Article XXIV of the General Agreement on Tariff and Trade (GATT) permits discriminatory trading arrangement among member nations of the World Trade Organisation (WTO). Following this article, member countries are now focusing to develop bilateral PTAs, RTCAs and FTAs tariff reduction to each other.
As of July 2010, some 474 RTAs, counting goods and services notifications separately, have been notified to the GATT/WTO. Of these, 351 RTAs were notified under Article XXIV of the GATT 1947 or GATT 1994; 31 under the Enabling Clause; and 92 under Article V of the GATS and as of end-2010, 278 PTAs have been notified by the WTO members and are currently in force. Of these RTAs, Free Trade Agreements (FTAs) and partial scope agreements account for 90%, while customs unions account for 10%.
Free trade is commerce between countries without government interference and protective duties. An agreement between various countries to trade goods and services without preferences, quotas, tariffs or excise duties. FTAs allow the partners to give each other preferential market access. The line between a PTA and a Free trade area (FTA) may be blurred, as almost any PTA has a main goal of becoming a FTA in accordance with the General Agreement on Tariffs and Trade. While some observers fear that these arrangements had adverse economic consequences and have eroded the multilateral system that has guided international economic relations during the post-World War II era. (Votes, vetoes, and Preferential Trading Agreements by Edvard D. Mansfiled & Helen v. Milner)
Pakistan has also signed Regional/Bilateral Trade Agreements, Pak-Afghanistan Trade Agreement, Agreement on South Asian Free Trade Area, Pak-Malaysia Trade Agreement, Pak- China Trade Agreement, Pak- Sri Lanka Free Trade Agreement, and Pak-Mauritius Preferential Trade Agreements. China and Pakistan free trade agreement (FTA) having become effective from July 1, 2007 is to enter its second phase towards easing further tariff barriers to be effective after 2012.
China joined WTO in 2001 and undertook to comply with the WTO trade commitments, such as lowering tariffs, reducing non-tariff barriers, expanding market access. Since entry in the WTO, China has introduced progressive reforms mainly in reducing import tariffs but some non-tariff barriers prohibits easy access to the Chinese markets.
True potential of free trade agreement can be evaluated through pre and post pattern of bilateral trade. Although volume of bilateral trade between Pakistan and China has increased after implementing the free trade agreement but this increase is mainly due to increase in the import items. Pakistan has not been getting the full benefit from this FTA. Pakistan is constantly facing a trade deficit. Pakistan-China trade has been growing very rapidly since the Free Trade Agreement (FTA) became operational. Pakistan exports have increased to US $1153.861 million in 2009-10 from US $575.93 million in 2006-07 while Pakistan imports from China have reached a level of US $4410.6 million during 2009-10. Volume of bilateral trade between Pakistan and China has expanded to US $5.564 billion. Share of Pakistan's exports in Chinese total imports was 0.076% (2009) while share of Pakistan imports in Chinese exports 0.34% (2009). Balance of trade between Pakistan and China is US $3.256 billion which is in favour of China. If the growth rate of the present trade between Pakistan and China is maintained, this gap is expected to be widened.
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Table-1
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TRADE BETWEEN PAKISTAN & CHINA
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(Million US$)
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Year Pakistan's Total % Share in Pakistan's Total
Export Rate of Export Total Imports Rate of Imports % Share in Total Balance
to China Growth of Pakistan Exports from China Growth of Pakistan Total Imports Trade of Trade
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2000-01 303.36 9201.595 3.30 525.11 10,728.918 4.89 828.47 -221.75
2001-02 228.63 -24.63 9202.218 2.48 575.37 9.57 10,342.865 5.56 804 -346.74
2002-03 244.59 6.98 11,160.246 2.19 839.00 45.82 12,220.253 6.87 1083.59 -594.41
2003-04 288.259 17.85 12,313.285 2.34 1,153.514 37.49 15,591.776 7.4 1441.77 -865.255
2004-05 354.092 22.84 14,391.081 2.46 1,842.270 59.71 20,598.114 8.94 2196.36 -1488.18
2005-06 463.967 31.03 16,452.398 2.82 2,706.159 46.89 28,586.007 9.46 3170.13 -2242.19
2006-07 575.903 24.13 16,976.243 3.39 3,533.794 30.58 30,539.709 11.57 4109.7 -2957.89
2007-08 684.793 18.91 19,222.857 3.56 4,688.239 32.67 39,968.496 11.72 5373.03 -4003.45
2008-09 701.043 2.37 17,688.00 3.96 4,086.736 -12.83 34,822.1 11.73 4787.78 -3385.69
2009-10 1,153.861 64.59 19,290.00 5.98 4410.6 7.92 34,710.0 12.7 5564.46 -3256.74
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Source: Economic Survey, TDAP
China's uninterrupted growth is characterised by higher productivity, lower wages, and exploitation of economies of scale among other parameters. China's GDP grew by 10.3% in 2010 due to buoyant domestic investments and exports. In 2010 China became the world's largest exporter. It is expected that the Chinese economy will become the world's greatest by 2030, when it will be double the size of the United States. China is one of the leading partners of the Economic Development of Pakistan. Chinese assistance to Pakistan especially in the development of seaport, mining projects, power generation, biotechnology, fishing sector, corporate farming and science and technology is appreciable. Pakistan and China have been enjoying amicable economic relations since long. China has provided Pakistan Technical and financial assistance for some of the major projects like Karakoram Highway, Heavy Mechanical Complex, Forge and Foundry Project, Heavy Rebuild Factory, Guddu Thermal power Station, and assistance in Agriculture.
Phase-I - Tariff Reduction Modality of China within five years after entry into force of this agreement:
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Table-3
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Category Nos Track No of %of tariff
Tariff lines line at
8 digit
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I Elimination of Tariff - three years 2681 35.5%
II 0 - 5 % - five years 2604 34.5%
III Reduction on Margin of 604 8%
Preference of 50% - five years
IV Reduction on Margin of 529 7%
Preference of 20% - five years
V No Concession 1132 15%
Total 7550
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(Source: Ministry of Commerce)
According to a country report on China; Tariff elimination is on 35.5% of tariff lines; only whereas on 34.5% of tariff lines, there would be tariff of 0-5%. Out of remaining 30% tariff lines, there would be no concession at all to 15% (1132 lines) and there would be marginal concession to other remaining 15% lines (1133). Therefore, it is obvious that the maximum concession is only to 35.5% of total tariff lines of 7,550 covered under the FTA. This is too narrow a coverage of bilateral trade and too low tariff lines if we look at China's FTAs with other countries. As provided in FTA, 90% coverage will be considered in Phase-II, which may start in 2013. Besides, if we look at the total data of 2009, we find the share of the duty-free lines applicable to China's imports from Pakistan was 19.2%. China's overall average tariff on imports from Pakistan was 6.9% in 2009 as compared to overall MFN average of 9.5. China-ASEAN FTA is in force since January 1, 2010. Under this FTA, tariff elimination covers 90% of the goods traded between China and the ASEAN countries. According to this FTA, the average tariff rate of China for ASEAN goods would be 0.1% instead of 9.5%. Besides, if we compare China's FTAs with Pakistan and ASEAN, we will find ASEAN at a great advantage as there is zero-percent duty under the China-ASEAN FTA on items, which are covered under China-Pakistan FTA, where there is some duty. ASEAN has a clear advantage rendering Pakistani products less competitive.
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Pakistan Export to China
Value in Value in Value in
S.No Product 2007 2008 2009
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'Total all products 1,104,226 1,006,800 1,258,652
1 Cotton yarn (not sewing thread)
85% or more cotton, not retail
2 Woven cotton fabrics, 85% 614,946 505,890 750,944
or more cotton, weight over 200 g/m2
3 Chromium ores and concentrates 85,832 62,665 101,147
4 Unrefined copper; copper anodes 86,928 177,420 66,290
for electrolytic refining 102,890 - 33,829
5 Leather of other animals, o/t 39,816 36,157 31,813
leather of hd no 41.08/41.09
6 Woven cotton fabrics, 85% or more cotton, 9,854 12,950 26,203
weight less than 200 g/m2
7 Fish, frozen, whole 11,295 15,281 20,739
8 Cotton, not carded or combed 2,358 4,159 18,918
9 Waste, parings and scrap, of plastics 11,979 15,107 15,722
10 Flour etc of meat, meat offal, fish, crust etc 8,895 9,124 13,527
unfit for human consumption
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(Source: Ministry of Commerce)
Pakistan's economy is facing various challenges which are contributing to a low economic growth, low value-addition in agriculture and industrial production as compared to China. A current account deficit is financed through borrowing and unsustainable in the long term. If the deficit reflects an excess of import over exports, it may be indicative of competitiveness problems. A trade deficit is not a good thing during a recession, but may help during an expansion. Similarly labour productivity is a revealing indicator of several economic indicators as it offers a dynamic measure of economic growth, competitiveness, and living standards within an economy. It is the measure of labour productivity which helps explain the principal economic foundations that are necessary for both economic growth and social development. There is a noticeable difference between the labour productivity of the two countries. One of the main reasons for declining trend in Pakistan's labour productivity is the badly affected business environment.
When countries are trading bilaterally a stable equilibrium in trade has significance implications and is only possible when trading partners are endowed with resources, products are cost-competitive, being produced under the laid down standards and quality and a level-playing field is available on both ends. But free trading between the two nations of the same region with the same regional advantages and one of them is a larger economy is not favourable. Bilateral agreements are justified when there is a level-playing field. Before going to negotiate the second phase of the Pak-China FTA, a Joint Task Force should be constituted including the private sector, associations, apex chamber body and academia. Pakistan-China trade co-operation should start with a reduced tariff in a phased manner covering selected manufactured, services, and agriculture products over a longer time horizon. The ultimate goal should be an FTA with a free flow of goods, services and investment, labour and capital.
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