China cheaper, period!

Pak-China trade deficit has been rising over the last five years, raising concerns amongst policymakers about economic relationship between the two friendly countries. Even the Chinese premier Li Keqiang said he would see to it that this issue is addressed.
One way to address this imbalance is to expand the items in the Pak-China FTA list. Phase 1 of the FTA expired last year. Industry sources say that additional 2,000 items on the FTA list should include food items, considering that China is a net food importer, whereas Pakistan may have a comparative advantage in that sector, if managed efficiently.
Be that as it may, the important question is whether the concerns over Pak-China trade imbalance are overblown or not. While it is not the scope of this column to run a complete analysis of bilateral trade, an analysis of Pakistans top 6 imports from China - as a proxy - provides some interesting insight.
The top 6 imports from China constituted about a quarter of total imports from China in fiscal year 2011 (See table). The interesting bit is that over the past few years, more and more of these products are being purchased from China than from Europe or elsewhere.
For instance, in the case of Synthetic Filament Yarn (HS Code 5402), 35 percent of Pakistans needs were being supplied by China in FY07. In FY11, China supplied 62 percent of Pakistans total Synthetic Filament Yarn imports.
This is a clear case of trade diversion - one that is also validated by market participants. Twenty two percent of importers surveyed by the Pakistan Institute of Trade and Development (PIDAT) reported that lower import transportation cost from China was determining their business decisions, according to PIDATs study called Evaluation of Pakistan-China FTA.
So while Pak-China trade gap may have ballooned in Chinas favour it is best if it is seen in the perspective of broader trade profile, instead of condemning the trade gap in isolation.

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Top 6 imports from China in FY11 *
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HS Code                                                    Value ($)   Weight **
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5402    Synthetic Filament Yarn Not Sewing Thread, Not      243,281           6%
5503    Synthetic Staple Fibers, Not Carded, Combed etc.    224,383           5%
8517    Electric Apparatus for Line Telephony, Telephone    208,740           5%
8525    Transmission Apparatus for Radio-telephony etc.     151,623           4%
5403    Artificial Filament Yarn Not Sewing Thread, Not      88,822           2%
8502    Electrical Generating Sets and Rotary Converters     87,981           2%
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