Pakistan Summary
Since joining the WTO in 1995, Pakistan has faced some difficulties implementing policies that liberalize trade. Many of these issues are associated with the fact that Pakistan has suffered a significant slowdown in economic growth in recent years. After accelerating in 1993-96, real GDP growth fell from 5.0% in to 1.2% in 1995, and has since hovered below 4%. [1] With population growing at a steady rate, the recession has led to a substantial rise in poverty levels: nearly one third of the population now fall below the poverty line, compared with one fifth a decade ago. The vulnerability of this mostly rural population is a significant concern when considering further trade liberalization.
Structural problems have been central to this reduced economic performance. In particular, the state retains a prominent role in the economy: tariffs and import prohibitions have shielded domestic producers from foreign competition while price supports and procurement preferences have contributed to an anti-export bias. Natural factors (severe drought), political instability and weak governance (non-transparency) have added to the slowness in recovery.
The Comprehensive Economic Revival Program
Pakistan's Comprehensive Economic Revival Program was launched in 1999 as per the conditions of an International Monetary Fund (IMF) loan and has since been forcefully pursued. Its central agenda calls for the implementation of a privatization program and further trade liberalization, as well as steps to strengthen the tax base and improve governance. By fostering domestic competition, the reforms undertaken by Pakistan are intended to encourage a more efficient allocation of domestic resources, which would enhance the economy's productivity and local firms' export competitiveness.
So far, steps have been taken to reduce state involvement in the economy and encourage private investment in several activities. With regards to services, legislation has been passed to reduce impediments to the operation of foreign firms. The dismantling of subsidized lending rates for priority sectors has been part of a gradual effort to eliminate numerous de facto subsidies still in place. Government procurement, however, has continued to be used as an instrument to support local industry. Price preferences of up to 25% may be accorded to domestic suppliers, particularly in engineering goods contracts, and 10% of the annual procurement budget of public sector agencies may be allocated to domestic purchases. Pakistan also has a local preference scheme for investment (the Indigenization/Deletion Programme) for which it has secured an extension for its elimination under the WTO Agreement on Trade-Related Investment Measures. [2] Despite opening most sectors of the economy to foreign direct investment, inflows have dropped, reflecting a decline in investors' confidence. However, the continued successful implementation of the Revival Program could well serve to improve the situation.
Trade Policy and Recent Reforms
Pakistan has taken a number of steps in the last few years to liberalize its trade regime, both unilaterally and in the context of commitments made to the WTO. In May 2001, Pakistan's 35 year-old price support system was dismantled under mounting international pressure. This was followed by the elimination of non-tariff barriers on several items. To ensure compliance with the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS) commitments, Pakistan amended its patent legislation in 1997 to implement TRIPS obligations, and in 2000 passed new legislation on patents, trademarks, and copyrights. Border protection, which is now largely confined to tariffs, has been reduced drastically through unilateral cuts. [3]
However, export subsidies remain in different forms, including direct financial support, export finance, and tax breaks in export-processing zones. Import prohibitions and restrictions have also been maintained on goods from particular origins (e.g. Israel, India). Following the dismantlement of import prohibitions on textiles and clothing, protection is now largely focused on the automotive sector, which registered effective rates of protection exceeding 5000%. [4]
Development Concerns
Pakistan's suggestions for the improving the position of developing nations in the global economy include tightening the restrictions on anti-dumping rules often applied by developed countries for protectionist purposes (see Textile section below), special market access for developing country exports, allowing developing countries flexibility in retaining export subsidies for the purpose of industrialization and diversification, and loosening the intellectual property commitments under the Doha Round. In previous proposals Pakistan has advocated for the right of developing countries to consider non-trade factors such as food security and employment when creating domestic agricultural policy. In addition, Pakistan has submitted a detailed proposal to modify the dispute settlement rules, with most provisions geared toward improving developing countries' access to the dispute settlement process and reducing the dispute settlement panel's ability to enforce social regulations such as environmental standards.
With regard to its own trade activity, Pakistan has limited its involvement in preferential and regional trade arrangements. Rather, it has expressed concern about the proliferation of regional trade agreements and initiatives for compromising the interests served by multilateralism. In particular, Pakistan's involvement in the South Asia Free Trade Agreement (SAFTA) has been limited; perhaps out of fear of being swamped by the economic strength of its neighbor, India.
Relationship with India
Though Pakistan and India are immediate neighbors, bilateral trade between the two is extraordinarily low, accounting for less than 1% of each nation's total trade numbers. [4] Until the early 1950s India was Pakistan's most important trading partner, but today political discord has intervened as the most significant barrier to trade between the two nations. Though India granted Most Favored Nation (MFN) status to Pakistan in 1995, its meager imports from Pakistan suggest that India has found ways to impose a de facto ban on Pakistani goods. Greater economic cooperation between the nations could provide mutual economic benefits and more importantly could generate new linkages between the business communities in the two countries, thereby nurturing constituencies for peace in the region. If the two countries are able to make progress in their political dialogue, expanding trade could be a useful complement to the political process.
Textiles and Dispute Settlement
Pakistani exports of certain textiles and clothing items have been subject to access-related restraints in several major markets, such as the European Union, Canada and the United States. Pakistan has brought numerous cases against such policies (such as quota regimes and antidumping tariffs) to the WTO dispute settlement process.
In response to a successful Dispute Settlement Panel ruling, the US in 2002 announced a package for Pakistani textiles worth $476 million over three years in the form of quota increases, granted as part of the US' commitment to Pakistan for its help in the 'war on terrorism'. The deal falls far short of Pakistan's original demand of trade benefits worth USD 1.4 billion, including suspension of all apparel tariffs until 2005 and quota increases for certain products. [5] More recently, European Union has been considering the imposition of anti-dumping duty on Pakistani cotton type bed linen. Under the countermeasure, Pakistan would lose the revenue of more than $500 million. Pakistan will surely challenge the duty if launched. [6]
Conclusion
Due to its narrow export base, concentrated mostly in low-value-added products (i.e. textiles), Pakistan's prospects for immediate trade-related growth are bleak. Pakistan's relationship with its major trading partners, the EU and the United States, is thorny due to disputes over market-access in textiles. Regional integration, on the other hand, has been stifled by poor relations with India. Pakistan's prospects for economic growth will therefore depend on the continued implementation of the Revival Programme, particularly in attracting greater foreign direct investment to the region. Long-term growth of the economy, then, will ultimately depend on Pakistan's success in diversifying its exports and assuring improved market access for its goods.
Last updated May 2004
[1] WTO Trade Policy Report - Pakistan, 2002
[2] WTO Trade Policy Report - Pakistan, 2002
[3] WTO Trade Policy Report - Pakistan, 2002
[4] South Asia Monitor, "India-Pakistan Trade: Creating Constituencies for Peace" March 3rd, 2003.
[5] ICTSD Bridges, US gives textile quota concessions to Pakistan, February 20th 2002.
[6] Fibre to Fashion, Anti-dumping duty causes $500m to Pakistan, March 5th 2004.
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