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Old Monday, April 25, 2011
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Arrow Proposals / Suggestions for 2011-12 Supplements to the Strategic Trade Policy Framewo

Proposals / Suggestions for 2011-12 Supplements to the Strategic Trade Policy Framework

(Amendments to Changes to Export Policy Order to Facilitate Trade)

By
Ayyaz MEHMOOD SHIEKH





TABLE OF CONTENT
1: Historical Perspective of Pakistan Economy and Trade…………… 3
1.1 The Comprehensive Economic Revival Program…………………............. 6
1.2 Trade Policy and Recent Reforms….......................................... ................. 7
1.3 Fundamental Principles / Objective of Strategic Trade Policy………….. 8
1.4 Challenges to the Trade Policy………………………………………………… 8
1.5 The Govt Initiative for the Enhancement of the Export Competitiveness...9
2: Suggestion for export improvements…………………………….........10
2.1 Relationship with India……………………………………………………...........10
2.2 Challenges Affecting Industrial Growth, Commercial Sections Abroad Role and strong collaboration with the concerned bodies. ………………………… 11
2.3 Development Concerns……………………………………………………………12
2.4 Trade policy to aim at improving textile exports………………………………13
2.5 Conclusion……………………………………………………………………………15
Annex B – Trade policy making in Pakistan.......................................... ....................16
Annex C – Trade policy flow charts............................................ ................................17

1. Historical Perspective of Pakistan Economy and Trade
As we all know that Pakistan is facing many difficulties on the non-economic front, which have led to further deterioration of the business climate. The issues created due the problems which we inherited such as energy crises, business closures, declining long term foreign investment have been worsened by the war on terror in which Pakistan is a frontline state. The direct and indirect costs of this war do not only include the loss of life, property and business assets, but also the deterioration of country’s image as a result of which the business to business interaction becomes more difficult. However after a critical phase of weak domestic macroeconomic situation and reduced external demand owing to the global financial crisis, Pakistan economy is now undergoing a recovery phase.
Since joining the WTO in 1995, Pakistan has faced some difficulties implementing policies that liberalize trade. Many of these issues are associated with the fact that Pakistan has suffered a significant slowdown in economic growth in recent years. After accelerating in 1993-96, real GDP growth fell from 5.0% in to 1.2% in 1995, and has since hovered below 4%. With population growing at a steady rate, the recession has led to a substantial rise in poverty levels: nearly one third of the population now fall below the poverty line, compared with one fifth a decade ago. The vulnerability of this mostly rural population is a significant concern when considering further trade liberalization.
Structural problems have been central to this reduced economic performance. In particular, the state retains a prominent role in the economy: tariffs and import prohibitions have shielded domestic producers from foreign competition while price supports and procurement preferences have contributed to an anti-export bias. Natural factors (severe drought), political instability and weak governance (non-transparency) have added to the slowness in recovery.
Coming to the trade performance of Pakistan, the year 2008-09 witnessed unprecedented economic downturn especially in our major markets of export i.e. USA & EU. Consumption decreased in the developed world and the global trade shrank by 9%. Global recession adversely affected exporting countries and Pakistan is no exception to it. Exports from Pakistan declined to US$ 17.8 billion as compared to previous year’s exports of US$ 19.1 billion. Imports also witnessed a relative decline and fell by 13% as Pakistan’s imports during 2008-09 stood at US $ 34.9 billion as compared to US $ 40.4 billion in 2007-08.
During 2008-9, the export of Textiles, which account for around 54% of Pakistan’s total exports, dropped from US$ 10.6 billion to US$ 9.6 billion. The major losers in this regard were Readymade Garments, which dropped by 21.7%, Cotton Yarn, which dropped by 15%, Bed linen, which dropped by 10.2%, Art Silk & Synthetic Textiles, which dropped by 22.1% and Cotton Fabric by 4.0%. The exports of finished leather and leather manufacturers dropped from US$ 1.1 billion to US$ 0.8 billion registering a drop 24.5%. The Rice exports have registered an impressive growth from US$ 1.84 billion to US$ 1.99 with an increase of 8.2%. Engineering goods also registered an increase of 26.1% from US$ 211.3 to US$ 266.4 million. In this regard, the major contributors have been the specialized machinery, transport equipment, electric fans etc. The export of Jewelry also rose from US$ 213.4 million to US$ 288.4 million, registering an increase of 35%.
Taking a long term view of Pakistan’s export performance over the last ten years, Pakistan’s share in the global market, according to WTO data, has declined by more than 1/3 to 0.13% in 2009 from 0.21 % in 1999.
During the last few decades, the global trade has undergone a major structural change as far as the product composition and geography of trade is concerned. There has been an explosion of non textile manufactured exports at the global level. Whereas, the share of non-textile manufactured in Pakistan’s exports has gone down from an already low figure of US $ 5.83 billion (25.08%) in 2007-08 to US $ 3.12 billion in 2008-09 (17.32 %). At the same time, our competitor economies, particularly in Asia, have significantly enhanced their share in non-textile manufactured. As far as the Textile and Clothing sectors are concerned, the rate of growth in Clothing is much higher than Textiles in the international market. Whereas, Pakistan, managing to keep its market share in Textiles to an extent, has been slow in benefiting from the expansion in higher value Clothing sector.
The principle reason for this growing disconnect between the evolving global market structure and our export performance is the erosion of the competitiveness of Pakistan’s traditional exports in general and the country’s weakness in diversifying its product and market mix.
1.1 The Comprehensive Economic Revival Program
Pakistan's Comprehensive Economic Revival Program was launched in 1999 as per the conditions of an International Monetary Fund (IMF) loan and has since been forcefully pursued. Its central agenda calls for the implementation of a privatization program and further trade liberalization, as well as steps to strengthen the tax base and improve governance. By fostering domestic competition, the reforms undertaken by Pakistan are intended to encourage a more efficient allocation of domestic resources, which would enhance the economy's productivity and local firms' export competitiveness.
So far, steps have been taken to reduce state involvement in the economy and encourage private investment in several activities. With regards to services, legislation has been passed to reduce impediments to the operation of foreign firms. The dismantling of subsidized lending rates for priority sectors has been part of a gradual effort to eliminate numerous de facto subsidies still in place. Government procurement, however, has continued to be used as an instrument to support local industry. Price preferences of up to 25% may be accorded to domestic suppliers, particularly in engineering goods contracts, and 10% of the annual procurement budget of public sector agencies may be allocated to domestic purchases. Pakistan also has a local preference scheme for investment (the Indigenization/Deletion Programmed) for which it has secured an extension for its elimination under the WTO Agreement on Trade-Related Investment Measures. Despite opening most sectors of the economy to foreign direct investment, inflows have dropped, reflecting a decline in investors' confidence. However, the continued successful implementation of the Revival Program could well serve to improve the situation.
1.2 Trade Policy and Recent Reforms
Pakistan has taken a number of steps in the last few years to liberalize its trade regime, both unilaterally and in the context of commitments made to the WTO. In May 2001, Pakistan's 35 year-old price support system was dismantled under mounting international pressure. This was followed by the elimination of non-tariff barriers on several items. To ensure compliance with the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS) commitments, Pakistan amended its patent legislation in 1997 to implement TRIPS obligations, and in 2000 passed new legislation on patents, trademarks, and copyrights. Border protection, which is now largely confined to tariffs, has been reduced drastically through unilateral cuts.
However, export subsidies remain in different forms, including direct financial support, export finance, and tax breaks in export-processing zones. Import prohibitions and restrictions have also been maintained on goods from particular origins (e.g. Israel, India). Following the dismantlement of import prohibitions on textiles and clothing, protection is now largely focused on the automotive sector, which registered effective rates of protection exceeding 5000%.
1.3 Fundamental Principles / Objective of Strategic Trade Policy
Trade Policy 2009-12 aims to set the country on the path of sustainable high economic growth through exports. The fundamental principles of the Strategic Trade Policy Framework are as under discussion.
 Growth with Equity
 Greater Opportunities for gainful employment
 Sound macro-economic framework for trade environment
 Concern with poverty eradication and environmental protection
 Investing in Human resources
 Targeting Poverty alleviation
 Promoting private sector as engine of growth
 Focus on small scale sector particularly in agriculture
1.4 Challenges to the Trade Policy
 Infrastructure deficit, particularly in energy
 Poor innovation and technological infrastructure
 Low labor productivity
 Low levels of manufacturing value addition
 Little Foreign Direct Investment in manufacturing and exportable sectors.
 Anti-export bias in taxation
 Increasing costs of exports as compared to imports
 Lack of product and geographical diversification in exports
 Absence of economies of scale in the production processes, especially in the Small and Medium Enterprise sector which accounts for a vast majority of the enterprises in the country.
1.5 The Govt Initiative for the Enhancement of the Export Competitiveness
 First, overcome the most pressing supply-side constraints such as the shortage of energy, cost of capital and difficulties linked with adverse travel advisories.
 Second, enhance competitiveness of textile and clothing, with the help of Textile Policy due to be announced shortly which focuses on new investments, modernization of machinery and increasing total factor productivity.
 Third, deepen and diversify export markets particularly our major trading partners US and EU as well as countries with which Pakistan has signed a free trade agreement such as China, Malaysia and Sri Lanka.
 Fourth, promote trade in services which globally have a more stable demand pattern and are less prone to detrimental external shocks seen for the case of commodity trading.
 Fifth, embark on domestic commerce reform and development where key areas such as wholesale and retail trade, storage and warehousing, transport, regulatory environment, promotion of modern business and taxation practices require immediate attention.
2: Suggestion for export improvement
Factors to be consider to Exports Promotion / Since Overlooked / Changes in Current Strategic Trade Policy Framework 2009-2012
2.1 Relationship with India
 Though Pakistan and India are immediate neighbors, bilateral trade between the two is extraordinarily low, accounting for less than 1% of each nation's total trade numbers. Until the early 1950s India was Pakistan's most important trading partner, but today political discord has intervened as the most significant barrier to trade between the two nations. Though India granted Most Favored Nation (MFN) status to Pakistan in 1995, its meager imports from Pakistan suggest that India has found ways to impose a de facto ban on Pakistani goods. Greater economic cooperation between the nations could provide mutual economic benefits and more importantly could generate new linkages between the business communities in the two countries, thereby nurturing constituencies for peace in the region. If the two countries are able to make progress in their political dialogue, expanding trade could be a useful complement to the political process.
2.2 Challenges Affecting Industrial Growth, Commercial Sections Abroad Role and strong collaboration with the concerned bodies.
 Pakistan’s commercial sections abroad should prepare market analysis reports to explore more trade and export opportunities for Pakistan. The foreign qualified Pakistani youth should be engaged in coordination with Commercial Sections abroad to carry out such studies.
 The government in coordination with Chambers should conduct needs analysis surveys of industries to find out their emerging needs and to come up with remedial measures to address those needs. The tariffs on the import of industrial raw material should also be reduced to facilitate the promotion of export oriented industries.
 Irrespective a potential demographic dividend, industries in Pakistan are facing shortage of skilled labor. Energy shortage, high power tariffs and credit cost, insufficient support for technology up-gradation, lack of proper infrastructure, shortage of skilled manpower and law & order situation are the main challenges affecting industrial growth. The skills up-gradation programs should be conducted through Chambers of Commerce & Industry to provide skilled manpower to industries.
 Ministry of Commerce should develop close collaboration with Ministry of Science & Technology & Information Technology, Ministry of Industries, Textiles and other establishments of technology and innovation promotion in Pakistan to provide technical support to industries in up-grading technology and improving quality of products. The Industrialists are not getting any technical support from the government to up-grade technology and they have to invite technical experts from foreign countries with their own efforts and at their own expense for installation of new technology and machinery.
 Trade Policy should address all these issues on priority to enhance the competitiveness of firms, which is key to effectively compete in today’s world of intense competition.
 New Trade Policy should focus on improving the competitiveness of export-oriented industries to improve products quality and enhance country’s exports.
2.3 Development Concerns
 Pakistan's suggestions for the improving the position of developing nations in the global economy include tightening the restrictions on anti-dumping rules often applied by developed countries for protectionist purposes and special market access for developing country exports, allowing developing countries flexibility in retaining export subsidies for the purpose of industrialization and diversification, and loosening the intellectual property commitments under the Doha Round. With regard to its own trade activity, Pakistan has limited its involvement in preferential and regional trade arrangements. Rather, it has expressed concern about the proliferation of regional trade agreements and initiatives for compromising the interests served by multilateralism. In particular, Pakistan's involvement in the South Asia Free Trade Agreement (SAFTA) has been limited; perhaps out of fear of being swamped by the economic strength of its neighbor, India.
2.4 Trade policy to aim at improving textile exports
 Major new initiatives to include, hiring of technologists from abroad, like Society of Dyers and Coloration London. Payment for services of local and foreigner fashion designers, support for opening of export offices abroad by renowned textile manufacturers.
 It included technology up gradation support for import of machinery and equipments and support for undertaking benchmarking studies of Pakistani textile manufacturing units. Training of middle management in textile sector, financial support for establishment of retail outlets abroad with own brands.
 Trade Development Authority of Pakistan (TDAP) would formulate delegations of textile sector for United States, United Kingdom, Germany, France, Belgium, Canada, Ukraine and Italy. TDAP would also organize participation in international textile fairs.
 He also informed Textile Industry Ministry was also taking initiatives to improve textile exports, including the launching of a well-organized Human Resource Development Programmed (HRDP). This would involve hiring international consultants to fill the shortage of textile graduates at all sector levels — from ginning to garments.
 Attract investment in common energy generation, distribution, facilities and augmentation of energy conservation programmed.
 To attain economies of scale in textile sector, provide incentives to weaving sector and encourage becoming formal one to enhance its productivity by introducing and installation of modern machinery.
 To establish world class accredited labs to check colors and final products. To provide market and product diversification especially in garment exports and support to this sector for making it cost effective.
 Strengthening of cotton and synthetic research institutions in the country, interaction with international companies and establishments of joint ventures.
 Technology up-gradation right from ginning to garment sector to make them most productive and cost effective by introducing modern and latest machinery and techniques. To enhance coordination among federal, provincial and donor agencies and stakeholders for infrastructure development and human resource development and supply of good quality raw materials.
2.5 Conclusion
Due to its narrow export base, concentrated mostly in low-value-added products (i.e. textiles), Pakistan's prospects for immediate trade-related growth are bleak. Pakistan's relationship with its major trading partners, the EU and the United States, is thorny due to disputes over market-access in textiles. Regional integration, on the other hand, has been stifled by poor relations with India. Pakistan's prospects for economic growth will therefore depend on the continued implementation of the Revival Programmed, particularly in attracting greater foreign direct investment to the region. Long-term growth of the economy, then, will ultimately depend on Pakistan's success in diversifying its exports and assuring improved market access for its goods.






Annex A – Trade policy flow charts



Annex B – Trade policy flow charts
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