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Anti-industry bias in free trade deals

January 25, 2016

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Prime Minister Nawaz Sharif speaking on ‘Perspective of Pakistan in the Regional Context’ at a panel discussion on ‘Regions in Transformation-South Asia’ during annual meeting 2016 World Economic Forum at Davos, Switzerland on Thursday. Pakistan Business Council says, ‘Manufacturers have to compete against cheap imports under FTAs/PTAs and are required to pay more taxes to make up for the revenue losses on account of these deals.’—PID
Prime Minister Nawaz Sharif speaking on ‘Perspective of Pakistan in the Regional Context’ at a panel discussion on ‘Regions in Transformation-South Asia’ during annual meeting 2016 World Economic Forum at Davos, Switzerland on Thursday. Pakistan Business Council says, ‘Manufacturers have to compete against cheap imports under FTAs/PTAs and are required to pay more taxes to make up for the revenue losses on account of these deals.’—PID

Pakistan’s officials are believed to be pushing quite hard to close a free trade deal with Thailand without properly analysing its costs and benefits for the domestic economy, and possible implications for jobs.

Nor have Pakistan’s trade negotiators ever consulted the manufacturers or are ready to look into the industry’s concerns before cutting the deal with Bangkok.

Even the impact of previous free trade and preferential trade deals, especially with China and Malaysia, on the domestic industry, particularly the small and medium enterprises (SMEs), and jobs, hasn’t deterred Islamabad from fast-tracking the proposed deal.

A study conducted by the Pakistan Business Council (PBC), a conglomerate of the country’s large foreign and local firms, shows that Pakistan’s top 50 high potential export items represent a total trade potential of $2.8bn and about 38pc of these high potential items are already tariff exempted by Thailand.

Therefore, the study entitled. ‘Feasibility of the Proposed Pakistan-Thailand Free Trade Agreement’ says, in practice the FTA may not bring much benefit to Pakistan in terms of concessionary rates.

The study indicates that Pakistan’s imports from Thailand will be elevated to $1.71bn whereas exports will increase by a mere $160m, resulting in a trade deficit of $1.54bn.

Furthermore, Thailand’s high potential exports to Pakistan are not capital goods, but rather consumer goods, making the potential trade deficit that will come about after the FTA harder to justify.

The PBC estimates that the actual export value of Pakistan’s highest growth items - apparel and home textiles - will grow only merely from the present $1.4m to $6.1m.

“Countries seek to enter this kind of arrangement in order to increase market access for their exports and enhance their trade competitiveness,” said a businessman from Karachi.

“In Pakistan’s case FTAs and PTAs have mostly resulted in import of subsidised consumer goods and exposure of our domestic industry to unfair competition,” he added.

The PBC analysis also concludes that Pakistan has historically failed to negotiate favourable FTA terms for its exports, with several high potential export items receiving no concessions under FTAs with China and Malaysia and PTA with Indonesia.

“Our trade and foreign office bureaucracy enjoy signing free trade agreements; they consider it a major plank of trade diplomacy without realising their impact on the economy and jobs,” a PBC official told Dawn.

Kamal Amjad Mian, a manufacturer of electric cables, was of the view that the existing free or preferential trade deals with the exception of the first FTA signed with Sri Lanka in 2005 had mostly diverted Pakistan’s trade (both exports and imports) with partner countries, especially China and Malaysia, rather than create new trade.

“Free trade arrangement has to be a means to an end, not the end in itself. The objective of the free or preferential trade deals must be to boost the country’s trade competitiveness and value-addition to domestic manufacturing industry leading to job creation,” he argued.

“But in our case, such deals have helped increase subsidised imports of finished consumer goods, lead to closure of the small and medium sized enterprises like cycle factories and stationary manufacturing, and stunted growth of the value added industry like ceramic tiles and rubber tyres. If we must make a free trade deal with a country, we should do so keeping our long-term economic goals in view and focusing on the country’s future industrialisation. How long shall we continue to be an exporter of low value industrial and agricultural commodities and jobs?,” contended Mian.

The PBC report on the proposed FTA with Thailand also questions the capacity of the National Tariff Commission (NTC), saying it lacks institutional capacity to fulfil its myriad responsibilities, such as setting safeguard measures, performing trade research and tariff rationalisation, and, therefore, will be unable to address issues having to do with the Pakistan-Thailand FTA. The NTC also currently faces a number of legislative hurdles to its effective functioning, which are yet to be addressed.

“Previous FTAs have led to Pakistan’s domestic market being flooded with cheap foreign goods and significant harm has been done to local industry. Given no improvement of institutional capacity the (proposed) Pakistan-Thailand FTA may very well lead to a similar result and a worsening of the already dire situation,” insisted the PBC.

“Institutional weaknesses have marginalised benefits of free trade agreements, turning Pakistan into a market for its FTA/PTA partners,” insisted Ijaz A Mumtaz, former president of the Lahore Chamber of Commerce and Industry.

“Our institutional capacity weaknesses and bad negotiation skills are to blame for our poor trade performance and lack of protection for domestic industries against mis-declared, under-invoiced imported goods and smuggling, forcing many manufacturers in the recent years to invest in trading or in property instead of industry,” he concluded.

The PBC official pointed out that FTAs/PTAs and widespread under-invoicing of imports from China, Iran and elsewhere under these arrangements had resulted in significant revenue losses to the tax authority without benefitting the economy and industry as expected.

“A revenue loss to the government means more taxes on the corporations. Thus, the manufacturers are faced with double whammy: on the one hand, they have to compete against subsidised, cheap imports under FTAs/PTAs and, on the other, they are required to pay more taxes to make up for the revenue losses of government on account of these deals,” he complained.

Published in Dawn, Business & Finance weekly, January 25th, 2016