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Trade policy: old wine, new bottle?

The news is that the Engineer wants a revamped Strategic Trade Policy Framework by year-end. The view is it will be more of the same: tall on promise couched in a jargon that will do the Professor proud. The fear is it won’t resuscitate exports. When SPTF 2015/18 was delivered, nine months late, it required no genius to pronounce it dead upon arrival. Even the authors of the document knew it to be just that: a damp squib. Despite their congratulatory ads, the trade associations knew the baby won’t survive.

It won’t work this time either, despite the change in Captains, because the team is the same and the pitch is the same – unless the new Commerce Secretary has learnt from his previous job how to blind side the third umpire, the Accountant. A policy that does not have the full support of the government can be no more than a statement of intent. The Prime Minister has to do more than endorse it. He has to own it.

The first, the most crucial, building block of the trade policy has to be the government’s total commitment to an export-led growth strategy. If you don’t have that you will only have the APTMAs of our world publish THANK YOU ads one day and strike notices another day – even if it is a solo flight that smacks of arrogance suffering from delusions of grandeur – harking back to the glory that once never was. Any event, it doesn’t behove an Association to allow its platform to be used to congratulate in expectation of personal gains, even if these are prominent pearls.

The battle-hardened business community has mastered the art of distinguishing governmental hot air from the ballast of real intent. It has learnt to recognize empty promises. Government’s verbosity does not influence business plans; action plans do. It is all a matter of confidence. If business thinks government means business they will gear up for exports and do whatever it takes. ‘Packages’ work for the wrong ones and trade fairs for the globe-trotting officials; the real McCoy wants a clear road map, with few diversions and no u-turns.

For sure, trade liberalization is a double-edged sword. But the evidence from the exporting tigers is compelling. Indeed, no country has excelled in exports, or for that matter economic well-being, with steep tariff and non-tariff barriers – as Trump is sure to learn, if he lasts long enough.

The standard excuse is that lower tariffs hurt domestic industry. We think it will help, not hurt, our manufacturing sector. Nothing debilitates like lack of competition. Our tariff and industrial policies, and a weak Competition Commission, have contributed in no small measure to make us uncompetitive; which explains why we can’t checkmate Chinese imports despite inordinate protection levels. Like it or not, the protection cocoon will remain a frail defence against growing global competition that derives its strength less from unfair trade practices than from much greater productivity levels and economies of scale.

The other excuse is that lower duties will hurt revenues. This is a bogus argument. If anything, with a slight time lag custom receipts have gone up whenever we reduced duties.

We are not advocating an abrupt slashing of duties. What we want is for the process to begin; for the government to announce that (with some exceptions) it intends to impose an X percent cut in import duties, each year over a specified period of time. To lend credence to its vision it should immediately reduce duty slabs and cap tariff peaks.

Zero-rating of exports is a right, not a favour. It should cover all products: You can’t penalize your exports by having them carry the burden of taxes paid on imported inputs. If you fear misuse do something about it instead of throwing the baby out with the bath water.

Besides, we should actively encourage greater import content in our exports, as have the super achievers of the exporting world. The other critical element of competitiveness overhaul is enhanced productivity, which is no longer seen as a function of capital and labour alone. Managerial skills, technology and innovation, and supportive institutional environment weigh in heavily.

If the government wishes to reward performance a better case can be made out for giving weightage to productivity gains rather than percentage growth over last year’s exports which is not always an indicator of improved performance. It won’t be easy – starting with a benchmarking exercise for various export products and then getting current productivity levels from the exporters – but replicable models exist, and it will give TDAP something worthwhile to do.

Our efforts to mitigate the serious concentration risks – both product and market- have failed. We hear a lot of pious pronouncements but see no evidence of any out-of-the-box thinking. Comparative advantage is no longer perceived to be God given. Experience of countries – from Switzerland to Japan to Brazil – tells us natural resources may help but it is not mission critical. Comparative advantage is manmade. Bangladesh story is illustrative: it grows no cotton but exports more textiles than the world’s fourth largest producer of cotton!

A vacuous industrial policy and the comfort-zone phenomenon explain our failure to manage product and market diversification. If you want product diversification you need an industrial policy that rewards it. Otherwise, the comfort zone phenomenon kicks in: why should an exporter, comfortable with his existing production and marketing arrangements, bother to incur the expense of developing new products and penetrating new markets, if it doesn’t have a salutary bottom line effect? Thank you, Sir, I am happy enough exporting bed linen to France, and put in my effort and money into real estate or retailing. If you want me to develop up-market household linen for the Argentinean market, make it worth my while.

The Engineer has a daunting task ahead of him. Basically, he has only three options: get an unequivocal commitment from the PM to the cause of exports, quit if he can’t, or scale down the ambition level and pray. All of us, not exactly for altruistic reasons, want the Engineer to succeed. He needs to build a constituency by getting more involved with genuine exporters. And he will do well to set up a standing advisory council (consisting of experts from the academia, retired bureaucrats with relevant experience, and exporters who can go beyond narrow self-interest) to generate ideas and oversee implementation. And please give TDAP something to do. They shouldn’t confuse wining for winning.


Shabir Ahmed, "Trade policy: old wine, new bottle?," Business Recorder. 2017-06-22.
Keywords: Economics , Strategic trade policy , Export growth , Business community , High production , Industrial policy , Prime Minister , Pakistan , TDAP , APTMA