The Pakistan-China FTA has had its fair share of criticism. The business community has complained that many of the country’s SMEs have been run out of business looking for cover when the Chinese goods hit the Pakistani markets at substantially lower prices, especially after duty concessions. Others have popularly claimed that the market access given to Pakistani goods in the Chinese market was not preferential and ASEAN countries got a much better deal which made Pakistani goods uncompetitive, despite concessions. How will the new deal fare in relation to the failings of its predecessor? Let’s take a cursory look.
The government claims that it has negotiated a better deal seven years after Phase-I expired which can boost exports to $6 billion (2018 actual: $3.8 billion, 16% of Pakistan’s exports globally) along the high priority 313 tariff lines where there will be no duty from day one of implementation (mind you, there are thousands more tariff lines that have concessions but for the purpose of this column, we are only looking at the priority lines).
Here’s the quote from a news report: “(Razzak) Dawood said that Beijing imports around $64 billion worth of these items from across the globe, and if Pakistan is successful in capturing just 10 percent of that market share, the country’s exports to China could rise to $6billion”. The sentiment is the right one, but it doesn’t seem the government ran any complex analysis to arrive at these numbers. In fact, the quoted $6 billion expected exports to China under the 313 tariff lines are the entire exports to the world that Pakistan made in 2018 along these tariff lines. Does this mean, Pakistan is going to/ can divert the entire exports (along the 313 tariff lines) from world to China? Seems rather unsophisticated.
The other important note is: the number of tariff lines themselves serves very little purpose. In the first phase of the FTA, there were 2681 tariff lines in China’s offer list (at 8-digit HS codes) that had zero rated preferences within three years of implementation of the FTA. But the number 2681 is itself entirely inconsequential, when only 5 percent of the tariff lines were utilized during the course of the FTA. In fact, there were nearly 2500 products under that list that Pakistan never exported in. On the other hand, of the 2423 products under Pakistan’s offer list to China in zero rated category, China exported in 1332 products—55 percent utilization! Is that a function of better negotiation that China made Pakistan put products that it actually could utilize given the chance, or is that luck? It definitely seems deliberate.
Let’s move to the new FTA then and see if we learnt a lesson. Sure enough, based on 2018 trade numbers, Pakistan has not exported anything to China across 78 percent of the zero rated 313 tariff lines. Worse yet, 48 percent of this list is where Pakistan has no potential at all to export having never exported these products to the world. Why are these 151 products part of this list? Here’s another kicker. Of the $867 million current exports in the 313 tariff lines, nearly 70 percent of that amount comes from exporting just one product in that offer list (HS 52051200: combed cotton yarn). Is 313 just a number?
There is the caveat that exports did grow during the first phase of the FTA, and concessions may have helped. Exports in the phase-I zero rated category for Pakistan grew from $92 million to $560 million between 2006 and 2012. Of course, greater market access allows exports to grow, and that is what policy makers are counting on.
But if half the products that China has given zero rated concessions are not even exported at all, is Pakistan hopeful that the domestic producers would start rolling up their sleeves to invest in them. For that to have happened, a lot of extensive economic modeling should have gone into determining which products Pakistan should potentially produce due to the FTA. Taking the phase-I example alone: in 2006, Pakistan did not export in 95 percent of the products in the zero rated category. This became 93 percent in 2012—virtually no real improvement. The FTA does not seem to have created opportunities for new sectors to join in on the spoils.
Moreover, the mechanism behind determining these product lines is also unknown. It does not seem that these offer lists have been as carefully curated as they should have been. Pakistan needs trade economists and experts that can tell the country what benefits it could reap from any FTA and the overall welfare it could potentially create. If the FTA will lead to new production, investment and trade creation, that has to be mapped out first. Did the Pakistani side do that exercise? Time will tell.
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