Pakistan has the higher average effective tariff rate in the region. A protectionist approach often results in erosion of competitiveness, and product quality. An unintended consequence of excessive import tariffs which eventually act as export taxes, and non-tariff barriers is the creation of a grey market for imported goods which cannot officially be imported but eventually finds its way to retail stores, and households. Michael Crichton in Jurassic Park remarked that life breaks free, it expands to new territories, and crashes through barriers painfully, maybe even dangerously, but life finds a way. The same can be said about goods being transported into or out of a country, despite multitude tariff and non-tariff barriers.
Whether it be Tim Horton’s coffee, the latest iPhone, or a Sephora face moisturizer – if there is a buyer, there will be a seller, even if the same goods are not officially imported in the country, and neither do they have any official distributor. There are multiple informal networks connecting buyers and sellers, with the sellers detailing their intent of traveling and the weight that they can carry. Meanwhile, buyers can enlist what they want from whichever jurisdiction in the world, and for the right price, someone can procure the merchandise, charge a market-clearing fee and enable access to that merchandise for the buyer.
The market-clearing rate for being a khepiya (or retail smuggler) is in the range of $15 to $25 per kilogram and can increase to as much as $200 for the latest iPhone, or other electronic items, depending on its novelty. The incentive for the buyer is that they can get access to merchandise from any corner of the world without having to pay excessive courier charges, or potential and arbitrary duties. Shipping charges from any European or North American jurisdiction is in excess of $70 per shipment, and in some cases, the official store does not even ship to Pakistan. Buyers in this case get a good bargain, as they can get the goods shipped through a retail smuggler at a much lower price.
Informal networks coming together connecting buyers and sellers create a layer of risk of fraudulent activities, in which a buyer may transfer funds, but the party on the other end may never complete the transaction, resulting in an increasing fraud rate. Such a risk can be addressed by having in place escrow accounts, but for that those informal networks need to become formal, and bring into the equation a recognized financial institution, or even a fintech. A number of businesses have tried going the formal route, but due to lack of product sophistication on part of financial institutions, and a regulatory environment which lags in many regards, could never really gain traction.
Such informal networks and arrangements are largely a function of barriers to trade, thereby creating inefficiency in the market, while also resulting in significant losses to the national exchequer due to tax-free imports, and sales. Life will find a way, and so will goods – a conducive trade policy would facilitate flow of goods in and out of the country. Excessive tariffs will only incentivize a grey market and contract the formal market, while propping up informal networks which largely operate outside the formal economy. Khepiyas have been operating for decades, but they are now much more sophisticated, and more decentralized. The policy makers can either learn through the economic value generated by such informal networks, or they can keep looking the other way. Either way, buyers and sellers will find a way, even if its gray.
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