Pakistan has set an ambitious exports target of $150 billion in its Vision 2025, while its current export levels have been hovering around $25 billion. If Pakistan wants to realistically reach its ambitious trade targets by 2025, the country needs to make serious adjustments in its trade policy strategy.
Pakistan’s trade policy has generally followed the path of liberalisation since 1990. Compared to other countries, however, the process has been slow. In the early 90s, a major liberalisation programme was introduced by the incumbent Prime Minister Mian Nawaz Sharif, who is also currently at the reins of government. The emphasis of the programme was to reduce government intervention and to promote trade by improving the tariff and regulatory environment.
According to a recent study on trade liberalisation, the reform process picked up pace during 2001 and 2002. As a result of decade-long reforms, overall average tariff rates were reduced from 47.1% in 1997-98 to 17.3% in 2002-03. These tariff reforms transformed Pakistan into the least protected market in the South Asian region, and the openness ratio rose from 25% in 1999-00 to almost 30% in 2004-05. For the first time, export growth rates reached double digit in 2004-06.
However, from 2008 onwards, Pakistan has yet again been steadily moving towards a protected economy. New import substitution policies were introduced by the leftist government in 2008, and the maximum tariff was raised back to 35% from 25% in 2002.
The impact of Pakistan’s trade policy is reflected in its stagnant performance and slight decrease in trade-to-GDP ratio. In contrast, peer countries have performed well with higher growth rates and improved trade performance in the same period. In 1998-00, Pakistan’s trade-to-GDP ratio was barely lower than that of China and significantly higher than India. After ten years, the trade-to-GDP ratios of both China and India almost doubled, while Pakistan’s has remained stagnant.
The world realized a long time ago that high tariffs discourage trade and create significant barriers, but for Pakistani policymakers, tariffs are the tools of choice for revenue generation and the so called protection of domestic industries.
For most countries, tariff reduction processes brought down average tariffs from 40% to less than 5%. This in turn resulted in higher trade and a better standard of living. Countries such as India, South Korea, Turkey, Chile, Vietnam etc. continue the process of tariff reforms through multilateral, regional and unilateral polices and enjoy significantly higher trade growth than Pakistan.
Pakistan needs to re-discover its unilateral liberalisation policies of the 90s. We do not need vague Strategic Trade Policy Frameworks but a concrete, crisp, integrated and forward-looking commitment that will continue tariff reforms, end special concessions and reduce import restrictions.
The regionalism in trade policy brings animosity and reactionary decision making. In comparison, a unilateral approach adopted on a basis of sound domestic tariff and exchange rate reforms liberates the policy process.
Pakistan should liberalise its imports not when its trading partners do so but for the sake of its own economic growth. The rigid stagnancy in our exports level can only be broken by opening up the borders not by closing them further.
This article was originally published in The Express Tribune, December 14th, 2015.
