Why we should embrace competition? — II

The conversation on competition is very pertinent right now. In times when the economy is expanding with satisfying nods from international organizations and credit rating agencies – despite concerns over macroeconomic stability – businesses and government have a unique opportunity.

For businesses, the opportunity is to grow, and for government, the opportunity is to repair some mistakes made and repeated in the past. A prominent such mistake is untargeted, often unnecessary tariff and non-tariff barriers to entry in a misguided attempt to protect certain industries. This happens instead of strengthening the regulatory, legal and quality frameworks and institutions to safeguard and boost business growth.

Let’s take the example of steel. It is a fast-growing sector, with many new upcoming private sector investments. The CPEC infrastructure growth and housing demand are seeing a visible construction boom, and steel is at the epicenter of it. However, the industry is still relatively nascent, as it never really had the incentive to grow and, extensively fragmented with virtually no quality standards in place.

It is also not self-sufficient in steel production, much less after the ongoing fiasco Pakistan Steel has brought on. A quarter of the steel demand of about 6.5 million tons has to be met with imports. These imports have a customs duty, regulatory duty and anti-dumping duty in place ultimately borne by the end users.

Let’s make sense of that: major overproduction in the Chinese economy and its own slowing demand had resulted in massive dumping all across the world including Europe and the US. Chinese producers get state subsidies and support in areas such as energy costs and financing arrangements. As a consequence, many countries proceeded to impose hefty anti-dumping duties on the dumped steel.

Pakistani steel makers – steel melters, breakers, re-rollers – rallied for a regulatory duty (RD) to protect them from said dumping since the National Tariff Commission (NTC) at the time was not functioning. Applications to them had been piling up seeking remedial measures from dumped steel. The government increased the RD on many steel items (particular rebars) from 15 percent to 30 percent under an SRO. This duty was time-bound since it is a temporary measure.

Later when NTC was operational again, anti-dumping duty was imposed on cold-rolled as well as galvanized coils (these had a RD of 5 percent on top of customs duty), which is the correct way to deal with trade malpractice. However, in a later SRO, the time-limitation on the revised RD was removed and there was no stipulation as to how long the duty was imposed for.

The issue of protection and creating a level-playing field is this: you have to do it right. The anti-dumping is legal and makes sense. But all other forms of protections should come in the form of a comprehensive policy with a focus on targets and the means to achieve them. If protectionist measures are taken, they should be structured with sunset clauses. A lot of background knowledge needs to go into which products need protection and for how long, and whether the protection would help the industry to compete and become sustainable.

Imposing an RD on a bulk of products is not helpful. In many cases, certain steel products are inputs for other industries that are not available locally and now have to be imported at a much steeper price. It’s discriminatory.

Just a few days ago, the Indian Cabinet approved a National Steel Policy that would increase steel utilization and accelerate growth. The policy gives incentives on the basis of value-addition, and it gives targets, all to help steel-makers reduce costs and become competitive.

Analyzing that policy is out of the scope of this column but the point is, there is a thought process behind whatever regulatory steps that country is taking. A policy is the right way to go about it. What Pakistani government does under pressure that is to dole out untargeted benefits which do not help anyone.

The ultimate goal of the economy should be to slowly open up the market and allow its industries to compete with imports and new players. This is so industries don’t inflate prices, and have an incentive to innovate, add value and reinvest in R&D. That’s the formula for sustainable growth.

What the government should do immediately is this: remove all regulatory duties under SROs, carve out a steel policy for a specified length of time, give incentives or protections so businesses can meet year-on-year growth targets, set up safeguard mechanisms and identify quality standards and strengthen institutions like the NTC and the PSQCA. After then, let them compete. The PML-N missed its chance, here’s hoping the next government will have the foresight.