PRIME Seminar on Trade Liberalization

Dr Manzoor Ahmaddrmanzoorahmad@gmail.com

24 November 2015

1

Agenda

• Why trade liberalization matters?• Pakistan’s tariff rates vis-à-vis other developing countries • Trade Performance of Pakistan vis-à-vis other developing countries • Pakistan’s strategic location and inability to utilize its potential• Why are Pakistan’s FTA’s not boosting its exports?• Impact of import substitution policies on production and exports• Moving from low skill to more sophisticated exports• Case of information technology• Conclusion

2

Why trade liberalization matters?

• Boosts average annual growth rates of about 1.5 % (Wacziarg and

Welch 2008)

• Pakistan losing on average 1.45% yearly in export market shares since

2005

• 80 per cent of global trade is through global supply chains (GSCs)

• Almost 30 per cent of total trade consists of reexports of

intermediate inputs

• Pakistan is not a part of these emerging trends because of high tariffs

3

Pakistan has higher applied tariffs than benchmarks

World average East AsiaPakistan

9.9%

5.0%3.2%

Effectively applied tariffs weighted average1

SOURCE: World Development Indicators, World Bank; team analysis

1 Defined as lowest available tariff for a given product

Inward Looking Policies in Pakistan

PAK NPL IND BGD LKA THA IDN MYS OMN KWT SAU CRI PER CHL EUN USA0

5

10

15

20

7.9

12.8

6.9 7.3

4.8 5.14.2

3.34.5

3.9 4.13.3

1.8

6.0

2.3 2.2

Weighted average MFN tariffs (2013)

Wei

ghte

d av

erag

e ta

riff

South Asia South East Asia

GCC Latin America

US & EU

Source: Daria Taglioni, World Bank Group. calculation based on data from WTO and FBR* Weighted averages calculated using MFN tariffs for 2013 and latest import data (varies by country)** Data for Pakistan uses latest available import data (FY12-13)

• The average weighted tariff in Pakistan is almost twice the average in other regions.

• Taxes on international trade - almost 40% - are the highest in the world

5

Tariff Reforms – India vs. Pakistan

Average Tariff on Industrial Goods (%)India Pakistan

0

5

10

15

20

25

302000-04 2006-09

Ad v

al.

6

Pakistan’s export performance vis-à-vis other developing countries

Source: World Bank

7

Pakistan’s unable to use its strategic location

8

Pakistan’s FTAs have not benefitted its exports

• Pakistan unable to make use of FTA concessions– Pakistan utilizing 5% of tariff concessions; China uses 57%

• Significant diversion of trade toward Pakistan’s FTA partners– e.g., China’s share in Pakistan’s imports increased from 18% to 63% in

electrical and electronics

Y2003

Y2004

Y2005

Y2006

Y2007

Y2008

Y2009

Y2010

0.00

1000.00

2000.00

3000.00

4000.00

5000.00

6000.00

Pakistan – China Trade

ExportsImports

Y2003

Y2004

Y2005

Y2006

Y2007

Y2008

Y2009

Y2010

0.00

500.00

1000.00

1500.00

2000.00

2500.00

Pakistan – Malaysia Trade

9

Key Findings: Adverse Impact of “Import Substitution” Policies - Units of Cars

Import Substitution Policies Eliminated Import Substitution Policies Still in Force

10

Moving from low skill to more sophisticated products

400

08

00

01

20

00

EX

PY

PP

P (

Co

nsta

nt 20

00 U

S$

)

100 800 1500Real GDP per capita (constant 2000 US$)

China

IndiaVietnamPakistan

1988-2006Change in Export Sophistication

Source: Reis, Taglioni, Kunaka, Pitigala (2013) “Reinvigorating the Agenda for Open Trade”. Chapter in Pakistan: the Transformative Path. Ed. R Benmessaoud, U.Basim, A. Cholst, J.R. Lopez-Calix. The World Bank.

11

Pakistan and Information Technology

• Trade in IT products and services monopolized by countries that are a

part of WTO Information Technology Agreement (ITA)

• Since 1997, these countries’ annual rate of exports expanded by

33.6%

• Pakistan reformed its tariff during the previous reform phase (1997-

2002) to enable it join the ITA

• The 1997-2002 reforms were subsequently undone

• Pakistan needs to become a member of the ITA to boost its exports of

IT goods and services, promote innovation, and make its

manufacturing more competitive12

Map of the ITA Participants

(https://www.wto.org/english/tratop_e/inftec_e/ita_map_e.htm)13

Promoting Export of Information Technology Products

• Accede to WTO Agreement on Information Technology (ITA) – 97 % of world trade is amongst members of ITA– Will attract more investment– Provide more predictability about the government policies

• It will require elimination of import duty on IT products such as computers

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Conclusions

• Pakistan should integrate its economy with other countries

• It needs to benchmark its trade policies with others• Pakistan needs to diversify its export markets and

products• It needs to move from import substitution to export-led

growth• It needs to increase its share of regional trade• Domestic reforms are a prerequisite for the growth of

exports

THE BEST TIME TO PLANT A TREE WAS 20 YEARS AGO. THE SECOND BEST TIME IS NOW. –CHINESE PROVERB

14

Supplementary Slides

How does trade benefit an economy?

• Surest way for economic development

• More trade results in more opportunities

• Creates higher paying jobs

• Benefits consumers by lowering the price and brining more variety

• Enables an economy move up the labour-chain

• Improves labour and environmental standards

• Makes an economy more competitive

• Brings peace and stability

• Improves quality of services

• Lowers poverty and thus human resource17

Bilateral trade of Pakistan, Sri Lanka and BD with India

Pakistan Sri Lanka Bangladesh0

1

2

3

4

5

6

7

India's bilateral trade (billion USD)

India's bilateral trade (billion USD)

18

Pakistan has highly protective trade regime compared to other regional countries

Average Tariff on Industrial Goods (%) Source: WTO

High

Median

Low19

Pakistan’s Long Term Decline in Export Performance

• Inward looking policies

• Negligible trade in the region

• High taxes on international trade

• No benchmarking

• Not allowing transit trade

20