WTO and the Pakistani industry

By the end of 2003, Pakistan is committed to follow the WTO mandate. When applied, the bulk of Pakistani industry will be affected in one way or another. In response to the inevitable arrival of the WTO era, the government is promising industry protection to the business community. 

Under the WTO, the most vulnerable will be the value-added basic industries. Engineering and, more so, auto industry, will be the hardest hit. This industry is not yet prepared for a free-for-all economy that the WTO espouses. 

The Pakistani industry thus needs some more time to become internationally competitive, particularly the auto industry, which is exempt from the discipline of the IFIs. Therefore the engineering sector should continue to be protected as is the case in the rest of the world. 

Since 9/11 attack on the World Trade Centre, Pakistan's macro economic situation has improved. Loans worth over $12 billion have been rescheduled - generally made payable after 23 to 30 years - a great facility indeed. Loans of about $2 billion have been written off and a couple of billion dollars have been received as grants. 

Well over $5 billion have been received as remittances, which continue to pour in. A couple of billion dollars have been bought from the open market - all amounting to a foreign exchange reserve of over $10 billion. The rupee has been unvalued from about Rs67 to about Rs58 to a dollar. 

Interest rates have declined from double to single digit. Export proceeds are being received in full with no more cushioning. As a result of the macro economic successes dollarization of the economy has reverted to a rupee economy. This is an unusual situation - indeed enviable for any growth economy. 

IMF vs localization: On the other hand, the IFIs, namely the World Bank and the IMF, are highly prudent organizations. Those running these organizations are experts in their particular areas of operations and their prudence and expertise, unfortunately, does not cater to individual countries. In fact, they hardly know the local genius or aspirations of countries like Pakistan. 

Professor Sen, the Nobel Laureate, advocates that IFIs' policies must mesh with the local priorities: India and Malaysia in particular have taken heed of this advice. The developed world itself is no exception. Local priorities are thus the responsibility of the locals, not of foreign organizations. 

In this respect, as an example, the IMF for some years now has made us reduce the maximum tariff from 60 per cent to 25 per cent. This has been applied to the automobile industry also, which is claimed to be exempt from the IMF discipline. A customs duty of 25 per cent on spare parts - as against 30-35 per cent on completely knocked down (CKD) for local assembly and progressive manufacturing has been applied. 

This policy attracts 'briefcase assemblies', who prefer to import spare parts, and that too, as under-invoiced components and as CKD, if not dumping or smuggling. This is not only hurting investment, employment and export but also government revenues. A reversal of last year's budget on spare parts duty of 25 per cent, to the original 50 per cent would thus be the only remedy creating an incentive for localization, the only fool-proof measure for price
reduction. 

WTO vs under-invoicing: Further, in addition to three motorcycle units from Japan, the government has allowed seven Chinese motorcycle units under the IFIs regime in the present market of about 185,000 units. All these Chinese manufacturers are carbon copies of Japanese motorcycles, forcing the latter to file law suits. Some of these cases have been won. 

An economic unit, however, is stated to be with a capacity of 30,000 units, hence making the industry, on the whole, uneconomical. The new Chinese units unlike their Japanese counterparts, have been sanctioned without any joint venture, technical assistance agreement or furnished drawings of component and parts, a condition of sanction and agreement with the local vending industry. There should be a level playing field for all. 

Under these circumstances, the new units are importing spare parts and knocked down components, heavily under-invoiced - a frame body and fuel tank each costing a mere US 50 cents against the normal cost of about $30. Two such cases have been penalized: one to pay duty as applicable on the import of completely built up (CBU) units and another's deletion programmed has been suspended. But the situation has not improved. The under-invoiced imports continue as before. 

It is thus imperative to ensure a level playing field for all - not at the cost of the existing units that have indigenized over 85 per cent. Otherwise the indigenization process will be stalled in addition to loss of billions of rupees as revenues and thousands of jobs. The new units, therefore, must be subject to normal indigenization discipline. Otherwise trade will replace industry - the life line of an economy. 

Further, in the last budget duty on the import of CBU motorcycles were reduced from 105 to 90 per cent. This had encouraged import of CBU units, if not dumping. According to present Chinese export official check price, the minimum export price of a unit is between $300 to $650. These units, however, are being imported in the range of $233 to $486 or Rs10,781 to Rs25,962 each as under-invoiced, as shown in the translation from the original Chinese script in the Table: 

Most countries including India, Malaysia, Indonesia. Thailand are checking such prices and not allowing free import, under invoicing or dumping thus protecting their industry in whatsoever circumstances. 

The Pakistan market is, in fact, heavily flooded with all kinds of imports, under-invoiced and dumped: Construction material such as tiles, auto parts, shoes, socks, undergarments, handkerchiefs, stationery items like pens and pencils, to name a few. As long as under-invoicing and dumping continues, developing countries like Pakistan will continue to suffer. 

IFIS' role: Therefore, the IFIs, i.e. the World Bank, the IMF and the WTO- cry for increased discipline has become rather contentious. Among others, according to a World Bank report several industries including steel, fertilizers, refineries, sugar, engineering, automobiles, chemicals, etc. must be phased out since they are internationally uncompetitive. At the same time, however, the USA recently imposed a $30 additional duty to protect its ailing steel industry. The USA and the EU openly protect their industry, agriculture and services. 

All this explains why investment is shy in Pakistan despite unprecedented macro economic stability, it calls for a fresh look -sooner than later- towards industry, import and export based and strategic, not trade.