Does the country's tariff policy require a bold rethink?

The notification of the National Tariff Policy (NTP) 2025-2030 at the start of the current fiscal year has sparked significant debate between those who call for a more open and freer trading economy with minimal government interventions and those who recommend protection for 'infant industries' to promote domestic industrialisation.

The Economic Advisory Group stands at the forefront in advocating for tariff reforms. Pakistan's tariff regime, plagued with high tariffs, low productivity levels, and poor investment rates coupled with low uptake of bank loans from the private sector, suggests that there is a much-needed rethinking of trade strategies. It is imperative to induce more dynamism in the market, which will require greater levels of competition and efforts to foster innovation. There is a need to massively overhaul the current policies that have contributed to the prevailing economic conditions.

The NTP outlines the reduction and rationalisation of customs duties over the next five years and eliminates several regulatory and additional customs duties that have made the international trading process in Pakistan more complex and convoluted. The reduction in customs duties and the elimination of regulatory and additional customs duties will not only create a more simplified international trading process but also increase investments in manufacturing activities as new and more dynamic businesses, less reliant on government intervention and support, enter their specific industries.

Raul Prebisch, hailed as the "father of import substitution industrialisation," provided theoretical justification for the infant industry argument. His work was rooted in the centre-periphery theory developed in the late 1940s. In order to escape this dependency, developing countries like Pakistan were recommended to protect and develop their local industries to meet domestic demand and achieve greater economic self-sufficiency. As Prebisch held an important position in the United Nations, he was able to push his views as a more dominant development strategy.

The idea of infant industry protection gained traction in the first half of the previous century, and Latin American economies adopted it as their primary growth strategy. However, he later became a prominent critic of the strategy as it failed to realise the promises of economic development across countries that adopted such policies.

These countries reported high tariff rates and significant government interventions, many of which became detrimental to their own economic growth. Such policies instead created perpetual dependence on imported capital goods, foreign technology, and raw materials, exacerbating the situation with repeated balance-of-payments crises. This is evident in Pakistan, as its industries continue to report high levels of inefficiency, lack innovation, and show significant anti-export bias as they focus primarily on selling to the domestic market while remaining heavily dependent on imported capital goods and raw materials for production.

One of the major failings of the industrialisation policies advocated by Prebisch was the significant inequality in wealth and lack of development across industrial sectors. This is again evident in Pakistan, as a few specific interest groups push for protection and government support.

Bela Balassa, an advocate for free trade in the 1960s and the developer of the Revealed Comparative Advantage Index, analysed the structure of protection in developing countries in the 1960s and noted that high tariff rates complemented by an overvalued currency created inefficiencies and an anti-export bias in the economy. It reduced their ability to export, while the countries propped up uncompetitive industries that drained important resources. Unfortunately, this trend remains an underlying feature in Pakistan's multiple balance-of-payments crises.

Douglas Irwin, a prominent economic historian and expert on international trade, argues that high tariffs are unlikely to be the source of growth. Other factors such as population growth, abundance of natural resources, enhancement of human and infrastructure capabilities, as well as access to large markets, may be more important contributors to industrial growth.

He further contends that protection from foreign competition may reduce incentives to innovate and become more efficient in production processes, making industries more dependent on government support over time. In other words, inefficiency breeds complacency. Furthermore, Irwin contends that protectionist policies, once adopted, are difficult to remove due to political pressure. Measures that are supposed to be temporary and include sunset clauses at the onset become permanent at the expense of consumer welfare.

Groups lobbying for specific interests in Pakistan have perpetually demanded protection from foreign competition and government support to ensure their survival, remaining comfortable with the status quo rather than striving for improvement in the overall business environment. The lack of innovation by the manufacturing sector creates welfare losses for consumers. Additionally, there is strong evidence pointing towards the positive impact of trade openness on economic growth, as highlighted by several empirical studies on this subject.

Further, Dani Rodrik, a prominent economist who, although does not support unrestricted trade, is also not in favour of blanket protectionism, suggests that industrial policy needs to be selective. It should be designed to target specific market failures while ensuring that firms performing poorly are forced to shut down. Therefore, many prominent economists calling for globalisation also push for measures that ensure the economy becomes competitive in the long run, resulting in higher economic growth.

On the one hand, Southeast Asian export powerhouses such as Thailand and Vietnam have abandoned their inward-looking policies in favour of export-oriented strategies, which have resulted in significant export and economic growth. They not only reduced their import tariffs across several industries but also abolished local content requirements and deletion programmes, improving the competitive pressure on their industries. Their regional integration strategies complemented policies that were market-driven, translating into better economic performance.

On the other hand, Pakistan reports high tariff rates, while its protectionist policies coupled with a poor business environment stifle innovation and productive activity, exacerbating economic conditions. It is essential that Pakistan embraces outward-looking policies that lead to better regional integration, higher trade openness, and greater economic activity. A holistic overhaul of the trade strategy is essential, and NTP 2025-2030 is a step in the right direction.

THE WRITER IS THE ASSISTANT PROFESSOR OF ECONOMICS AND RESEARCH FELLOW AT CBER, INSTITUTE OF BUSINESS ADMINISTRATION, KARACHI