Brexit: Should developing economies like Pakistan be worried?
Let’s take the example of an emerging market economy such as Pakistan. It has the world’s sixth largest population and is on the list of top-40 economies if measured by nominal gross domestic product. Seven percent of the country’s exports go to the U.K. and that figure has been rising in the past three years. Pakistan also imports machinery and mechanical appliances used in local production processes from the U.K. As a result of increased business links and trade ties with the U.K., Islamabad is extremely sensitive to any changes in the British pound.
Pakistani migrant workers send $2.5 billion annually in remittances back home. In 2018, Pakistan also saw an increase in foreign direct investment from the U.K.
Should an economy like Pakistan be worried about the post-Brexit outcome? The answer is yes; at least until the time comes, Islamabad will not know the actual outcome.
Other economies that have a greater voice in the U.K. parliament are already pushing for things to work in their favor. Just in the past week, we saw Japan pushing for visa exemption for employees of Japanese companies in a post-Brexit trade deal. Turkey has intensified talks with the U.K. for a fair trade deal. Post-Brexit talks between the U.K. and GCC countries are set to resume in the coming days.
The concerns are acute for countries like Pakistan which were trading with the U.K. under the European Union’s Generalized System of Preferences (GSP) scheme where developing countries are required to pay less or no duties on merchandise exports to the EU region.
This provides significant access to manufacturers of export products in Pakistan and contributes to their growth over time. Such a scheme also allows countries like Pakistan to compete with economies that are paying large subsidies to their producers for penetrating the EU region. It was under this scheme that Pakistan saw an increase in export items of textiles including bed and table linen, toilet and kitchen linen, men's unstitched suits, knitted or crocheted gents shirts, sweaters, pullovers, vests, T-shirts and singlets.
Of course, Pakistan would also be aiming to get a renewal of this scheme after 2019 during renewal negotiations with the EU.
But herein lies another concern. Recent media reports have highlighted the role of British members of parliament who are of Pakistani origin playing a decisive role during the EU’s decision in favor of Pakistan. As these parliamentarians will not be at the 2019 negotiations, Pakistan needs new friends who will favor a renewal of market access facility. A key condition for renewal of this facility is compliance with 27 conventions that fall under human rights, labor rights, good governance, and environment.
There are concerns for countries like Pakistan which were trading with the U.K. under a special scheme with EU which allowed Islamabad to pay less or no duties on exports to the EU.
Dr. Vaqar Ahmed
The government will need to be more proactive with leading trade partners in the EU region. The role of Pakistan’s commercial attaches in 27 EU countries will be crucial to expand trade diplomacy. Given that Pakistan has a large English speaking and educated youth population, trade in services needs to be encouraged during future negotiations.
Recently, the British High Commissioner in Islamabad said the U.K. “will unilaterally agree to put those GSP Plus arrangements in place, which are positive in terms of strengthening U.K.-Pakistan trade ties and show U.K.’s strong commitment to expanding trade with Pakistan.” However, after several months, the details of such arrangements have yet to come out from London. This is creating uncertainty for textile exporters in Pakistan and for businesses having supply chain linkages with British firms.
The Pakistan Business Council (PBC)— a business policy advocacy platform that represents the largest private-sector businesses and conglomerates, including multinationals working in Pakistan — has highlighted this uncertainty in their report. The council suggests that “rather than waiting to be approached by the U.K. government, the Government of Pakistan needs to immediately initiate negotiations for the signing of a Free Trade Agreement (FTA) with the U.K.”
The report also recommended that an ideal scenario would be arrangements similar to the concessions which Pakistan is enjoying under the EU’s GSP plus facility. However it is possible that the U.K. may demand reciprocity whereby Pakistan may be asked to reduce duties on imports from the U.K.; in which case the two countries may embark on FTA negotiations as early as possible.
Once Pakistan (or for that matter, any developing country) sits for the post-Brexit trade negotiations with the U.K., there will be several emerging issues requiring attention.
First, U.S. companies in the U.K. are now in the process of relocating to the EU. This will have implications for developing countries who were dealing with U.K.-based American companies. Second, there are looming threats to EU economies as well which could affect the current trade patterns within the region. These include the risks arising due to lack of diversification in the EU economy, the current wave of protectionism, the backlash due to migrant inflows, and uncertain relations of the EU with the current U.S. administration. All these factors will need to be thought through once the next 5-year strategic engagement plan between the EU and Pakistan is chalked out.
− Dr. Vaqar Ahmed is Joint Executive Director of Sustainable Development Policy Institute, Pakistan (SDPI). His book ‘Pakistan’s Agenda for Economic Reforms’ was recently published by the Oxford University Press. Twitter: @vaqarahmed
