WTO and Pakistani industry
By Yusuf H. Shirazi
By the end of 2003, Paksitan will be stipulqted to follow the WTO mandate. When applied, the bulk of Pakistani industry will be affected in one way or another. In response to the inevitable arrival of the WTO era, the government is promising industry protection to the business community.

Under the WTO, the most vulnerable will be the value added basic industries. Engineering and, more so, the auto industry, will be the hardest hit. This industry is not yet prepared for a free for all economy that the WTO espouses. The Pakistani industry this needs some more time to become internationally competitive, particularly the auto industry, which is exempt from the discipline of the IFIs. Therefore, the engineering sector should continue to be protected as is the case in the rest of the world.

Since 9/11 attack on the World Trade Centre, Pakistan's macro economic situation has improved. Loans worth over US$30 billion have been rescheduled - generally payable after 23 to 30 years - a great facility indeed. Loans of about US$2 billion have been written off and another couple of billion dollars have been received as grants. Well over 5 billion US dollars have been received as remittances, which continue to pour in. A couple of billion dollars have been bought from the open market - all amounting to a foreign exchange reserve of over US$ 10 billion. The rupee has been unvalued from about Rs 67 to about Rs 58/- to the dollar. Interest rates have decreased from double to single digit. Export proceeds are being received in full with no more cushioning. As a result of the macro economic success dollarization of the economy has reverted to a rupee economy. This is an unusual situation - indeed enviable for any growth economy.

IMF vs localisations

On the other hand, the IFIs - WB IMF and WTO - are highly prudent organizations. Those running these organizations are experts in their particular areas of operations and their prudence and expertise, unfortunately, does not cater to individual countries. In fact, they hardly know the local genius or aspirations of countries like Pakistan. Professor Sen, the Nobel Laureate advocates that IFIs policies must mesh with the local priorities: India and Malaysia in particular have taken heed of this advice. The developed world itself is no exception. Local priorities are thus the responsibility of the locals, not of foreign organizations.

In this respect, as an example, the IMF for some years now has reduced the maximum tariff from 60% to 25% for Pakistan. This has been applied to the automobile industry also, which is claimed to be exempt from IMF discipline. A customs duty of 25% on spare parts - as against 30-35% on Completely Knocked Down -CKD - for local assembly and progressive manufacturing has been applied. This policy attracts 'BRIEF CASE ASSEMBLERS', who prefer to import spare parts, and that too, as under invoiced components and as CKD, if not dumping or smuggling. This is not only hurting investment, employment and export but also government revenues. A reversal of last year's budget on spare parts duty of 25%, to the original 50% - would thus be the only remedy creating an incentive for localization, the only fool proof measure for price reduction.

WTO vs under-invoicing

Further, in addition to three motorcycle units from Japan, the government has allowed seven Chinese motorcycle units under the IFIs regime in the present market of about 185000 units. All these Chinese manufacturers are carbon copies of Japanese motorcycles, forcing the latter to file lawsuits. Some of these cases have been won.

An economic unit, however, is stated to be with a capacity of 30,000 units, hence making the industry, on the whole, uneconomical. The new Chinese units unlike their Japanese counterparts, have been sanctioned without any Joint Venture, Technical Assistance Agreement or furnished drawings of component and parts, a condition of sanction and agreement with the local vending industry. There should be a level playing field for all.

Under these circumstances, the new units are importing spare parts and knocked down components - CKD, heavily under-invoiced - a frame body and fuel tank each costing a mere US 50 cents against the normal cost of about US$30. Two such cases have been penalized: one to pay duty as applicable on the import of completely built up - CBU - units and another's deletion program has been suspended. But the situation has not improved The under-invoiced imports continues as before.

It is thus imperative to ensure a level playing field for all - not at the cost of the existing units, that are indigenizing over 85%: Otherwise the indigenization process will be stalled in addition to loss of billions of rupees as revenues and employment. The new units, therefore, must be subject to normal indigenizaiton discipline. Otherwise trade will replace industry - the life line of an economy. An economy is indeed where the means of production are and not trade.

Free trade vs dumping

Further, in the last budget duty o the import of Completely Built Up- CBU - motorcycles were reduced from 10.5% to 90% This had encouraged import of CBU units, if not dumping. According to present Chinese export official check price, the minimum export price of a unit is between US$300 -US$650. these units, however, are being imported in range of US$233 to US$486 or Rs 10,781/- to Rs 25,962/- each as under-invoiced, as seen from the original Chinese script and its translation in English below:

Note:

1. The above prices are the lowest for export of motorcycle as a whole. The Prices of a whole set of motorcycle parts equal whole motorcycle export prices. Export prices of parts of motorcycle parts are calculated in the ratio of parts to the motorcycle as a whole.

2. Current motorcycle exporters' agreed prices were adjusted and passed by Motorcycle Export Coordination Team on November 14th, 2002.

3. Motorcycles which for the moment are not listed in "the Table of Motorcycle Exporters' Agreed Prices" cannot be sold at a lower price than should-be prices (should-be prices: production costs + storage, transportation, insurance and operation costs demanded by foreign trade + reasonable profits).

4. The above motorcycle exporters' agreed prices come into use since January lst , 2003 when the former price tables are abolished.

Most countries including India, Malaysia, Indonesia, Thailand are checking such prices and not allowing free import, under invoicing or dumping thus protecting their industry in whatsoever circumstances.

The Pakistan market is, in fact, heavily flooded with all kinds of imports, under-invoiced and dumping: Construction material such as, tiles - auto parts, shoes, socks, undergarments, handkerchiefs, stationery items like pens and pencils, to name a few. As long as under-invoicing and dumping continues, developing countries like Pakistan will continue to suffer.

IFIs' role

Therefore, the IFIs - WB-IMF-WTO cry for increased discipline has become rather contentious. Among others, according to a World Bank export several industries including Steel, Fertilizers, Refineries, Sugar, Engineering, Automobiles, Chemicals, etc. must be phased out since they are internationally uncompetitive. At the same time, however, USA recently imposed a 30% additional duty to protect its ailing steel industry. USA - EU openly protect their industry, agriculture and services.

All this explains why investment is shy in Pakistan despite unprecedented macro economic stability- it calls for afresh look - sooner than later - towards import and export based and strategic - not trade.

THE TABLE OF MOTORCYCLE EXPORTERS' AGREED PRICES

Product category: Motorcycle

Unit: US Dollar / Per Motorcycle or set.

Commodity numbers Displacement Prices

Straddle Pedal beam bending

Type type type

8711.1000 50CC 160 210

50CC 200 210

8711.2000 50CC-60CC 325

70CC 310 310

80CC 320 320

90CC 320 400 350

100CC 340 440 400

110CC-120CC 350 460 410

125CC 450 500 450

150CC 600 650

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