Trade distortions
PAKISTAN’s exports are not increasing at a fast rate, perhaps because the authorities give incentives to traditional export sectors and restrict imports through tariff walls. We often overlook the link between imports and industry. The unintended consequences of imposing tariffs as a means of revenue collection have eroded our regulatory capacity to collect direct taxes.
In FY2022-23, import duties contributed 13 per cent towards overall FBR collection and some 24pc in indirect taxes, while 73pc of import duties were collected from just 15 product groups. Duties on petroleum products, iron and steel, vehicles and edible oil constitute almost 50pc of all customs duties. The narrow base of dutiable imports is also a reason for high tariff rates.
Our first National Tariff Policy (2019-24) marked a shift in revenue generation methods as tariffs became a tool for promoting trade and industrialisation. It was considered a step in the right direction as it intended to simplify the tariff structure. The NTP also aimed to provide time-bound strategic protection to domestic industries.
The NTP included all relevant stakeholders at a single decision-making forum, the National Tariff Board. This approach altered the balance between various stakeholders, mainly FBR and the Commerce Division, making decision-making more com-plex, thus leading to delays and court cases.
Our industrial structure favours those who thrive on subsidies.
The government has decreased tariff rates but by imposing additional regulatory duties has increased the effective and nominal protection rate. Given frequent changes and the import control policy, the dispersion rate and the reduction in the mean tariff rate indicate more policy distortions.
The complexity of our tariff structure goes beyond the variation in rates across different slabs. Rates also vary based on product usage and origin, leading to policies that foster the misuse of concessions, create anomalies, and result in valuation lapses.
In the last five years, regulatory duties have increased by 140pc, and warehouse charges by 64pc. The nominal tariff rate (the total tariff divided by the value of all imports) has gone up significantly.
Let us examine our industrial landscape. Our last Census of Manufacturing Industries for 2015-16 revealed that the industrial sector still consists mainly of textile, food processing units, chemicals, and automobiles — all heavily reliant on imports. The “inexorable and mysterious” growth of these sectors has puzzled policymakers. It was thought that protection and incentives would trigger export-led growth but that did not happen. Instead, we have seen exports increase sluggishly and imports double.
Pakistan’s trade duties have tried to protect industries in the pursuit of growth but industry finds it difficult to compete because exports rely on imports for essential inputs. Our industrial structure is highly skewed in favour of a few who thrive on state subsidies. Heavy indirect taxes such as customs duty and sales tax on imports hinder growth. Industry also finds it difficult to survive and compete with increasing costs of production.
It is the consumer who ends up paying for trade distortions created by subsidies and tariff, over and above inflation and high energy costs.
The WTO’s general principle is that foreign goods must not be treated any “worse than domestic products”, and that “internal taxes or other charges on imports must be no higher than on domestic products, and laws and regulations affecting their sale, purchase, transportation, distribution”. However, we routinely see this principle being violated.
Countries such as the US and China, as well as the European Union, are giving huge subsidies and building tariff walls to lessen competition. Despite slowing globalisation and rising retaliatory tariffs, technology links markets, and does not fracture economies. Trade is realigning itself, with like-minded states trading with each other. We are living in a world which is more connected and interdependent. Isolation and tariffs can be addressed by creating new markets.
For economists, trade depends on differences in cost ratios. As tariff costs increase, aggregate demand and income shrink based on the ‘reciprocal demand’ principle. Low growth imposes a constraint on achieving the objective of ‘decent work for all’. It also creates a set of other regulatory issues, such as the problem of calculating true income because of illegal trade and parallel economies.
Tariff has proved to be a major hindrance in the promotion of trade. Tariff walls are protecting a high-end industry, which is not there. Can we create such an industry out of thin air without collaboration, coordination and exchanging goods and ideas? For industrial growth, we need not just one of these factors but all three.
The writer is director, Centre for Aerospace and Security Studies, Lahore.
Published in Dawn, November 2nd, 2024