International Trade Tax Revenue and Trade Liberalization: A Case Study of Pakistan

: In this paper the authors tried to find out the implications of trade liberalization on international trade tax revenues and its macroeconomic implication on Pakistan economy. The theoretical approach of trade reforms and its impact on the direction of change of revenue is ambiguous because of its dependence on the productivity of ‘trade tax revenues’. By using the data of twenty five years, the paper first establishes the productivity of ‘trade tax revenues’ in Pakistan, then by an econometric analysis exploration of the relationship between trade revenues and trade liberalization in Pakistan is done. It was observed through our analysis that there is high productivity of trade tax revenues. Further, our results show a positive and significant relationship between the trade liberalization and collection of trade tax revenue. To support this relationship, a second test of Granger’s causality is also performed which confirm the causal relationship between trade tax revenues and trade liberalization. It was suggested that supportive macroeconomic policies are prerequisite for successful trade liberalization.


INTRODUCTION
encouraging the elimination of both qualitative and With the changing of time, economists are very After some time it replaced by WTO and the concept of strongly referring economic development to international trade liberalization has become a common strategy for trade and feel a strong international trade become an trade policy among countries.And this trade liberalization integral part of the economic development.The world is is accepted greatly by developing as well as developed rapidly transforming into a global village.Trade has countries and is further enhanced by the way of contributed to this transformation more significantly than globalization.any other factor.In fact, the high economic, social, A number of market-oriented moves have surged cultural, political, human and intellectual integration during the last couple of decades in the world.In the wake witnessed in the world in the recent past is due to trade of these moves, the global trend has also witnessed the among its different countries.Further, trade has liberalization of the capital account, foreign exchange, contributed much more to the development of the world credit, domestic consumption and trade in different economies than any other factor.Thus, trade and countries.However, the area which has received development go hand in hand and therefore the strategies unprecedented emphasis in various economies is trade adopted in the case of the former have a strong bearing liberalization.Trade liberalization denotes the reduction in on the latter.
barriers to the movement of goods and services in After the Second World War many trade related international trade.In the words of and Krueger [1] "any agreements took place and the most important problem policy which reduces the anti-export bias will lead towards which had been faced by developed as well developing liberalization of trade".A new explanation by Edwards in countries are different international trade taxes.GATT study [2] described a liberal trade regime as one in which tried to overcome the issue of trade tax and by all trade distortions including import tariffs and export quantitative restrictions, it facilitate free trade activities.
subsidies are completely eliminated.Globalization is a industries from import duties was phased out by June, relatively new concept in the social sciences and is 2004 and import duties on 4000 items were reduced.Import acquiring a critical importance for the academic as well as liberalization measures were adopted for agricultural and the political agenda of the twenty-first century.In social petroleum products.Restrictions on agriculture exports theory the universalizing tendencies and transnational were also removed.structural transformations bound up with globalization.
A sound fiscal position is vital for achieving Other than benefits, some costs are also associated macroeconomic stability, which is increasingly recognized with trade liberalization.A substantial problem arising as being critical for sustained economic growth and from reducing trade barriers in the wake of trade poverty reduction.The sooner Pakistan improves its fiscal liberalization is the loss in tariff revenue that accounts for position by making sharp fiscal adjustments, the lesser 10-20 percent of government revenue in developing the price is likely to pay for its fiscal indiscipline.A sharp countries [3].If tariffs are reduced or eliminated, these fiscal adjustment can reduce large external current countries will have to impose large increases in other account imbalances, restore the confidence of global taxes in order to keep their budgets in line, causing some investors, ease financing constraints, support growth and economic distortions.contain inflation.Pakistan's fiscal policy position Economists have different argument about the effect remained focused on sustained economic growth in of trade liberalization on the productivity of trade tax unison with declining debt services, alleviating poverty revenue, so the relationship of trade tax revenue and trade and investing in physical and human infrastructure.liberalization is ambiguous.The higher tariff stimulate During the last 17 years, tax-to-GDP and hence revenueimporter for seeking exemptions so it may affect the to-GDP ratios have shown a declining trend, owing mainly productivity of tax system.the lower tariff in some areas the structural deficiencies in the tax collection system [6].become a cause to increase in the tax base by lowering the The combined result of such characteristics is the low and marginal benefit to avoid taxation, hence liberalization stagnant tax-to-GDP-ratio, which represents the country's leads to rise in revenue [4].So this is not always the case fiscal effort, has remained stagnant in the neighborhood that the reduction of tariff due to liberalization leads to the of 12-14 percent over the last three decades [6].Along reduction in revenue.
with the reduction of tariff and non-tariff barriers for In case of developing economies, where the large liberalizing the trade, the government has initiated portion of government revenue is based on the collection successive reforms in tax system since 1990.Induced of tariff and other international trade taxes, trade largely by trade liberalization, the customs collection liberalization proves a negative impact on revenue declined sharply over the past decade, but rose sharply collection, according to Keen in studty [5], Fiscal from FY2002-03 because of higher imports.As a share of problems will arise when trade restrictions drop below GDP, customs collection declined from 55% during 1990their revenue-maximizing level of around 10-15 percent.91 to 25% during 2007-08.With the rationalization of In these countries, the collection of direct taxes is very import tariff regime in the country whereby the average poor.After the trade liberalization, the tax system also tariff rates have come down from 55% in 1995 to 17% in failed to overcome this collection problem.So the revenue 2004 have obviously influenced the volume of collections by government become lower than before international trade in the economy [7].Such a large trade liberalization.
slippage on the fiscal side has already caused severe Pakistan has made significant efforts in liberalizing its macroeconomic imbalances.The hard-earned trade regime during the last two decades.The maximum macroeconomic stability underpinned by fiscal discipline tariff rate had declined from 225 percent in 1990-91 to 45 appears to have been lost and Pakistan is likely to pay a percent by 1996-97.It was further reduced to a maximum heavy price in terms of deceleration in growth and tariff rate of 25 percent (barring automobile sector) during investment, reversal in poverty trends, widening of fiscal year 2007-08.The average tariff rate stood at just 6 current account deficit, rise in public and external debt, percent in fiscal year 2007-08 as compared to 65 percent in depletion of foreign exchange reserves and mounting 1990-91.The number of tariff slabs was reduced from 13 to pressures on the exchange rate.4 during same period.Quantitative import restrictions In this paper we tried to evaluate the implications of have already been eliminated except those relating to the process of trade liberalization on revenue generation security, health religious and cultural concerns.The from trade restrictions.The paper focused on quantitative number of statutory orders that exempted certain restriction in form of tariff but at the same time it also focused on the theoretical explanation of the effect of results suggest that supportive macroeconomic policies.trade liberalization on trade tax revenue by hypothesizing In a World Bank study [12] observed that Niger has the crucial fact that the trade liberalization leads to a suffered major fluctuations in revenue since the 1970s.significant affect in trade tax revenue.
The revenue/GDP ratio has fallen from 14 percent in 1980 Literature Review: By the emergence of WTO and then several operational missions, this study finds that the introduction of trade liberalization, most of the developing principal reasons for low revenue mobilization are: the countries were attracting toward it, to see their dream adverse fiscal impact of trade liberalization, the decome true to be industrialized nation.Trade liberalization fiescalization of agriculture in the 1970s, the collapse of may help them a lot, but we intended to see the fiscal the uranium boom in the 1980s and the poor record of the impact of trade liberalization, in Pakistan which can better VAT in mobilizing revenue.The large reduction in tariffs analyze with the help of research experience done in other during the 1980s and 1990s in the context of structural countries.Tanzi in study [8] hypothesized a several wide-adjustment programs and West African regional ranging issue to check the relationship of different macro integration initiatives had adverse effects on trade tax economics variables, he also included inflation, exchange revenue during the period 1980-2003.However, higher rate and most prominently tax revenues.He observe there import levels after 1994 succeeded in partially mitigating is often an inverse relationship between a country's tax the revenue losses.The experience of Niger demonstrates revenue and real level of its exchange rate, he is of the that without accompanying macroeconomic policies, view that overvaluation has a direct effect by suppressing parallel improvements in tax and customs import and export bases measured in domestic currency administration and success in mobilizing domestic term.This in turn reduces the collection of international taxes, most notably the VAT, trade reform can have trade taxes and sales and excise taxes, which are usually adverse fiscal consequences.Dutta in study [13] by levied upon domestic and imported consumption.On the using the data of 1973-1995, they empirically analyze other hand he also concludes that, the tax collection the relationship of trade liberalization and industrial method is different in different countries.It is therefore growth in Pakistan, with this relationship, they also not possible to generalize about the effect of changes in analyze the impact of trade liberalization and revenue trade liberalization and the surrounding macroeconomic collection of a country, in this context, they use two environment on tax revenues without examining the method for empirical analysis, the Co-integration analysis structure of the different components of revenues and the and error correction modeling have been used.It is importance of each different component in the total.
suggested that there exists a unique long run relationship Reisen in study [9] and Seade in study [10], formulate among the aggregate growth function on industrial value hypotheses on similar issues and tested the relationship added and its major determinants of the real capital stock, of tax revenue and exchange rate, they also found an the labor force, real exports the import tariff collection rate inverse relationship between them.Matlanyane in study and the secondary school enrolment ratio.Yasmin et al [11], highlight the implications of trade liberalization on [3], empirically analyzed how trade liberalization has international trade tax revenue and the macroeconomic affected economic development in Pakistan.Its effects implications thereof in the context of the South African have been examined with respect to four measures of economy.It follows quantitative restrictions in the form of economic development: per capita GDP, income tariffs for liberalizing trade in South Africa.By using inequality, poverty and employment over the period from econometrics techniques, it is estimated that customs 1960-2003.The analysis shows that, over the study revenue highly influenced by trade liberalization.It was period, trade liberalization has not affected all the chosen suggested that Government should couple the indicators of development uniformly.It has affected liberalization polices with other macroeconomic policies employment positively but per capita GDP and income such as exchange rate liberalization that would be the distribution negatively.However, it has not affected main focus of the paper is on quantitative restrictions in poverty in any way.The obvious message is that trade the form of tariffs.Customs revenue is used as a measure liberalization has not affected all the indicators of of trade tax revenue.The estimation results show that development favorably in Pakistan.It thus implies the customs revenue is highly productive.In addition, trade need of a cautious move towards liberalization.The focus liberalization has a significant influence on customs of trade liberalization should be to bring about revenue and that an increase in imports may lead to a improvement in the performance of mediating factors and reduction in trade tax revenue.On the other hand the to focus exports on labor-intensive products., "Fiscal Implications of to check this relationship, for this purpose they use Multilateral Tariff Cuts" The paper contributes to the Generalized Method of Moment Method.They prove a discussion about the revenue implications of trade reform sensitive and negative relationship between trade by assessing the approximate fiscal revenue impact of liberalization and tax revenue.According to them in different liberalization formulae under consideration in general, trade liberalization is not strongly linked to multilateral trade negotiations for a group of low-and aggregate tax revenue, it is basically linked with higher middle-income countries.The study applies a linear income tax revenue.They suggest that to adopt trade optimization framework to data for bound tariffs, applied liberalization, the countries should be careful to apply tariffs and imports at the HS-6 digit level for 58 developing some macro economic policies to preserve the overall countries and simulates results for different sets of import revenue yield.demand elasticity and developing country "flexibilities." By using the data from 125 countries, Baunsgaard in While only a small number of countries face a significant study [18] give their point of view about the relationship impact, results point toward the need for complementary of trade liberalization with tariff revenue, they find that fiscal measures in the countries most affected by revenue after trade liberalization middle-income countries had been loss.Joseph P. and A. Shoham in study [15] focusing on able to recover between 35 and 55 cents per dollar of the experience of the Israeli economy in the twenty year income from lost trade income, whereas lowest income period  where Israel undertook both major tariff countries had recovered basically none.liberalization and a related domestic tax reform, with no reversion to border taxes.The Israeli experience highlights Methodology: Econometric methods of analysis are used the initial budget revenue concerns associated with tariff to achieve the above objectives.The following equation, liberalization and quickly moves the issue away from adapted from the work of Osoro [19] is estimated using border tax substitutes to domestic issues concerning the method or ordinary least squares to determine the enforcement.By de-linking the two issues the paper productivity of trade tax revenue; demonstrates that it is feasible to successfully tackling both external and internal tax reforms.Furthermore, it ln T = ln + ln Y + µ (1) demonstrates that it is possible not to fall into the trap of looking at border taxes as a cure for internal high costs of where tax revenue.The appropriate prescription for other T = customs revenue developing or newly industrialized countries is to de-link Y = GDP the two tax issues, focus on the collection side of the = a measure of revenue productivity/ tax buoyancy domestic tax structure while at the same time reducing local taxes and broadening the tax base.
In order to test the main hypotheses, trade revenue Panel data very broadly covers the relationship of is specified as a function of the import base, the exchange trade liberalization and revenue effect.In fact the trade rate, the average tariff rate and a dummy variable liberalization impact in panel data analysis helps us to representing trade liberalization.The specific equation to examine the policies of different countries in order to be estimated is; adopt trade liberalization and other countries can learn from their experience.
ln TR = + lnM + lnw + Lib + r + (2) Khattry and Rao in study [16] investigate the issue of fiscal impact and trade liberalization, on the basis of the where TR is customs revenue as a percentage of GDP, data of 1970-1998 from 84 countries, by applying the fixed M: are imports as a percentage of GDP representing the effect model, they conclude that with trade liberalization, import base, lower and middle income countries had experienced lower W: is the exchange rate, fiscal income as a result of fall in trade related tariff and Lib: is a variable for trade liberalization which is calculated income and trade liberalization is negatively correlated as import duties as percentage of total imports, TR: is the with total tax revenue and international trade tax revenue.
average overall tariff rate and : is the error term.Agbeyegbe T, S in study [17] on the basis of empirical The import GDP ratio is included in this equation to evidence find out the relationship of trade liberalization, isolate the effect of trade liberalization on international exchange rates and tax revenue.By using the panel data trade, which can then be related to the effect on revenue, of 22 African countries of the period of 1980-1996, they try while the exchange rate is used to represent the macroeconomic effects of this policy.The tariff reform Liberalization and the average tariff rate will then indicate the direct effect of the reduction in the average tariffs on trade tax revenue.
Estimation Techniques and Data: Ordinary least squares are used to estimate the productivity of trade tax revenue and to establish the effect of trade liberalization on tariff revenue.The equations are estimated in linear logarithmic form.The exchange rate is expressed as Rupee per US dollar.This means that an increase in the exchange rate represents a depreciation of the Rupee.Customs revenue is used as a proxy for international trade tax revenue.Because of data efficiencies, the overall average tariff rate was calculated from the series on customs revenue and that of the value of imports.Although not all imports are subject to trade restrictions, this measure gives an ideal of the average tariff based on all import commodities.Annual time series data ranging from 1971 to 2007 has been used.

RESULTS AND DISCUSSION
This section presents and discusses the estimated results of the above equations.
Table 1 shows the estimation of results of the productivity of trade tax revenue.The results exhibit a good fit of 90 percent.The coefficient of GDP is positive and significant as expected a priori.This implies that a rise in output will lead to an increase in international trade tax revenue.A one percent increase in output will increase customs revenue by approximately 10 percent.This coefficient also shows that tax revenue is highly responsive to changes in output.This relationship is significant at 1% level of significance.On the other hand the overall model is also highly significant, which can be analyzing by the value of F-statistics.The overall model presents a good and significant picture of the data.
The estimation results of the determinants of import and trade tax revenues are shown in Table 2.The dependent variable in this regression is customs revenue as a percentage of GDP.
The coefficient of the exchange rate is negative but not significant.This result has two implications.Firstly, it means that when the currency depreciates the volume of imports falls and hence leads to a loss of trade tax revenue.Secondly however, the fact that this coefficient is not significant in statistical terms implies that the value of imports rises in Dollar terms and partially makes up for the loss in revenue resulting from lower trade taxes.The coefficient of the import-GDP ratio is positive and significant at 1 percent level of significance.A one percent increase in the import-GDP ratio results in an increase in customs revenue GDP ratio by approximately 0.48 percent.This indicates that even if the volume and value of imports increase (by a higher proportion that GDP) as a result of trade liberalization, import tax revenue actually has increased.This could imply that although a combination of lower tariffs and the depreciation of the current depreciation of the local currency may increase imports both in terms of volume and value, the effect of these two factors on revenue as well.
The relationship of imports as a percentage of GDP with trade Liberalization is positive and significant at 1% level of significance.This states that by the increase in the volume of imports there is an increase in the trade tax revenues of a country.On other hand the relationship of trade liberalization and trade tax revenue is positive and highly significant at 1% level of significance.The coefficient of the average tariff rate is positive and significant as expected.This confirms the hypothesis that a reduction in the tariff rates results in a significant loss of customs revenue as indicated by the coefficient of the import GDP ratio.The coefficient liberalization is positive, indicates the positive impact of trade liberalization in Pakistan economy, implies that with the trade liberalization, there is more increase in revenue and economy as well the fiscal implication of the liberalization have positive impacts as well.This implies that liberalization policies have been able to significantly affect international trade tax revenue in short as well as in long run.Two main conclusions can be drawn from this analysis.Firstly trade liberalization in the form of tariff reforms has not reduced trade tax revenue significantly.Secondly, macroeconomic policies that support the prevailing macroeconomic environment can significantly facilitate successful trade liberalization.In this regard, the government can take advantage of the depreciation of the Rupee to increase exports and thus the fiscal implication of liberalization is positive.For this purpose up to two lags of both variables has been taken and with one lag we got the result that trade liberalization has a strong causal effect on trade tax revenue, but on the other hand trade tax revenues has no casual effect on trade liberalization.So it is concluded that trade liberalization has a strong causal effect on trade tax revenue which is significant at 1% level of significance.From the Granger's causality test the causal relationship of trade liberalization and trade tax revenue has been proved at one lag and it indicate that the direction of causality is from trade liberalization to trade tax revues.From the Granger's Causality test, the relationship between trade tax and trade liberalization has been proved from Table 4 which basically indicates two way causal relationships between these two variables.So by the results it is conclude that the trade liberalization has a causal effect on trade tax revenues but at the same time the trade tax revenues also has a causal effect on trade liberalization.
Concluding Remarks: This paper set out to establish the effect of trade reform on government revenue.This task is executed by an econometric analysis of the determinants of trade tax revenue.From the analysis, it can be concluded that trade liberalization in Pakistan has led to a significant improvement in trade tax revenue in both short as well in long run.Even, given the significant positive effect of the import-GDP ratio on customs revenue, it is imperative for government to couple the liberalization policies with other macroeconomic policies such as exchange rate liberalization that would work to mitigate budgetary pressures.One of the important conclusions that can be drawn from the analysis is therefore that a sound macroeconomic policy environment can significantly facilitate successful trade liberalization.In this particular case, prudent exchange rate policies are crucial.Taking advantage of the depreciation of the Rupee by increasing import earnings could ensure enough earnings from imports to offset the loss in revenue from trade taxes due to lower taxes.The results for Pakistan economy are quite different from many developing countries.Granger causality supports the argument that the trade tax revenue has increased by the trade liberalization mainly because of tax reforms initiative from Federal Board of Revenue and growth of GDP during the period.This relationship encourages liberalization policies accompanied by macro economic policies to increase GDP and economic growth in the economy.

to 10 .
6 percent in 2002.Using data collected during An IMF working Paper [14] Granger's Causality Test: Granger causality test has also been performing to check the causal relationship trade liberalization and Trade tax revenue Tr =