Trade liberalization in pakistan
HISTORICAL REVIEW OF TRADE LIBERALIZATION IN PAKISTAN
The early years of Pakistanís economy can be characterized by a weak industrial base, dominance of the agriculture sector, lack of well-organized infrastructure, and above all eco-political instability. The main objective of the policies of those years was to strengthen the industrial base. To this end, Pakistan adopted a restricted trade regime and protected its domestic industries with high tariff and non-tariff barriers.
The period of the sixties was the period in which the industrial base was laid and in which rapid expansion of large scale manufacturing industries started in the country. While the highly protected trade regime remained effective in this period, some additional policies were introduced to encourage industrial exports from the country:
o an overvalued exchange rate,
o export bonuses,
o preferential credit access to industries with export potential and automatic renewal of import licenses.
Consequently, both industrial production and exports registered a reasonable increase during the 1960s. However, industrial expansion did not continue at the same rate in the next decade of seventies. In fact, it suffered a setback in the next decade due to the nationalization of industries. Although the government nationalized different types of industries in the country, it took three additional trade liberalization measures to encourage exports during this period:
o devaluation of the Pakistani Rupee by 57% in 1972,
o elimination of the export bonus scheme, and
o the discontinuation of restrictive licensing scheme. These steps stimulated exports especially of manufactured products.
Substantial trade liberalization has taken place in Pakistan since the late 1980s at a pace that has been accelerating over time. Import taxes have been reduced, the Statutory Regulatory Orders (SROs) have now been mostly withdrawn and Non-Tariff Barriers (NTBs) have been largely dismantled. In particular, the average tariff rate has declined sharply from 77 percent in 1985 to about 17 percent.
Although trade policies were modified continuously in Pakistan, changes of particular significance were made after the formulation of the new trade policy in 1987. After the incorporation of the other changes, the trade policy led, inter alia, to a reduction in tariff slabs from 17 to 10 and introduction of a uniform tax in place of commodity based sales taxes. In fact, the government focused in this decade mainly on enhancing the role of private sector in the economy, increasing the competitiveness and efficiency of the domestic industrial sector, and promoting exports. The specific measures that the government took in pursuance of these objectives related to the provision of different fiscal incentives such as
o tax holidays,
o tariff cuts and
o other profit augmenting opportunities to the exporters
o the maximum tariff was reduced from 225 percent in 1986-87 to 70 percent in 1994-95.
o the number of custom duty slabs were reduced from 13 to 5.
o flexible exchange rate system introduced earlier was kept in effect during this decade.
The years 2000-2003 have witnessed the introduction of such policies as promotion of liberalization, deregulation, and reduction in the cost of doing business; these policies have laid equal emphasis on encouraging a stable macro economic framework in terms of inflation, interest rate and exchange rate. Further, they have also concentrated on the promotion of export of services, which had not received proportional attention in the past. In fact, they have made the promotion of services an integral component of the overall trade policy of the country.
Trade, as measured by the sum of imports and exports, has accelerated as a result of the process of greater openness of the economy, especially over the past 5 years. However, trade performance relative to many other developing Asian economies has not been that impressive. While the trade-to-GDP ratio has increased 0.4 percentage points per annum in Pakistan since 1990, it has increased by 0.8 percentage points per annum in India, 1 percentage point per annum in Korea, for example. The world average growth of trade as a share of GDP, at 1 percent per annum, has also been higher than that of Pakistan.
REGIONAL / BILATERAL TRADE AGREEMENTS
In a bid to liberalize and enhance its trade Pakistan has concluded several regional and bilateral agreements. Some of these are:
1. AGREEMENT ON SOUTH ASIAN FREE TRADE AREA
The South Asian Association for Regional Cooperation (SAARC) was established on December 8, 1985.The SAARC Charter was adopted by Governments of Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka with a aim to accelerate the process of economic and social development in Member States. The Agreement on South Asian Free Trade Area (SAFTA) was signed during the Twelfth SAARC Summit on 6 January 2004. The entry into force of the Agreement thus launches the South Asian Free Trade Area which would be completed by 1st January 2016.
2. PREFERENTIAL TRADE AGREEMENT WITH IRAN
Pakistan signed a Preferential Trade Agreement with Islamic Republic of Iran on 4th March 2004. The Cabinet ratified the agreement on 25th May 2005. As mutually agreed the agreement has become operational from 1st September 2006. Under the Agreement, Pakistan offered concessions to Iran on 338 tariff lines, whereas Iran gave concessions on 309 tariff lines. Preferences granted by both countries to each other cover approximately 18% of MFN tariff of both countries.
3. FREE TRADE AGREEMENT WITH SRI LANKA
Free Trade Agreement (FTA) between Pakistan and Sri Lanka is operational from June 12, 2005. Under the Free Trade Agreement, Sri Lanka and Pakistan have agreed to offer preferential market access to each othersí exports by way of granting tariff concessions. Sri Lanka would be able to enjoy duty free market access on 206 products in the Pakistani market including tea, rubber and coconut. Pakistan, in return, would gain duty free access on 102 products in the Sri Lankan market. These products include oranges, basmati rice and engineering goods.
4. EARLY HARVEST PROGRAMME WITH MALAYSIA
The Agreement on the Early Harvest Programme (EHP) for the Free Trade Area ( FTA ) between Malaysia and Pakistan was signed on Saturday, 1 October 2005 in Kuala Lumpur. The Pak-Malaysia EHP is operational from January 1st 2006 and shall expire upon entry into force of the FTA or 31st March 2007. The EHP is based on the 2004 import statistics and the Most Favoured Nation (MFN) applied tariff rates of 1 January 2005 of both countries.
5. EARLY HARVEST PROGRAMME WITH CHINA
The Agreement on Early Harvest Programme (EHP) between Pakistan and China is operational with effect from 1st January 2006. The EHP along with annexes relating to tariff concessions and the time schedule for reduction of tariffs was signed and exchanged on 5th April 2005.
The Early Harvest Programme (EHP) is a mini fast track prelude to the FTA under negotiation. Both Pakistan and China have increased market access for each other on items of significant commercial interests. The EHP has provided duty free access to a substantial number of products within next two years. Apart from this, a large number of products will be exportable by both counties at Margin of Preference in relation to MFN duty rate. In this way both countries would enjoy concessionary duty rate in comparison to exports of same products from other countries.
6. FREE TRADE AGREEMENT WITH MALALYSIA
The Comprehensive Free Trade Agreement (FTA) for Closer Economic Partnership between Pakistan and Malaysia was approved by the Cabinet on 6th November, 2007. It was signed on 08-11-2007 at Kuala Lumpur Malaysia.
The Agreement is a timely initiative by the Government of Pakistan to secure market for its export products in Malaysia and deepen the economic and trade relationship with an important member of the region.
7. FREE TRADE AGREEMENT WITH CHINA
Chinese President Hu Jintao and his Pakistani counterpart Pervez Musharraf oversaw the signing of a free trade agreement between the two allies here in Islamabad on 24th November, 2006. The architecture of the bilateral Free Trade Agreement includes Trade in Goods and Investments in the first Phase and the leaders of both the countries have decided to negotiate on Trade in Services during 2007 to enlarge the coverage of the Free Trade Agreement.
8. PREFERENTIAL TRADE AGREEMENT WITH MAURITIUS
Pakistan has also signed Preferential Trade Agreement with Mauritius on July 30, 2007.
Five out of ten members of ECO signed ECO Trade Agreement in July; 2003.The senatory members are Pakistan, Iran, Turkey, Afghanistan and Tajikistan.
10. FRAMEWORK AGREEMENT ON TRADE
In order to promote and extend trade relations, Pakistan started free trade negotiations with MERCOSUR countries, which concluded on a Framework Agreement on Trade which was signed on July 21, 2006.
EFFORTS FOR MARKET ACCESS IN THE EU
The following initiatives have been taken to increase market access in EU, which is Pakistanís single largest export market.
1. PAK-EU FTA
Pakistan has approached the EU to persuade them to enter into FFTA negotiations with Pakistan. A strategy has been launched to convince EC that given the size of its marketand huge market potential, Pakistan can be a credible FTA partner of EU.
2. MARKET ACCESS INITIATIVE IN NON-EU COUNTRIES
Pakistan has targeted non-EU states within Europe to sign PTAs leading to FTAs. These countries include Switzerland, Norway, Serbia, Montenegro, Bosnia, Croatia Belarus, and Ukraine. Serbia and Bosnia have agreed to initiate negotiations with Pakistan.
A draft text of PTA was sent to Russia for consideration on May 12, 2006. Later on their queries on the draft were clarified and the response is now awaited. Lately, the issue has been discussed between the PMs of the two countries during the visit of Russian Prime Minister on 12-13 April 2007.
TRADE POLICY 2008-09
The objectives of current trade policy are:-
o Trade Policy should be people centric i.e. help in poverty alleviation. This is achieved by facilitating increased exports leading to increased production of exportable surpluses thereby creating more employment.
o Focus should be on increased export earnings by encouraging and supporting exports of higher unit value products. This implies stress on better quality, value addition and compliance with international standards.
o Emphasis should be on improving competitiveness via reduction in cost of doing business, and supporting appropriate capacity building and vertical integration.
o Assistance in marketing through trade promotion activities and increasing market access.
o Diversification of export products and markets.
The export target for 2008-09 has been fixed at US$ 22.10 Billion. This represents a growth of 15% over our last yearís exports.
EXPORT STRATEGY AND MEASURES
The Export Strategy for 2008-09 has been designed keeping in view the aforementioned objectives and its salient features are
o Intensification of market intelligence.
o Trade promotion by TDAP through activities such as organizing exhibitions, participation in trade fairs and trade delegations. Also supplemental efforts by Ministry of Commerce through trade diplomacy for additional market access opportunities, and to minimize any non tariff barriers facing our exporters in other countries.
o Enhancing competitiveness of exports by helping reduce costs of doing business. Hence various measures are being proposed to simplify procedural requirements including relief through comprehensive zero rating of various export sectors.
o Improvement of physical infrastructure through coordination with concerned Government agencies since poor condition of the infrastructure imposes extra costs on our exporters.
o Instead of providing cash incentives or subsidies to exporters, especially in view of current financial constraints, emphasis would be to support capacity building efforts of the exporters like productivity enhancement programmes such as training facilities to upgrade human resource skills.
o Diversification will be encouraged by proposals geared specifically to promote more trade in agricultural products. In the manufacturing sector this diversification policy will also facilitate SMEs.
o Exporters would be encouraged to improve quality, cater to latest consumer preferences, comply with international standards and obtain the relevant certification in this regard.
o Continue with past trade policy measures that are proving valuable for increasing exports.
In accordance with the strategy that I have just outlined, a number of new policy measures have been formulated to implement the strategy.
o Temporary Importation for Exports
o Zero Rating of Exports
o Development of Export Clusters
o To facilitate exports to the Afghanistan provinces of Paktia (Gardez) and Khost, it has been decided that a customs station at Pak-Afghan border would be setup at an appropriate location. This will reduce transportation cost & delivery time to this area from Pakistan.
IMPORT STRATEGY AND MEASURES
This year our import strategy besides addressing the problem of the large trade gap is also designed to facilitate those imports that will serve to increase the competitiveness of our exports and therefore increase their over all quantum and value
o In order to reduce cost of raw material imports and thereby make our export products more competitive the import of Job lot & Stock lots of raw material, which attracts duty up to 5%, would now be allowed.
o Enlarge the list of importable items from India, which is based on the requests of our stakeholders. Cheaper raw material sourced from India would make our exports more competitive in international market. Although the list is being issued separately, I may mention that we are allowing import of diesel and fuel oil from India, because it will be cheaper due to the difference in transportation cost. This will also help us to address our global trade deficit.
o Customs Duty on the import CNG Buses was brought from 15% to zero in the Budget 2008-09
o In case any Indian manufacturer of CNG buses makes a firm commitment to establish manufacturing of such buses in Pakistan, the Ministry of Commerce may provide special dispensation for import of 10 buses by road via Wahga from each possible investor as test consignments.
PAKISTAN AND THE WTO
Pakistan is one of the founder Members of the WTO since 1995, and its predecessor organization the GATT set up in 1948. We are following an export led growth strategy and as such market access is of vital importance for our businesses. The increase in preferential arrangements and free trade areas between some members is also eroding our market access. Therefore in order to maintain current markets and gain new ones for our exportable goods and services we are dependent on the WTO to get tariff and non tariff barriers lowered on an MFN basis. Such MFN liberalization effectively levels the playing field for competitive suppliers.
Pakistan has been actively engaged in the Doha round of trade talks that were launched in the Qatari capital in November 2001. Aptly named the "Doha Development Agenda" (DDA), this round of trade talks has been focusing on removing distortions in the world agriculture markets and attaining enhanced market access for both products and service providers from Pakistan.
Since 2001, there have two more ministerial conferences in Cancun in 2003 and Hong Kong in 2005 respectively. There have been many ups and downs in the road to a successful conclusion to the Doha round that takes into account the myriad interests of the developing membership. There was a breakdown of talks in the summer of 2006 which led many observers to be skeptical of the entire process. However, sustained efforts by the membership led to a partial resumption of the talks in November 2006 and full resumption since January 2007 after the annual meeting of the World economic forum at Davos.
TRADE POLICY REVIEW BY THE WTO
Pakistanís economic growth has been impressive since its previous Trade Policy Review in 2002 mainly as a result of its relatively open trade and investment regimes, sound macroeconomic policies and structural reforms that have also contributed to lower unemployment and reduced poverty, according to a WTO Secretariat report on the trade policies and practices of Pakistan
Trade liberalization has resulted inter alia in noticeable improvements in customs procedures, the considerable reduction of tariff protection and the widening of the scope of tariff bindings, giving more predictability to the trade regime. Despite these improvements, a complex tariff structure remains in place in some sectors. In addition, the protection of Intellectual Property Rights has been strengthened.
The report also notes that Pakistan still lags behind in export diversification still depending heavily on textiles and clothing, which account for two thirds of the total exports. This sector now faces stronger competition in major markets. Also, State involvement in certain activities like engineering and key services persists.
Continued trade liberalization and other productivity-boosting structural reforms to address bottlenecks, excessive regulatory controls and labour market rigidities would help improve Pakistanís international competitiveness and the prospects for sustainable economic growth, according to the report.
EFFECTS OF TRADE LIBERALZATION ON GROWTH AND POVERTY
Both positive and negative effects are involved in the channels of transmission. Trade liberalization has had a poverty-reducing effect through enhanced growth, productivity and investment and through price stability. But it also has entailed some costs, in particular costs related to fiscal adjustment, which have been poverty-increasing. The axe of lower tax revenues resulting from lower import taxes and control of the fiscal deficit fell on developing expenditures. Not only are such expenditures directly pro-poor, but the employment opportunities that could have been created as a consequence of these expenditures were also foregone, adversely affecting the income of the poor. With respect to income inequality, the evidence suggests that although trade liberalization by itself leads to a slight reduction in inequality, a rise in Foreign Direct Investment (FDI) appears to increase it.
This process of liberalization puts Pakistan towards the middle of a group of developing economies in Asia in terms of self-imposed restrictions on trade through both tariff and NTBs. In this group, Pakistan restricts its imports about as much as China and less than India, Malaysia, the Philippines, and Bangladesh, but more than Thailand, Turkey, Indonesia, Sri Lanka and Indonesia. However, in terms of barriers imposed by other countries on a countryís exports, Pakistan is the country allowed the least market access among the same group of developing countries in Asia and also ranks amid the highest among all countries of the world in being denied market access.
CONCLUSION AND POLICY IMPLICATION
While trade liberalization is regarded as encouraging development by affecting development indicators in a desirable manner, it has not influenced the chosen indicators of poverty, income distribution, PGDP and employment in Pakistan as expected. Increased imports, availability of cheap raw material and machinery under conditions of unrestricted trade on the one hand enhances production, while exports of manufactured goods on the other hand, led to the creation of additional employment opportunities in the country due mainly to increase in demand for domestic goods.
Trade liberalization has contributed to the accentuation of income inequality in the country. This may be attributed to the poor performance of mediating factors in Pakistan. It may thus be argued that trade liberalization has not affected development favorably in Pakistan. It may not be the fault of just liberalization policies themselves but also of the mediating factors of our economy. Some policy implications are hence suggested:
o Since Pakistan is a labor abundant country, it should give priority to the production and export of labor-intensive products, such as textiles.
o For poverty alleviation the productivity-oriented approaches, with the potential to increase the income of the poor by increasing their productivity, should be encouraged.
o Political stability which is one of the most effective factors of development should be promoted in the country. Improved political stability has favorable implications. In the last fifty years Pakistan has faced several changes in government and consequently changes in economic policies. To improve economic performance, the country should improve political stability.
o Pakistan should improve the performance of its mediating factors for trade liberalization to be effective in promoting growth and development.
o Further reduction in trade barriers can enhance growth and reduce poverty in Pakistan under the right conditions. It is important to have other pro-investment policies in place though, in order to take full advantage of this channel.
o Increases in development expenditures should be rigorously pursued in order that the adjustment costs of trade liberalization do not negate the gains from trade. But budgeting for more development expenditures is only the first step in this process. Delivery systems and monitoring systems of these development outlays must also be improved.
o The development expenditures should not largely be financed through increased fiscal deficits otherwise the hard-earned macroeconomic stability and credibility will be put at risk. Some expenditure switching is required and taxes as a share of GDP need to increase, including through such measures as taxation of agricultural income and services as well as of capital gains on stock and real estate.
o Efforts to improve social safety nets and skill development and training schemes are needed to guard against the employment losses in the transition period
o For sustainability of exports, further progress in improving institutions, attracting export-oriented FDI and developing new export markets is needed as well as making a better case for improving market access in existing markers.
o Textile quota removal represents a potential opportunity, but given stiff competition from China, India and others Pakistanís international competitiveness needs to improve to take advantage of this.