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Trade

Q) What is meant by the word trade?

Trade is the exchange of goods and services between different areas.
Trade can be within a country (internal trade) or with other countries (foreign
trade/international trade).

Q) How does a country/Pakistan benefit from trade?

• Trade allows for specialization of goods and services, enabling a country to trade it
with other countries and earn.
• Due to trade, demand for exports increases and more domestic resources are
utilized to produce them.
• As trade increases economic activities, thus it creates employment.
• Trade facilitates the flow of capital and information technology from developed
countries to developing countries.
• The foreign exchange earned through trade can be used for import of capital good,
and industrialization.
• If export goods are produced on a large scale, it helps in achieving economies of
scale (decreasing cost of production due to mass production).
• Through foreign trade, a country increases its national income (GNP).

Q) What is meant by exports?

Exports mean sale of goods and services to other countries.

Q) What is meant by imports?

Import mean purchase of goods and services from other countries.

Q) What is meant by the following terms?

→ Primary commodities: are the materials of natural origin, and can be used directly, or
as raw materials for different industries, such as food grain, minerals, rice, fish etc.
→ Processed goods: are processed resourced that are more useful as compared to
primary goods due to their enhanced usefulness. However, they could be further
processed and their value could be improved e.g. cotton yarn, tanned leather, iron
and steel.
→ Manufactured goods: these are the final products of processing that can be sold
commercially in the market, such as carpets, cement, glass, sports goods etc.

Q) What has there been an increase in imports of Pakistan?

Increase in imports can be attributed to the following reasons:
• Industrialization – machinery has to be imported for the purpose.
• Ever increasing population – to fulfill their needs.
• Because of an unfavorable exchange rate – Rs-Dollar or Rs-any other currency.
Q) Name the major countries of imports for Pakistan.
7 countries – Saudi Arabia, Kuwait, USA, Japan, Malaysia, Germany and UK.

Q) What is the difference between balance of trade and balance of payments?

Balance of trade: value of exports (goods) – value of imports (goods)
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Balance of payments: value of exports (goods and services) – value of imports (goods and
services)
In short, balance of trade is the difference between the value of exports and imports of
goods during a given period of time, but the balance of payments also includes the service
sector in the above definition.

Q) How does a negative balance of trade affect our economy negatively?

A negative balance of trade occurs when a country imports more than it exports. Such a
condition affects the economy in many ways.
• The imbalance of trade has to be filled by taking loans or foreign economic
assistance, which increases debts.
• Developmental projects have to be curtailed/put off due to lack of funds.
• A country’s dependence on foreign assistance increases.
• In case of non-payment of loans, the assets of the country may have to be sold to
foreign companies.
• While negotiating for loans with foreign donors, a country has to accept strict
conditions for economy, such as ore taxes etc.
• High taxation limits purchasing power of people, resulting in low demands and less
production.
• Business and economic activities slow down.

Trade Routes
Pakistan conducts trade through land and sea routes. However, for a number of reasons,
geographical location and political situation in Pakistan, trade by land is limited and
encouraged by sea.

The factors which discourage trade by land:

→ With India: politically, Pakistan and India are not on good terms. Bilateral trade, cultural
and diplomatic relations could not be developed since 1947. Pakistan and India have
many disputes such as Kashmir issue, to be resolved. Pakistan has linked trade with
resolution of Kashmir issue.
Thus, the trade between the two countries remains on a limited scale.
→ Afghanistan: is to the West and North-West of Pakistan. It is a mountainous terrain.
There are few historical passes (Khurram, Khojak and Khyber passes), but are not well
developed.
o There are few roads, so trade is limited. Because of inadequate road links and
poor infrastructure, Pakistan cannot carry out trade with Central Asian states
through Afghanistan.
o Insecurity is another factor that prevents free flow of trade between the two
states.
o However, some improvements have been made in the recent years by
providing better facilities at some crossings, and improving roads between
Quetta and Chaman.
→ China: North Pakistan is linked to China through a historical trade route called Silk route.
The trade between Pakistan and China increased after the construction of Karakoram
Highway, and a modern and all-weather road.
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o KKH highway passes through Gilgit district in the Northern areas, and over the
Khunjerab pass into Xinjiang province of China.
o Where KKH links on one hand, China to Pakistan, it also gives the land-locked
Central Asian states access to warm water sea ports of Karachi (through
Afghanistan or China).
It also connects Pakistani area such as Northern areas to the rest of Pakistan.
o It has increased high Chinese goods (electronics, medicinal herbs, Chinese
fabrics, decorative items and toys) inflow into Pakistan, and Pakistani goods
(cotton textile, dried fruits, hosiery goods) to China.
o However, movement of goods and people on KKH is effected by/due to natural
hazards such as heavy snowfall blocking KKH.
→ Iran: to the Southwest, a land route RCO highway goes to Iran and Turkey. Though not
properly built, and with inadequate facilities, work is in progress for its proper
development.

Q) Why is trade preferred by sea routes?

→ Land route to Europe is long, expensive and heavily taxed by various governments.
Sea route is shorter and linked to Europe through Suez Canal. Transportation
charges are also low comparatively.
→ Karachi and Bin Qasim port provide modern facilities for handling container vessels
and bulk cargo.
→ Countries of the Middle East are easily accessible by sea.
→ Karachi is a warm water port open throughout the year, while land routes could be
blocked by snow or land slides.

Q) Why is there a negative balance of payments in case of Pakistan?

• To speed up industrialization, we have to import capital goods. It increases our
import bill considerably.
• Due to lack of standardization and efficient quality control, our goods cannot
compete in the international market.
• Our society is a consumption oriented one. Many goods are imported to be
consumed.
• The occasional rise in oil prices or its increasing demand in Pakistan also adds to
our import bill.
• Pakistan is heavily dependent upon exports of few items like cotton, rice, leather
products, sports goods, carpets and rugs. Moreover, unfavorable weather conditions
affect our agricultural products of exports.
• At times wheat and other food items have to be imported due to bad harvest.
• Imported raw materials, which are inputs to industry. More of these raw materials
need to be produced in Pakistan.
• Exports of non-cotton products by Pakistan faces trade barriers as industrialized
countries express concerns about labor, child labor, environmental and health
standard.
• Pakistan does not belong to any of the major regional organizations. Pakistan is a
member of ECO, SAARC, but these organizations are not active enough to benefit
Pakistan.
All these factors adversely affect our balance of payments.
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Q) What measures could be taken to correct the balance of payments?

• By increasing exports.
• By restricting imports.
• By curtailing exports related to the tertiary sector.

Q) What steps can be taken to increase our exports?

• Exports with a higher value-added elements should be encouraged.
• The development of cottage and small-scale industries for export purposes should
be encouraged.
• Efforts to be made to increase the variety of export items.
• Reduced taxes should be offered to provide incentives to exporters.
• Export agencies such as Export Promotion Bureau should be encouraged to
organize export activities.
• Strict quality control measures should be imposed to ensure high standard goods for
exports.
• More export processing zones to be set up in different parts of the country to
promote setting up of industries to produce goods for export.

Export Processing Zones (EPZs)

Q) What is meant by export processing zones?
EPZs contain industrial units which manufacture the products with export potential.

Q) What are the objectives/advantages of setting up EPZs in Pakistan?

• To boost industrialization.
• To increase the country’s export by creating facilities for local and foreign investors
to set up export oriented units.
• To create job opportunities.
• To transfer hi-tech from the developed world to the developing countries.

Q) What kind of infrastructure is required for the EPZs?

• EPZs should be established near the seaport to facilitate export and import goods,
and the required machinery.
• Consistent government policies are required to attract more local and foreign
investors.
• Adequate air travel facilities.
• Adequate transport facilities for the marketing of finished goods.
• Efficient transport links to raw material sources.

Q) Explain the strategic geographical situation of Gwadar.

• Gwadar’s location between Karachi and UAE on one hand, and the doorstep of the
Central Asian states on the other could be suitable for EPZs due to a number of
factors.
• Foreign investment along with hi-tech for EPZs could be attracted to Gwadar and
Ormara being port cities.
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• The port of Gwadar can serve as a “Regional Trade Hub” with the recent
geographical developments such as – rehabilitation and development of Afghanistan
and CAS’s.
• It will be in position to cater for the requirements of the trade between UAE, Oman,
Saudi Arabia and Qatar, and serving as a gateway to landlocked Central Asian
States.
• Deep water port and EPZ can be developed simultaneously.
• It can also facilitate trade for Eastern Chinese provinces, which China plans to
develop.

Q) What are the functions of Export Promotion Bureau?

Export Promotion Bureau is an organization set up by the government of Pakistan for
organizing and regulating export activities.
Its functions include:
• Creating awareness among manufacturing sector about potential exports.
• Exploring and identifying market opportunities abroad.
• Assisting Pakistani entrepreneurs to secure entries in international market.

WTO – World Trade Organization

• WTO is an organization (international) to allow free trade between countries which
have become its members.
• WTO calls for tariff (taxes/duties) reduction on imported goods by other countries.
• Pakistan is also a member of WTO, and would be subject to its terms and conditions
(its accessibility to international markets would depend on its competitiveness).

Q) What are the challenges of WTO’s membership for Pakistan?

Challenges are faced in the following sectors:
• Cotton textile industry:
o We have to produce better quality cotton yarn, fine cloth and value-added
products.
o Modern tech to be used, and outdated industrial machinery should be replaced.
• Agriculture: in this sector we need to
o Open domestic market for foreign agriculture producers.
o Eliminate domestic support on agricultural products, and withdraw export
subsidies.
o Health, safety and hygiene standards are to be maintained in agricultural sector
for better international competition.
• Small-scale and medium-scale industry: faces challenges of
o Rising prices of raw material, high electricity costs, outdated machines, low
investments etc.

Q) How can Pakistan deal with the situation related to WTO to its benefit?
• To modernize the production process is very important + training in specific field
should be provided.
• The government of Pakistan should focus on building up the infrastructure,
improving human resources and the research in agriculture.
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• Taking measures to make our industry comply with international quality standards,
switching to efficient production methods, and awareness of global trend of demand
and supply.