Made in China

Free trade is a great idea until it starts affecting your livelihood- then maybe it's not such a great idea. The problem is not school of thought. Economics sometimes makes too many assumptions (or too many wrong assumptions) and often overlooks ground realities which can then only be analyzed retrospectively. That's where the Pakistan China FTA failed. Traders and the business community have reported instances of dramatic losses, cut-backs in production and massive layoffs as a direct result of the FTA that was implemented in 2007 and ended its first liberalization phase in 2012.

Are those assertions exaggerated or is there some truth in it? The government probably realizes that an answer to that is necessary since the FTA will soon enter a second phase.

The question though is whether the existing framework is good enough to be built on or it needs a complete overhaul. That is also- though no one would say it in so many words- the primary bone of contention between the business community and the government.

In an event co-organized by the Pakistan Business Council (PBC), the Ministry of Commerce discussed the findings of a study they conducted with the help of World Bank on the impact of the FTA where the study finds, much to the chagrin of the business community, that the impact of overall FTA was 'modest'; that it was 'well-targeted' as tariff concessions to China were higher on inputs than on value-added products as a result of which imports from Chinese inputs and raw material may have contributed to Pakistan's value-added exports.

The authors estimate that imports from China went up by 68 percent between 2007 and 2012; of which 4.6 percent was because of the FTA. On the other hand, FTA concessions led to an increase in Pakistan's exports of only 3.4 percent. These are awfully low growth rates given the coverage of the FTA. If one were to look at trade trends from 2012 and 2015- the former year was when all FTA concessions reached their final liberalization stage- imports from China have been going up way faster while exports to China have been swiftly coming down.

Now combine this with the MOC's findings that after FTA one of the fastest growth in imports from China is seen in the no concession list, one will a) question whether FTA benefited Pakistan at all, given the FTA's contribution to Pakistan's export growth was merely 3.4 percent and even at the highest liberalization, exports were decreasing and b) wonder whether China even needs the FTA to keep exporting to Pakistan.

Secondly, MOC's findings suggest that in a scenario where Pakistan provides zero duty across the board, China's imports would further increase by 12 percent. And if China gives zero duty access to Pakistan, exports to China will increase by 7.3 percent. Not that the Chinese have agreed to it, but even in unilateral liberalization, Pakistan will be none the wiser. The said growth rate using Pakistan's exports to China for 2012 would make exports reach $2.8 billion from $2.6 billion. Mind, that exports have actually come down to $1.9 billion in 2015, so any estimated growth rate is merely hypothetical.

Pakistan's exports have limited potential, even at zero duty and China's exports to Pakistan are increasing, FTA or no FTA. China is also known to dump its products, recent example of steel, massively affecting larger economies such as the EU and the US so Pakistan is but a speck in comparison. This lends credence to the industries who have been crying that their businesses are hurting.

It is then surprising when the MOC suggests that the FTA should offer concessions to Pakistan's rice, fish, cotton yarn, garments, leather and nuts that have earlier had no or partial concession. This market access is not going to be enough, even if it is comparable to ASEAN concessions. Pakistan is not competitive enough to compete in China despite the FTA and China is too competitive to hold back even if concessions are taken away.

Quite simply, while it is a good step to throw light on the FTA and suggest areas where Pakistan would need to get concessions; before any concessions are even discussed there are a myriad of other areas that need agreement on. To start with, setting up safeguard mechanisms that should kick in at specified thresholds to protect the domestic producer; strong anti-dumping regulations that do not take years to determine whether dumping has occurred; protection for those industries that are entering production; and most of all, opening lines of communications with big and small businesses who claim they have been affected.

On the export side, some homework needs to be done on why Pakistan is not competitive enough- bringing cost of business significantly down for industries specially small and medium sized ones that continue to complain about the high cost of energy, corruption, access to energy and access to finance, all of which make Pakistani products more expensive even if tariff concessions are offered. These are repeated time and again but there isn't any headway. Pakistan first needs to help itself before it can play with the big boys and embark on these ambitious trade agreements- with China or any other country- that are for all intents and purposes destined to failure.