Revival of the Manufacturing Sector Focus on Trade Aspects December 2010

1. Revival of the Manufacturing SectorFocus on Trade AspectsDecember 2010 PAKISTAN BUSINESS COUNCIL

2. Table of Contents Afghan Transit Trade Agreement … 44 Salient Features of the New APTTA … 46 Recommendations of Industries not considered in the APTTA … 47 Pakistan Afghanistan Bilateral Trade … 48 Top 10 Pakistani Exports to Afghanistan in 2009 … 49 Afghanistan’s Transit Trade … 50 Incentive to Smuggle … 51 Top 10 Imported Commodities under the ATTA by Afghanistan … 52 Limited Potential of CAR … 53 Problems of Under Invoicing and Misreporting … 54 Comparison of Official 2009 data From Top 10 Import Partners … 55 Pakistan – China: Difference in Reported Import/Export Figures … 56 Pakistan – China: Discrepancy in Import Figures for Selected Commodities - 2009 … 57 Pakistan – UAE: Difference in Reported Import/Export Figures … 58 Background … 3 World Trade Organization … 9 Tariff Rates for Selected Commodities for Pakistan & India … 11 Trade and Manufacturing Data for Selected Commodities … 12 Television Sets … 13 Paper and Paperboard … 14 Electric Motors … 15 Tea … 16 Ceramics … 17 Footwear … 18 Textiles – Synthetic Fabrics, Ready Made Garments … 19 Pakistan’s Free Trade Agreements … 20 Pakistan – Sri Lanka FTA … 22 Pakistan – China FTA … 28 Pakistan – Malaysia FTA … 34 Export Potential with Major Trading Partners … 40 Total EU Imports from Bangladesh, Pakistan, Sri Lanka and Viet Nam … 41 Total US Imports from Bangladesh, Pakistan, Sri Lanka and Viet Nam … 42 Under Utilization of SAARC … 43

3. Background • Government & Industry urgently need to develop a strategy to reduce the trade gap and to bring about higher levels of economic growth • It is critical to revive the manufacturing sector as this will lead to: • Creation of jobs • Reduction in imports as domestic manufacturing regains domestic market share • Increased competitiveness in export markets

4. Background $15.3 B Source: United Nations Commodity Trade Statistics Database * Data on the basis of GoP Fiscal Year. Fiscal year runs from Jul – Jun. Source: State Bank of Pakistan The current Foreign Exchange situation is grave. With commodity prices rising again after dropping in 2009, the current account deficit of $15.3 B is very high and not sustainable.

5. Background In 2009, top 10 items accounted for 72% of our imports. In 2008, they accounted for 77% of our imports. Source: United Nations Commodity Trade Statistics Database Reducing our import bill looks difficult due to the highly inelastic composition of our imports

6. Background Source: United Nations Commodity Trade Statistics Database Majority of Pakistan’s exports are still based around a single crop (Cotton)/manufacturing sector (Textiles). Export diversification, though necessary, looks difficult in the near term

7. Background Source: United Nations Commodity Trade Statistics Database As a result, Pakistan’s export performance in the world has declined with competitors starting to either catch up or outstrip Pakistan

8. Background Source: IMF, FBS, Pakistan Economic Survey 2009-10 The discussion has to be framed within the context of global manufacturing trends

9. The World Trade Organization

10. Revival of the Manufacturing Sector: WTO a Hindrance? Proponents of WTO stress that structural imbalances, trade malpractices and misuse of the ATTA are the real culprits. In addition, there seems to be an inability to fully exploit the opportunities created through WTO & existing FTAs Pending conclusive evidence we can only make educated guesses on the real causes behind the lackluster performance of our manufacturing sector

11. Tariff Rates for Selected Commodities for Pakistan & India Source: World Trade Organization Bound and Applied Tariff rates for India and Pakistan Bound tariff: Represents a commitment not to increase tariffs above the listed rates for all countries Applied tariff: Duties that are actually charged on imports. These can be below the bound rates Even though Pakistan’s applied rates are quite low, the high bound rates are viewed negatively as they represent a risk to investors. The possibility of GoP suddenly raising duties to the higher bound rate means that investors have to account for it in their projections.

12. Trade and Manufacturing Data for Selected Commodities

13. Television Sets Televisions were removed from the ATTA† negative list in 2005. Domestic manufactures and legal imports started declining at the same time. See page 52 for Afghan Imports under ATTA † Afghan Transit Trade Agreement ** 2009 manufacturing data not available Source: Trade Data: United Nations Commodity Trade Statistics Database (HS 02 code: 8528) Manufacturing Data: Pakistan Statistical Year Book, Federal Bureau of Statistics Tariff Data: World Trade Organization

14. Paper and Paperboard Market share of domestic manufacturers has been steadily eroding ** 2009 manufacturing data not available Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 4801-4814) Manufacturing Data: Pakistan Statistical Year Book, Federal Bureau of Statistics Tariff Data: Pakistan Country Profile, World Trade Organization

15. Electric Motors The decline in domestic manufacture has coincided with the lowering of applied tariff. Starting 2004, import quantities started outstripping domestic manufacturing ** 2009 manufacturing data not available Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 850140, 850151-850153) Manufacturing Data: Pakistan Statistical Year Book, Federal Bureau of Statistics Tariff Data: Pakistan Country Profile, World Trade Organization

16. Tea Domestic Blended quantities are steady. Legal import quantities have declined even though Pakistan’s population has been growing. Compare with Afghan Imports under ATTA on pg 52 ** 2009 domestic blend data not available Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 090230, 090240) Manufacturing Data: Pakistan Statistical Year Book, Federal Bureau of Statistics Tariff Data: Pakistan Country Profile, World Trade Organization

17. Ceramics The increase in import quantities of ceramics corresponds with the building boom in Pakistan **Manufacturing data was not available for Ceramics Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 6901, 6904-6911) Tariff Data: Pakistan Country Profile, World Trade Organization

18. Footwear Export quantity is back at the 2003 level whereas imports have steadily been increasing **Manufacturing data was not available for Footwear Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 6401-6405) Tariff Data: Pakistan Country Profile, World Trade Organization

19. Textiles – Synthetic Fabrics, Ready Made Garments Cause for concern is that imports under ATTA as well as exports of synthetic fabrics to Pakistan (reported by China) are greater than the total legal imports reported by Pakistan Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 5407, 5408, 5512-5516) Tariff Data: Pakistan Country Profile, World Trade Organization As in the case of synthetic fabrics, total imports reported by Pakistan are less than the exports to Pakistan reported by China Source: Trade Data: United Nations Commodity Trade Statistics Database (Product HS 02 code: 61 ,62) Tariff Data: Pakistan Country Profile, World Trade Organization

20. Pakistan’s Free Trade Agreements

21. Free Trade Agreements (FTA) An FTA is an agreement between two or more countries to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. An FTA generally starts off with a reduction in tariffs before eventually leading to elimination of tariffs in 5-10 years. With WTO talks stalled, more and more countries are resorting to signing FTAs with their preferred trading partners. This could create problems of market access. For example, the EU is planning on signing an FTA with India but an EU FTA with Pakistan is not on the horizon. This will have an effect on Pakistan’s textile exports. Pakistan has signed 3 major FTAs (with about 10 more in the works)

22. Pakistan – Sri Lanka FTA

23. Pakistan Sri Lanka FTA • Pakistan’s first FTA. Operational from June 2005 • Total trade in 2009 was $273 Million • Pakistan got market access at zero duty for 102 products including agricultural goods, rice (with quantity restrictions) and engineering goods • Sri Lanka was given duty free market access on 206 products including tea (with quantity restrictions), rubber and coconut

24. Comparison of Key Economic Indicators SRI LANKA PAKISTAN 2008 2009 2008 2009 World Bank – World Development Indicators (http://data.worldbank.org/indicator) 2. UNCTSD

25. Trends in Pakistan - Sri Lanka Trade $161 M --- FTA operational Source: United Nations Commodity Trade Statistics Database

26. Comparison of Pre and Post FTA Import figures Source: United Nations Commodity Trade Statistics Database Import growth: Primarily in rubber with smaller growth registered in fruits/nuts. Due to quantity restrictions on tea imported at a lower tariff, tea imports have not grown

27. Comparison of Pre and Post FTA Export figures Source: United Nations Commodity Trade Statistics Database Export growth: Main export is cotton and its derivatives (yarn & fabrics). Mild export growth has occurred in cereals, vegetables and knitted fabrics (growth in the three commodities is ~ $43 million compared to 2005)

28. Pakistan – China FTA

29. Pakistan China FTA • Early Harvest Program (EHP) operational from Jan 2006. FTA operational from Nov 2006 • Total trade in 2009 was $4.78 Billion • Pakistan got market access at zero duty for: Cotton fabrics, bed-linen and other home textiles, marble and other tiles, leather articles, sports goods, iron & steel products and engineering goods, industrial alcohol • China was given market access mostly on commodities required for industrial growth: Industrial machinery, organic and inorganic chemicals, raw material for various industries including engineering sector, intermediary goods for engineering sector

30. Comparison of Key Economic Indicators CHINA PAKISTAN 2008 2009 2008 2009 World Bank – World Development Indicators (http://data.worldbank.org/indicator) 2. UNCTSD

31. Trends in Pakistan - China Trade $2.78 B --- EHP operational Source: United Nations Commodity Trade Statistics Database

32. Comparison of Pre and Post FTA Import figures Source: United Nations Commodity Trade Statistics Database Import growth: Imports have grown across the board. Cause for concern from a domestic manufacturing view is the increased import of the highlighted items

33. Comparison of Pre and Post FTA Export figures Source: United Nations Commodity Trade Statistics Database Export growth: Growth has primarily been in Cotton and its derivatives (yarn and fabrics) and raw materials. No growth in value added products

34. Pakistan – Malaysia FTA

35. Pakistan Malaysia FTA • Early Harvest Program (EHP) operational from Jan 2006. FTA operational from Aug 2007 • Total trade in 2009 was $1.83 Billion • Pakistan has duty free market access for: cotton yarn & fabrics, fruits and jewellery. However, textile made-ups are excluded. • Malaysia was given preferential market access on palm oil, industrial machinery, organic and inorganic chemicals, raw material for various industries including engineering sector and intermediary goods for engineering sector • Has received criticism for being a ‘Palm Oil’ FTA

36. Comparison of Key Economic Indicators MALAYSIA PAKISTAN 2008 2009 2008 2009 World Bank – World Development Indicators (http://data.worldbank.org/indicator) 2. UNCTSD

37. Trends in Pakistan – Malaysia Trade $1.45 B --- EHP operational Source: United Nations Commodity Trade Statistics Database

38. Comparison of Pre and Post FTA Import figures Source: United Nations Commodity Trade Statistics Database Import growth: Main import growth has been in Palm Oil. Little to no increase in imports of other commodities

39. Comparison of Pre and Post FTA Export figures Source: United Nations Commodity Trade Statistics Database Export growth: Substantial growth has only been in the export of cereals (rice) with mild growth in value-added textile products. Although Malaysia is a bigger market, total exports in 2009 of $158 M are less than the exports to Sri Lanka

40. Export Potential with Major Trading Partners

41. Total EU Imports from Bangladesh, Pakistan, Sri Lanka and Viet Nam Source: United Nations Commodity Trade Statistics Database In 2002, of the total Pakistani exports to EU of $2 million, cotton and textiles made up 54% while in 2009 they made up 62%. The 2009 corresponding percentage for Bangladesh, Sri Lanka and Viet Nam is 92%, 59% and 17% respectively.

42. Total US Imports from Bangladesh, Pakistan, Sri Lanka and Viet Nam Source: United Nations Commodity Trade Statistics Database As in the case of EU, cotton and textiles make up majority of Pakistan’s exports to the EU. In 2002, of the $2 million Pakistani exports to the US, cotton & textiles contributed 79% which rose to 82.4% of exports to the US by 2009.

43. SAARC is heavily under-utilized Source: United Nations Commodity Trade Statistics Database In 2009 total world trade by SAARC countries was nearly $550 billion

44. Afghan Transit Trade Agreement (ATTA)

45. Afghan Transit Trade Agreement (ATTA) - Background • Original treaty signed in 1965 between Pakistan and Afghanistan. A new treaty, the Afghanistan-Pakistan Transit Trade Agreement (APTTA) signed in 2010 • Widespread misuse of ATTA is reported • TV sets included in the 1996 negative list. • TV sets removed from the negative list in 2005.

46. Salient Features of the New APTTA • Provides transit routes to Pakistan to the Central Asian Republics (CARs) • Afghan exports to India via Wagah allowed. Indian exports to Afghanistan via Wagah not allowed • Afghan Cargo allowed from 3 seaports: Port Qasim, Karachi Port, Gwadar Port • No negative list or provision of negative list included • Measures adopted to reduce unauthorized trade: • Installation of tracking device on transport unit • Custom to Custom information sharing • Provision of financial guarantees equivalent to Pakistan import duties

47. Recommendations of Industries not considered in the APTTA • Imposing quotas on transit items after calculating the consumption of these goods in Afghanistan (Refused by Afghanistan) • Collecting customs duties at the seaports on transit items at Pakistan’s Tariff rates, to be refunded once the cargo reaches (Refused by Afghanistan) • Setting an identical tariff structure for Afghanistan and Pakistan to reduce smuggling margins (Cabinet Decision to rationalize tariff regime but no long term road map) • Documenting Afghan Imports/Exports – Letters of Credit and registration with Afghan tax authorities for Afghan importers (Provision of financial guarantees equivalent to Pakistan import duties incorporated in APTTA)

48. Pakistan Afghanistan Bilateral Trade Source: United Nations Commodity Trade Statistics Database Bilateral trade between Pakistan and Afghanistan has been increasing since 2000. In 2009, exports to Afghanistan totaled $1.3 billion while imports were $122 million

49. Top 10 Pakistani Exports to Afghanistan in 2009 Total Exports: $1.34 B Source: United Nations Commodity Trade Statistics Database The top 4 items (Petroleum products, stone & cement, cereals, edible oil), which do not include any value added products, make up almost 60% of our exports

50. Afghanistan’s Transit Trade Source: Pakistan Customs To access seaports, two possible options exist for Afghanistan: Chabahar/Bandar Abbas port in Iran and Port Qasim, Karachi Port & Gwadar Port in Pakistan Afghanistan’s transit trade through Pakistan has been increasing, reaching $1.9 billion imports in 2009 (representing an increase of over 900% from 2001 levels)