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Trade agreements and exemption withdrawals

June 19, 2017

After realising that free and preferential trade agreements are not a panacea for export growth, the government resorted to trying to minimise their impact by withdrawing, in phases, duty free exemptions on import of certain items.

This strategy, put in effect last year, had a two-pronged objective — to provide protection to local industries and to minimise loss in revenue. The net revenue impact of preferential trade deals in 2016-17 is estimated to be Rs41 billion.

In the 2017-18 budget the government has withdrawn exemption on certain items in a bid to provide a level playing field to domestic industries. The objective is to achieve import led industrialisation.

Independent economists blame fault lines in bilateral trade agreements for persisting problems. But despite their adverse impact on the economy, the Ministry of Commerce intends to sign further FTAs

Independent economists blame fault lines in bilateral trade agreements for the persisting problems and stress the need to assess the situation realistically and reset direction to reverse this trend.

Evidently, the trade diplomacy strategy pursued so far has not helped minimise the external sector’s vulnerability. Policymakers have focused on the export of low value-added products ignoring the need for effective import substitution.

It is time the government addressed issues in import substitution, at least in those areas where Pakistan has a domestic advantage. One may ask what wisdom is there in allowing imports of dairy products — cheese and milk-based confectioneries or fruit juices — that tend to widen the trade gap?

Most of Pakistan’s trade deals were probably concluded in haste as they generally benefit the trade partners. Trade data also confirms that these agreements have led to negligible gains in exports while increasing imports notably.

In the budget 2017-18, the government has identified certain products which were importable duty free under FTAs from China, Sri Lanka and others PTAs. In this case, Pakistan has imported duty-free import of 24.3 million mobile sets from China in 2016-17, while 1.7m mobile sets were sourced from non- FTA countries during the year under review.

As a result, Pakistan lost over Rs6bn in revenue because of duty free mobile imports from China. To reverse the trend, the FBR has imposed a regulatory duty at the rate of Rs250 per mobile-set that will now be applicable to imports from all countries including China, even if they are covered by trade deals. Earlier, almost all types of telecom equipment were cleared at zero per cent duty under the FTA. Now a regulatory duty of 9pc has been imposed on telecom equipment.

Last year, the government also imposed regulatory duty on alloy steel to curtail its duty free import from China under the FTA.

The import of synthetic filament yarn is subject to a 5pc duty under the South Asia Free Trade Area (Safta). The normal duty on synthetic filament yarn was 11pc. To incentivise local production, a regulatory duty was imposed at the rate of 5pc.

In the 2017-18 budget the government has withdrawn exemption on certain items in a bid to provide a level playing field to domestic industries. The objective is to achieve import led industrialisation

Metalised yarn is importable at 5pc under Safta. The normal rate of duty is 11pc. A regulatory duty of 5pc was imposed on metalised yarn to provide protection to its local producers. Similarly, the duty on its raw material, uncoated polyester film and aluminium wire, was reduced to 11pc from 20pc.

Under the FTA with Sri Lanka, the import of sacks and bags is exempted from customs duty. The normal customs duty on the import of sacks and bags is 20pc. To restrict flows under the FTA, the government has imposed a 10pc regulatory duty on it.

Similarly, parts of electro-thermic domestic appliances, like coffee-makers, tea-makers, dryers and irons, are imported under the FTA at reduced customs duty of 3pc and zero per cent. However, all these finished products imported from non-FTA countries are subject to 20pc customs duty and 15pc regulatory duty.

Under the China FTA, commercial importers prefer to import electric appliances in semi-assembled conditions as partial shipments of parts. To control this, a regulatory duty of 10pc was imposed on parts, excluding imports by local assemblers/manufacturers of these items.

The rate of regulatory duty on betel nuts has been increased to 25pc from 10pc while that on betel leaves stands at Rs200 per kilogramme. This decision is aimed at discouraging imports under the FTA from Sri Lanka.

Despite the adverse impact on the economy, the Ministry of Commerce intends to sign FTAs with Turkey and Thailand. But, a report by the Pakistan Business Council has raised questions over the validity of these agreements in terms of boosting exports.

According to the report, for every additional dollar increase in Pakistan’s exports to Turkey, Turkish imports to Pakistan would increase by roughly $3. Similarly, for every potential dollar increase in Pakistan’s exports to Thailand, imports from Thailand would increase by $4.

Both countries want to get market access to Pakistan’s automobile, autoparts, chemicals, plastics and rubber markets which, if granted, would undermine the existing industry.

Turkey is one of the highest users of trade defences, even against its FTA partners. Presently, it has antidumping, countervailing and safeguard levies on Pakistan’s cotton yarn, madeups and PET.

Pakistan’s trade deficit has reached an all time high of $30bn in 11 months. It seems these FTAs have not only failed to extend protection to local industries but also failed to secure terms for Pakistan’s exports while undermining tax revenues.

Published in Dawn, The Business and Finance Weekly, June 19th, 2017