Strategic Trade Policy for Pakistan’s Textile Sector in 2018: Enhancing High Value-Added Exports through Low-Priced Intermediate Input (Article)

We examine the relationship between low-priced intermediate inputs (via input tariff reductions) and export performance indicators using panel data from 166 countries from the years 2000-2015. Employing an instrumental variable approach, we show that export performance indicators improve as better quality; low-priced intermediate inputs are made available to the local manufacturer. We further propose a new methodology based upon a conservative approach to identify a list of intermediate inputs (with their exact HS codes) on which tariffs should be lowered. Using the average unit value of the intermediate input as a proxy for input quality, this methodology is based on comparing intermediate input quality available domestically with that available in the foreign market. Taking Pakistan’s textile sector as an example, we list the intermediate inputs for tariff reductions based on their importance ranging from a scale being extremely important to less important to promote highvalue-added exports. We reason that reducing tariffs on a selective range of inputs will lead to improved quality exports of the final product while protecting the domestic input manufacturers. Finally, we conduct a cross-country comparison of tariff rates between Pakistan, India, and Sri Lanka to identify the intermediate inputs where potential tariff reductions exist for Pakistan.