Trade What is meant by trade? Trade is the exchange of goods and services between different areas. i Internal Trade International Trade (within the country) |__| (with other countries) Benefits of Trade: No country in the world is self-sufficient in all commodities so through trade goods can be brought from other countries and also sold to get foreign exchange {Fx}. Y Domestic resources are used to export items e.g. raw cotton is used to manufacture bedding for export. ¥ This leads to employment generation in all three sectors (Primary, Secondary and Tertiary). ¥ Trade promotes industrialization eg to manufacture export items so more industries are set up. Y The country starts to produce value-added products which can fully manufactured good that fetch a more foreign exchange eg raw cotton (bed sheets, garments) ¥ Trade also leads to economies of scale (reduced cost of production due to mass production). Y Geographical specialization is achieved due to trade for example we are specialized in cloth production. Y Trade leads to transfer of technology and capital from developed countries to underdeveloped countries for example, big bands get their goods, wade in other countries and share their production techniques and pay the factories for their goods. KFC led to AFC and now everyone knows about this type of chicken, Y The natural income of the country increases e.g. GNP Exports Exports represent the flow of foreign exchange into the country and goods out of the country. Categories of Exports: 1. Primary commodities- for example fri the primary sector). 2. Processed goods: e.g, yarn and leather 3. Manufactured goods (value-added goods): cotton garments/cloth, surgical goods, sports ‘goods, carpets, cement, canned fish Exports to different countries Raw cotton to Eastem Europe and Middle East, cotton yarn to China y Hong Kong (our cotton yarn export is much more than cloth because more demand for the intemational market) Y Carpets, hand knotted rugs, surgical/sports goods to USA and Middle East Y Ready-made garments, rice, spices, mangoes to USA and Middle East , Tice, vegetables, raw cotton (goods obtained forY Fish/fish products to Japan (main export), EU and dried salted fish to the Middle East. Canned fish banned due to contamination. Changes in the categories of exports: Initially, Pakistan was an exporter of raw materials because of lack of industrialization. Gradually, with the onset of industrialization, we diversified our trade, and moved towards the export of value-added products. Exports also increased with the exploration of new markets and by the export of good quality products. Imports of Pakistan: Imports are categorized by the flow of foreign exchange out of the country and goods into the country. Categories of Imports: Imports steadily grow between 47/48 and from 71-72. Imports after 72, grew rapidly because of industrialization in the 60°s, oil prices grew due to the Arab-Israeli War and the devaluation of currency. Before the 60’s, most consumer goods were imported due to lack of industrialization and increase in population (food products). Imports: 1. Capital goods © Capital goods are goods made in one industry and used in another industry to make use for common use e.g. machinery. Agricultural Machinery- tractors, harvesters, threshers Industrial Machinery- Sugar mills, cloth textile Cranes Cars! Vehicles (Buses) Raw material Raw material is used for capital and consumer goods e.g. refined oil/ crude oil, edible oil (Malaysian palm oil) Spices Chemicals used to make consumer goods e.g. shampoo Steel- the steel mill does not produce enough steel so it is imported, the raw materials of steel mill (iron ore, manganese, coking coal) 3. Consumer goods ‘© Luxury items for example cosmetics, clothing, food items, electronics etc. Major import and different countric ‘© Capital goods e.g. machinery, electrical and electronic appliances mainly for UK, Japan, South Korea, USA + Eastern Europe Edible oil from Malaysia (This is added to locally produced edible/ vegetable oil for e.g. Sunflower, Canola etc.) Crude oil form the Middle East, Saudi Arabia + Iran, UAE Tea from Srilanka, Kenya + Rwanda Medicines from UK, Germany + USA ‘Vegetable (tomatoes) ~ India ° 0000© Fruits (banana) ~ India © Wheat- Australia, USA, Russia Changes in the categories of Imports: From 47 onwards, Pakistan was a heavy importer of capital goods and consumer goods due to Jack on industriatization. In the 60's, there was rapid industrialization in the country, so more import of machinery (capital goods) and raw materials for consumer goods Similarly, the devaluation of currency/ exchange rates, rise in oil prices also led to an increase in imports. In 1947, we have a smaller population so enough food products were available but now a lot of import of food products, edible oil ete. Currency exchange rates: Intemational trade takes place in American dollars. Due to continuous depreciation of the rupee (value of dollar became less with the dollar) e.g. Rs 81-100. Previously, it was Rs 19-70. This has led to increased import cost but more exchange earnings. If the rupee appreciated against the dollar, then there would be less import earnings but export earings would decline. So to ‘improve Balance of Payments, an appreciated rupee is better. Pakistan's position in World Trade: Right now, Pakistan's share in world trade is 0.1%. We are trading with around 6-7 countries while we are importing from many countries in the world. B lance of Trade (BOT)/ Balance of Payments (BOP): > POT is the difference between the value of exports and the value of imports, while the BOP is also the difference between the value of exports and imports but it also includes. service sector, while BOT only includes goods. > Ifthe value turns to be negative, then we have a negative BOP/BOT. > Pakistan has had a negative BOP/BOT for a long time. Reasons for a Negative BOP: ‘© There are many reasons for Pakistan having a negative balance of payments situation. ‘Some of these reasons are related to world events, some are related to rapid increase in imports and some are due to Pakistan’s poor performance in the export sector. © Pakistan’s imports are lot of capital goods, raw material and consumer goods because © Duc to rapid industrialization, capital goods (machinery) and raw material were needed. This increased the import bil © Pakistan isa consumption oriented society, a lot of luxury items are imported such as electronics, eatables and vehicles, expensive garments, cosmetics © A lot of consumer items c.g. medicine are needed which are also imported. © A lot of agricultural products are also imported, even though Pakistan is an agro-based economy e.g. pulses, wheat etc. © Imports in the tertiary sector are also high. Foreign consultants and advisors are hired or different projects mostly dams. They are paid in dollars, so a huge burden on our foreign exchange reserves‘Similarly, our exports are not up to the mark because: é We have 2 narrow export base e.g. we have few items that we export such as cotton , surgical goods, carpets etc. ed to expand our expor” bese so that we can reach more markets and compete with ne world (60% of our foreign exchange is from cotton). Most of our.exports are agro-based, thus weather related, Natural calamities such as loose, pest attacks etc. This also affects our exports. ‘c of quality control and tough competition with countries such as Egypt, Bangladesh, ‘istnom eto, in the cotton sector. vate Lesciers such as Child Labor, Environmental concerns, working conditions, vcsid ag system of preferences atc, also have effected exports, Expert of canned fish has sed due to contamination. ‘Shusilasly, sports goods (footballs) sot used in FIFA due to child labor. Similarly, polities aloo offcts exports. Nuclear testing led to reduced exports. Poicictan has a narrow export base and the value-added (manufactured goods) that it ~xpome are still in the lov value-added secior. Thus, there are limited foreign exchange iE. ‘oy trade to flourish there should be many trade partners/agreements. So we do not trade aurny countries in the world. Pakistan’s share in trade in 0.10% (exports) which is igibie. ce: t0 find mote markots for cur goods. We are right now part of Commonwealth, ARC, WTO, ECO ete. : ‘voson2 include: Lo price of oil ithe 70’e afierted our trade balance because petroleum uecame our import Lill jumped. izations only. cater to Paic'stan when our political conditions are demeézratic comnonweslth, oily allow Pakistan to become a part when there is lensed iced to leave. tore.g: the, goveciment. During marshel inw, we are ‘ovis of an unfavorable balance of payments situation: iste Sse exports, there Zs less money t> run the affairs of the country, so loans heve to from other countsies or organizations e.g. IMF. This increases the debt. lopanental projects such as construction of hospitals, schools have to be curtailed. sovecament stavis to rely more on foreign assistance. ‘imitarly, whea the govt. cannot pay off its loans, an economic and trade embargo (boyortt) is imposed by the countries whose loans we have to pay back. Se, to pay back the loans, govt. assets have to be sold to foreign companies etc. The Steel Mill wes cold by the govt Gath citor hand, texction will «Iso increase on the local population and this will reduc> ther purchasing power (ike ability to buy goods). >. s uillthave a bad effect on th production of goods (industries will start to close dy is buying their goods). cis] activities will slow doviu in the country. + +Measures to correct the BOP situation: " )_ Increase exports a ata 1), To correct the BOP/BOT situation the country has to increase its exports and improve its wx remittances 66 ov 2) Exports can be increased by widening the export base of the country ie. finding more cetat products to export such as flowers, electronics and defense equipment. ye! 3) The country should aim at higher value addition i.e.machinery ete. fase 4) Encourage cottage small sal industries because ther goods are more popula inthe ma world market ete, carpets, and sports goods. « > 5) Reduce taxation on export items; this encourages more peli industrialists to cl ° their goods es 6) Strict quality control should be ensured by the ee oe 7) Organizations dealing with trade such as EPB (Export Promotion Burea.) and TDAP {Trade Development Authority of Pakistan) need to play ther part eestively by holding trade fairs and by finding markets for Pakistani oods.- , 3 8) Special land areas like Export Processing Zonesi(similar to industrial estates) should be set up with al kinds of facilities tha ae needed to setup export oriented industries and export their goods to other countries. ow “ 9) Dry port port facilities should be efficient to facilitate trade activities. b) By restricting imports te Another thing that should be done to reduce the negative balance of payments situation is to restrict imports in the goods sector. Pakistan imports a ldtof Yuxury items such as clothin; perfumes, soaps, eatables etc. these imports should be reduced to the minimum requirement. c) Restricting imports in the service/tertiary sector: .. 56" 5 erp It is another measure that needs to be taken. Inviting experts and consultants fom etier countries « is abig burden on exchequer. Pakistan should produce ts own experts Similar, tne peter edb oe ttc anch a sleteciy seceess dicing tian, ‘gas problems during winters should also be promptly dealt with,to improve exports. Raw New: material should be produced with inthe country and there shpuld be casistent gov. polices for trade and industrialization. finer esice Gomer g Ail business and sommesiny ATrade Routes: There are two kinds of trade routes. Trade Routes Pakistan uses its land routes to Main officers 7 | Custom officers trade with its neighbors. Trade 2 Sea_| (World Map) I A enw oo co] Rail Keamari road or rail, Or to the border openings with our x a neighbors .i. trade by | €——— | bry ports . ‘© Warm water ports Deep i © Sheltered © Provided with modern port facilities Lahore Dry Port trade e.g. berths, storage areas etc. J Custom officers] = | collect goods from exporters J Used to trade with far off countries ‘store goods Advantage: cheaper, relatively safer J Disadvantage: slow “Transport them to either the sea port to be loaded on toa ship or oan airport (surgical goods) wagel~ Proneits chase - India (East): Trading port Wagha, Ganda Singh (Punjab) through the G.T Road. Railway in Sindh it is a railway track called Khrukhpar- Manabao railway track. We have a long border line with India the topography is flatland and climate condition are favorable all yea road. But only 3 border openings. Why? This is due to strained political relations. Repti Kanter China (North East): A small border in the north, with China Vey good relation, but only one border opening i.e. The Karakorum Highway through the Khunjerab Pass. Why? Because the topography is rugged, mountainous terrain and the climatic condition are harsh, The area is not open all year round. The roads are covered with snow making them slippery and they are damaged by the snow.if. Werle Vardehed iv. Afghanistan (North West): A long border called the Durand line between the 2 countries. Pakistan has tried to have good relation between the 2 countries; we allowed millions of ‘Afghanistan to entry in the 80°s, 90°s during the Afghan-Russia war. _- Peslows — Nar ‘Coming to the border opening again few one in KPK-Khyber Pass (Torkham Border) and ‘one in Baluchistan (Chaman Border area) Kojak Pass. Why few? Due to the topography and climate all along the border. Similarly, the river flowing over the passes and the gorges formed by the rivers are also detrimental to trade (avalanches and landslide). Trade agreements like ATTA (Afghanistan Transit Trade Agreement) have been signed between the 2 countries and Afghanistan has been allowed to import and export through the Karachi port and they can use our godowns at discounted rates. Security and facilities to deal with natural calamities like landsides have been improved. Iran (south west): The RCD highway is the main route to Iran. It extends from Karachi to ‘Quetta and from there to the Chagai Hills to Iran and then onto Turkey. This and a railway track is the only route to Iran. Why? The topography and the mountain on both sides are the reason. Male Cova Lenge abd — Site. Vm Land trade is heavily taxed, too far off countries, it is very expensive and bulk transportation is not feasible by road. Land routes are used for trade with neighboring countries. GDP and GNP: 1. GDP (Gross Domestic Trade): It refers to the goods produced within the borders of the country. It doesn’t have to be a Pakistani. He can be a foreign investor producing goods in Pakistan. GDP is calculated on a yearly basis. 2. GNP (Gross National Product): This refers to the goods produced by Pakistani’s living in any part of the world. This is a measure of the total economic activity. It includes income of the citizens working in the country and the investment of overseas residents (Pakistanis). Government role in increasing export: © Loans to import machinery to modernize production’ value addition © Develops the infrastructure e.g, roads (motorways, highways) to make movement of goods/raw material faster. Dry ports developed in the inland areas EPZ’s developed to increase export Port facilities modernized to handle cargo Policies such as the development of the Engineering Development Board to oversee the development of export items e.g, electrical appliances, motor vehicles Foreign collaboration on technology transfer Reduced tariffs on import of parts for the assembly industry Engineering goods industry privatized e.g. cement Trade Barriers: ‘Trade barriers is a set of restrictions imposed by the governments on the trade of goods and services ‘These restrictions include/ or may exist in the form ofi. Tariffs Trade embargoes (a ban on certain imports) iii, Quotas (a restriction on the physical quality of a good) These restrictions are imposed to protect the local industry from inflow of cheap, imported ‘2004s. Too much import can lead to high level of unemployment due to closing down of industries. Advantages of Trade Barriers: a) By imposing trade barriers, the country becomes self-sufficient in producing goods within the country e.g. your own shampoos etc. This also leads to employment in the country. b) Infant ( new industries) are protected from competition from foreign goods ©) The domestic/ local demand increases thus there is more industrialization and more exploitation of resources to produce goods. Disadvantages of Trade Barriers: a) With very little import consumer choice becomes limited, and people are forced to use local goods which might not be very good. b) With little import of goods, local industries will have no! less competition which will ‘make them relaxed and the will not improve their product. ©) With little impor the country will have to produce even those goods that are not viable/ ‘or too expensive to be produced in the country. Trading Blocs This refers to regional groupings of intemational economies to allow for greater economic cooperation and facilitation of free trade for e.g, groups of countries cooperate with each other, have lower or no trade restriction and allow for free trade. Similarly, these groupings give a tough time to non-members. (Barriers) Pakistan is a member of i. SAARC- not effective due to India ii, ECO (for RCD) iii, ASEAN- not effective due to differences between members iv. EU Recent) v. WTO (Recently) EU: This is an organization of 27 European Countries that trade with each other. It is also a political group. This group allows the circulation of goods, capital, people and services within the BU. The goods are not subject to custom duties, and import quotas. But when trade is done with other countries, then there are restrictions. ‘Advantages! Disadvantages and improve relations: Pg. 197/98 Huma Naz Sethi BOP also increases FX WTO (World Trade Organization) ‘© Successor to GATT (General Agreement on Trade and Tariffs) © WTO isan international institution which allows free trade between its members by reducing or abolishing some of the restriction imposed by the government on import/ export, Pakistan became a member of WTO in 2. WTO calls for tariff reduction. UnderWTO, Pakistan access to intemational markets would be according to its competitiveness (standardized goods! good quality goods). Challenges of WTO: ‘© Mainly for the agricultural and cottage-small/scale industries They will have to be reoriented, subsidies and other kinds of support will have to be withdrawn, with cheap food products and industrial goods coming into the country, the rural population (farmers) are going to suffer when their goods will not be able to compete, and thus will lead to ‘unemployment and loss of revenue for the government. Similarly, the government will have to reduce import duties on goods in line with WTO regulation; this will adversely affect our local industry Opportunities: The tertiary sector is in a position to compete with the foreign companies. Our telecommunication sector is already competing with foreign companies like Mobilink, Jazz etc. ‘Similarly, our banking sector is also competing with foreign banks etc. How to cope with the challenges of WTO: To cope with the requirement of WTO, the government should modemize the production process. Training and Education is most important. = The infrastructure (roads, railway, electricity, clear water) should be developed. Research in agriculture should become a priority. * The business environment should be favorable for farmers and small scale industries e.g, provide loans with less interest. The civil service should also provide a secure environment for industries to flourish. = International quality standards should be with Global trends should be adhered to in production and processing of exports. Export Processing Zones: Areas specified/reserved for the development/setting up of export-oriented industries, similar to Industrial estates, but EPZ’s are only for export, not local marketing of goods. EPZ’S aim to: Increase industrialization in the country To increase the exports of the country by creating facilities for local and foreign investors to set up industries To increase employment To transfer hi-tech and capital from the developed world to developing countries Examples of EPZ’s include Landhi, Karachi In future, they are planning to develop EPZ’s in Gwadar, Risalpur and Sialkot Sooo oe Incentives for the setup of units in EPZ are of Pakistan: Y Foreign/local investor have 100% ownership rights of the land they purchase to setup an industry Y The government does not limit the amount of investment coming into the country. You ‘can bring how much you want.Y The domestic market is open for the investor to get any raw material they need with no sales tax. This is also for gas and electricity bills. Y They are exempted from import duties and natural import restrictions on machinery, equipment and material. ir iP * Since export is the most important activity so seaport location are the best for cheaper export and also import of raw material and machinery. So Karachi and Gwadar are the best location. ‘* Consistent government policies is very important for industrialization in the country, a stable environment for investors to come and set up industries ‘© Efficient road and rail transport for the movement of raw materials, products to the market and labor to the industries. Gwadar (Potential and Scope for EPZ’s on the Makran Coast): ‘* Shortest route to the Middle East and also on the door step to the CARS make an ideal location for the setting up of EPZ’s, © Foreign exchange and hi-tech can be attracted to mainly Gwadar but also Pasni and Ormara (in future) and provide seaport facilities to the landlocked CAR’s. © The port can serve as a regional trade hub to cater to the needs of the CARS’s and Afghanistan especially when Afghanistan is rebuilding itself. Similarly, it will also cater to the local demands/requirements of Saudia Arabia, Qatar, Oman, and UAE with the CAR’S. Infrastructure and land required for the EPZ at Gwadar such as a Dam for electricity, metalled roads, desalination plants etc can be arranged by the government. Mirani Dam on the Dasht River will provide the water resource and electricity. Similarly, the Makran Coastal Highway, from Karachi to Gwadar has already reduced the distances between Karachi and Gwadar. CPEC (China Pakistan Economic Corridor) is already underway with roads being constructed and Balochistan and other parts of the country to connect Gwadar to Xinjiang province in China. The CAR’s also want to be part of the agreement. EPB (Export Promotion Bureau) > Ithas a narrow role, that’s why TDAP replaced it, TDAP (Trade Development Authority Pakistan) > Itplays a more effective role in trade related activities. > Itis responsible for overall plans and development of all sectors of production, > Itwill hold trade fairs with collaboration of FPCCI. FPCCI (Federation of Pakistan's Chambers and Industry) > Pakistan’s businessman will also attend trade fairs abroad for e.g. expo 20 in Dubai (scheduled for 2020) > TDAP more effective for the challenge of WTO Countries with favorable trade Balance: USA, UAE ete. Countries with in favorable trade balance: MalaysiaFactors that help trade with other countries: © To facilitate trade the government has and is developing the infrastructure e.g Karakoram Highway, Chaman road from Quetta to Afghanistan and the RCD Highway has been upgraded to facilitate trade with Iran and Turkey. ©. Similarly the ports are also developed to increase sea trade with far off countries. Modern oil handlings, cargo handling facilities have been provided. ‘© Besides this Pakistan is looking to join more regional organization so that trade increases e.g. WTO, GSP** with the EU. The government has setup organization like TDAP to guide exporters on what and how to produce exports for the world market. Taxes on exports and devaluation of currency are other policies of the government to increase exports of Pakistan, On the other hand there are factors that have hindered/reduced trade especially exports of Pakistan:- a) Trade Barriers e.g. child labor, health standards and environmental protection, Quota System are problem that our exports face with foreign countries, 'b) Land routes are sometimes less developed due to the physical conditions of the border eg. Afghanistan or due to political conducts e.g. India so trade is less. ©) Similarly, the security situation in Pakistan especially in Karachi has led to reduced industrial growth and foreign investment. Inconsistent government policies and devaluation of currency has made input more expensive. 4) Pakistan is also not a member of many organizations which would help it to get cheap imported goods with less tariffivor no tariffs. Similarly Pakistan has negative balance of payments of situation so most of the money earned through trade is channelized into debt servicing and if loan not returned can lead to a trade embargo or more economic assistance/more loans leading to a weak economy.