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SUMMARY of the article “Foreign trade debate,” by Miftah Ismail, published on November 23, 2023

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The article delves into the ongoing debate in Pakistan regarding the optimal foreign trade strategy: export promotion or import substitution. While much of the world, especially Southeast Asia, has embraced export promotion successfully, Pakistan remains entangled in a confused approach, attempting both strategies simultaneously and reaping the disadvantages of each. Import substitution involves replacing imported goods with domestic production, exemplified by higher duties on imported cars in the 1980s. However, this approach has led to inefficiencies, high prices, and a small market. On the contrary, export promotion aims to make manufacturers prefer selling to foreign customers through policies favoring exporters. Despite offering similar incentives, Pakistan struggles to boost exports due to conflicting strategies that increase the overall cost of doing business. The article emphasizes the need to prioritize export promotion, diversify industries beyond textiles, and implement policies encouraging companies to increase their share of exports. The current tax system, heavily reliant on imports, hinders the shift towards an export-focused strategy. Tough measures, such as linking taxes to export performance, moral suasion on large business houses to enter non-textile export businesses, and a ‘eat what you hunt’ policy for foreign exchange, are suggested to propel Pakistan towards a more export-oriented economic model.

Easy/Short SUMMARY:

The article discusses Pakistan’s internal debate on foreign trade strategies—export promotion versus import substitution. While much of the world has embraced export promotion successfully, Pakistan is caught between both strategies, resulting in inefficiencies. Import substitution, exemplified by higher duties on cars, has led to high prices and a small market. Export promotion, despite incentives, struggles due to conflicting strategies, hindering overall business competitiveness. The article advocates for prioritizing export promotion, diversifying industries, and implementing policies linking taxes to export performance to boost Pakistan’s exports effectively.

SOLUTIONS of The Problem:

Tax Incentives for Exporters

Convert the 10% supertax on companies to zero for those with zero exports, gradually reducing it to zero as companies increase their export share.

Moral Suasion for Business Houses

Urge large business houses to venture into non-textile export businesses through concerted moral suasion, encouraging diversification.

Export-Focused New Factories

Permit new factories only if they generate at least 25% of sales from exports, promoting the establishment of export-focused industries.

Policy of ‘Eat What You Hunt’

Implement a policy, for a specified period, where industries with a protected domestic market should gradually generate an equal amount of exports in foreign exchange.

Relentless Focus on Exports

Prioritize and emphasize exports in both agriculture and industry, directing efforts and policies towards fostering a robust export-oriented economic model.

IMPORTANT Facts and Figures Given in the article:

• Pakistan has pursued both export promotion and import substitution simultaneously, leading to increased business costs and hindering competitiveness.
• The import substitution model, exemplified by the automotive industry, has resulted in inefficiencies, high prices, and a small market.
• Export promotion, despite offering incentives similar to successful models in East Asia, struggles to boost Pakistan’s exports.
• The tax system in Pakistan heavily relies on collecting taxes from imports, discouraging the pursuit of import substitution.

MCQs from the Article:

1. What is the import substitution strategy?
   A. Focusing on boosting exports
   B. Replacing imported goods with domestic production
   C. Offering tax incentives to exporters
   D. Encouraging foreign investments

2. Why did Pakistan reduce duties on components like engines and transmissions in the 1980s?
   A. To increase import tariffs
   B. To promote domestic production of cars
   C. To encourage foreign competition
   D. To boost import substitution

3. What is the primary drawback of the import substitution model in Pakistan?
   A. Large market size
   B. Inefficiencies and high prices
   C. Increased global competitiveness
   D. High exports from the automotive industry

4. What is export promotion aimed at achieving?
   A. Increasing import duties
   B. Making manufacturers prefer selling to foreign customers
   C. Encouraging protectionist policies
   D. Promoting domestic consumption

5. Why does Pakistan struggle to boost exports despite offering incentives?
   A. Lack of tax revenue from imports
   B. Conflicting strategies of export promotion and import substitution
   C. Overvalued currency
   D. Law and order issues

VOCABULARY:

1. Spectacular (adjective) (درخشان): Impressively great or significant, especially in appearance or style.

2. Entangled (adjective) (الجھا ہوا): Involved in difficulties or complications.

3. Exemplified (verb) (مثال کے طور پر آئیا): Serve as a typical example of.

4. Inefficiencies (noun) (غیر فعالیت): The state or quality of being inefficient, lack of efficiency.

5. Protectionist (adjective) (ترقی معنویاتی): Relating to or characterized by policies that restrict imports to protect domestic industries.

6. Hindering (verb) (رکاوٹ ڈالنا): Create difficulties for (someone or something), resulting in delay or obstruction.

7. Concerted (adjective) (متفقہ): Jointly arranged, planned, or carried out; coordinated.

8. Supertax (noun) (سپر ٹیکس): An additional tax on top of an existing tax.

9. Venture (verb) (دلیرانہ کام کرنا): Dare to do something or go somewhere that may be dangerous or unpleasant.

10. Robust (adjective) (مضبوط): Strong and healthy; vigorous.

11. Incentives (noun) (محرک): A thing that motivates or encourages someone to do something.

12. Protectionism (noun) (حفاظتی تجارتی نیتی): The theory or practice of shielding a country’s domestic industries from foreign competition by taxing imports.

13. Diversification (noun) (مختلف کاموں میں مشغول ہونا): The process of varying the range of products or field of operation of a company.

14. Refinancing (noun) (فنانس کرنا): Finance (something) again, typically with new loans at a lower rate of interest.

15. Relentlessly (adverb) (نچھورے پن سے): In an unceasingly intense or harsh way.

16. Foster (verb) (پرورش دینا): Encourage the development of (something, especially something desirable).

17. Protectionist Policies (noun) (ترقی معنویاتی پالیسیاں): Government policies that use trade barriers to protect domestic industries from foreign competition.

18. Conflicting (adjective) (متصادم): Incompatible or at variance; contradictory.

19. Stagnation (noun) (رکاوٹ): The state of not flowing or moving, characterized by lack of development, advancement, or progressive movement.

20. Paradox (noun) (حیرت انگیز موقف): A seemingly absurd or self-contradictory statement or proposition that, when investigated or explained, may prove to be well-founded or true.

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dawn.com
Foreign trade debate
Miftah Ismail

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THERE is a debate in Pakistan on the foreign trade strategy we should pursue: export promotion, or import substitution? In much of the world, especially Southeast Asia, the debate has been won by export promotion to spectacular effect. We, however, are still confused, trying to carry out the best of both strategies and ending up with the worst of both.

Import substitution is a strategy that seeks to substitute imported goods with domestic production. Take, for example, cars. In the 1980s, our government, while keeping higher duties on imported cars, reduced duties on components such as engines, transmissions, windshields, etc, so that firms that assembled cars here could get a domestic market protected from foreign competition through this duty differential. This tariff protection, paid by consumers through higher prices, was justified by the argument that this was an ‘infant industry’ and the small local market didn’t allow companies to quickly reach the production scale needed for global competitiveness. Three decades later, infant-industry protection continues, we have excellent local cars from several international brands but they remain expensive and the market remains small. Both customs duty on parts — which is quite high — and domestic protection through prohibitively high duties on foreign cars, have kept prices high. Moreover, the auto market and firms remain small and therefore inefficient and uncompetitive.

There are, of course, certain advantages to the import substitution model. We have now developed a vibrant engineering and vendor industry, the auto industry provides many jobs, we save foreign exchange compared to importing built-up cars and collect considerable taxes.

The downside is that we still have to import a lot of auto components and we have almost no exports from this sector, so it is still a drain on our foreign exchange reserves. If every industry were like that, substituting imports but exporting nothing, we’d have no dollars to pay for the raw materials for any industry.

How do we get our exports to finally increase?

I have given the example of cars but the effect of protecting markets from competition is the same, whether it’s air conditioners, shampoos, candies, or any other good. By imposing tariffs to protect manufacturers catering to domestic consumers, we let companies remain small and inefficient and not able to export their wares. This is an important reason why Pakistan has such low exports.

Export promotion, on the other hand, is a strategy that makes manufacturers better off selling to foreign customers than local ones. This is done through policies that favour exporters with cheap credit, lower taxes, etc. East Asian countries have used this strategy to achieve impressive growth, but even though Pakistan has also offered many of the same incentives, we have not been able to increase exports.

The reason is that by pursuing both these stra­tegies simultaneously, we just end up increasing the cost of doing business for all manufacturers, which renders our industry neither competitive in exports nor in substituting imports.

Of course, this isn’t the only factor holding back exports; there are others as well. For instance: non-reliable and expensive provision of energy; periodically overvalued rupee; and law and order issues that prevent foreign buyers from visiting Pakistan. But here I want to discuss how, by pursuing both import substitution and export promotion simultaneously, we mess things up.

Consider a zipper manufacturer that has to import various metals, say at five per cent duty, to produce zippers. He will typically go to the government and request that it impose a 15pc duty on the imports of zippers so he can compete with larger foreign manufacturers. Even assuming that the Pakistani zipper has no quality issues and is available in all varieties, our garment exporters will quickly run to the government and say they can’t afford to buy the more expensive Pakistani zippers or pay 15pc duty on imported zippers as they have to compete in the international market. So the government allows them to import duty-free imported zippers that are then re-exported as part of a garment. As a result, Pakistani exporters still have to buy imported zippers and pay for freight (and hence be at a disadvantage to their international competitors) while the local zipper manufacturer will remain small and inefficient. Rather than win-win, we end up with lose-lose.

Our Ministry of Commerce over the years has tried to have an export promotion strategy, but the problem is that more than half of our tax revenues come from the ports — in the shape of customs duty, sales tax and withholding tax. And much of the remaining sales tax is also collected because the government knows who has imported raw materials and therefore those manufacturers have to pay sales tax on goods. So our entire tax system depends on us collecting taxes from imports and therefore the import substitution strategy is not pursued because we want to but because we have to.

So, how do we get our exports to finally increase? While our textile industry has done well in spite of mills having to import cotton, not getting gas (in Punjab) and buying expensive land and water (Karachi), textile cannot be the only industry that exports. We must diversify. We have, over the years, given a lot of benefits to exporters, such as cheap loans. And yet, we have seen these incentives not result in increased exports. (One recent World Bank study has confirmed that export refinancing has had little effect on increasing exports). What we need now is tough love.

We need to convert the 10pc supertax on all companies to those that have zero exports and reduce that tax to zero as companies increase their share of exports. Similarly, we need concerted moral suasion on our large business houses to get into non-textile export businesses and only allow new factories that generate at least 25pc of their sales from exports. Finally, there should be a policy, for a few years, of ‘eat what you hunt’ with foreign exchange, whereby industries that are large importers and have a protected domestic market should be asked to, over time, generate at least an equal amount of exports. In short, we need to relentlessly focus on exports, whether in agriculture or industry.

The writer is a former finance minister.

Published in Dawn, November 23rd, 2023