Making Sense of MFN

The Minister for Commerce expressed his views in the meeting with the Pakistan Business Council (PBC) on April 8, 2024, emphasizing and stating that the economy of the country and business, exports, trade, and energy sectors are among the government’s top priorities. He further noted that business community representatives from all over the country were invited for their valuable suggestions for incorporation in the policy and decision-making process. However, the minister was reportedly silent on any policy interventions by the government for the revival of trade and industry, with particular reference to enhancing exports.

The primary export stimulants for a country are the trade and tariff policies and the Free and Preferential Trade Agreements, which, it concludes, with its trading partners under the provisions of the GATT / WTO Agreements and set the direction and pace of exports. In Pakistan, its exports are regulated, among other things, through the Strategic Trade Policy Framework (STPF), trade, textile, industrial, tariff, fiscal, and monetary policies. A careful analysis of global export trends and data reveals that only those goods sold in the international market which is competitive not only cost-wise but also conform to mandatory and technical product standards prescribed in terms of the WTO Agreements on Sanitary and Phytosanitary Measures (SPS) and Technical Barriers to Trade (TBT). The comparison of Pakistan’s export volumes with other surrogate countries’ exports has become irrelevant as our export figures and foreign exchange reserves do not match and are proportional to them now.

Export-oriented policies, for that matter any policy, unless backed by legal and statutory strength, only remain guidelines and cannot be implemented as such to achieve the desired objectives. The same is evident from the outcomes of the STPF announced by the Ministry of Commerce and the Textile Policy by the Textile Division. Only those measures are operationalized and implemented through trade policy orders or budgetary notifications. These policies must be enacted under some legal framework/statute to make them practical and implementable. Without that, they will continue to be wishful policies with no enabling legal force available for the stakeholders to protect their rights under the declared policies.

In the textile sector, the fibre/yarn industry has not witnessed modernization and expansion to match and cater to the requirements of the domestic industry engaged in exports, despite (i) excessive effective tariff protection, (ii) application of higher slab of customs duty rates than prescribed for economic category of goods under the principles of value addition and cascading, (iii) arbitrary levy of anti-dumping duties even on the yarns not manufactured locally in adequate quantities to meet the national demand and (iv) increase in unintended tariff protection resulting from rupee depreciation.

The government announced the Tariff Policy 2019-24, among other things, to improve competitiveness and remove anomalies in the tariff structure. However, a critical analysis of the Pakistan Customs Tariff reveals that there are a large number of raw materials and inputs that are required for the production of sophisticated/high-value-added products required by developed countries and for use in manufacturing as per international mandatory and technical standards prescribed under the WTO Agreements on SPS and TBT, etc. Such raw materials and inputs are still subjected to statutory customs duty rates, as they have not been used in producing sophisticated/high value-added products, nor has the industrial/trade policy prioritized such industrial sectors/products. For illustration, raw material/intermediate inputs, among other things, include chemicals for fire-resistant wooden doors and no return gas valves for gas heaters, etc.

The analysis further reveals an anti-export bias in the tariffs of such sophisticated/high-value-added products. Anti-export bias in tariffs is one of the severe hidden impediments to exports of high-value-added products in the country, which is being overlooked by policymakers. Import tariffs indirectly alter and affect the prices of exports relative to the prices of goods produced solely for the domestic market (non-traded or home goods). Since a tariff raises the cost of imports, consumers and industrial users are incentivized to shift consumption away from expensive imports towards locally produced goods, thus relocating resources towards import substitution industries, where profits are high. Therefore, the tariff on imports reduces the price of exports relative to import substitution goods, thereby creating an anti-export bias.

Another important factor that, if not negotiated and concluded diligently, considering the provisions of GATT/WTO, can make the free and preferential trade agreements counterproductive for domestic industry, adversely affecting export promotion. Negotiating Free Trade Agreements (FTA) and acquiring increased market access to enhance exports have become tedious and complex.

Economic and technical analyses are also involved, besides the myriad aspects and rules under the WTO regime. The GATT/WTO Articles and Agreements viz. Article XXIV (Territorial Applications –Frontier Traffic – Customs Unions and Free-trade Areas) and Article XXVIII bis (Tariff Negotiations), among other things, prescribe the rules for negotiations which enunciate that negotiations shall be conducted on a reciprocal and mutually advantageous basis that affords adequate opportunity to take into account (i) the needs of individual member country and individual industry, (ii) the needs of less-developed countries for a more flexible use of tariff protection to assist their economic development and special needs of these countries to maintain tariffs for revenue purposes, and (iii) all other relevant circumstances, including fiscal, developmental, strategic and other needs of the concerned WTO member country (WMC). Countries generally target specific tariffs of countries they wish to see reduced through negotiations.

At the same time, most countries import sensitive products and industrial sectors for which they are not inclined to agree to duty reductions. FTA and PTA negotiations have significant and far-reaching implications on the economy and industry of any country, especially a developing country like Pakistan, as they affect the protection levels of the domestic sector and increase the market accessibility for its products in the international markets for export and vice versa.

Pakistan and China signed the Free Trade Agreement in 2006. Under the Pak-China FTA, all exportable items of Pakistan, including textile, surgical and sports goods, vegetables, fruits, rice, citrus, and mangoes, got duty-free market access from January 2006, while Pakistan’s imports pertain to machinery, chemicals, polyesters, Iron and steel, and other raw material from China. The arrangement seemed to be quite enthusiastic and ambitious. However, the ground realities are much different; the Pakistani market is already flooded with Chinese consumers and other goods as Pakistan has extended unwarranted and unintentional clandestine market access to Chinese goods in Pakistan. Pakistan’s trade and industry are adversely affected by Chinese goods, especially polyesters, textiles (made-ups and fabrics), tableware, shoes, chemicals, iron, steel, and toys.

The economic managers of international trade should consider its actual trade balance with China and the on-ground situation. Pakistan certainly needs to learn lessons from this when it decides to conclude more FTA with Turkey, Korea, and Thailand. Ill-planned and hasty grant of MFN status to India, without considering provisions of Clause 11 of the GATT Article XXIV, can further erode Pakistan’s industrial competitiveness, adversely affecting its domestic industry and exports.

No country can be competitive with its production either indigenously or internationally if its industry meets its financial requirements at a policy rate of twenty-two percent, has exorbitantly high energy tariffs, and has unrealistic POL prices. With such precarious economic conditions, no industrial activity can be competitive enough to face competition from imported equivalents or in the export/international markets.

The government, if it really wants the economic revival of the country, raising its foreign exchange reserves, should on war footings (a) revisit its STPF, trade, industrial, fiscal and monetary policies, (b) reconsider its existing FTAs invoking GATT/WTO provisions, (c) re-strategize its policies, in consideration of GATT/WTO provisions, while concluding new FTAs with Turkey, Thailand and Korea, (d) instead of granting a full-fledged MFN status to India, consider entering into special arrangements, pending the establishment of mutual trade relations on a definitive basis, as provided under the GATT/WTO regime (e) consider grant of rebate/drawback on energy tariffs and POL prices over and above normal values on export of goods, (f) import tariff rates on inputs required for the production of sophisticated/high value added exportable should be identified with the help of stakeholders and subjected to zero rate of import duties and taxes, and (g) all policies mentioned above should be duly supported with legislation approved by the parliament. For Pakistan, this is not a time for business as usual; it needs to revisit all policy instruments in its toolkits and find out-of-box solutions to enhance exports.