Pakistan and Regional Trade

SCHEME OF THE PRESENTATION

• Part-I
• Historical background of International Trade
• Basis of Trade
• Benefits of International Trade
• Purpose of Trade Policy
• Trade Policy of Pakistan
• Salient Features of Strategic Trade Policy 2015-19
• Challenges and Opportunities for trade relations
with regional clusters specially India
SCHEME OF THE PRESENTATION (Cont)
• Part-II
• Regional Trade with perspective of WTO
• Background.
• Concept of Regional Trade
• Effects of RTAs, FTAs and PTAs.
• Rol of RTAs its economic/political consideration
• Part-III
• Regional Trade Dynamics and Pakistan
• Focus of Regional Market with Special References to
India, China, Afghanistan, Iran, SAARC, ASEAN, CAR
• Evolving regional trade dynamics of Pakistan
• Enhancement of trade
• Key enablers
• Four pillars
HISTORICAL BACKGROUND OF
INTERNATIONAL TRADE

Part-I
 HISTORICAL BACKGROUND OF
INTERNATIONAL TRADE
• Trade between nations has occurred through out history

• Much of the world was discovered and explored by the

traders(Arab and European Traders)

• Mercantilist valued trade for gold.

• European established colonies to earn more gold-

restricted imports

• 19th century- gains from trade maximized if trade

occurred without restrictions
 BASIS

• Trade gain if specialize in which

comparative.

• International trade driven by economy of

scale rather comparative advantage ( new
concept)
 Benefits
• Trade raises income generate employment
• Improved Efficiency
• Int. Trade provide protection from lobbying and
monopoly
• Promote good governance.
• Expansion in Market lead Division of labour,
reduction in cost of production.
 Benefits (Contd.)

• Revolution in Transport companies and growing

facilities generally facilitated economy growth.

• International Trade produce Foreign Exchange which

can be used in break through of Poverty Trap.

• Industries producing on large scale, enjoy economies of

scale.

• The National Income of a country increase with

expansion in scale of production.
 GAINS FROM INTERNATIONAL TRADE
• Consumption gains.
• Exchange rate gains.
• Production gains.
• Technological (Specialization) gains.
• Investment gains.
• Economic development gains
• Institutional gains.
• Social gains.
• Globalization (GATT – WTO – regionalism )

• International peace and order.

 TRADE POLICY

A Trade Policy (also referred to as a commercial policy or

international trade policy) is a governmental policy
governing import and export with other countries.

The Trade Policy in Pakistan is formulated by the Federal

Government, in exercise of the powers conferred by sub-
section (1) of section 3 of the Imports and Exports (Control)
Act, 1950.
 SALIENT FEATURES OF STRATEGIC
TRADE POLICY 2015-19
• Mark-up support for future import and purchase of
machinery ,
• Export finance scheme for selected export sectors,
• Ad hoc relief at 3%of Freight on Board (FOB) to offset the
impact of high cost of utilities in selected sectors,
• Establishment of Export Import Bank (EXIM Bank) to
increase exports and make them competitive with regional
competitors such as India and Bangladesh,
• Promotion of service sector through institutional
arrangements,
• Promotion of regional trade especially trade with China,
Iran and Afghanistan,
• Mobilization of new investment in export oriented industry
with establishment of Special Economic Zones.
 CHALLENGES FOR INTERNATIONAL
TRADE
•Economic downturn in our major markets

•Consumer confidence erosion in USA

•Economic slowdown
•Buyers’ perception of Pakistan as a supplier of low
quality products and inability to deliver in bulk and in
time

•Negative travel advisories

 Challenges for International Trade
(Internal)
• Large Scale Manufacturing growth declined
• Long term structural issues
• Rapid change in monetary policy
• Competition in export market
• High cost of finance
• Law and Order
• Energy Crisis (Electricity and Gas)
• Lack of International Competitiveness
• Investment declined
 OPPORTUNITIES FOR TRADE

• Favorable market access owing to bilateral 19 trade

agreements
• Potential of doubling the value- addition of cotton products
• Pakistan is the 4th largest producer
• Strong resource base in many sectors (food, building
stones, gems & jewelry, leather, rice, cement, light
engineering)
• Growing Services Sectors
Regional Trade with
perspective
of
WTO
Part-II
 Regional Trade with perspective
of WTO
• Trade one of the key enablers for
development important role in reducing
poverty
• WTO its rules are to provide enabling
environment
• WTO deals with global rules of trade
between the States
• main function to ensure trade flows
smoothly predictably and freely
 The Development of Regionalism
Background
• Regional trade agreements have become a very important
feature of multi-lateral trading system in recent years.
• There is a surge in regional trade agreements since 1990.
• Up till now presentaly, 511 RTAs notified to the WTO 585 are
enforced.
• By estimation, the total number might well exceed 400 if the
RTAs that are being negotiated, those at the proposal stage,
and the ones signed but not yet in force, are taken on board.
• During the GATT years between 1948 to 1994, the number of
RTA notifications was 124.
• Since the birth of the WTO in 1995, approximately 511 new
RTAs have been notified.
• Nearly all WTO members have notified participation in one or
more RTAs. Some are signatories to twenty or more!
 Regional Trade Agreements
• The surge of RTAs began in the 1990s, but the seeds were
sown in the 1980s.
• The bleak prospects for progress on the multilateral trading
system caused by the inconclusive 1982 GATT Ministerial
Meeting.
• Western Europe was continuing its moves towards deeper and
broader regional integration.
• The United States began to explore the preferential approach to
trade.
• It signed its first FTA with Israel in the mid-1980s, followed by a
FTA with Canada in 1988 and the NAFTA in 1994. The current
negotiations on free trade for the America (FTAA) include two
continents and over 30 countries.
• More recently Asian countries have also departed from
exclusive reliance on MFN-based trade.
Transition economies contributed the large share of
recent RTAs (about one third of the new RTAs in force
since the 1990s)
•RTAs among developing countries accounted for 30-40
percent of all RTAs currently in force.
•The number of RTAs signed between developed and
developing countries has also increased over the years.
–The European Union has played a major role in this
respect.

HOW SIGNIFICANT IS RTAS IN WORLD TRADE?

–43 PERCENT OF WORLD MERCHANDISE TRADE
TAKE PLACE UNDER RTAS IN 2000,
–BY ESTIMATION THE SHARE WILL INCREASE
FURTHER BY 2016.
ROLE OF RTAs IN WORLD TRADE

S.NO. AREA YEAR 2000 YEAR 2016

1 Western Europe 64.7 67.0
2 Transition Economies 61.6 63.6
3 North America (Including 41.4 51.6
Mexico)
4 Africa 37.2 43.6
5 Middle East 19.2 38.1
6 Latin America (Excluding 18.3 63.6
Mexico)
7 Asia 5.6 16.2
 Definitions & Concepts

Regionalism vs Multilateralism
Regionalism “action by Govt. on regional basis to
liberate and facilitate trade through FTAs, Custom
Unions, PTAs
WTO context
Agreement concluded between countries not
necessarily belonging to same geographical area.
In specific terms WTO provision relates to PTAs
 Difference between Multilateralism and
Regionalism

•Multilateralism based on GATT

• In Regionalism countries lower trade barriers only for

small group of partners and discriminates against others.

• EU and NAFTA are two examples of FTA & Custom

Union
• Preferential Treatment Agreements are accorded by
developed countries on the basis of MFN and reciprocity in
accordance with GATT Para 2(c) permits system of
preferences. PTA is the first stage of economic integration.
• In Preferential Treatment Agreements developed
countries do not expect reciprocity from developing
countries, usually based on political reasons, unilateral.

• PTA or GSP give product coverage by the interest of

donor country, e.g; EU excluded agricultural product from
GSP

• PTA & GSP gives marginal benefits

Generalized System of Preferences legal
basis of GSP
• Legal basis, decision of fuller participation of developing
countries, which was a decision on deferential and more
favorable treatment adopted 1979 which is called
enabling clause, which forms a part of WTO

• Purpose was to give preferential treatment to developing

countries
- Integrate them into global economy

• It was adopted when it was a high tariff on imports for

developing countries
25
• Developed countries wanted developing countries to
follow policy of export led growth instead of import
substitution.

• Under GSP imports are allowed on preferential basis by

developed country either duty free or on preferential
basis, almost on industrial and selected agricultural
products. i.e; Caribbean countries import enjoy GSP by
USA

26
 Forms Of Different Preferential Treatment Agreements
When two more countries agree to establish PTA, they can
do so by two ways.
PTA

FTA CU
NAFTA EU
Free Trade Agreement (FTA)
• Free trade is ability for countries to import and export products without restrictions and
paying additional cost like tariff free trade is a better solution for trading community
• FTA is the form of PTA which is an agreement between countries that agrees to
eliminate tariff & quotas on most of the goods traded between them. Helps to
strengthen business climate by eliminating and reducing tariff rates.
• It can be bilateral or multilateral
• Goods shipped to other countries without tariff but countries can set tariff outside world
independently. It is the second stage of economic integration. NAFTA is an example of
FTA. 27
Custom Union (CU)
• It is a agreement between two or more countries. Tariff of
members
countries are harmonized and applied to import outside
countries on
uniform basis

• Purpose of Custom Union is to increase economic

efficiencies and to establish closure political ties. EU is an
example of CU their ultimate aim to achieve level of
economic integration.

• PTA is the first stage of economic integration, FTA is the

second
stage and CU is the third stage. 28
 Difference between Custom Union & FTA
FTA
1)
No tariff between member countries or common tariff between
member countries
2)
MC have their own tariff rates with NMC
UK 5%
Italy 3%
Germany 9% Pakistan
Holland 6%
Custom Union
1)
No tariff between member countries or common tariff between
member countries
2)
MC have common external tariff rates with NMC
UK
Italy
Germany 5% Pakistan
Holland
 Effects of FTA’s and PTA’s RTA’s
When country opens its market for free trade or PTAs or
RTAs it enjoys static gains trade will lead both
consumption and production within country which will
effect the economy.

• Free trade agreements eliminates Distortion loss and

consumptions loss

• Production distortion loss means when domestic

producer to much of the good. Whereas, consumption
distortion loss means when consumer consume too little

• Free trade agreements eliminates these distortion and

increase national welfare 30
 Effects of RTAs

FTAs & Custom Union have two effects on trade

• Trade diversion: Means trade is diverted towards more

efficient export to less efficient by formation of FTAs.
• Trade creation: Trade created by formation of Custom
Union and FTAs.

31
 How RTAs frustrate & hinder multilateral
goals (Critical Analysis)
1. Helpful though seen contradictory but actually support multi-lateral trading
system.
2. Allowed group to negotiate rules and made commitment that was beyond
multilaterally.
3. Some rules paved way for agreement in WTO like Services, Intellectual
Property Rights, Environment Standards, Investment & Competition.
4. Closure to economic integration that reduce trade barriers.
5. Article XXIV of the GATT allow derogation from MFN principles and permit FTA
and RTA, rule XXIV emphasis if free trade and Custom Union not create
hindrance or barriers for all sectors of trade in the group are permissible.
6. Whereas, article V of the GATS provides for economic integration agreements
in services.
7. Establishment of regional trade agreement committee to assess the progress
which are consistent with WTO rules.
8. If these RTAs make contribution to multi-lateral trading system, acceptable, 32
though they entail a departure from MFN principles.
Regional Dynamics of Trade
Pakistan

Part-III
 Regional Dynamics of Trade
South Asia

• Despite immense potential region of south and central less

integrated (lesser trade upto 5%) due to:

• High cost (infrastructure missing links)

• Lack of transit agreement

• Increase share in regional trade

• Enhancing access to regional trade markets as ASEAN,

SAARC, Afghanistan, CARs.
 Regional Trade / Economic Growth
Regional Trade an important factor in economics success of many
countries. Intra Regional Trade share more than 40% whereas,
Pakistan share in trade is 5%. Till 60’s Pakistan forward looking
manufacture exports higher. Pakistan strategic location is greatest
asset but not utilized.

• Must revisit its regional / global policies.

• Must trade with India, Central Asia by opening more routes

• Pakistani ports can provide Central Asian shortest route to sea

• Extreme potential of export

• Must restructure taxation system to integrate comparative

35
 Regional Trade Dynamics of Pakistan

• Pakistan develop to achieve shared property through

better connectivity and transit trade
• Initiatives.
• Resolution of outstanding issues in Pak-Afghan transit
trade agreement
• Early conclusion of APTTTA
• Effective implementation of TIR
• Re-activation, QTTA (Quadrilateral transit agreement)
• Economic integration (Pak Afghan Central Asia
Republics)
 Regional Markets
Pakistan traditionally liberalized trade uni-laterally and multi-laterally.
Now is focusing on regionalism which means action by government to
facilitate and liberalize trade on regional basis. Pakistan formed
preferential trade agreement under GATT. It has also benefited from
GSP with EU in combating drug trafficking.

•Pakistan became member of WTO in 1995 since than it

has made efforts to have market access negotiation with
various trading partners for seeking maximum market
share.
• Ensuring level playing field for Pakistani’s exporters
• Pakistan actively participated in DDA negotiation, key
interest to seek market access and to remove tariff
barriers
• For this Pakistan has signed different FTAs, PTAs & BITs
with different countries of the world.
 Regional Markets

• GSP PLUS STAUS

• EU granted GSP to Pakistan in Dec 2013 to
increase access to EU Market import effect from
1st January 2014
• EU is largest trading partner 12% remittance
come from EU
• Under GSP eliminated or reduce import tariff will
boost competitiveness
• Through this GSP Plus Status Pakistan has been
granted 40% waiver of trade tariff but exports
should be minimized from EU and regional trade
should be preferred
 Regional Markets

• Currently, Trade Policy of Pakistan is based on

Foreign relations with other countries and regional
organizations rather than on economic indicators
and financial implications which creates
inconsistencies because of ever changing political
scenario of this region of the world
• The biggest opportunity Pakistan can avail
through WTO is improvement in Textile Industries
after expiry of MFA in 2005
• Restructuring of Textile Industries with valued
added products should be manufactured
 Regional Markets
• Export finished and semi finished goods rather
than raw materials
• Pakistan should fully utilize the trade quota which
it is unable to utilize because of energy crises. For
this industrial sector must be prioritize in
distribution of energy
• Granting MFN status to different countries
because countries are concerned about bound
tariff rather than applied rate
• Public awareness should be created before
granting status of MFN in case of India because
India is one of the rapidly growing economy of the
world
 Regional Markets India

• India granted MFN status to Pakistan in 1996,

however no substantial advantage has been
achieved because of the high tariff in India for
agriculture and textile sector. Thus, Pakistani
exporter are unable to access Indian markets

• Trade with India will be productive if Pakistan

resolves its energy crises and resolve trade
barriers on textile and agriculture on equal
grounds
 Regional Markets India

• Before granting MFN status to India Government

should concern textile, automobile, leather,
garments and pharmaceutical sectors and
manufacturers before finalizing negative list in
order to protect domestic industries from any
damage
• Machinery and semi finished products can be
imported from India at lower cost as compared to
other options eg. Remote areas like USA and
European countries
 Regional Markets India

• Trade with India will be cost effective in field of

rate and time consumption
• Further, it will document the economy by
overcoming smuggling from adjacent Gulf region
• Granting of MFN status to different countries is
important for full utilization of trade quotas
• Pakistan activities in WTO should based on
regional alliances in trade rather than political
alliances. For this Pakistan should have a regiona,
trade relations with BRIC (Brazil, Russia, India
and China)
 Regional Market India

• Currently Modi adopted tough approach because

• Closer tie with Arab Estates
• India interest in Iran after lifting of sanctions
• Tie between Afghanistan/Pakistan continued fry
• Positive close relations with China
• Modi developing closer tie with America lobbying
against Pakistan
• Putting blame on Pakistan
• Violation of firing at LOC at eastern border
• Internal disturbance in Baluchistan attack on Police
Training Center /Shah Noorani Mazar
• After CPEC
 Regional Markets
Russia

• Trade relations with Russia has not been

established on full potential because of Pakistan
inclination towards the USA
• Fostering trade relations with Russia is an
important aspect of trade diplomacy as Russia
holds key position is various regional trade
associations like SCO
• Great opportunity for Pakistan to enter into an
FTA/ PTA with Russia which will result 25% of
trade concession for Pakistani exports
 Regional Markets
Russia

• Pakistan should relax its visa policy, bilateral

banking cooperation and construction of land
route (New silk road connecting Central Asia
through this Pakistan can become an exporter to
Russia and Central Asia at cheaper cost after
FTA/ PTA association
 Regional Markets
China

Pakistan is the biggest trading partner of China but

• Large imports from China Adversely affected the
local manufacturing industries because of cheaper
prices of imported goods
• Checks should be made on imported items
• Negative list should be maintained
• Extensive visits to China should be arranged for
Pakistan manufacturers and exporters for
exploring the Chinese markets
• After operationalization of CPEC provide rout
through Gawadar Port to Arabian Sea/oil rich.
• Supplement narrow over crowded Malacca straits
for carrying Chines goods energy input
• Stimulate greater economic activity in both
Pakistan/Afghanistan
• Attract also land locked states of CARs
• Mutuality of interests independent of Indian factor
not depend on India
• India sees China project attempt to extend
influence in South Asia
• Fear of Encirclement India (Gawadar Navy base
chines Army)
• CPEC consolidate Pak-China strategic
partnership
• Fear Iran deciding to make use of economic
corridor to promote its gas exports (Alarming
Scenario)
 Regional Markets
SAARC

• SAARC countries excluding India and particularly

Bangladesh and Srilanka provide great potential
to Pakistani exporters since these countries are
overly populated having limited agriculture base to
feed their large population
• Pakistan can export agricultural goods, cement
and electronic items to these countries as these
countries have the advantage of lower prices and
cheaper logistics though Pakistan has got FTA/
PTA with Srilanka, Bangladesh, Nepal, Bhutan
 Regional Markets
Bangladesh

• Pakistan / Bangladesh have maintained Paranoi /

anger since 71 prosecuting those for war crime
who were in support of Pakistan security force
BNP/Jamat-e-Islami
• Two countries withdrawing their diplomat referred
to come in SAARC Conference supposed to held
in Nov, 2016 Islamabad
• Main threat remain i.e. India-Pakistan policy
Pakistan want Pro Pakistan anti India Afghan
ground
 Regional Markets

Iran , Afghanistan & Central Asian States

• These countries offers largest market in the region
for Pakistani exporters
• Pakistan has advantage of its long shared border
with Afghanistan and Iran
• Pakistan can also import cheaper energy
resources from Central Asian states. Agreement
have already been made with Turkmenistan
• Pakistan should take leading role for trade
cooperation in the region and initiate the idea of
new silk road running thorough Afghanistan to
Central Asian states
 Regional Markets Iran

• Iran Pakistan enjoy common geographical boarder

• Member of ECO
• Shared faith and believe and internal value of
Islam
• Old trade relations (border trade)
• RCD 1964 completed several project completed
latter converted into ECO several bilateral trade
agreement signed but progress marginalized
• Iran with other member of ECO block have
potential for bilateral trade
 Regional Markets Iran

• Visit of Hassan Rohani after lifting of sanctions

• An Iranian angle to the arrest of Kulboshen Yadev
revealed all not well in bilateral relationship
• Iran accessed his cooper
• Gawader will emerge as competitor to the port of
Chah Bahar in South East Iran (Port developed by
India) to open rout to land locked Afghan for
increasing diplomatic / economic pressures
 Regional Markets Afghanistan

• Ashraf Ghani showed leniency to towards Pakistan

against his Cabinet/ opposition
• Announcement of Mullah Akhter killing in Karachi rise
in
• Pakistan accused of providing safe sanctuaries to
militant
• Mullah Akhter Mansoor Killed on Pakistan soil
• Better relation US Military engagements winding up
• Pakistan accused of providing sanctuaries to Haqqani
network
• When talk fail always raise finger against Pakistan
• Relationship under stress since past three months
• Pakistan relations gone worse Torkham Border Killing
 Regional Markets

Iran , Afghanistan & Central Asian States

• Gwadar port can be utilized by Central Asian
states by earning large amount of foreign
exchange as transit fee
• Trade with Iran can be beneficial by exporting
cheap agricultural products or getting cheap fossil
fuels for solving energy crises
• After conclusion of Iran nuclear deal International
sanctions has been removed. IN this context
regional economic cooperation can yield much
better results for Pakistan economy.
 CHALLENGES AND OPPORTUNITIES FOR
TRADE RELATIONS WITH REGIONAL
CLUSTERS SPECIALLY INDIA
Recommendations for improvement in volume of
trade
• Promotion of export of services i.e.
telecommunication and software can be exported
to Africa and South Asia, since the implementation
of GATTS there is a large market for services in
least developed countries
• Improvement in security situation be done to invite
foreign investors
• Value addition be done for exports articles,
finished product be preferred rather than on raw
and semi finished goods
 CHALLENGES AND OPPORTUNITIES FOR
TRADE RELATIONS WITH REGIONAL
CLUSTERS SPECIALLY INDIA

Recommendations for improvement in volume of

trade
• Trade policy should be based on the principle of
trade liberation and regional cooperation
• The quality of goods be improved. For this
purpose research and development institutes
should be established by Ministry of Commerce
• Proper legislation should be carried out for IPR
and Copy rights for inviting FDI
• Consistency in trade policy be maintained
 Evolving Regional Dynamics of Pakistan
• Emergence of favorable regional dynamics
• Operationalization of CPEC
• Clearance of foreign military sale by USA (Helli Fire II
Missile, Viper Attack Helicopter)
• Pak-Russian Defence Agreement Procurement of M-135
Helicopter
• Prudent avoidance of direct Military involvement in Yemen
crises is likely paid off Pakistan in long term
• Afghanistan rationalized foreign policy towards Pakistan
brought respite in Karzai era cross border attack
• If p5+1 and Iran seal the nuclear deal Pak-Iran gas pipeline
become reality.
• Lower oil price prove to be a real boom
 Evolving Regional Dynamics of Pakistan

• US-Pak arm sale delivered a strong message to India if

countries to shop elsewhere then America sell arms to
other countries
• India source of regional instability India also realize its
dependencies on Pakistan in context trade transit facilities
it endeavors to extract concession through arm twisting
• Through there is renewed talk of India-Iran deal to develop
the Chah Bahar port India lost comparative advantage after
conclusion of CPEC agreement
• China has already economic presence in Afghanistan
• It will concentrate now energy rich Iran that shall emerge
stronger after its nuclear deal recent unraveling in middle
east
 Evolving Regional Dynamics of Pakistan
• Russia emerging a regional player develop understanding
with China successful 3000 missile deal with Iran
• Afghanistan desire to make land graveyard of terror which
require help from India Pakistan and other neighbors after
close strategic tie with China India losing influence India
disappointed Afghanistan many time in providing high tech
military equipment for India it is require to join existing
Afghan Pakistan trade and transit agreement for freely flow
of goods by land from Afghanistan to eastern India back
• CPEC indicates land to convert this region into economic
integration from which Afghanistan would benefit
substantially
• Pakistan need to follow prudent policy to capitalize the
advantage time bound effort require for benefit from
transient to comprehensive stage
 Evolving Regional Dynamics of Pakistan

• Enhancement of trade upto 35 billion

• Competitiveness
• Transition from factor driven economy to efficient driven
economy
• Increase share in regional trade.
• Key enablers
• Competitiveness
• Compliance to standard
• Efficient dispute mechanism
• Four Pillars
• Product sophistication and diversification
• Market access
• Institutional straightening
• Business standardization and regulatory measures