Pakistan News

Much ado about nothing

Much ado about nothing

After 18 years of deliberations and nineteen rounds of negotiations, Pakistan recently signed a preferential trade agreement with Turkey. Both sides have expressed optimism that with increased market access, bilateral trade will rise to $5 billion in the medium term from the current trade volume of fewer than one billion dollars.

However, with the low ambition of the agreement, much will likely stay the same. Pakistan has offered market access on 130 tariff lines, whereas Turkey has offered concessions on 261. These account for less than 2 per cent of each country’s tariff lines. Both countries are not opening up any notable sector of export interest for the other side.

The difference could not be starker if we compare our free trade agreement (FTA) with Turkey to what Turkey signed with Malaysia. In the case of the Malaysia-Turkey FTA, immediately upon entering into force, 70pc of the tariff lines of both parties gained duty-free access.

At the end of the transition period of three to eight years, over 90pc of trade would become exempt from duty. Only selected sensitive agricultural products were excluded from the full liberalisation.

Pakistan wants to keep its protectionist policies intact but also be seen as moving towards global integration through trade agreements

It is not just with Turkey but even the old preferential trade agreements (eg, with Malaysia, Indonesia, Sri Lanka and Mauritius) that Pakistan entered into more than a decade ago, and the coverage of trade flows has yet to reach even 5pc. The only exception is with China, but after 15 years of the agreement, the range of trade flows under the FTA is 27pc for Pakistan’s imports and 8pc for its exports, according to World Trade Organisation (WTO) data.

Generally, free trade agreements are negotiated under the WTO rules, which require that duties and other restrictions be reduced on “substantially all trade,” which is taken as over 90pc of existing trade. The bilateral or regional free trade agreements that Pakistan has with different countries can, at best, be considered interim agreements but with no time frame for further liberalisation.

Why can’t Pakistan have a proper bilateral or regional trade agreement like most other countries? There may be many reasons, but the most obvious is that Pakistan wants to keep its protectionist policies intact. Still, at the same time, it wants to be seen as moving towards regional or global integration.

In other words, it is chasing two rabbits and catching none. Unless our policymakers realise that free trade is the opposite of trade protectionism or economic isolationism, no agreement can work.

An overwhelming majority of its manufacturers are not keen to let go of the protection level they have been enjoying vis-à-vis the imported products. Similarly, since import taxes account for almost 50pc of total tax revenue, the Federal Board of Revenue would oppose any tariff concessions. With these important stakeholders opposing any liberalisation, the Ministry of Commerce is not likely to ever conclude any meaningful bilateral or regional free trade agreement. This is one of the reasons why Pakistan has failed to make any progress on the preferential trade agreements that it has been negotiating for many years with several East Asian countries such as Singapore, Thailand and South Korea.

Others have moved fast, especially on the East Asian front, where most trade and economic activity has shifted in the last three decades. For example, under its Act East Policy, India signed a free trade agreement with the Association of South East Asian Nations (Asean) countries in 2008. Since then, its bilateral trade has more than doubled, rising from $45 billion to $ 110 billion in 2021-22. They have also entered into such arrangements with other East Asian countries, such as South Korea (2009) and Japan (2011).

After having paused for almost a decade, India has recently once again started negotiating trade agreements with major economies. Earlier this year, they concluded two major agreements — one with UAE and the other with Australia. Furthermore, the newly elected UK’s Prime Minister, Rishi Sunak, has agreed with his Indian counterpart to swiftly conclude a free trade agreement to increase bilateral trade between the two countries to $100bn by 2030.

It would be in Pakistan’s interest to build a domestic consensus on the way forward rather than signing inconsequential agreements. Pakistan’s isolation is not doing any good. A lot of it is due to its flawed trade policies. Its trade-to-GDP of less than 30pc is one of the lowest in the world. For the last 15 years, its global export share has continuously been declining by an average of 1.45pc annually.

Despite this poor performance, if it wants to stay isolated and remain content with GSP-type unilateral concessions, there is no use spending time and resources on signing meaningless shallow trade agreements that lead us nowhere.

The writer is currently serving as an international trade arbitrator. Previously he has worked as Pakistan’s ambassador to WTO and FAO’s representative to the United Nations at Geneva

Published in Dawn, The Business and Finance Weekly, November 7th, 2022

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