Pak-China FTA: Jury’s out!

The second-phase of the Pakistan-China FTA is due to be implemented in t minus 14 days and the official word from Prime Minister’s Advisor for Commerce and Investment Abdul Razak Dawood is that the FTA would generate an additional $500 million in export dollars in the first year. The agreement is a full 10 year deal with both countries eliminating tariffs to zero by 2030 across 6000-8000 tariff lines (at 8-digit HS code) and China eliminating tariffs on Pakistani exports across some 313 priority tariff lines from day-1. Pause for applause? Let’s reserve judgement.

Based on comparable trade numbers from International Trade Center’s data portal, the 313 tariff lines across which Pakistan enjoys zero duty access in China immediately does not seem to be a carefully curated list. In fact, it contains items which Pakistan has never exported to the world ever before. Such items are 48 percent that makes up the entire 313 item list. If Pakistan has never exported nearly half the items anywhere in the world, these items are unexplored. Will the sudden concession make them competitive? Does Pakistan even have the capability to produce and export these items? Did the industry contribute to creating this list, because after all, it is the industry that will be making this “exportable” products?

In addition, 73 percent of this priority list contains items which Pakistan has never exported to China. Let’s assume that the new concessions would make these 230 products more attractive in the Chinese market. But the curious thing is: of the $867 million total Pakistani exports to China across 313 tariff lines (in 2018), nearly 70 percent of that amount comes from exporting just one product in that offer list (HS 52051200: uncombed cotton yarn). Another curious observation: the top 24 items in the list (by dollar value) consist of only cotton and value-added textile products (aside from one item: cement). Of total exports to the world across these 313 items, these 24 items took up 81 percent of the share. In short: Pakistan is barely exporting these products (read more: “313 grains of salt: Pakistan-China FTA” May 24, 2019)

A last quick observation is that the big ticket items in the list—where China is actively and heavily importing from the world—are products Pakistan has little to no experience exporting to the world—aside from the aforementioned cotton yarn product. Sure, it is definitely possible that due to these concessions Pakistan will be able to export many of these items—which include automotive parts, home appliances and electronic items including fans and air conditioners. The deal with China was to give Pakistan concessions along the lines of ASEAN countries so that Pakistan will be at par with them. But, even if we ignore that Pakistan has never exported so many of these products where China has given Pakistan full market access, will Pakistan gain parity with just that?

Recall in the first phase of the agreement, Pakistan had zero-rated duty across nearly 3000 products, of which 95 percent were items where Pakistan never exported in throughout the five years the agreement remained operational. That’s a big share to swallow. It’s true that not all products are exportable in any given FTA around the world. But consider the other side of the picture. In the same agreement, Pakistan offered China zero-rate concessions on about 2500 products. China was able to utilize 55 percent of this deal i.e. it exported across 1332 products. Many of these products were those that China had never exported to Pakistan, so the possibility of Pakistani exports growing in products it has never exported in—exists, though China and Pakistan are two dramatically different countries with different knowledge base and production possibilities.

One could hope that this time, the Ministry of Commerce negotiated a better deal by having those products included which Pakistan has domestic capabilities in, or there is some optimism that it would spur new investment inflows into local production. The experience from Phase-I reveals that competitiveness cannot be developed overnight with just market access. For starters, it will take into account competitors’ cost efficiency, compared to Pakistan’s input costs. Even at zero-rate, price parity may not be possible for Pakistani manufacturers at their current level of efficiencies. In addition, if the concessions spur new production avenues, let’s not forget economies of scale come with volumes. Unless Chinese companies and importers take out large contracts, Pakistani manufacturers cannot compete with established manufacturers in other Asian countries. That will take time. But if the deal lasts a decade, it seems time is something we can spare.