Re-thinking the tariff structure

In a recent letter to Miftah Ismail, the Pakistan Business Council emphasised its “Make in Pakistan” agenda to promote the domestic industry. One of its key points is their stance against protectionism in Pakistan. In bold and capital letters its agenda states that PBC is against a tariff structure that prevents access to raw material and intermediate goods at competitive prices to export industries.

This sentiment was echoed in SBP’s annual report which indicated that there is a need to review industrial policies which face impediments like the escalating tariff structure. Custom and regulatory duties not only divert export orientation of the industrial sector but also make the local economy import dependent by hindering the formation of strong backward linkages.

For example, semi-finished goods within the shoe sector have custom duty of 25 percent and regulatory duty of 25 percent which is the same for finished goods in that category. How is the local industry supposed to compete if the end cost of value addition to semi-finished goods makes them more expensive than imports? Another example is of that of a part of a break drum forge. On its raw materials the commercial duty and regulatory duty combined is 41 percent whereas the duty on imported finished goods is 21 percent.

Another complaint along similar lines is that of Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM) that cried foul when import duties were increased to 35 percent on selected steel products. The local industry does not have the capacity to cater to the entire steel demand and the gap, which is estimated to be of over 2 million tonnes, and has to thus depend on imports. The result is more expensive end products for consumers or manufacturers for whom these imports are inputs. (Read BR Research’s “Steel: Wrongful protection needs correction, published on February 19, 2017).

A lot has been said in this column about the distorting affect of the recent spate of regulatory duties imposed on essential and non-essential items. Suffice to say that a well designed liberalization policy would not only decrease cost of business and promote local manufacturing; it would also promote a technology transfer. The resulting gains would make products more competitive domestically and internationally.