USTR - 1996 National Trade Estimate-Pakistan
Office of the United States Trade Representative

 

1996 National Trade Estimate-Pakistan

In 1995, the United States trade deficit with Pakistan was $263 million, or $30 million less than in 1994. U.S. merchandise exports to Pakistan were $934 million, an increase of $215 million or 29.9 percent over 1994. Pakistan was the United States' fifty-fourth largest trading partner in 1995. U.S. imports from Pakistan totaled $1.2 billion in 1995, an increase of 18.3 percent from those in 1994.

After years of inward looking trade policy that restricted participation in world markets, Pakistan since the late 1980s has been reducing levels of tariff and non-tariff protection and state intervention in trade as part of a comprehensive macroeconomic and structural reform program. Implementation has been uneven, however, and government protection continues to restrict U.S. exports to Pakistan and the country's fuller integration into the world economy.

IMPORT POLICIES

In recent years, Pakistan has significantly reformed its restrictive import regime by reducing tariffs on many products and lifting some bans and quantitative restrictions. In 1993-94 the government began a three-year program to reduce maximum tariffs from 90 percent and above to 35 percent. However, due to the Pakistan Government's fiscal dependence upon customs duties for revenue, it has been unable to meet this schedule and also achieve the goal of reducing the overall fiscal deficit. In the 1995-96 fiscal year that began July 1, 1995, maximum tariffs were set at 65 percent, compared with the original target of 45 percent. Four months into the year, in response to a sharply worsening trade deficit, the Government of Pakistan (GOP) imposed an additional temporary duty of from 5 to 10 percent on most imports under this ceiling. The average tariff rate (exclusive of the temporary duty) is about 45 percent. Under an IMF standby arrangement approved in December 1995, the temporary duty is to be removed and maximum tariffs are to be set no higher than 55 percent as of July 1996. Therefore, progress in reducing tariffs will continue to require mobilizing other sources of revenue.

The tariff regime is also characterized by complexity, broad discretionary powers, and lack of transparency. Administrative decisions frequently grant exemptions and concessions from general rules under the system of Special Regulatory Orders (SRO) that basically are temporary duty suspension decrees. As a result, different rates are frequently applied to the same product and average applied rates are often lower than statutory duties. The IMF standby program aims to simplify the tariff structure through elimination of some tariff exemptions and concessions. While this program, if fully implemented, may help simplify the systemand augment GOP revenues, it may also result in higher applied tariffs on specific U.S. exports. The United States will continue to monitor the GOP's tariff regime to ensure that Pakistan implements and enforces all WTO tariff bindings.

As of July 1993, formerly common import licenses have been abolished on all "freely importable" goods, i.e., on all items not on the negative list of items banned for religious, health or security reasons, or justified according to provisions of international agreements. The negative list has been reduced in recent years, from 215 categories of products in 1989-90 to 75 in 1994-95.

Complaints by traders and investors about customs procedures are common. For example, preferential tariff rates are usually subject to the proviso that the goods in question are not domestically manufactured. Disputes sometimes arise over this provision, with firms arguing that local output does not meet their quality specifications. U.S. firms also cite arbitrary and inconsistent customs valuations and frequent changes in rates. Charges that customs officers demand bribes are also common.

American exporters have complained of problems with implementation of Pakistan's preshipment inspection (PSI) system, run by the Swiss firm SGS. U.S. companies contend that PSI procedures result in significant overvaluation of U.S. exports to Pakistan. Problems have also arisen over the sometimes conflicting roles of the PSI firms and Pakistani Customs authorities. The United States is working closely with U.S. industry and the Pakistan Government to ensure that Pakistan lives up to its obligations under the WTO PSI agreement. The U.S. Government is also working within the WTO framework to address this issue. The U.S. Embassy estimates that elimination of these barriers would increase U.S. exports by $25-100 million.

The Pakistani Government offers investment incentives, such as tax holidays, in various sectors and these incentives can include the creation of barriers to imported products. In the pharmaceutical sector, for example, locally produced pharmaceutical raw materials are exempted from sales taxes.

Additional incentives in the form of lower duties and sales tax exemptions for imported production machinery and equipment, and soft loans for new factories, are also used to encourage local production. U.S. industry estimates that these practices result in the loss of tens of millions of dollars of U.S. exports.

GOVERNMENT PROCUREMENT

The Government, along with its numerous state-run corporations, is Pakistan's largest importer. Work performed for government agencies, including purchase of imported equipment and services, is usuallyawarded through tenders that are publicly announced and/or issued to registered suppliers. The GOP subscribes to principles of international competitive bidding, but political influence on procurement decisions is common, and these are not always made on the basis of price and technical quality alone. Charges of official corruption and long delays in bureaucratic decision-making are common. Pakistan is not a member of the WTO government procurement code. The U.S. Embassy estimates that if these barriers were eliminated, U.S. exports would increase by $10-25 million.

EXPORT SUBSIDIES

Pakistan actively promotes the export of Pakistani goods with measures such as government financing and other tariff concessions on imported inputs, and income and sales tax concessions. Pakistan has established one export processing zone (EPZ) in Karachi and the addition of more zones is under consideration. EPZ benefits include tax holidays, indefinite carry forward of losses, exemption of imports from taxes and duties, and exemption from labor laws and various other regulatory regimes.

While Pakistan has not reported any export subsidies to the World Trade Organization, the Government-run Rice Export Corporation of Pakistan continues to sell rice to selected exporters for well below market prices.

LACK OF INTELLECTUAL PROPERTY PROTECTION

As a member of the WTO, Pakistan is subject to the terms of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). The U.S. Government is taking steps to ensure that Pakistan complies with its TRIPs commitments, particularly with respect to fulfilling its obligation to establish a "mailbox" for agricultural chemical and pharmaceutical patents.

Piracy in Pakistan is widespread. Recently, the authorities have taken some steps to strengthen enforcement, including raids on several pirated-video rental shops, and the government has pledged to continue such efforts. The U.S.-Pakistan Treaty of Friendship and Commerce guarantees national and most favored nation treatment for patents, trademarks and industrial property rights. Pakistan is a member of the Berne Convention, the Universal Copyright Convention, and the World Intellectual Property Organization, but not a member of the Paris Convention for the Protection of Industrial Property.

Patents

Current law protects only process patents for a duration of sixteen years, though the government is committed to eventually offering product patents in accordance with its WTO obligations. Because there is only process patent protection, there are only a few instances of litigation of patent infringement cases registered in Pakistan. U.S. industry has complained that the right of the patentee is not adequately protected in the law with the result that the infringer continues to freely manufacture the illegal product. In addition, only the patent-owner, not licensees, can file a suit against an infringer and there is always the threat of revocation of the patent through compulsory licensing.

Trademarks

There have been occasional instances of trademark infringement, including of trademarks for toys, playing cards and industrial machinery.

Copyright

IPR violations are most common in the area of copyrights, where the piracy levels are exceptionally high. The markets for imported computer software and, until recently, film videos are nearly 100 percent pirated. Piracy of copyrighted textile designs is also a serious problem. Some counterfeit products made in Pakistan are exported to other markets. However, at least one local firm is now distributing legitimate, copyrighted videotapes produced by U.S. film studios. As a result of strengthened law enforcement, some other pirate outlets are taking steps to offer legitimate product. Nonetheless, U.S. industry believes that Pakistan's copyright law falls short of international standards and the judicial system seems ill-prepared to deal with a more concerted enforcement strategy. Sustained stronger enforcement needs to be paired with action by the courts to prosecute and sentence violators.

In the area of copyright infringement alone, the International Intellectual Property Alliance estimates that piracy of films, sound recordings, computer programs, and books resulted in trade losses of $45 million in 1995. The U.S. Embassy estimates an impact of less than $10 million for patent and trademark violations.

SERVICES BARRIERS

Several sectors, including banking, insurance, transportation and telecommunications, are affected by services barriers. Portions of major service industries are nationalized and run by the government. Foreign banks are generally restricted to at most four branches, are subject to higher withholding taxes than domestic banks, and face restrictions on doing business with state-owned corporations.

New foreign entrants to the general insurance market are effectively barred, and those to the life insurance market, while not barred, face severe obstacles. Meanwhile, those few foreign insurance companies operating in Pakistan face various tax problems, long delays in remitting profits, and problems associated with operating within a cartelized industry.

Foreign brokers are allowed to join one of the country's three stock exchanges only as part of a joint venture with a Pakistani firm. Basic telephony remains the monopoly of the majority state-owned Pakistan Telecommunications Corporation, but competition among private providers is now allowed in cellular telephony. If these barriers were eliminated, the U.S. Embassy estimates an increase in U.S. exports of $25-100 million.

INVESTMENT BARRIERS

Foreigners may invest without prior government approval in any industrial sector, up to 100 percent ownership, in all but the following industries: arms and ammunition, security printing (currency and mint), radioactive substances, and non-industrial alcohol. With these exceptions, statutory provision of national treatment exists for foreign investors in industrial sectors, though it does not in non-industrial sectors.

Foreign investors are not allowed to own land for agriculture, forestry, irrigation, or real estate; but, with the approval of the relevant provincial government, can obtain long-term leases on land for commercial and industrial purposes. Foreign ownership of land in joint venture with Pakistani citizens may be allowed. Where investment is allowed, repatriation of profits (except, as noted, for insurance companies), dividends, and (except for banks) capital is freely allowed.

Local content requirements can occur in the automobile, electronics, electrical products and engineering industries under Pakistan's "deletion program". The program is ostensibly not compulsory. However, one telecom producer advises that telecom licensees must adhere to the import deletion program. Investors who "voluntarily" undertake to increase the local content of their output enjoy lower tariffs on imported inputs but are subject to fines for non-compliance with an agreed-upon import deletion schedule. Local content requirements such as these will have to be phased out in order for Pakistan to comply with the WTO TRIMs Agreement.

Additional incentives for investment apply to rural areas, "less developed areas", and those designated as export processing zones or special industrial zones. The government allows and offers incentives for private, including foreign, investment in electric power production, and numerous foreign firms have submitted proposals for new plants. It is also encouraging foreign investment in oil and gas exploration and development, and in state-owned energy utilities, banks and the phone company that are to be privatized.

ANTI-COMPETITIVE PRACTICES

Lack of transparency is a recurrent problem in government procurement and other trade matters. There are two federal government bodies that take an interest in this problem, in addition to the various government departments that might investigate allegations of corruption under their purview. The Monopolies Control Authority is credited with being reasonably effective at combating the anti-competitive practices covered by the law it is charged with enforcing, though the law is said to be somewhat narrow in scope. The federal anti-corruption commission is considered a somewhat politicized and therefore less effective body.

OTHER BARRIERS

Motion pictures face high tax rates, especially the practice of including the royalty value in the dutiable value of films imported for showing in theaters, which have sharply cut their export into Pakistan. In addition, there are screen quotas on foreign films shown in local theaters, that must be authorized to screen foreign films, and the high entertainment tax combined with government admission price controls make it difficult for theaters to be profitable. Estimated increase in U.S. exports if these barriers were eliminated the U.S. Embassy estimates that U.S. exports would increase by less than $10 million.

 
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