Domestic and Foreign Market Access

Overview: Trade Policy and Business Environment

The Kingdom of Bhutan is considered a lower middle income country which is open for trade. Over the last 30 years, the economy has grown steadily at a rate of 7 per cent per year. Over the past decade, Bhutan has taken steps to modernize its economic structure and reduce poverty. Hydropower is the mainstay of its economy, accounting for over 12 per cent of its GDP, 40 per cent of total export – almost 90 per cent of which is to India. The industry generates 45 per cent of government revenues. Exports of minerals and mineral-based products account for nearly half of total exports. Bhutan's economy remains dominated by state-owned enterprises, with the private sector contributing a mere 8 per cent of total national revenue. To spur private sector development, a number of policies and laws have been formulated in recent years (UNDP 2012; World Bank 2013). There are various logistical and technical barriers to trade development and diversification. However, the primary obstacle is the underdevelopment of Bhutan’s supply chain. Market access and demand for Bhutan’s goods and services are rather favourable due to Bhutan’s completely open access to the Indian market as part of one of the most liberal trade agreements in the world. It also has duty-free and quota-free access to European and United States markets as a Least Developed Country (LDC) (UNDP 2012).

UNDP, 2012, Diagnostic Trade Integration Study (Bhutan)
World Bank, 2013, Bhutan Partnership Country Program Snapshot

Domestic Market Access The pillar assesses the level and complexity of a country’s tariff protection as a result of its trade policy. This component includes the effective trade-weighted average tariff applied by a country, the share of goods imported duty free and the complexity of the tariff regime, measured through tariff variance, the prevalence of tariff peaks and specific tariffs, and the number of distinct tariffs. 109 3.88
Foreign Market Access The pillar assesses tariff barriers faced by a country’s exporters in destination markets. It includes the average tariffs faced by the country as well as the margin of preference in destination markets negotiated through bilateral or regional trade agreements or granted in the form of trade preferences. 57 2.85
Tariff rate (%) This indicator is calculated as a trade-weighted average of all the applied tariff rates, including preferential rates that a country applies to the rest of the world. The weights are the trade patterns of the importing country’s reference group (2012 data). An applied tariff is a customs duty that is levied on imports of merchandise goods. 137 22.71
Complexity of tariffs , index 1-7 (best) This indicator is calculated as the average of the following indicators: Tariff dispersion, Specific tariffs and Number of distinct tariffs. See description of each individual indicator for more details. Prior to averaging, values for each indicator were transformed to a 1–7 score, using the min-max method. 52 6.33
Tariffs dispersion (standard deviation) This indicator reflects differences in tariffs across product categories in a country’s tariff structure. The variance is calculated across all the tariffs on imported merchandise goods, at the 6-digit level of the Harmonized Schedule. 118 13.73
Tariffs peaks (%) This indicator is the ratio of the number of tariff lines exceeding three times the average domestic tariff (across all products) to the MFN (most-favoured nation) tariff schedule. The tariff schedule is equal to the total number of tariff lines for each country. These tariffs are revised on a yearly basis. 45 0.80
Specific tariffs (%) This indicator is the ratio of the number of Harmonized System (HS) tariff lines, with at least one specific tariff, to the total number of HS tariff lines. A specific tariff is a tariff rate charged on fixed amount per quantity (as opposed to ad valorem) 1 0.00
Number of distinct tariffs This indicator reflects the number of distinct tariff rates applied by a country to its imports across all sectors. 32 8.00
Share of duty-free imports (%) Share of trade, excluding petroleum, that is imported free of tariff duties, taking into account MFN tariffs and preferential agreements. Tariff data is from 2013 or most recent year available and imports data is from 2012 81 55.17
Tariffs faced (%) This indicator is calculated as the trade-weighted average of the applied tariff rates, including preferential rates that the rest of the world applies to each country. The weights are the trade patterns of the importing country’s reference group (2012 data). A tariff is a customs duty that is levied by the destination country on imports of merchandise goods 137 13.35
Index of margin of preference in destination markets, 0-100 (best) This indicator measures the percentage by which particular imports from one country are subject to lower tariffs than the MFN rate. It is calculated as the average of two components: 1) the trade-weighted average difference between the MFN tariff and the most advantageous preferential duty (advantage score), and 2) the ratio of the advantage score to the trade-weighted average MFN tariff level. This allows capturing both the absolute and the relative margin of preference. 12 61.54
Source : WEF, 2013, Global Competitiveness Report

Trade Policy and Market Access

Bhutan has been in the process of accession to the WTO since 1999, but progress has stalled due to the resistance of the previous government. While Bhutan’s tariffs are not bound by the WTO, it applies a high 17.8 percent average tariff as of 2007 and numerous non-tariff barriers. However there is little information available on tariff and nontariff barriers. Bhutan’s trade structure is dominated by its close relationship with India. This highly liberal bilateral Free Trade Agreement (FTA) features duty-free and quota-free trade and therefore trade with India is not restricted by tariff or rules of origin. The majority of trade takes places with India, amounting to nearly 90 per net of exports and 75 per cent of imports (UNDP 2012). Exports, beyond hydroelectricity to India, remain minimal and of low value. Most imported goods travel overland through India to get to Bhutan. (Bertelsmann Stiftung, 2014) The European Union’s General System of Preferences (GSP) and Everything But Arms (EBA) programme have been extended to Bhutan, but it has so far not been able to make full use of this facility. Bhutan is a member of South Asian Free Trade Area (SAFTA), which is considered to be the most beneficial instrument of cooperation within the region However small countries like Bhutan, the Maldives and Nepal have not increased their exports as a direct result of SAFTA because the main export destination, India, has already liberalized imports from these countries and market access of agricultural products is still blocked by the sensitive lists of non-LDC members.

Bertelsmann Stiftung, 2014, Country Report (Bhutan)

The Heritage Foundation, 2014, Economic Freedom Index (Bhutan)

UNDP, 2012, Diagnostic Trade Integration Study (Bhutan)

Standard Compliance and Other Relevant Import/Export Restrictions

The Bhutan Standards Bureau is an umbrella institution that coordinates and oversees all standardization and related activities. It has the responsibility for standards, metrology, and certification. Bhutan is not only a corresponding member of the International Organisation for Standardisation but also recognizes the mark of the Bureau of Indian Standards pursuant to the India-Bhutan Agreement on Operation of the Certification Scheme. Moreover, the Bhutan Agriculture and Food Regulatory Authority develops scientific testing facilities and procedures in line with international norms such as those established by Food and Agriculture Organization of the United Nations, the World Health Organization, Codex Alimentarius, the World Organization for Animal Health, the International Plant Protection Convention and the Convention on Biological Diversity of which Bhutan is a member. It accepts sanitary and phytosanitary (SPS) measures of other countries utilizing internationally-recognized and accepted SPS approaches in practice. Since neighbouring countries tend to have similar pest and disease profiles, SPS barriers to trade tend to be relatively low. However, SPS barriers to trade with industrialized countries may be very significant.

Bhutan Standards Bureau, 2012, Overview

Ministry of Agriculture and Forests of Bhutan, 2011, Bhutan Agriculture and Food Regulatory Authority