Leveraging Free Trade Agreements for Pakistan’s Export Growth

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| Shahid Sattar and Eman Ahmed

Free Trade Agreements (FTAs) regulate trade by removing certain duties, taxes and tariffs, with the aim of making the most of the comparative advantages of the two countries. However, these agreements must be effectively exploited to enable market access and export-led economic growth and to maintain a sustainable trade balance.

Pakistan’s anti-export trade policy bias has made it difficult for expansion-oriented industries to grow by entering global markets and has also discouraged foreign companies from investing in Pakistan.

As a result, Pakistan’s exports have remained stagnant, lacking in diversification and sophistication.

Read more: In search of missing Pakistani exports

The untapped Chinese market

Despite its immense potential, the Pakistan-China Free Trade Agreement (FTA) has had only a modest impact on bilateral trade.

The first phase of the FTA failed to steer export diversification as expected, as the products behind this increase were mainly cotton yarn, flax and leather exports.

Pakistan’s main exports have been subject to partial or no concessions under the FTA-I. While China has granted concessions on tariff lines accounting for 83% of the volume of exports, around 70% of exports are on tariff lines at less than 50% or no concessions.

Although China has conceded 72 percent of Pakistan’s exports, the results show that there is considerable export potential that could be further explored. Only 30% of Chinese tariffs under the agreement have been fully liberalized. The main Pakistani exports not or only benefiting from partial concessions under the FTA include cotton yarn (with more than 85 percent cotton), semi-milled or fully bleached rice, leather still prepared after tanning or crust and fresh or dried nuts. In short, the China-Pakistan Free Trade Agreement has the potential to broaden both the sectoral scope and the depth of commitments.

Read more: China Pakistan Free Trade Agreement Opening up bigger and brighter opportunities

Phase II of the CEFTA aims to deepen China-Pakistan trade relations through further trade liberalization, safeguard mechanisms for domestic industry, and facilitate intercountry balance of payments and trade. electronic data exchange.

Other free trade agreements

Pakistan has signed FTAs ​​with China, Sri Lanka and Malaysia; while benefiting from preferential trade agreements (ACP) with Iran, Indonesia and Mauritius. Pakistan is also part of the South Asian Free Trade Agreement (SAFTA) under the auspices of the South Asian Association for Regional Cooperation (SAARC) and has a transit trade agreement with Afghanistan. neighbour.

Pakistan also signed a transit trade agreement with Uzbekistan, finalizing a preferential trade agreement (ACP) within three months to increase the volume of bilateral trade and open the door to trade with the Central Asian republics.

The two countries, welcoming the continued progress of bilateral relations, announced the establishment of a strategic partnership for their mutual benefit. The parties agreed to deepen the partnership in industrial cooperation, by organizing joint ventures in the field of textile industry, assembly of agricultural machinery, and processing and packaging of fruits and vegetables.

Read more: Pakistan and Uzbekistan to jointly produce film on Mughal Emperor Babar

Preferential trade agreements have a key role to play in Pakistan’s trade development. With Iran, Pakistan’s trade volume is not that high due to sanctions against Iran, but there is still immense potential for exports and barter. This trade can be improved by removing tariff and non-tariff barriers. The same goes for Turkey, where cooperation is already underway to strengthen trade in goods.

Pakistani-US trade

Pakistan does not have an FTA with the United States, which is a considerable handicap in the country’s trade dynamics compared to regional players like Bangladesh, for which the United States is the most important trading partner. .

The 2003 United States-Pakistan Trade and Investment Framework Agreement (TIFA) aimed to create jobs through economic growth by increasing investment in various sectors of the economy. The objective of this agreement was to develop bilateral trade and investment in goods and services.

The growth model through this framework has been envisioned to improve digital trade, improve the business climate, strengthen intellectual property rights as well as target women’s empowerment, labor reforms and workers’ skills development.

Read more: Huge investment doors will open for Pakistan by 2023

The United States is one of the biggest markets for Pakistani goods and services, so it could be the main destination for Pakistani products to enjoy real international exposure. At present, the volume of trade between the Pak and the United States exceeds $ 7 billion.

Impact of trade reforms

The benefits of FTAs ​​are rooted in the increased competition they allow. This competition creates efficiency gains and strengthens exports, resulting in overall economic growth and development.

Once trade barriers are removed, manufacturers compete directly with each other and market forces drive them to become more efficient and capture more market share for profit.

The World Bank Group has assessed the potential economic impacts of three types of trade reform scenarios in Pakistan:

  • Unilateral liberalization of tariffs and other charges on imports,
  • Liberalization of non-tariff measures (NTMs)
  • Improvements in trade facilitation

The unilateral tariff liberalization scenario will require certain measures such as the imposition of a maximum limit of 5 percent on tariffs, which could lead to a 4.2 percent increase in imports and a decrease of 12.8 percent. percent of tax revenue from imports. In the medium and long term, imports could increase by 5.7%, exports by 10.2% and GDP by 0.5%.

Read more: Pakistan’s trade deficit increases 20.05% as imports rise in March

In the long run, these increases would exceed the loss of tax revenue in the short run. The elimination of non-FTA import duty suspension and refund programs imposing zero tariffs on raw materials, intermediates and capital goods would reduce anti-export bias and revitalize trade in Pakistan.

Better access to better quality inputs must be ensured through tariff reductions on textiles and an improved Exporter Duty and Tax Remission (DTRE) program.

Others in the region are leading in this regard: Sri Lanka has removed all import tariffs on textiles to improve the competitiveness of the garment industry, while the special bonded warehouse program (SBWS ) Bangladesh provides prompt and duty-free access to all imported inputs for all exporters. in all sectors of Bangladesh’s economy. The program has some 4,500 licensed users, and Bangladesh’s textile and garment manufacturers attribute their success in large part to the SBWS agreement.

The focus of modern FTAs ​​has changed dramatically from the traditional focus on market access to other measures such as services, investment, competition policy, intellectual property rights, government procurement, state trading enterprises, labor, environment, etc.

Read more: AWT Investments set to transform Pakistan’s investment landscape

Cross-cutting reforms needed to improve overall competitiveness include leveraging high value-added garments, providing local garment exporters with access to better quality inputs – including man-made fibers – at world prices, and suspending / lasting elimination of import duties, and effective sales tax refund / exemption programs for textiles and other clothing inputs.

The National Export Development Council (NEDB), was recently incorporated to serve as a tool for monitoring government policies aimed at improving exports and providing strategic guidance to the government to improve exports, review the implementation and progress of the country’s trade policy. It is hoped that the suggested reforms will be taken into account for the expected results of trade liberalization and benefits for the economy as a whole.

The tariff structure offered to Pakistan under Phase II is a marked improvement over Phase I. Reduced tariffs, wider market access, new safeguards to protect domestic industry are just a few. of the main characteristics of the amendment.

Mr. Shahid Sattar, now Executive Director and General Secretary of All Pakistan Textile Mills
Association (APTMA), was previously a member of the Planning Commission of Pakistan and an advisor to the Ministry of Finance, Ministry of Petroleum, Ministry of Water and Electricity. Eman Ahmed is a research analyst at APTMA. The opinions expressed by the authors do not necessarily represent the editorial policy of Global Village Space.

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