Pakistan’s pursuit: Making FTAs more effective
They are tools for facilitation of trade between participant countries
They are tools for facilitation of trade between participant countries. PHOTO: AFP
KARACHI:
There are negotiations under way for free trade agreements (FTA) with Turkey, Iran, Indonesia, Thailand and Republic of Korea. Along with regional trade agreements, FTAs with China, Sri Lanka and Malaysia are currently in-effect.
FTAs lower tariffs and quotas on imports and ease trade flow of goods between participating countries. However, that said, FTAs are simply tools for facilitation of trade. Complementary investment and industrial policies that involve production linkages are needed to increase trade flow between countries in both directions. As FTAs involve reciprocity, which requires Pakistan to offer concessions to the trading partners as well, the balance of trade is tilted towards its trading partners as Pakistan reports higher balance of trade deficits. The unfavourable balance of trade gives FTAs a negative perception and they are denounced as an unfair advantage to the trading partners.
In order to understand the benefits and costs, we need to analyse the impact on different representatives of the economy, i.e. domestic consumers, domestic producers and the government. Consumers are beneficiaries of FTAs as they are provided access to a greater variety of products, in terms of price and quality. However, benefits and costs of an FTA will vary for different producers. Those domestic producers who face intense competition from imported goods are likely to lose out. Unfortunately, there are a large number of producers in Pakistan who are sensitive to import competition as they sell products that are mainly of poorer quality and have several substitutes in the global market.
On the other hand, domestic producers who rely on imported inputs may reap the benefits of greater availability of a varied range of inputs. Similarly, domestic producers who export their products may enjoy greater market access. Improved production linkages may provide opportunities for producers to expand their sales in the domestic as well as the foreign markets.
The government may lose revenue if the percentage fall in tariffs is not matched by the percentage increase in the demand for imports. However, the government can gain tax revenues from business generated by those producers who are able to increase their own sales revenue and expand their production scope. If FTAs provide an opportunity to obtain better quality inputs, more varieties in inputs and induce ‘learning effects’ for firms, businesses can benefit through productivity gains.
China, Republic of Korea, Malaysia and Thailand have large manufacturing sectors and run trade surpluses. Although, easier access to a large and emerging consumer market in Pakistan is a major reason for the trading partners to sign a FTA, the policymakers must adopt policies to integrate the manufacturing sector of Pakistan with the producers in the partner countries.
In 2014, Pakistan reported a trade deficit of over $7 billion with China. With the advent of the China-Pakistan Economic Corridor, this deficit is likely to increase. Pakistan imported over 900 products worth over $1 million at six-digit level of Harmonized System codes from China in 2014 compared to approximately 500 products in 2007. Approximately 40% of the total imports, in terms of value as well as number of products, into Pakistan from China were intermediate goods.
These goods have to be processed before being sold as consumer goods, adding value in the domestic economy. It is important that the FTAs are utilised to expand the manufacturing sector in Pakistan by using internal resources, such as cheaper labour, to convert the intermediate goods imported from our trading partners into goods that can be consumed in Pakistan and exported elsewhere.
The GSP Plus status has provided an opportunity to increase our exports to the European Union. Unfortunately, our current industrial and investment policies have failed to incorporate global production linkages and take advantage from such trade concessions. The declining trends in exports need to be addressed.
An FTA must be negotiated such that it accounts for the benefits to our exporters to the European Union and other developed countries. Consider the case of Sri Lanka and Bangladesh when they received preferential treatment from the EU. Although, they have not yet negotiated a FTA with China, both countries have been successful in creating production linkages with producers in China.
Sri Lanka was given the GSP Plus status in the late 2000s (currently suspended) and even though it had a significantly smaller share in the EU market, it was able to double its textile exports to the EU between 2005 and 2011. Sri Lanka imported fabric from China and India and processed it into garments and other apparels to export to the EU. Similarly, Bangladesh, a country that grows a negligible amount of cotton, is the second largest exporter of ready-made garments in the world.
Bangladesh has been awarded the ‘Everything but Arms’ status by the EU, which provides full duty free and quota free access on its exports to the EU. Bangladesh imports a significant proportion of its inputs for the textile industry from China, mainly in the form of fabric and synthetic material which are processed into exportable goods.
Although, there is a large domestic textile sector in Pakistan, it must take advantage of its FTA with China in order to improve the competitiveness of the textile industry. Pakistan imports man-made staple fibre from China, which is an important input for the textile industry.
This is crucial as global preference is increasing for products that use a larger mix of synthetic material produced from man-made fibres rather than natural fibres, which is more commonly available in Pakistan. Similarly, the petrochemical industry in the Republic of Korea is one of its largest exporters and the industry in Pakistan can benefit from South Korean producers.
Other linkages must be sought, particularly in industries that require the use of abundant labour. Without complementary industrial and investment policies, the free trade agreement will have only limited benefits and such agreements are likely to end up as wasted opportunities. It is important to address the lack of growth in the domestic manufacturing sector rather than avoid FTAs, which can provide the necessary impetus to growth.
The writer is an Assistant Professor of Economics & Research Fellow at CBER, IBA
Published in The Express Tribune, June 20th, 2016.
There are negotiations under way for free trade agreements (FTA) with Turkey, Iran, Indonesia, Thailand and Republic of Korea. Along with regional trade agreements, FTAs with China, Sri Lanka and Malaysia are currently in-effect.
FTAs lower tariffs and quotas on imports and ease trade flow of goods between participating countries. However, that said, FTAs are simply tools for facilitation of trade. Complementary investment and industrial policies that involve production linkages are needed to increase trade flow between countries in both directions. As FTAs involve reciprocity, which requires Pakistan to offer concessions to the trading partners as well, the balance of trade is tilted towards its trading partners as Pakistan reports higher balance of trade deficits. The unfavourable balance of trade gives FTAs a negative perception and they are denounced as an unfair advantage to the trading partners.
In order to understand the benefits and costs, we need to analyse the impact on different representatives of the economy, i.e. domestic consumers, domestic producers and the government. Consumers are beneficiaries of FTAs as they are provided access to a greater variety of products, in terms of price and quality. However, benefits and costs of an FTA will vary for different producers. Those domestic producers who face intense competition from imported goods are likely to lose out. Unfortunately, there are a large number of producers in Pakistan who are sensitive to import competition as they sell products that are mainly of poorer quality and have several substitutes in the global market.
On the other hand, domestic producers who rely on imported inputs may reap the benefits of greater availability of a varied range of inputs. Similarly, domestic producers who export their products may enjoy greater market access. Improved production linkages may provide opportunities for producers to expand their sales in the domestic as well as the foreign markets.
The government may lose revenue if the percentage fall in tariffs is not matched by the percentage increase in the demand for imports. However, the government can gain tax revenues from business generated by those producers who are able to increase their own sales revenue and expand their production scope. If FTAs provide an opportunity to obtain better quality inputs, more varieties in inputs and induce ‘learning effects’ for firms, businesses can benefit through productivity gains.
China, Republic of Korea, Malaysia and Thailand have large manufacturing sectors and run trade surpluses. Although, easier access to a large and emerging consumer market in Pakistan is a major reason for the trading partners to sign a FTA, the policymakers must adopt policies to integrate the manufacturing sector of Pakistan with the producers in the partner countries.
In 2014, Pakistan reported a trade deficit of over $7 billion with China. With the advent of the China-Pakistan Economic Corridor, this deficit is likely to increase. Pakistan imported over 900 products worth over $1 million at six-digit level of Harmonized System codes from China in 2014 compared to approximately 500 products in 2007. Approximately 40% of the total imports, in terms of value as well as number of products, into Pakistan from China were intermediate goods.
These goods have to be processed before being sold as consumer goods, adding value in the domestic economy. It is important that the FTAs are utilised to expand the manufacturing sector in Pakistan by using internal resources, such as cheaper labour, to convert the intermediate goods imported from our trading partners into goods that can be consumed in Pakistan and exported elsewhere.
The GSP Plus status has provided an opportunity to increase our exports to the European Union. Unfortunately, our current industrial and investment policies have failed to incorporate global production linkages and take advantage from such trade concessions. The declining trends in exports need to be addressed.
An FTA must be negotiated such that it accounts for the benefits to our exporters to the European Union and other developed countries. Consider the case of Sri Lanka and Bangladesh when they received preferential treatment from the EU. Although, they have not yet negotiated a FTA with China, both countries have been successful in creating production linkages with producers in China.
Sri Lanka was given the GSP Plus status in the late 2000s (currently suspended) and even though it had a significantly smaller share in the EU market, it was able to double its textile exports to the EU between 2005 and 2011. Sri Lanka imported fabric from China and India and processed it into garments and other apparels to export to the EU. Similarly, Bangladesh, a country that grows a negligible amount of cotton, is the second largest exporter of ready-made garments in the world.
Bangladesh has been awarded the ‘Everything but Arms’ status by the EU, which provides full duty free and quota free access on its exports to the EU. Bangladesh imports a significant proportion of its inputs for the textile industry from China, mainly in the form of fabric and synthetic material which are processed into exportable goods.
Although, there is a large domestic textile sector in Pakistan, it must take advantage of its FTA with China in order to improve the competitiveness of the textile industry. Pakistan imports man-made staple fibre from China, which is an important input for the textile industry.
This is crucial as global preference is increasing for products that use a larger mix of synthetic material produced from man-made fibres rather than natural fibres, which is more commonly available in Pakistan. Similarly, the petrochemical industry in the Republic of Korea is one of its largest exporters and the industry in Pakistan can benefit from South Korean producers.
Other linkages must be sought, particularly in industries that require the use of abundant labour. Without complementary industrial and investment policies, the free trade agreement will have only limited benefits and such agreements are likely to end up as wasted opportunities. It is important to address the lack of growth in the domestic manufacturing sector rather than avoid FTAs, which can provide the necessary impetus to growth.
The writer is an Assistant Professor of Economics & Research Fellow at CBER, IBA
Published in The Express Tribune, June 20th, 2016.