National Tariff Policy (2019-2024)

A WAY FORWARD

Omer Hussan Bajwa

 

1. Introduction

During the last two decades, Factory Asia has taken the central position in global trade. China has emerged as a new demand-and-supply hub. India, Bangladesh and Vietnam have earned great dividends in this changing paradigm. However, Pakistan has not been seen anywhere in securing benefits. Pakistan is globally out of sync as it has one of the highest tariffs in the world. Continuation of protectionist policies in Pakistan has been the major culprit behind this state of affairs. Although a few manifestation of trade liberalization has been witnessed in the last two decades, yet, its extent has been very limited. In November last year, the incumbent government came up with one of the most-awaited policies, National Tariff Policy 2019-2024 (hereinafter NTP). It is a step towards reversing the trend of de-industrialization in the country and declining exports. Undoubtedly, prolonged de-industrialization has resulted in sluggish exports and unaffordable import costs, as well as erratic economic growth.

1. Currency of Topic

Trade paradigm of Pakistan has been infested with protectionist policies, high import tariffs and concessionary Statutory Regulatory Orders (SROs) and Customs General Orders (CGOs). Resultantly, dismal picture of trade statistics, growing trend of de-industrialization and losing competitiveness of domestic products in both domestic and global markets are some of the deplorable outcomes that the country has to confront. Keeping in view all this, the government has come up with a step in the right direction by formulating the NTP.

1. Problem Statement

The deplorable situation of trade of Pakistan points finger at the continuation of flawed policies. Imposition of high tariffs on imports by considering tariffs as a source of revenue generation plays a pivotal role in deplorable trade growth. The NTP has come as an ambitious measure to plug the loopholes present in previous tariff regimes. However, its fruits, just like all other policies, lie in its effective implementation.

1. NTP: Salient Features

National Tariff Policy 2019-2024 has aptly and comprehensively assessed Pakistan’s tariff regime; mentioned institutional responsibility of tariff setting; highlighted the issues created by current tariff regime; established regional comparison; and mentioned objectives, principles and guidelines of new tariff policy.

Salient features of the NTP are listed below.

1. Pakistan’s export growth has been in agreement with tariff liberalization. From 2000 to 2014, exports increased by 173% and tariff reduced from 23.1% to 8.9%. Since 2014, applied tariff has been increased to 11.9%. Resultantly, exports have decreased from $25bn to $23bn. Following graphs categorically explain this trend.
2. In the last three decades, significant reduction in tariff slabs has been witnessed.

However, additional customs and regulatory duties have been imposed from time to time.

3. It has been mentioned in the policy that tariff setting is not a revenue instrument, but a trade policy. The tariff policy and protection regime is the mandate of Commerce Division, and not of the Federal Board of Revenue (FBR) that has used tariff setting as a revenue instrument.
4. Current tariff regime has been responsible for numerous problems:

• Loss in competitiveness of export-oriented sectors owing to higher import tariffs.
• Decrease in share of domestic goods in the domestic market owing to tariff protections that bring inefficiencies in the manufacturing sector.
• Creation of anti-export bias by making domestic protected market more attractive.
• Formation of complex tariff structure.
• Increase in incentives for smuggling, under-invoicing and wrong declaration.
• Presence of intra-sector anomalies and discriminations.
• Hurdles in investment decisions owing to inconsistent and unpredictable tariff structure.

5. Among the top 70 exporting countries, Pakistan’s average mean tariff is the highest: 12.7%. However, the weighted average tariff of these countries is just 2.7%. Besides this, contrary to other export-driven economies, Pakistan’s tariff collection at import stage constitutes alarmingly 48% of its total tax revenues.
6. The NTP aims to improve competitiveness, increase employment opportunities, improve consumer welfare, and remove anomalies in tax system.
7. Some of the guidelines under the policy are tariff as trade policy instrument, simple and cascading tariff structure, strategic protection during infancy phase, and competitive import substitution subject to time-bound protection.
8. Gradual, but significant, reduction in tariffs and regulatory duties, and time-bound protection to infant industries are some of the policy reforms that have been mentioned in the NTP.
9. The NTP will be shaped by intensive interaction among various ministries and institutions rather than a single agency entrusted to boost revenue. The FBR will no longer set the recommended tariff rates for approval by the cabinet. Instead, the responsibility will be delegated to a newly-created Tariff Policy Board (TPB).
10. Challenges
11. Administrative realignment

As per the NTP, tariff-setting is the mandate of Commerce Division, not of FBR anymore. However, in current trying circumstances, it will be a daunting task to reverse the decades-old onus back to Ministry of Commerce from FBR as the country is confronting fiscal deficit, severe economic choices and tough stabilization measures under IMF Stabilization Program. Besides this, capacity of Commerce Division to deliver and pacify the fears of revenue loss during the ongoing IMF program will be a difficult challenge.

2. Concerns regarding decrease in revenue

It has been observed that after the implementation of the NTP, there will be revenue loss of around Rs. 250 billion in FY21 and Rs. 270-320 billion in FY22. Definitely, the policy aims to have uniform low tariffs across the board, eventually. However, there still is a long way to go. In this perspective, the policy might face a severe opposition and backlash in the short run.

3. Tariff Policy board: a facilitator or another bureaucratic hurdle?

History of Pakistan is replete with formation of ‘boards’ but their performance has always been in question. Formation of Tariff Policy Board (TPB) that has to be chaired by the Commerce Minister/Advisor with representatives of ministries and divisions may be tantamount to creating another high-level bureaucratic hurdle.

4. Time-bound protections

Another major challenge is the successful removal of those time-bound protections that are mentioned in the policy in the future. History bears testimony to the fact that such protections have never been time-bound. For instance, the government offered protection to the polyester sector in 1995. Twenty-five years later, the sector is still protected. It has been witnessed that once any protection has been offered, even though it has been time-bound, manufacturers have never seemed to graduate out of it.

5. Poorly-negotiated Free and Preferential Trade Agreements

Poorly-negotiated Free Trade Agreements (FTAs) and Preferential Trade Agreements (PTAs) is another challenge that the government has to confront for effectively implementing this policy. It is an admitted fact that trade agreements have done no favour to Pakistan’s current account deficit. Trade statistics with China in particular, and with South Asian countries in general, speak clearly about loopholes present in these agreements.

6. The dangerous lure of self-sufficiency

Covid-19 pandemic has shaken the foundations of globalization and free trade. Public opinion around the world is shifting away from globalization and the dangerous lure of self-sufficiency is taking ground. The trade will suffer as countries abandon the idea that firms and goods are treated equally regardless of where they come from. The new era of economic self-reliance has begun. These changes around the world pose challenge to the implementation of policy. However, inclusion of new terms, competitive import substitution, in the policy is in agreement with these changes.

In a nutshell, National Tariff Policy 2019-2024, is a step in the right direction as it reverses administrative imbalances. The policy not only highlights issues associated with previous tariff regimes but also mentions guidelines to overcome those.  It has always been easy to approve a policy, but harder to put it into action. Undoubtedly, the fruits of policy lie in its effective implementation. Following are some of the recommendations in this regard that keeping in view the past experiences, though, seem an uphill task to undertake, yet there is no blinking at the fact that the salvation of the country is dependent on them.

A Way Forward

1. Continuation of policy

The history of Pakistan is replete with instances of immature discontinuation of policies, irrespective of their soundness. Undoubtedly, immature abandonment does more harm than good. In this perspective, the government has to ensure continuation of policy by building the capacity of institutions that are responsible for its effective implementation. As there will be revenue loss by the reduction of import tariffs, it must not be done at once.

2. Institutional capacity-building

Capacity-building of commerce division is required for offsetting the fear of loss of revenue owing to decrease in tariffs. Besides this, FBR should be made to rely on direct taxes instead of indirect taxes, including tariffs.

3. Strict check on time-bound protections

Contrary to the past practices, removal of all time-bound protections should be ensured after the lapse of stipulated time. In this regard, strict monitoring of all the protected and infant sectors should be done.

4. Vigilance in signing FTAs and PTAs

Another recommendation is pertaining to signing of FTAs and PTAs. The government should act prudently while signing such agreements. Moreover, more venues should be explored and any available opportunity should be cashed instantly. For instance, last year, an American lawmaker, Senator Lindsey Graham, hinted at signing of an FTA between Pakistan and USA. However, Pakistan could not grab the opportunity.

5. Reciprocity in trade tariffs in Covid-19 pandemic world

Pakistan should act vigilantly in the Covid-19 pandemic world by keeping an eye on all threats and opportunities. As it seems that post-pandemic world will be the one having tariff walls, Pakistan should consider reciprocity as General Agreement on Tariff and Trade (GATT) allows this to all participatory countries.

The author is currently serving as Assistant Director, Pakistan Institute of Trade and Development.