New US law may shoot up costs for exporters.

Indian exporters tran­saction costs may go up steeply as the Obama administration proposes to put the onus of supply of faulty products to the exporter-manufacturer rather than the agent.

While Indian exporters are already grappling with high transaction costs, the US move will make goods less cost competitive.

If the US government approves and notifies the Foreign Manufacturers Leg­al Accountability Act of 2010 (FMLAA), export manufact­urers supplying chemicals, pesticides, cosmetics, cons­u­mer goods, drugs and auto components will be the worst sufferers.

“Indian companies are jittery about this Act as it will incur an additional cost burden on our exporters dea­l­ing with drugs, chem­icals and auto components. However, there is still no clarity in the US as to how will they implement or enforce the law,” Ajay Sahai, director general, Federation of Indian Export Organ­isations said.

Sahai said there will be even competition as it will be applicable to all coun­tries exporting to the US. But, the only concern is that it might eventually be used as a non-tariff barrier to restrict imports from India.

A rough estimate sugg­ests that additional cost of compliance with this new Am­erican law for Indian co­mpanies could be any­where between $300 and $500 mi­ll­ion. This is over and above the $16 billion transaction cost that is being borne by the Indian expor­ters each year. The US constitutes nearly 10 per cent of total Indian merc­handise exports at $18-20 billion.

Pritam Banerjee, head (trade policy), Confedera­tion of Indian Industry, said, the FMLAA would prove to be very expensive for Indian exporters, especially for sm­all and medium scale ma­nufacturers as they do not have the capacity to hire registered agents on a permanent basis.

It is estimated that 80 per cent of the 50,000-odd exporters in India are in the small and medium scale category with turnover of less than Rs 10 crore.

“While a retainer fee for such a legal agent could be at least $15,000 to $20,000 a year, it would be unjustified because many Indian expor­ters do not export to the US all year round; some not ev­en every year. Consequ­ently, it will make American mar­ket less attractive with inc­re­ased risk of liability and eve­n­tually open us to the US lit­i­gation,” he said, adding that products with high risk lia­bility like chemicals, engi­ne­ering goods, auto tools and toys will be most impacted.

However, American Cha­m­ber of Commerce and Ind­ustry says this Act is more specific to China, which has a history of faulty products. “Over the last few years, there have been a lar­ge number of recall of Chinese products and FMLAA aims to ensure the stricter quality standards are met in all products coming to the US,” Amitabh Singh, chairman (taxes and tariffs), American Chamber of Commerce and Industry said. Intended or unintend­ed, Indian export­ers are bound to cough up for complying with new laws. FMLAA comes close on the heels of US government sla­p­ping an additional visa fees on high technology pers­on­nel and those in the export business, thereby bleeding the services exporters by $250 million annually.

The Act that was pro­posed in February 2010 requires all foreign manu­facturers exporting drugs, devices, cosmetics, biologi­cal products, consumer pro­ducts, chemical substan­ces, new chemical substan­ces and pesticides to establish a registered agent in US who would take legal respon­sibility for liabilities arising out of these products.

In case third country goods having Indian spare parts, components or inte­rmediates are used, even Indian exporters will have to face fresh liabilities. How­ever, electronic har­dware exports is least likely to be impacted because US constitutes a very small part of its exports from India.

“Our major export markets are South-East Asia, Europe and Middle-East and not US and therefore if this comes into force, the burden on us would be miniscule,” Sunil Vachani, chairman of Elec­tronics and Compute Sof­tware Export Promotion Council explained.

Rakesh Kher, vice president (export), NK Minda group, said: “While we have insurance for product liability, we are closely studying the Act to understand the implication. Subsequently, we will discuss with our buyers and see if the additional cost could be in built into our prices or it could be shared depending on the case.”

Source : mydigitalfc.com