Pak-China FTA – the swinging pendulum

Since the signing of the Pak China FTA in 2006, trade relations and negotiations have gone through many stages. But it is only in recent times that they have started swinging around like a pendulum.

This makes sense given that the average rate of increase in trade deficit between the two countries from its implementation in FY07 to FY13 was 4 percent. However, for the last four fiscal year, the average rate of increase in trade deficit has been 45 percent, with the deficit for the current fiscal year standing at $6.2 billion as per SBP data.

The alarming increase in trade deficit is primarily driven by increasing imports for China, however Pakistan’s declining exports raise a bigger red flag and hence the renegotiation of the FTA became essential as preferential tariffs from ASEAN helped erode away Pakistan’s market. For nearly half a decade, trade negotiations were stalled till they resumed and embarked on the current roller coaster ride.
First came the welcome news that the Chinese side was a listening mood, courtesy CPEC, and that trade negotiations were more unilateral in nature with Pakistan’s tariffs being pegged with ASEAN’s tariffs. In a recent interview, Ehsan Malik informed that the Ministry of Commerce was hoping for favourable renegotiations.

Then came the shock that far from unilateral concessions, Pakistan appears to be agreeing to 0 percent duties for 6000 of its tariffs lines, over the next 15 years. Unsurprisingly, this caused a furor in manufacturing and industrial circles that already resort to NTC repeatedly for imposition of anti-dumping duties. FBR, FPCCI, LCCI, PCMA and other business/trade bodies and associations have made their objections known and as a result the second phase of the FTA has been deferred.

The trajectory of this trade agreement has been from implementation of the trade agreement, to maintaining status quo, to demanding unilateral tariff reductions, to increasing Chinese market access, to back to status quo. As it appears, the best case scenario is to let things continue rather than end up digging a deeper hole.