LAHORE – Ministry of Industries and Production (MoIP) has warned that the removal of tariff and non-tariff barriers would not only increase the gaping trade deficit, erode exchange reserves, severely hurt local manufacturing capacity, increase unemployment and poverty, but also leave the government with little or no leverage for free trade negotiations with different trading partners.
The MoIP has expressed strong reservations of the conclusions drawn in the Planning Commission’s draft report on “Pakistan’s Trade Policies – Future Directions”, which mainly elaborates on the removal or reduction in tariff and non-tariff barriers. The ministry has underlined that Planning Commission’s recommendations would not only be a complete u-turn on the government’s policy of providing an even playing field to local industry vis-a-vis import substitutes and promoting indigenisation; but would also have far reaching implications on local industry.
Official documents made available to Pakistan Today, reveal that the MoIP has pointed out that the proposed recommendation to remove non-tariff barriers, including import licensing, will create hurdles in regulating imports and anti-dumping efforts under the WTO’s Trade-Related Investment Measures (TRIM) Agreement.
The ministry has underscored that non-tariff measures are taken by many developing economies like Pakistan to provide optimum protection to the nascent local industry. It points out that in the formative phase, all advanced economies, including Japan, India, Thailand, Malaysia and Europe, resort to such protections. The MoIP has indicated that all developing countries, which have substituted local content scheme, have adopted a similar tariff based system. This is why there are quota restrictions for Pakistani exports to many countries including the USA and Western Europe. The MoIP has also alerted that if concessions are provided without any quantitative restrictions, as proposed in the draft report, the same may very likely be misused by industry operating in the informal sector, without any benefit to the exchequer, as well as to the legitimate industry.
Commenting on the proposal of low and uniform import tariff regime, the MoIP has stressed that the customs import tariff not only represents the duty structure but also denotes the government policies, such as investment policy, power policy, textile policy, automotive industry policy, export policy, petroleum policy, food security policy, agricultural policy, and a host of other policies.
The ministry points out that reliance on a single rule applied across the board can prove counterproductive and will only create distortions in the tariff as different products have different dynamics. But the MoIP suggests that there is a dire need to align tariff and non-tariff measures with government policies and WTO directives. Referring to the example of the education policy, it points out that books and other printed materials are zero rated, whereas paper is chargeable to customs duty at the rate of 25 percent. Such distortions need to be removed, the ministry believes. Official documents indicate that the Planning Commission in its recommendations suggested that all tariffs should bring down to a maximum ad valorem rate of 10 percent. Commenting on this, the Ministry of Industries and Production has pointed out that under the existing regime, majority of imports, especially plant, machinery and equipment used for setting up an industry, are already subjected to lower rate of duty and taxes. Further reduction in tariff rates, besides minimising tax revenues, would hurt local industry, and thereby double jeopardy for the exchequer, which would lose substantial chunk of domestic taxes, the MoIP has suggested.
It warns that general uniform rate of zero and ten percent will increase trade deficit, shrink forex reserves and hurt local manufacturing capacity. However, the MoIP believes that all tariffs above 25 percent should be discussed individually on merit or otherwise. In addition, customs import tariffs cannot be reduced to the extent that future potential of industrial development is compromised. The MoIP has proposed that Pakistan wait for the outcome of Non Agriculture Market Access (NAMA) and other Free Trade Agreement (FTA) negotiations so that it may have an industrial base to offer a position in lieu of concessions it needs for market access and export growth. It states that the government is already facing problems in negotiating Free Trade Agreements (FTA) with various countries as it has little to offer to its trading partners due to already lowered tariff rates.
However, the MoIP in its cautionary missive supports liberalisation of trade through gradual reduction of tariffs, which should be carried out in close consultation with relevant stakeholders in a phased manner and by way of a thorough study of Effective Rate of Tariff Protection (EPR) by the National Tariff Commission.
The Ministry of Industries and Production (MoIP) has also opposed the proposal to offer same tariff rate to all importers, including commercial or trader importers. It underlines that concessionary tariffs are provided for inputs considered necessary for making the industry competitive with imports, and not for commercial trading activity. In addition, checks and balances are required to be maintained as Pakistan faces enormous challenges in the shape of trade deficit, revenue generation, employment creation and developing priority sectors.
