The Prime Minister sealed the Erdogan visit with the announcement of a Free Trade Agreement (FTA) by next year. With Boris Johnson, the tedious formality of Indian atrocities over (we already knew his position), the focus shifted to Investments and Trade. Meanwhile, the beleaguered Engineer has a pleasurable pastime exploring FTAs with Thailand, South Korea, and Iran.
Pakistan has no difficulties with unilateral trade concessions, for instance the Generalised System of Preferences (GSP) that gives tariff concessions to developing countries. The GSP plus with the EU is even better - it gives us a preference margin over competitors not covered by it. Small matter if certain social compliance requirements make it more of a reciprocal arrangement than a unilateral concession.
But it is so much less fun when we have to pay a price for concessions, which is what FTAs invariably exact. FTAs are a two way street: give something to get something. We have got too used to the 'Dutch disease' - that reliance on a sole revenue source; in our case our geostrategic location. We like 'gifts'; let our benefactors call them by another name. We have FTAs with Sri Lanka, China and Malaysia. We have Preferential Trading Arrangements (PTAs) - the less troublesome cousin - with Iran, Indonesia and Mauritius. Have they helped our exports?
There is no evidence to suggest that they have. There may have been growth on a bilateral basis - quite remarkably in the case of China, where our exports grew three-fold to $1.9 billion last year - but not on a total export basis. In defence of FTAs, some scholarly works cite the Chinese example. They err in ignoring the 'displacement factor': if more of a product, say Yarn, goes to a particular destination, say China, without an accompanying growth in overall Yarn exports, it is a clear case of 'diversion', not export 'creation'. They are also unmindful of a truly successful FTA running the risk of aggravating Pakistan's market concentration dilemma.
Have the FTAs hindered our industrial development?
Again, there is no evidence to suggest that they have. If our manufacturing sector is struggling it is for reasons that have little to do with FTAs. Yes, imports from China have grown from $4 billion in 2007 to $11 billion last year but we have yet to come across any serious research that establishes a causal link between this growth and the FTA. It would have happened, regardless - the whole world is an example. And, mind you, we have dented the FTA by imposing regulatory duties. If China has not been more vociferous in protesting this derogation it is for reasons of the 'bigger picture', and not because of loopholes in the FTA text or the enticement that our market offers -we are less than half a percent of China's global exports. [As an aside, the more telling question is what happened in 2014 and 2015? In just these two years, our imports from China nearly doubled. A subsequent article shall offer some clues] So, if FTAs are neither a help to our exports nor a hindrance to our industrial development, should we have more of them? Yes, we should - but for entirely different reasons. FTAs are not a substitute for structural reforms, but can secure similar outcomes with less pain. They can pull in export-oriented FDI, diversify and enlarge the export basket, provide for greater economies of scale and technological diffusion, and serve to reduce the unconscionable protection levels that have been the poisoned chalice for our manufacturing sector.
Securing the stated objectives would require a paradigm shift in our approach to FTAs. And in our narrative: FTAs should not be perceived as an end game but a precursor; not a short cut to greater exports but the start of a difficult but promising journey. In terms of approach and negotiating strategy, we have to first accept that with all our supply side constraints even the friendliest FTA will not give us the desired export dividends. At best, it will mean greater trade diversification.
To get the greatest bang for the FTA buck, we need to abandon the current model of seeking concessions based on indicative potential (often derived from flawed Revealed Comparative Advantage studies) which necessarily limits our ambition level to a narrow range of textiles, rice, leather products, horticulture, handicrafts and the like - all low value-added and commodity based, with little upside potential. Our experience with the existing FTAs clearly shows this model is not working.
We need to rethink FTAs. We need to use them to develop new and better capacities for higher value-added products. We need to use them for greater intra-industry trade, with production sharing systems leading to vertically integrated production structures. This would also help usher in greater technological diffusion and the badly needed economies of scale. Further, our interests should be driven by much closer B2B collaboration targeting third countries, particularly those with which either partner has preferential arrangements.
Higher value addition requires greater import content. Our current tariff structure and state of trade facilitation are not geared towards it. A major overhaul will face stiff resistance from the current beneficiaries who have the ear of the policy maker. FTAs can play a role here. Not as a trade liberalization Trojan horse, but as a means to open some side doors.
We recognise that attracting FDI is much more than a function of preferential access to a certain market. But it is an important starting point. To illustrate, simplistically, if an EU producer has an interest in the Chinese market but faces high tariffs he will certainly look at Pakistan for some partial fabrication if exports out of Pakistan have material tariff concessions that out-weigh his additional costs.
Inevitably, FTAs create losers too. Developed countries have special programmes to deal with it: Trade Adjustment Assistance in the US, the Rapid Response Service of the UK, and EU's Globalization Adjustment Fund. We don't have 'safety nets' and hence play it safe in our FTA negotiations. This robs the FTAs of their full potential. Our choices are to give up FTAs, do more of the same, or negotiate FTAs with an eye to the future. Pakistan cannot hope to make a breakthrough unless it gets integrated with the global supply and value chains. Smart FTAs will help. shabirahmed@yahoo.com