A long standing difference of opinion on rules governing international trade has focused on supporting free versus fair trade with the developed world arguing in favour of free, backed by a number of economic theories, while the developing world has supported fair trade narrowly defined as bilateral matching of exports and imports that may necessitate tariff and/or non-tariff barriers (NTBs) to ensure that the balance of payments do not require periodic support through external borrowing from multilaterals/bilaterals.
President Donald Trump changed that paradigm and insisted on both fair and free trade for America as part of his America First policy - free specific to individual countries/trading blocs with which the US suffered a huge deficit. The result: exchanging barbs with the leadership of the offending countries and/or trade war with major trading partners, notably China and the European Union with occasional mention of India during Trump's four-year tenure.
The affected countries employed three arguments to challenge Trump's charges/sanctions. Firstly, that sanctions/tariffs would penalize American consumers who would pay higher prices for the same products. True but this would also hurt their own economies because their sales to the US were a significant portion of their total exports.
Secondly, Congressional Research Service (CRS) in a paper titled US Trade Concepts, Performance and Policy: Frequently asked questions 2016 noted that "economic theory states that trade occurs because it is mutually enriching...it has a positive economic effect like that caused by technological change, whereby economic efficiency is increased, allowing greater output from the same amount of scarce productive resources. By allowing each participant to specialize in producing what it is relatively more efficient at and trading for what it is relatively less efficient at, trade can increase economic well-being above what would be possible without trade." The developing countries argue that because of low technology available to them, partly due to the rules governing intellectual property rights, they are unable to compete with developed countries that in turn accounts for large unsustainable current account deficits compelling them to borrow and/or undertake austerity measures that are politically extremely challenging.
In Pakistan's case the constant self-praise by the Khan administration on achieving a current account surplus (in spite of inheriting a historically high 20 billion dollar current account deficit) two and a quarter years down the line has not raised the comfort level of domestic economists as: (i) there has not been a noteworthy rise in exports which have increased by no more than a couple of hundred million dollars while imports have been massively curtailed attributed to extremely harsh contractionary monetary and fiscal policies with a consequent negative impact on the growth rate; but (ii) higher remittances have supported a current account surplus today which, as per international donor agencies and parroted in the recent State Bank of Pakistan report, are not likely to be sustainable. Thus it is fair to say that it is not exports that are paying for imports but remittances, reduced imports which are negatively impacting on GDP.
Thirdly, CRS argued that ''the benefit of trade is attached to the differences in comparative advantage between countries (which) occur because of differences in the relative abundance of the factors of production: land, labour, physical capital (plant and equipment), human capital (skills and knowledge including entrepreneurial talent), and technology in product received (the import), not in the product given (the export)." True enough but in Pakistan's context flawed government policies have led to farmers abandoning the comparative advantage in producing cotton to producing sugar which requires export subsidy before the next cane crop can be purchased by the millers.
CRS further maintained that "government actions to influence comparative advantage can be grouped in two broad categories: policies that indirectly nurture comparative advantage, most often by compensating for some form of market failure, but not targeted at any specific industry or activity; and policies that aim to directly create and nurture comparative advantage in particular industries. Indirect influence on comparative advantage can emanate from government policies that eliminate corruption, enforce property rights, remove unnecessary impediments to domestic market transactions, liberalize trade and foreign investment barriers, assure macroeconomic stability, build transport and communication infrastructure, support mass education, and assist technological advance... . Policies that try to exert a direct influence on comparative advantage may include policies to promote and protect certain industries (such as through subsidies or trade protection) that are thought to have significant economic potential."
Trump's policies did not reduce the trade deficit though it certainly contained it: in 2016 the US Bureau of Economic Analysis noted that in 2015 US trade deficit was 502.3 billion dollars, and in 2019 576.9 billion dollars. But then it is noted that the 2020 figures are not comparable given that "the full economic effects of the pandemic cannot be quantified in the trade statistics because the impacts are generally embedded in source data and cannot be separately identified."
There is little doubt that the impact of the pandemic on Pakistan's exports has been considerable however other factors continue to impact negatively on our exports/economy while the Khan administration, like its predecessors, attempts to nurture comparative advantage through direct and indirect policy measures including: (i) lower utility charges for exporters relative to other consumers though, on average, they remain higher relative to the regional average sourced to conditions imposed by Pakistan's multilateral and bilateral creditors and due to sustained poor sectoral performance indicated by the rise in circular debt from 1.2 trillion rupees in August 2018 to 2.3 trillion rupees today; (ii) providing the same incentives as during previous administrations (fiscal/monetary) with the powerful industrial lobby insisting on these incentives in spite of successive government's inability to fund these incentives due to rising budget and current account deficits; (iii) failure to formulate holistic policies which accounts for higher incentives to cane growers, a commodity that is increasingly contributing to our large scale manufacturing index but requires subsidy for exporting the surplus, at the cost of cotton which remains Pakistan's major export item; and (iv) the failure to check smuggling across Pakistan's thousands of miles of porous border that has implied that the country is competing with neighbours and higher utility/input costs have disabled some domestic industry from even competing in the domestic market.
To conclude, there are market imperfections in nearly all sectors, government run as well as privately run, and need to be dealt with through out of the box policy measures which are sadly lacking to this day.
Copyright Business Recorder, 2020
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