Foreign trade is important to the economy because of the country's need to

import a variety of products. Imports have exceeded exports in almost every year
since 1950, and Pakistan had a deficit on its balance of trade each year from FY
1973 through FY 1992 (see table 5, Appendix). In FY 1991, exports were US$5.9
billion, compared with imports of US$8.4 billion, which resulted in a deficit of
US$2.5 billion. In FY 1992, exports rose to an estimated US$6.9 billion, but
imports reached an estimated US$9.3 billion, resulting in a trade deficit of
US$2.4 billion. Economists forecast a trade deficit of around US$2.5 billion for FY
1993. Pakistan's terms of trade (see Glossary), expressed in an index set at 100
in FY 1981, were 78.0 in FY 1991 and 82.7 in FY 1992.

Crude oil and refined products are significant imports (see table 6, Appendix).
Their value varies with internal demand and changes in the world oil price. In FY
1982, oil products accounted for around 30 percent of Pakistan's imports, falling
to an annual average of 15 percent in FY 1987 to FY 1990, rising to over 21
percent in FY 1991, but dropping back to 15 percent in FY 1992. Other important
categories of imports in FY 1992 included nonelectrical machinery (24 percent),
chemicals (10 percent), transportation equipment (9 percent), and edible oils (4
percent).

Although import-substitution industrialization (see Glossary) policies favored

domestic manufacturing of substitutes for imports, officials also encouraged
manufactured exports in the 1950s and 1960s. In the early 1980s, incentives
were again provided to industrialists to increase manufactured exports.
Nonetheless, in the early 1990s the export base remained primarily dependent
on two agricultural products, cotton and rice, which are subject to great variations
in output and demand. In FY 1992, raw cotton, cotton yarn, cotton cloth, and
cotton waste accounted for 37 percent of all exports (see table 7, Appendix).
Other important exports were ready made garments (15 percent), synthetic
textiles (6 percent), and rice (6 percent). There was some diversification during
the late 1980s as the share of manufactured goods rose. The share of primary
goods fell from 35 percent to 16 percent between FY 1986 and FY 1993. During
the same period, the share of semimanufactures rose from 16 percent to 20
percent, and that of manufactured goods rose from 49 percent to 64 percent.

In the early 1990s, Pakistan's balance of trade remained particularly vulnerable

to changes in the world economy and bad weather. Sharp increases in crude oil
prices, such as those of 1979-81 and 1990, raised the nation's import bill
significantly. Total exports, on the other hand, are more sensitive to agricultural
production. The decline in cotton production in FY 1993, for instance, seriously
affected the export level.

Sources for imports and markets for exports are widely scattered, and they
fluctuate from year to year. In the early 1990s, the United States and Japan were
Pakistan's most important trading partners. In FY 1993, the United States
accounted for 13.7 percent of Pakistan's exports and 11.2 percent of its imports.
Japan accounted for 6.6 percent of exports and 14.2 percent of imports.
Germany, Britain, and Saudi Arabia are also important trading partners. Hong
Kong is an important export market and China a significant supplier of imports.
Trade with the Republic of Korea (South Korea) and Malaysia is small but not
unimportant. Trade with India is negligible.

Because of Pakistani fears of protectionism in developed countries and the

increasing importance of regional blocs in international trade, the government in
the 1980s and early 1990s placed new importance on developing trade links with
nearby nations. In the early 1990s, new trading initiatives were being pursued
through membership in two regional organizations, the Economic Co-operation
Organization (ECO) and the South Asian Association for Regional Cooperation
(SAARC--see Glossary).

The ECO was formed in 1985 with Pakistan, Iran, and Turkey as its only
members, but Afghanistan, Azerbaijan, Kyrgyzstan, Tajikistan, Turkmenistan,
and Uzbekistan joined in 1992. Some politicians in the member nations see the
ECO as a potential Muslim common market, but political rivalries, especially
between Iran and Turkey, limit its effectiveness. In 1994 most of the concrete
measures being taken by the ECO concerned the improvement of transportation
and communications among the member nations, including the construction of a
highway from Turkey to Pakistan through Iran.

SAARC was founded in the mid-1980s primarily as a vehicle to increase trade

within South Asia by delinking the region's political conflicts from economic
cooperation. Its seven member states--Bangladesh, Bhutan, India, Maldives,
Nepal, Pakistan, and Sri Lanka--adopted the principle of unanimity in selecting
multilateral questions for debate. Despite frequent consultative committee
meetings, progress toward increased trade remained limited in 1994. Pakistan's
trade with India, for instance, is extremely limited. At the annual SAARC summit
in April 1993, members agreed to negotiate a South Asian Preferential Trade
Agreement by 1996 that would lower or abolish tariffs among members.

During the first four decades after independence, controls on imports were used
to ensure priority use of foreign exchange and to assist industrialization. In the
1980s, the government maintained lists of permissible imports and also used
quantitative restrictions and regulations on foreign exchange to control imports.
The most extensive list covers consumer goods as well as raw materials and
capital goods that can be imported by commercial and industrial users. A second
list, mostly of raw materials, can only be imported by industrial users. A third list
covers commodities only the public sector can import.

In 1991 and 1992, the government announced various measures to liberalize

trade. Import licensing was ended for most goods, many products were removed
from the lists of restricted imports, and import duties were cut. In addition, foreign
companies were allowed into the export trade. The government also promised to
convert the remaining nontariff barriers into tariffs, incorporate various ad hoc
import taxes into customs duties, and reduce the numerous exemptions and
concessions on duties.

Data as of April 1994