Rethinking, not demonizing imports

The declining exports in Pakistan have been the focus of many conversations lately and for good reason. Global trade started slowing down in 2014 but exports in Pakistan have been stagnant since 2011 and started declining thereafter; and even when they were increasing, they were paltry in comparison to some of Pakistans competitors and peers.

Recently, Pakistani exports fell by 8 percent in FY15, 12.5 percent in FY16, 9 percent in Q1FY17; whilst maintaining a trade deficit which has widened over the years. The intellectual community has highlighted the reasoning behind exports not picking up and the missing policy steps that are needed for a long term growth in exports. This column has talked about it too.

Imports on the other hand do not get the limelight. High imports are bemoaned and businesses accuse the government of wanting a trading nation and letting imports of all and sundry come in at preferential rates and destroy local industriessigning trade deals (like Pakistan China FTA) that result in a greater trade deficit with no local growth.

The truth is far from it. Not only does Pakistan still maintain higher average tariffs (10%) than South Asia (8%), India (6%), Sri Lanka (5%), the world (3%) and many East Asian economies; in many cases, duties are too high just because either the government wants to collect a certain level of revenue and customs tariffs are a way to achieve those levels or it gets pressured by business lobbies to continue to protect them. Think cement, steel, autos, pharmaceuticals etc.

Rising trade deficit is bad because you have less foreign exchange to pay for more, but lets be clear it is not because of increasing imports.

Heres the deal: it is a popular (and fallacious) belief all over the world that countries become rich by exporting more than they are importing; that high exports are an indicator of growth while high imports hurt the economy. This thought process results in government policies that keep tariffs higher, institute non-tariff barriers and measures that systematically make imports harder to enter the country.

Ultimately policymakers end up protecting inefficient firms within the economy who do not become competitive and gain economies of scale because of the lack of competition or incentive to innovate, and the consumer is not better off either because he gets limited products at higher prices. Some would say imports are just a necessary evila quid pro quo; a way to gain market access for ones exports into other economies but in fact, imports help in production, consumption, jobs and competitiveness and are a major driver of growth and industries.

So what is Pakistan importing and what should it be importing? Ideally, Pakistani industries need quality inputs that domestic producers do not make or make at a sub-par quality. These primary imports are then processed at home to become high quality export products or used locally. Industries also need capital goods (equipment, machinery etc) for the purpose of industrialization. Then, industries and sectors that have enjoyed decades of protection from competition need imports to become competitive and bring prices down.

Overall, imports make more variety and choices available in an economy. Economies are not meant to manufacture everything but a select range of products in which they maintain a competitive advantage.

A more in-depth analysis is out of the scope of this column but some trends emerge when taking a quick look at import structure: capital goods increased from 10 percent to 19 percent between 2001 and 2005 as a share of total imports (which denotes a positive sign in industrial development) but down to 13 percent in 2015. Parts & accessories of capital goods have fallen from 7 percent to 5 percent which could either mean less capital goods are being made in Pakistan or Pakistan is self-producing parts. There is little evidence of latter.

Consumption goods have remained 4 percent of total imports in the past decade or so, while industrial supplies overall have remained at 37 to 38 percent. Food and beverages in processed form have fallen 11 percent to 5 percent between 2005 and 2015 while industrial supplies in primary form have increased from 5 percent to 7 percent; both apparently positive signs. For fuels and lubricants, it is the oppositean increase in processed, more expensive fuel and a decline in primary fuels that can be processed in-country.

The point is, first, that imports need to be analyzed and looked at strategically by policymakers while cutting trade dealsto design them for the welfare of industries and consumers alike.

Second, the conversation on trade must evolve from discussing trade deficits and exports to having substantial goals for imports. It is easy to call a country an importing nation without digging into what a country is importing and what it should be importing. Self-sufficiency, that some believe is a virtue, leads to rent seeking and limits the economy from the fruits of a free market.

Lastly, it is important to recognize that without imports, there can be no exports. Now more than ever, with CPEC happening and signing of so many trade deals, the debate on imports cannot come as an afterthought.