Protectionism undermines growth of industrial sector

Comment

LAHORE: Local and foreign economists agree that protection makes industries inefficient. However, it is puzzling that many protected industrial sectors in Pakistan are efficient, but they are still losing market to imports.

Prime Minister Imran Khan will be presiding over a meeting on Monday to find out ways to curb smuggling and money transfer through hawala and unofficial channels. This is a good move as smuggled goods undermine the viability of domestic industries that are smuggled into the country without payment of any government levy. Tyres and tubes are smuggled, tiles are smuggled and artificial leather, air conditioners, television sets and many other home appliances are smuggled without depositing a penny to national exchequer.

Smuggled goods come from our marine and land borders.

These goods are not brought in from places where customs check posts are established, but through the porous borders or sea routes. They either escape the eye of our border and marine security forces or come in with their blessings.

Smugglers are serious security risk as they can bring in anything including arms and explosives through routes where they are protected.

The Prime Minister should ensure that the risk is addressed once and for all.

Apart from smuggling there are other avenues that make domestic industries vulnerable. It should be a matter of concern for our trade experts that many Pakistani products that are at par in quality with the imported goods and enjoy five to 10 percent duty protection are overlooked by the consumers because of their higher cost.

Their productivity and production processes are at par with global standards and wages in Pakistan are much lower than other countries which should result in lower prices, but it is not so.

The trade regime in Pakistan is extremely flawed. The government levies, other than import duties, are equal for both domestic producers and the importers.

The only additional levy that the importers pay is the import duty. Sales tax and excise duties are the same for both. Interestingly, the percentage of other levies is much higher than the protective import duty.

The domestic producer only pays sales tax on the retail price of the product and at the end of year pays income tax on his total profit.

The trick of the trade invented by the importers is to manage the custom management to accept a very low price of their product at the time of clearance.

You may be paying Rs100 to a foreign supplier for a product but on the invoice the price may range from 10-35 or 50 percent of original price.

The officials accept this price after ‘proper evaluation’, aided by speed money. Once this is done no domestic product could compete with you irrespective of its efficiency level. The system is so well-designed that it is in fact the importer that gets protection from domestic industry. The domestic industries in Pakistan are operating on handicap and are finding it hard to survive.

An item, even if imported at 35 percent (or Rs35) of its value, pays much less levies than that paid by domestic producer.

If imported at 35 percent of its original value 10 percent import duty would increase its price by 10 percent, which means 38.5 percent. It is on this amount that importer would be paying 17 percent sales tax, which would officially take the landed cost much less than the local substitute.

The domestic producer that produces the same product at global efficient rate of Rs100 would have to pay Rs17 as sales tax that would shoot its price to Rs117.

We are losing millions of jobs by patronising foreign goods through smuggling and under invoicing. For creating 10 million jobs, it would be imperative to plug these two major avenues of job destruction.

The curb on these activities would also substantially increase the revenues though the number of imported goods would decline.

A clean and transparent trade policy would also induce foreign investors to enter our markets without seeking any sovereign guarantees.