The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.
This note discusses the role that import duties have in Pakistan's economy, and their links with export competitiveness. Import duties play two key roles. First, they are a source of tax revenues for governments. Second, when imposed on a product, they create a wedge between its world price, and the price paid domestically (as well as a wedge between its domestic price, and the price of its substitute in the domestic economy). These wedges affect the allocation of resources. They divert resources away from export markets-in which firms will only fetch world prices for the product-and into the domestic market, effectively creating an anti-export bias. Thus, an import duty is implicitly an export duty. When these duties are applied on inputs that different sectors use to produce, the duty induces firms to substitute away from that-now more expensive-input, and into other substitutes, thus affecting the otherwise optimal technological choice of firms, as well as increasing their production costs. This note is organized as follows. The first section presents a snapshot of import duties in Pakistan. It discusses the role that import duties have in Pakistan's overall tax revenues and presents an overview of the type of duties importers pay, and how these duties fall disproportionately on final goods rather than on raw materials, intermediates and capital equipment-structure known as 'cascading', which aims at protecting domestic producers of final goods. Finally, it provides measures of effective protection by sector, revealing how tariff policy encourages or discourages resource allocation sectors through changes in relative prices. The second section empirically examines the ways import duties induce an allocation of resources that is different from the one that would be obtained without the duty distortion. First, it quantifies the antiexport bias that these duties introduce through two channels: the input channel-by increasing production costs and therefore reducing competitiveness, and the output channel-by increasing profits of selling domestically rather than exporting. Second, it presents evidence of the way the FTA between China and Pakistan, that liberalized a substantial portion of trade through reductions in import duties, helped Pakistan's export competitiveness through the input channel, while inducing some reallocation of resources in less competitive sectors. Third, and again focusing on the input channel, it examines the effects of import duty reductions on Pakistan's firms' productivity. The third section looks at the role of tariff policy in the context of the COVID-19 pandemic. It provides a brief overview on how tariffs can play a role in the COVID-19 relief and recovery process in Pakistan, by affecting affordability of COVID-19 essentials and by determining the robustness of the domestic supply response for those products. The fourth section briefly describes the recent changes in the tariff policy institutional arrangement. It analyzes how the novel National Tariff Policy objectives interact wit...
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