Bane or Boon?

The Ministry of Commerce has amended its Negative List and placed a large number of tariff lines under it. Apparently, the import of these goods, considered luxury items, have been banned in order to reduce the demand and pressure on foreign exchange reserves to stabilize the balance of payments. A careful look at the list shows that most of the items are consumer products, automobiles and home appliances.

The measure to control the deteriorating balance of payments must be analyzed in economic and legal terms. The GATT / WTO bars WTO member countries from banning imports by restricting imports, Pakistan has generally bound its tariffs at fifty percent rate of customs duties and cannot increase the tariffs above the bound rates as specified in its Schedule of Concessions in terms of the Article II of GATT 1994. Any violation to the bound tariffs or commitments made with WMC trading partners can attract retaliatory actions.

Article XI on General Elimination of Quantitative Restrictions, says that no prohibition other than duties, taxes or other charges whether made effective through quotas, licences or other measures, shall be instituted or maintained by any WHO member countries on the import of any product. Moreover, the quantitative restriction shall not reduce the total of imports relative to the total domestic production. Whereas, Article XII on Restriction to Safeguard the Balance of Payments, requires that if a WMC desires to safeguard its external financial position and its balance of payments it may restrict the quantity or value of imported goods. The Article requires that such import restrictions instituted or intensified under this Article shall not exceed those necessary (i) to forestall the imminent threat of, or to stop, a serious decline in its monetary reserves, or (ii) in the case with a very low monetary reserve, to achieve a reasonable rate of increase in its reserve.

Some provisions to handle the balance of payments are also covered in Article XVIII of GATT 1994 on Governmental Assistance to Economic Development. This Article also provides measures to apply quantitative restrictions for balance of payments in a manner which takes full account of a continued high levels of demand for imports. In terms of Article XVIII, a WMC, in addition to higher tariffs, may impose quantitative restrictions on agricultural and industrial goods. Such measures are internationally considered justifiable from a legal perspective, as an exception to GATT Rules, in case of deteriorating balance of payments. Countries are considered to be in balance of payments difficulties when their external earnings from trade in goods and services and the flow of investment and loans are far from adequate for their external payment liabilities and when their monetary reserves for meeting immediate liabilities are declining.

The IMF has also raised concerns on these import restrictions. Article XV on Exchange Arrangements of GATT 1994 requires the WMC to consult the IMF prior to the imposition of any measures for addressing issues pertaining to monetary reserves, balance of payments or foreign exchange reserves.

Most of the items now included in the negative list are prone to smuggling and would move from legal imports to clandestine imports, resulting both in revenue loss and diversion of foreign exchange to illegal imports, further causing loss of valuable government revenues and scarcity of foreign exchange, for which such insane measures to ban goods have been resorted to. Foreign exchange would now be diverted into smuggling instead of going through banking channels. Moreover, since the items in question have been put under complete ban the cost of smuggling will increase manifold due to corruption gaps, giving ample opportunity to the local manufacturers to increase prices of domestically produced goods as their prices are fixed a little below the landed cost of legal/clandestine imports. This will unintentionally add up to artificial inflation, which is already under a snowball effect due depreciation in the value of PKR, arbitrary POL price fixation and poor governance, etc.

Most of the items now included in the negative list are prone to smuggling and would move from legal imports to clandestine imports.

Another crucial issue has probably been left out by the decision-makers, is an import ban on a product gives unlimited tariff protection to it and enables the local manufacturers to compromise on the qualitative competitiveness and standard of their products at the cost of the health and wellbeing of consumers.

Since an import ban on any product gives it an unlimited tariff protection, the National Tariff Commission, under the Ministry of Commerce, requires it to advise the government on tariffs or trade measures and product standards in case of unlimited protection.

A cost benefit analysis needs to be conducted by the relevant regulators on the ban imposed on a large number of products to ascertain, the revenue loss and foreign exchange diversion to clandestine imports.
The government should revisit the SRO and take measures in line with the WTO regime in consultation with the IMF.