In today’s global economy production has become increasingly fragmented across national borders and restructured around global value chains. Many products are ‘made in the world’ with the range of activities in the process being performed in several countries.

The traditional trade in final goods and services is being replaced with vertical specialisation in which countries specialising in different steps of the production process are connected in the value chain through trade in intermediate inputs (primary goods, parts and components, and semi-finished products). Today, more than half of the world’s imports of goods, and 70pc of services, are in intermediate inputs.

The shift is also in the manner that exports have been traditionally viewed — the WTO and OECD have commenced tabulating the Trade in Value Added (TiVA) by countries.

The current structure of Pakistan’s exports, heavily reliant on vertically-integrated export sectors like textiles, is out of sync with a global market increasingly restructured around GVCs

The shifting pattern of global trade, on the one hand, challenges the viability of Pakistan’s export basket — heavily dependent on vertically-integrated low-potential sectors, and on the other hand offers immense opportunities to integrate into global value chains (GVCs) of high-value sectors by specialising in specific aspects or stages of production.

The integration into GVCs can bring multiple benefits: market entry in intermediate activities within a value chain; productivity enhancement through specialisation in comparative advantage niches and economies of scale; transfer of sophisticated technologies, and improvement of quality standards that enhance access to global markets.

The participation in GVCs depends on five critical success factors. Firstly, the global dimension of competition requires hyper competitiveness which, in turn, is contingent upon the macro-economic environment, efficacy of institutions, labour productivity, affordable finance, technological readiness and innovation.

Pakistan’s ranking in the Global Competitiveness Index, though marginally improved in 2016-17, remains amongst the bottom 20 out of 138 economies.

Secondly, the core physical infrastructure including ports, transportation, energy supply systems, shared facilities, laboratories and logistic centres, is vital for connectivity with regional and global markets in a swift and efficient manner.

According to the Global Competitiveness Report 2016 the ‘quality of infrastructure has improved significantly (although from low levels) in India, Bangladesh, and Sri Lanka, while it stalls in Nepal and deteriorates in Pakistan.’ Besides, the energy deficit has been a major impediment to production. However, the CPEC is expected to effectively address both these issues.

Thirdly, soft connectivity has assumed prominence in the 21st century over hard connectivity. The participation in GVCs is linked with the availability of skilled workforce, an entrepreneurial culture, a positive policy environment, efficient business support institutions and an ecosystem conducive to innovation and protection of intellectual property.

Ironically, in Pakistan despite immense human capital, the non-availability of skilled workforce remains the biggest productivity constraint. At the institutional level, the failure of the trade support organisations to evolve with the changing dynamics of trade promotion has rendered them anachronistic.

Fourthly, the globalisation of value chains has challenged the validity of the mercantilist dictum of considering exports as good and imports as bad. Success in the global market depends not only on the capacity to export but also on cost-

effective imported inputs. High import tariffs increase the cost of production and reduce competitiveness to participate in GVCs.

The phenomenal trade growth of China, India and Vietnam is directly correlated with the lowering of import tariffs during the last decade. On the contrary, in Pakistan, around 40pc of the duty-free tariff lines, mainly essential raw materials and machinery have been subjected to import duties since 2014.

Finally, trade facilitation and efficient border procedures are crucial for the smooth operation of GVCs as goods cross borders multiple times — first as inputs and then as final products.

In order to minimise inventory costs, firms employ just-in-time (JIT) inventory strategies in which materials or components are received immediately before they are required.

A country where intermediate inputs can quickly enter and exit the borders in a predictable timeframe after processing, becomes a preferred location for international firms to outsource production.

Pakistan’s performance in OECD’s trade facilitation indicators (1.2 on a scale of 2.0) is lower than almost all its major competitors — Thailand 1.6, India 1.5, China 1.4, Malaysia 1.4, Indonesia 1.4 and Vietnam 1.3. On the positive side, Pakistan has acceded to the WTO’s Trade Facilitation Agreement which is expected to reduce the trade cost of member countries by an average of 14.5pc.

In order to integrate into GVCs, Pakistan needs to rework the export ecosystem — devise a synergic policy framework for enhancing competitiveness, leverage the CPEC for attracting export-oriented FDI, thoroughly revamp trade development institutions like TDAP, improve the efficiency of border control agencies, simplify border procedures and rationalise tariffs, especially on inputs.

The current structure of Pakistan’s exports, heavily reliant on vertically-integrated export sectors like textiles, is out of sync with a global market increasingly restructured around GVCs.

The exports can break the range trap of $20-25bn

only through a structural change and the participation in GVCs of innovation-based sectors for example, engineering, pharmaceuticals and ICT.

The writer is joint secretary (exim), ministry of commerce.

Published in Dawn, Business & Finance weekly, November 14th, 2016