ISLAMABAD: Pakistan’s tariffs on imported intermediate goods average 8 percent – four times the average in the East Asia – and its regulatory and additional duties are also high, making it difficult for the country’s major export sector of textiles and apparel to import artificial fibers, says the World Bank (WB).
The WB in its latest report ‘World Development Report 2020: Trading for Development in the Age of Global Value Chains’ states that costly imported intermediates are a barrier to Global Value Chains (GVCs) integration.
Exporters can often circumvent high tariffs on imported intermediates by using duty suspension mechanisms, but these often do not function efficiently. Two examples from South Asia illustrate this point.
Pakistan’s tariffs on intermediates average 8 percent – four times the average in East Asia – and its regulatory and additional duties (para-tariffs) are high. Pakistani exporters of textiles and apparel – the country’s major export sector – rely mostly on domestic cotton rather than on imported artificial fibers such as polyester (the leading input to the fast growing global imports of apparel).
The WB further stated that in principle Pakistani exporters have access to duty suspension schemes for their imported intermediates, such as the Duty and Tax Remission on Exports. In practice, approvals for remission takes on average 60 days— twice the time specified by law—and clearing customs after approval takes an extra 5–10 days. For that reason, a mere 3 percent of textile and apparel exporters use the scheme.
In Bangladesh, by contrast, obtaining approval for duty suspension on intermediates takes on average 24 hours, and about 90 percent of textile and apparel firms use the scheme.
Despite the gradual decline in tariffs over the last decades, especially for manufactured goods, there are still important differences in the restrictiveness of trade policies across countries. Countries specializing in commodities imposed manufacturing tariffs averaging 7.5 percent from 2006 to 2015, and those with limited manufacturing global value chains (GVCs) imposed tariffs averaging 6.5 percent. Tariffs drop sharply to less than 3 percent for countries with advanced manufacturing and services GVCs and to less than 2 percent for those with innovative GVC activities.
The importance of lower tariffs on intermediate inputs to foster the use of imported inputs and improve export performance at the firm level is true both in countries poorly integrated into GVCs such as Nepal and Pakistan, as well as Peru and in countries highly integrated into GVCs such as China.
Although the risk of displacement of jobs or exports currently seems low, middle-income countries such as Mexico, Tunisia and Pakistan would seem most exposed to the threat of robotization-induced reshoring because their exports are heavily concentrated in goods that robots can help produce. Commodity exporters, however, seem somewhat shielded from the threat of robotization-induced reshoring.
Pakistan’s ability to overcome an export ban on fish and expand horticultural exports attests to the value of building a strong national standards regime. But being in a value chain today does not guarantee that a country will capture significant benefits from participation and that those benefits will grow. Many of the traditional approaches to industrial policy, including tax incentives, subsidies, and local content policies are more likely to distort than help in today’s GVC context, as Brazil’s poor experience of promoting localization in the automotive sector illustrates. However, a range of proactive policies can enhance GVC participation.
Effective and efficient quality infrastructure, appropriately recognized internationally, is a precondition for delivering such demonstrable compliance. Pakistan’s development of a robust national quality standards regime helped lift the European Union’s ban on the country’s fish exports and facilitated rapid growth in mango and mandarin exports by ensuring full traceability in the supply chain.—TAHIR AMIN
