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To Ministry of Commerce Market Access, its euphemism for preferential tariffs seems to be the only arrow in the sheaf. Undeterred by Q block and cohorts' distrainment of its weaponry- competitive production base, low import tariffs, fair exchange rate, supportive infrastructure, technological diffusion; all cling-filmed by sharp managerial acumen - MoC battles on, relying on Free Trade Agreements (FTAs) to countervail all that it has been denuded of.
The FTA smorgasbord displays a wholesome array. But largely the feast has been denied to us. From the choicest dishes (the US and the EU) to the lesser morsels of Jordan, Egypt, Mauritius, Bangladesh, Singapore; to the combos - some dead on arrival (SAFTA), some pie in the sky: Latin America (MERCUSOR), Africa (SADC), Islamic bloc (PRETAS), Central Asia (ECOTA), G-8. The latest offerings, hot from the oven, are Turkey, South Korea and Thailand.
What we have on our plate are Sri Lanka (2005), China (2007), Malaysia (2008) and Indonesia (2013). Before we pile on more, time to ask whether FTA is a cure for our exporting ills, or a performance enhancing steroid. Is it a welcome-mat for the reformers or the door-mat for stragglers. Should it precede or follow fundamental export reforms.
Let's examine the evidence. It is only with China that we see a significant export growth: up an impressive $2 billion. But when we drill deeper we spot the mould. Exports have largely been confined to low value-added products (yarn, the single biggest item, has negative value-addition!); per unit prices have declined; and our exports are concentrated in the same products as before the FTA, establishing our failure to leverage the concessions.
We would still applaud the growth in our exports to China if it had added to our total exports. Unfortunately, what we see is trade diversion. From one pocket to the other; no net gain. This message seems to be lost on MoC as it hubristically goes hunting for more FTAs.
Besides the diversionary effect of FTAs, we seem to be unmindful of three growing trends that make 'preference erosion' a matter of time. First, world tariffs are on a declining trajectory. This dilutes the FTA concessions. Second, increasingly Pakistan's major competitors are also getting preferential access (watch out for Vietnam when TPP becomes effective). This neutralises the concessions. Third, exchange rate is the new kid on the block. A deft handling of exchange rates offsets the concessions.
But if an FTA gets you so little why is the whole world scurrying for them. FTA rewards countries that use them to embed structural reforms. It penalises those that do not. FTA creates competition that demands greater competitiveness. String together a series of overlapping FTAs and you have a surrogate globalisation of trade liberalisation. Not 'the real McCoy' that WTO has vainly sought but a good enough clone.
FTAs can be quite unforgiving if you are not competitive. It becomes an unequal partnership. Pak-China FTA is a classic example. The devil is not in our poor negotiations. The devil is in our doing little to measure up to the challenge. Before finalising the FTA we should have prepared ourselves well to make sure we get more than we lose. We didn't and now we scream and kick that the FTA is unfair, which it is not.
At the root is the truant Industrial Policy, if indeed ad hocism can be beatified as policy. Perhaps unwittingly, the scanner has been on the domestic market. This spawns dis-economies of scale that feed on protection. We end up with an inefficient manufacturing sector that finds the domestic market far more interesting. No FTA, no duty-free market access, will help us earn the kind of export dollars that the State Bank governor pines for with a flailing production base. We saw that with the earlier duty-free access to the EU (2002-2005) and are seeing it now with the much cheered GSP-plus.
The irony is that well-structured FTA's are the dream vehicle forex port-oriented Foreign Direct Investment (eFDI). If you have zero duty on a product for which China has a big market, and the EU exporter faces a 20% duty for the same product, there is a clear incentive for the EU producer to invest here. However, to ensnare eFDI we would need to seek concessions not for our traditional products but where the FTA partner has high tariff walls. It will also require for the Ministries of Finance, Commerce and Industries - and yes that 'bored of investment' BoI - to work in tandem; to incentivize exports, to facilitate eFDI.
We have been advised that MoC feels challenged by its minister's eloquence and piqued with our verbosity. So let us put it plainly. Don't pretend global recession is the problem. If anything it helps as the lower end of the market, where we abound, becomes more buoyant. Don't blame energy and security. That canard is nailed by the quantitative growth in exports. Don't believe that FTA's can be the fixed shorthand for export growth. FTA's come at the end of the flowchart. They are not a panacea for our woes, and certainly not a substitute for a serious effort to dismantle export barriers.
The way out of the Export Vortex is neither on the wing of FTA's nor the Prayer of Global Recovery. It is through having the right Products, for the right Market, at the right price - and for the Seller to have better margins in the Export Market than at Home. Export competitiveness is the name of the game, and it won't happen unless it is top of the government agenda. We see little evidence of it; but dream we can.

Copyright Business Recorder, 2016


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