Picking up from the export-competitiveness thread published yesterday, the second theme that repeatedly comes up – besides import tariff liberalisation – in stakeholder discussions is diversification of exports. It’s a difficult thing to achieve, however. For one, Pakistan cannot be expected to graduate from exporting semi-processed raw materials to sophisticated components and machinery. And second, market access in advanced countries, already saturated, doesn’t come easy.
If going it alone is difficult, why not partner with others? In that context, Pakistan can diversify its exports by linking up with global value chains (GVCs). GVCs signify finished products that are designed, processed, assembled and marketed in different countries. As per WTO, over two-thirds of global trade takes place through simple and complex GVCs. While North America, Western Europe and East Asia form three inter-connected GVC hubs, South Asia and Africa are largely absent from the GVC map.
Global exports are about value addition across a spectrum that starts from research and design, moves into the middle stages of component manufacturing and assembly, and ends down the line at marketing and after-sales services. The middle stage – component manufacturing and assembly – is what developing countries like Pakistan have a reasonable shot at, with the beginning and end stages usually handled by advanced countries where high-skilled labor is competitive and end-user demand is lucrative.
To become GVC-competitive, tariff liberalisation, though necessary, won’t cut it alone; the whole trade governance regime needs a fix. It’s an ambitious agenda. For a GVC to work in Pakistan, efficiency is needed in procedures and logistics to a point where intermediate goods and components can smoothly enter and exit the country after necessary processing within.
Besides, reforms are needed to bring down non-tariff trade costs – identified by the WTO as major impediments to a developing country becoming part of GVC – of both monetary nature (e.g. freight, insurance and trade-related fees) and non-monetary nature (e.g. customs clearance, contract enforcement, and IPR protection).
All that may sound like a pipedream, especially considering that Pakistan is situated in one of the least integrated regions economically. But there is an opportunity, thanks to the China-Pakistan Economic Corridor (CPEC), which can potentially catalyze regional economic cooperation in the future. CPEC, the great North-South corridor, can arguably benefit Pakistan by branching out East and West, opening up economic opportunities on the way.
China, which has mastered the art of economic deal-making despite conflicts with some of its neighbours, would like India to be a part of the massive Belt and Road Initiative (BRI) to really make the most of its connectivity investments. Given the warming of Indo-China ties lately and the growing US belligerence towards even its allies, India may want to hedge its bets by dropping wholesale opposition to BRI some point after Modi’s re-election next year. Pakistan has already signaled openness to India coming on board.
Pakistan has to raise its competitiveness in making intermediate goods by becoming part of the regional-value-chain of textile apparels, auto parts and electronics assembly spearheaded by China. The proposed SEZs under CPEC can be instrumental in that regard, ensuring speed and efficiency. But it will still pay to reform tariffs as well as trade governance across the board so that local small-and-medium-sized domestic suppliers who are not part of SEZs can also be a part of the value-addition equation. It will be interesting to see where major political parties stand on GVCs in their upcoming election manifestos.
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