The second phase of Pak China FTA, overdue by about 5 years, is to be completed and implemented soon and it bears little good news. Among all the reports and chatter about Pakistan’s receiving tariff concessions equal to that of ASEAN countries comes the sorry tale of Pakistan extending further concessions to China.
Out of 7,120 tariff lines that are exported, duties will be reduced to zero percent for 6,000 tariff lines with protection provided to the remaining tariff lines, mostly consisting of textile products. This will be done in three phases spread over 15 years, though in the first phase the duties on one third of these tariff lines will be removed immediately. Half of the remaining tariff lines will see 0 percent duties in the next 5 to 7 years with the rest eliminated within 15 years.
Keeping in mind Pakistan’s already limited access to China’s $1.6 trillion market of which Pakistan’s share is less than $2 billion, what does Pakistan stand to gain from the second phase of implementation? Previously, Pakistan had shared a list of 70 items that constituted more than 80 percent of its export which China had agreed to consider favourably. Assuming that China keeps true to its word and Pakistan’s access is increased but at what cost?
Pakistan’s ‘all weather’ friend is unwilling to extend unilateral concessions. Over the current eight month period the trade imbalance stands at $6.2 billion, 13 percent higher than the same period last year. How much more will the deficit increase and what would be the impact on the domestic market already flooded with Chinese products?
In a recent interview with BR Research, Ehsan Malik, current CEO of Pakistan Business Council and ex-CEO of Unilever pointed out that Pakistan has consumption based economy. As it stands, big industrial groups such as Yunus brothers and Packages are setting up malls that cater to high end consumers of imported goods, rather than investing in areas that could generate exports. Increasing access to Chinese imports could further stifle the manufacturing economy. For example, Lotte’s CEO in a recent interview said quite frankly that Lotte would have to pack up its bags if its tariff protection was to be removed.
Another impact of the next chapter of Pak China FTA is the loss in revenue. Pakistan has already lost Rs2 billion in FY17 on account of tariff concession on imports from China under the FTA. Though tariffs should not be used as a revenue generating tool, unfortunately FBR requires it to control the budget deficit.
The implementation of the next phase of Pak China FTA is expected to increase Pakistan’s twin deficit and adversely affect domestic production. Given the lack of skill and ability to negotiate a favourable FTA, one wonders at the fate of CPEC.
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