Shutting competitors out: Pakistan’s trade barriers

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Pakistan’s non-tariff barriers are far less comprehensive than those of its neighbours, yet their negative effects are far worse

Pakistan’s non-tariff barriers are far less comprehensive than those of its neighbours, yet their negative effects are far worse

Free trade between Pakistan, China, and India would allow consumers to get the best products and services at the least cost. Transportation costs and cultural barriers are low, so the producers in one country can readily adapt to demand in neighboring countries. However, both economic and non-economic factors have caused these states to close their economies to varying degrees through tariffs and non-tariff barriers (NTBs).

A tariff is a tax on imports that is generally paid by the consumer. NTBs have roughly the same effect as tariffs, but they are more pernicious because they are difficult to detect. NTBs are non-monetary restrictions on trade set by regulatory bodies, such as documentation requirements, technical or safety standards, and packaging requirements. The World Trade Organization (WTO) in particular and international trade law in general attempt to limit the use of domestic laws that restrict trade.

However, trade law contains several exceptions that allow states, particularly developing countries, to protect local industry. These exceptions are contained in the General Agreement on Tariffs and Trade (GATT) and its associated documents. They include anti-dumping measures, countervailing duties, safeguards, allowances for developing states, and national security exemptions. Since the scope of these exceptions is unclear, countries can enact numerous NTBs under the garb of a recognised exemption.

Pakistan versus China and India

China and India have enacted more NTBs than Pakistan. 3 points about NTBs in these countries are notable. First, while Pakistan’s NTBs protect industries that have relatively low growth rates, Indian and Chinese NTBs protect strategic industries, such as small businesses, defence contractors, and electronics manufacturers that have high growth rates, produce more jobs, and are more likely to compete internationally in the foreseeable future.

Second, while many Pakistani NTBs operate as bans that shut competitors out of the Pakistani market, Indian and Chinese NTBs create costs that make foreign products more expensive (but still available) to their consumers. Foreign businesses can at least compete with Chinese and Indian businesses, albeit on unequal terms, and provide local businesses with some incentive to improve. In contrast, Pakistani businesses that are protected by (effective) bans face no foreign competition at all.

Third, while Indian and Chinese NTBs are narrowly tailored to particular types of businesses, Pakistani NTBs tend to protect very general categories of products. Put differently, Pakistani NTBs are blunt instruments, and it is difficult to use them to provide targeted protection to strategic industries.

Pakistan’s non-tariff barriers are far less comprehensive than those of India and China, and do not appear to have a substantial effect on imports: both China and India have overwhelming trade surpluses against Pakistan.

3 options for Pakistan

In light of this, Pakistan has 3 options.

  1. The first-best solution would be for all these countries to lower their NTBs, but this is clearly an unreasonable expectation. It is difficult to identify NTBs and to monitor compliance with any agreement to reduce NTBs; moreover, political considerations may make it infeasible for Pakistan, India, or China to open their markets to each other.
  2. The second-best solution would be for Pakistan to unilaterally eliminate its NTBs. This approach would benefit Pakistani consumers and force Pakistani producers who are unable to compete with foreign businesses to redirect their investments. However, a unilateral opening of the market is also unlikely. In many cases, Indian and Chinese competitors who would enter Pakistani markets are supported by government subsidies. Exposing Pakistani producers to subsidised competitors would destroy Pakistani businesses that could compete with foreign producers on a level playing field.
  3. The third-best solution, which seems to be the most viable, is that Pakistan could develop sophisticated NTBs to counteract the effects of Indian and other NTBs.

Developing more sophistication

Pakistan’s current NTBs are unsophisticated and protect low-tech industries. They can be improved in several ways.

Firstly, all Pakistani NTBs should be justifiable under international trade law exemptions under the GATT, General Agreement on Trade in Services, TBT (technical barriers to trade) Agreement, SPS Agreement on sanitary and phytosanitary measures, and Agreement on Agriculture. In particular, the government must hire and train a cadre of lawyers who are well-versed in international trade law and can evaluate the legality of proposed NTBs. Further, the government should organise a standing task force, which regularly studies the changes in the trade policies of partners, evaluates the impact of those policies and responds with counter-policies in real time with the relevant interest groups on board.

Secondly, domestic interest groups need to be educated in the relationship between domestic taxes and subsidies on the one hand and Pakistani trade policy on the other. Interest groups for and against NTBs can negotiate directly, and successfully, if they agree on debating taxes and subsidies rather than trade. Their main interest is a reasonable return, which is just as attainable under a subsidy as it is under NTB protection. To make such bargaining possible, interest groups and officials need to be educated on the current regime of taxes and subsidies to Pakistani industries.

Third, the government must credibly commit to the subsidies and tax incentives that it offers. Domestic producers are less likely to focus on subsidies than on NTBs in part because NTBs are enforced more effectively than subsidies. The government sometimes pro­mises subsidies and incentives that it later reneges on. Interest groups will only switch their discussion from NTBs to subsidies and taxes if the latter discussion is worth having. Put differently, subsidies must guarantee higher returns in the same way that NTBs do.

Fourth, NTBs need to be disaggregated and slowly redirected to protect strategic industries that have high projected growth rates. The Pakistan government could begin by lowering non-tariff barriers that protect industries with low political influence and a negligible chance of competing internationally, such as the automobiles industry.

There is much to be gained

Much is to be gained in revising Pakistan’s policies concerning NTBs, and several developing countries have optimised their use of exceptions to the free trade regime in international trade law. The government should seriously look into making the trade and non-trade regimes more sophisticated and need-tailored in order to create the best possible economic environment for both domestic producers and consumers.

This is an edited version of an article that also appeared in Dawn.