Report No. IDP - 163 SOUTH ASIA REGION INTERNAL DISCUSSION PAPER Pakistan and the Uruguay Round: Impact and Opportunities A Quantitative Assessment Merlinda Ingco & Alan Winters The World Bank April 1996 The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to it's affiliated organizations, or to members of it's Board of Executive Directors or the countries they represent. SOUTH ASIA REGIONAL SERIES Title Author Date Originator IDPI 11 How Composition of Public Expenditure Affects Competitiveness: The Case of Bangladesh K. Matin March 1992 P. Mitra (80419) IDPI21 Labor Retrenchment and Redundancy Compensation in State Owned Enterprises: The Case of Sri Lanka A. Fiszbein December 1992 G. Nankani (84641) IDPl26 Some Guidelines for the Appraisal of Large Projects W. Jack February 1993 A. Estache (81442) IDPl09 Reforming Higher Secondary Education in South Asia: The Case of Nepal H. Abadzi May 1993 H. Abadzi (80375) IDPl27 Some Lessons for South Asia from Developing Country Experience with Foreign Direct Investment M. Fry June 1993 A. Estache (81442) IDPl29 Quasi-Fiscal Deficits: Latin American Lessons for South Asia C.A.Rodriguez August 1993 A. Estache (81442) IDPl31 The Impact of Rural Infrastructure on Rural Poverty: Lessons for South Asia E. Goldstein June 1993 G. Nankani (84641) IDPl34 Infrastructure and Industrial Policy in South Asia: Achieving the Transition to a New Regulatory Environment P. Seabright December 1993 A. Estache (84641) IDPl35 Taxation of Foreign Investment in J. Mintz South Asia T. Tsiopoulos December 1993 A. Estache (81442) IDPl42 Regional Trading Arrangements and Beyond Exploring Some Options for South Asia Theory., Empirics and Policy T.N. Srinivasan July 1994 G. Nankani (84641) IDPl46 Participation n the South Asia Region's Project Portfolio: Towards Defining Conditions for Success B. Parker August 1994 G. Nankani (84641) IDPl53 Pakistan: Public Expenditure in Y. Choudhry Agriculture R. Faruqee June 1995 J. Wall (85045) IDPl54 Unemployment in Sri Lanka: Sources and Solutions M. Prywes July 1995 J. Wall (85045) IDPl57 Impact of Economic and Sector in South Asia: A Client Perspective V. Dubey December 1995 J. Wall (85045) Background Paper for Pakistan 2010 Report Pakistan and the Uruguay Round: Impact and Opportunities A Quantitative Assessment by Merlinda D. Ingco and L. Alan Winters International Trade Division International Economics Department World Bank Washington, D.C. 20433 Revised April, 1996 The World Bank does not accept responsibility for the views expressed herein which are those of the authors and should not be attributed to the World Bank or to its affiliated organizations. The findings, interpretations, and conclusions are the results of research supported by the Bank; they do not necessarily represent official policy of the Bank. The authors are grateful to Shahrokh Fardoust and to the government of Pakistan for helpful comments and guidance. Pakistan and the Uruguay Round: Impact and Opportunities in the 1990s A Quantitative Assessment Table of Contents Page E x ecu tiv e S u m m ary........................... ........................................................................... i In tro d u c tio n .................................................................................................................... 1 2. Changes in Composition and Patterns of Merchandise Trade........................................ 2 3. Own Liberalization: Pre- and Post- Uruguay Round Reforms....................................... 3 3.1 Pre-UR Reforms in Import Regime............................................................... 3 3.2 Tariff Bindings and Reductions in the Uruguay Round.................................. 6 3.3 R ecent R eform s in Export R egim e.................................................................. 7 4. Enhanced Market Access for Pakistan's Exports.............................................................. 8 4.1 T ariff R eductions and B inding ..................................................................... 9 4.2 Effects of Liberalization in Textiles and Clothing......................................... 10 4.3 Impact of the Uruguay Round on Nontariff Measure Coverage Ratio.......... 15 5. Welfare Effects of the Uruguay Round on South Asia and Pakistan.............................. 16 5 . 1 T erm s o f T rade E ffects................................................................................... 19 5 .2 M F A P h ase-O u t .............................................................................................. 22 5.3 O ther M anufacturing R eform ....................................................................... 26 5 .4 F u ll R e fo rms................................................................................................. 2 8 6. How and under what conditions can Pakistan take advantage of the post-Uruguay R ound trad ing environm ent............................................................................................. 29 7. Summary, Conclusions and Perspectives For Future Reforms............................................ 31 R e fe re n c es.............................................................................................................................. 38 T a b le s .................... ................................................................................................................. 40 9 Executive Summary The Uruguay Round trade agreement will have significant implications on the economic prospects of developing countries over the next decade and beyond. If effectively implemented, direct benefits in the medium to long-term will result from both increased market access to developed countries' markets, and from enhanced efficiency originating from the countries' own liberalization commitments. Potential indirect gains which are difficult to quantify may also result from improved security of market access -- through increased coverage of tariff bindings, clearer rules and standards and strengthened dispute settlement procedures. The distribution of these benefits will, however, be uneven. Recent analysis of the effects of the Round indicate that "what you do to yourself matters more than what others do to you". That is, the gains from multilateral reforms tend to be larger, the greater the extent of own liberalization achieved. This paper provides a quantitative evaluation of the Uruguay Round commitments of Pakistan and its trading partners' and the potential impact of the agreement on Pakistan's trade and incomes. The paper concludes that Pakistan stands to gain from the Uruguay Round commitments on tariff reductions and elimination of non-tariff barriers facing its major exports. Some key points and conclusions of the analysis are: * Overall, the Uruguay Round provides a framework for liberalizing world agriculture, but much less liberalization was achieved than previously expected. In contrast, substantial liberalization was achieved in manufactures trade, both in the area of tariff reduction and through the abolition of nontariff barriers such as Voluntary Export Restraints and the quotas imposed under the Multifibre Arrangement. The UR Agreement on Textiles and Clothing (ATC) is built on three areas: a liberalization process to progressively expand existing quotas; a program for integrating textiles and clothing products into GATT rules and a special safeguard to deal with cases of market disruption during the transition. For developing countries as a whole, the main improvements include the expansion of bindings (commitments on maximum tariffs) to cover 99% of industrial countries' imports and the reduction of the trade-weighted average tariff by 40% from 6.2% to 3.7%. In terms of total developing countries' exports to industrial countries, the reduction in the average tariff is 30%. * However, Pakistan was generally very cautious with its offers under the Round. In agriculture, Pakistan offered very high tariff ceiling bindings (100-150%). In manufacturing, Pakistan committed to bind only 25% of its tariffs, mostly at ceiling bindings of 20-50%. By failing to bind the remaining 75% of its tariffs in manufacturing and by making no commitments to reduce protection in agriculture, Pakistan lost the opportunity to achieve additional potential gains from a more efficient resource allocation and lower costs resulting from lower average and variability of protection. However, in April 1995 this shortcoming was partly ameliorated by binding tariffs in textiles and clothing - mostly to 35 % by the year 2006, which while not a particularly liberal target was a considerable improvement over the current level of generally 70%. * Given the limited extent of own liberalization committed by Pakistan, most of the potential gains for Pakistan will come from improvements in market access for its manufacturing exports due to tariff reductions and phasing-out of quantitative restrictions and other non-tariff barriers in major trading partners. Overall, Pakistan's total merchandise exports to OECD and developing countries will benefit from a weighted average tariff reduction of 2.4% and 6.9%, respectively. These concessions will result in a weighted average post-Round tariff of 6.9% in the OECD countries and 9.1% in developing countries. Exports of basic manufactures which includes textiles and clothing will enjoy a tariff reduction of 8.9% in developing countries and 2.2% in OECD countries. * Enormous progress was made in reducing nontariff barriers. For Pakistan, the estimated direct impact is very significant -- the incidence of NTBs affecting Pakistan's exports to OECD countries will decline significantly from 50.4% to 6.9%. For non-oil manufacturing exports, the incidence of NTBs will decline from 50.4% to 6.8% and for other manufactures from 59.6% to 8.2%. * Significant expansion in Pakistan's market access in major markets for textiles and clothing will be achieved by the increase in the export quotas over a ten-year period. Welfare and Income Gains from Uruguay Round Agreement The agreement will result in significant increases in world income which will be unevenly distributed among countries. Substantial increases in inter-developing country trade are also expected, with generally positive effects on reil wages. The welfare effects of trade liberalization in the short-run arise from three main components: terms of trade effects, efficiency gains, and second-best effects due to induced changes in tariff revenues. Under imperfect competition, additional gains will likely result from increases in the scale of output and in variety of available goods. In the longer-term, these effects are likely to be enhanced due to important dynamic gains resulting from externalities generated by increased competition, economies of scale, greater innovation, and positive impact of increased productivity, induced investment and savings. While these are more difficult to measure, they might even be more significant than the estimated static gains. However, there is a great deal of uncertainty about the actual magnitude and distribution of the gains. Recent attempts to quantify the effects of the Round are only partial, based on selected areas of the agreement affecting explicit distortions in agricultural and industrial markets. The global models treat South Asia as a region which includes Pakistan, India, Bangladesh, Sri Lanka, and Nepal. Thus, the general equilibrium estimates of welfare effects for Pakistan are estimated based on the effects for South Asia as a whole. The estimated effects are static -- they refer to once-and-for-all improvements in resource allocation and efficiency rather than to processes operating over time. The latter, which represents dynamic gains acting through improved growth rates are likely to be larger than static gains, but they are more difficult to quantify. A second-round effect reported by recent studies arises from higher incentive to invest as efficiency improves through liberalization. This induced investment effect roughly doubles the estimated income effects of the agreement, with a further approximate increase due to economies of scale and allowing for potential increases in the flexibility of firms and economies over the longer-term. Effects of Agricultural Liberalization * Trade liberalization as a result of the Round will affect world prices of agricultural commodities. However, due to the erosion of intended liberalization achieved in agriculture, the changes in world prices for major agricultural products resulting from liberalization will be very small and are expected to have only a very small impact on welfare (Ingco, 1995). The analysis based on the RUNS model by Goldin and van der Mensbrugghe (1995) predicts very small price changes in the range of -1% to 4%. For Pakistan's major imports, real prices (relative to prices of manufacturing exports from OECD) are foreseen to rise in 2002 by 3.8% in wheat, 2.3% in coarse grains, and 1.8% in sugar; at the same time, world prices of some major imports are predicted to decline such as other foods (-1.4%). For Pakistan's major exports, such as rice and cotton, world prices are predicted to decline slightly from benchmark levels with rice prices declining by 0.9% and cotton by 1.2% in 2002. Combining 1990-92 trade data with the price changes generates the estimates of increased cost in food trade. Both absolutely and relative to total trade and income, the total net terms of trade losses are small, estimated at USS16.6 million or 0.04% of GDP in 1992. If the world price changes are transmitted into the domestic market, consumption and production will adjust which would result in a reduction of the extra ii costs of imports. Also,-food imports partly occur because of inappropriate policies such as import subsidies and/or taxes on output. * After allowing for adjustments in production and consumption as in the general equilibrium analysis, the net terms of trade losses for Pakistan due to agricultural liberalization would be significantly lower than the results based on the partial analysis. In addition, these losses are offset by potential efficiency gains from improved resource allocation when production subsidies are reduced. The implementation of these additional reforms is predicted to result in a combined net gain for South Asia of about US$97 million and for Pakistan of about US$12 million (in 1992 prices). The estimated gains increase if potential induced investment and increasing returns at the level of the firm are taken into account. This increase arises because the liberalization increases both the level of income and the initial returns to capital. As a result, agents represented in the analysis increase their level of saving and investment, creating second-round increase in incomes. For Pakistan, potential gains allowing for these factors are estimated to be between US$29 to USS37 million (in 1992 prices). Gains from Manufacturing Reforms and Liberalization in Textiles and Clothing The extent of the potential welfare and income effects for Pakistan due to increased market access for its exports of textiles and clothing will depend on several factors including the degree of current restrictions (indicated by the quota utilization rates and the shares of Pakistan's exports sold in the MFA restricted markets). In addition, the extent of the gains depend on Pakistan's relative efficiency and competitiveness compared to other exporters, and the ability to expand exports. The smaller the current quota relative to its supply potential, and the larger the proportion of its exports to restricted markets, the larger will be the gains from liberalization. The analysis highlights the following results: * Pakistan's MFA quota utilization rates in recent years remain high, with some 100% in 5 categories and over 80% in 12 categories in the United States in 1993. In the EU, Pakistan's quota utilization rates were between 80%-100% during the same period. The very high rate of quota utilization rates indicates that the MFA is a binding constraint on Pakistan's exports, with the highest restriction on exports of higher value-added items. In addition, the distribution of Pakistan's exports between restricted and unrestricted markets indicate significant potential gains from the liberalization of MFA quotas under Round. * Given the complexity of the agreement, the estimated effects cannot be precise. Our best guess is that, assuming current shares in total exports, Pakistan could gain more than US$500 million (in 1992 prices) from the abolition of the MFA. This would represent a lower bound since it does not account for potential increases in export shares due to the higher growth rates in textile and clothing quota compared to other South Asian countries under the ATC. Pakistan would potentially achieve additional gains by allowing for the increased growth rates and larger shares in total exports by 2004. In this situation, the estimated increase in welfare increases -- ranging from more than USS700 million to about USS3.3 billion (in 1992 prices). In a dynamic framework, the benefits from the abolition of the MFA are likely to be even higher than if it were abolished immediately. This is because the MFA would have become more restrictive over time as comparative advantage shift out of textiles and clothing in the industrial countries while it increase in developing countries. * Trade liberalization facilitates reallocation of labor and other resources in line with Pakistan's comparative advantage. While trade reform is not a sufficient condition for growth, some supportive evidence is provided by studies (e.g. Sachs and Warner, 1995) that show positive correlation between the openness of an economy and its economic growth. Trade liberalization can contribute to higher productivity growth--and thus economic growth--in several ways: by exchange of ideas, inputs, technology and factors of production. While limited, there is enough evidence to suggest that dynamic growth effects--eg, through economies of scale associated with learning by doing, investment in R&D and human capital and specialized inputs-- are important source of gains from trade reform and greater integration into world markets. In conclusion, the Uruguay Round agreement provides potential benefits for Pakistan. The possibilities for expanded trade with the liberalization in textiles and clothing under the MFA as well as tariff reductions in the industrial and developing countries will be important for Pakistan. The extent of the gains will depend crucially on how Pakistan take advantage of the new possibilities in the changing trade environment. By reducing discretionary non-tariff protection, the agreement will reward producers who are competent and efficient. Important factors will be Pakistan's efficiency and competitiveness in comparison to other suppliers in an open free trade environment as well as the extent of expansion in export sales -- this supply response will be important in determining the extent of the gains from the Round. The gains will not be automatic and depends on careful implementation and monitoring of the agreed reforms, lest the outlawed barriers be replaced by equivalent or worse measures under the guise of special safeguards and antidumping. For Pakistan as well as in other countries, further liberalization is needed in key areas such as agriculture and in other manufacturing sectors such as textiles and clothing where protection remains high. Recent studies show that the gains from the Round will not be evenly distributed among countries and the magnitude depends on the degree of own liberalization achieved. Although the uncertainties in model results are large for certain regions, for most developing countries offering significant liberalization, as in East Asia, recent analysis foresees substantial potential benefits. In contrast, the estimated potential gains are modest or even negative for countries offering no or little liberalization, as in sub-Saharan Africa. To achieve the potential gains from the Round, Pakistan needs to continue its trade reform program and pursue to liberalize their own trade by allowing prices to be passed on to producers and pursuing flexible economic policies at home. This will also facilitate Pakistan's ability to exploit the market access advantages offered by the industrial countries and will be able to reap the benefits of the induced investment from higher incomes. The potential growth of exports and Pakistan's ability to gain from MFA liberalization would also crucially depend on other factors, including measures to improve the quality of textiles and clothing exports and re-structuring of the domestic industry to enhance productivity and efficiency of the sector. iv Pakistan and the Uruguay Round: Impact and Opportunities in the 1990s and Beyond A Quantitative Assessment 1. Introduction The Uruguay Round trade agreement will have significant implications on the economic prospects of developing countries over the next decade. Its effective implementation will bring about increases in trade, investment, income and welfare to most developing countries. Medium to long-run benefits will result from both increased market access to developed countries' markets, and from enhanced efficiency originating from the countries' own liberalization commitments. The distribution of these benefits among developing countries will, however, be uneven. Those with open domestic markets will be favored as their openness implies a relatively better capacity to adjust to emerging market opportunities. More importantly, recent analysis of the effects of the Round indicate that "what you do to yourself matters more than what others do to you". That is, the gains from multilateral reforms tend to be larger, the greater the extent of own liberalization achieved. While some countries may experience a deterioration in their terms of trade and others may lose market share due to erosion of their trade preferences, recent studies indicate that these negative effects will be relatively small and could easily be outweighed by potential gains from small improvements in domestic efficiency and other benefits from the overall agreement. Countries' overall gain will depend more on their own trade policy decisions than actions of their partners. Pakistan stands to gain from continued liberalization of its trade regime as well as from the Uruguay Round commitments on tariff reductions and elimination of non-tariff barriers facing its major exports. The extent of the gains depends much on how well Pakistan take advantage of the new possibilities and how fast they adjust to the changing trade environment. This paper provides a quantitative analysis of the impact of the Uruguay Round agreement on Pakistan. The analysis is based on the quantitative assessments of welfare and income gains for South Asia presented at the World Bank conference on the Uruguay Round. Section 2 of the paper reviews the recent changes in the patterns of Pakistan's merchandise trade. In section 3, domestic policy reforms are discussed and Pakistan's own liberalization and Uruguay Round tariff commitments are analyzed. Section 4 discusses the highlights of the Round negotiations and the potential impact on Pakistan's market access. Quantitative estimates of welfare and income gains resulting from agricultural reforms, liberalization of the multi-fibre arrangement (MFA), and other manufacturing reforms are discussed in section 5. Section 6 provides some conclusions and perspectives for future reforms. 2. Changes in Composition and Patterns of iMerchandise Trade Until the end of the 1980s, Pakistan followed a policy of import substitution. With high protection through tariffs and non-tariff barriers, the economy was largely insulated from world markets. The high protection given to the domestic economy placed a heavy burden on Pakistan's exports. Except for some cotton-based exports, the manufacturing sector was uncompetitive in world markets. Since 1988, Pakistan has adopted a more market-oriented trade strategy, with strong emphasis on export orientation. Barriers to imports have been reduced and the number of tariff lines included in the Negative List has declined by more than 300. Tariffs and other taxes on imports have been reduced and import licensing was completely eliminated in 1994. Pakistan, however, continues to apply import restrictions for balance-of-payments reasons under Article XVIII:B of the GATT. The structure of Pakistan's merchandise trade has changed significantly since the early 1980s. In 1982/83. primary commodities accounted for 30% of exports. By 1992/93, their share had declined to 15%. In contrast, the share of manufactures and semi-manufactures exports rose from 57% and 13% to 64% and 21%, respectively, during the same period. Most of the growth took place in cotton based manufactures. In imports, the share of raw materials declined from 55% to 44%, while imports of capital goods increased from 31% to 42% during the same period. Pakistan's exports consist mainly of cotton and cotton-based manufactured goods,' accounting for about 60% of total merchandise exports in 1993 (Table 1). The combined share of textiles and clothing in total exports has reached 70% in 1992/93, compared to 38% in 1980. Other important export goods include leather products, rice, fish and fish preparation, and carpets. Significant import items include machinery, chemicals, petroleum and petroleum products, transport equipment and edible oils. During 1980 to 1993, the share in imports of non-electric machinery increased from 7.4% to 20.6%. Other goods whose share in total imports rose substantially include automotive products, telecommunications apparatus and office machinery. The share of fuel imports declined from 27% to 17%, reflecting the decline in world oil prices. 'This includes raw cotton, textiles (cotton yarn, cotton thread, cotton cloth, cotton bags, and cotton waste); and clothing (towels, bed sheets, napkins, curtains, tent and canvas, ready-made garments and hosiery). 2 In 1994/95, Pakistan's export revenue reached more than US$8 billion, showing more than 19% increase over 1993/94. The items which made major contributions to export earnings include cotton yarn (18.8%), cotton fabrics (13.3%), hosiery (8.5%), cotton made-ups including towels (8%), synthetic textiles (7.1%), rice (5.6%), leather garmens (4.2%), leather (3.3%) and sports goods (3.2%). 3. Own Liberalization: Pre- and Uruguay Round Reforms 3.1 Pre- Uruguay Reforms in the Import Regime Before the structural reforms in 1988, Pakistan's tariff protection was high and uneven. In the early 1980s, the average (unweighted) ad-valorem tariff rate was about 77% with a standard deviation of more than 50%. The tariff structure2 allowed numerous tariff concessions to industries and regions. The first tariff reform, instituted in 1987/88 resulted in an average tariff reduction of about 10.3%, from 77% to 69%. Table 3 shows the unweighted average tariff rates for Pakistan and other Asian countries during the mid- to late 1980s. In general, South Asian countries including Pakistan have maintained more protectionist trade policy than East Asian countries. In addition, the wide dispersion of tariffs indicate wide distortions among sectors. Next to India, Pakistan had the most restrictive trade regime in South Asia. Table 3 Tariff Structure: Pre - Uruguay Round Average Dispersion Tariff (Standard Rates (%) Deviation) Country Pakistan (1987,1990) 68.9 64.8 * 52.2 41.4 India (1987,1990) 77 * 87 **/128 * n.a. 41 India (1992,1993) 64* 47 ** / 71* n.a. 30 Bangladesh (1989.1993) 94 * 31 **/50* 59 32 Indonesia (1985,1990) 27 * 22 * 107.8 89.4 Malaysia (1993) 14 * 13.5 Thailand (1986.1990) 13 I 1.4 * n.2. n.a. China (1986,1992) 38.1 * 32 */ 43 *n.a. 30 * unweighted *. weighted by imports Source: Dean, Desai, and Rzedel: 1994 2 Pakistan's tariff system is based on the Harmonized System (HS), containing 5,464 tariff lines at the 8 digit level. About 97 % of the tariff lines are in ad-valorem rates. The remainder of the tariff lines contain specific and compound tariffs. The tariff structure is complex, with statuiory rates often replaced by lower concessionary rates. 3 Since 1990, Pakistan has further liberalized its trade regime. Major reforms entailed several steps including (i) elimination of import licenses; (ii) reduction in quantitative restrictions on imports and exports; (iii) reduction in tariff and tax exemptions; and (iv) streamlining of the tariff structure. Despite these reforms, however, Pakistan's import regime still remained highly regulated in 1995. Import licensing was abolished in 1991 except for a negative and a health and safety list, and in 1993 these too were abolished including for items subject to specific requirements. At the same time, the number of quantitative restrictions in the Restricted List was reduced in several steps over 1990-1993, and in January 1994, the Restricted List was abolished. The tariff reforms have reduced tariff peaks, resulting in an average ad-valorem m.f.n. statutory import tariff of about 50% in 1994/95.' Other specific reforms include (i) the reduction of the Negative List from 300 to 75 items between 1988 and 1994; (ii) a commitment to reduce the average statutory tariff rate to a maximum of 35% by 1997; (iii) the integration of "para-tariffs" (6% import fee and 5% surcharge and regulatory duties) into the single tariff rate in mid-1994; and (iv) liberalization of the foreign investment regime and abolition of industrial licensing. In 1993/94, the tariff structure consisted of 13 different rates: 0, 10, 15, 20, 30, 40, 50, 60, 70, 75, 80, 90, and 100. The simple average ad-valorem m.f.n. statutory tariff rate was 56%, with a standard deviation of 27%. The modal tariff rate was 75%, accounting for more than 40% of all tariff lines, with rates of 30% and 50% applying to 21% and 11% of all tariff lines, respectively. In agriculture (HS Chapters 1-24), the simple average tariff was 55% in 1993/94, with half of the tariff lines consisting of tariff rates at 80%, the highest tariff rate applied to agricultural imports and a further 17% of the tariff lines having 50% rate. Moreover, many of these tariffs were applied to reference, rather than actual prices; if the former exceeded the latter as they do in plenty of developing countries, actual rates of protection will be even higher. In July 1994, a number of tariffs were reduced from 92% to 70%. Also, duties on a number of dyes and chemicals used as inputs for textile and leather manufacturing were reduced by 30 percentage points. In July 1994, all para-tariffs were added to the customs duty and tariff rates were further reduced. This excludes the few specific rates in the tariff schedule. 4 In manufacturing (HS Chapters 25-97), the simple average tariff was 60% in 1993/94, with more than 40% of the tariff lines subject to 75%-80% tariffs. The remainder of the tariff lines had rates from 30% (22% of tariff lines) to 60% (6% of tariff lines). Tariff rates on imports of industrial raw materials and intermediate goods ranged between 20% and 50%, while imports of capital goods were charged tariffs between 40% to 80%. In 1994/95, the average tariff on manufactured goods was reduced to 51.4%. The minimum tariff rates imports of industrial raw materials and intermediate goods have also been reduced to 10% and 15%, respectively. The tariff structure in manufactured goods based on statutory tariff rates in 1993/94 showed some degree of escalation, where imports of primary products facing average tariffs of about 45%, while the average rate for semi-processed and processed items was 52% and 60%, respectively. Tariff escalation appears significant in agriculture, textiles, rubber, petroleum, and non-ferrous metals. The escalated tariff structure provides an incentive for higher value added production. Early in 1994/95, the number of items in the Negative List was further reduced. Under bilateral agreements concluded in 1994 with the United States and the European Union, Pakistan removed many cotton textile items from the Negative List in exchange for removal of quantitative restrictions on its textile exports to these two markets. Pakistan imposed a maximum import tariff of 70 percent on the textile items removed from the Negative List. Other reform measures implemented in 1994/95 include (i) a reduction in the maximum all-inclusive tariff rate to 70 percent, except in cars and alcoholic beverages; (ii) a minimum tariff rate of 10 percent applied to intermediate and investment goods except in basic items such as food, fertilizer, and medicine, which are kept at zero percent; (iii) a reduction in intermediate rates, resulting in reductions in statutory rates equal to concessional rates; (iv) a reduction in the value of imports under exemptions; (v) the elimination of the differential customs treatment of commercial and industrial importers. However, the all-inclusive tariff rates for cars were increased to 100-265 percent in 1994/95, compared with 70-250 percent in 1993/94. The Health and Safety List was extended to 34 items in 1994/95; the Procedural List requires a technical expertise for certain imports (e.g. petroleum imports). All imports from India remain prohibited, unless authorized by special legislation. 5 Given the new exemptions, the result of the 1994/95 tariff reforms implied a reduction in the average effective rate on dutiable imports to about 34 percent of total c.i.f. import value. This reflect the lower average statutory rate on dutiable imports to below 50 percent which could not be offset by an improvement in duty collections. Despite the move toward pre-shipment inspection, Pakistan's custom's valuation is not yet invoiced-based and the Import Trade Prices continue to be used in determining the duty base. Under the Uruguay Round commitments, Pakistan is required to move to an invoiced-based system by the year 2000. 3.2 Tariff Bindings and Reductions in the Uruguay Round Pakistan had effectively no pre-UR tariff bindings5. In the Uruguay Round, Pakistan committed to bind more than 90% of its agricultural import tariffs (HS Chapters 1-24). ). Table 4 compares the estimated applied rates of protection in 1986-88 for commodities where data are available with the average tariff bindings offered in the Round. Pakistan was cautious in its offers under the Round and made no commitment to reduce protection in agriculture as shown in offers at ceiling rates of 100%-150%. Tariffs on rice, wheat, maize, sugar and sugar products from cane and beet are now bound at 150% and tariffs on betel nuts will be bound at 200%. The high ceiling bindings make the welfare gains from agricultural liberalization essentially zero. About 6% of the agricultural tariff lines will remain unbound, mainly in alcoholic beverages, swines, and pig meat and products. Table4 Pakisn Pre-URftecandF-UR TariffBuALS ccmmOhty PreLRpFat=m Pakistan and other South Asian countries UR BCUd AMae ariffJeq i Rate 1986- (except Sri Lanka) have generally made very conservative and cautious offers in HHEAT 150 -21 -r- agriculture compared with most countries in RICE 100 4 SLUAR 1-50 14 East Asia (see Table 4-6 and Figure 1). Mtoo0 10 For instance, India and Bangladesh bound COTN 100 -24 'tanffs on most agricultural products at prohibitive levels -- at 100%, 150% or 300%. This is in sharp contrast with the lower bound rates Pakistan bound 113 tariff lines when it joined the GATT. However, a waiver authorizing Pakistan to suspend the application the bound rates according to the provisions of Article II of the General Agreement was granted in 1977 under paragraph 5 of Article XXV of the General Agreement. The waiver was extended several times and its scope extended to include the renegotiation of the Pakistan's Schedule of Concessions in the context of the introduction of the Harmonized System in 1988. 6 offered by Indonesia, Malaysia, and Thailand. However, India's negotiations with the United States and the EU resulted in lower MFN tariffs on several agricultural products -- sugar, cheese, butter, vegetables at 35-40%. For major staple foods and grains, such as rice and sorghum, the bound rates at zero percent were maintained. The high level of tariff bindings in agriculture resulting from the Round provide no effective discipline on domestic and trade policy distortions. In manufactures (HS Chapters 25-97) some progress was made by locking-in the tariff reforms in 1994/95 and with the commitments to bind 25% of its tariffs, mostly at ceiling bindings of 40%-50%". However, by failing to bind the remaining 75% of its tariffs, Pakistan lost the opportunity to achieve potential gains from a more efficient resource allocation and lower costs resulting from less variability in protection. Moreover, Pakistan appears to have committed less own liberalization than other South Asian countries. For instance, India commirtted to bind tariffs of more than 56% of its total merchandise imports and achieved a weighted average tariff reduction of more than 19%, resulting in an average (trade weighted) post-Round tariff of about 35.7%. Fortunately, this situation improved considerably in 1995, when, following the completion of bilateral talks with the EU and the USA, Pakistan submitted amendments to its Uruguay Round schedule binding tariffs in textiles and clothing--HS50-63 (492 tariff lines in all). Most lines are bound to 50% after five years and 35% after ten. These levels of protection are still fairly high and apply only after a considerable lag relative to the announced autonomous liberalization, but they are a significant step in the right direction. Moreover, in some cases they replace not only higher tariffs, but outright bans on imports. The extent of the liberalization entailed in these recent developments has yet to be quantified and has, unfortunately, not been taken into account in the quantitative analysis of the Round undertaken below. Thus the benefits attributed to the Round in the remainder of this paper, fall at least partly short of the total stimulus which the Pakistan economy from its international trade sector. Taking the recent changes in textiles into account the Government of Pakistan reports that it has now made bindings in 2158 of the approximately 2900 tariff lines in which it records positive imports. This is a reasonably sound situation in terms of current actual trade, but is must not be presumed that bindings are unimportant for commodities that are not currently traded. 6 Pakistan's tariff schedule of commitments are not included in the Integrated Data Base (IDB) received by the World Bank from the WTO, so a systematic comparison of pre- and post-Round tariffs and estimation of the extent of tariff reductions is not yet available. 7 Indeed, the lack of a reasonable binding could be the reason why certain of these lines are not traded. 3.3 Recent Reforms in the Export Regime Quantitative export restrictions are imposed mainly on major agricultural products. Until 1995, the export regime prohibited exports of certain live animals, beef and mutton, grains and pulses, edible oils, hides and skins, nonferrous metals, arms, sugar, and re-exports of imports except in cases where the re-export value exceeds the c.i.f. import value by at least 10 percent. Pakistan maintained export quotas for several agricultural products, procedural requirements for exports of rice, fertilizers and textiles to quota countries, and imposed minimum export prices for breeding animals. Traditionally, Pakistan reserved supplies of cotton for domestic consumption by limiting exports to surplus quantities through the issuance of quotas and the imposition of taxes. However, in 1995 she allowed exports of cotton without reference to quotas or minimum prices. In 1995-96, exporters are permitted to export any quantity, provided that a performance bond of 3 percent of the f.o.b. value is paid at the time of registration and that a letter of credit is opened within 35 days of the sales registration. Exporters have benefited from several incentives including (i) concessional rates for import tariffs and full exemptions from the sales tax for direct imports of machinery and certain raw materials and intermediate goods from selected countries; (ii) full exemption of import duties for Export Processing Zones and bonded warehouses; and (iii) a duty drawback system which allows reimbursement for import duties and domestic taxes paid on imported inputs that entered production for exports.' In mid-1994, all remaining export taxes on cotton, yarn and other products were abolished.8 4. Enhanced Market Access for Pakistan's Exports The Uruguay Round will expand access for Pakistan's exports through their partners' commitments to liberalize market access by reducing tariffs and phasing-out quantitative restrictions and other non-tariff barriers. The lowering of tariffs and the removal of non-tariff restrictions on trade in textiles and clothing will represent the most important part of the Uruguay In January 1995, the duty drawback rates were reduced by 15 percent. The export development cess, equal to 0.25 percent levy on the f.o.b. value of all exports remained in place. The proceeds are used for export promotion activities and training under the extra-budgetary Development Fund. 8 Round commitments for Pakistan over the next decade. This section summarizes the potential effects on Pakistan of these two areas of reform-- tariff reductions and bindings and liberalization of bilateral quotas in textiles and clothing under the MFA. The effects of these reforms on the incidence of non-tariff barriers facing Pakistan's exports to OECD and developing countries are then discussed. 4.1 Tariff Reductions and Bindings Significant improvements in market access for manufacturing exports were achieved. As shown by de Paiva'-Abreu (1995), the main improvements include the expansion of bindings (commitments on maximum tariffs) to cover 99% of industrial countries' imports from developing countries and the reduction of the trade-weighted average tariff by 40% from 6.9% to 4.7%. In terms of total developing countries' exports to industrial countries, the reduction in the average tariff is 30%. The industrial countries committed to an average reduction of 16% in their textile and clothing imports, with the average tariff dropping from 15.7% to 13.2%. A large number of developing countries also committed to reduce tariffs to an average of 25%-56%. For Pakistan's major exports, the achievements of the Round in the area of tariff reductions and concessions received from OECD and other developing countries9 are shown in Table 7. The estimates are based on m.f.n. tariff reductions weighted by Pakistan's trade with OECD and developing countries. In developing countries, significant tariff reductions were achieved in Pakistan's major exports. Tariffs facing basic manufactures, which includes textiles and clothing will decline by 8.9%, agricultural products by 5.1%, minerals and fuels by 13.3%, and miscellaneous manufactures by 7.5%. In OECD countries, tariffs on basic manufactures were reduced by 2.2%, resulting in a weighted average post-Round tariff of 6.5%. In other major exports, tariff reductions were also important as in agriculture (3.6%), and other miscellaneous manufactured goods (2.5%), resulting in average post-Round tariff of 3.4% and 10.8%, respectively. Overall, Pakistan's total merchandise exports to OECD and developing countries will benefit from a weighted average tariff reduction of 2.4% and 6.9%, respectively. These concessions will result in an weighted average post-Round tariff of 6.9% in the OECD countries 9 Developing countries included in this calculation are based on the Integrated Date Base (IDB) which includes the following countries: Argentina, Brazil, Chile, Colombia, Czech Republic, El Salvador, Hong Kong, Hungary, India, Indonesia, Jamaica, Republic of Korea, Malaysia, Mexico, Peru, Philippines, Poland, Romania, Senegal, Singapore, Sri Lanka, Thailand, Tunisia, Turkey, Uruguay, Venezuela, and Zimbabwe. 9 and 9.1% in developing countries. Exports of basic manufactures which includes textiles and clothing will enjoy a tariff reduction of 2.2% in the OECD and 8.9% in developing countries. The incidence of tariff peaks and tariff escalation in industrial country tariff schedules has also been reduced somewhat by the Round but they remain important constraints in Pakistan's major exports items. In textiles and clothing, 28% of imports face tariffs of over 15%, compared to 35% of imports during pre-UR period. 4.2 Effects of Liberalization of Textiles and Clothing Since the mid-1980s, the growth rates of Pakistan's quotas under the MIFA have progressively been reduced from their target level of 6% per year; further, products have continually been brought under restrictions by major trading partners. The UR Agreement on Textiles and Clothing (ATC) is built on three areas: a liberalization process to progressively expand existing quotas; a program for integrating textiles and clothing products into GATT rules (i.e. to abandon quantitative controls) and a special safeguard to deal with cases of market disruption during the transition. The potential impact of the Agreement on textiles and clothing on Pakistan is difficult to predict as the implementation period extends over a decade and will involve a major change in direction from the current trade regime. In addition, the details of how the agreement will actually be implemented remain unclear. In considering the future, one has to consider the significant changes that have already taken place in world markets during the MFA period as there have been important shifts in production and trade, particularly in the clothing sector (Hertel, et al). There have been extensive adjustments in Pakistan's major industrial country markets as the latter have shifted to high-technology and specialty market "niche" products and adopted flexible and delivery processes. Despite the MFA restrictions, world trade in clothing has grown at a much faster rate than the world merchandise trade over the past two decades. The structure of the Agreement and the 10-year transition over the next decade indicate that future changes will be gradual. That is, the structure of the transition will smooth the impact of future changes. It is likely that many of the current quotas will remain in place for several years, particularly those on the most sensitive products. However, the current quota levels will be enlarged by the process of liberalization. Given the changes occurring in comparative 10 advantage in this industry (e.g. traditional exporters in East Asia such as Japan has become a net importer; Korea and Taiwan (China) and Hong Kong have lost their advantage as their labor costs have risen) and the likely tendency in the absence of the UR for the MFA arrangements to become more restrictive over time, the effects of MFA liberalization will be favorable for other Asian countries including those in South Asia. The agreement on textiles and clothing provides for the phase-out of bilateral quantitative restrictions under the MFA in three stages over ten years with the remaining restrictions in place at the end of that period with about 49% of total restraints to be removed at the end of the transition period in 2004 (see Box 1). Box 1: The MFA and the Agreement on Textiles and Clothing The Uruguay Round Agreement on Textiles and Clothing provided for the phasing-out of non- tariff restrictions under both the Multifibre Arrangement (MFA) as well as non-MIFA restrictions on trade over the period to 2005 in stages. In each stage, importers will transfer from the MFA to normal GATT rules a trance of products of a size related to the share of the items in their total 1990 import volume. The agreed phasing will allow importing countries to delay the bulk of the transfer into the next century. Integration consists of three stages. First, countries would integrate into the GATT products from the specific list in the Agreement, which accounted for not less than 16% of the total volume of imports in 1990 of the products in the specific list. On January 1, 1998, products which in 1990 accounted for not less than 17% of the total volume of 1990 imports of the products from the specific lists would be integrated. On January 1, 2002, products which in 1990 account for not less than 18% of the total volume of 1990 imports would be integrated. All remaining products would be integrated at the end of the implementation period on January 1 2005. For products remaining under bilateral restraint, the agreement provides a formula for increasing the existing growth rates. During the first stage, the level of each restriction under MFA bilateral agreement in force for 1994 will be raised annually by not less than the growth rate established for the respective restrictions, increased by 16%. For phase 2, (1998-2001), the growth rates should be the phase] rates, increased by 25%. In the third stage, (2002-2004), the growth rates should the phase 2 rates, raised by 27%. How will Pakistan be affected by the MFA reforms under the Agreement on Textiles and Clothing (ATC)? The changes in Pakistan's quota on textile and clothing exports under the normal growth rates without the ATC are shown in Table 7 and 8. The effects of the ATC on the growth rates on Pakistan's quotas on textiles and clothing exports in comparison to other South Asian countries are reported in Table 9 and 10 and in Figures I to 4. Several developments for Pakistan are important. First, significant expansion in market access in three major markets for textiles and clothing will be achieved by the increase in the export quotas over a ten-year period. II For instance, the normal increase between 1994 to 2004 without the ATC in textile quota will be 48.8% in the EU, 82% in the United States, and 89.9% in Canada. As a result of the ATC, these growth rates will rise to 79.% in the EU, 139.5% in the United States, and 155.6% in Canada. In the case of clothing, Pakistan's quota would have grown normally without the ATC by 70.8% in the EU, 87.7% in the United States, and 82.6% in Canada. Under the ATC, these growth rates will increase -- 118.5% in the EU, 150% in the United States and 143.5% in Canada. Since, Pakistan's growth rates exceed India's, the former's share in total South Asian quota in the three major markets will rise over the period due to the ATC. In 1994, Pakistan's share was about three-quarters of the India's share. By 2004, the two countries will have almost equal share in the total quota for South Asian exports of textiles and clothing. The extent of the gains due to increased market access for Pakistan's exports of textiles and clothing will depend on several factors including the degree of current restrictions (indicated by the shares of Pakistan's exports sold in the MFA restricted markets), Pakistan's relative efficiency and competitiveness in manufacturing textiles and clothing compared to other exporters, and the ability to expand supply and exports. The smaller the current quota relative to its supply potential, and the larger the proportion of its exports to restricted markets, the larger will be the gains from liberalization. Table II and 12 show MFA quota utilization rates and the distribution of textiles exports between the quota and non-quota countries. Quota utilization rates in recent years remain high, with some 100% in 5 categories and over 80% in 12 categories in the United States in 1993. In the EU, quota utilization rates were between 80%-100% in 1993. The very high rate of quota utilization rates indicates that the MFA is a binding constraint on Pakistan's exports, with the highest restriction on exports of higher value-added items. The distribution of Pakistan's exports between restricted and unrestricted markets in Table 12 indicate significant potential gains from the liberalization of MFA quotas under Round. The welfare and trade effects of these changes are evaluated in section 5. Pakistan's ability to achieve the potential gains from the MIFA reforms will crucially depend on the efficiency and competitiveness of its manufacturing textiles and clothing industry. The sector is based on domestic high quality cotton and draws on a relatively low-cost labor force. According to the recent trade policy review by the GATI (GATT, 1994), the industry appears to 12 be most efficient in the spinning of cotton and in manufacturing cotton yarn for made-ups, including towels, canvas, knitwear, and garments. However, the conversion of spun short staple and filament yam into cloth as well as the conversion of imported fibre, particularly wool, into yam and cloth are considered relatively less efficient compared to other Asian countries. In addition, Pakistan's cotton policy will influence the ability of Pakistan to achieve the potential gains from the expansion in market access in textile and clothing exports. Pakistan manages the cotton sector to insure relatively stable domestic prices for their producers at prices which are usually lowe- than would be the case under free market conditions. This lower price at the producer level allows domestic spinners to purchase cotton fiber at a price below the world price level, thus conferring a competitive advantage to the textile industry since the cost of acquiring cotton accounts for between 49% to 61% of the total cost of yam production. In addition, Pakistan's cotton lint export policy has given domestic textile and clothing mills a competitive advantage relative to other countries as the levy of export duties has served to keep domestic prices for cotton lint below international prices. In the six years (1986-1992) following the new U.S. cotton policy, Pakistani domestic prices have averaged only 65% of comparable international cotton prices. This has given the Pakistani textile sector a large apparent comparative advantage in cotton spinning. However, declines in Pakistan's cotton production since 1992/93 due to lower yields have dramatically reversed the previous advantage of domestic mills. In 1992/93, the spot Karachi price averaged 85.5% of the Cotlook "B" Index and during 1993/94 97%. The actual price paid by mills during 1993/94 likely exceeded this index as Pakistani mills imported cotton during the marketing year when international prices were relatively high. As Pakistani spinners imported cotton at the world price, their comparative advantage in cotton manufactures has declined. In an attempt to control the rise in domestic cotton prices, Pakistan banned cotton exports in January 1994 and subjected cotton yarn exports to a monthly quota with a 10% export tax. Thus, the prospects for Pakistan's cotton and textile industry and its competitiveness in a more open market economy will influence the ability to take advantage of the opportunities offered by the reforms under the Round. The reforms agreed during the Round will be gradually implemented and most of the gains will be achieved towards the end of the transition period. Pakistan should seize the opportunity in the interim to implement reform programs designed to make their domestic economy more open and more flexible. As the transition to a more open 13 market economy occurs, mechanisms must be put in place to facilitate the flow of price signals not only from the world cotton market but also from the domestic and world textiles sectors back to the domestic cotton production sector. These price signals can be put in place only by restructuring the industry and by removing input subsidies, modifying exchange rate policies, and disbanding inefficient parastatal institutions. 14 Figure 1 Figure 2 700 -- othing-QuotComp:rton I Textile Quota Comparison (US) 600 800 500 E 400 -fi00 p 300 --400 200 2 -00U 100 - -illo 0- 01 11 Pakistan India Bangladesh Sri Lanka Pakistan India Bangladesh Sri Lanka 01994 M 2004 w/o Growth Factors [1 1994 U 2004 w/o Growth Factors o 2004 w/ Growth Factors I 2004 w/Growth Factors Figure 3 Figure 4 Clothing Quota Comparison (EU) Textile Quota Comparison (EU) M Pakistan 0 India 90000 200,000 70000 150.000 2 6 0000. S50000Pks 40000 UdiU100I000 E 30000 na 20000 OSr Lanka 50.000 10000 1994 2004 w/o 2004 wl 1994 2004 w/o 2004 w/ Growth Growth Growth Growth Factors Factors Factors Factors 15 4.3 Impact of the Uruguay Round on Nontariff Measure Coverage Ratio The data and analysis in the previous section indicate that tariffs are less important than non-tariff protection for Pakistan's major exports. Exports of textiles and clothing have been constrained by the quantitative restrictions embodied in the Multi-Fibre Agreement (MFA) and previous similar arrangements. As discussed in the previous section, major achievements in the Round were the agreement to eliminate the MFA within ten years, the tariffication of agriculture and the phase-out voluntary export restraints within four years. This represents a significant reduction on the incidence of non-tariff protection on developing country's trade. According to Low and Yeats (1994), for exports of developing countries as a whole, the coverage of non-tariff barriers will decline from 18% of their exports in 1992 to 5.5% of their 1992 exports by the end of the implementation period. For Pakistan, the estimated impact is very significant. The results of the Round regarding the level and structure of NTBs and the impact on Pakistan in comparison with other South Asian countries are described in Table 13 and Figure 5. The values of OECD imports in 1992 from South Asia as a whole and from Pakistan and the pre- and post-Uruguay Round NTB coverage ratios are shown for major product groupslo. Prior to the Round, exports of textiles, foods and agricultural materials to OECD countries appear to have been the most affected by NTBs, both in absolute terms and relative to the average for all countries. The extent of NTB coverage ratios for Pakistan's exports to OECD were relatively high (more than 50% of total non- oil exports to OECD countries in 1992). Other South Asian countries' exports also faced relatively high NTB coverage in OECD countries. This is in contrast to the average ratios of other Asian countries, with average NTB coverage ratios of less than 20% of total exports in 1992. The Round has virtually eliminated all types of NTBs on industrial and agricultural goods. Thus, the incidence of NTBs affecting Pakistan's exports to OECD countries will decline significantly from 50.4% to 6.9%. For non-oil manufacturing exports, the incidence of NTBs will decline from 50.4% to 6.8% and for other manufactures from 59.6% to 8.2%. This represents a significant scaling back of the scope of NTBs on Pakistan's exports. The potential gains from these reforms are very significant for Pakistan. However, according to Finger (1994), they are not measures include quantitative restrictions such as quotas and non-automatic licensing requirements, voluntary export restraints under the MFA and similar textile quotas as well as other VERs on quantity that were negotiated outside the textile and clothing sectors. 16 guaranteed unless the Agreement is implemented effectively as agreed and countries do not resort to safeguard protection, which has become easier to use as a result of the Round." Much depends on the extent to which countries abstain from using other protectionist measures such as general safeguards, antidumping measures, and special safeguards in textiles and agriculture. Figure 5 Non-tariff Coverage Ratio 60- 40- U 30 -U L7 _ 20 Pakistan Bangladesh India Sri Lanka 5. Welfare Effects of the Uruguay Round on South Asia and Pakistan How much are the Uruguay Round reforms worth to Pakistan? In this section, we estimate the potential welfare and income effects for Pakistan based on recent evaluations of the Article XIX, the safeguards clause, has made changes in ways that may increase its use against developing countries. During the pre-UR period, industrial countries have been reluctant to use it as a basis for import control because these have to be applied against all suppliers and compensation "payable". The UR agreement allows selectivity if it can be shown that imports from certain countries have increased disproportionately. It is not clear whether this will be to the disadvantage of developing countries (by legalizing import controls against them) or to their advantage (by bringing within the WTO discipline actions that industrial countries would otherwise would have taken unilaterally)- 17 outcome of the Round (see Martin, W. and L. Alan Winters, 1995). The agreed reforms discussed in the previous section might be expected to generate substantial welfare gains because they result in sizable reductions in protection in manufactures. However, there is a great deal of uncertainty about the actual magnitude and distribution of the gains. This is because the overall effect of the Uruguay Round is difficult to quantify. Some aspects of the agreement such as the new rules on dispute settlement and standards can only be evaluated qualitatively. In agriculture, much depends on future implementation of the new rules and whether protection will be raised as far as the maximum allowed levels. Recent attempts to quantify the effects of the Round are only partial, based on selected areas-of the agreement affecting explicit distortions in agricultural and industrial markets such as: (i) tariffication of non-tariff barriers in agriculture; (ii) reduction of export and production subsidies in agriculture; (iii) tariff reductions in manufactured products; and (iv) the elimination of voluntary export restraints and the MFA. To the extent that there are additional benefits from institutional and rule changes as well as reforms in new areas (e.g. trade related investment measures (TRIMS), trade related aspects of intellectual property rights (TRIPS) and the general agreement on trade in services (GATS)), these estimates are an underestimate of the gains from the Uruguay Round. It is important to note that the estimates of welfare effects of the UR on Pakistan provided in this paper are conditional on effective implementation of the agreed reforms. Whereas Riordan and Srinivasan (1995) provides "unconditional" predictions of Pakistan's economic future by the year 2010, the estimates of welfare gains provided in this paper refer to the effects of implementing the UR in addition to whatever else may be happening in and to the Pakistan's economy. In fact, the precise value of the Round will depend on "whatever else" is happening, but for a wide range of scenarios our estimates will be fairly robust. The range of welfare effects provided reflects different assumptions about the economy--eg, constant or increasing returns to scale and the use of different models. It serves to remund the reader that none of this is quantitatively very precise. Rather, our results provide broad quantitative indications of the effects of policy. The empirical analysis from several economic models attempts to decompose the effects of the Round resulting from each of the four areas of reform as well as from full implementation of these reforms. The details of these models differ quite significantly, as do their representation of the reforms and the "base scenario" (i.e. economy without the Round) to which 18 they are applied. The global models treat South Asia as a single region, including India, Pakistan, Bangladesh, Sri Lanka and Nepal. Thus, our estimate of the impact of the Round on Pakistan has to be based on the effects estimated for the South Asian region as a whole. As a first approximation of the magnitude of the gains specific to Pakistan, the regional estimates are adjusted based on several characteristics for Pakistan in comparison to the aggregate for South Asia such as shares in total GDP, shares in total merchandise exports, and proportion of exports in restricted markets. The values of these factors are summarized for Pakistan and for South Asia as a whole in Table 14. To the extent that the regional estimates are dominated by Indian characteristics, we make further adjustments to reflect the weak liberalization undertaken by Pakistan and the differences in wages and labor productivity rates in Pakistan's manufacturing sector relative to India. This method of decomposition is crude but provides indicative measures of effects of the Round on Pakistan. We also estimate directly the effects of the changes in world agricultural prices due to the outcome of agricultural liberalization on Pakistan's terms of trade. We present results from different economic models to evaluate the sensitivity of the results under different assumptions and varying representations of the world economy. Since there is no perfect representation of the world, the range of results provides indicative estimates of the potential effects of the Round under different conditions. The RUNS model focuses on agriculture and assumes perfect competition in all sectors and countries. A variant of this model allows for imperfections in the labor market and potential employment effects as certain sectors contract while others expand as the value of output per worker increases due to liberalization under the Round. The model developed by Hertel, Martin, Yanagishima and Dimaranan (HMYD) assumes perfect competition and constant returns to scale. However, the analysis by HMYD considers a base case which allows for potential changes in the structure of the world economy between 1992 and 2005 without the agreement. Hence, the liberalization scenario is compared against a counterfactual of the economy as it would otherwise have been in 2005. This is in contrast with the other models where the effects of the Round on the world economy is evaluated such that it would have its full effect in the base year (1992). The model by Harrison, Rutherford and Tarr (HRT) has several variants -- a standard specification of perfect competition and constant returns to scale, another which allows for product differentiation and economies of scale and a third variant which allows for capital accumulation and greater flexibility to adjust (by assuming higher elasticities) over the medium- to long-term. 19 The GATF model by Francois et al has similar variants to the model by HRT, but assumes larger elasticities than the latter. Based on the third variants, these two models provide a set of estimates of income gains which are larger than the static results -- these estimates allow for some second round effects of liberalization such as potential increases in the incentive to invest as efficiency and incomes rise. Essentially, the estimated gains increase when the analysis allow for induced increases in the stock of capital resulting from higher levels of income due to liberalization. However, because the extra investment must be paid for in terms of foregone consumption, the higher gains refer only to total income rather than steady-state economic welfare. The following section reports summary estimates of the welfare effects of the Round based on the different economic models. All estimates refer to annual gains or losses (in 1992 prices) after the Round has been implemented. The welfare effects of trade liberalization arise from three main components: terms of trade effects, efficiency gains, and second-best effects due to induced changes in tariff revenues. The net effects for South Asia are decomposed into three components -- agricultural reforms, MFA reforms and other manufacturing reforms. The overall welfare gains from these three areas are then summarized. To understand these results better it is important to remember that the benefits of trade come from consuming or using imports. It is imports that increase the supply of goods and services to consumers and which offer life-enhancing variety2. Exports may well be important as one of the ways in which increased imports can be financed and so be of indirect interest, but they should not be primary focus of analysis. An increase in imports is just as beneficial if it comes about because import prices have fallen or if through reductions in protection consumers are led to, ceteris paribus, import closer to optimal amounts. 5.1 Terms of Trade Effects from Agricultural Liberalization Trade liberalization as a result of the Round will affect world prices of agricultural commodities. However, according to Ingco (1995), the extent of liberalization actually achieved in agriculture is relatively limited and less than previously expected. As a result, the changes in world prices for major agricultural products resulting from liberalization will be very small and are expected to have only a very small impact on welfare. The analysis based on the RUNS model by 12 The point here is that trade is welfare enhancing by increasing the supply and variety of goods available to consumers. This is not to say that the welfare function is just a function of the level of imports. 20 Goldin and van der Mensbrugghe (1995) predicts very small price changes in the range of -1% to 4% (Table 15). For Pakistan's major imports, prices are foreseen to rise in 2002 by 3.8% in wheat, 2.3% in coarse grains, and 1.8% in sugar; at the same time, world prices of some major imports are predicted to decline such as other foods (-1.4%). For Pakistan's major exports, such as rice and cotton, world prices are predicted to decline slightly from benchmark levels with rice prices declining by 0.9% and cotton by 1.2% in 2002. In this section, the detailed estimates of the changes in food prices from the World Bank/OECD model (RUNS) are used to calculate the change in the costs of Pakistan's current volumes of food trade. Combining 1990-92 trade data with the price changes generates the estimates of increased cost in food trade. Both absolutely and relative to total trade and income, the total net terms of trade losses are small, estimated at USS16.6 million or 0.04% of GDP in 1992 (Table 16). Pakistan suffers from adverse terms of trade effects because other countries are reducing export subsidies as well as lowering tariffs and attracting imports, which drives up the price of agricultural products in world markets. In particular, Pakistan's terms of trade is adversely affected due to lower world prices predicted for its major exports (rice and cotton) as well as from higher world prices of its major imports, such as wheat, sugar, dairy products, other foods, and non-food agricultural products. Without allowing for adjustments in the quantity of imports or exports at the 1990-92 average, the terms of trade losses are estimated to be largest in wheat (-USS9.3 million), cotton (-USS6.8 million), and rice (-USS3.0 million). These estimates theoretically represent upper bounds of the actual economic costs of higher world food prices to Pakistan. If the world price changes are transmitted into the domestic market, consumption and production will adjust which would result in a reduction of the extra costs of imports. Also, food imports partly occur because of inappropriate policies such as import subsidies and/or taxes on output. This is true in Pakistan where import subsidies exists in major food items such as wheat. In these cases, if higher world food prices are passed on to consumers, they will reduce the burden of these distortions, maybe even far enough to more than offset the extra costs of imports. These adjustments as well as other effects of the agricultural reforms are considered in the analysis based on the general equilibrium models. The model developed by HRT (1995) decomposed the overall agricultural reforms into three components -- reduction in export subsidies 21 (AGRI). reduction in production subsidies (AGR2) and reduction in import protection (AGR3). The combined effects of these reforms are also considered . The effects on South Asia as a whole and on Pakistan based on HRT and the GATT model by Francois et al are shown in Table 16. The model by HRT predicts net losses of about USS2 million for the region as a whole due to the reduction of agricultural export subsidies in the industrial countries. The larger estimates of terms of trade losses based on the GATT model are due to the assumption of higher elasticities than in the HRT model. The welfare effects of agricultural reforms for Pakistan based on the estimate for South Asia is difficult to estimate accurately without further analysis because the countries of the region differ in their trade structure, production subsidies and import protection by country. India, which dominates the trade balance for South Asia is a net exporter of agricultural products, which in 1990-92 averaged about US$1.9 billion in value. Pakistan, on the other hand, is a net importer of agricultural products (USS222 million in 1990-92) as shown in Table 15. The net gains to Pakistan will depend on how much adjustments in production and consumption will occur as well as the extent of efficiency gains from reduced production subsidies and import protection. To the extent that Pakistan will fail to achieve any liberalization of its own import protection in agriculture as indicated by the high ceiling bindings offered in the Round, the country will miss the opportunity to achieve the efficiency gains from own liberalization. This is true for the other South Asian countries where high ceiling bindings in agriculture were also offered in the Round. The estimated gains for South Asia based on the HRT model are mainly a result of lower production subsidies in the region and the rest of the world and from reduced import protection in the rest of world. The latter benefits South Asia through increased market access and lower tariffs facing their exports to the rest of the world. We approximate the net gains for Pakistan from agricultural reforms based on the size of its agricultural imports and exports relative to the aggregate for South Asia. Thus, after allowing for adjustments in production and consumption as in the general equilibrium analysis, the net terms of trade losses for Pakistan would be significantly lower than the results based on the partial analysis reported in Table 15. In addition, these losses are offset by efficiency gains from improved resource allocation when production subsidies are reduced as shown in row AGR2 and AGR3. The implementation of these additional reforms is predicted to result in a combined net gain for South Asia of about USS97 million and for Pakistan of about 22 US$12 million in 1992 prices. Additional welfare and income gains are achieved after allowing for potential economies of scale and induced investment due to liberalization. For Pakistan, additional gains due to these factors are estimated to be about US$29 million. These additional gains would have been higher if Pakistan carried out its own liberalization in agriculture. Table 16. Gains from Agricuirural Reform Increase in Welfare Billion of 19915 1MODELIVariant _Iout A,i Pakiri Harrison. Rurberford and Tarr (1995). standconstant rerurns/perfect competition 0.097 0012 AGRJ 1 .0 02 -0.003 AGRI 2 0 071 0 009 AGRJ 3 0.025 0.003 staticiincreasing rerurn s/im perfect competition 0.303 0037 steady SMIrelincreaSin"g returnsthigh elasticity 0.241 0.029 Francois, McDonald and Nordstrom (1995) stanc/constant rtrndperfect compermon -0 22 -0 027 static/incrasing returns/monopolistic competition -0.21 -0026 Induced invesumntincreasing returns/monopolistic compeation -021 -0.026 AGR - Reduce import distortions and subsidies on agricultural goods AGRI - Reduce export subsidies in agiculture AGR2 - Reduce production subsidies in agnculrure AGR3 - Reduce import distortions in agriculture Sources: Harrson. Rutherford. and Tarr (1995) Henre. Marmn. Yanigishima, and Dimaranan (1995) Fr.mcois. McDonald, and Nordstrom (1995) 5.2 Welfare Effects of Phasing-Out the Multifibre Arrangement The welfare effects of phasing-out the Multifibre Arrangement under the ATC will be determined by the following factors, namely, (i) the magnitude of the losses in quota rents in the restricted markets in comparison to the potential gains associated with higher output and export sales, (ii) the potential gains in efficiency costs to the extent that resources shift to the textiles and clothing sector assuming that Pakistan have an ex-post comparative advantage in these sectors, (iii) the extent of current restrictions relative to Pakistan's supply potential, and (iv) the magnitude of potential benefits from inframarginal rents on sales to unrestricted markets as prices rise in these markets. The magnitude of the effects from quota liberalization depend upon the share of its exports sold to quota restricted markets and on the relative magnitude of the price decline in the restricted market and the price increase in the unrestricted markets. Liberalization of textile and 23 clothing quotas will reduce the domestic prices of textiles and clothing and therefore will reduce the demand for imports of goods which are close domestic substitutes. Behind most of these factors lies the crucial question "how efficient is Pakistan in comparison with other suppliers in a free trade environment?" If it continues its trade reform program and continues to liberalize it own trade by allowing prices to be passed on to producers and pursuing flexible economic policies at home, Pakistan will be able to exploit the market access advantages offered by the industrial countries. This, in turn, will allow it to reap the pseudo- dynamic benefits of the-induced investment from higher incomes. The potential growth of exports and Pakistan's ability to gain from MFA liberalization would also crucially depend on other factors, such as measures to improve the quality of textiles and clothing exports and re-structuring of the domestic industry to enhance the productivity and efficiency of the sector, particularly its spinning and ginning operations. The welfare and income effects of MFA liberalization on South Asia based on several economic models are reported in Table 17. The proportionate welfare gains for Pakistan will probably be somewhat higher than the average estimate of welfare gains for other South Asian countries, given that Pakistan's exports to restricted markets tend to more tightly bound than those of other South Asian countries -- see the quota utilization rates in Table 11 and 12. Furthermore, the growth in the textile and clothing quotas in major markets as a result of MFA liberalization (reported in Table 9 and 10) indicate a faster quota growth rate for Pakistan compared to India. Other characteristics of Pakistan's manufacturing sector compared to other South Asian countries are summarized in Table 18. Pakistan accounted for more than 14% of total GDP and 20% of total South Asian merchandise exports in 1992. Next to India, Pakistan supplied more than 19% of total South Asian exports to OECD countries in 1992. More than 85% of Pakistan's exports to OECD countries are textiles and clothing. Based on these characteristics, the MFA-based gains for Pakistan are first approximated by multiplying the total change in welfare for the region by the share of Pakistan's total merchandise exports in total South Asian exports -- around 26% in 1992. This assumes that at the minimum, Pakistan's net gains from the MFA reforms will be proportional to the size of its exports. The estimated welfare effects for Pakistan based on this assumption are shown in the column labeled "low scenario" in Table 17. This represents a lower bound since it does not 24 account for the potential increases in export volumes and larger shares in total South Asian exports due to the higher growth rates in textiles and clothing as discussed in section 4.2. Thus, an alternative calculation is made which, recognizing Pakistan's faster rate of quota growth over the MFA phase-in period and its greater degree of restriction under the MFA (both relative to India), attributes a larger share of the gains to Pakistan. In this view we assume that Pakistan's share in 2004 will be two-fifths higher than its 1992 share - viz. 36.4%. The results based on this assumption are shown in the column labeled "high scenario" in Table 17. In both the high and the low versions of its standard static analysis, the model by HRT estimates that South Asian countries gains from the abolition of the MFA (Table 17). The second model, by HMYD, also predicts substantial gains resulting from both the accelerated growth rates in textile and clothing quotas over the period to 2005, and the eventual abolition of the MFA in that year. Both it and the static version of the GATT model predict that the losses in quota rents will be more than offset by the stronger expansion in exports to restricted markets. HMYD estimate that Pakistan could gain welfare worth about US$275 million (in 1992 prices, but in "2004" economy) due to the acceleration in quota growth rates, and an additional US5510 million when the MFA then is abolished. HYMD also predict large potential gains for other Asian countries: the largest are foreseen for Indonesia (USS2.48 billion in 1992 prices) and China (USS5.87 billion in 1992 prices). The GATT model, on the other hand, suggests static gains of US$385 million from textile liberalization in an "1992" economy. The differences in these results are partly due to differences in the assumption of demand elasticities. The model by HRT contains smaller elasticities of demand for traded goods than the HMYD and the GATT models, resulting in less expansion in export sales available to offset the losses in quota rents. The differences also reflect the fact that the GATE model includes the benefits of the tariff reductions in textile and clothing in this scenario, whereas the other models deal only with the MFA proper (i.e., the accelerated growth and eventual abolition). Pakistan might reasonably be expected to achieve the greater potential gains indicated in the column labeled "high scenario" when allowance is made for its tighter constraints and possible larger shares in total exports by 2005 when the MFA is abolished. In this situation, the estimated increase in welfare from abolition rises to more than US$700 million (in 1992 prices) based on HYMD and to about US$539 million (in 1992 prices) based on GATE by the end of the 25 transition period. The faster growth in quotas gives Pakistan a larger share in total South Asian exports, and thus a larger share of welfare gains. Another aspect with potentially important implications for the gains from the agreement is market structure. If firms are assumed to produce differentiated products, subject to increasing returns to scale, trade liberalization may lead to important welfare gains by rationalizing industries and by producing a greater variety of products. These factors are considered in the second lines of results reported for the HRT and GATE models. Potential larger gains result from lower costs as producers exploit scale economies and expand production. That is, liberalization raises competition and efficiency among firms as output expands. In addition, increased welfare gains are also achieved by allowing consumers access to a more diversified basket of goods. In this situation, Pakistan is predicted to gain about US$231 million by HRT and to gain by about USS2.22 billion based on the GATT model assuming current shares in total South Asian exports are maintained. A third set of results based on the HRT and GATT models allows for medium-term dynamics resulting from the increases in incomes resulting from second-round effects of liberalization. That is, additional gains are achieved from liberalization through the increase in incentives to invest as efficiency improves. The resulting induced investment raises the income gains from liberalization, assuming that the initial welfare gains are invested rather than consumed. The additional gains from induced investment more than offset the adverse effects from the losses in quota rents predicted by HRT in their standard model. Furthermore, additional gains are predicted due to economies of scale and the fact that over the long-run, producers are assumed to be more flexible than in the short- or medium-term, thus allowing for higher growth in output. Considering all these factors, the potential gains to Pakistan from MFA abolition rise significantly. Assuming current shares in total exports, the estimated gains range between US$500 million (in 1992 prices) based on the HRT model to more than US$2.3 billion (in 1992 prices) based on the GATT model. Allowing for potential increases in export shares these gains increase to between US$700 million to more than USS3.3 billion (in 1992 prices) It should be recalled that these are income, not welfare gains, and also that these estimates are very imprecise. GATT's estimate of the benefits for South Asia of the textile liberalization look optimistic at 3.1 percent of GDP and our related decomposition which suggests 26 benefits of 8 percent for Pakistan seems out of court. On the other hand, even if such figures are discounted severely, they show the very large stakes that Pakistan has both in the Round and in responding rationally to it. HYMD also look at the effects of quota growth acceleration and the elimination of the MFA on the patterns of output and trade in textiles and clothing. The estimates measure the difference between the percentage change in output without the Round (under the MFA) and those under the ATC. The results show that quota acceleration will cause output of textiles and wearing apparel to expand by 3% and 12%, respectively. Exports of textiles and wearing apparel expand by 9% and 32%, respectively, than would otherwise be the case without the Round. Abolition of the MFA by 2005 will result in output expansion in South Asian textiles (12%) and wearing apparel (5 1%), with corresponding growth in exports by 23% and 123%, respectively. Table 17. Gains fron MFA Rtforrm Model/Vaiant Increase in Welfare (billiocs in 19912 S) Pabstan (scenarios) South Asia Lw Hinh Harrison. RuLhrrford and Tarr (HRT) 1995 stanc/constant retimspefect coripenton 0 629 0.164 0.229 static/incrtasin, rrumsArrperfect corrpeation 0887 0231 0323 induced nesmentl/ increasin. rerurns/ high cLasucity 1 924 0 5( 0.700 Helre Martii Yanrishirru & Drainn (HYNID) I995 staic/constant returns to scakWpefea corpetition AT growth rates 1 056 0.275 0384 NFA Aboltion 1960 0.510 0713 Francois. McDrnld & Ncrdstmr (GATil 1995 staticconstant rearns to scalepaerfect corrVeion 1 480 0 385 0.539 static/increasing ruumrs/mnoposoc competition 8.5-10 222) 3.109 induczd insmerrrntmcreasing rmusirrnopolisuc corypetition 9180 2-387 3.342 Sarces: Harrison. RuLthrford, and Tarr (1995) Herret Marmi. Yanigishirm. and Dirmranan (1995) Francois. McDonald & Nordstrom (1995) 5.3 Gains from Other Manufacturing Reforms The reforms considered in this section vary by model. HRT consider mainly tariff reductions in textiles and clothing as well as in other manufacturing sector. HYMD also consider tariff cuts (as well as reductions in agricultural export subsidies) but with bilateral exports of textiles and clothing restricted to grow at "normal" growth rates. The tariff cuts increase import 27 demand, which raises the per unit quota rents accruing to the exporting countries such as Pakistan. The GATT, on the other hand, considers here only tariff cuts on industrial goods excluding textiles and clothing. The effects of Pakistan's own tariff reductions are difficult to estimate, since its tariff reductions are rarely bound, and, for lack of data, the economic models do not include all aspects of Pakistan's own liberalization in the formulation of South Asian protection changes in protection. The models are based on tariff reductions by India with some supplementary data on protection rates for Pakistan and Sri Lanka. To the extent that Pakistan carried out less tariff reductions in the Round than did India, the gains to Pakistan will be substantially less than indicated by the average gain for South Asia. The welfare effects for South Asia as a whole due to tariff reductions and other manufacturing reforms based on the three models are reported in Table 19. The South Asian results are decomposed as follows: one quarter of the total effect is attributed to partner countries' liberalization, with Pakistan's share being its share of the region's merchandise exports (23%). The remainder is attributed to South Asia's own liberalization, and only 10% of this is assumed to flow through to Pakistan. In view of the latter's cautious offer at the end of the 1993 this is probably over-generous. The net effect is that Pakistan is estimated to receive 13.25% of the South Asian gains from this aspect of the Round, ranging from minor loses in the GATT static calculations to over USS. billion in HMYD. The latter, however, reflects the rent transfer implicit in holding the quantitative restrictions of the MFA in place when tariffs on textile and clothing are reduced. It must also be recalled that these calculations exclude any allowance for Pakistan's post-Round autonomous liberalization's either in general, or in particular, in textiles and clothing. To the extent that Pakistan intends to diversity into non-traditional manufactured exports by, say, encouraging the creation of new small firms and allowing all firms to export freely at will, the liberalization of "other manufacturing' imports by trading partners is an important potential benefit of the Round. 28 Table 19. Gains from other Manufacturins Reforms Nodel/Variant Increase in Welfare (bilion in 1992 S) South Asia Pakistan Harrison. Rutherford. and Tarr (1995) static/constant returns/perfect competition 2.730 0.362 staficrincreasing returns/imperfect competiuon 3.071 0.407 induced in%estrnentl/ Increasing returns/ high elasticity 5.298 0.702 Hertel Martin Yani ishima & Dimaranan 1995) static/constant returns to scale/perfect competition 8.084 1.071 Francois. McDonald. & Nordstrom (1995) static/constant returns to scale/perfect competition -0.020 -0.003 static/increasing retums/monopolistic competition 1.100 0.146 induced investrncntincreasing returns/monopolistic 2.090 0.277 competition Sources: Harnson, Rutherford. and Tarr (1995) Hertel, Martin. Yanigishima, and Dimaranan (1995) Francois. McDonald & Nordstrom (1995) 5.4 Full Reforms The sum of the welfare and income effects of agricultural liberalization, MFA elimination, and tariff reductions in manufacturing sectors are reported in Table 20. By design, the effects from each of these reforms are additive. In reality, however, the impacts of different reforms of the Round are likely to interact. Overall, Pakistan is foreseen to achieve a net gain from the implementation of these reforms. The adverse terms of trade effects from agricultural liberalization estimated in section 5.1 are predicted to be offset by the welfare and income gains from liberalization of the MFA and tariff reductions in the manufacturing sector. In static analyses the estimated gains vary from US$538 million in 1992 and to nearly US$2 billion in 2004. Once allowance is made for induced investment effects they increase to US$1.23 billion in HRT and US$2.638 billion based on Francois, et al. These figures suggest that, despite its own rather cautious approach, the Round has overall been very positive for Pakistan. 29 Table 20. Gains from Full Reforms Model/Variant increase in Welfare (billions in 1992 S) Pakistan South Asia Low Hieh Harrison. Rutherford. and Tart (199) stauc/constant returns/perfect competition 3.286 0.538 0.603 static/increasing retums/imperfect competition 3.719 0.675 0.767 induced investmentL increasing returns/ high elasticity 6.745 1.231 I.431 Hertel. Martin. Yaniishima& Dtmaranan (19951 static/constant returns to scale/perfect competition I 1.101 1.856 2.168 Francois. McDonald. & Nordstrom ( 1990l static/constant returns to scale/perfect competition 1.230 0.355 0.509 staticlincreasing retums/monopolisic competition 9.240 2.3-10 3.229 induced investmentlincreasing returns/monopolistic competiton 10.270 2.638 3.593 Sources: Harnson. Rutherford, and Tarr (1995) Hertel, Martin. Yanigishima. and Dimaranan (1995) Francois. McDonald & Nordstrom (1995) 6. How and Under What Conditions can Pakistan take advantage of the post- UR trading environment? The post-UR global economic environment provides Pakistan with a more favorable setting in which to accelerate and deepen reforms that will assist the country to exploit new opportunities in world trade. The Uruguay Round trade liberalization--in particular, the liberalization in textiles and clothing under the MFA as well as the tariff reductions in the industrial and developing countries-- provide possibilities for expanded trade for Pakistan. The extent of the benefits will depend on how Pakistan takes advantage of the new opportunities. By reducing trade barriers to exports, the agreement will reward producers who are productive and efficient. The gains will not be automatic on either side of the equation. they depend on effective implementation of the agreed reforms. Importers retain many elements of discretion in their trade 30 policies. The new rules and dispute settlement procedures may improve on the old system, but they cannot prevent domestic pressures for protectionism. As long as the actions agreed to are effectively implemented, however, and as long as the industrial countries honor their commitments on the MFA, Pakistan will benefit from the improved market access opportunities. More importantly, Pakistan's ability to take advantage of the new trading environment depends on its own commitment for further trade reform, its determination to allow market signals and price changes to be passed on to producers and consumers, and its willingness to pursue flexible economic policies at home. Further liberalization is needed in Pakistan in key areas such as agriculture and in manufacturing sectors such as textiles and clothing where applied protection remains high. Trade liberalization will make markets more competitive, forcing firms to reduce their margins and either to cease production or to increase efficiency by raising their output. Though the evidence is limited, the dynamic growth effects of liberalization--eg through increases in the incentives to invest and undertake research and development (R&D)--could be an important source of second-round effects.13 Better economic policies in general will enhance Pakistan's ability to thrive in the post- UR economic environment. The experiences in other Asian countries, while diversified, provide evidence that macroeconomic discipline, investments in human capital and outward orientation are "core policies" that laid the foundation for economic growth (Leipziger and Thomas, 1993). Macroeconomic stabilization and fiscal consolidation will be required to reduce pressures on prices and real exchange rates, while increasing domestic savings will allow more investment. Pakistan needs to press ahead with outward-oriented structural reforms that maximize competition in product and factor markets, ensure flexible entry and exit to domestic industries, and expand the opportunities for the private sector. Such policies should improve efficiency and raise domestic productivity growth and allow Pakistan to reap the benefits of increased access to private capital flows and the expanding economic ties with the fast-growing East Asian region. The question of Pakistan's international competitiveness is a complex one which requires careful analysis. Competitiveness has been evaluated and measured in different ways 13 Some supportive evidence is provided by studies (e.g. Sachs and Warner, 1995) that show positive correlation between openness of an economy and growth. Some evidence for dynamic economies of scale associated with learning by doing, investment in R&D and human capital, and specialization is shown by Backus et al (1991). 31 such as export growth, unit value of exports, net export volumes and values, comparative production costs, value added, etc. But each of these measures has limitations. In particular, each is an intermediate step towards the ultimate goal of generating economic welfare and each can be misleading if viewed in isolation or if considered sector by sector.14 The overall level of exports or the balance of trade are basically consequences of macroeconomic conditions; higher competitiveness will not necessarily improve the trade balance but merely render a given imbalance consistent with higher levels of income after all the ramifications for the exchange rates and consumption have been worked through. Similarly, supporting one sector's exports will reduce performance elsewhere- in the economy unless macroeconomic conditions are changed. Thus, genuine competitiveness will not be achieved through unfair trade policies that may jeopardize future trade relations or through excessive financial assistance or other support to producers in one export-oriented sector while possibly reducing employment and income opportunities in other sectors with better long-term prospects. For Pakistan to achieve sustainable competitiveness in major exports, it must raise product quality, improve product technology and boost production efficiency. Protectionist support to the spinning sector should be removed, forcing firms to compete without special subsidies. In the textiles and clothing sector, the government should remove the distortions in the market for raw cotton, diversify its product range, improve productivity and quality standards. This is especially important for the weaving sector where productivity has declined in recent years. According to local sources, the loom efficiency of the mills in Pakistan has remained low at 55 to 60 percent as compared with 85 to 95 percent in Europe and North America. At the same time, labor efficiency is reported to have declined by about 8 percent in recent years. The concern of the government that the Uruguay Round reforms will reduce welfare through lower public sector revenues and larger budget deficit needs careful analysis. While trade reforms have both favorable and unfavorable effects on trade tax revenue, the direction and magnitude of effects depend on the actual content of the reform program and characteristics of the country. Import liberalization involving the elimination of tariff exemptions or the replacement of 1 Paul Krugman (1994) argues that "competitiveness is an elusive concept and the obsession with it could be dangerous." He points out that international trade is not a zero-sum game: "If the European economy does well, it need not be at the US expense; indeed, if anything a successful European economy is likely to help the US economy by providing it with larger markets and selling it goods of superior quality at lower prices." Hence, international trade is characterized by "win-win" relationships of internationally integrated economies rather than by "win-lose" competition between nations. 32 quantitative restrictions by tariffs is unambigously revenue enhancing, while tariff reductions are more prone to lower trade tax receipts. Pakistan's pre- and post-UR trade reform include both reductions of exemptions and the removal of bans and quotas and thus may offset the unfavorable revenue effect of tariff reductions. It may, however, still be necessary to consider new less- distortionary revenue-generating measures through a domestic tax reform initiated prior or along with a program of tariff reductions. This will complement stabilization efforts through a period of increasing trade and domestic tax receipts and prepare the ground for further tariff reductions subsequently. 7. Summary, Conclusions and Perspectives for Future Reforms The Uruguay Round trade agreement will have significant implications on the economic prospects of developing countries over the next decade and beyond. If effectively implemented, direct benefits in the medium to long-term will result from both increased market access to developed countries markets, and from enhanced efficiency originating from the countries own liberalization commitments. Potential indirect gains which are difficult to quantify may also result from improved security of market access -- through increased coverage of tariff bindings, clearer rules and standards and strengthened dispute settlement procedures. The distribution of these benefits will, however, be uneven. The benefits of improved trade policy come directly in terms of better access to imports (these, after all, are what directly generate welfare). Thus in trade policy the key word is "WYDIWIG"- what you do is what you get. That is, the gains from multilateral reforms tend to be larger, the greater the extent of own liberalization achieved. This paper provides a quantitative evaluation of the Uruguay Round commitments of Pakistan and its trading partners' and the potential impact of the agreement on Pakistan's trade and incomes. The paper concludes that Pakistan stands to gain significantly from the Uruguay Round commitments on tariff reductions and elimination of non-tariff barriers facing its major exports. However, by committing to only a minor degree of liberalization in its own schedule of tariff concessions appended to the Marrakesh Agreement, Pakistan has lost an opportunity to benefit more strongly from the Round. Some key points and conclusions of the analysis are: Overall, the Uruguay Round provides a framework for liberalizing world agriculture, but much less liberalization was achieved than previously expected. In contrast, substantial liberalization was achieved in manufactures trade, both in the area of tariff reduction 33 and through the abolition of nontariff barriers such as Voluntary Export Restraints and the quotas imposed under the Multifibre Arrangement. The UR Agreement on Textiles and Clothing (ATC) is built on three areas: a liberalization process to progressively expand existing quotas; a program for integrating textiles and clothing products into GATT rules and a special safeguard to deal with cases of market disruption during the transition. For developing countries as a whole, the main improvements include the expansion of bindings (commitments on maximum tariffs) to cover 99% of industrial countries' imports and the reduction of the trade-weighted average tariff by 40% from 6.2% to 3.7%. In terms of total developing countries' exports to industrial countries, the reduction in the average tariff is 30%. Pakistan was generally very cautious with its offers under the Round. In agriculture, it offered very high tariff ceiling bindings (100-150%). In manufacturing, it committed to bind only 25% of its tariffs, mostly at ceiling bindings of 20-50%. By failing to bind the remaining 75% of its tariffs in manufacturing and by making no commitments to reduce protection in agriculture, Pakistan lost the opportunity to achieve additional potential gains from a more efficient resource allocation and lower costs resulting from lower average and variability of protection. However, in April 1995 this shortcoming was partly ameliorated by binding tariffs in textiles and clothing - mostly to 35 % by the year 2006, which while not a particularly liberal target was a considerable improvement over the current level of generally 70%. Unfortunately, this binding arrived too late to be factored into the quantitative examined here. Given the limited extent of own liberalization committed by Pakistan, most of the potential gains identified here for Pakistan will come from improvements in market access for its manufacturing exports due to tariff reductions and phasing-out of quantitative restrictions and other non-tariff barriers in major trading partners. Overall, Pakistan's total merchandise exports to OECD and developing countries will benefit from a weighted average tariff reduction of 2.4% and 6.9%, respectively. These concessions will result in a weighted average post-Round tariff of 6.9% in the OECD countries and 9. 1% in developing countries. Exports of basic manufactures which includes textiles and clothing will enjoy a tariff reduction of 8.9% in developing countries and 2.2% in OECD countries. 34 Enormous progress was made in reducing nontariff barriers. For Pakistan, the estimated direct impact is very significant -- the incidence of NTBs affecting Pakistan's exports to OECD countries will decline significantly from 50.4% to 6.9%. For non-oil manufacturing exports, the incidence of NTBs will decline from 50.4% to 6.8% and for other manufactures from 59.6% to 8.2%. Significant expansion in Pakistan's market access in major markets for textiles and clothing will be achieved by the increase in the export quotas over a ten-year period and second by the eventual abolition of the MFA in 2004. The extent"of the potential welfare and income effects for Pakistan due to increased market access for its exports textiles and clothing will depend on several factors including the degree of current restrictions (indicated by the quota utilization rates and the shares of Pakistan's exports sold in the MFA restricted markets). In addition, the extent of the gains depend on Pakistan's relative efficiency and competitiveness compared to other exporters, and the ability to expand exports. The smaller the current quota relative to its supply potential, and the larger the proportion of its exports to restricted markets, the larger will be the gains from liberalization. The analysis highlights the following results: Pakistan's MFA quota utilization rates in recent years remain high, with some 100% in 5 categories and over 80% in 12 categories in the United States in 1993. In the EU, Pakistan's quota utilization rates were between 80%-100% during the same period. The very high rate of quota utilization rates indicates that the MFA is a binding constraint on Pakistan's exports, with the highest restriction on exports of higher value-added items. In addition, the distribution of Pakistan's exports between restricted and unrestricted markets indicate significant potential gains from the liberalization of MFA quotas under Round. Given the complexity of the agreement, the estimated effects cannot be precise. Our best guess is that, assuming current shares in total exports, Pakistan could gain more than USS500 million (on a 1992 base and in 1992 prices) from the abolition of the MFA. This would represent a lower bound since it does not account for potential increases in export shares due to Pakistan's higher growth rates in textile and clothing quotas compared to other South Asian countries under the ATC and the tightness with which the MFA binds Pakistan. Allowing for the growth in Pakistan's share of South Asian exports due to these factors, its gains might get as high as USS713 million. 35 If they are based on how the world economy will look in 2004, the benefits from the abolition of the MFA look even higher. This is because without reform the MFA would have become more restrictive over time as comparative advantage shifted out of textiles and clothing in the industrial countries and the NICs while it increase in developing countries. In the absence of reform the MFA would have been a greater burden by 2004, and its abolition a correspondingly greater benefit. The Uruguay Round agreement provides significant potential benefits for Pakistan. The possibilities for expanded trade stemming from the liberalization in textiles and clothing as well as partners' tariff reductions in textiles and other non-traditional manufacturing exports, will be important for Pakistan. The extent of the actual gains, however, will depend on how Pakistan take advantage of the new possibilities in the changing trade environment. By removing quantitative restrictions, the agreement will reward producers who are efficient and can expand their output. To help in this regard Pakistan must liberalize its own economy --at the minimum stick to its announced plans for tariff reductions -- to ensure that resources flow to the area of greatest economic efficiency, including in textiles and clothing itself. It must also address any constraints that exist in the creation and growth of new firms-- such as access to credit and utilities, limits on which firms can export and official and unofficial bureaucratic hurdles. Even then the gains will not be automatic. Pakistan must avoid discretionary protection through the activities of the National Tariff Commission or, even worse, the introduction of anti-dumping laws. There will be pressure for protection, frequently justified on the grounds that jobs are being lost. In fact it is very unlikely that there will be net job losses from the Round (indeed, one would expect the opposite), but there will be strains in some sectors. Ensuring general encouragement for the creation of new firms will help to offset job losses as large inefficient firms, used to high protection, contract. Pakistan must also, with other developing countries, ensure the full implementation and monitoring of the agreed reforms, by delivering on the commitments the industrial countries expect from them under the Round and by being prepared to use the new dispute settlement rules to ensure that the MFA is not replaced by something worse. Finally, Pakistan's ability to gain from MFA liberalization will also depend on factors such as measures to improve the quality of textiles and clothing exports and re- structuring domestic industry to enhance productivity and efficiency in that sector. 36 Pakistan stands to gain from the Uruguay Round trade agreement, notably from the possibilities for expanded trade arising from the liberalization in textiles and clothing quotas and from the tariff reductions in the industrial and developing countries. Income from exports of textiles and clothing products will increase when the MFA is eliminated and tariffs reduced, despite the loss of the quota rents associated with the former. As indicated above, no estimate of the effects of something as complex as the Uruguay Round can be precise.-, Our best guess is that, for the simple effects quantified, the estimated potential gains for Pakistan from MFA reforms amount to about half a billion dollars if current shares in total South Asian exports are maintained, and to about one billion if the potential increases in exports share due to faster quota growth and the current restrictiveness of the MFA are factored in. The total annual estimated gain from overall reforms range between USS538 million and more than USS3.5 billion at 1992 prices, if potential second-round effects of liberalization are considered. The former estimate is almost certainly nearer the mark for the set of effects that has been modeled, but not necessarily so when all the unquantifiable effects such as services, changes in rules and TRIMS, are added in. The potential benefits of abolishing the MFA and other non- tariff barriers are very significant, but they are not guaranteed. First, as the MFA restrictions are phased-out participating countries must abstain from using other protectionist measures such as general safeguards, anti-dumping measures and special safeguards. A willingness by exporters to honor their reciprocal commitments, such as in TRIPs and services, and a readiness to make use of the new dispute settlement procedures will both help in this respect. Second, the extent of the gains will also depend on how efficient Pakistan is in comparison to other suppliers in an open trade environment. If Pakistan continues its trade reform program and allows the resulting prices to be passed on to producers and consumers, and if it pursues policies for flexibility at home, it will be able to exploit the market access advantages offered by the industrial countries and will be able to reap the benefits of the induced investment from higher incomes. In the critical area of textiles and clothing, Pakistan's growth of exports will also depend on other factors, including measures to improve the quality of textiles and clothing exports, allowing domestic industry to re-structure to enhance productivity and efficiency. 37 The principal danger facing Pakistan in the aftermath of the Uruguay Round is that entrepreneurs and industrialists do not rise to the challenge which it poses. While nothing can ever be completely guaranteed evidence from around the world and over several decades suggests that, faced with the right incentives and freed from unnecessary constraints, entrepreneurs will deliver the desired response. Thomas et al (1991) and Papageorgiou, Michaely and Choksi (1990), for example, between them report many successful trade liberalizations and identify some of the conditions necessary for success. Among the latter are maintaining a realistic real exchange rate and ensuring that suitable alternative sources of public revenue are available. At a more micro level, it is necessary to persuade entrepreneurs that the liberalization will not be reversed, either in response to the macro-economic failures just identified or, in the case of individual countries, through a grant of tailor-made protection on demand or the grant of special tax or tariff concessions. If they suspect that discretionary protection might be available, firms will not incur the short-term costs of adjustment and will instead devote vital energies to lobbying rather than improving efficiency. Two particular dangers may be identified in this respect. First, the National Tariff Commission exists to examine requests for protection by industries that feel threatened by import competition. It currently deals with about 35 cases per year and so potentially offers firms a fairly direct way of circumventing at least some of the effects of the Round. One can probably not do without some kind of safeguard such as this, but every effort must be made to ensure that it offers support only where justified in the national interest. Adhering to WTO procedures (Article XIX) helps in this regard, but much more can be done to increase efficiency, including: an explicit and public commitment to forgo the use of quantitative restrictions and the newly introduced discrimination clauses; introducing a formal procedure for publicizing cases and hearing from consumer/user goods; being explicit that protection is only to be granted when it is in the interests of the economy as a whole; and a commitment to publish the calculations on which such national interest decisions are based. The second risk of destructive discretionary trade policy lies in anti-dumping actions. Anti-dumping is currently the instrument of choice for many governments seeking to protect a domestic industry. It is selective (ie discriminatory), offers protection above bound tariff levels, and has an attractive rhetoric in which the problem is perfidious foreigners rather than domestic short-comings. Moreover, it does not have to be used to be effective --the mere threat of anti- 38 dumping action has been shown to curtail imports. The best altemative is to eschew anti-dumping law and use safeguards instead. There is no sense in an obligation to have anti-dumping law under the WTO, rather a commitment that, if one does have it, it will be administered in a particular and fairly onerous fashion. The Uruguay Round introduced new administrative regulations for anti- dumping actions, but did virtually nothing to address the fundamental short-coming that it allows dumping to be found where none exists. Virtually every country which has a workable anti- dumping law has found it progressively stretched and exploited until it runs out of control. Pakistan has been on the receiving end of such actions in other countries, and the govemment should not deceive itself that it will fare better than administrations elsewhere. If anti-dumping law is introduced in a way which makes it accessible to industry, it will almost certainly lead to excessive protection and a serious loss of competitive pressure from imports. Finally, it is often objected that trade liberalization - and hence the Uruguay Round - will lead to unemployment. It will, of course, destroy jobs, but it will also create them. Experience from elsewhere suggests quite strongly that it will not have a net job-destroying effect; indeed, given that the Round should lead Pakistan to import capital-intensive goods and export labor- intensive ones more actively, one would expect it to boost jobs and/or real wages. Recent cross- country evidence -- Harrison and Revenga (1995) - finds no evidence that liberalization tends to cause net job losses. It is true that large, protected, inefficient firms do frequently have to contract (although they go out of business relatively infrequently), and that such contractions are quite conspicuous. However, in many economies such job losses are more than offset by expansion by small and new firms, often in new areas of activity. To increase the chances of reaping such offsets, governments should ensure that constraints on small firms are removed in areas such as access to credit and utilities, building permissions, unnecessary controls on who may export, labor regulations, and. bureaucratic licensing. In fact, given the likely boost to Pakistan's textile exports, the Uruguay Round seems unlikely to cause much job loss or distress (although the recent liberalization of imports in this sector will probably cause some), but it would still be desirable to increase flexibility in non-traditional sectors by such policy reforms. 39 References Chyc, Karen, Hanslow, Kevin, Hertel Thomas, Lanclos, D. Kent, and Tsigas, Marinos. 1994. "GTAP Behavioral Parameters," in T.W. Hertel (ed.), Global Trade Analysis Using the GTAP Model, Unpublished Manuscript, Department of Agricultural Economics, OPurdue University. Dean, J.M., Desai, S. and Riedel, J. 1994. Trade Policy Reform in Developing Countries since 1985: A Review of Evidence, World Bank Discussion Paper No. 267, The World Bank. Finger, J.M. 1995, "Legalized Backsliding: Safeguard Provisions in the GATT," in The Urupuav Round and the Developing Economies, edited by Martin, W. and L. Alan Winters, World Bank Discussion Paper No 307, World Bank, Washington, D.C., October. Francois, Joseph, Brad McDonald, and Hakan Nordstrom. 1995. "Assessing the Uruguay Round." in The Uruguay Round and the Developin2 Economies, edited by Martin, W. and L. Alan Winters, World Bank Discussion Paper No 307, World Bank, Washington, D.C., October. GATT, November 1994. Trade Policy Review Mechanism: Pakistan. Goldin, Ian and Dominique van der Mensbrugghe. 1995. "The Uruguay Round: An Assessment of Economywide and Agricultural Reforms." in The Urupuay Round and the Developin! Economies, edited by Martin, W. and L. Alan Winters, World Bank Discussion Paper No 307, World Bank, Washington, D.C., October. Harrison, Glenn, Thomas Rutherford, and David Tarr, 1995. "Quantifying the Uruguay Round." in The Uruguay Round and the Developing Economies, edited by Martin, W. and L. Alan Winters, World Bank Discussion Paper No 307, World Bank, Washington, D.C., October. Hertel Tom, Will Martin, Koji Yanagishima, and Betina Dimaranan. 1995. "Liberalizing Manufactures Trade in a Changing World Economy." in The Uruguay Round and the Developing Economies, edited by Martin, W. and L. Alan Winters, World Bank Discussion Paper No 307, World Bank, Washington, D.C., October Ingco, Merlinda, 1995. "Agricultural Trade Liberalization in the Uruguay Round: One Step Forward, One Step Back?" Policy Research Working Paper No. 1500, World Bank, Washington, D.C. August. Background paper prepared for the "Conference on The Uruguay Round and the Developing Economies." World Bank, Washington, D.C., January 26-27. Kemal, A.R. 1995. "Import and Export Restrictions in Pakistan," Pakistan Institute of Development Economics, Islamabad, Pakistan. Krugman, P. 1994. "Competitiveness: A Dangerous Obsession," Foreign Affairs, March/April, Vol. 73, No. 2, pp. 28-44. Leipziger, D. and Vinod Thomas, 1993. East Asian Experience, World Bank, Washington D.C. 40 Low, Patrick, 1994. "Pakistan: Uruguay Round and Trade Policy Reform ino the Next Century," Background paper for Pakistan 2010 Report, unpublished. Martin Will, Odin Knudsen, Marinos Tsigas and Dominique van der Mensbrugghe, 1992. "Welfare Implications of Partial Agricultural Liberalization in a Distorted World Economy." Unpublished manuscript, International Trade Division, World Bank. Papageorgiou, Dimitri, Michael Micaely and Armeane Choksi (1990) Liberalizing Foreign Trade in Developing Countries: Lessons from Experience, Washington D.C. The World Bank. Riordan, M.E and T.G. Srinivasan, Pakistan's International Linkages: Evolution and Prospects, Background paper for Pakistan 2010 report, World Bank, unpublished. Thomas, Vinod, John Nash and associates (1991) Best Practices in Trade Policy Reform, New York, Oxford University Press. 41 Tablc I Pakisans Pnncical Exports By Ca(egory. 1987-93 Shar COMMODITY 197 19s8 1939 1990 1991 1992 1993 1993 (USS mikon) TOTAL TOTAL TRADE -115 4-"s5 -693 5522 646-4 7254 6842 1 CoCO% 65 TEXTILE YARN.FABRIC ETC IS-11 1799 2002 2597 3134 348-1 34C0 49.69% 34 CLOTHING 606 623 731 1092 1239 1557 1692 24.73% 26 TEXTILE FIBRES 492 770 733 501 511 650 273 3.99% 04 CEREALS AND PREPARATIONS 303 335 310 24- 416 396 252 3.69% 61 LEATHER.DRESSED FUR.ETC 270 273 265 314 271 253 240 3.51% 03 FISH AND PREPARATIONS 121 125 92 107 110 138 206 3.01% 39 MISC MANUFCTRD GOODS NES 85 96 114 147 185 177 202 2.95% 86 INSTRMNTS.WATCHES,CLOCKS 54 64 62 30 93 94 IC6 1.5-'% 05 FRUIT AND VEGETABLES 53 55 53 62 49 63 76 1.11% 29 CRUDE ANIMALVEG MAT NES 49 75 60 62 52 51 66 0.96% C6 SUGAR AND PREPS HONEY 32 56 .'4 46 38 66 62 0.90% 33 PETROLEUM AND PRODUCTS 23 22 -2 67 94 33 50 0.73% 35 FOOTWEAR 19 21 16 23 27 3- 30 0.44% 07 COFFEE TEA COCOA SPICES 17 25 13 14 23 21 23 0.40% 67 (RON AND STEEL 17 11 5 1 1 0 20 0.29% 66 NONMETAL MINERAL MFS NES 15 17 19 25 21 21 19 0.27% 69 METAL MANUFACTURES NES 12 13 15 17 25 22 16 0.23% 12 TOBACCO ANDMFRS 12 14 6 6 3 10 14 0.21% CO LIVE ANIMALS 10 3 6 5 2 3 12 0.13% 17 CRUDE FERTLZR.MINRLS NES 9 9 11 10 3 9 10 0.15% 935PECIALTRANSACTIONS 7 11 16 11 Is 18 9 0.13% 73 TRANSPORT EQUIPMENT 6 3 3 5 13 23 7 0.11% 08 ANIMAL FEEDING STUFF 5 5 5 4 3 5 6 0.09% 71 MACHINERY.NON-ELECTRIC 5 7 6 3 6 3 6 0.09% 33 TRAVEL OODS.HANDBAGS 3 -1 - 3 4 6 5 0.08% 62 RUBBER MANUFACTURES NES 3 3 1 1 1 I 5 0.07% 5- MEDICINAL ETC PRODUCTS 3 5 15 11 15 21 5 0.07% 22 OIL SEEDS.NUTS.K-ERNELS 3 3 10 23 17 12 4 0.06% 59 CHEMICALS NES 3 2 2 2 2 4 -4 0.05% 55 PERFUME.CLEANING ETC PRD 3 3 I 2 2 2 4 005% Source: COMTRADE T. 2 l :kt: s nne.j I rr.ru hv C4u crv. I990 . 1993 C:. r, I990 1991 1992 1993 1993 TOT.k.L TOTAL TRA,DE 7354.5 34734 9360-2 9736.6 100.00 NIA,CHLNES.TRANSPOTEQ(IP 1537.3 2911.5 3257.1 3.L&2.4 3536% Ni1NERtAL FUEL5 ETC 1536.7 1521 1534.2 1666.5 17.12% .1 ETROLEUNI kND PRODUCT3 1439.6 145!.6 1474.9 1580.1 16.23% 5CHMIlCALS 1:01.3 1379 1455.5 1549.3 15.91% SMLACH1NERY.NONELECTRIC 962.9 1537.2 1833.3 1490.6 15.31% STRANSPOR T EQU?sENT 474 779.4 738.6 1346.5 l3.33% e 3ASC .5LFACTR Es 307.5 371.2 916 902 9.26% 0 =OD.DAND UVE.ANL\L A LS 736.9 546.3 576.7 756 7.76% ELEC'tRICAL NIACHINEY 450.9 594.9 634.7 605.3 6.22% AYINAL\'EETALOLAT 471.1 463 510.2 601.3 6.13% 2 FL\D VECETABLE OtFAT 4(02 153 461.5 545.3 5.4% CDE MATL.S EXCL FU.,ELS 462.3 532.4 566.3 539-5 5.54% ;1 CHEN EL EN 3.COMPOUNDS 331.4 3353 £19.4 437.7 4.50% tu CRE4.ALS .ASD PRE?A:LA TONS 335.3 160.3 456.3 362.5 3.72% IRO .4ND S",EL 272.7 291j 319.1 3521 3.52% 55 M-4LSTc IMATERALS ETC 194 199.3 254.3 266.1 2.73% NUSC.\ANIFAC-LILED COODS 159.4 227.7 227.9 :60.3 2.57% 5 FERTX'TJZS NL\Ni:ACPJRED 241.$ 279.2 237.2 253.4 2.55% SL NCEDICNALi ETC PROUCT5 1S2.9 207.3 217.3 235.3 2.42% t17 COFF= TE\ CCCOA SPICES 196.9 190.3 199.3 230.9 2.37% "TEXTILE :=3.ES 152.4 :03.4 220.5 202.1 2.05% C3IEŽtiCAL.S .ES 133.4 172.1 174.2 135.7 1.91% < INSTRMNT.WA7rES.CLOCKS 113.3 136.5 133.3 144.3 1.49% :S.\[ETALLFEkU ROC5 ORES.SCRAP 121.9 165.7 159.5 133.2 1.42% * OYES.TA.NLNG.COLOUR PROD 92.3 107.1 121.6 133.2 [.42% c, PAMEÅ.PAPER30ARD AND MFR 135.9 152. 157.2 1343 133% i FRCTrAND.ECETABLES 63.7 - 79.6 111.6 116 1.19% N< NON-FEKROUS NIETA.S 107.4 99.2 113.9 1133 1.16% 5Q.IISC.\ ANFCTRC0 OOD$ ES 71.2 33.2 31.3 109.7 1.13% c? TEX.\Tl.U VARN..A RIC ETC 1-6.5 129.1 124.1 100.2 1.03% COALCO KE. Ri!QUETTES 47.1 6.-: 53.4 :6.1 0.73% eM !tETAL MANUFACTRES NES 6 L4 72.6 32.2 67.4 0.69% a RUSTR MA.NU ACTURES NES 51.9 62.7 51.5 60.2 0.62% enNON\NETAL MtINER.AL.MI'3 NES 42.7 51 50 59.5 0.61% 2CRuDEANI.ALVEG.AT NES 33-7 35.1 32.1 36.4 0.37% 2.' RU1flER CRUDE.SYNTIITC 31.3 30.5 33.3 35.3 0.37% 21llS.SKINS.FURS lNDRSSD 12.2 14.4 21.6 31.3 0.35% 7 CKUrDE FERT lNR1- NES 33.1 33.3 37.7 32.1 0.33% 4. USD A.NMI VEG O(LETC 25.3 23.s 20 29.9 0.31% 23 ruLP A.ND WASTE P.xr.R 13.3 23.9 26.5 27.1 0.25% • 5 MlRlNl CU ANI.G ET R D 21.2 22-4 26.4 24.7 0.23% I L S1'-.DW.NUTM.KRS t-.5 15.5 11.4 19.7 29 0.24% 41 A.NI.ALOS ANDFAT S 13. 23.7 23.7 22.7 0.23% Vý SVtGAR A.N V PR!:ISIRI0NM:Y 1"5.9 73.6 50.4 :0.4 0 21% i' .DADR(V I1 ''l'A.ND ICels :11. 33 48.4 17 0.17% GtxNø l'Ul lS V KIND C.) 17 f2.3 16.5 0.17% MC, . N.AC11NS : 14.7 3.3 is 0.15% 2WkV0Il alf.NtOK5791. 10.7 •.17 .4G.S NAr-.'RAl. ANINl 1AN:4I<-i' -em ø 0.9 10.3 0.11% [t l I13R.R I.SK l i I w.1:'( 6.6 9.l 9.5 3.1 0.03% i ISQC I i l' Il I. K.A i llONS 4.. 5-6 3.1 6.5 0.,7% IK k u CD t \ I TN 1: X*,; N.' 2.6 3.2 2.9 65 0(37% Table 3 Tariff Structure: Pre - Uruguay Round Average Dispe.sion Tariff (Standard Rates (N) Dviadon) Counqry Pakistan (1987.1990) 63.9 648.8 52.2 41.4 India (1937.1990) 77 87 1123 n.2. 41 Iadia (1992.1993) 64" -17 /1 71 na. 30 Bangladesh (1989.1993) 94' 31 "/50' 59 32 Indonesia (1985.1990) 27 22' 107.3 894 Malaysia (1993) 14 - 13.5 Thailand (1986.1990) 13 1 1.4 n.a. n.a. China (1986.1992) 38.1 ' 32 **/43 /..30 unweighted '- weighted by imports Source: Dean, Desai. and Riedel: 1994 Table 4 Pakistan: Pre -UR Protection and Post -UR Tariff Bindin2s Commodity Post -UR Protection Pre UR Protection UR Base UR Final Average Tariff EQuivalent Rate Rate 1986-88 () M)%) Wheat 150 -21 Rice 100 4 Sugar 150 14 Milk 100 10 Cotton 100 -24 Source: Ingco, 1995 Table 5 Coveraae of Tariff Bindinss. all merchandise trade. oost-Uruguay Round Percentage of Imports thzt are GATT Bound Post - Uruguay Round From World Country Pakistan 25.00 India . 56.20 Sri Lanka 26.70 Indonesia 93.40 Malaysia 77.00 Thailand 66.10 Source: Finger, J.M. U. Reincke, and NI. Ingco, 1995. Table 6 PAMkisn, Conccssions received on exporis: A veage percenilge reduiiciono, pIeiceiiage e.Apolis on) which lariffs wele rediced and export weighted averaIge tariff rates, post Uruguay Roumfl Siiunary Cinlegory (l digit SITC) by OfECD countrics by selected developing courittes export export value export export value weiglted % of veightted of weigiled % of' weiglted of avg. lariff exporis avg. larif expos (s avg. lariff expo is ävg. anrifl expol Is reduction affeeted post-UR ($000) redtiion iffected post- UR ('00(o) Agricuilure 5/(0 l -f 2+4-27-28) 3.6 16.3 3.4 556000 5 1 39.2 11.8 435000 Feriili.ers, Minerals, Ores, Scrap (27+28) 3.4 0.6 0 10600 13.7 68.3 13.2 3680 Minleral FuCS etc. (3) 2.2 0 1.3 2070 13.3 0.6 3.9 24600 Checila)s (5) 3.6 70 7.3 6630 11.3 9.9 12.9 6270 Basic Manufactures (6) 2.2 82.5 6.5 1430000 8.9 22.7 7.3 65.1000 Machines, Transport Equitpient (7) 6.6 87.9 0.4 52000 7.4 19 12.6 3800 Misc. Manufactured Goods (8) 2.5 90.9 10.8 679000 7.5 12.5 13.3 10900 Goods no( Classilied by Kinld (9) 2.8 90.4 2.2 101 13.3 4.7 4.9 212 All Nierelandise Tr ade 2.4 70.8 6.9 2740000 6.9 28.5 9.1 '10000 5/ Includes estimated tariff equivalents of uariffed NTBs. Source: Finger, .1.M., U. Reineke, and NI. Ingco (1995). '1'аЫс 7. lurrcaee� т'Гслиlе QuuU 1Vuhwd Cruwth 1'�сwп in Лl'С Cuunules 1:иГиlкап Uniun U1111CJ S1J1CY (,�r1:1J:1 �1•и1�1 SI1:ul1 111 �UUlI1 Лl1J11 (1UUlJ 19ЧJ 20Q�1 1пСlе�н I 19'1а 20U 1 1пrп�н 1'19а 2и41 lucrcasc 19')1 200•J lпсге:ис 1 Ч9а 20а1 1ПСгrаSг 19')4 2UW 2Wa/199а 200а/19')а 20U�1/1Ч9а 20О•1/1'1'Ia 2Wa/19'Ja Типл Х� mi1 smc К u1i1 лтс 9i, mi1 лте % mi1 кте 7L % Soudl,�,ia 2]7,а72 ]25.и0-1 ]9.55 929.]] I2I6.tl6 ]9.55 55-1 1,и11 и2.4Ч 27 4а 77.7а I.5I0 2,]56 55.9а 100.00 1(Юии 1'�1.iц�п 1US.a6J 157.611 Jtl.tla J21.]) 627.]7 dtl.tlи ]17 577 tl2.U! 7 17 ии.tl') 7а7 1.221 67.а2 4Ч.47 51.tlJ 1и�1� 127,ЬОи 16и,19з ]1.8U 507.9� 669.J9 ]1.иU 21з ]ЧО и7.1и 14 25 7а.57 7]5 1,Оиа 47.56 аи.бб a6.U] 11�ng1;,Jc�11 и 15 и7.50 и 15 87.5U 0.5] 0б+ in 1�шА� 16 2') tl1.25 а G 50 и0 2U 75 75 1а+ 1.72 1.J9 1'лG1г а 1п:гг.l,н in C1u+hiu�; Quuras Wi+huu+ Gruw+h Гасlиn in А"1'С , Сиипиiгл liurul�cau Uniun 11ni1cd Sta+л Саиад:l 'Ги+а1 $h.uci in Suuih Afidn Qиша 17ЧJ 2uo�l lисге:лг I 19v•+ 2ио�+ lиггс:пс 177�1 2оо�1 1и:гга,с �'17�1 2uu�t иггс:ис 17�1�1 2ио�+ lисгс.l,с 199.1 гии+ г+wlп9л+ п>и�и1чЧ�+ 2сх1.и1'г�1 2+х)и1'�'ia 2Wи1Ч'1а 'Гип, 'ti � wi1 �те ц. mi1 ю1с '.6 ии1 лuit mi1 Чпс '7 '/ s,гиlь л��� чs.+бЧ isa.7иa ь2.ьа з7и и2 616.12 6z 6�1 7зЧ 1,зs� из.�и иn 15о и7.sи i.1'�и 2.125 77.42 7Ч.з1 Чо.z1 г�1.г�1�и зы111 ьзииз 7о.и1 1�7.Ои 2s1.1u 7иа1 1zt 22'1 и7.70 2] �2 и2ь1 2'12 s22 7а.ии 1ч.зз 22.16 +�1,ь� ��юп 7зи+7 ач.о2 1Ч5.1 i 2Чо.76 �19.ut 1ьt г7л ЬЧ.1•1 i2 22 и].з� ]ЬЧ sи7 5и Ч7 2а.•+•1 2а.в+ и.1и51.��с,ь 2а7 аиь 96.7ь ]� ьь 9�1.i2 2ь1 ssг '16.а•1 1и.б1 zз..+з \г1+.�и1.1 '>?2! +иь5а +пг.зд зь7и 7.125 lutw :иа ]7и 77.на i1 2и и1а't 256 аь•1 н15ь 1ь'�з 1Ч7+ '1'�Ыс'1 lnirca�re и�Гел1Jс QuuL1 1)ие ю Cгuwlh Г:к�иг< in л'1'С С�иииtл lгигиргап Uniuu Uu11cJ S1.tlc� С:тчд:+ '1L1.i1 Sh�ue� in $ои1Ь A�i:m Quu1a 1Ч9а 2UU-1 fпеге�ле, 1994 200J 1nпе:не 199а 20и1 1u��re:ne 199•1 2UUJ lпсге:ие 1ЧЧа 2UU�1 lпсгт:ис 17Ч�1 .Uf1! 2ии1п'1ЧJ :ии1п77а 2ии1ПЧ'1�t 20и11199�1 2(К1и+9'з�1 'Гип� '.G mi1 ипс % гго1 лпlс 'h mi1 �1пс '/и mi1 �п1с '/ % S1„�и1л,�., 71з.П2 зи1.17ь Gз.н Ч2Ч.)] 15�7.27 ь716 55•+ t.])2 1•1и.•1] 27 G.1 гЛ]] 1,s+u 2.912 Ч?.и2 1гх+иU 1?+.б] 1'ль.пl.lп 1U5.ибд 1и'1.67Ч 7Ч 1? а2l.]Ч 75SA2 '!'1.17 ]1'! 7GU lзЧ.'11 7 2з 155.5(1 7П 1.51tl 105.1и .1ч.а9 L52a 1г1�1:1 i�7.ьиа 1'�1,�+v7 su.ui 5и7.91 762.25 5U0"! 21] 5��1 141.]1 1J ]2 12и.57 7�s 1,]ии 7аи1 •+а.бб ss.sз и�иЫ:г1lг,ь а 2и 1 su.uu и 2и 1 su ии и.sз и иs sп1.:и��., 1ь эи 177.su а и iгю.tхl 2о аб пиlю 1.п t.'1i l �Ыe 10 lппеаиг in С1и1Ьiи Quo1a� Due w Gruw+Ь Гааип in А'1'С Cwluuicf 1:игирсаи Uniun llui+c� S+:un C:111:11]:1 �I�111:1I 1I1:1f1'1 111 tiU111I1 11)1:111 (�uu1J 177а 2uU�1 lncrcaul 177а 20и4 tпrгсилс 1Ч7�1 2(Ю�I Ипсис 1Ч'11 20U•I lпгггллс 1Ч'1�1 2(1U1 lиагс.ис 1'1')1 2ии1 21Ю�и1'17а 21и14/1Ч7�1 2twt11�1')�1 1(а1�1/17Ч•t 2UQ�1/1')v�I 'Гит % wi1 >,те '%, _mi1 �1пе 'Х. mi1 �тс '14 mi1 юк 'К. �,(, SuulhAfra 95.1G9 1ЧG.712 10G.7U ]7и.и2 7tl].01 1UG.7u 779 1.77и 1а].]и иU 201 151.25 1,17а 2.7а2 П2.26 79.]1 1180Ч 1'аА1и:и 7ь771 tlu71G 11tl.5G 1Л7.W ]21.2'1 11и.Sь 12"t 7U5 15U.1w 2] 5G 1•17.•1tl 292 Ga2 1]].GG 1Ч.]] 2a9G 1nJi� a9U17 tl79a7 7Ч.а2 I'15.11 ]5UU7 'lЧА2 162 ]а7 115.J] 12 2'1 1д1.б7 ]69 72tl Ч7.25 2а.а�1 ]UJu 11�пg1.�Jc�h 2�7 G62 16tl.U2 7д 9U 1G•1.71 2и1 752 167.G2 1а.б1 ]1.')2 Sr1L1u1.:� '1t71 itl(11'1 2U1.1'1 ]G."/0 111.65 1U117 711a аи2 П1.'1з 11 2G 1]GJG 21G G7u 142.]] 1G.7] 2G.70 5иигсг: lnmrn�liun�l'fcaldcs аид C1uUiing 1lигсди I iývei.ige ýVeitýlileti NIFA QL1o1:1 Uiiiii.:liit>ii Rale ill Ulli(ed Siaics and I:ijr(jl)e;iii Union ('Y,,) 21 Exporter 1985-89 Average US lillfl()ri Skare 11 1985 1986 1987 1988 1989 1985-89 1993 Ulliled stalcs Pakistan 2.0 87.3 82.2 96.1 88.1 94.2 89.6 90 India 92 2 96.8 97,6 95.6 89.7 94.2 U;jfigl,idesii 2.5 9'7.3 lia 96.5 9,1 2 92.5 95.1 Sýi Lanka 2,7 6, 1, 4 97.0 90,7 80.8 83.2 Eurlipc:111 Ullioll 1985-89 Average EU Impori share 11 1985 1986 1987 1988 1989 1985-99 Pakistan 2.4 1 14.7 106,10 90.8 105.3 l 19.2 107.2 fflo 6.9 53. t 66.40 98.8 82.3 89.9 78.1 1/ Share of all iniporis under Øle NIFA qL]01,15 2/ \Vciglits are býLýed oil (tie vulue of exports ývitiiiii eieli MUA lliiui;i Sources: Woild 13ýiiik NIFA Dala Bast, 1993 es(iiiin(es ;ile Ironi GATU 199,1). Table 12 Pakistan: Direction of Exports to the Quota and the Non-quota Countries Non-quota Quota Quota Good Country Country Utilization Yam 95 5 99.40 Fabrics 72 28 99.80 Made-ups 29 71 98.10 Source: Economic and Social Commission for Asia and the Pacific, 1994 T;ble 13 Itiriiad Ipact ( the Hitiguay lRouLd oi NTM Covciage 16Itiis Nuntarifl cMasurC Coverage Ratio (%) 1992 OFCD Imports Pre-Ul Post-UR Country All Goods All Non-oil Other All Goods All Non-oil Olher All Goods All Non-oil Otrr Goods vianufactures Goods Manufactures Goods MlitanuIfactures Pakistan 3978.6 3967.6 3511.7 50.4 50.4 59.6 6.9 6.8 8.2 langladesh 2059.9 2056.4 1862.4 58.3 58.6 74.1 10.5 10.4 13.3 India 13532.3 13162.2 10551.1 29.4 30.6 40.9 5 I 5.A 7.1 Sri Lanka 2066 5 2058.8 1709.7 50.5 50.7 67.8 0.9 0.8 0.5 Source: Yeas. S ond Low. P (1994). I Tic 14 GDP. Value Addcd. MIcllandlc E Ktlx l and Wagcs ill Mlm(acttil; Courury GDP Value Tal OECD Impoi is of Manufactured % in South Wages in Value 1992 Added Merchandise Go(xk Value Asia's Textile Mallufacturing Addcd in In Exports Total 'k of Textiles Textiles & Clothing Ruxecs/ionth Agriculue Manufacturing & Clothing & Clodting Exports (Pakistan) 1992 1992 1992 1992 1992 To OECD 1989 USS million South Asi3 291817 49752 31818 17937 11323 68 100% 93JI3 India 214598 39254 19795 10539 18.30% 5090.34 45% 869.3 69.682 IAwtn 4190-1 7099 7264 317.1 85.60% 2973.74 26% 1289.7 11.416 Bangladesh 23783 2041 1903 1879 89.70% 1685.16 ,15% 8.197 Sn Lanka 8769 1155 2187 1717 74.20% 1274.01 11% 2,308 Nepal 2763 203 369 328 91.50% 3(X) 12 3% 1,4.10 percent South A%ia 100 100 100 100 India 73 5.1 78.90 62.21 58.76 PA1,1an 14.36 1.1.27 22 83 19.37 lIjnglIdc%h 8 I5 4.10 5.98 10.48 Sn LaIna 3 0) 2.32 7.82 9.57 Ncpjl 095 0.41 1.16 1.83 SourLes Woid llik. CONITRADE, Initernatonal Labor Statitics, 1993. Table 15. Pakistan: Effects of World Price Chances from Asricultural Liberalization Commodity Change in World Prices Value of Value of Value of Terms of Trade Due to Net Net Net Effects Agricultural Exports Exports Exoorts Q'P(WR)- Liberalization (No Round) (With Round) Q'P(NR)- 2002 1/ [990-92 2/ 2002 2002 2002 % mil US S mit US S mil US5 rnil US S Wheat 3.3 -293.0 -250.0 -259.5 -9.5 Rice -0.9 333.0 332.3 329.3 -3.0 Coarse grains 2.3 -0.6 -0.6 -0.6 0.0 Sugar 1.8 -98.0 -121.0 -123.2 -2.2 Beef, veal & mutton 0.6 0.7 0.9 0.9 0.0 Other Meats -0.6 -0.2 -0.1 -0.1 0.0 Coffee -1.5 -0.1 -0.2 -0.2 0.0 Cocoa -0.7 3.4 4.9 4.9 0.0 Tea -1.4 -172.2 -166.3 -164.0 2.3 Vegetmble Oils -0.3 5.0 4.9 4.8 0.0 Dairy 1.2 -23.3 -18.3 -13.5 -0.2 Other Food Products -1.4 -274.1 -237.7 -233.6 4.0 Wool -0.9 -9.2 0.0 0.0 0.0 Cotton -1.2 457.3 563.3 557.0 -6.8 Other Agriculture 0.8 -145.3 -157.1 -158.4 -1.3 Net Terms of Trade Loss (USS million) -16.61 GDP in 1990-92 (USS million) 44,3 18 Net Loss as share of GDP in 1990-92 % -0.04 Sources: 1/ Price changes are from Goldin and van der Mensbrughe. 1995. 21 Net trade values are from FAO, Commodily Balances Databases. T;blc 18. I-lhor Costs and Efliciency Measures Wne:ing Apparel exti les Value Output Value Wages Value Wages Value Output Value Wages Value Wages Added Added per per Added in in Added Added per per Added in in EmployCe Employee Output Value Employee Eimiployee Oupt Value Added Added US$rnillion US$million US$000 US(0) % % US$nillion US$million US$000 US$000 % 1 India 1970 11.3 53.7 0.6 0.3 21.1 44.7 891.3 3372.0 0.7 0.4 26.4 59.6 1975 21.6 110.8 0.7 0.4 19.5 56.9 1124.8 5765.0 0,9 0.6 24.7 67.6 1980 62.3 443.3 1.2 0.7 14.1 54.1 2642.2 10965.3 1.6 0.9 24.1 60.4 1983 66.9 425.8 1.2 0.7 15.7 54.3 2424.0 11232.4 1.5 1.0 21.6 68.4 1987 1.5 1.2 18.7 75.5 Pakistan 1970 1.2 2.9 I 7 0.6 41.1 36.5 358.5 901.2 1.7 0.4 39.8 25.1 1980 7.2 27.2 2.6 1.3 26.3 49.3 483.4 1805.6 2.2 0.8 26.8 37.8 1983 23.5 59.5 5.2 1.2 39.4 23.9 505.4 1976.6 2.5 0.9 25.6 34.7 1987 1.3 3.3 1.1 26.0 39.0 Source: UNIDO I kindbook of Industilal Statisics. various years. .. а� � о м 'Ь� Г�..лi iОд Й � � о .� -о 'д, [� О vi � rn у I о� � и � � Г.� А о. рГ7,� а w и а д и �-. � U У О �° ои .5 � �- ° 3 ь� д � ¢ � и д х � о � и -v .? � � � � с �.� х � л � � � а оц ¢ � � � � и а� � ..С � '-' С � С с � О а� _ и �о � � у I '1� -О и и : а � д Е� Г�1 lG � �