The Central Board of Revenue (CBR) is making yet another attempt to restructure / reform the Pakistan Customs Tariff (PCT). The proposal prepared by the CBR in this regard contains measures pertaining to (i) reduction of maximum and minimum tariff rates from 25% to 20% and 5% to 0% respectively, (ii) readjustment of existing slabs from 5%, 10%, 20% and 25% to 0%, 5%, 10% and 20%, (iii) minimization of the dispersion of customs duty rates. The tariff restructuring / reforms are expected to be implemented in the fiscal budget for 2005-06.
Apparently there is no dire and urgent need for reducing the maximum tariff rates from 25% to 20% and that too without a well thought and planned tariff strategy. Arbitrary reduction in tariff rates primarily means allowing unintentional and unintended market access to imported products in your country.
This article has been written to give an insight to the reader and the stake holders on the concept of tariff reforms, respective provisions on tariffs under the GATT / WTO regime, Pakistan’s case and a proposed strategy.
There is no precise or prescribed definition of tariff reforms, rationalization or restructuring of the tariff structure. However, rationalization of a tariff structure with in a given set of economic parameters to achieve desired national economic objectives could be termed as tariff rationalization / reform. In other words a rationalized or restructured tariff structure, inter alia, should (i) serve the purposes of resource allocation, (ii) not excessively biased towards revenue generation, (iii) not suffer from anti export bias, (iv) serve all the purposes of the declared objectives of various economic policies such as fiscal, trade, industrial and agricultural policies etc. (v) follow a rational scheme of tariff protection taking into account the principles of tariff escalation (cascading of tariff structure), (vi) should be transparent and not riddled with exemption notifications, (vii) should take into account the existing bound levels of tariffs under Market Access Negotiations under the WTO, (viii) take into account future possible requests from other WTO member countries for further increased market access, (ix) provide a preferential treatment between export oriented and import substitution industries, high tech vs. low tech industries, labour intensive vs. capital intensive industries depending upon government’s national economic policies.
The GATT / WTO rules and regulations are primarily contained in the Marrakesh Protocol and Article XXVIII on “Tariff Negotiations”. Under the Marrakesh Protocol to the GATT 1994, the WTO Member countries were required to reduce their tariffs in five equal tariff rate reductions of about 20% each year from the base year as 1986. The first such reduction was made effective on the date of entry into force of the WTO Agreement i.e. 1 January, 1995, each successive reduction was to be made effective on 1 January of each of the following years, and the final rate was to become effective no later than the date four years after the date of entry into force of the WTO Agreement. The implementation of the concessions and commitments contained in the schedules annexed to this Protocol are, upon request, subject to multilateral examination by the Members. Pakistan has already complied with the said WTO requirement.
No where in the world countries extend market access to other countries by reducing tariffs unilaterally and arbitrarily on non-reciprocal and non-beneficial basis. The GATT / WTO history shows that when ever countries have reduced their tariffs they have very smartly and cleverly done it by engaging themselves in market access negotiations with other countries either under multilateral, bilateral or regional trade basis.
The Article XXVIII on “Tariff Negotiations” of the GATT 1994 lays down the basis for tariff negotiations. The salient features of the Article XXVIII, inter alia, include that the negotiations should (i) be on a reciprocal and mutually advantageous manner on a selective product-by-product basis, (ii) be conducted on a basis which affords adequate opportunity to take into account the needs of WTO Member Country and individual industries, (iii) consider all other relevant circumstances, including the fiscal, developmental, strategic and other needs of the WTO member country. The Ad Article XXVIII of GATT 1994 clarifies that fiscal needs include the revenue aspects of duties and particularly duties imposed primarily for revenue purpose or duties imposed on substitutable products.
Pakistan and China have recently signed the early harvest agreement of Pak China Free Trade Area. Under this programme all exportable items of Pakistan including textile, surgical and sports goods, vegetables, fruits, rice, citrus and mangoes will have duty free market access from January, 2006, while Pakistan will import machinery and raw material. Apparently the arrangement seems to be quite enthusiastic and ambitious. However, the ground realities are much different, Pakistani market is already flooded with Chinese consumer and other goods as Pakistan has extended unwarranted and unintentional clandestine market access to Chinese goods in Pakistan. Pakistan’s trade and industry with special reference to textile (made ups and fabrics), table ware, shoe and toys industry is adversely being effected by the Chinese goods. The government is also being deprived off valuable revenue on account of customs duty and sales tax as these products are entering Pakistan as clandestine imports.
The economic managers of international trade and concerned departments must have taken into account its actual trade balance with China and considered the on ground situation before signing the trade agreement, as Chinese are known for their negotiation skills throughout the world. One example is that China against the grant of duty free import of marble from Pakistan has demanded Pakistan to reduce the import duty on Chinese granite to zero. Some body very rightly said that there is no free lunch. Pakistan certainly needs to learn lessons from this.
Restructuring of tariff structure without undertaking a thorough and a detailed study could produce serious devastating adverse effects on the protection levels and the viability of Pakistan’s trade and industry. It would also deprive Pakistan from its negotiation strengths and the level playing field especially when Pakistan is also considering the question of grant of Most Favoured Nation (MFN) treatment to India. Both the countries are producing directly competitive goods. The reduction of maximum customs duty rates from 25% to 20% has also to be analyzed in context of Indian customs tariff rates. The level playing field will play a major role in the reciprocal and mutually advantageous trade.
The reduction of minimum tariff rates from 5% to 0% on selective items should not be discretion based but rather based on set, declared, transparent and economically beneficial basis and parameters. Besides, as the reduction of maximum tariff rates from 25% to 20% would be reducing the effective and nominal protection levels of the domestic industry. The ability and capacity of the respective government departments to take quick, adequate, timely and transparent trade remedy measure also needs to be assessed and evaluated.
In consideration of the detriments that can be caused to the domestic industry it is necessary and advisable that the government should take appropriate measures before restructuring the PCT. The entire situation on ground with reference to providing support and protection to the domestic industry in consideration of the WTO rules and regulations should be taken into account with reference to the (i) impact of the WTO and globalization on domestic industry, (ii) comparison of the level of protection to the domestic industry prior and after the globalization measures, (iii) patterns of growth and the future of the industry with respect to their capacity utilization and investment, (iv) identification of the efficient and non-efficient industry for re-allocation of scarce resources, (v) identification of options and restrictions of protection measures under the GATT / WTO regime, (vi) development of a consistent tariff protection policy in the light of the WTO and other constraints.
By M. Abbas Raza, email: abbasraza55@gmail.com
(The author is an analyst on trade and fiscal issues)
