Unilateral Liberalisation: Pakistan’s Path to Trade Revival Sara Javed 24 th November,

Introduction Pakistan’s export is stagnant for last couple of years, Why? Other countries are progressing in terms of trade. Why? How Pakistan will achieve the target of $150 billion exports by 2025?  Objective: To analyse the significant shifts in trade policy over the last 25 years and their impact on overall trade performance. ‘Pakistan has become relatively open compared to 1990s but when compared to its neighbouring countries today, it is still much protectionist’ 2

Pakistan: The Experience of Trade Liberalisation Unilateral Trade Liberalisation Period ( )Policy Neutral Period ( ) Trade Policy Mix: From Bilateral and Regional Liberalisation to Trade Restrictions (2006 onwards) 3

Unilateral Trade Liberalisation Period ( )  The Era of Economic Reforms  Early 1990s- A comprehensive programme of macroeconomic adjustment and structural reforms.  1991 – initiation of unilateral liberalisation  – imposition of regulatory duties  reform process started again  WTO: Pakistan Misses the opportunity to Reform  1995 – Pakistan joined WTO  TRIMs (partially implemented)  Plurilateral Agreements 4

Unilateral Trade Liberalisation Period ( )  The maximum level of tariff reduced to 45 percent in and to 25 percent by  Moreover, the numbers of slabs in custom duties were reduced (with some exception) from 13 to 5 with rates of 0, 5, 10, 15 and 25 percent. WTO was not the driving force to implement reforms in Pakistan. The reform period of was witnessed due to commitments with the IMF under the poverty reduction programme. 5

6 Exports $ 6.13 billion $ billion Imports 1990 – $ 7.62 billion $ 12.2 billion 90% 61% Unilateral Trade Liberalisation Period ( )

Policy Neutral Period ( )  : No reforms were undertaken  Lagged Impact:  90s reforms made Pakistan one of the least protected markets in the South Asian region.  Pakistan’s openness ratio rose from 25 percent in to almost 30 percent in , and for the first time export growth rates reached double digit in  During , trade openness was third among the most important factors contributing to growth. 7

Trade Policy Mix (2006 onwards) 8 Bilateral and Regional Trade Liberalisation  Regional Trade Agreements  South Asia Free Trade Agreement (SAFTA)  South Asian Free Trade Area (SAFTA) came into force in January The member countries of the Agreement are Afghanistan, Bangladesh, Bhutan, Maldives, India, Pakistan, Nepal and Sri Lanka.  Economic Cooperation Organisation Trade Agreement (ECOTA)

Trade Policy Mix (2006 onwards)  Bilateral Trade Agreements  Pakistan – China FTA  Pakistan – Malaysia FTA  Pakistan – Sri Lanka FTA  Pakistan – Iran PTA  Pakistan – Mauritius PTA 9

Pakistan – China FTA  FTA – signed in 2006  Imports from China:  Increase by 2.3 times – $4.2b (2007) to $9.6b (2014)  contributing approximately 25 percent of the total imports of Pakistan  Export to China:  increase by 3.58 times - $ 613m (2007) to $2.2b (2014)  12 percent growth in products that are not in FTA  Pakistan’s share in exports of China accounts to approximately 1% 10 The tariff concessions offered to Pakistan are impressive but almost all top performing products, including in which Pakistan has comparative advantage, China provided equal or higher tariff reduction to ASEAN countries.

Pakistan – Sri Lanka FTA 11  FTA – signed in 2002, operational in  Pakistan offered 206 items, Sri Lanka 102 items.  Pakistan’s share in imports of SriLanka:  27.6% (1995), 5.8% (2005), 9.8% (2010)

Restrictive Trade Policy  2008 – Financial Crisis resulted in;  Regulatory duties  New SROs introduced  Maximum tariff increased to 35% from 25% in 2002  – maximum tariff was reduced to 25% and number of slabs were reduced from 7 to 5 but for 131 items (for which maximum tariff was reduced) regulatory duty was imposed.  0 percent slab in tariff was replaced with 2% (except for petroleum, fertilizer and food items) 12 Pakistan’s trade policy has been characterized with major reversals from the previous trade liberalization and regulatory simplification programs. With a limited, but effective return to more protectionist policies and indigenization programs, Pakistan’s trade policy has become increasingly complex. (World Bank 2013) Pakistan’s trade policy has been characterized with major reversals from the previous trade liberalization and regulatory simplification programs. With a limited, but effective return to more protectionist policies and indigenization programs, Pakistan’s trade policy has become increasingly complex. (World Bank 2013)

Average MFN applied duties by Product Group 2014 AfghanistanBangladeshNepalSri LankaPakistan Chemicals Textile Transport Equipment Electrical Machinery Manufactures, n.e.s Average Tariff on Industrial Goods Country Indonesia Malaysia China Sri Lanka India Pakistan Overall Trade Restrictiveness Index (OTRI) increased from 9.0 (2004) to 9.9 (2010 onwards)

14 Joined WTO 3.1. Bilateral/ Regional Trade Agreements

Pakistan vs. Rest of the World  India 15 Trade liberalisation started from 1991 onwards. In , India removed all restrictions on imports and continued tariff reforms. Exports: Increased by approximately 8 times ($43 billion in 2000 to $366 billion in 2013) Trade liberalisation started in 1991 which was discontinued and reversed many times. Exports: Increased by 4 times ($6 billion in 2000 to $ 25 billion in 2013)

 Chile 16 Chile: Liberalisation process started in 1970s throughout 1980s. 1992: Weighted average of applied tariff (all products) reduced from 10.95% to 1.02% in Export earning increased by 14 times between 1973 and 2008 Trade to GDP ratio o Chile: 25% (1970) to 57.7% (2014) o Pakistan: 10% (1970) to 30% (2014) Pakistan vs. Rest of the World

 Vietnam : Simplified and rationalised reform system was introduced. Average weighted tariff reduced from 20% in 1990s to 15% in 2000 (prior to joining WTO) Pakistan Exports: $5 billion (1995) to $ 25 billion (2014) - 21% increase per annum Vietnam Exports: $5 billion (1995) to $ billion (2014) – 164% increase per annum Pakistan’s Import: $11.65 billion (1996) to $ billion (2014) – 17.17% increase per annum Vietnam’s Import: $11.95 billion (1996) to $ billion (2014) – 66% increase per annum Pakistan vs. Rest of the World

 China 18 Since 1980s – China undertook unilateral liberalisation. Simple average tariff fell down to 16.6% in 2001 from 42% in Many steps were taken such as FDI liberalisation, industrial and agriculture restricting to join WTO After joining WTO in 2001, unilateral liberalisation was reinforced in China under strong WTO commitment. In 2010, its average applied tariff was noted at 3.57 percent (28.6 percentage points lower since 1991) Pakistan vs. Rest of the World

Unilateral Liberalisation 19 The process of unilateral liberalisation is ‘liberalism from below’ which provides governments’ flexibility to adopt a policy based on local conditions “ Welfare gains result directly from import liberalisation, which replaces comparatively costly domestic production and reallocates resources more efficiently, and spurs capital accumulation and economic of scale as well as longer-run dynamic gains such as the transfer of technological and skills. Among its many benefits, import liberalisation provides cheaper inputs and reallocates resources to promising export sectors. Such gains come more quickly through unconditional liberalisation than through protected, politicised and bureaucratically cumbersome international negotiations.” Sally (2008) “ Welfare gains result directly from import liberalisation, which replaces comparatively costly domestic production and reallocates resources more efficiently, and spurs capital accumulation and economic of scale as well as longer-run dynamic gains such as the transfer of technological and skills. Among its many benefits, import liberalisation provides cheaper inputs and reallocates resources to promising export sectors. Such gains come more quickly through unconditional liberalisation than through protected, politicised and bureaucratically cumbersome international negotiations.” Sally (2008)

Lessons for Pakistan 1.Liberalisation is the surest way for boosting exports and achieving economic development. 2.Unilateral liberalisation is a flexible process. 3.Domestic reforms are essential. 20 ‘ An interesting and highly unique insight gained from the study was that the trade liberalisation has had some adjustment cost associated with it, in particular costs related to fiscal adjustment. Had the lower government revenue collection arising from a reduction in import tariffs been fully neutralised by other modes of direct and indirect taxation and development expenditures not fallen the impact of trade liberalisation on poverty and income inequality would have been larger.’ Dr. Ishrat Hussain ‘ An interesting and highly unique insight gained from the study was that the trade liberalisation has had some adjustment cost associated with it, in particular costs related to fiscal adjustment. Had the lower government revenue collection arising from a reduction in import tariffs been fully neutralised by other modes of direct and indirect taxation and development expenditures not fallen the impact of trade liberalisation on poverty and income inequality would have been larger.’ Dr. Ishrat Hussain

Way Forward: How Pakistan Can Capture International Export Market 1.Improve Integration  Increase regional trade (its less than 5%)  MFN treatment  ECOTA  TIR Convention 2.Be Part of Supply Chain  Pakistan should shift its focus from living in the silos to being a part of this supply chain. For that, tariff dispersion, tariff peaks and tariff escalation have to be rationalised to part of the supply chain based on Pakistan’s comparative advantage. 3.Effective Implementation of Multilateral and Regional Commitments Pakistan has not eliminated its WTO commitments in several areas. For instance:  Import substitution policies are still in implementation despite being WTO agreement on trade-related investments (TRIMs).  Customs valuation is not as per WTO valuation agreement. 21

Way Forward 4.Effective FTAs  Under Article XXIV of the GATT, FTAs should cover substantial trade (over 90%) and should become fully operational within a reasonable time frame. 5.Re-start Unilateral Liberalisation  5 year program for restructuring its customs tariff (bring tariff at the similar level to other competing countries)  Abolish special concessions and restrictions through SROs 6.Set-up Committee for Tariff Determination  Tariff rates should be bench marked with respect to other successful developing countries  A Tariff Reform Committee that includes representatives from the government as well as private sector should review the existing tariff structure.  The committee could be coordinated by the Ministry of Commerce and should include representatives of relevant ministries and departments such as the FBR, Planning Commission, Ministry of Industries, Ministry of Textile and National Tariff Commission. Representatives of private sector, such as chambers of commerce and industry, specialized business association, consumer associations should also be involved 22

23 Pakistan could achieve a 16 percent increase in exports by removing its import tariffs whereas the increase would be only 11 percent if developed countries removed all their tariffs on imports from Pakistan. Stephen Tokanick Pakistan could achieve a 16 percent increase in exports by removing its import tariffs whereas the increase would be only 11 percent if developed countries removed all their tariffs on imports from Pakistan. Stephen Tokanick