Second Chance

By Sikander Bizenjo | May 2020

Sweeter than honey, deeper than oceans and higher than the Himalayas – this is the mantra that signifies the bond of Pakistan and China’s association. The official rhetoric in Pakistan terms this relationship as “all weather friendship between iron brothers”. But does this all-weather friendship benefits both of the iron brothers equally?

Both countries rely on each other in times of need, either as a voice in the United Nations Security Council or a helping hand in tumultuous economic conditions. Pakistan has almost always relied on China which too has never let Pakistan down. Similarly, China’s ambitious Belt and Road Initiative depends heavily on the success of CPEC or, in other words, prosperity in Pakistan.

Realizing the potential of mutual economic partnership, both countries signed their first mutual trade agreement, known as China-Pakistan Free Trade Agreement (CPFTA) in 2006. The agreement, which came into effect in July 2007, proved to be instrumental in the bilateral relationship, as China quickly became Pakistan’s largest trading partner. The bilateral trade volume increased from $4.8bn in 2007 to $16.4bn in 2018 – a growth of 242% in little more than a decade. However, this trade volume was highly skewed in favour of China.

Contrary to the heightened hopes put forth by the government, it did not do much good for Pakistan. A total of 350 tariff lines were approved for CPFTA. Out of these, China managed to utilize 57% of its lines; whereas, Pakistan’s meager share of utilization was 5% only. Similarly, imports from China increased from $4.2bn in 2007 to $14.5bn in 2018; a whopping 245 percent increase from 2007. The exports to China have only increased by $1.2bn over the 11 years, from $0.6bn to $1.8bn. To make matters worse, Pakistan’s global exports have shrunk from 16.5% in 2008 to 8.5% in 2019.

In CPFTA, a sizeable chunk of concessions were given to low-valued products. The Pakistan Business Council reports that in 2017, 40% of all exports to China were low-value goods. This, in turn, reduced the overall contribution of Pakistani products for export.

A similar report by ICG in 2017 paints a gloomier picture of the CPFTA. The reports asserts that Pakistan was given access to 1400 tariff lines that it did not even export; in addition, 3 out of 13 tariff lines within the garments industry were those that China does not import from anywhere in the world. Making matters worse, Pakistan’s top exports: rice, fish, leather, cotton, shirts and automated parts, were completely ignored in the agreement. Moreover, the comparative advantage that Pakistan enjoyed owing to 100% concessions under CPFTA was offset by China’s better tariff reductions to Bangladesh and ASEAN countries. This reduced Pakistan’s competitive space in the Chinese market. In short, it was a bad trade deal for Pakistan.

Defying the Chinese proverb opportunity knocks at the door only once, Pakistan got a second chance to negotiate a better deal that would be fairer to both parties. Negotiated well, Pakistan could enormously enhance its exports base by gaining access to the $2 trillion Chinese imports market.

CPFTA II was signed and officially came into force on the 1st of January, 2020. The government of Pakistan seems confident that this trade deal would not bite the dust. Not this time.

CPFTA II was signed and officially came into force on the 1st of January, 2020.

China has given duty-free access to 313 tariff lines from Pakistan. The yardstick to measure this deal’s success is analyzing how many of the tariff lines can Pakistan actually export and benefit from. Looking at the top 20 Pakistani exports to the Chinese market in 2018, only 13 of them are in this list of 313. Dissecting this further, it is revealed that a mere 6 of those had positive growth from 2014 to 2018. This shows that the majority included from the top 20 were shrinking in growth.

The silver lining is that some heavy-weights are included which will gain Pakistan significant revenue. There are machinery and appliances-related products, for example. These tariff lines grew by 49% from 2014-18 and the trajectory shows that it will keep growing in the near future. Similarly, 13 tariff lines out of the 313 list were related to fish products; this area has witnessed a 14% growth from 2014-18.

In the revised deal, Pakistan seems to have started off on the right foot. Carefully analyzing the deals offered by China to other countries, including Bangladesh and ASEAN, Pakistan has used this as one of the central components on the negotiating table. In more than 80% of the CPFTA II tariff lines that China imports, Pakistan is offered a concession that is either equivalent or lower than China’s main trading partners.

Another significant achievement for Pakistan is protection of its local industries. The country has increased its protected list from 10% in the CPFTA to 25% in the revised deal. The major protected industries include textiles, agriculture, ceramics, leather, etc.

Nevertheless, the deal has its fair share of shortcomings. A significant number of tariff lines which Pakistan does not face strong competition in China are left out. For instance, rice, wheat and paper, among a few others, are not a part of CPFTA II. Similarly, there are myriad non-tariff impediments, such as poor ease of doing business in the country and low capacity of the Pakistani business community to meet Chinese demands and match their required set of quality assurances.

It is understood that an omelet cannot be made without breaking a few eggs. The first phase of CPFTA from its inception was doubtful in bringing Pakistan much good. The new phase, however, brings a lot of hope to the economists and business community. Whether it will be an absolute success or not, is still too early to say. But it is certain that Pakistan has hit the ground running.

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