News headlines are blaring about the alarming increase in trade deficit, caused as much by Pakistan’s increase in imports as it has by Pakistan’s decrease in exports. In such a scenario, Pakistan’s efforts to increase its exports through trade agreements need further scrutiny.
Among current trade agreements, Pakistan has SAFTA, FTAs with Malaysia, China, Sri Lanka and PTAs with Iran, Indonesia and Mauritius. FTAs with Iran and Turkey are in the process of being negotiated.
Pakistan’s policy makers are often under much criticism for not being able to negotiate trade agreements favourable towards Pakistan. And though that might be the case, analysis of Pakistan’s top exports and imports puts the fault at the feet of domestic policies rather than international policies.
Keeping SAFTA aside, Pakistan has a trade deficit with China, Malaysia, Iran, and Indonesia. Sri Lanka’s $160 million and Mauritius’s modest $13 million trade balances are the only ones in Pakistan’s favour among countries with which Pakistan has an operating FTA or PTA.
The increase in exports to China and Malaysia post implementation of trade agreements has been marginal in terms of exports as a percentage of total bilateral trade.
With the advancements of technology, it makes sense that Pakistan’s imports of electronics and machinery from China have increased by more than 6 times since the FTA was signed. Pakistan’s top export to China, then and now is cotton. Pakistan imports edible and mineral oil from Malaysia while the majority of exports consist of cereals.
In case of Indonesia and Iran, exports as a percentage of total bilateral trade has decreased post implementation of the respective PTAs.
The bulk of Pakistan’s exports to Iran consist of paper and paperboard while imports from Iran are largely made of oil. The top import of palm oil from Indonesia has increased exponentially since implementation of the PTA. On the other hand, Pakistan’s top export of cotton has decreased over the period, which the increases in exports of cereals and paper and paperboard have not compensated for.
The lessons of the implemented trade agreements seem clear. Even if policy makers were to overhaul Pakistan’s trade agreements and replace them with ones stewed in Pakistan’s favour, odds are Pakistan will still experience a significant trade deficit because of the lack of value addition in exports.
Regardless of the Pakistan Iran FTA and Pakistan Turkey FTA, which are in the process of negotiation, the lack of value addition to Pakistan’s export implies that the alarming trade deficit is not likely to decrease to manageable levels in the near future.
Till implemented domestic policies support and increase manufacture and exports beyond primary products to finished goods, Pakistan’s headlines will continue to lambaste Pakistan’s trade deficit.
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