The FTA fatigue

Consensus eludes China and Pakistan on the methodology to expand Free Trade Agreement after both sides have dissimilar claims on bilateral trade, says a Business Recorder report on the second round of negotiations between the two countries. According to Federal Secretary Commerce Azmat Ali Ranjha, free trade agreements (FTAs) have not benefited Pakistan in any effective and meaningful manner. He expressed these views before Senate Standing Committee on Commerce on last Wednesday. This is indeed having a negative impact on the economy of the country. Why is it so? Is it because Pakistani businessmen cannot compete or need time to lower their cost of products and improve quality as well? Is it due to poor productivity of workers who largely remain unskilled but always demand higher wages? Or, is it due to poor negotiating skills at the Ministry of Commerce? The net result is the negative impact of factors. The situation, therefore, requires an in-depth study and needs to be rectified urgently.
An FTA is an agreement between two or more countries to minimise tariffs, quotas and preferences on most (if not all) goods and services traded between them. An FTA generally starts with a reduction in tariffs before eventually leading to elimination of tariffs in five to 10 years. Ideally. the outcome of an FTA leverages competitive advantage in each value chain and obtains preferential tariff access versus non-FTA countries. It is supposed to add value-added employment generating exports and slows import of raw material and intermediate goods to add value locally. FTAs are expected to move trade balance positively with the world if not the partner. It is supposed to enhance regional connectivity and evolve partnership into third countries. Pakistan has since 2005 already signed three FTAs and five PTAs with 10 more such trade deals being negotiated as of August, 2016.
Three things have adversely impacted our trade and domestic industry: trade with China, smuggling from Afghanistan and political tensions between Pakistan and India. Small and medium-size enterprises have been badly hit by low cost Chinese goods. Smuggling from landlocked Afghanistan dropped the potential for fast moving consumer goods imported in Afghanistan destined for Pakistan such as tea, cigarettes and tyres. And, non-tariff barriers imposed on imports by our eastern neighbour on items like textile goods and cement. Politics, unfortunately, has trumped economics. We need to understand that multilateralism is on the decline while bilateralism is on the rise. Regional trade will be more beneficial if domestic industry is allowed to export in the region. Time is of the essence so our competitive advantage needs to be exploited to its full potential. We need to supply energy at a low price but with consistency. Moreover, labour costs as well as raw material inputs have to reduce. Let us work out FTAs and PTAs after talking to the stakeholders and give them protection with proper laws and regulations until they come to scale. Pakistan is a domestic market of nearly 200 million people. We need to take advantage of this fact.
It increasingly appears that Federal Commerce Ministry has finally learnt a lesson on how to negotiate FTAs. Opting for non-tariff barriers in case of Indonesia shows other countries are using tricks in trade deals. It is understood that such a rare action was proposed to be undertaken against Jakarta in retaliation to its policy to restrict imports from Pakistan.
The PTA arrangement signed about three years ago between two friendly countries could degenerate to such an acrimony and bitterness could perhaps never have been foreseen. While Pakistan needed huge quantities of palm oil from Indonesia to meet its domestic requirements, Indonesia was believed to have a lucrative consumer market for Pakistani products due to its size in terms of population and per capita income. The trade balance between the two countries continues to be highly skewed in favour of Indonesia. Such a position is unacceptable to Pakistani side which is of the view that the country should use its status as the 4th largest importer of Indonesian palm oil as a leverage to seek a waiver from most restrictive NTMs to get more market access. Failing this, Pakistan should also take reciprocal restrictive measures such as compulsory requirements of Certificate of Origin attested from the embassy of Pakistan in Jakarta for palm oil, paper and paperboard and mandatory Halal certificates for exports.
But can we do it in case of China? China is the manufacturing base for the entire world. India's auto sector can be adversely affected in case it signs an FTA with China. Why the prospects of an India-China FTA are quite dim. But can we do it with CPEC on the horizon? Or will politics have a clear precedence on economics once again. The real test is the third round of negotiations. Twenty-five percent of Pakistan's small-scale and medium-size industry such as shoes, organic chemicals and man-made filament yarn (polyester) are already adversely impacted. We certainly cannot afford more industries to be badly hit once again!