FTA with Thailand: PBC urges MoC to give weight to trade proposals

Pakistan Business Council (PBC) has recommended to the Commerce Ministry to give weight to the proposals of business community before engaging into a Free Trade Agreement (FTA) with Thailand. PBC which is a non-profit advocacy forum has sent its recommendations to the Commerce Ministry days before a Pakistani team will be leaving for Thailand on November 15, 2016 for the fifth round wherein details of offer lists will be discussed in detail.
On November 9, 2016, Commerce Minister Engineer Khurram Dastgir Khan held a detailed meeting with his team and directed them to address the concerns of local industry. On November 10, an inter-ministerial meeting was held in the Commerce Ministry which was duly attended by the EDB. The meeting discussed the pros and cons of the proposed FTA with Thailand and its impact on local industry.
Giving the background, PBC said that in August 2015, Pakistan and Thailand agreed to start negotiations for FTA and delegations from both countries met in September 2015 in Thailand to discuss the Framework for the FTA negotiations. Both countries at various forums have expressed a strong interest in a speedy conclusion of a Free Trade Agreement. On September 11, 2016, deputy director-general of the Thai Commerce Ministry disclosed that 70 percent of the FTA talks have been concluded, with the remaining issues to be discussed at the 5th round of negotiations in Thailand scheduled to be held in October 2016.
Nonetheless, even without an FTA, Thailand and Pakistan share an important bilateral trade relation, with Thailand being Pakistan's 39th largest export destination and 13th largest import source. Similarly, Pakistan is Thailand's second largest Trading partner in South Asia after India and ranks 46th globally. Finally, since Thailand is part of ASEAN one of the reasons given for the need to sign an FTA with Thailand is to use Thailand to penetrate the larger ASEAN market. Pakistan already has an FTA with Malaysia and a PTA with Indonesia - both ASEAN members - however Pakistan has not really been able to penetrate either the markets of these trading partners nor has it been able to increase its exports to the larger ASEAN market using either Malaysia or Indonesia as a base. Though feasibility studies by both sides have supported the expansion of bilateral trade between the two countries through the signing of the FTA, Thailand stands to benefit about four times more than Pakistan. Food and agriculture, fisheries, auto parts and textiles are some of the areas that can benefit with the signing of the FTA.
Taking cognizance of Pakistan's past experiences with trade agreements whether FTAs or PTAs which have not proved beneficial for Pakistan, it is imperative that Pakistan performs an independent feasibility study and more intensive stakeholder interaction before rushing into a FTA with Thailand. In addition to Pakistan's negative experiences with FTAs and PTAs, Pakistan has consistently faced a negative trade balance with Thailand, and all studies indicate that Pakistan's negative trade balance will only increase post signing of an FTA.
The current study by the PBC is a follow-up to its study in 2015 on the feasibility of a Free Trade Agreement between Pakistan and Thailand. This and similar studies which are undertaken by the PBC are a part of its efforts to initiate a dialogue on Pakistan's trade diplomacy which is suffering at the hands of cheap and under-invoiced imports. Funding for this study was provided with the PBC's own resources. In 2015, Pakistan faced its worse trade deficit in the last five years which amounted to $732 million. Additionally, whereas exports have remained consistently flat imports increased between 2014 and 2015 from $730 million to $852 million.
According to the study, Pakistan's top imports from Thailand are capital goods, intermediate goods, transportation, consumer goods and plastic or rubber. Other smaller product groups include machines and electronic products, textiles and clothing, chemicals and raw materials. Imports from Thailand to Pakistan have increased over the last four years from $716 million in 2012 to $852.7 million in 2015. At 02 Digit HS Code Level, top imports from Thailand to Pakistan comprise of vehicles other than railway, plastics, manmade staple fibers, machinery and nuclear reactors, rubber and electrical and electronic products. Vehicles other than railways accounted for about 38 percent of Pakistan's total imports from Thailand in 2015.
Pakistan's exports to Thailand amounted to $120.3 million in 2015. At 02-digit HS Code Level, Pakistan's exports mainly consist of fish, crustaceans and mollusks, cotton, raw hides and skin and other products of animal origin. Combined value of these goods amounted to $93.7 million out of the total $120 million in exports in 2015. Fish and crustaceans accounted for about 47 percent and cotton contributed about 23 percent to Pakistan's total exports to Thailand.
Top groups include raw material, animal, intermediate goods and textile and clothing. It is in sharp contrast to Thai exports to Pakistan which mainly consist of capital and intermediate goods and transportation.
Revealed comparative advantage has been used to help assess Pakistan's and Thailand's export potential respectively so that potential trade prospects with new partners can be analyzed. A value greater than 1 indicates that the country has a revealed comparative advantage in those areas and the country should therefore pursue trade in those items. In case of Pakistan, textiles and clothing had a very high value of 16.6 followed by hides and skins which had a value of 8.47. Plastic and rubber, food products, machines and electronic goods and capital goods are some items that have a value of greater than one for Thailand.
As part of this study, a simulation study has also been conducted using the World Integrated Trade Solution (WITS) software and a Trains data set from the World Bank web site. It helped to calculate the prospective trade and the potential gain from the Pakistan Thailand FTA to both sides. The study assumes that the FTA will reduce tariffs to zero. According to the simulation, women's or girls trousers, bib and brace overalls, light oils and preparations and frozen shrimps and prawns are the top three export potential items from Pakistan to Thailand.
Thailand's highest prospective growth items to Pakistan included motor cars and motor vehicles, parts and accessories of tractors and motor vehicles for transport of goods.
The total export potential within the top 50 high potential exports from Pakistan to Thailand at 6-digit HS Code level is $1.86 billion. However, Pakistan's exports to Thailand for these products amounted to a mere $21 million while exports to the world amounted to $5.69 billion in 2015 (including exports to Thailand).
Top Pakistani potential exports to Thailand consist of instruments and appliances used in medical or veterinary sciences, mandarins and cotton not carded or combed valued at $234.9, $106.2 and $98.6 million respectively. The total export potential within the top 50 high potential exports from Thailand to Pakistan at the 6-digit HS Code Level is $6.93 billion. In 2015, Thailand's total exports of these 50 high potential items to Pakistan amounted to a mere $140.7million whereas Thailand's export to the world of the same items totalled $30.9 billion.
Top Thai potential exports to Pakistan consist of telephones for cellular networks, Polypropylene, in primary form and other motor cars. Evaluating changes from 2014 to 2015, the study observed that trade potential for the top 50 items from Pakistan to Thailand at the 6-digit HS code level was $2.02billion in 2014 whereas trade potential for the top 50 exports to Thailand in 2015 amounted to $1.86 billion, reflecting a drop of $160 million between 2014 and 2015. Overall there are 10 products that have changed in the top 50 export items list from 2014 to 2015. For those 40 products which were present in the top 50 list of 2014 and 2015 both, trade potential in 2014 amounted to $1.86 billion whereas trade potential for such 40 items equalled $1.64 billion in 2015.
The trade potential for the top 50 high trade potential exports from Thailand to Pakistan in 2014 was $6.44 billion whereas in 2015 it was $6.93 billion. The top two high potential exports remain same for both 2014 and 2015 (Telephones and polypropylene). Overall, there are 10 items in Thailand's top 50 high potential exports to Pakistan in 2015 which were not present in 2014 list. The trade potential for the common 40 items was $5.97 billion in 2014 and $6.24 billion in 2015.
The study further said that Pakistan's export potential fell between 2014 and 2015 whereas the export potential of Thai items increased in the corresponding period. Additionally Thailand's potential exports are about four times the size of Pakistan's potential exports. This clearly shows that Thai exports will penetrate Pakistani market to a much greater degree than vice versa.
In Pakistan's top 50 potential exports, 7 products which account for 25 percent of the indicative potential trade are already exempt from tariffs. This shows that a tariff reduction under the Pakistan-Thailand FTA may not bring much benefit to Pakistan. Pakistan's exports to Thailand as a percentage of its total exports have increased from 0.48 percent in 2014 to 0.54 percent in 2015.
Thai exports to Pakistan as percentage of its total exports have also increased from 0.39 percent in 2014 to 0.43 percent in 2015. However, Thai imports from Pakistan as a percentage of total imports remained constant at 0.06 in both years. Out of the top 50 high export potential items from Pakistan to Thailand, 43 products have a revealed comparative advantage of greater than 1. Out of the top 50 high export potential items from Thailand, only 28 items have a revealed comparative advantage of greater than 1.
PBC observed that lack of institutional and legislative depth in Pakistan has been a major impediment to Pakistan being able to negotiate favourable trade agreements and has hampered its ability to defend its domestic industry from the influx of reduced tariff imports from FTA partners.
The policy advocacy group has recommended that the government needs to be cautious before signing an FTA with Thailand. The PBC recommends a more robust consultative process and in-depth analysis of the feasibility of an FTA with Thailand. It further suggested that in case the government does decide to sign an FTA with Thailand, it should ensure preferential access for Pakistan's high potential export items to Thailand. At present, only 7 commodities out of top 50 potential export items of Pakistan to Thailand face zero tariffs. Australia and New Zealand enjoy zero tariffs on 49 and 48 of these high potential export items to Thailand. China has zero tariff access for 42 of these top 50 export items to Thailand while India faces zero tariffs on 21 of them.
PBC also recommended that the government takes into account the views of the business community before engaging in an FTA with another country. Pakistani businesses can provide the government with on-ground knowledge regarding issues faced when trading with Thailand. The local producers, especially infant industries, need protection from influx of cheap imports.