Increasing Exports through Tariff Reductions on Intermediate Goods

To counter the severe trade deficit problem that Pakistan faces, we explain how to move up the value chain of exports by reducing tariff rates on the intermediate inputs used by local manufacturers. The availability of cheaper intermediate inputs through tariff reductions can substantially reduce input constraints. We begin by identifying trends in the tariff rates imposed on intermediate inputs, and their imports over time by Pakistan and its counterparts. Using an instrumental variable approach, we measure the gains that can be achieved by importing more of these intermediate inputs in terms of export performance indicators. We emphasize that input tariff reductions could help Pakistan expand exports. We also identify specific sectors in which intermediate input tariff reductions could have significant gains for Pakistan in terms of export growth. We recommend the need to reduce intermediate input tariffs in these sectors only, rather than general tariff reductions across all sectors.