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Revival of the Manufacturing Sector Focus on Trade Aspects December 2010 PAKISTAN BUSINESS COUNCIL.

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Presentation on theme: "Revival of the Manufacturing Sector Focus on Trade Aspects December 2010 PAKISTAN BUSINESS COUNCIL."— Presentation transcript:

1 Revival of the Manufacturing Sector Focus on Trade Aspects December 2010 PAKISTAN BUSINESS COUNCIL

2 Table of Contents Background … 3 World Trade Organization … 9 Tariff Rates for Selected Commodities for Pakistan & India … 11 Trade and Manufacturing Data for Selected Commodities … 12 Television Sets … 13 Paper and Paperboard … 14 Electric Motors … 15 Tea … 16 Ceramics … 17 Footwear … 18 Textiles – Synthetic Fabrics, Ready Made Garments … 19 Pakistans Free Trade Agreements … 20 Pakistan – Sri Lanka FTA … 22 Pakistan – China FTA … 28 Pakistan – Malaysia FTA … 34 Export Potential with Major Trading Partners … 40 Total EU Imports from Bangladesh, Pakistan, Sri Lanka and Viet Nam … 41 Total US Imports from Bangladesh, Pakistan, Sri Lanka and Viet Nam … 42 Under Utilization of SAARC … 43 Afghan Transit Trade Agreement … 44 Salient Features of the New APTTA … 46 Recommendations of Industries not considered in the APTTA … 47 Pakistan Afghanistan Bilateral Trade … 48 Top 10 Pakistani Exports to Afghanistan in 2009 … 49 Afghanistans Transit Trade … 50 Incentive to Smuggle … 51 Top 10 Imported Commodities under the ATTA by Afghanistan … 52 Limited Potential of CAR … 53 Problems of Under Invoicing and Misreporting … 54 Comparison of Official 2009 data From Top 10 Import Partners … 55 Pakistan – China: Difference in Reported Import/Export Figures … 56 Pakistan – China: Discrepancy in Import Figures for Selected Commodities - 2009 … 57 Pakistan – UAE: Difference in Reported Import/Export Figures … 58 Page 2

3 Background Government & Industry urgently need to develop a strategy to reduce the trade gap and to bring about higher levels of economic growth It is critical to revive the manufacturing sector as this will lead to: – Creation of jobs – Reduction in imports as domestic manufacturing regains domestic market share – Increased competitiveness in export markets Page 3

4 Background The current Foreign Exchange situation is grave. With commodity prices rising again after dropping in 2009, the current account deficit of $15.3 B is very high and not sustainable. $15.3 B Page 4 Source: United Nations Commodity Trade Statistics Database * Data on the basis of GoP Fiscal Year. Fiscal year runs from Jul – Jun. Source: State Bank of Pakistan

5 Background Reducing our import bill looks difficult due to the highly inelastic composition of our imports Source: United Nations Commodity Trade Statistics Database Page 5 In 2009, top 10 items accounted for 72% of our imports. In 2008, they accounted for 77% of our imports.

6 Background Majority of Pakistans exports are still based around a single crop (Cotton)/manufacturing sector (Textiles). Export diversification, though necessary, looks difficult in the near term Page 6 Source: United Nations Commodity Trade Statistics Database

7 Background Page 7 As a result, Pakistans export performance in the world has declined with competitors starting to either catch up or outstrip Pakistan Source: United Nations Commodity Trade Statistics Database

8 Background Source: IMF, FBS, Pakistan Economic Survey 2009-10 Page 8 The discussion has to be framed within the context of global manufacturing trends

9 The World Trade Organization Page 9

10 Revival of the Manufacturing Sector: WTO a Hindrance? Proponents of WTO stress that structural imbalances, trade malpractices and misuse of the ATTA are the real culprits. In addition, there seems to be an inability to fully exploit the opportunities created through WTO & existing FTAs Pending conclusive evidence we can only make educated guesses on the real causes behind the lackluster performance of our manufacturing sector Page 10

11 Tariff Rates for Selected Commodities for Pakistan & India Bound tariff: Represents a commitment not to increase tariffs above the listed rates for all countries Applied tariff: Duties that are actually charged on imports. These can be below the bound rates Even though Pakistans applied rates are quite low, the high bound rates are viewed negatively as they represent a risk to investors. The possibility of GoP suddenly raising duties to the higher bound rate means that investors have to account for it in their projections. Page 11 Source: World Trade Organization Bound and Applied Tariff rates for India and Pakistan

12 Trade and Manufacturing Data for Selected Commodities Page 12

13 Television Sets Source: Trade Data: United Nations Commodity Trade Statistics Database (HS 02 code: 8528) Manufacturing Data: Pakistan Statistical Year Book, Federal Bureau of Statistics Tariff Data: World Trade Organization Televisions were removed from the ATTA negative list in 2005. Domestic manufactures and legal imports started declining at the same time. See page 52 for Afghan Imports under ATTA Page 13 ** 2009 manufacturing data not available Afghan Transit Trade Agreement

14 Paper and Paperboard Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 4801-4814) Manufacturing Data: Pakistan Statistical Year Book, Federal Bureau of Statistics Tariff Data: Pakistan Country Profile, World Trade Organization Page 14 Market share of domestic manufacturers has been steadily eroding ** 2009 manufacturing data not available

15 Electric Motors Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 850140, 850151-850153) Manufacturing Data: Pakistan Statistical Year Book, Federal Bureau of Statistics Tariff Data: Pakistan Country Profile, World Trade Organization Page 15 The decline in domestic manufacture has coincided with the lowering of applied tariff. Starting 2004, import quantities started outstripping domestic manufacturing ** 2009 manufacturing data not available

16 Tea Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 090230, 090240) Manufacturing Data: Pakistan Statistical Year Book, Federal Bureau of Statistics Tariff Data: Pakistan Country Profile, World Trade Organization Page 16 Domestic Blended quantities are steady. Legal import quantities have declined even though Pakistans population has been growing. Compare with Afghan Imports under ATTA on pg 52 ** 2009 domestic blend data not available

17 Ceramics **Manufacturing data was not available for Ceramics Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 6901, 6904-6911) Tariff Data: Pakistan Country Profile, World Trade Organization Page 17 The increase in import quantities of ceramics corresponds with the building boom in Pakistan

18 Footwear Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 6401-6405) Tariff Data: Pakistan Country Profile, World Trade Organization **Manufacturing data was not available for Footwear Page 18 Export quantity is back at the 2003 level whereas imports have steadily been increasing

19 Textiles – Synthetic Fabrics, Ready Made Garments Page 19 Cause for concern is that imports under ATTA as well as exports of synthetic fabrics to Pakistan (reported by China) are greater than the total legal imports reported by Pakistan Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 5407, 5408, 5512-5516) Tariff Data: Pakistan Country Profile, World Trade Organization Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 61,62) Tariff Data: Pakistan Country Profile, World Trade Organization As in the case of synthetic fabrics, total imports reported by Pakistan are less than the exports to Pakistan reported by China

20 Pakistans Free Trade Agreements Page 20

21 Free Trade Agreements (FTA) Page 21 An FTA is an agreement between two or more countries to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. An FTA generally starts off with a reduction in tariffs before eventually leading to elimination of tariffs in 5-10 years. With WTO talks stalled, more and more countries are resorting to signing FTAs with their preferred trading partners. This could create problems of market access. For example, the EU is planning on signing an FTA with India but an EU FTA with Pakistan is not on the horizon. This will have an effect on Pakistans textile exports. Pakistan has signed 3 major FTAs (with about 10 more in the works)

22 Pakistan – Sri Lanka FTA Page 22

23 Pakistans first FTA. Operational from June 2005 Total trade in 2009 was $273 Million Pakistan got market access at zero duty for 102 products including agricultural goods, rice (with quantity restrictions) and engineering goods Sri Lanka was given duty free market access on 206 products including tea (with quantity restrictions), rubber and coconut Pakistan Sri Lanka FTA Page 23

24 GDP 1 :$40.7 B$42.0 B$165 B$167 BGDP Growth 1 :6.0%3.5%2.0%3.7%Population 1 :20.2 M20.3 M166 M170 MPer Capita Income 1 :$2,020$2,068$ 994$ 981Exports 2 :$8.1 B$7.1 B$20.2 B$17.6 BImports 2 :$13.6 B$9.4 B$42.3 B$31.6 BTrade Surplus/Deficit:-$5.5 B-$2.3 B-$22.1 B-$14.0 BForeign Currency Reserves 1 :$2.6 B$4.8 B$9.0 B$13.6 B FDI, net inflow 1 :$752 M$404 M$5.44 B$2.39 B Comparison of Key Economic Indicators SRI LANKAPAKISTAN 1.World Bank – World Development Indicators ( http://data.worldbank.org/indicator) 2. UNCTSD http://data.worldbank.org/indicator Page 24 2008 2009

25 Trends in Pakistan - Sri Lanka Trade $161 M Source: United Nations Commodity Trade Statistics Database --- FTA operational Page 25

26 Comparison of Pre and Post FTA Import figures Source: United Nations Commodity Trade Statistics Database Page 26 Import growth: Primarily in rubber with smaller growth registered in fruits/nuts. Due to quantity restrictions on tea imported at a lower tariff, tea imports have not grown

27 Comparison of Pre and Post FTA Export figures Source: United Nations Commodity Trade Statistics Database Page 27 Export growth: Main export is cotton and its derivatives (yarn & fabrics). Mild export growth has occurred in cereals, vegetables and knitted fabrics (growth in the three commodities is ~ $43 million compared to 2005)

28 Pakistan – China FTA Page 28

29 Early Harvest Program (EHP) operational from Jan 2006. FTA operational from Nov 2006 Total trade in 2009 was $4.78 Billion Pakistan got market access at zero duty for: Cotton fabrics, bed-linen and other home textiles, marble and other tiles, leather articles, sports goods, iron & steel products and engineering goods, industrial alcohol China was given market access mostly on commodities required for industrial growth: Industrial machinery, organic and inorganic chemicals, raw material for various industries including engineering sector, intermediary goods for engineering sector Pakistan China FTA Page 29

30 GDP 1 :$4,533 B$4,984 B$165 B$167 BGDP Growth 1 :9.6 %9.1 %2.0 %3.7 %Population 1 :1,325 M1,331 M166 M170 MPer Capita Income 1 :$3,422$3,744$994$991Exports 2 :$1,430 B$1,202 B$20.2 B$17.6 BImports 2 :$1,131 B$1,006 B$42.3 B$31.6 BTrade Surplus/Deficit: $299 B$196 B-$22.1 B-$14.0 BForeign Currency Reserves 1 :$1,966 B$2,453 B$9.0 B$13.6 B FDI, net inflow 1 :$147.8 B$78.2 B$5.44 B$2.39 B Comparison of Key Economic Indicators CHINAPAKISTAN Page 30 2008 2009 1.World Bank – World Development Indicators ( http://data.worldbank.org/indicator) 2. UNCTSD http://data.worldbank.org/indicator

31 Trends in Pakistan - China Trade Source: United Nations Commodity Trade Statistics Database $2.78 B --- EHP operational Page 31

32 Comparison of Pre and Post FTA Import figures Source: United Nations Commodity Trade Statistics Database Page 32 Import growth: Imports have grown across the board. Cause for concern from a domestic manufacturing view is the increased import of the highlighted items

33 Comparison of Pre and Post FTA Export figures Source: United Nations Commodity Trade Statistics Database Page 33 Export growth: Growth has primarily been in Cotton and its derivatives (yarn and fabrics) and raw materials. No growth in value added products

34 Pakistan – Malaysia FTA Page 34

35 Early Harvest Program (EHP) operational from Jan 2006. FTA operational from Aug 2007 Total trade in 2009 was $1.83 Billion Pakistan has duty free market access for: cotton yarn & fabrics, fruits and jewellery. However, textile made-ups are excluded. Malaysia was given preferential market access on palm oil, industrial machinery, organic and inorganic chemicals, raw material for various industries including engineering sector and intermediary goods for engineering sector Has received criticism for being a Palm Oil FTA Pakistan Malaysia FTA Page 35

36 GDP 1 :$221 B$192 B$165 B$167 BGDP Growth 1 :4.6 %-1.7 %2.0 %3.7 %Population 1 :27.0 M27.5 M166 M170 MPer Capita Income 1 :$8,187$6,975$994$981Exports 2 :$199 B$157 B$20.2 B$17.6 BImports 2 :$156 B$124 B$42.3 B$31.6 BTrade Surplus/Deficit: $43 B$33 B-$22.1 B-$14.0 BForeign Currency Reserves 1 :$92 B$97 B$9.0 B$13.6 B FDI, net inflow 1 :$7.4 B$1.6 B$5.44 B$2.39 B Comparison of Key Economic Indicators MALAYSIAPAKISTAN Page 36 2008 2009 1.World Bank – World Development Indicators ( http://data.worldbank.org/indicator) 2. UNCTSD http://data.worldbank.org/indicator

37 Trends in Pakistan – Malaysia Trade $1.45 B Source: United Nations Commodity Trade Statistics Database --- EHP operational Page 37

38 Comparison of Pre and Post FTA Import figures Source: United Nations Commodity Trade Statistics Database Page 38 Import growth: Main import growth has been in Palm Oil. Little to no increase in imports of other commodities

39 Comparison of Pre and Post FTA Export figures Source: United Nations Commodity Trade Statistics Database Page 39 Export growth: Substantial growth has only been in the export of cereals (rice) with mild growth in value-added textile products. Although Malaysia is a bigger market, total exports in 2009 of $158 M are less than the exports to Sri Lanka

40 Export Potential with Major Trading Partners Page 40

41 Total EU Imports from Bangladesh, Pakistan, Sri Lanka and Viet Nam Page 41 In 2002, of the total Pakistani exports to EU of $2 million, cotton and textiles made up 54% while in 2009 they made up 62%. The 2009 corresponding percentage for Bangladesh, Sri Lanka and Viet Nam is 92%, 59% and 17% respectively. Source: United Nations Commodity Trade Statistics Database

42 Total US Imports from Bangladesh, Pakistan, Sri Lanka and Viet Nam Page 42 Source: United Nations Commodity Trade Statistics Database As in the case of EU, cotton and textiles make up majority of Pakistans exports to the EU. In 2002, of the $2 million Pakistani exports to the US, cotton & textiles contributed 79% which rose to 82.4% of exports to the US by 2009.

43 SAARC is heavily under-utilized Page 43 Source: United Nations Commodity Trade Statistics Database In 2009 total world trade by SAARC countries was nearly $550 billion

44 Afghan Transit Trade Agreement (ATTA) Page 44

45 Afghan Transit Trade Agreement (ATTA) - Background Original treaty signed in 1965 between Pakistan and Afghanistan. A new treaty, the Afghanistan-Pakistan Transit Trade Agreement (APTTA) signed in 2010 Widespread misuse of ATTA is reported o TV sets included in the 1996 negative list. o TV sets removed from the negative list in 2005. Page 45 Domestic Production: From 72,000 to 288,000 Domestic Production: From 795,000 to 534,000 Legal Imports: From 935,000 to 609,000

46 Salient Features of the New APTTA Provides transit routes to Pakistan to the Central Asian Republics (CARs) Afghan exports to India via Wagah allowed. Indian exports to Afghanistan via Wagah not allowed Afghan Cargo allowed from 3 seaports: Port Qasim, Karachi Port, Gwadar Port No negative list or provision of negative list included Measures adopted to reduce unauthorized trade: – Installation of tracking device on transport unit – Custom to Custom information sharing – Provision of financial guarantees equivalent to Pakistan import duties Page 46

47 Recommendations of Industries not considered in the APTTA – Imposing quotas on transit items after calculating the consumption of these goods in Afghanistan (Refused by Afghanistan) – Collecting customs duties at the seaports on transit items at Pakistans Tariff rates, to be refunded once the cargo reaches (Refused by Afghanistan) – Setting an identical tariff structure for Afghanistan and Pakistan to reduce smuggling margins (Cabinet Decision to rationalize tariff regime but no long term road map) – Documenting Afghan Imports/Exports – Letters of Credit and registration with Afghan tax authorities for Afghan importers (Provision of financial guarantees equivalent to Pakistan import duties incorporated in APTTA) Page 47

48 Pakistan Afghanistan Bilateral Trade Bilateral trade between Pakistan and Afghanistan has been increasing since 2000. In 2009, exports to Afghanistan totaled $1.3 billion while imports were $122 million Source: United Nations Commodity Trade Statistics Database Page 48

49 Top 10 Pakistani Exports to Afghanistan in 2009 Source: United Nations Commodity Trade Statistics Database Total Exports: $1.34 B Page 49 The top 4 items (Petroleum products, stone & cement, cereals, edible oil), which do not include any value added products, make up almost 60% of our exports

50 Afghanistans Transit Trade To access seaports, two possible options exist for Afghanistan: Chabahar/Bandar Abbas port in Iran and Port Qasim, Karachi Port & Gwadar Port in Pakistan Afghanistans transit trade through Pakistan has been increasing, reaching $1.9 billion imports in 2009 (representing an increase of over 900% from 2001 levels) Slide 50 Source: Pakistan Customs

51 Incentive to Smuggle Page 51 ItemAfghanistan TariffPakistan Tariff Tobacco*16% CD 25% CD + 16% ST + 4% WHT + ED Auto Parts*5% CD35% CD + 16% ST Tea2.5% CD 10% CD + 16% ST + 1% ED By staying out of the formal sector, smugglers are able to avoid Customs Duty as well as other taxes. Avoidance of Sales Tax and Excise Duty is a major source of advantage to smugglers. *On the negative list prior to signing of the new APTTA

52 Top 10 Imported Commodities under the ATTA by Afghanistan Keeping in mind the limited resources of Afghanistan, the large amounts of imports of the highlighted items suggests misuse of ATTA Slide 52 Source: Pakistan Customs

53 Furthermore: The CAR markets have already been penetrated by Chinese, Iranian and Turkish goods. It will be many years before Afghanistan has stabilized to the point that transit is possible to CAR without significant risks Limited Potential of CAR Though major concessions were given in the new APTTA in exchange for transit access to CAR for Pakistani goods, the realistic potential of the markets in that region needs assessed Slide 53 Source: World Bank – World Development Indicators (http://data.worldbank.org/indicator)http://data.worldbank.org/indicator CountryGDP (billion $)Per Capita IncomePopulation (millions) Tajikistan$4.98$7167.0 Kazakhstan$109.16$6,87015.9 Kyrgyzstan$4.58$8605.3 Uzbekistan$32.82$1,18227.8 Turkmenistan$19.94$3,9045.1 Pakistan$166.54$981170.0 Total Population: 61.1 million

54 Problems of Under Invoicing and Misreporting Variance in data as reported by the Governments of Pakistan and its trading partners for imports and exports of Pakistan Page 54

55 Comparison of Official 2009 data From Top 10 Import Partners Note: The figure reported by the importing country should be slightly higher because of the difference between CIF and FOB valuation Source: United Nations Commodity Trade Statistics Database Page 55 The high variance in reported figures occurs mainly for China & UAE. For China, the imports reported by Pakistan are much less than the exports reported by China. For UAE the phenomenon is opposite. Imports reported by Pakistan are much higher than the exports reported by UAE

56 Pakistan – China: Difference in Reported Import/Export Figures Source: United Nations Commodity Trade Statistics Database Page 56 $1.74 B $0.26 B Note: The figure reported by the importing country should be slightly higher because of the difference between CIF and FOB valuation

57 Pakistan – China: Discrepancy in Import Figures for Selected Commodities - 2009 Source: United Nations Commodity Trade Statistics Database Page 57 The large amounts of under declared imports of textiles, footwear and auto-parts has hurt the domestic industry

58 Pakistan – UAE: Difference in Reported Import/Export Figures Page 58 $2.29 B Source: United Nations Commodity Trade Statistics Database Note: The figure reported by the importing country should be slightly higher because of the difference between CIF and FOB valuation


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