ISLAMABAD:
When President Trump announced a sweeping 10% tariff on all imports to the United States, along with steeper duties on goods from around 60 countries, the tremors were felt far beyond American shores. What was once the domain of economists and trade negotiators became a global household concern. Tariffs, long considered a technicality in trade policy, had suddenly become a symbol of national economic survival.
Economists around the world swiftly warned that these unilateral tariff hikes could not only derail US economic growth but also drag the global economy towards a recession. Already the tariffs have resulted in the biggest disruption to global trade since the Second World War. Well-known CNN commentator Fareed Zakaria warned that high tariffs, and the exemptions that inevitably follow, could result in an “orgy of corruption.”
Indeed, exemptions have already begun to surface for well-connected billionaires with direct access to President Trump, including hi-tech companies importing smartphones, computers, electronic components, and auto parts. In contrast, the lower-income segments of society – those whose grocery bills and costs for essential goods like shoes and clothing are set to rise – are unlikely to receive any relief.
Although tariffs have been paused for three months – with the exception of China – none have been formally excluded from the tariff regime. This remains the case even as countries like Vietnam and Israel have publicly announced their intention to eliminate all tariffs for the United States under their FTAs.
Meanwhile, the US administration is reportedly reviewing the steps taken to address identified non-tariff barriers. Pakistan’s six-page list includes trade irritants such as the misuse of SROs (Statutory Regulatory Orders) to grant arbitrary exemptions, bans on imports like US beef and wheat, and non-compliance with global customs valuation rules.
For Pakistan, this moment demands a serious reappraisal of its trade policies. Our exports not only seriously lag behind other peer countries but they also remain heavily concentrated in two markets – Europe and the United States. Pakistan has made no substantial efforts to engage with the rapidly expanding Asia-Pacific trade bloc or RCEP countries.
Moreover, Pakistan has failed to diversify its export base. While engineering goods account for over 50% of global trade, they represent less than 5% of Pakistan’s exports. One significant reason is our outdated regulatory framework, which micromanages the production and trade of engineering goods through rigid input-output coefficient policies – remnants of mid-20th-century economic planning.
Another foundational pillar of our current trade policy also warrants scrutiny. This is our preference for import substitution as compared to export-led growth. It is done through tariff cascading, which implies higher duties at each processing stage.
A recent study ranks Pakistan as having the second-highest tariff cascading structure globally, after Egypt. Such policies incentivise local manufacturers to focus solely on the domestic market, where they can make higher profits even if they produce low-quality goods. Our auto and mobile assembling policies are clear examples of import substitution.
Both sectors enjoy low duties on import of kits or other components but have no incentive to export finished goods as the profits are much higher in the local market due to high tariff protection. Such policies increase our import bill without achieving any exports to pay for the imports.
As Bertrand Russell wisely noted, “In all affairs it’s a healthy thing now and then to hang a question mark on the things you have long taken for granted.” It is time to question our long-standing faith in import substitution through tariff cascading. Other countries did so decades ago. Although we are late to the game, the global spotlight on tariffs offers a rare and urgent impetus for change.
The global trading system is shifting rapidly, and the Trump tariffs are merely the latest sign of a new era taking shape. For Pakistan, this is not just a moment of reckoning – it is a rare opportunity. We must shed outdated import substitution policy and embrace export-led growth. We must diversify our export basket and destinations.
The cost of inaction is steep, but the potential rewards of reform are transformative. By choosing pragmatism over protectionism and boldness over inertia, Pakistan can revitalise its trade and industry – lifting it out of the wilderness where outdated policies have left it stranded.
THE WRITER IS A SENIOR FELLOW AT THE PAKISTAN INSTITUTE OF DEVELOPMENT ECONOMICS (PIDE) AND HAS PREVIOUSLY SERVED AS PAKISTAN’S AMBASSADOR TO THE WTO AND THE FAO’S REPRESENTATIVE TO THE UNITED NATIONS IN GENEVA
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