1. PRIME Seminar on Trade Liberalization Dr Manzoor Ahmad drmanzoorahmad@gmail.com 24 November 2015 PRIME Seminar on Trade Liberalization Dr Manzoor Ahmad drmanzoorahmad@gmail.com 24 November 2015 1

2. 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

3. 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

4. Pakistan has higher applied tariffs than benchmarks 4 World averageEast AsiaPakistan 9.9% 5.0% 3.2% Effectively applied tariffs weighted average 1 SOURCE: World Development Indicators, World Bank; team analysis 1 Defined as lowest available tariff for a given product

5. Inward Looking Policies in Pakistan 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

6. Tariff Reforms – India vs. Pakistan Average Tariff on Industrial Goods (%) Ad val. 6

7. Pakistan’s export performance vis-à-vis other developing countries Source: World Bank 7

8. Pakistan’s unable to use its strategic location 8

9. 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 9

10. Key Findings: Adverse Impact of “Import Substitution” Policies - Units of Cars Import Substitution Policies Eliminated Import Substitution Policies Still in Force 10

11. Moving from low skill to more sophisticated products 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

12. 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 competitive 12

13. Map of the ITA Participants (https://www.wto.org/english/tratop_e/inftec_e/ita_map_e.htm) 13

14. 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 14

15. 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

16. Supplementary Slides

17. 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 resource 17

18. Bilateral trade of Pakistan, Sri Lanka and BD with India 18

19. Pakistan has highly protective trade regime compared to other regional countries Average Tariff on Industrial Goods (%) Source: WTO High Median Low 19

20. 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