Pak-China, Free Trade Agreements

Ever increasing imports, and not nearly enough exports; such is the constant state of dilemma that is coming in the way of Pakistan’s growth. According to the country’s Commerce Secretary Younus Dagha, ‘Pakistan is at eighth position in the world in terms of export growth’. The country exported goods worth $2.13 billion in April 2018, which was an increase of 18.7 per cent from last fiscal year. Nonetheless, Pakistan’s trade deficit still stands at approximately $30 billion.

The government has failed to meet its trade target goals in the last four years, which has adversely affected the country’s current account deficit and official foreign currency reserves. Currently, the country’s imports are more than double the size of its exports. What is more shocking is that this has come to pass even though international prices of oil, which is the biggest import item of the country, have been relatively low. According to the National Data Collection Agency, during the July-March time period, value of imports exceeded the value of exports by $27.3 billion, which is a 17.3 per cent increase from last year. By the end of final year 2017-2018, the account deficit is expected at $16 billion. Even though exports stood at $18 billion, an increase of 24.4 per cent compared to last year, receipts are still 260 per cent lower than the import bill.

By the end of final year 2017-2018, the account deficit is expected at $16 billion. Even though exports stood at $18 billion, an increase of 24.4 per cent compared to last year, receipts are still 260 per cent lower than the import bill.

Looking at an overview of Pakistan and China’s trading patterns over the years, we can see that Pakistan’s trade deficit with China has only been expanding. In the last five years, the trade deficit has tripled to approximately $12 billion in the last fiscal year. Pakistan’s total imports constitute 29 per cent of Chinese imports while exports to China are only 8.8 per cent of Pakistan’s total exports, which is a huge gap for any economy.

In the 1950s during the onset of the Pak-China trade relations, Pakistan exported raw materials to China. These exporting goods took a topsy-turvy ride going from being worth $84 million in 1952, to a drop in export volume following the post Korean War boom, and further fall in exports up till 1959. China could not increase its export to Pakistan during this decade, while Pakistan accumulated only marginal trade surplus against China.

During the 1960s, a number of trade delegations were exchanged between China and Pakistan. The first formal agreement was signed in 1963 when both countries granted each other the status of ‘Most Favoured Nation (MFN)’ in attempts to increase economic cooperation and trade. However during this period, bilateral trade with China remained somewhat mixed. Bilateral trade only increased to $77 million in 1966 but declined to $56.7 million by 1969 because of sluggish economic growth of Pakistan thanks to a war with India.

Further bilateral agreements resulted in an increase of Pakistani exports from $73.4 million in 1970 to $192.8 million by 1979. China’s export-driven policies also had a substantial impact on its exports to Pakistan during this time period, which resulted in the increase of export earnings from $34 million to $167.8 million by 1979. On the other hand, Pakistan’s exports fluctuated throughout this time period owing to tensions caused due to nationalism and separation of East Pakistan. Many industries had closed down and exports level could not be maintained. Hence, this period saw the shift of trade surplus from Pakistan to China. Pakistan’s feeble economy, at the time, was further burdened by the onset of the Afghan war and the influx of Afghan refugees into the country. Pakistan suffered as there was a sharp decline in the exports of goods up till 1988. On the other hand, China’s exports had peaked at $337.5 million by 1989. This time period led to a trade deficit of $505 million between Pakistan and China by 1989, and it went on to effect Pakistan throughout the 1990s. Over the next couple of years, bilateral trade decreased and Pakistan’s trade deficit was at $359 million by 1999.

A number of trading initiatives were taken during the early years of the new millennium, which resulted in an increase in bilateral trade to $8.6 billion in 2009. In 2003, a ‘Joint Declaration on Direction of Bilateral Relations’ was signed which determined the scope and direction of future Pak-China bilateral relations. Moreover in December 2004, Pakistan and China signed more trade agreements which envisaged greater cooperation. Pakistan also gave China the status of a Free Market Economy (FME).

Amongst these trade agreements was the Early Harvest Programme (EHP) that resulted in tariff reductions on approximately 3000 agricultural and industrial products. The agreement became the first step towards establishing free trade between Pakistan and China. Under EHP, which became operational in January 2006, China reduced tariffs to zero on 893 items whereas Pakistan reduced tariffs on nearly 200 items.

After signing FTA on trade in goods and FTA on trade in services in November 2006 and February 2009 respectively, Pakistan and China officially stepped into a comprehensive FTA with each other. Pakistan’s exports to China marginally increased in the years following FTA, crossing the one billion dollars mark in 2007. The increasing export trend remained constant up to 2009 and bilateral trade reached $8.6 billion. The EHP agreement increased the volume of bilateral trade to $7.2 billion in 2006, with $915 million exports to China and $6.5 billion imports from China by 2009.

On the contrary, even though FTA led to bilateral trade between the two countries, Pakistan faced an increasing trade deficit with China which constantly increased throughout the 2000s and recorded $6.6 billion by the end of 2009.

Bilateral trade increased from $9.2 billion in 2010 to $17 billion by 2014 which caused a further increase in Pakistan’s trade deficit which reached $12 billion by 2014. Pakistan’s exports only increased from $1.5 billion to $2.5 billion in this time period, while China doubled their exports from $7.6 to $14.5 billion.

Trade volume between the two countries peaked to $15.6 billion in 2016-17. While Pakistan’s imports from China amounted to $14 billion, exports to China were only $1.5 billion in 2017. Most of the imports from China comprised of capital goods, 40 per cent of which were not entitled for duty concessions. Since 2011, Pakistan and China have been meeting frequently to reach negotiations for the second phase of FTA, in which agreement will call for the market to open for 90 per cent concessions. In December 2016, officials of the Ministries of Commerce of both China and Pakistan met to continue negotiations but Pakistani business houses and the Federal Board of Revenue (FBR) were critical of moving onto the second phase of the FTA because Pakistan did not meet its desired outcome from the first phase. The decision was to be finalized in March 2018, but has not yet been concluded because of dissimilar claims by both the parties. Minister for Commerce Khurram Dastgir recently said, ‘negotiations have been halted as Pakistani businessmen were protectionists while the Chinese wanted more liberalization’.

Trade volume between the two countries peaked to $15.6 billion in 2016-17. While Pakistan’s imports from China amounted to $14 billion, exports to China were only $1.5 billion in 2017.

For decades, the trade imbalance has been growing because of China’s constant increase in exports over the years to Pakistan. Even though it enhanced the two-way bilateral trade, Chinese exporters are the ones who largely benefitted from the agreements as Pakistan only utilized around three per cent of tariff concessions given by China.

One of the reasons why Pakistan did not benefit much from FTA is because Pakistan’s exports have been highly concentrated in a few items. The items imported from China have mostly been heavy duty machinery, iron and steel and various medical and pharmaceutical products. Whereas Pakistan exports raw materials like cotton yarn and fabrics, which constitute 80 per cent of Pakistan’s exports. Other items exported mostly include crude oil, aquatic products, leather, and fruits and vegetables. In order to increase exports, Pakistan has to diversify its export items and make its goods more competitive by improving their quality.

Another reason is the lack of Pakistan’s efforts to expand their exports to countries other than the US and Western Europe. Exploring different options and widening the market for exporting can help Pakistan increase its volume of exports.

Pakistan can tackle the problem of trade deficit with China if the country utilizes the increased market access given by China under FTA. By boosting overall global exports, upgrading technology, and increasing investment flows, Pakistan can enhance the capacity of its existing industries. Investment flows will also help in employment generation for the local population, thereby contributing positively to the economy of Pakistan.

Even though the trade deficit is a cause for great concern, the nation is told to be patient and look forward to the time when the imported machinery and capital goods are installed in our industries and ready to boost export produce. After all, it is true that progress takes time and with CPEC underway, the government should keep trying its best to apply policies to protect the country’s commercial interests and safeguard its local industries.

One of the reasons why Pakistan did not benefit much from FTA is because Pakistan’s exports have been highly concentrated in a few items.

Strong representation of Pakistan’s interests in negotiations with China is also needed. If the country is to benefit from the second phase of FTA, China should treat Pakistan in the same way and provide similar concessions in Chinese markets which it gives to Australia, New Zealand and the ASEAN countries. Additionally, the practice of under-invoicing by the Chinese exporters to avoid paying duty and sales tax is unfair, and this discrepancy to Pakistan should come to an end. Huge quantities of cheap and value-added Chinese products in the country have also resulted in employment issues and revenue losses. Moreover, in addition to the inflow of high-tech machinery from China, there has also been an influx of Chinese workers in Pakistan to operate and work on the development projects in the country. Coupled with further revenue losses due to soaring tariff concessions of high potential import products from both nations, this would have little to inject back into the economy or increase production capacity.

Further losses in revenue have resulted because of unbalanced and inefficient tariff concessions from China. Pakistani exporters only use a small fraction of concessions under Chinese tariffs. This is because Pakistan does not have the capacity to export many of the higher value export items mentioned in the list of favorable items to be exported into China under the FTA. The list should be updated to include items that Pakistan can export, like basic and semi-finished commodities; the FTA with China as a whole should be reassessed. Pakistani businessmen should play an important role in the decision making process of future agreements to remove Pakistan from an industrial structure that endorses anti-export bias.

Zahra Khan Durrani

is a Development Economist with an MPhil  in Development Studies from the Pakistan Institute of Development  Economics, Islamabad. She is passionate about working towards a  developed, inclusive, and greener environment and is currently working  as a Research Associate at the Centre for Strategic and Contemporary  Research.

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