Last update: Tue, 09 Feb 2016 10pm
Home» BR Research - Pakistan Macroeconomics » External Account

Pak-China FTA: exploit untapped potential

Imagine a fruit bowl of juicy summer fruits, diced and chilled, on a sweltering summer afternoon. The bowl’s right in front, but despite immense hunger and thirst, you haven’t been able to reach it.

That’s one way of describing the Pak-China FTA.

The trade agreement appears quite beneficial for both countries, at least on the face of it: Pakistan has been given tariff concessions for its major exports such as raw cotton, cotton made-ups, leather and sports goods, and sea food to name a few prominent items.

China, on the other hand, gets to have market access for products such as industrial and electrical machinery and equipment among others.

A look at Pak-China trade figures, after the signing of the FTA, depicts an expanding two-pronged fork, showing trade growth tilted in China’s favour as the difference between imports from China and exports to China rises.

While China marches on in opportunity utilisation by increasing its exports to Pakistan, the latter’s exports to the growing giant have witnessed only a marginal increase.

A closer look reveals the qualitative imbalance of traded goods between the countries. Growth in Pakistan’s exports under the FTA has mainly been in secondary goods or raw materials used for further production such as yarn, etc. Exports of value-added products, on the contrary, have barely grown.

China has, unlike Pakistan, benefited from greater exports in all categories, particularly electrical goods and machinery. The nature of exports from China raises concerns from a domestic manufacturing point of view, since greater dependence on Chinese machinery will hinder growth of indigenous manufacturing capability.

But Pakistan’s got a lot of untapped opportunity to exploit as well before working on deeper concerns.

A research by the Research, Development and Advisory Cell of the Ministry of Textile Industry claims that tremendous potential opportunity currently exists in the value-added garment sector, such as for clothing items such as trousers, pullovers, cotton blouses for women, socks, towels, bed wear, etc.

Asking China for tariff concession on additional items, given this scenario, seems more like tactless greed. It’s like adding more fruits to the bowl one hasn’t been able to reach in the first place.

There’s a lot of idle benefit to be utilised from the FTA before entreating for more concessions. Besides, China would like Pakistan to reciprocate the additional concessions by enhancing reduced-tariff access for more products from China into Pakistan.

Since 2006, the year that the FTA was signed, trade gap between China and Pakistan has increased by about 30 percent to over $2 billion –not surprisingly, in China’s favour.

Bilateral trade between the two stood at $4.5 billion in FY10. During the visit of the Chinese Premier Wen Jiabao to Pakistan at the end of the last year, the signing of MoUs to boost trade between the two countries envisaged this figure to balloon to $15 billion by 2015.

If the past is anything to go by, it won’t be unnatural to worry about further skewing of the bilateral trade in favour of China. To take advantage of a market of over 1.3 billion people, the government needs to strategically prioritise the sectors where maximum benefit can be borne through the FTA.