Foreign trade debate

THERE is a debate in Pakistan on the foreign trade strategy we should pursue: export promotion, or import substitution? In much of the world, especially Southeast Asia, the debate has been won by export promotion to spectacular effect. We, however, are still confused, trying to carry out the best of both strategies and ending up with the worst of both. Import substitution is a strategy that seeks to substitute imported goods with domestic production. Take, for example, cars. In the 1980s, our government, while keeping higher duties on imported cars, reduced duties on components such as engines, transmissions, windshields, etc, so that firms that assembled cars here could get a domestic market protected from foreign competition through this duty differential. This tariff protection, paid by consumers through higher prices, was justified by the argument that this was an ‘infant industry’ and the small local market didn’t allow companies to quickly reach the production scale needed for global competitiveness. Three decades later, infant-industry protection continues, we have excellent local cars from several international brands but they remain expensive and the market remains small. Both customs duty on parts — which is quite high — and domestic protection through prohibitively high duties on foreign cars, have kept prices high. Moreover, the auto market and firms remain small and therefore inefficient and uncompetitive.