The first 10 months of the current financial year have seen imports surge 14.05 per cent year-on-year to reach $49.41 billion. Although exports have also gone up, it is the widening trade imbalance, which has reached $30.21bn, which is a cause for concern.
The common view is that the government has little policy space available to restrict imports due to international obligations. Is this view valid?
Pakistan’s international trade obligations are of two types: those which arise out of its commitments under the World Trade Organisation (WTO), multilateral obligations; and those which arise out of its free trade agreements (FTAs), or bilateral obligations.
With such a big gap between the applied and bound tariffs, imports can be scaled down by raising applied tariffs to an appropriate level without circumventing the country’s international obligations
The multilateral obligations mainly take the form of tariff bindings contained in the country’s schedule of commitments in the WTO. Being a WTO member, Pakistan is prohibited to increase its import tariffs on a product or tariff line beyond the bound tariffs.
However, as is the case with several other developing countries, Pakistan’s applied tariffs are far below its bound tariffs. Pakistan’s simple average bound tariffs for all products are 60.9pc, while its applied tariffs in 2017 were 12pc.
For agricultural products, the average bound tariffs are 96.2pc, while average applied tariffs are 13.4pc. Likewise, for non-agricultural or industrial products, the average bound tariffs are 55.1pc, while average applied tariffs are 11.9pc.
Pakistan’s trade-weighted average applied tariffs in 2017 were 8.3pc for agricultural products and 11.1pc for non-agricultural products. This shows that on account of a large gap between bound and applied tariffs, a lot of policy space is available to Pakistan for restricting imports.
To go deeper into the gap between the applied and bound tariffs, let’s look at the tariffs on Pakistan’s major imports. According to Comtrade data, in 2017 Pakistan’s total imports were $57.44bn, which included $13.71bn petroleum imports and $43.73bn non-petroleum imports.
The combined import value of Pakistan’s top ten import items was $27.95bn. On all these products, the applied tariffs are far less than the bound tariffs. For example, for mechanical appliances, the average and maximum bound tariffs are 60pc and 75pc respectively, while the average applied and maximum applied tariffs are only 10pc and 35pc, respectively.
This shows that for the major imports, applied tariffs are at least five times less than bound tariffs. With such a gap between the applied and bound tariffs, imports, and by implication trade and current account deficits, can be scaled down by raising applied tariffs to an appropriate level without circumventing the country’s international obligations.
The flip side is that an increase in tariffs will drive up prices. However, every economic measure has its costs and benefits. If the government’s overwhelming purpose is to bring down trade and current account deficits and improve its balance of payment position, such a trade-off can be made.
From time to time, the government imposes regulatory duties (RDs) to check a surge in imports. The problem with RDs is two-fold. One, they are imposed subject to certain limitations and exceptions, which dilutes their impact.
They are also seen as short-term measures, which creates uncertainty for traders. Two, they unduly complicate the tariff structure. In addition to tariffs, Pakistan can also use quantitative restrictions (quotas) on imports to scale down their volume.
Import quotas are always more restrictive than tariffs, because their use can ensure that the import of a product will not exceed the maximum desired level. Although WTO rules prohibit the use of import quotas, there are some exceptions to the rule.
For example, Article XII of the General Agreement on Tariffs and Trade allows a member country facing balance-of-payment problems to restrict the quantity of imports to a level necessary.
Therefore, Pakistan, which is facing serious balance-of-payment problems, can invoke the said article to restrict imports. However, quotas may reduce government revenue as well as create rents for the authorised importers.
The WTO’s Agreement on Safeguards (AoS) authorises a member to restrict imports in view of serious injury or threat of serious injury to its domestic industry caused by import surge. The safeguard action may take the form of higher than bound tariffs or import quotas.
Pakistan’s bilateral FTAs also provide a mechanism for curtailing imports. Take the Pak-China FTA. Under Article 26 of the FTA, both Pakistan and China have maintained their rights under the WTO’s AoS, which means Pakistan can invoke the relevant provisions of the agreement.
Article 27 also provides for bilateral safeguard measures, whereby bilateral concessions granted on a product can be temporarily withdrawn in case of injury or threat of serious injury to the domestic industry. It is strange that Pakistan has never considered such measures before.
Published in Dawn, The Business and Finance Weekly, June 4th, 2018
