KARACHI:
The automotive sector in Pakistan is facing the brunt of the current economic crisis. Balance of payments challenges, which have led not only to import restrictions but also to an economic slowdown, have hit new car sales in the country.
According to recent statistics shared by Pakwheels.com, car sales in the first quarter of the current financial year saw a 44% plunge, while bus sales fell by 32%. This raises questions about the performance of the auto sector, raising concerns about its flexibility as it is mostly inward-looking with negligible exports.
I presented on international trade standards in the automotive industry at the recent Pakistan Auto Parts Show Symposium 2023 held at the Karachi Expo Centre. Corresponding data for analysis are extracted from various sources, including CEPII’s BACI dataset, World Bank’s Global Trade Information Solution, Unctad’s NTM Hub, and ADB’s Multi-Regional Input Output Table.
Total global trade in this sector is expected to exceed $1.8 trillion in 2021, with $800 billion contributed by trade in intermediate products such as engines, brakes, transmissions, other parts and accessories.
The five largest exporters were Germany, Japan, China, the United States and Mexico. All reported exports worth more than $100 billion. Germany and China also reported exports of parts and accessories of more than $100 billion.
Major exporters in this industry not only export finished vehicles but also export parts and accessories, with significant values, used in the production of finished vehicles.
However, trade in this sector is highly regional. Mexico trades mainly with the US, while Thailand, a major exporter in the Asian region, trades mainly with its East Asian counterparts.
It is also important to mention that the largest exporters are also important destination markets, underscoring the importance of intra-industry trade in this sector.
Unfortunately, Pakistan only exported $160 million worth of goods in this industry, with 85% being parts and accessories. Pakistan has extremely regressive trade policies that have limited the growth of manufacturers in this sector.
Participation in global value chains (GVCs), where a product crosses international borders more than once in its production process, is an integral part of international trade activities in the automotive sector.
Backward linkages, which involve value added to foreign goods consumed by the importing country as imported inputs are transformed into exportable goods, are more common than forward linkages for top middle-income exporters.
The latter includes value added to domestically produced goods that are further transformed into export products in the importing country. Therefore, products produced for export in the automotive sector mostly require imported inputs.
The value derived from participation in GVCs exceeded $20 billion in 2022 in China, Mexico, India and Thailand. It was only $80 million in Pakistan. Although China and India have invested in forward connectivity, backward connectivity still dominates this sector.
GVC participation requires a reduction in import duties, especially for spare parts and accessories. Pakistan has the highest tariff rate on imports of parts and accessories at 18%, while other middle-income peers have reduced it below 10%.
It is virtually non-existent in Mexico and Turkey, increasing their ability to market parts and accessories.
However, the use of non-tariff technical measures (NTM) to ensure higher standards of product quality and consumer safety is more evident. China covers all of its imports with at least one technical NTM, while the US and EU cover almost all of their imports with NTMs.
Middle-income exporters have also adopted such measures on a significant proportion of their imports. Unfortunately, the use of NTM techniques in Pakistan is limited, citing the lowest coverage ratio and frequency index.
The recommendations to boost exports entail a review of the current mindset. The focus of large manufacturers is often on increasing local production, so that increasing local production counts as an achievement of success.
Localization in an environment where quality standards and certification regulations are not only poorly enforced but non-existent coupled with high tariff rates can lead to a significant discrepancy between the quality of products produced in Pakistan and markets where competitiveness of exports drives growth. This may rather encourage the dumping of low-quality goods while reducing access to new technological developments in the sector. The result is a loss of national prosperity.
The lack of innovative activities heralding new technologies as well as product churn, where not only new products are added but old redundant products are discarded, has led to the recent slowdown in the industry.
It is recommended that SMEs in the sector should be facilitated by the government to engage in international trade activities. SMEs should be encouraged to enter global and regional value chains.
Digitization of trade processes and procedures through Pakistan’s single window is a step in the right direction as it reduces trade barriers and delays.
The government and trade associations should focus on developing and improving the technical skills of producers and human resources involved in this sector. This not only requires investment in better institutes, but also the development of more efficient clusters and settlements involving producers in all production chains.
The potential can only be realized if producers shift from an introverted mindset that focuses on localization to a more extroverted approach that embraces the benefits of competition and promotes innovative activities.
The author is Assistant Professor of Economics and Research Fellow at CBER, Institute of Business Administration, Karachi
Published in The Express Tribune, November 6u2023.
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