Since inception, the Pakistan economy has been gung ho about protectionism. Conventional wisdom suggests protectionism enables the local economy to grow without threat of imports. Practically speaking, without international competition there is no incentive to innovate and improve quality if protectionism continues ad finitum.
The recent SBP report highlights the ill effects of protectionism in Pakistan. Not only has Pakistan been missing out on technological transfer due to a lack of well designed liberalisation policy, gains such as improved efficiency and larger economies of scale have been largely missed out upon as well.
Unlike countries in the region such as India, Bangladesh, and Sri Lanka, Pakistan waited till the start of the new millennium to lower tariffs significantly. Even now, Pakistan’s key sectors such as textiles, automobiles, and ceramics are affected by past and present protectionism. This may have protected their domestic market shares but it has prevented them for being competitive globally, creating an anti-export bias.
For example, while international trends are moving towards polyester-based apparel, Pakistan still specialises in cotton-based textile (Read “Changing trends in textiles,” published on October 26, 2017). Another example would be of the auto sector. Until recently, before the Automotive Development Policy 2016-2021 that enticed new players, barriers to entry and high tariffs resulted in manufacturing well below economies of scale. And while local demand may be flourishing for cars right now, no one abroad is clamouring for Pakistani cars and will not be doing so in the foreseeable future.
In a study by Prime Institute, Dr. Manzoor Ahmad, Former ambassador to WTO said that Pakistan was losing on average 1.45 percent yearly in export market shares due to its high tariffs. However, it is not just high tariffs that are adversely impacting the local manufacturers in the short and the long run; it is the pendulum with which Pakistan swings from opening up to imposing duties.
Not only has the tariff structure been applied disproportionately with final goods facing stricter controls than raw materials and intermediaries, a system that encourages low value addition, there is also a lack of purpose to it.
With the trade deficit soaring regulatory duties have been imposed to curb imports, a move that has not proved to be successful in the past (Read “On imports” policies that won’t work”, published on October 10, 2017). Despite their lack of success, regulatory duties are slapped on as easy short cut solutions rather than investing in the time and effort it would take to formulate and implement a strong national trade policy that strengthens the domestic sector.
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