Export Subsidies and Import Substitution: Steering Mercantilism in the Modern Time
Mercantilism, rather than being a well-organized body of thought, is better understood as a set of ideas and policies aimed at controlling and interfering with international trade. This economic philosophy remained prominent in Europe from the 16th to the 18th century, where nations sought to accumulate wealth and power by managing trade flows and maximizing their stock of precious metals & valuables (Haque, 2006).
One of the core principles behind mercantilism is the Montaigne fallacy—the belief that in trade, the gain of one person or country comes only at the loss of another. According to this fallacy, wealth is viewed as a zero-sum game: “No profit can be made but at the expense of another.” (Qadir, 2022)
This assumption, driving many mercantilist policies, leads to the idea that a nation’s wealth is determined by its stock of precious metals (gold and silver), making the accumulation of these resources a key economic goal. Countries while adopting policies, would impose tariffs and export subsidies, protect domestic industries, and hoard precious metals to enhance power in the homeland. It has been noted that Pakistan’s economic policies have historically aligned with mercantilist doctrines by focusing on export promotion[1], import substitution[2], and policies that are often linked to currency management (Raja,2003)[3]. Currently, they are considered outdated but the fragments of mercantilist thought still exist in modern policies where nations emphasize export promotion and import substitution, often at the expense of global cooperation and long-term economic efficiency (PIDE webinar, 2022). Despite the efforts for export substitution Pakistan managed to export only 65% of its products to traditional export partners and has not made remarkable progress in terms of destination diversification (RASTA-PIDE,2023).
With this backdrop, this paper aims to test the hypothesis that “Is Pakistan a mercantilist state seeking to subsidize exports and substitute imports with high tariffs to maintain an appreciated exchange rate?”. Additionally, it will be argued how these policies are impacting the economy. A thorough review has been done. To meet the objective of this paper, secondary sources, policy documents and PIDE research all are explored well.
Pakistan’s Policy Choices and Outcomes
In the contemporary global economy, where nations strive for integration, liberalization, and the unified flow of goods and services, Pakistan stands as a country still following a mercantilist approach. This economic philosophy of 16th to 18th-century European powers is characterized by a strong emphasis on export subsidies and import substitution through high tariffs. This policy aims to maintain an appreciated exchange rate, and raise national wealth and economic self-sufficiency. However, in a world of complex interdependencies, this strategy seems questionable and impacts the long-term economic growth of Pakistan.
Pakistan’s trade-related policies aim to enhance exports and protect its domestic economy. The Strategic Trade Policy Framework (STPF) focuses on export growth, while the National Tariff Policy (2019-2024) is designed to safeguard the domestic market. The Trade-Related Investment Policy seeks to attract investments in export-oriented manufacturing. Special Economic Zones (SEZs) are being developed as industrial hubs to draw foreign direct investment (FDI). Additionally, Pakistan participates in multiple trade agreements, including bilateral deals, free trade agreements, and is a member of the World Trade Organization, South Asian Free Trade Area, and China-Pakistan Free Trade Agreement.
[1] Export promotion (EP) strategy- implemented in early 1990s
[2] Import substitution (IS) strategy-adopted in early years, & in current period
[3] https://pide.org.pk/research/misplaced-mercantilism-and-the-case-for-domestic-markets/
