Commerce and Competition: A Conference on Pakistani Trade Issues

This past March, Pakistan's government announced an ambitious plan to increase annual export revenues to $45 billion by 2013—almost $30 billion more than Pakistan currently exports per year. Perhaps not coincidentally, this announcement came just days before the release of official Pakistani trade data revealing a trade deficit of nearly $10 billion during the first nine months of fiscal year 2006-07—a 15 percent increase from the same period of FY 2005-06. Islamabad's decision to accelerate its export-driven trade policy raises key questions: What range of exports will Pakistan emphasize? How will Pakistan make its exports competitive? How and where will it seek new export markets? And how will Pakistan calibrate trade links with its regional neighbors and the United States?

In an effort to examine these and related questions, the Asia Program on June 15 convened a day-long conference on Pakistani trade issues. In his opening keynote address, Manzoor Ahmad argued that meeting the $45 billion export target will require progress in three key areas of Pakistan's trade policy: tariff reform, market access, and export diversification. He declared that tariff-reducing reforms do work, noting how Pakistani exports increased 28 percent in 2003 after reforms were in full swing. Ahmad chronicled Pakistan's experience with ethanol to illustrate how better market access can boost Pakistani exports. Once awarded the EU's preferential duty rate on ethanol in 2002, Pakistan—which to that point had never exported ethanol—soon became the second largest ethanol exporter to the EU (surpassed only by Brazil). As for diversification, 75 percent of Pakistan's exports come from only four commodities, while more than half of its exports go to only seven countries. Ahmad underscored that the nation must diversify both its range of products and its export destinations. While clothing and textiles comprise the lion's share of Pakistani exports, air conditioning products and pharmaceuticals also hold considerable promise. The country should also target markets in strong or growing economies such as Japan, South Korea, and Mexico—all nations to whom Pakistan currently sends less than 1 percent of its total exports.

Read Ambassador Ahmad's keynote address

The opening panel assessed Pakistan's recent trade performance. Parvez Hasan faulted the country for its "missed opportunities" in export development. From 1980 to 2005, major developing countries as a whole demonstrated "explosive growth," increasing their market share of global trade in manufactured exports from 8 to 30 percent. However, Pakistan has garnered a significantly smaller share of this market than have many of its developing world competitors. Pakistan has simply been unable to take advantage of market demand for modern, high-tech manufactured products; at least 80 percent of Pakistan's manufactured exports still consist of textiles and clothing. Abid Farooq, offering a private sector perspective on Pakistani trade, painted a mixed picture. There is considerable growth in the communications and service sectors, but there are also rising energy and borrowing costs and a textile industry struggling to capture markets. Farooq called for deepened trade relations with the United States, with whom Pakistan currently enjoys a trade surplus. Pakistan's business community wants Pakistan to be perceived as a "progressive and enlightened country of sound economic growth," and the United States is well positioned to help promote this message.

In his luncheon keynote address, Mirza Qamar Beg underscored Pakistan's "export imperative," arguing that future growth will be jeopardized if its exports fail to expand at the rate of its imports. The reality, however, is that Islamabad's export strategy faces many challenges. As a percentage of gross domestic product (GDP), exports have actually declined. Poor infrastructure in Pakistan is an "export albatross," and diversification remains the "holy grail" of Pakistan's exports. Beg, acknowledging the lack of "stroke of the pen solutions," suggested some strategies to boost exports. The country should dedicate more time and attention to cultivating the skills necessary for producing competitive non-textile exports. Pakistani firms must be professionalized, with more skills training and less "family management." Ultimately, Pakistan should strive for the status of a "fair trading partner"—that is, it should seek "equitable" market access and a level playing field, even if it is not accorded the status of a favored trading partner.

Read Ambassador Beg's keynote address

The day's second panel addressed Pakistan and regional trade. Shahid Javed Burki argued that history and "50 years of bad public policy" have caused a "distortion" in the structure of Pakistan's trade. In 1949, India reduced exports to Pakistan in retaliation for the latter's decision not to devalue its currency. Later, Pakistani ruler Ayub Khan's decision to grant large numbers of licenses to establish spinning mills set in motion Pakistan's inefficient textile industry. Ever since, Pakistan has eschewed trade with its neighbors and instead "fixated" on textiles and bilateral free trade agreements (FTAs). Burki argued that Islamabad should really focus its "limited intellectual resources" on regional trade arrangements like SAFTA (South Asia Free Trade Agreement) that can help restructure Pakistan's economy. Douglas A. Hartwick charted future challenges for South Asian regional trade. One is "more benign relations" between Pakistan and India. The two states share comparative advantages in many goods, yet less than 1 percent of Pakistan's exports flow to India. Another is "realizing the benefits" of trade with Afghanistan and trade corridors with Central Asia—even though Central Asian trade links have traditionally flowed East-West. A third challenge is invigorating SAARC (South Asian Association for Regional Cooperation), whose member-states trade overwhelmingly more with nonmembers than with each other. Zareen F. Naqvi highlighted incentives for enhancing Pakistan-India trade. Pakistan's Northwest Frontier Province would gain new Indian markets for its fresh fruit and marble exports, while Lahore would become a trade hub for towns along India's northern border. Meanwhile, trade with Pakistan would breathe new life into Western India's troubled economy. Increased bilateral trade would also provide a regional benefit: since Pakistan and India account for nearly 90 percent of South Asia's GDP, more bilateral commerce would invigorate South Asia's sluggish intraregional trade.

The conference's final panel examined U.S.-Pakistan trade relations. Esperanza Gomez Jelalian, representing American private sector views, underscored the high levels of U.S. corporate investment in Pakistan that have yielded cumulative revenues of $3 billion. She also reported what American companies seek from Pakistan. This wish list includes completion of a U.S.-Pakistan bilateral investment treaty (BIT), which would create a stable investment climate; the strengthening of intellectual property rights; and tax reductions. U.S. firms also want Islamabad "to brand" Pakistan as a business destination and to counter negative media portrayals of Pakistan. According to Jelalian, American companies typically thrive in Pakistan, finding the nation vibrant and safe. Gary Clyde Hufbauer spoke of "realistic opportunities" for U.S.-Pakistan economic relations. While cautiously optimistic about future prospects for a BIT or FTA between the two countries, Hufbauer pointed out that FTAs are not guaranteed to succeed or endure. Of the 550 FTAs completed since 1948, about 220 have expired or been replaced. Additionally, he concluded that the greatest benefit of a U.S.-Pakistan BIT would be the strong message it would send to foreign investors that they would be treated fairly by Pakistan's government and courts. Edward Gresser criticized Washington's trade policies toward Pakistan, arguing that they discriminate against Pakistani exports with disproportionately high import tariffs. A Pakistani towel, for instance, is slapped with a 9 percent tariff. Many of Pakistan's rival towel exporters are exempted from paying this duty, while wealthier U.S. trade partners pay much lower tariffs. Gresser judged that the U.S. government has done little to alter this unfair tariff policy. In 2003, Sen. John McCain and Sen. Max Baucus introduced legislation—dubbed the "Silk Road Bill"—that pledged duty-free status to Muslim countries. However, the bill failed to elicit support from the George W. Bush administration. Nevertheless, the truth of the matter, according to Gresser, is that the costs of tariff-friendly U.S. policies toward Pakistani textiles would be negligible for American employment.

Drafted by Michael Kugelman, Asia Program Assistant/Special Projects
Robert M. Hathaway, Director, Asia Program, Ph: (202) 691-4020