During eight years of President Pervez Musharraf’s rule, Pakistan did not develop a trade policy suited to its circumstances. If some initiatives were taken by the Ministry of Commerce – there were not all that many – they took the country in the wrong direction.

Much effort was devoted to concluding a free trade arrangement with the United States and increasing textile exports to America. Neither objective, even it was realised, would help Pakistan to bring about a bounce in its exports.

This is something the country needs to do with some urgency in order to deal with the problem posed by the widening trade deficit.

The current deficit has reached unsustainable levels. In the short run the only way to constrain it is to limit imports. This can be done with tariff increases and other charges on imports that feed consumption, not investment. This the government is already doing.

But a move towards a closed economy would take the country back by decades at a time when most of the rest of the world is taking advantage of the process of globalisation.

The only viable solution to the problem of growing trade and balance of payments deficits is to increase exports. This won’t happen suddenly; it will take time and much greater involvement of the state in developing the export sector.

Trade policy, in other words, should be at the heart of the strategy needed to take care of the country’s ailing economy. What is it that the government should be doing to increase exports?

Pakistan needs to change in a dramatic way the direction and content of its exports. As the “gravity model of trade” suggests, Pakistan should be building stronger trade relations with the countries in its neighborhood and concentrating on the production of exportable surpluses that have markets in these places.

Continued emphasis on textiles does not belong to this strategy. Neither does the focus on gaining access to the markets in the United States. Pakistan’s exports to America are concentrated in the cotton group in which the country faces many competitors.

However, for Pakistan to adopt an entirely different approach to trade would mean that the countries that are its natural trading partners should be prepared to play ball with Islamabad.

For that to happen they must abide by the rules of international trade which has not always been the case. This is particularly the case with India which, if the gravity model has any validity, should be Pakistan’s largest trading partner.

India freely uses devices such as the “dumping clause” in the treaty that set up the World Trade Organization to keep out the goods in which its own industry is not very competitive. For it to play on a level field, it must come under international pressure and scrutiny.

This is why multilateral trade negotiations such as the Doha round acquire considerable importance and this is also why Pakistan should have played a much more active role in these talks than it did.

Now that Doha has collapsed, what are the options available to Pakistan and how should Islamabad reflect these options in its trade policy? What stance should the country’s industry owners adopt to move Islamabad towards formulating a trade policy that would work for them and for the country?

That the current approach to trade defies economic logic and is the consequence of public policy mistakes is well illustrated by some of the recent trends.

The cotton group remains the dominant player. Its share in total exports has declined a bit and some changes have taken place in the group’s composition. Pakistan, once one of the major exporters of raw cotton, has become a net importer.

That said, there is still not enough diversification in the composition of exports to indicate that the country has positioned itself to take advantage of the enormous changes that have taken place in the structure of the global economy.

But there is one silver lining on the horizon. The fact that the share of miscellaneous manufactures has increased significantly – last year it increased at an impressive rate of 33 per cent – gives some hope.

There is sufficient diversification within this group and sufficient presence of the items in which Pakistan has some comparative advantage to indicate that an export oriented strategy could be put in place.

One example will help to illustrate this point. The leather group is one of the fastest growing lines of export products.

The country has moved away from exporting raw hides to selling processed leather and leather products. Since Pakistan has one of the largest animal populations in the world the leather group could become a major export item.

To move in that direction, leather products should replace processed leather as an item of growth. While Pakistan has missed out in developing large scale export oriented industry as was done by the countries in East Asia and while it has made very slow progress in making use of its abundant human resource to export services such as IT and health services as India has done, it can still develop some niches in the international markets. Leather products could constitute one such niche.

The other area in which work needs to be done is to follow the gravity model of trade and concentrate on the development of markets nearer home. The accompanying table illustrates two problems in the current structure of exports: concentration in a few markets and dependence on distant countries.

For the last ten years, six countries have accounted for nearly one-half of total exports. Within these, the United States has been by far the largest. China and India don’t figure among major markets for the country’s exports although given their size, the rapid growth in their economies and their proximity to Pakistan, they should be the largest importers of Pakistan’s products.

Given the collapse in the Doha round, what public policy choices are available to Pakistan to change the composition of its exports. Islamabad should do a number of things differently. Among these three are especially important and all of them are directed at trade policy affecting India.

One it should allow the provincial governments much larger role in the making of trade policy. At this point they have been largely kept out of the policymaking process. The Punjab, being India’s neighbor, should be allowed to develop strong trading relations with that country.

Two, Pakistan should aggressively pursue the markets in India even if it means undertaking unilateral actions such as the grant of visas to the Indians wanting to visit the country in the hope that New Delhi would reciprocate such as gesture.

Three, it should use regional arrangements to tie down India to good behavior. In the past Islamabad chose not to pay much attention to the development of the South Asia Free Trade Area, the Safta. That was a mistake.

In so far as China is concerned, Pakistan already has a free trade arrangement but it is not working to produce much trade. The reason is the absence of items of production which would interest China.

One way of developing a China oriented export industry is to encourage investors in both sides of the border to invest in the industries and services of specific interest to China. The Indians are talking that route with good results.