries outward positions positions direct investment , (net) equity positions and outward debt Korea Rep. 201,828 185,983 15,845 instruments positions has been China 835,457 750,766 71,999 Mainland

impressive India 79,675 64,730 14,945

Bangladesh 90 75 15

Source: IMF, Coordinated Direct Investment Survey, www.cdis.imf.org,

16 20‐Apr‐15

Schedule I: Production and Manufacturing: Priority List of Activities

Sl.No. Sector Minimum Project Cost Maximum Foreign Conditions/Requireme (Nu Million) Investor’s Equity (%) nts

1 Agro-based Production 20 74 None

2 Forest-based Production 20 74 None

3 Energy (Hydro-power based) Minimum project cost and maximum foreign investor’s equity based on sustainable hydro power policy.

4 Energy (solar, wind and other 20 Maximum foreign renewable) investor’s equity based on renewable energy policy.

5 Water-based Products 50 74 None

6 Other Manufacturing 50 74 none

Schedule II: Services: Priority List of Services Sl.No. Sector Minimum Project Cost Maximum Foreign Conditions/Requireme (Nu Million) Investment Equity (%) nts ( 1 Education 200 100 High end

2 Health 200 100 High end

3 Hotel resorts (5-star) 200 100 International reputed hotel chain 4 Infrastructure facilities 200 100 PPP model wherein the facility returns to the Government on expiry of term. 5 Research & Development 10 100 Established firms employing a minimum of 5 experts. 6 Head office services 5 100 None

7 IT/ITES-under IT parks and SEZs 5 100 None

8 IT/ITES-outside IT parks and SEZs 25 74 None

17 20‐Apr‐15

Schedule II: Services: Priority List of Services (Contd) 9 Construction services 100 74 None

10 Waste management 25 74 PPP model wherein the facility returns to the Government on expiry of term. 11 Water supply 25 74 PPP model wherein the facility returns to the Government on expiry of term. 12 4-star hotels 25 74 None

13 Technical & vocational education 25 74 PPP model wherein the facility returns to the Government on expiry of term. 14 Transport & related services 25 74 PPP model wherein the facility returns to the Government on expiry of term 15 Consultancy services 25 51 Minimum of 5 experts to be employed 16 Financial services 25 51 As per Financial Services Act

List of services imported by Bhutan (US $ Thousand)

Imported Value Imported Value Imported Value Imported Value Imported Value Code Service label in 2009 in 2010 in 2011 in 2012 in 2013 '200 Total services 98595 140102 176575 196613 177507 Commercial 2CS services 94524 135135 171322 187820 171397 '236 Travel 32874 41388 56164 68339 63700 Construction '249 services 22191 22192 26680 30732 50997 '205 Transportation 26505 51573 61608 59850 32141 Other business '268 services 7764 12902 17807 17929 17685 Government '291 services, n.i.e. 4071 4967 5253 8793 6110 Insurance '253 services 2282 4615 5708 5880 3588 Communication '245 s services 1609 1756 2182 2652 2511 Computer and information '262 services 609 477 756 2059 413 Financial '260 services 321 65 194 313 323 Royalties and '266 license fees 370 168 221 65 39

18 20‐Apr‐15

China: Profile of Outward Investment: 2011 (USD Million)

Change p.a. since Sectors Outflow Outward Stock Sector Type 2009 Total merchandise trade and 74654 424781 31.50% Tertiary services Business activities 29055 165218 41.00% Tertiary Mining and quarrying 14446 66995 28.50% Primary Wholesale and retail trade 10324 49094 17.30% Tertiary Unspecified secondary 7041 26964 40.90% Secondary Finance 6071 67393 21.00% Tertiary Transport, storage and 2564 25261 23.20% Tertiary communications Electricity, gas and water 2131 9543 69.50% Tertiary Construction 1648 8051 53.60% Tertiary Agriculture and hunting 798 3417 29.80% Primary Other services 329 1616 29.60% Tertiary Hotels and restaurants 117 604 57.50% Tertiary Community, social and personal 105 541 99.80% Tertiary service activities Education 20 67 77.10% Tertiary Health and social services 6 17 67.70% Tertiary

China: Profile of Outward Investment by Sectors : 2011 (USD Millions)

80000

70000

60000

50000 Millions) 40000 (USD

30000 Value 20000

10000

0

19 20‐Apr‐15

: Korea Rep: Profile of Outward Investment by Sectors: 2010 (USD Millions)

Sectors Outflows Sector Type

Total (Merchandise and Services) 33120 All sectors

Mining and quarrying 10,060 Primary

Unspecified secondary 8,720 Secondary

Finance 5,950 Finance

Business activities 2,240 Tertiary

Wholesale and retail trade 1,480 Tertiary

Korea Rep: Profile of Outward Investment : 2010 (USD Millions)

35000

30000

25000

20000 Millions)

(USD

15000 Outflows Value

10000

5000

0 Total Mining and Unspecified Finance Business activities Wholesale and (Merchandise and quarrying secondary retail trade Services)

20 20‐Apr‐15

Structure of Service Imports of APTA PSs /Exports of Bhutan (USD Millions) Computer Information, Commercial Insurance and communications Transport Travel Service Exports Financial Services and other commercial services APTA Particip $ millions % of total % of total % of total % of total ating States 2005 2012 2005 2012 2005 2012 2005 2012 2005 2012

China 88,655 195,312 17 20 33 26 1 3 49 52 Korea Rep 48,327 109,619 49 37 12 13 4 3 35 46

India 51,851 145,030 13 12 14 12 4 5 69 70

Structure of Bhutan's Commercial Imports 2005 2012 2005 2012 2005 2012 2005 2012 2005 2012

Bhutan 61 129 4 6 37 53 3 2 57 39

Trade‐Investment Linkages : IIT USD Thousand: IIT more that USD 1 million; IIT >= 20%)

IIT‐BTN‐ HS Code Description BTN‐M‐IND BTN‐X‐IND BTN‐ IND IIT Trade IND 070190 ‐ Other 863 5,387 6,250 28%

110100 Wheat or meslin flour. 1,260 2,016 3,277 77%

‐ Protein concentrates and textured protein 210610 substances 265 778 1,042 51%

220300 Beer made from malt. 6,390 953 7,344 26% 252210 ‐ Quicklime 2,553 382 2,934 26% 252310 ‐ Cement clinkers 1,521 934 2,455 76% 252329 ‐‐ Other 7,963 21,990 29,953 53%

Slag, dross (other than granulated slag), scalings and other waste from the manufacture of iron or 261900 steel. 2,330 418 2,749 30%

21 20‐Apr‐15

Trade‐Investment Linkages : IIT USD Thousand: IIT more that USD 1 million; IIT >= 20%)

270119 ‐‐ Other coal 10,203 1,490 11,692 25%

340119 ‐‐ Other 787 241 1,028 47% ‐‐ Of other 391729 plastics 1,469 513 1,981 52%

391740 ‐ Fittings 380 999 1,379 55%

701090 ‐ Other 3,089 424 3,513 24% ‐ Waste and 720410 scrap of cast iron 11,106 1,378 12,485 22%

Source: Estimated from UN Comtrade database on Source: WITS platform.

Investment to address supply side constraints with Bangladesh (USD Thousand)

HS Code Description BTN‐X‐WLD CHN‐M‐WLD BHU‐EE‐CHN AMAF

min(Supply, Demad)‐Existing Product Supply Demand Existing exports exports

120110 ‐ Seed 3 29,726,066 0 3 Copper waste 740400 and scrap. 28 16,337,926 0 28 ‐‐ Bituminous 270112 coal 4,078 13,121,991 0 4,078 ‐ Other, 440320 coniferous 2 4,861,114 0 2 Aluminium 760200 waste and scrap. 66 4,625,402 0 66

270119 ‐‐ Other coal 1,877 4,274,653 0 1,877

22 20‐Apr‐15

Investment to address supply side constraints with China (USD Thousand)

HS Code Description BTN‐X‐WLD CHN‐M‐WLD BHU‐EE‐CHN AMAF

min(Supply, Demad)‐Existing Supply Demand Existing exports exports

120110 ‐ Seed 3 29,726,066 0 3

Copper waste and 740400 scrap. 28 16,337,926 0 28

270112 ‐‐ Bituminous coal 4,078 13,121,991 0 4,078

440320 ‐ Other, coniferous 2 4,861,114 0 2

Aluminium waste 760200 and scrap. 66 4,625,402 0 66

270119 ‐‐ Other coal 1,877 4,274,653 0 1,877

Summary: Implications for Bhutan • Supported by hydropower energy development, Bhutan is on a high growth trajectory. However for sustainable development, Bhutan urgently needs to diversify its economy both in terms of geographic distribution as also in terms of commodity composition of its exports. • The high share of Bhutan’s trade with APTA PSs (around 80 per cent), is mainly on account of its trade with India. Trade analysis of Bhutan’s exports reveals that even though Bhutan’s trade with APTA PSs, excluding India is either non‐existent or miniscule, it nevertheless exports a large number of products to the world, that are being imported in significant values from the world, particularly by the advanced APTA PSs, China and Korea Rep. • The latter countries provide considerable AMAF to Bhutan which the latter country could exploit by getting preferential access on products in which they can avail of preferences, particularly in most which they have revealed comparative advantage. This study reveals that even going beyond, having once acceded, Bhutan can seek additional preferences on products in which they have high AMAF and also high revealed comparative advantage during the forthcoming Fifth Round negotiations.

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Summary: Implications for Bhutan

• Given Bhutan’s growing current account deficit, the country has so far succeeded in pushing its economy forward by being financed mainly by development aid, notably from India. Noting that Bhutan’s aid prospects in relation to its development agenda may not be adequate, it needs to diversify its sourcing of capital flows, particularly in FDI which combines with skill, managerial development of its local staff through technology transfer. • It has been noted that the advanced APTA PSs, notably China, Korea Rep and India have considerable experience and capital stock to undertake investments beyond their national territories in diverse sectors, some of which also fall as priority sectors in Bhutan’s FDI policy. Following Bhutan’s liberalised FDI policy of May 2010, many countries have already invested in a number of projects while others have offered proposals to invest in Bhutan.

Summary: Implications for Bhutan • Bhutan has no bilateral investment treaty covering either manufacturing or services with any other country, including India. Under the plurilateral framework of SAARC and BIMSTEC of which Bhutan is a member, while provision for agreements on investment protection exists, these have yet to be made operational. With the Framework Agreement on investment protection and services being made operational in APTA, many from APTA PSs may consider investing in Bhutan. The limited size of Bhutanese market may not be a constraint since the investors will be eyeing the neighbouring Indian market as well which provides duty‐free access to Bhutanese products.

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