NationalVOLUME 16 ISSUE # 16

The debate over trade liberalisation

According to an international survey, Pakistan remains the least open country for trade in Asia and the second-last performer in the Morgan Stanley Capital International (MSCI) emerging markets group ahead of Brazil. The average in the MSCI emerging markets category is 72.7pc, while the Asian average hovers above 100pc. The survey report portrays a murky picture of Pakistan’s trade status over the last two decades compared to China, India, and Bangladesh.

Pakistan’s trade as a percentage of GDP is meagre. Growth has suffered as imports have surged uncontrollably while the exports remain stagnant. Hence, the overall trade ranges from 30pc to 40pc of GDP. The import-export FX corridor (trade balance) shrunk recently due to a curb on imports and may be short-lived until a long-term upturn in exports.

But the import restriction is not without its cost. It has made Pakistan compromise on growth. Its worst fallout is its trickledown adverse implications on the employment level. It is because Pakistan imports machinery, minerals (petroleum), electrical and electronic equipment, and chemicals that aid industrial production. Besides, protectionist policies can have repercussions, like retaliatory measures by other countries. This is what led to the US-China trade war.

There is a strong argument in favour of limiting imports. It is said that Pakistan has adopted import substitution in order to support the local industries. This policy was adopted during the Ayub Khan-era and continued until it was replaced by export-led industrialisation in the early 1980s. Pakistan is still suffering from the effects resulting from the policy as it led to rent-seeking by local players and the citizens had to get along with inferior yet high-priced products. An example of it is the abysmal state of Pakistan’s Japanese auto industry, whose products are bad in quality but high in prices.

The crux of pro-protectionists’ argument is the increase in market share for the local industries, especially the SMEs. However, their contention remains erroneous. International exposure does expose businesses to foreign competitors, but it provides an opportunity for them to integrate into global value chains. This prompts innovation and accords them with a substantial market (within and beyond the borders) to tap.

International trade works on certain well-recognized principles. It is premised not on the ability to produce an output with lower inputs than other nations but on the appetite to forgo the least quantum of the other commodity for the sake of making another. Hence, countries use resources to produce goods they have a comparative advantage in and import ones in which others incur a lower opportunity cost. The net result is a supplementary quantity of all the outputs to consume, leaving the partaking parties better-off.

Needless to say, countries have a comparative advantage in certain commodities on the basis of variations in weather and resources. Some are richly endowed with a distinct natural resource while others possess inexpensive labour. This elucidates why the US exports aircraft, Saudi Arabia crude oil, and Brazil coffee.

There are many competing trade theories. Free trade proponents assert that trade openness promotes economic growth. On the other side, protectionists consider trade counterproductive to growth. Some also deduce a causal relationship, arguing that trade openness is a mere by-product of growth in the economy’s real side, that is growth-led trade.

For relatively smaller economies, trade is more beneficial because the gains from comparative advantage are proportional to relative price differentials in the world market and relative prices in the home country without trade. The larger the difference, the greater the benefit for a country, and vice versa. For instance, Japan has an opportunity cost of $5,000 for producing a vehicle while Pakistan has to forego $15,000 for the same vehicle. The relative price for Japan to produce the car would range from $5000 to $15,000. On the contrary, the relative price in Pakistan’s case has to be more than $15,000. So, Pakistan would be worse-off if it continues to produce the car instead of importing it from Japan.

Another problem is that Pakistan has minimal trade with neighbours, like India and Iran. Our prime trading partners include the US, the UK, and Germany, which are located far away. This implies higher transportation costs. Moreover, Pakistan’s labour has a dismal productivity level on an average. Pakistan’s labour productivity not only lags behind its neighbours but also many poor African nations.

According to some experts, there is a strong case for trade liberalisation in order to push the growth momentum. Initially, the industries competing with foreign manufacturers will suffer and the workers employed in the sectors may lose their jobs. But in the long run, the economy will gain as our productive resources become more efficient and innovative to meet the challenge of international trade.

In economic terms, the interest groups, protected by successive governments for far too long, will suffer a decrease in their relative incomes. Hence, it is for the government to decide between siding with the special groups’ interest or national interests.