1 Trade Liberalization and Exports Performance Analysis of Trade Policy Reforms in Pakistan: 2004-2012 Salamat Ali Abstract The paper analyses Pakistan’s experience of trade liberalization at macro and micro levels . It investigates the effectiveness of using tariffs as a tool of industrial policy for promoting the exports of value added goods. I exploit a natural experiment of enhanced trade liberalization of the textile, leather, surgical and sports sectors to measure the causal impact of tax exemptions on the export performance of these industrial sectors. Variation of tariff levels across industries allows for using a difference-in-difference approach, establishing whether or not the sectors benefiting from tax exemptions show enhanced export performance. Using the transaction level data of Pakistan Customs Department, there is no evidence that the industrial sectors granted tax exemptions performed better than the other sectors which did not benefit from the tax reforms. The study finds that export performance of the economy is highly associated with the performance of imports; however, there is no evidence that the reduced tariffs encourage increased imports of the industrial raw materials and capital goods required for expansion of the industrial base. The results are robust to time varying trends and industry fixed effects. The study suggests that in addition to tariff reduction, other complementary policy measures are necessary for increasing the share of manufactured goods in the country’s exports and to materialize the gains associated from the trade openness. Introduction In 2004, Pakistan made radical changes to its trade policy. The tariff policy reforms removed the sales tax (@16%) 1 on the industrial inputs required in its vital export sectors: textile, leather, sports and surgical. The exemption was extended across the board to all of the production networks in these industries, ranging from the purchase of raw materials, capital goods, and industrial utilities at all the stages, to the start of production processes to the export of finished goods. Its coverage included imports as well as domestic purchases of industrial inputs. In certain instances, where the importers paid duty/taxes on the import of multiple use items at the import stage, or domestically purchased tax-paid-inputs from other traders, they could claim refunds on furnishing the necessary evidence. The tariff reforms aimed to reduce the costs of doing business by improving cash flows, as well as saving time and resources consumed in claiming refunds on exports. It was believed that the decrease in the cost of doing business 1 Federal Budget 2004.-05, Ministry of Finance, Government of Pakistan