PAKISTAN - JAPAN TRADE

 

Current scenario and future prospects

By Dr. TALAT AFZA
Nov 27 - Dec 03, 2000

The famous economists Adam Smith and David Ricardo presented the theory of specialization and trade. The thesis developed by these economists is that if two countries have different natural resource endowments, they should specialize in the production of the goods and services in which they have higher natural resource endowments and should involve in bilateral trade. This will result in higher production and consumption levels and higher social and economic well being of both the countries. Analyzing the natural resource endowments and stage of economic development of Pakistan and Japan, it can be said that Japan is an industrialized country deficient in natural resources and raw materials which relies heavily on its value added exports to pay for these imports. On the other hand, Pakistan stands in the category of developing countries deficient in technology and endowed with natural resources of fertile agricultural land and raw materials. The natural resource endowments and economic backgrounds of both the countries make a very strong case to develop these economies through international trade and investment. The objective of the paper is to analyze the trade relations of Japan and Pakistan and suggest the ways to improve and benefit from these relations in future.

Pattern of trades

During the early days of Japan-Pakistan foreign trade relations, Pakistan exported raw cotton to Japan and Japan processed the cotton into yarn and cloth and then exported them back to Pakistan. This pattern shifted later on as Japan began to export spinning machinery to Pakistan, and currently textile yarn and fabric is the largest component of Pakistani exports to Japan. From Pakistan's perspective Japan is one of the important trading partner. During the period 1990-91 to 1993-94 Japan's percentage share in Pakistani exports can be ranked on average at second or third place after U.S.A and Germany. The percentage share of Pakistani exports to Japan has been declining persistently during the period 1990-91 to January 2000 probably due to recession in Pakistan, Japan's protective trade policies and Japan's trade with ASEAN countries. See table 1.

 Table 1

Major Export Markets of Pakistan

( % Share )

 

Country

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-Jan 2000

USA

10.8

12.8

13.9

14.4

16.2

15.5

17.7

20.5

21.8

24.4

Germany

8.9

7.1

7.8

8.0

7.0

6.8

7.5

6.3

6.6

6.2

Japan

8.3

8.3

6.8

8.0

6.7

6.6

5.7

4.2

3.5

3.4

UK

7.3

6.6

7.1

7.8

7.1

6.4

7.2

6.9

6.6

6.9

Hong Kong

6.0

7.3

6.6

7.3

6.6

9.1

9.4

7.1

7.1

5.9

Dubai

2.8

4.4

5.9

6.3

4.0

4.7

4.6

5.0

5.4

5.5

Saudi Arabia

3.6

4.3

4.7

3.5

2.7

2.4

2.6

2.5

2.4

2.5

Sub Total

47.7

50.8

52.8

55.3

50.3

51.5

54.7

52.5

53.4

54.8

Other Countries

52.3

49.2

47.2

44.7

49.7

48.5

45.3

47.5

46.6

45.2

Total

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Source: Pakistan's Foreign Trade Key Indicators, Ministry of Commerce, Islamabad & Review of Foreign Trade, Federal Bureau of Statistics, Statistics Division, Government of Pakistan, Vol. 24, March 2000.

Pakistan's major imports consist of machinery, petroleum products and chemicals. Japan and U.S.A. dominates the other countries in terms of % share of Pakistani imports. As indicated by table 2, Japan stood at the first place in terms of percentage share of Pakistani imports during the period 1990-91 to 1995-96. But on average the percentage shares of Pakistani imports from Japan showed a declining trend.

 Table 2

Major Sources of Pakistani Imports

( % Share )

Country

90-91

91-92

92-93

93-94

94-95

95-96

96-97

97-98

98-99

99-Jan 2000

U.S.A.

11.8

10.5

9.4

10.6

9.4

8.9

12.0

11.2

7.7

6.1

Japan

13.0

14.3

15.9

11.8

9.6

10.7

8.6

7.8

8.3

6.6

Kuwait

0.7

0.9

3.3

5.3

5.8

6.4

6.9

5.6

5.9

10.5

Saudi Arabia

6.2

5.2

5.4

5.4

4.9

5.9

6.0

6.1

6.8

9.5

Germany

7.3

8.0

7.4

7.7

6.8

5.8

5.6

5.2

4.1

4.4

U.K.

4.9

5.5

5.2

4.9

5.1

4.4

5.0

4.1

4.3

3.7

Malaysia

4.0

4.2

5.1

5.5

8.8

7.2

4.7

7.1

6.7

4.5

Sub Total

47.9

48.6

51.7

51.2

50.4

49.3

48.8

47.1

43.8

45.3

Other Countries

52.1

51.4

48.3

48.8

49.6

50.7

51.2

52.9

56.2

54.7

Total

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

100.0

Source: Pakistan's Foreign Trade Key Indicators, Ministry of Commerce, Islamabad & Review of Foreign Trade, Federal Bureau of Statistics, Statistics Division, Government of Pakistan Vol. 24 March 2000

Overall, Pakistan had a continuous trade deficit with Japan during the period 1993-94 to 1998-99. Pakistani exports to Japan had an increasing trend up to the year 1995-96 but started declining mainly due to the antidumping duties of Japanese government on textile imports from Pakistan in 1995 and partially because of the increasing trade between Japan and ASEAN countries. The imports from Japan were also on the rise since 1995-96 and started declining from 1996-97 onwards. The probable reasons for this declining trend in imports may be the joint ventures between Pakistan and Japan in the automobile sector and the discouragement of Pakistani government for these imports to develop the domestic industry and conserve the foreign exchange reserves.

 Table 3

Pakistan Japan Balance of Trade

(Million US$)

Year

Import

Export

Balance

1993-94

1008.05

542.67

-465.38

1994-95

994.0

543.01

-450.99

1995-96

1270.64

582.50

-688.14

1996-97

1029.33

479.16

-550.17

1997-98

792.83

360.76

-432.07

1998-99

785.69

271.35

-514.34

Source: "Economic Review" 1998 Chamber of Commerce and Industries, Karachi, Research and Development Department.

Trade restrictions

It is generally believed that foreign trade had played an important role in the economic development of Japan. But this foreign trade led growth was not based on the notion of "free trade" as envisaged by Adam Smith rather this growth was achieved under the umbrella of protectionism. During the 1950s and early 1960s the Japanese government exercised strict control over foreign trade and exchange dealings in order to protect Japanese manufacturers from competition in their home markets, and to strengthen their capacity to sell abroad. Japan's elaborate structure of trade restriction was dismantled under the pressure from her trading partners. Since the late 1960s Japan's import policies have been continuously liberalized. This does not however, mean that imports into Japan are free from artificial barriers. Although overt and formal quantitative restriction are few, some individual sectors are still heavily protected. agriculture being the most important example. Government regulations have a visible effect on agricultural products. Rice, wheat, beef, sugar and dairy products are among the most prominent. Although Japan's formal NTBs, or quantitative restrictions, are relatively few, but these formal NTBs still remain high in agriculture. The protection to the agriculture sector is provided by means of import restrictions and massive provision of direct and indirect subsidies. The imposition of these barriers is probably the largest single factor to negatively affect the market opportunities of Pakistan, as Pakistan is basically an agricultural country with a potential to export the agricultural products to Japan. Currently, almost 80 per cent of Pakistani exports to Japan consists of textile yarn and fabric. Japan is following import restriction policies for the textile products but these restrictions do not cover all textile products. The restrictions are in the forms of quota and duties on particular products and particular exporting countries. For example, Pakistani exports of coarse cotton yarn to Japan were restricted on account of anti-dumping duties in 1995 by the Japanese government at the rate of 9.9 per cent. The exporters of 20/s and 21/s yarns were affected by these measures. Recently, these anti-dumping duties have been removed which is expected to have a positive effect on Pakistani textile exports to Japan. Japan introduced the General System of Preferences (GSP) on August 1,1971 with an intended duration of 10 years. The scheme was extended twice in 1981 and 1991. The Japanese imports grew after the introduction of GSP. Currently 184 countries, including Pakistan, are the beneficiaries of Japan's GSP. Although GSP is meant to encourage the imports but its conditions are strict on the commodities in which developing countries have competitive edge for example, textile and footwear. In contrast, conditions are more lenient for the products in which developing countries are less competitive, such as machinery, which limits the significance of the GSP scheme. Moreover, there is a tendency for small groups of developing countries to monopolize the benefits. ASEAN countries are a good example as the Japan's trade with these countries is continuously on the rise.

Conclusion and policy recommendations

Overall, Pakistan had a continuous trade deficit during the period 1993-94 to 1998-99. Both the Pakistani exports to and imports from Japan were on the rise up to the year 1995-96 and started declining later on. The probable reasons for the decline in exports are the imposition of anti-dumping duties of Japanese government in 1995 on textile imports from Pakistan and increased trade between Japan and ASEAN countries. The declining trend of Pakistani imports from Japan may be attributed to the joint ventures between Pakistan and Japan in the automobile sector and the discouragement of Pakistani government for these imports to develop domestic automobile industry and conserve the foreign exchange reserves. Although Japan is liberalizing its import policies but still the agriculture sector is heavily protected by means of import restrictions and massive provision of direct and indirect subsidies. These barriers negatively affect the market opportunities of Pakistan as Pakistan is an agricultural country with a potential to export the agricultural products to Japan. In the textile sector, the main item of Pakistani exports to Japan, Japan's import restrictions are in the form of quota and duties on particular products and particular exporting countries. Japan introduced the GSP with a purpose to encourage the imports but its conditions are strict on the commodities in which developing countries have competitive edge for example, textile and footwear. Moreover, under the GSP scheme the Japanese trade with the ASEAN countries is continuously on the rise. Although Pakistan-Japan trade relations can be traced back to 1950's but currently the volume of trade between the two countries is on the decline. There is an urgent need to strengthen and improve the bilateral trade relations. In this regards following recommendation are made

1. Pakistan needs to focus on increasing the textile exports to Japan but it cannot be done single-handedly rather it needs the positive attitude of the Japanese government as it imposes the quota restriction on specific textile products and specific countries. Recently, the Japanese government has removed the anti-dumping duties imposed in 1995 on certain categories of Pakistani textile exports to Japan, which is expected to encourage the Pakistani textile exporters to recapture the market.

2. Pakistani government can also play an important role in encouraging the textile exporters by providing them the concession in duties on the imported textile machinery and accessories. In the trade policy of 1999-2000 the government of Pakistan has allowed the duty free import of auto coners for the textile sector, which is a right step towards increasing the textile exports.

3. The exporters should be persuaded to export the higher Value added finished textile products instead of textile yarn and clothes. In this regard, Pakistani exporters should be encouraged to meet the Japanese importers to get export specifications and adhere to them. Moreover, Pakistani government through the Embassy of Pakistan in Tokyo should arrange the exhibitions for the display of article of apparel / cloth accessories to encourage these exports.

4. Currently, textile exports consists of 80 per cent of the total exports of Pakistan to Japan. There is a strong need to focus on the other agricultural products as well. Although it cannot be denied that the Japanese agricultural sector is heavily protected yet there is still room to increase the agricultural exports to Japan. Pakistan is among the beneficiaries of Japan's GSP scheme and can benefit from this by exporting the agricultural products, which are on the positive list of GSP. Some of the prospective export products which are allowed duty free entry into Japan includes ornamental fish; fish livers and roes, dried, smoked, salted or in brine; mushrooms; dried bananas; guavas; mangoes and mangos teens. Pakistan can also avail the privilege of reduced tariff rates on the agricultural products, which are on the positive list of GSP. The prospective export products on this list includes crab; lobster; shrimp; prawns; tomatoes; potatoes; peas; beans; fruit juices and vegetable Juices.

5. Pakistani government should also encourage the exports of the agricultural products, which are on the positive list of GSP by giving incentives and concessions to the exporters of these products. The decision of the Pakistani government to reduce the income tax on the export of fish and other edible items from one per cent to half a per cent (Trade Policy, 1999-2000) is a right step towards this direction. Moreover, the decision of decreasing the regulatory duties on steamed and crushed bones from 20% - 15% to 10% - 5% will also help increase the export of crushed bones.

6. Last but not the least, the exporters should be stressed to be conscious of and improve the quality of exports so that they could be able to compete with their competitors and increase their market share which in turn will help improve the balance of trade with Japan as well as, rest of the world.