Trade

Important definitions:
 Trade: Exchange of goods and services between different areas/ countries is called trade.

– Internal Trade: Trade with in a country

– External / foreign Trade: Trade with different countries

 Exports: goods sold to other countries OR flow of foreign exchange coming into a country

 Imports: flow of foreign exchange leaving the country

 GDP: (Gross Domestic Product) - Total value of goods and services produced in a country in a year

 GNP: total value of goods and services produced by nationals either with in a country or abroad.

 Balance of Trade (BoT): Difference between the value of exports and imports

 Balance of Payment (PoP): Difference in total value of payment coming into the country (through
exports, remittance and funds) and leaving the country (import, paying back the previous loan etc).

 Trade Barriers: Set of restrictions on trade by some countries

– Tariffs: Taxes on imports

– Quota: Physical quantities of goods allowed to import by the will / consent of govt.

– Embargo: ban on imports of certain products

 Direct Taxes: directly paid to government by the taxpayer. e.g. income tax, property tax.

 Indirect Taxes: Indirect taxes are paid by the consumer. e.g. sales tax, excise duty etc

 Inflation: Increase in prices and decrease in capacity to purchase goods

 Primary Commodities (Raw Materials): Raw Cotton, rice, vegetables, fruits, raw hides, fish)

 Processed Goods: Cotton Yarn, leather, cloth

 Value added commodities (manufactured goods): Ready-made garments, sports goods, surgical goods,
leather products

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Purpose of Trade:

 Movement raw material for processing and manufacturing of goods and selling of value added
commodities

 Specialization of regions in production of variety of commodities

 Provide employment opportunities in tertiary industry

Benefit of Trade:

 Ensure specialization of goods and services e.g Pakistan is famous for textile and sports products and
Japan for electronics

 Ensure utility of domestic resources

 Growth of secondary sector industries

 Flow of capital and information technology from developed to developing countries

 Increase in exports

 Create employment opportunities

 Improve relationship among states

 Increase in national income

 Foreign exchange earned through trade

Trends in Pakistan’s Trade

 Pakistan has a narrow export base, dependance on few exports (rice, leather, cotton products)
 Pakistan mainly exports primary commodities (raw-materials) and less manufactured goods
(consumer goods) to other countries.
 Primary commodities have less priced in international market which causing less income for
Pakistan.
 Three categories of exports namely, cotton, leather and rice accounted for more than 70%.
 Pakistan was importing more manufactured goods (high value goods) as compared to primary
goods mean more burden on economy (less GDP) after 1947.
 After 1960’s & 70’s with industrial growth started more import of raw materials
 Import of food crops increased with the population growth

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  Pakistan’s economy is mainly agricultural economy and exporting more primary goods or low
value goods as compared to value added goods.

Recent change in trends of Pakistan’s imports and exports:

 fewer food products are imported;

 imports of fuel energy are decreasing;
 imports of high value/capital goods has increased (e.g. machinery to
 manufacture its products);
 imports of consumer goods have decreased (e.g. computers,
 appliances, clothes);
 exports of low value/primary /agricultural products have decreased;
 exports of high value/manufactured/processed/industrial products have
 increased;
 exports of value-added goods have increased;

Reasons for change in Composition of Trade:

 Increase in the exports of diversified goods.

 Exploration of new markets

 Better quality products are produced

 More industrialization in Pakistan after 1960’s

 Increase in import of crude oil with the establishment of oil refineries

 More exploration & extraction of minerals

Major Trade Partners of Pakistan:

Import:
When a country buys goods or services it is known as an import.
When import happens, the foreign exchange leaves the country.

Export:
When a country sells goods or services it is known as export.
When export happens, foreign exchange comes to the country.

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Trade Partners for Imports:

• USA (Machinery, vegetable oil, wheat, electrical appliances)

• U.K (Machinery & Electrical appliances)

• China (Machinery, electrical appliances, toys & others)

• Middle East Countries: (Mineral Oil)

• Japan (Machinery & Electrical Appliances)

• Europe: (Machinery & Electrical Appliances)

• Malaysia: [Edible oil (palm oil)]

• Srilanka: Tea

Trade Partners for Exports:

• U.K: (Raw Cotton)

• Eastern Europe: (Cotton cloth)

• U.S.A: (Carpets, rugs, surgical and sports goods)

• China: (Coal, cotton yarn (mainly to Hong Kong)

• Japan (Fish and Fish Products)

• Middle East Countries (Spices, Rice, Ready-Made garments)

GDP & GNP

GDP:
It stands for Gross Domestic Product.
It defines any country’s economy in geographical terms.
It represents the total value (monetary) of all goods that are produced in a country in a period.

GNP:
It stands for Gross National Product.
It defines the country’s production of goods by locals.
It represents the total value (monetary) of all goods and services produced by the resources owned by the locals
of a country in anywhere in the world.

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 P

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Trade Routes of Pakistan:
 Pakistan has the great potential for the trade with other countries through sea and land.
 Pakistan is surrounded by the land from its three sides with China in north, India in east and Afghanistan
and Iran in the west.
 Pakistan’s land routes in north and west are not developed so much due to difficult terrain and abrupt
landscape. But the development of motorway infrastructure in Pakistan is provided the huge potential
for Pakistan to extends its relations with Central Asian Countries.

Land Routes of Pakistan:

Trade Route to India:

 India is located in the east of Pakistan and Pakistan shares the largest border with India.
 There are two crossings to India, one from Wahga Border near Lahore (Road and Rail link) and
Khakharapar Crossing near Thar Desert (rail link).
 Pakistan and India doesn’t enjoy good relationships due to Kashmir issue.

Trade Route to Afghanistan and Central Asian Contries:

 Afghanistan is located in the north-west of Pakistan. The border between India and Pakistan called
“Durand Line”.
 There is developed link between Afghanistan and Pakistan due to difficult terrain.
 There are historical passes the links the Pakistan and Afghanistan. Khyber Pass, Kurram Pass and
Khojak Pass.
 Pakistan has developed the Khyber and Khojak Pass from its side and facilities have been provided to
improve the trade.
 Central Asian Countries are located across to Afghanistan that are enrich with mineral resources but are
land locked countries. Pakistan can also extends its motorway to these countries through Afghanistan
which will develop trade relations of Pakistan.

Trade Route to China:

 China is located in the north of Pakistan. The border between Pakistan and China is naturally
separated by Karakoram Mountain Range that makes this border difficult for trade.
 But due to construction of Karakoram Highway in 1970’s provided opportunity to increase the
trade link between these two countries.
 More development during 1990’s with Rs. 500 million provided access to China to Gwadar and
Karachi Port.
 Pakistan also provided the shortest route to China to reach Arab, African and European countries
through Suez Canal.

Trade Route to Iran:

 Iran is located in the south-west of Pakistan.

 Pakistan is linked with Iran through RCD highway and rail link through Taftan Crossing.
 Very little trade is carried out through this route as this route is not properly developed.
 Pakistan is also linked with Turkey (located across Iran) through this RCD Highway and railway track.
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 Sea Routes of Pakistan:
 There is a Arabian Sea in the south of Pakistan.
 Land routes to Europe are longer and expensive as well. The sea route is shorter and cheaper is the
Arabian Peninsula and linked to Europe and even U.S.A and Canada through Suez Canal.
 Pakistan is also liked with Middle East and eastern countries (Indonesia, Malaysia, Sri Lanka) through
Arabian Sea.
 Pakistan has developed three sea ports (Karachi Port, Bin-Qasim Port and Gwadar Port) on its coast
which provide facilities to develop the trade through sea.
 Karachi is a warm-water port that is open throughout the year.

Balance of Trade:
It represents the value difference between exports and imports of goods.

Balance of Trade = Value of export goods - Value of import goods

Balance of Payment:
It represents the value difference between exports and imports of goods and services.
Or
It represents the difference in the inflow and outflow of the foreign exchange from the country.

Reasons for Negative BoP (Export)

 More export of primary goods
 Export of few items (cotton, carpets, rugs, hides)
 More export of low-value added goods
 Less export of high value added goods
 Pakistani products can’t compete in International market due to lack of standardization
 Poor quality products, tough competition

Reasons for Negative BoP (Import)

 More import of capital goods
 More import of consumer goods
 Unable to fulfill the demands of growing population
 Import of luxury items
 Import of food items despite agro-based economy
 Import of services in tertiary sector

Reasons for Negative BoP (Other)

 Rise in oil prices in international market
 International restrictions and trade barriers (e.g. USA withdrew GSP due to child labour issue)
 No many trade partners
 Pakistan is not a active player in regional organization
 Depreciating the value of currency (depreciation) against Dollar
 The competition is increasing in the cotton textile export. E.g. Thailand, Korea, Bangkok
 Power crises in Pakistan
 Stop trade with Pakistan after nuclear blasts
 Heavy spending on defense due to Indian threat

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 Effects of Negative BoP:-
 Taking more loans
 In case of non-payment of loans Trade embargo may be imposed
 assets may be sold to pay off loans
 Developmental projects have to be curtailed (funds may be diverted from developmental projects)
 More relience on foreign aids
 More taxation on consumers
 Business and industrial activities slow down
 People may lost their jobs /more unemployment
 High inflation (increase in prices of goods and services)

Measure to improve BoP:-

 Export high-value added goods

 Development of cottage and small-scale industries to increase exports
 Export of variety of items
 Strict quality control meet international standards
 Reducing taxes on exports
 Search for new international market to increase exports
 Export Processing Zone (EPZ’s) should be established to promote exports
 Ban on import of luxury items
 Necessary consumer goods should be imported
 Reduction in imports related to tertiary sector

Trade Barriers:=

• Trade Barriers: Set of restrictions on trade to restrict the inflow of import to correct balance of payment
or to promote local products

– Tarrifs:Taxes on imports
– Quota: Physical quantities of goods allowed to import by the will / consent of govt.
– Embargo: ban on imports of certain products
Advantages of Trade Barriers

 Give rise to greater self-suuficiency and reducing foreign depedency

 Protect local industries
 Create employment oppertunities
 Improve the balance of payment
 Increase the demand of domestic products
 Lesser borrowing

Disadvantages of Trade Barriers

 Consumer choice is limited

 Lack of competitive spirit for local industries
 Local manufacturer forced to produce low quality goods with higher cost
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Exchange Rate
An exchange rate refers to the price of one currencyin terms of another currency, e.g. one US dollar is equal to
106 Rupees. OR
The Exchange Rate is the rate at which one currency can be exchanged for another.
Exchange rates are significant in determining the cost of imports and the price of exports.

Currency Depreciation
A decrease in the value of a currency.
Currency depreciation is the loss of value of a country’s currency with resspect to another country’s currency.
An exchange rate is said to be depreciate when one unit of that currency buys fewer and fewer units of another
currency. For example, if Pakistan’s exchange rate against the US dollar was $1 = Rs 84 last month, but then
changed to $1 = Rs 70, the dollar is said to have been depreciated since now it can buy a lower value of the
rupee.
When a currency depreciates, imports become more expensive, while exports become cheaper. Imports should
fall, exports should rise and the trade deficit should become smaller.

Impacts of currency depreciation on trade:

 Imports expensive, exports are cheaper
 High inflation rate
 Taxes increased
 Increase debts
 Trade deficit
 Stop ongoing projects due to rising costs
 Purchasing power of citizens reduced
 Unfavorable balance of payment
 Less GDP
 Unemployment.

Currency Appreciation
An increase in the value of a currency.
Appreciation of the exchange rates takes place when one unit of a currency can buy a greater value of another
currency. For example, the US dollar is said to appreciate against the rupee when the exchange rate changes
from $1 = 79 rupees to $1 = 85 rupees.

Impacts of currency appreciation of trade:

When a currency appreciates, imports become cheaper, while exports become more expensive. Imports should
rise, exports should fall and the trade deficit become larger.
 Exports expensive, so more income for the country in terms of exports
 Imports are cheaper, Pakistan can afford the import, and
 Lower inflation rate
 Increase of employment and per capita income in a country.
 Favorable balance of payment
 Incentive to businessmen from government side.

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Exports Processing Zones (EPZ’s)
 EPZ’s are established to boost industrialization (export based industries)
 To increase the exports of the country
 To create job opportunities
 To attract local and foreign investors
 To transfer high-technology from developed world

Infrastructure of EPZ’s

 Should be established near sea port to facilitate in import and export (Karachi & Gwadar)
 Land and air transport for the traders
 Road infrastructure to raw-material sources
 Railway link
 Adequate supply of water
 Uninterrupted supply of electricity and gas
 Good sewage system

Incentives for EPZ’s

 100% ownership right

 Subsidized electricity and gas
 No minimum and maximum limit of investment
 Loan would be provided
 Low tax on import of machinery, equipment’s
 Exemption from import and export duties
 Freedom from trade barriers

Benefits of EPZ:
Employment opportunities
Goods for local needs
Goods for export / more trade
Increase GNP / GDP
Reduce imports
Attract more investors
Development of infrastructure e.g. roads, power
Reduces emigration
More competition improves quality.
Problems for EPZ:
Lack of skilled labour
Loss of agricultural land
Lack of infrastructure facilities
Lack of government support
Pollution
Increases rural-urban migration.

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EPB & TDAP
 EPB was established in (1963) and TDAP in 2006
 Planning and development of different sectors of economy and in linking with international trade
requirements.
 Encourage the development of export business
 Helping exporters in finding potential markets
 To plan and organize the exhibition for Pakistani products
 Work for to get GSP status and remove trade barriers for Paksitani products

Trading Blocs
• SAARC (South Asian Association for Regional Cooperation) Organization of South Asian Countries

• ECO (Economic Cooperation Organization) Pakistan, Iran, Turkey and Central Asian Countries

• SCO (Shanghai Cooperation Organization) China, Russia, Pakistan, India and Central Asian Countries

• EU (European Union)

Benefit of Trading Blocs

 Enhance trade relationship among member countries

 Free trade between member countries
 Trade without restrictions / trade barriers
 Lower prices of goods for each other

Trade with EU (European Union)

Advantages:

 Trade with 27 countries of the bloc at same time

 No need to make agreements separately
 Increase in exports means earning of more foreign exchange
 Development of export based industries
 More local and foreign investment in industrial sector
 Increase the GDP / national income
 Create more job opportunities
 Fewer trade barriers
 EU has stable and strong market

Disadvantages:

 Sanctions may be imposed due to terrorism

 Pakistani small-scale and cottage industries based products lake standardization

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  Trade barriers due to child labour issues or due to environmental concerns.
 Small-scale and cottage industries products lack of standardization
 Agreement with other competitive bloc / country lead to few trade with EU
 Cheaper products entering into may not compete with the products imported form EU in local market
 Agricultural production unreliable due to subsistence farming
 Change in currency rates

Trade with China

Advantages:

 One of the developed country

 Market of more than 1 billion population
 Increase the exports
 Correct BoP issue
 More employment opportunities
 Trade is possible through KKH
 Development of the infrastructure under CPEC
 Transfer of technology to Pakistan

Disadvantages:

 Pakistan is importing more instead of exporting

 Importing more raw materials for Chinese industries
 Trade barriers by USA and EU due to enhance relationship with China
 Destruction of local industry as China exporting low prices products in Pakistan
 Difficult terrain creates hurdles to develop infrastructure on Pakistan-China border.

Foreign Exchange
Obtaining money (in the form of U.S Dollars or UK Pound) from abroad through export, tourism or
remittance.

Sources (To get foreign exchange)

By exports
By tourism
By remittance
By aid and loans
Advantages of Foreign Exchange
1. Return loans.
2. To reduce the debt.
3. Improve balance of payment.
4. Stability in currency.
5. Decrease of inflation rates.

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Uses of Foreign Exchange
1. Loans to industrialists and landlords.
2. Improvement in Communication.
3. Improvement in infrastructure.
4. Establishment of Industrial Estates and EPZ.
5. Establishment of Air ports.
6. Establishment of Dry ports.

Why does Pakistan need to increase foreign exchange?

 Correct the balance of payment.
 Reduce foreign debt.
 Investment in agriculture.
 Industrialization.
 Improvement in infrastructure.

How can Pakistan increase foreign exchange?

 Value-added goods / processed goods.
 Good quality.
 Competitive prices.
 Reliable supply.
 Stable Government.
 Good telecommunication.
 Political agreements.
 Better port facilities.

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