No doubt, the perennial current account deficit crisis Pakistan faces makes increasing exports a top priority. We are an exports-starved nation. This is also why the new-and-improved part II of the Pakistan-China FTA has received so much attention. Advisor to the Prime Minister for Commerce and Investment, Abdul Razak Dawood has been found to say exports would grow 20 times. As a result, all efforts are going into ascertaining how to gain better market access into China. But an equally important question that nobody seems to be asking is how to deal with—or rather utilize—the influx of affordable Chinese imports that will soon be coming into Pakistan. After all, trade is a two-way street.
For one, recall the biggest criticism the FTA received in its first round. The criticism was on imports—specifically, that Chinese dumping had caused many Pakistani SMEs to be wiped out (think electronics, cutlery, plastic made products etc.). Many claimed that heavy concessions to China merely resulted in trade diversion and allowed a free-flow of goods that local manufacturers were already making (though whether they were productive/competitive sectors or not is another question). Many invoked the “nascent” industry argument as well.
Fast forward nearly a decade, and Pakistan-China are back with another agreement. A latest research report on it comes from the Pakistan Business Council (PBC) which shows that Pakistan has a robust list of items where it enjoys tariff concessions from China. The study also looks at the “margin of over-performance” i.e how the concessions to Pakistan—or rather market access for Pakistani goods in the Chinese markets—fares against other top countries also exporting to China. As per the study, 80 percent of the product lines part of the FTA are where Pakistani enjoys similar or lower tariff regime access into China.
The report identifies important issues that need work such as information gaps into the Chinese markets, inability of Pakistani exporters to meet large orders, underdeveloped domestic supply chain networks, technical barriers to trade (commonly known as non-tariff barriers) that exist in China, as well as trade facilitation.
However, it misses an integral section of analysis that needs to be done on the import side and the policy measures needed to optimize Pakistan’s gains from this deal. Particularly, how can Pakistan use Chinese products to a) improve manufacturing and create employment; b) improve productivity; c) contribute towards exports and bringing in foreign exchange; d) not wipe out smaller firms that might be in their nascent stage; and e) not merely result in trade diversion i.e. a product which may (or may not) be a better quality good originating from some country would get replaced by a Chinese-make only due to the lower concessional duty China enjoys.
There are lessons from the first part of the FTA, and its impact thereof which are important to revisit. For instance, in Sep-17, Theresa Chaudhry, Nida Jamil and Azam Chaudhry published a paper in Lahore Journal of Economics that found there was a pronounced decline in productivity of sectors that faced the largest reduction in protection following the FTA.
As per the report: “[results] imply that lower Pakistani tariffs on Chinese goods have negatively affected productivity in those sectors that became more vulnerable to Chinese imports. At the same time, there has been a significant decrease in the value added and value added per worker in those sectors that became more vulnerable. The result is that Chinese imports may be pushing Pakistani producers out of the market in certain vulnerable sectors, leaving the remaining firms smaller and less productive”.
While there were other important findings in the study, another curious point the authors highlighted was that “several sectors that gained access to China through the FTA were the same sectors for which Pakistan reduced tariffs on Chinese goods”. This almost seems counter-productive. These sectors faced greater competition which may have hindered their ability to take advantage of new opportunities in China.
On the other hand, a SBP staff note published by Junaid Kamal and Manzoor Hussain Malik highlighted that the rise in imports from China was mainly attributed to “(a) the surge in machinery and equipment in the backdrop of development activities in Pakistan; b) diversion of import from other trading partners towards China; (c) the increase in demand for imported raw material due to emergence of local assembly businesses; (d) the robust demand for cheap goods; and (e) trade diversion from informal to formal channels after signing of the FTA”.
There are certainly other learnings from past studies on both export/import side, but typically, the question of imports only arises when we are examining the “impact” of a deal, rather than when we are in search for opportunities. This is a national phenomenon reminiscent of mercantilism — imports are often considered a burden, rather than a contribution to the economy or collective welfare. The point is, over the next few years, we will definitely see a lot more research on the FTA but a full-fledged analysis requires studying imports as well. A deeper study is required from relevant research bodies that would look at trade as a whole, where imports should be used strategically as an opportunity rather than a threat or an after-thought.