Businesses lament that Pakistan is an import-driven economy, making calls for “level-playing field” and “Make in Pakistan”, all feel-good tropes that are euphemisms for businesses seeking tariff-based protection from the government. So naturally, we here must ask two questions: is Pakistan in fact, import-driven? And is that bad? The idea that somehow Pakistani consumers are lining up the stores buying and hoarding cheap imported goods is ludicrous—one, because imported final goods are heavily protected and hence, are not cheap for the larger populace; and second, because the burden of these goods simply does not weigh as heavily on imports as raw material, intermediates, fuels and capital goods do—used none other than Pakistani industries themselves. But don’t take our word for it.
In a series of tweets, World Bank Economist Gonzalo Varela argued that only $1 out of every $4 of imports into Pakistan corresponded to final goods—the rest i.e. 75 percent of imports were in fact, being fed into Pakistani industries to “make in Pakistan”. This can be corroborated by data reported by PBS and the United Nations trade database (UN Comtrade) which shows that industrial supplies take up the largest share in imports followed by capital goods that include machinery and technology, followed by fuels (see graph). Furthermore, PBS data shows that in the past three years (FY17 – FY19), on average, final consumer goods were 17 percent of all imports—the rest are raw materials for production of consumer and capital goods and final capital goods imports.
Imported goods have escalating tariff structures and aside from custom duties, subsequent governments have time and again slapped regulatory duties on top to curb the import of goods—where higher duties are levied on consumer and final goods while lower duties are imposed on inputs and intermediates. It should be surprising that even on industrial intermediate goods; tariffs remain high considering there are para-tariffs and regulatory duties on them. This has major consequences. Tariff protection on inputs and intermediates create an anti-export bias and result in lower value-addition. It remains a dominating factor for Pakistan’s inability to integrate within Global Value Chains (GVCs).
This case has been made by the World Bank’s World Development Report titled: “Trading for Development in the Age of Global Value Chains”. Citing the case of Pakistan, the report argued: “Pakistan’s tariffs on intermediates average 8 percent—four times the average in East Asia—and its regulatory and additional duties (para-tariffs) are high. Thus, Pakistani exporters of textiles and apparel—the country’s major export sector—rely mostly on domestic cotton rather than on imported artificial fibers such as polyester (the leading input to the fast- growing global imports of apparel”.
Since Pakistani industries are manufacturing lower value-added products, and remain in their “infancy” stage, they are often unable to compete with imported goods, and seek frequent tariff protections. But this has debilitating effects on industries. It not only makes better quality raw materials and inputs inaccessible to industries that need them (which would allow them to make better quality goods in turn), it also disincentivizes existing industries that seek these protections from moving up the value-chain. They remain in their comfort zone of low value-add and uncompetitive production—simply because they can.
Imports are demonized because they cost dollars but clearly, they also generate revenue. In a globalized world where one product travels from one manufacturing unit in one location to another manufacturing unit in another location and touches several nodes before it is finalized and sold, trade protections seem counterproductive.
When industries argue for import substitution (read more: “Imports and the bogeyman”, July 23, 2019), it is important to understand that in itself, import substitution is not a novel one. It may even cause productivity and competitiveness to decline. So if there is indeed space for import substitution, we have to ask, is it the best use of our resources or should we simply be manufacturing something we are far more suited to make?
https://www.brecorder.com/2019/10/24/537455/imports-and-the-bogeyman-ii/
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