China-Pakistan Free Trade Agreement (CPFTA) is a milestone in the development of business relations between two neighbours. Signed between China and Pakistan in 2006 and entered into effect in July 2007 the agreement has gone through a number of alignments since then. CPFTA regulated and expanded bilateral trade between the two countries which touched a volume of $20 billion by 2015 when both countries signed as many as 51 agreements and Memoranda of Understanding on cooperation in various fields.
But the consequence of the same has resulted in a gross imbalance in the bilateral trade, which is strongly in favour of China.
Pakistan and China are bonded by deep strategic ties, but business is business and this status of imbalance needs to change for equitable business relations between the two friendly neighbours.
Presently, talks are underway for the revision of CPFTA and the realignment has the potential to yield $542m annually in favour of Pakistan.
Pakistan has proposed many revisions to narrow the gap such as tariff reduction on 80 percent tariff lines, no reduction on 20 percent tariff lines since the date of entry into force of the 2nd phase of CPFTA, elimination of products' tariff on 40 percent lines to zero (including MFN zero tariff), 10 percent tariff lines on elimination of products' tariff to zero within 5 years and similar adjustments.
Pakistan's exports of bed linen, denim, leather & leather apparel, frozen prawns, marble, surgical instruments and football are at 100 percent concession in China. From Pakistan's perspective, however, deeper concessions are required to be gained in export of items such as rice, cotton yarn, garments, leather and pine nut.
At present, there is a debate in the business circles of Pakistan on a question whether or not CPFTA really constitutes a preferential treatment to Pakistan.
China signed several bilateral and regional FTAs, which limited the benefit of preferences to Pakistan. China's FTA with the Association of Southeast Asian Nations countries (ASEAN) has also rendered the preferential treaty with Pakistan largely irrelevant. For example, China charges 3.5 per cent duty on the import of yarn from Pakistan under the FTA while it also charges the same duty on imports from India in the absence of any China-India treaty.
China cannot be held responsible for all woes. One reason for the imbalance is that Pakistan, comparatively, has little to offer. The country is still stuck up in export of items such as textile, leather and some agri produce whereas China has expanded its exports to engineering, building material, electronics, vehicles and similar goods. But whatever Pakistan has to offer must be leveraged well.
Currently, Pakistan has reduced the duty on 35 percent products to zero percent while China has reciprocated by reducing the duty on 40 percent products of Pakistan's exports to zero percent. But Pakistan could not utilize the concessions granted by China under the first phase. It only exported in 253 tariff lines, where the average export value was $500 or more, which was around 3.3 percent of the total tariff lines (7,550) on which China granted concessions to Pakistan. The issue is Pakistan's limited export potential against China's potential, which is growing exponentially.
Pakistan's key exports to China are raw material and intermediate products, such as cotton yarn, woven fabric, grey fabric etc. Value-added products were missing despite the fact that some of these products, like garments, were included in the concessionary regime. Trade imbalance between Pakistan and China has much greater negative effects on the socio-economic dynamics of Pakistan than a couple of million of dollars here or there. Pakistan is moving towards de-industrialization and as a nation of traders.
According to a study conducted by the Lahore School of Economics, Pakistani tariffs on Chinese goods have negatively affected productivity in those sectors that have become more vulnerable to Chinese imports.
Owing to low tariffs on Chinese imports, a reduction has also been seen in the number of firms and the level of employment in those sectors.
The researchers also found that lower Chinese tariffs on Pakistani goods have negatively affected productivity in those sectors that could have potentially benefited from higher access to the Chinese market.
As a result, there has been a significant decrease in the value-added products in those sectors as compared to others. The sectors that benefit from lower Chinese tariffs, have witnessed a significant increase in the level of employment as well as in the total Pakistani exports to China.
The researchers further said that in the context of results drawn on the impact of Chinese tariff concessions to Pakistani exports, it is about time Pakistan gain the same level of tariff concessions from China as received by the ASEAN countries.
"Only with equal access will Pakistani manufacturers have a chance to move out of the cycle of low productivity firms producing and exporting low value-added goods to China and into higher productivity firms producing and exporting higher value-added goods to China."
The researchers concluded that since there is a very central industrial cooperation component to the China Pakistan Economic Corridor (CPEC), it is critical that Chinese industrial initiatives yield the maximum economic benefits for local stakeholders in Pakistan.
Maximum benefits could be achieved by ensuring that CPEC-related industrial activities must have well-defined local stakeholders who help maximise the local benefits for firms. This can be achieved by promoting joint ventures between the Pakistanis and the Chinese, which contain a minimum requirement for local partner's involvement in each project as well as a guarantee that each is allocated a minimum financial share of each project.
They also recommended that the government make pragmatic decisions such as, which sectors to focus on. The decision should take into account which sectors can most benefit from greater productivity, which sector can lead to the greatest increase in value-added and which sectors have the greatest potential to increase exports.
Finally, they recommended that in order to increase productivity, employment, value-added and exports, there has to be a conscious decision by the policymakers that CPEC-related industrial projects should help local firms move up the technology ladder.
This can be achieved by: first, creating firm level incentives for investment in advanced machinery based on the technological sophistication of output. Second, placing a minimum local content requirement (ie minimum percentage of locally sourced inputs) for all goods created in CPEC industrial zones.
Thirdly, by ensuring that Pakistan's technology is upgraded through technology transfers from China by ensuring that a minimum level of technology transfer takes place over the life of all CPEC initiatives.
Finally, the only way to ensure higher level of firm productivity, higher wages and a move towards higher value added output is to develop a CPEC-related labour policy that enables the manufacturing sector to switch from low-skilled to high-skilled labour.
The CPFTA negotiators from Pakistan must look beyond the concessions in duties. There is a much bigger canvas to look and work at. Also, Pakistan needs to move out of Pakistan-China centric business isolation in which it is getting fully entangled. It must seriously revert back to markets in the EU, the US and Japan which promise trade, transfer of technology, foreign direct investment and industrialization. The country must work harder to regain the spots it conceded to Bangladesh and India.
(The writer is former President of Overseas Investors Chamber of Commerce and Industry)