Free trade and domestic policy | The Express Tribune

ISLAMABAD:

It’s a war of narratives and ideas. In its critique of the new National Tariff Policy (2025-30), the Policy Research & Advisory Council (PRAC), which was established by the business community and the Karachi Chamber of Commerce (KCCI), has expressed concern that the new tariff policy could destabilise the external sector and lead to premature deindustrialisation in the country.

In a statement, PRAC said that the policy is based on an ideology of free trade that is no longer compatible with the changing economic realities of the world.

The business community is seeking the reinstatement of tariff protections and subsidies. They are of the view that if left unchanged, the new policy could undermine recent economic stability, further weaken industries and limit long-term growth.

It is not surprising that a think tank set up by the KCCI and the business community has opposed a bold and paradigm shift in trade policy. It is for the first time that the government has given a clear signal to move away from the import substitution regime, which is mainly responsible for Pakistan’s poor industrial performance and growth outlook in the first place.

PRAC’s vehement opposition to the new tariff is purely because of the losses that the existing firms would incur, having grown thus far depending on tariff-based protections.

Let’s pick the auto sector, for instance, and perhaps the most contested sector when it comes to the tariff policy. I divide the auto sector broadly into two product categories: the two-wheeler or motorbike and the four-wheeler or motor car. The underlying thought behind this classification is the role of tariff policy.

About 25 years ago, the government took a clear exit from the protectionist regime in the case of motorbikes. It opened the industry and liberalised the licensing regime. As a result, almost 30 new firms stepped into the market, triggering a wide-scale multiplication in the industrial output, bringing economies of scale, and keeping a competitive check on prices. The result: for almost 20 years, till 2018, the price of the leading bike brand remained the same.

Let this sink in. In those 20 years, the Pakistani rupee depreciated considerably, and all utility costs, input prices, and material costs increased substantially. Yet, the leading bike brand was forced to sell its product at the same price of Rs70,000.

In the meantime, competitive products were available at half the price. Overall production doubled, thereby helping leading firms to upscale their production. The annual production of motorbikes jumped from less than 100,000 units to more than 1.5 million.

Now, let’s consider the case of the four-wheeler, which has enjoyed strong tariff-based protection throughout the last five decades, though now this sector is relatively open. Even otherwise well-intentioned, the new tariff policy has given a kind of waiver to this sector for another year, until the expiry of the current auto policy.

As consumers, we continue to buy the most expensive, locally assembled cars, while the government continues to collect heavy taxes on the product. Both the corporate and the state reap benefits at the cost of the average citizen.

Car ownership, based on households, remains quite low at just 7%. Motorbike ownership, on the other hand, is above 54%. The annual production of cars increased 3.7 times in 25 years, whereas the production of motorbikes increased 15 times during the same period.

Conclusion: It is not free trade, which has undermined our economic growth, but the absence of it.

A disclaimer is in order. Free trade policy, in the presence of anti-growth taxes and onerous regulations, can’t achieve much on its own. It, however, has the power to shift business dynamics by encouraging investment, competition and innovation.

Free trade can also create sustained pressure on the domestic policy to fix where it is needed — in taxes, regulations and energy pricing. Therefore, while we need a robust domestic policy, it should not be traded with more protectionism.

PRAC is right in mentioning that after Trump Tariffs, the world has potentially entered into a new tariff war, implying we should wash our hands of the free trade principle. However, first, we need to understand that the world’s economy is no longer driven solely by the US.

In a recent statement, President Trump expressed his desire to learn from other advanced economies. He is right. About 86% of the world’s imports are non-US, and 93% of the world’s exports are non-US.

I favour the broader thrust and direction of the new tariff policy. However, it remains to be cautious and modestly incremental and thus concerns raised by PRAC may not be realised in any case.

Another promising aspect would be the active discourse that the new policy has generated. The government must make sure to bring such documents to public scrutiny well before approval, an action that is largely neglected.

The writer is the CEO of Policy Research Institute of Market Economy (PRIME), an independent economic policy think tank