MANAGING THE CHALLENGES OF WTO PARTICIPATION: CASE STUDY 31
Nepal: Exports of Ayurvedic Herbal Remedies and SPS Issues
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I. The problem in context
When his company received a hefty order from a Swedish importer in August 2000, Prem Raj Tiwari rejoiced with much enthusiasm at a relatively big business deal. The single largest export order the company ever had for ayurvedic products — processed medicinal herbs — had strengthened his aim of reviving the company’s languishing export trade by cashing in on the flourishing world demand for herbal products. But Tiwari’s enthusiasm was soon dashed when he received an e-mail from his Narkayrd-based Swedish counterpart withdrawing the order. The mail stated that the company’s product samples did not pass the ‘satisfactory and sufficient’ sanitary and quality standard tests for access to the Swedish market. Moreover, Tiwari was astonished to learn of the requirement for a certificate of good manufacturing practices (GMP) for each consignment.
Until this incident, Tiwari had not been aware of the requirements for such a specific test and the GMP certificate in order to be able to export the company’s products. The GMP is a system of quality assurance and quality control not only for the products themselves but also for the pre- and post-manufacturing processes to ensure sanitation and the minimization of the risks inherent in food and medicinal production, processes which cannot be assessed by only testing the final products.
Tiwari’s company, the Gorkha Ayurved Co. — a joint venture between Nepalese and French investors — had gained about 6% of the domestic market for herbal products. One of the major products of the company was the herbal tea sold under the established brand name Guduchi, known as a health drink. The popularity of Guduchi had, in fact, tempted other herbal firms into imitation of the brand name. Other key products manufactured by the company were about fifty herbal remedies, based on ayurvedic medicines or traditional health science. Satisfied with the sales volume in the local market, which allowed the company to break even, Tiwari, the managing director, contemplated good prospects for the export of ayurvedic medicines, as he had received business inquiries from Germany, France, Italy, Sweden, the Czech Republic and Australia over the previous couple of years.
Since Tiwari joined the company as a financial consultant in 1999, he had seen tremendous scope in this sector, for two main reasons. First, the international demand for herbal products was growing at an annual rate of 10% on average, and the global market for herbal medicines was expected to reach US$16 billion by 2005, according to a recent study. Second, Nepal had witnessed a smooth growth trend in export of herbal products, indicating one of the most potential areas of comparative advantage. That had resulted in an increased number of foreign investors — particularly the popular Indian herbal product manufacturers — being attracted to Nepal to exploit the country’s favourable climate and abundance of a wide variety of aromatic plants and medicinal herbs. Nepal is endowed with more than 700 species of medicinal and aromatic plants, of which 250 species are endemic. These companies had firmly established backward and forward linkages and had exported products made from Nepalese herbs under their own brand names. However, Nepal’s share in the global market for the product range remained minuscule, despite promising signs.
II. The local and external players and their roles
Although the share of herbal products in Nepal’s export basket seemed to be modest, Tiwari expected three points of comparative advantage for his company to boost trade in this product line. First, the export of herbal products, including the ayurvedic remedies, did not have to face stiff price competition due to a limited number of suppliers in the world market. Second, these products had been enjoying duty advantages, as they were exempted from the customs duties under the generalized system of preferences (GSP) applying to Nepalese goods in all major international markets. Third, ayurvedic remedies had been noticeably concentrated in the European markets that accounted for almost half of the global demand for herbal remedies: Germany and France were the most prominent markets in Europe.
Despite these advantages the Swedish importer’s requirement had, for the first time, put Tiwari in a very complicated situation if he was to strike a successful export business deal. If his company’s products were to gain access to the Swedish market, they needed to undergo tests, in particular for organochloropesticide, fungicide and heavy metal, but also other detailed microbiological tests, which were not easily available in Nepal. In addition, the requirement of the ‘stringent’ GMP certification had come as a surprise to him, as he had hitherto been used only to basic laboratory tests for sanitary certificates.
In the meantime Tiwari was surprised to get an order in October 2001 from a Sydney-based importer who did not seek any such complicated tests and certification. Only a general sample test was required for the products, which were exported in the form of a single ingredient in powder form, before entering the Australian market. Since then, Gorkha Ayurved had regularly been exporting wide varieties of ayurvedic remedies without any stringent requirements.
Baffled by the two different quality and sanitary requirements for the same product range, Tiwari at first thought that the Swedish importer’s conditions were ‘arbitrary’ and intended as barriers to trade in the importing country. Similarly, he was bewildered by the application of ‘double standards’ in international trade and reckoned that the buyers’ requirements could possibly impede his company’s export endeavours.
But soon he learned that the buyers could ask for compliance with international standard under the WTO’s Sanitary and Phytosanitary Measures (SPS) Agreement. That is because the WTO recognizes internationally harmonized standards and encourages member countries to use them as a basis for their SPS measures in order to reduce distortions in market access. The SPS Agreement is consistent with the standards and guidelines of the FAO and WHO with respect to food additives, pesticide residues, contaminants, hygienic practices and methods of analysis and sampling for harmonizing international rules in this field of trade.
Thus, contrary to his initial perception, Tiwari discovered that his Swedish counterpart’s requirement for GMP was in conformity to the international standards. The GMP code, developed by WHO, was in fact the internationally harmonized system for assuring quality and sanitary standards in trade related to medicinal products. In a number of advanced countries all herbal products were strictly required to be made under the GMP code. No wonder he then understood why the code of GMP had become a common requirement. Regarding the two different standards requirements, he was assured that the Australian importer was entitled to use less strict standards if they were still considered to be sufficient.
In such a situation, Tiwari understood that he had no choice other than to prepare his company to meet the international sanitary and quality standards under the guidance and support of the domestic system if he did not want to lose any lucrative business order in the future. Regarding the export of ayurvedic remedies he came to know that without the assurance of the GMP certification it wouldn’t be that simple to win importers’ hearts and get through the border regulations in importing countries.
Buyers in Western countries had increasingly been asking for GMP certificates for aryurvedic remedies, as these products were relatively vulnerable to contamination and unwanted substances. Meeting the quality assurances for ayurvedic remedies was comparatively complicated, because they were prepared from material of plant origin which might be exposed to a higher risk of contamination and deterioration. Unlike conventional pharmaceutical products, they may vary in composition and properties, as well as in the application of procedures and techniques. Apparently there was no exact surveillance system to be followed internationally as to standard and quality control in ayurvedic medicines. However, GMP had been considered as a basis of sanitary standards for this product category. Failure to comply with the requirements by importers in the respective countries had resulted in severe consequences: penalties, confiscation and even the rejection of consignments.
‘If international buyers were entitled to ask for the quality and sanitary assurances according to the internationally recognized system, the exporters were then obliged to meet the requirement if they wanted to avoid market access complications in importing countries, and to retain exporter’s positions in international markets for products like ayurvedic remedies, which indicated an increasing trend’, Tiwari asserted. Keeping that in mind he contacted the Royal Drug Research Lab (RDRL), the government-owned drug quality control authority, and the Department of Food Technology and Quality Control — DFTQC (previously the Central Food Research Laboratory), the responsible government body for the inspection and accreditation of food standards, to find out if they could be of any help in preparing his company for the buyers’ requirements.
III. Challenges faced and the outcome
Unfortunately, Tiwari found both institutions without any plan or policy regarding SPS standards, including the GMP certification procedures, particularly with regard to the export of products in the herbal and ayurvedic category. Although Nepal was in the process of acceding to the WTO at that time, no serious efforts were being made on policy or the institutional framework for the SPS requirements. That had resulted in a more confused situation for exporters, including Gorkha Ayurved, posing complex questions for export promotion strategy. ‘How could we exploit the country’s comparative advantage if the authorized bodies lacked the vigilance and departmental co-ordination to guide exporters and enforce the system recognized internationally, in the wake of Nepal’s accession to the WTO?’ Tiwari lamented as his problem was left unresolved.
But with endorsement of Nepal’s membership to the WTO at the Cancún Ministerial in September 2003 there were reasons for Tiwari to be optimistic about his endeavour. In its accession negotiations Nepal had committed to full implementation of the SPS requirement by 1 January 2007. For that reason His Majesty’s Government of Nepal (HMG) has designated the DFTQC as the national enquiry point for SPS. The DFTQC, which enforces food-related laws and code of conduct, had now been made responsible for initiating co-ordination between the government departments and the private sector regarding the implementation of the international SPS mechanism. Following that the department had expedited efforts to synergize the network and had developed a departmental structure to function effectively as the SPS national inquiry point by 2004. That required the DFTQC to implement the risk assessment mechanism and the pest detection and eradication campaigns, including the strict quarantine procedures to support Nepalese exporters in meeting the SPS standards. Among other important steps taken by the Department was promoting the awareness of FAO and WHO quality and sanitary systems among all stakeholders, to be followed by the application of the basic rules and then the fully-fledged operation of the FAO rules and WHO GMP standards in Nepal. The Department as a focal point had also actively participated in the aim of the member states of the South Asian Association for Regional Co-operation (SAARC) of implementing the FAO/WHO systems within the region by 2005.
As Tiwari went on inquiring, he found out that the Department of Drug Administration (DDA), which enforces pharmaceutical standards and quality control in Nepal, was the proper government authority to deal with the SPS system for ayurvedic remedies. However, since the DFTQC had been designated as the national SPS inquiry point, the DDA was supposed to co-ordinate with the former for policy implementation and monitoring GMP standards for products related to remedies.
Interestingly, Tiwari was surprised to know that the DDA had already made GMP mandatory for the importing of all kinds of drug-related products into Nepal since 2000. Also it had voluntarily imposed the GMP on the domestic pharmaceutical manufacturers. As soon as Nepal had acceded to the WTO, the DDA had informally instructed all pharmaceutical manufacturing companies, including the herbal medicinal producers, to abide by the WHO GMP code by the end of 2006, as a prerequisite to the SPS mechanism.
With that policy in the offing the DDA and the medicinal manufacturers both had obligations to meet. The DDA as an executing government body should have prepared itself for the accreditation of GMP certification in the country. Its organizational structure should have been strengthened to achieve the inspection and auditing capacity for effectively monitoring and evaluating the system. Additionally, it should have developed mechanisms to determine the basic requirements to be fulfilled by the firms which were obliged to operate under the GMP system. The criteria to be developed included the selection and approval of site designs, equipment selection guidelines, performance qualifications and data processing. As part of the capacity development programme, its staff have been trained by foreign experts to mobilize them as GMP auditors.
On the part of the industrial sector, businesses were required to develop the GMP-related physical facilities and implementation know-how themselves. These were supposed to be the preconditions for being officially certified for the system. Of the thirty-eight pharmaceutical manufacturers in the country, six had already made preparations for conformity with GMP before the deadline and had already requested inspection and certification from the DDA.
Although it took some time, Tiwari’s untiring investigation had made him acquainted with the significance of the GMP system and its policy issues. ‘Yet almost all herbal and ayurvedic manufacturers had remained unaware of its necessity because there were no genuine authorities to help them and because they lacked business advocacy skills especially within the industry concerned’, Tiwari said. Nevertheless, it seemed to him that it would be worth taking his company under the GMP system to be compatible with the SPS requirements, in order to avert market access barriers in other countries and also to achieve his ambition to promote exports. His exploration of the system and policy matters gave him enough ideas for taking the necessary actions.
First of all, Tiwari raised the issue at a meeting of the company’s board of directors. The meeting had been called to discuss the possibility of shifting the company’s final processing units from Gorkha district, where its entire manufacturing processes had been taking place, to Kathmandu, for direct supervision. He took this opportunity to inform the other board members about the importance of SPS requirements and advised the building of the necessary infrastructures within the proposed plan for compliance with the GMP and SPS systems. The board members approved Tiwari’s proposal without any hesitation.
Accordingly, Gorkha Ayurved launched the project by purchasing land in Kathmandu. It planned to utilize the company’s capital reserve and external financing to meet the ‘huge’ project cost, estimated at Rs 25 million (approximately US$338,000). Tiwari informed us that ‘We had contacted a specialist from Italy for the consultancy services on GMP technical inputs, among others. It required additional funding of Rs 900,000 (US$12,000) for a month of services that would be an extra financial burden to the company.’ If the financial constraint was not an obstacle and the government was fully committed to the policy implementation, Gorkha Ayurved would be equipped with the GMP process to meet the international SPS standards within the stipulated time — Tiwari was confident about that.
IV. Lessons for others (the players’ view)
Tiwari explained what he had learned.
I encountered difficulties in meeting the
importers’ requirements that inspired me to delve into the issue of
quality and sanitary standards in international trade. It was
indispensable for me to gain in-depth knowledge about the application of
the provisions, domestically and internationally, in order to overcome
the market access problem to meet my goal for export promotion.
Without a constant follow-up and vigilance I
wouldn’t have successfully convinced the company board members about
the benefit of assembling the GMP facility within my company’s
proposed plan to build a processing unit in Kathmandu. Of course, the
DDA’s instruction for GMP application and Nepal’s systemic
commitment to full implementation of the SPS measures in its accession
protocol to WTO membership had actually given me ample reasons to raise
the issue at the company board meeting.
I think that was the key to success for getting
approval from the board to make the company prepare itself for the
internationally recognized standards, despite the initial requirement of
huge financial and technical investments.
Including the constraints of initial investments to the companies like mine, there were a number of internal challenges to effectively implement the SPS standards. First of all, the government’s commitment to meet the SPS regulation within the stipulated timeframe can only be determined by the financial resources and technical expertise at its disposal.
He pointed to one of the studies that calculated that the Nepalese government was seeking more than US$12 million to introduce an improved SPS regime. ‘It’s difficult for the government to easily adopt the internationally recognized policy and build capacity for the purpose unless financial and technical assistance from international donors is forthcoming.’
The government has received assurances of support from different international donors. Remarkably, the European Union (EU) had approved technical assistance for SPS national capacity building for Nepal. Tiwari’s suggestion was that the technical assistance should at the same time be diverted to develop the DFTQC as the fully-fledged SPS national inquiry point and to the capacity-building of the SPS-related departments, including the DDA, which was the body responsible for enforcing the GMP.
Tiwari commented that ‘The private sector should also benefit from the technical assistance, as it had an immense role to play in the awareness and business advocacy on Nepal’s entry into the WTO and its commitment to the SPS mechanism. Many stakeholders, including the business community, thought they did not have roles to play in the multilateral trading system. They need to be able to understand the possibility of unfavourable consequences in international business if trade rules are not well understood.’
There were two things to be done urgently in this regard. First of all there should have been regular government-private-sector interactions to exchange their views on the multilateral trading system. One of the objectives of the purpose should have been to listen to the voice and concerns of the Nepalese business community. However, that would not have been achieved until the private-sector associations came forward to lead in their respective fields.
Considering the rapidly changing global trading environment, Tiwari recently took the initiative in establishing the Ayurvedic Medicine Producers Association of Nepal (AMPAN). He has assumed the post of general secretary of the association with much pride.
But it is early days yet and there is still much the Association hopes to achieve in advocating the needs of its members.
* Chief, WTO Cell, Garment Association of Nepal, New Baneswor.