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Pakistan : February 1995

“ Some participants noted that Pakistan's balance of payments was still under pressure, due in part to natural disasters. They urged Pakistan to disinvoke its use of the GATT balance-of-payments provisions as the situation improved.

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Summary of Secretariat report
  > Summary of Government report

17 February 1995

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The Trade Policy Review Body of the World Trade Organization (WTO) and the GATT 1947 Council conducted its first review of Pakistan on 15 and 16 February 1995. The trade review of Pakistan was carried over from the 1994 programme of reviews under GATT 1947. The text of the Chairman's concluding remarks is attached as a summary of the salient points which emerged during the two-day discussion.

The review enables the Council to conduct a collective examination of the full range of trade policies and practices of each member country at regular periodic intervals to monitor significant trends and developments which may have an impact on the global trading system.

The review is based on two reports which are prepared respectively by the WTO Secretariat and the government under review and which cover all aspects of the country's trade policies, including: its domestic laws and regulations; the institutional framework; bilateral, regional and other preferential agreements; the wider economic needs and the external environment.

A record of the discussions and the Chairman's summing-up, together with these two reports, will be published in due course as the complete trade policy review of Pakistan and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.

Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992), Cameroon (1995), Canada (1990, 1992 & 1994), Chile (1991), Colombia (1990), Egypt (1992), the European Communities (1991 & 1993), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 & 1994), Israel (1994), Japan (1990 & 1992), Kenya (1993), Korea, Rep. of (1992), Macau (1994), Malaysia (1993), Mexico (1993), Morocco (1989), New Zealand (1990), Nigeria (1991), Norway (1991), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992), South Africa (1993), Sweden (1990 & 1994), Switzerland (1991), Thailand (1991), Tunisia (1994), Turkey (1994), the United States (1989, 1992 & 1994), Uruguay (1992) and Zimbabwe (1994).

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This joint meeting of the Trade Policy Review Body of the WTO and the Council of GATT 1947 has now completed the first review of Pakistan's trade policies and practices. These remarks, made on my own responsibility, summarize salient points raised during the discussion; they are not intended to substitute for the collective evaluation and appreciation of Pakistan's trade policies and practices. Details of the discussion will be reflected in the minutes of the meeting.

The discussion developed under four themes.

Macroeconomic reforms and structural adjustment

Participants commended Pakistan on its macroeconomic adjustment and structural reform programme which had ended four decades of inward orientation. Pakistan was encouraged to continue with its programme, thus ensuring the basis for stable, long run growth.

Some participants noted that Pakistan's balance of payments was still under pressure, due in part to natural disasters. They urged Pakistan to disinvoke its use of the GATT balance-of-payments provisions as the situation improved.

Some members suggested that infrastructure weaknesses impeded economic growth. The utility of improving education was stressed. In this connection, attention was drawn to the low participation rate of women in the economy. The private sector appeared to show little interest in research, contributing to the low quality of Pakistani goods.

A number of participants felt that measures could be taken to improve the flow of direct investment into Pakistan, including broader application of national treatment, simplification of procedures and improved intellectual property protection. The need to accelerate privatization was stressed and questions were raised regarding local content legislation. Some concern was expressed about Pakistan's adherence to internationally recognized labour standards, although others emphasized that this was not a subject for discussion in this forum.

In reply, the representative of Pakistan affirmed his Government's commitment to economic liberalization, deregulation and privatization, despite various constraints. To this end, fiscal and monetary discipline was actively pursued under the Structural Adjustment Programme; however, the external current account situation remained difficult, both because of the debt service burden and a reduction in worker remittances and despite an improved trade balance. The outward-orientated economic policy would continue uninterrupted in the medium- and long term.

One of the primary objectives of economic planning was to accelerate development in infrastructure, particularly in energy, transportation and communications. Over 46 per cent of public expenditure in the Eighth Plan was assigned to these areas. Partnership between the public and private sectors was being encouraged.

Women had historically lagged behind men in Pakistan's development. High priority was now given to the rôle of women, with a special Ministry for Women Development created in 1979 and specific programmes pursued under the Sixth and Seventh Plans. The thrust of policy during the Eighth Plan was on education, health, and encouraging income generation for women; in addition, removal of discrimination in education and employment and better information and communication on women's rights and responsibilities would be ensured.

Privatization would continue; 35 additional units had been identified for disinvestment and modalities for dis-investing two nationalized banks were also being examined. The critical linkage between investment policy and intellectual property rights was recognised, and inter-agency consultations were continuing with a view to overcoming Pakistan's reservations on protection of patented products.

Pakistan was signatory to a large number of ILO conventions, and had signed a Memorandum of Understanding with the ILO on the critical area of child labour. The recommendations of the Task Force on labour were being considered by the Government and adoption of these should remove the expressed concerns on this "new issue". Pakistan was concerned, like other developing countries, that linkage of labour standards with trade could be used as a cover for new forms of protectionism.

Trade policy and trade régime

Participants welcomed Pakistan's trade liberalization. Reductions in barriers had improved efficiency. The introduction of a three-year tariff reduction programme was seen as a positive step. Some members asked whether the continuation of trade liberalization was consistent with the objective of the Eighth Plan (1993-1998) to limit the real growth of imports to 5 per cent a year.

Participants welcomed the abolition of Import Trade Prices for customs valuation and the introduction of transactions value, as verified by pre-shipment inspection. Pakistan was urged to move quickly to implement the provisions of the Customs Valuation Agreement.

Concerns were expressed over:

- the general registration requirement for companies engaging in foreign trade and the restrictions on employment of foreign managers;

- the high level of tariffs, with tariff peaks and substantial escalation;

- the low number of tariff bindings and the discretionary power available to state authorities under Statutes, Regulations and Orders (SROs), which reduced transparency;

- the use of export prohibitions, particularly on agricultural products, and of minimum prices, taxes and charges;

- the extension of export support through such measures as tax credits on export earnings; Pakistan was urged to bring such measures into conformity with the Uruguay Round Agreement on Subsidies and Countervailing Measures;

- lack of clarity in the use of standards on imported products;

- the justification for an additional 2 per cent sales tax imposed on 28 import items.

Participants also welcomed the reduction of the Negative Import List to 70 items and the elimination of the Restricted List. Questions were raised about the inclusion of textile products on the Negative List.

Questions were also asked about remaining trade privileges of the Trading Corporation of Pakistan and information was sought on advantages given to domestic enterprises in government procurement; in this connection, Pakistan was urged to join the Agreement on Government Procurement. Some members also urged Pakistan to bring its laws on anti-dumping and countervailing measures into accordance with the Uruguay Round agreements.

The representative of Pakistan stated that trade policy was traditionally fairly transparent, with key instruments published in the Official Gazette. Businesses were familiar with the SRO system; no official discretion was involved. The number of SROs, tariff exemptions and concessions was being steadily reduced. Fuller rationalization of the tariff structure by July 1996 should remove any problem of perceived lack of transparency. Other trade policy instruments were not thought to present any problem of transparency.

The 5 per cent real import growth target was indicative, with no instruments to enforce it, and would not slow the liberalization process.

The general maximum tariff would be reduced to 35 per cent by financial year 1996/97, with minimum rates set at 10 per cent except for food, fertilizer, pharmaceuticals and energy sector imports; tariff dispersion would be limited through a 4-6 tiered tariff structure within the above maxima and minima; and further integration of the Pakistan tariff into the Harmonized System would be undertaken. This, together with the withdrawal of exemptions and concessions under SROs, would bring about full transparency in the tariff régime. However, the SRO system could not be abolished altogether.

Pakistan aimed to increase its scope of GATT bindings beyond 33 per cent. As a first step, imports of textiles were allowed at high bound rates, to give the industry breathing space for adjustment. Pakistan agreed to review its tariff peaks and would not escalate tariff rates beyond GATT bindings. The National Tariff Commission (NTC) would identify items that might require temporary protection as a result of tariff reductions. The NTC was also entrusted with anti-dumping functions under the Tariff Act 1990. Regulations being drafted would reflect the Uruguay Round standards and guidelines.

It was not yet practicable to extend the General Sales Tax (GST) at retail level across the board; however, as a first step, a 2 per cent fixed sales tax had been levied on the retail price of 49 items. Full details would be provided. The GST net had also been expanded from 486 to 863 items.

Pakistan currently followed the Brussels Definition of Value; this would be phased out under the Uruguay Round Agreement. As a first step, Import Trade Prices had been abolished; the pre-shipment inspection agency was responsible for verifying the transaction value of goods. Pakistan would need the five years' transition period to implement the Uruguay Round Agreement.

The requirement that importers and exporters be registered with a government agency and be members of a Chamber of Commerce and Industry or an Exporters' and Importers' Association was originally intended to prevent frauds and facilitate handling of trade complaints and disputes. It was recognized that the system was outdated. Consultations with the business community, including foreign firms, on this issue would be initiated in spring 1995.

The Negative List consisted of about seventy 8-digit tariff lines, including 63 textile products on which restrictions were maintained for balance-of-payments reasons. Under the Uruguay Round, Pakistan was committed to removing quantitative restrictions on textile products form 1 July 1995; in addition, the achievement of current account convertibility left little rationale for maintaining such restrictions. The maintenance of remaining items on the Negative List was justified on account of religious, moral, security considerations or under international treaties.

The three state trading enterprises were established in 1972-73 partly to protect farmers against exploitation and malpractices. These corporations no longer enjoyed any trade monopolies. Their rôle now was, in part, to undertake procurement where the private sector did not yet have the necessary financial resources. The Cotton Corporation's rôle in exports had diminished because of absence of surpluses; in fact the Corporation was engaged in 1994/95 in purchasing cotton from Central Asian states, because the private sector was not equipped to handle the difficult logistic problems involved in transportation through Afghanistan.

Like many other developing countries, Pakistan had not signed the Tokyo Round on Government Procurement Code. The bulk of government procurement business in Pakistan remained with foreign firms under foreign financing of major projects. Small-scale procurement remained with Pakistani firms, partly because of lack of sufficient interest by foreign firms; in addition, most local firms acted on behalf of foreign businesses. Price preferences for domestic suppliers were recognized by international institutions as a measure conducive to developing the private sector; and tolerated because of complaints regarding dumping practices by some State trading countries.

Pakistan's standards requirements did not apply to imported products. Relevant ministries were authorized to establish quality and safety requirements for imported goods, with Customs ensuring compliance.

There were no duties on exports. However, exported goods were subject to provincial levies and to an export development surcharge of 0.25 per cent of the f.o.b. value. Twenty-six products were prohibited for export; items subject to quota restrictions, minimum price restrictions, special procedures and quality control restrictions and contract registration requirements were published. Export earnings were exempt from tax on a scale ranging from 25 to 90 per cent, but exports were subject to an across-the-board tax of 1 per cent of f.o.b. value.

Sectoral questions

Participants welcomed the market-oriented measures introduced in agriculture and industry. Questions were asked about Pakistan's self-sufficiency in dairy products, subsidies on domestic and imported wheat and restrictions on imports of meat.

Participants recognized that, with about 60 per cent of exports in the cotton group, Pakistan was vulnerable to changes in the external environment. Questions arose about diversification of exports.

The representative of Pakistan emphasized that the self-sufficiency goals of the Eighth Five Year Plan were essentially indicative. Moves towards market-oriented agricultural polices had been accelerated; self-sufficiency would be achieved through such policies. Cotton and rice were not subsidized; however, wheat, as a basic food, received consumption subsidies, which were also extended to imports. Government imported wheat through open tender, and wheat imports had been opened to private trade. Although tariffs on dairy products were high, they would be reduced under tariff reforms. Ceiling bindings on agricultural commodities, at 100 to 150 per cent, compared favourably with those of other countries.

To subject the textile and clothing industry to increased competition, the concessional credit facility and dual cotton pricing system had been phased out; moreover, access to fibres, yarns and cotton substitutes had been improved by allowing imports at reduced tariffs. Pakistan was committed to removing textiles from the Negative List by 1 July 1995; tariffs would be reduced to 35 per cent for garments, 25 per cent for fabrics and 15 per cent for fibres and yarns. It was hoped that diversification of the export sector would result, including into non-traditional items.

External environment

Participants commended Pakistan for its active participation in the Uruguay Round, especially in the textile and clothing area. Participants urged Pakistan to implement fully its obligations under the WTO as soon as possible.

Questions were raised about Pakistan's policy towards regional integration, including exchanges of concessions under the South Asian Association for Regional Cooperation.

Participants recognized that a favourable external economic environment was needed for the consistent implementation of Pakistan's reform programme. In this regard, the full implementation of the Uruguay Round commitments, especially on textiles and clothing, was of crucial importance.

The representative of Pakistan replied that Pakistan had ratified the WTO in full recognition of the higher level of obligations required. Ministries were currently working out measures necessary to implement individual agreements. The success of the WTO would, however, hinge on the implementation of the obligations by the major trading nations and the understanding they might display towards the adjustment difficulties of countries representing small shares of world trade.

Despite reservations about the drift towards regional arrangements, Pakistan recognized that, if kept within the legal confines of the GATT, these could contribute to increased trade.

Most quotas on Pakistan's textile exports remained in place. However, modification of the existing agreements had mitigated the rigour of the quotas; some had been removed and in other cases enhanced flexibility had been extended. There was considerable concern about the erosion or withdrawal of GSP for textiles in the European Union. The rigorous implementation of standards, combined with rapid enforcement of pre-shipment inspection and quality controls, had reached the point of becoming a technical barrier to trade. NAFTA rules of origin were encouraging a shift of textiles production from Pakistan to the NAFTA region.

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My conclusion from this review is that Pakistan has been warmly praised for its adjustment efforts and the liberalization being undertaken. Pakistan was encouraged to continue this process steadfastly. The proposed tariff reform and the elimination of textiles from the Negative List are particularly welcome; members clearly hope that these will be reinforced by an increased number of tariff bindings. At the same time, a supportive external environment is important.