Reducing trade costs and barriers remains an important means of accelerating the economic growth of a country. Today’s blog illustrates the concept of trade costs and compares Pakistan’s trade cost indicators with those of its regional neighbours

Ali, Salamat

LSE Research Online

20/06/2017 Trade costs and potential: Removing barriers to growth in Pakistan - IGChttp://www.theigc.org/blog/trade-costs-and-trade-potential-in-pakistan/ 1/5Authors Salamat AliPhD Candidate inInternational EconomicsUniversity of NottinghamPublished on: 29 Jan 2016Countries: PakistanResearch themes: Firms, Trade Trade costs and potential:Removing barriers to growth inPakistanReducing trade costs and barriers remains animportant means of accelerating the economicgrowth of a country. Today’s blog illustratesthe concept of trade costs and comparesPakistan’s trade cost indicators with those ofits regional neighbours.International trade is costly. Exporters bear a plethora of fixedand variable costs, such as documentation, transportation,border delays, tariffs, and non-tariffs. In the last two decades,multilateral negotiations under the auspices of World TradeOrganization (WTO) have driven down tariffs to historicallows. Improvements in shipping connectivity and the ITrevolution have drastically reduced transportation andcommunication costs. Reduced costs have, in most countries,influenced the nature, direction and composition of trade flows.Better connectivity and trade agreements could unlock thebeneﬁts of trade for PakistanTo date, Pakistan’s trade regime has been mainly MFN (MostFavoured Nation) in nature. It is still not party to most of theongoing negotiations on regional integration or the constitutionof mega trading blocks. If the emerging international tradearchitecture reduces trade costs and diverts existing trade flows,it could have a negative impact on comparative advantage ofPakistan’s exporting sectors.Pakistan is believed to have enormous potential for increasingits international trade. At present, this potential remainsuntapped due to high trade costs. A recent study conducted atthe Commonwealth Secretariat, London shows that in 2013,Pakistan under-traded with the former British colonies to thetune of 400%: its exports to these countries amounted to $4billion, against a potential of around $20 billion. Anothersimilar investigation by the Global Trade Analysis Project(GTAP) predicts that a reduction in trade costs in Pakistan tothe level of those of Singapore could increase Pakistan’s GDP by$10 billion, create 2.2 million jobs and reduce poverty by 5%.The best time to harness this unexploited potential was‘yesterday’, and the second best time is ‘now’. However, to doso requires an innovative policy response in line with thecurrent developments in the domain of trade facilitation.Measuring the costs of trade20/06/2017 Trade costs and potential: Removing barriers to growth in Pakistan - IGChttp://www.theigc.org/blog/trade-costs-and-trade-potential-in-pakistan/ 2/5“Measuring the costs of tradeTrade costs include all the factors that drive a wedge betweenthe producers’ price in the country of origin and the consumers’price in the country of destination. Most trade costs are difficultto observe and measure directly; most studies therefore,compute them indirectly. The burgeoning scholarly andtechnical literature on trade policy analysis uses geographicaldistance between trading partners as a proxy for these costs.Global Trade Analysis Project (GTAP) predicts thata reduction in trade costs in Pakistan to the level ofthose of Singapore could increase Pakistan’s GDP by$10 billion, create 2.2 million jobs and reduce povertyby 5%. ”Multilateral institutions, however, have developed variousindices to compare these costs across countries. For example,the World Bank uses a logistic performance index (LPI), whichis based on a survey of business enterprises. Similarly, theUnited Nations Conference on Trade and Development(UNCTAD) employs the liner shipping connectivity index(LSCI), which is computed using various components ofmaritime connectivity.Trade costs: How Pakistan ranksTable 1 presents some of the indicators reflecting differentaspects of the costs of trading. It compares the relative rankingsof Pakistan with that of regional economies, India andBangladesh. Despite performing well on costs of exporting, and‘ ease of doing business’, Pakistan still has much ground tocover on improving its shipping connectivity and logisticperformance.Table 1: Commonly used trade cost indicatorsNotes: Data from China and Singapore serves as a benchmarkof global leaders in trade facilitation.These indices are informative to a certain extent. A fullerpicture, however, emerges from the World Bank’s recentlyreleased bilateral trade-cost dataset, spanning 178 countries.The dataset measures the trade-depressing effects of nationalborders, relative to the costs of domestic trade. Exploration ofthis dataset indicates that Pakistan’s bilateral trade costs arerelatively higher than those of most developing economies.Moreover, costs vary widely between trading partners, as doPakistan’s export shares to various markets (Figure 1, Table 2).20/06/2017 Trade costs and potential: Removing barriers to growth in Pakistan - IGChttp://www.theigc.org/blog/trade-costs-and-trade-potential-in-pakistan/ 3/5Pakistan’s export shares to various markets (Figure 1, Table 2).It appears that the costs of exporting are lower for trading withthe economies of North America, Europe and with Australiaand New Zealand. This can be explained by the relativelyhigher shipping line connectivity of these countries. By contrast,trade costs are highest for the counties located in Middle Africa(most likely due to the landlocked nature of these economies).Figure 1: Evolution of Pakistan’s trade costs between differentregions over timeSource: Author’s work using bilateral trade cost dataset of theWorld BankAlthough Pakistan’s trade costs decline over time, the decline isuneven across countries. Overall, Pakistan’s trade costs havealmost been stagnant (Table 2). By contrast in India and China,costs are continuously falling; the drop is much morepronounced for China than India. Export volumes varyinversely with the trade costs. As a result, Pakistan’s exports areconcentrated in regions with lower trade costs (Figure 2 andFigure 3).Greater connectivity has the potential to reduce costs,incentivise higher trade volumes and expand productmixesA key insight from this data is that some of the trade costindicators in Pakistan are much more promising than those ofits neighbours. For example, Pakistan ranks relatively higher onthe World Bank’s ‘Doing Business Index’. The cost of exportingor importing a 20-foot container is around 35% lower inPakistan than in India or Bangladesh. Moreover, Pakistan’sborder-clearance procedures ranked among the most efficient inthe developing world. However, bilateral trade costs arerelatively higher in Pakistan and vary enormously across itstrading partners, as does Pakistan’s export share to variousmarkets.20/06/2017 Trade costs and potential: Removing barriers to growth in Pakistan - IGChttp://www.theigc.org/blog/trade-costs-and-trade-potential-in-pakistan/ 4/5“Figure 2: Trade volume variesinversely with trade costsFigure 3: Concentration ofexports to low trade costregionsNotes: Trade volume is measured in billions of US dollars,while trade costs are measured in ad valorem equivalents(normalised with 100 to make the corresponding barscomparable)Source: Calculations using bilateral trade cost dataset, the UN-ESCAP and Trade flows from WITSPakistan still has the potential to reduce trade costs significantlyby improving shipping connectivity and enhancing its logisticsperformance. Considerable investment in infrastructure to linkmajor seaports and international airports to the hinterlandcould reduce domestic trade costs. Similarly, policy incentives toattract more shipping lines to navigate Pakistan’s ports coulddrastically reduce international trade costs. This reduction indomestic and international trade costs will incentivise morefirms to export and encourage existing exporters to expandtheir volumes and widen their product mix.Table 2: Average bilateral trade costsCurrently, various efforts are being made at national, regional,and multilateral forums to facilitate trade flows. Pakistan needsto actively engage in these initiatives to benefit from thechanging patterns of world trade. Two recent initiatives are theWTO’s trade facilitation agreement (TFA), and the US-led megatrading blocks in Asia and Europe (TPP, TTIP, and REC).Active involvement in these programmes could improve thecomparative advantage of Pakistan’s export-oriented firms.Pakistan still has the potential to reduce trade costssignificantly by improving shipping connectivity andenhancing its logistics performance. ”Accession to the WTO’s trade facilitation agreement (TFA) maynot generate many trade gains, as Pakistan has alreadyimplemented most of the provisions of the agreementunilaterally. Additionally, most trade costs faced by Pakistan’sexporters are induced by non-tariff measures, namelyinfrastructure, and connectivity challenges. These issues are not20/06/2017 Trade costs and potential: Removing barriers to growth in Pakistan - IGChttp://www.theigc.org/blog/trade-costs-and-trade-potential-in-pakistan/ 5/5infrastructure, and connectivity challenges. These issues are notaddressed in the TFA, which focuses on streamlining borderclearance procedures.ConclusionAny meaningful trade facilitation warrants active policyresponses at the domestic and bilateral levels. This will meansigning trade deals with the countries of high-trade-cost regions.Otherwise, Pakistan’s trade will continue to grind forward withthe handbrake on.  

Trade costs and potential: removing barriers to growth in Pakistan

Abstract

Similar works

Full text

Available Versions

LSE Research Online