The World Bank has suggested Pakistan to fully normalise trade relations with India, simplify tariff and trade regulations and accelerate preferential trade agreements as policy actions to stimulate export diversification and expansion. The WB in a report titled: "Pakistan, the transformative path" identified reversion to protectionism, poor trade facilitation and logistics trade policy complexity impediments in the way of improving Pakistan trade competitiveness and suggestion policy actions.
The domestic market protection through tariff p
otection generates an anti-export bias. As Pakistan cannot influence world market prices, exporting firms gain no benefit from domestic tariff policies whereas the producers for the domestic market enjoy a price advantage over foreign competitors which leads to market distortions.
Simplifying the complex import tariff and tax regime would also foster certainty, increase transparency, and promote firm dynamism. The remaining regulatory duties also need to be eliminated - and the import tax regime liberalised. While many regulatory duties were removed in 2011, selective protection and concessions on inputs remain a source of economic inefficiency because valuable resources are being diverted - to less productive sectors that are protected from otherwise low international prices and away from the industries that have comparative advantage.
In the short-term, a road map should be outlined for gradually simplifying the tariff regime which might include an immediate reduction of the top rate to 25 percent and a move to a transparent, three-band structure (25 percent, 10 percent, and 0 percent).
In the medium-term (three to five years), the government should consider phasing out regulators duties and eliminating exemptions outside trade agreements and free zones. These steps would have important positive effects in the long run, with transitory adjustment effects on output and employment limited to some sectors and a relatively small impact on tariff revenues. Higher value-added export-oriented sectors, such as chemicals and chemical products and machinery and equipment, are likely to benefit even in the short run. Many lower value-added, import-competing sectors, such as processed foods, rubber and plastic goods, and other manufacturing, would adjust production downward in the short run, as would many services sectors that temporarily lose out as consumption adjusts to take advantage of lower prices, particularly in traded goods.
The medium-term should also see a move toward an eventual uniform 10 percent tariff. Estimates calculated for this note found that eliminating all exemptions and moving toward a uniform 10 percent tariff would raise tariff revenues 79 percent and total import tax revenue 36 percent while increasing import prices 1.4 percent. The full effects of reform would start to emerge over the medium term, as economic agents respond to the new incentive environment, shifting resources from less productive to more productive economic activities.
Accelerating implementation of deep preferential trade agreements and signing other agree merits in that vein are key initiatives in expanding market access. Pakistan has to scale up efforts to benefit from the geographic advantage of being in a high growth region of the world. Significant trade-creation effects are likely to originate from the relatively recent trade agreements with China and Malaysia, due to the deep nature of these agreements and their coverage beyond market access issues. By contract, regional preferential trade agreements limited to market access are unlikely to bring benefits because of Asia''''s deep, fast-paced integration agreements.
Fully normalising trade relations with India, including opening the border, will facilitate deep forms of trade integration. The measures are necessary to benefit from India''''s first growth and to promote complementarities, including value-chain activities and invest merit potential. Our calculations using a gravity equation suggest that exports to India are 40 percent below their predicted potential. Similarly, Pakistan is the key missing market for India, underlining that both countries would gain greatly by normalising their trade relations. These moves should aim at deep forms of trade integration and not be limited to market access. Given that trade is only now starting to be normalised, the focus should be on expediting measures to facilitate trade, building on the recently signed agreements on mutual recognition and visas, and improving infrastructure, institutions, services, policies, procedures, and market-oriented regulatory systems.
Specific measures for further assessment, potentially, on a joint basis with India, include, removing impediments at the border, especially Wagha-Attari, and along trade routes. A one-stop border post at Wagha-Attari would have a large demonstration effect, as would inland container depots on either side of the border. There is also potential for transit agreements to link Pakistan to Bangladesh and to Nepal, and India to Afghanistan (similar to the one negotiated between Pakistan and Afghanistan); for associated infrastructure supporting new trade routes; and for online payment systems.
Further integrate border communities as the populations along the border regions are among the poorest in both Pakistan and India, and so integrating their communities presents particular challenges. More localised initiatives to target them including border bazaars and other measures to encourage cross-border trade, are yet to be fully explored. Some initiatives along these lines arc already in place between Bangladesh and India.
According to the report it is critical to improve the regulation of trucking and of the clearing and forwarding industries. A wide gap in the legal framework is a liability for goods as they move along the chain-truck operators, for instance, carry only third-party liability. (A draft law on logistical service providers, currently in Parliament, should help improve the quality of other logistical services.) Given the presence of numerous small players in this market, a solid legal framework for responsibilities and liabilities, including those of truckers, is paramount. Freight forwarders, most of whom are also clearing agents, are the most important intermediaries in trade logistics in any country, and in Pakistan they urgently require capacity building.
Improving customs and border management is crucial for lowering logistical Costs, particularly port operations and customs procedures. It is important to reduce the current high dwell time for cargo, especially in ports. A unified and comprehensive customs system would benefit trade logistics, allowing the private sector to develop and invest in appropriate interfaces. Also critical is the introduction of an effective risk management system, a formal Authorised Economic Operators regime, and an expedited regime for transit shipments. These measures will allow more cargo to be cleared inland, reducing bottlenecks at seaports and land borders, making clearance procedures more effective, and allowing for greater co-operation between shippers and customs officials. As Pakistan is developing trade links to the Central Asian republics in the north, these systems would be strategic.
The WB stated that the trade to GDP ratio is one of the most basic indicators of openness to foreign trade and economic integration. It weighs the combined importance of exports and imports of goods and services in an economy. The ratio gives an indication of the dependence of domestic producers on foreign demand and of domestic consumers and producers on foreign supply. There is a concave relationship between trade openness and per capita income: countries tend to trade more as incomes rise, but at a decreasing rate.
An ordinary least squares regression (using cross-country data from the World Development Indicators database) of trade/GDP on the log of per capita income (purchasing power parity dollars), its squared value, the cost of exporting (using a sub-indicator from Doing Business 2008 to 2010), and population predicts a trade share of 65 percent. The actual trade share of less than 32 percent is therefore extremely low.
Export growth is said to take place at the intensive margin when it occurs by selling more of the same products to the same markets, while growth at the extensive margin includes new product discovery, existing products sold to new markets, and new firms entering export markets.
