D8 PTA: Calculate your next move

Granted it didn get the same media attention as the G20 conference in Toronto, leaders of the Developing 8 nations met for the biannual summit of the organization in Abuja, Nigeria.
The first such summit in Sub Saharan Africa also marked a change in the Chair from Malaysia to Nigerian President, Goodluck Jonathan. Interestingly, Mr. Jonathan is the Christian head of state to be in the chair of a predominantly Muslim organization.
The three day conference reaffirmed the member nations co-operation primarily in trade and economic development, with talks of a Preferential Trade Agreement (PTA). But, leaders emphasized that while the government was going to play a key role in facilitating trade between the countries, the participation of the private sector was of paramount importance.
In 2006, trade between the D-8 member states stood at $35 billion, which has jumped to around $68 billion in 2010. The figure is projected to grow by 10-15 percent in the next few years, according to the Iran envoy to D8.
A proposal was floated by Iran to develop a joint investment fund for the organization, which would facilitate intra-region projects. Tehran also announced a seed donation of €50 million, encouraging other members to follow suit.
So, where does Pakistan stand to gain from a PTA with D8 countries?
D8 countries include Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria and Turkey. Already about 10 percent of Pakistans international trade is with the developing group. But the balance of trade is in favour of the trading partners. On average, Pakistan extends nearly $1 billion in import payments to the D8 group.
If history is anything to go by, when a country faces a negative trade balance with respect to another, entering into a free trade agreement only aggravates the deficit.
From Pakistans perspective, Pakistan-Malaysia FTA is the prime example, where the trade imbalance has nearly doubled in the past five fiscal years.
Interestingly, if Indonesia and Malaysia are taken out of the calculation, Pakistan has a positive trade balance of roughly $3.5 billion in the last five years with the D8 group.
Perhaps it would make more sense for Islamabad to enter into negotiations with Bangladesh, Egypt, Nigeria and Iran for free trade agreements, instead of a PTA with the entire group.
But PTAs offer more than just trade numbers such as guaranteed and timely availability of essential commodities, depth in relationships between the participating countries, and so forth.
So commerce policymakers really need to ponder over whether strengthening trade relations trumps balancing trade deficits.

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TRADE BALANCE: PAKISTAN V D8

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                    FY06    FY07     FY08     FY09  11MFY10     Total

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Bangladesh           178     210      252      334      337     1,586

Egypt                (36)    (40)     (59)        2     (15)    (169)

Indonesia           (343)   (348)    (466)    (409)    (210)  (2,207)

Iran                 (79)   (134)    (278)    (320)    (764)  (1,651)

Malaysia            (574)   (729)  (1,184)  (1,176)    (967)  (5,681)

Nigeria               26      27       17       45       54       288

Turkey               143     196      337      316      273     1,500

D8 trade balance    (684)   (818)  (1,381)  (1,207)  (1,292)  (6,334)

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Source: SBP

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