CPEC, Opinions

CPEC could turn into a nightmare if Pakistan keeps tariffs high

ISLAMABAD: Pakistan’s situation regarding its international trade and tariff policies is similar to that of Alice in Wonderland.

Should it continue to negotiate new free trade agreements (FTAs) and thus liberalise or should it keep imposing new regulatory duties, consequently tightening its import regime further?

At present, it seems to be going in both directions, not knowing which is the right course.

Pakistan has played on both sides of the fence in the past and its success in a few cases probably encourages it to stick to that strategy.

For example, in 2006 Pakistan became part of the South Asia Free Trade Area (Safta). At the same time, it was able to keep the door closed on most of the Indian imports through land routes on the pretext that becoming part of a free trade area did not mean that it had granted the Most Favoured Nation (MFN) status.

While other countries in Safta moved on and integrated their economies and in the process gained in terms of exports and prosperity, Pakistan continued to remain aloof. Why is Pakistan not able to move on whereas the rest of the world has successfully used bilateral and regional free trade agreements for their benefit?

First, as in the domestic economy, Pakistan wants preferential access without having to negotiate quid pro quo. In other words, it is always on the lookout for other countries to give it special concessions under a SRO-type arrangement.

Thus, it considered it a great achievement to have secured from the European Union (EU) the Generalised Scheme of Preference (GSP) Plus facility without having to offer any reciprocal market in return.

It did not realise that in this process, it has to accept many humiliating terms including EU’s intrusive inspections in various domestic situations including human rights and labour practices. Since it did not have to offer any market access, it had no incentive to reform or become more competitive.

Second, even a cursory look at the local press shows that most commentators would prefer going back to the 20th Century trade regime when import substitution policies were in vogue.

Our manufacturers present the infant industry argument and would like to avoid all competition. For the FBR, it is much easier to collect taxes on imports than make the rich pay their fair share through income tax.

Third, so far Pakistan has signed all its free trade agreements without having conducted any serious studies. As soon as imports from the partner country start flowing in, then blame game starts.

When the FTA was first signed with China in 2006, it was celebrated as a big step forward for the economy. But even before negotiations could start on the second phase, there were calls all around for renegotiating the terms agreed in the first phase.

It is not clear how it would be different with competitive countries such as Turkey, Thailand and South Korea, with whom we are trying to sign new trade agreements.

Tariff concessions

What we do not realise is that these economies have liberalised their trade regimes a long time ago and there is not much they can offer to Pakistan in terms of tariff concessions. In those countries, average import duties on industrial goods are no more than 2-3% and constitute less than 5% of their revenues.

In the case of Pakistan, customs duty is at least three times the average in these countries and constitute over 13% of the import revenue. In fact, taxes on imports account for almost 40% of total collection.

Without domestic reforms, opening up to these countries will not give results any different from what happened in the case of China or Malaysia.

How to get out of this dilemma? Obviously, Pakistan cannot keep running in opposite directions and expect to get anywhere. There is a need for a national consensus whether we want to remain isolated economically or we want to be more integrated.

If we prefer isolation, then there is no need for more FTAs. However, if we want to be more globalised, then we have to first reform trade and tariff policies.

Most countries that have benefitted from the FTAs have first liberalised unilaterally, thereby preparing their domestic industry for competition and only then opted for bilateral or regional free trade agreements.

This question is now more important than ever in the past. Through CPEC, Pakistan can become a hub for transit and trade. However, if it continues to keep high tariffs, CPEC could turn into a nightmare. It could further flood our markets with smuggled goods.

There would be calls for more restrictions on transit trade as has been made in the case of Afghanistan transit trade. Special Economic Zones would never be successful if the current duty regimes are maintained.


The writer served as Pakistan’s ambassador to the WTO from 2002 to 2008