PAK-CHINA Trade to Increase

For Pakistan, a window of opportunity came about with the visit of Prime Minister Wen Jiabao during which 22 trade-related agreements worth $15 billion, and 20 other agreements and MoUs worth $20 billion, covering a period of the next five years were signed.

During a four-day visit of Prime Minister Yousuf Raza Gilani to China that started from May 17, he stated that Pakistan aimed to increase its bilateral trade volume with China from $8.7 billion to $15 billion by the end of 2012. The present trade balance is in favour of China as its exports to Pakistan were recorded at $6.9 billion, with a rise of 25.5 per cent over the exports in 2009. Pakistan’s imports were worth $1.7 billion with a hike of 37.2 per cent over imports in 2009. The need to strengthen trade and economic relations between the two countries is obvious because of the huge potential that the Chinese markets have for Pakistani goods and large scope for Chinese investment in Pakistan. It is plausible to further expand and strengthen bilateral relations between the two countries in the backdrop of longstanding economic, diplomatic and defence ties.

Pak-China trade partnership has developed significantly during the last decade (2000-2010) because of an end to globalisation and geo-strategic priorities. Regional cooperation assumed immense importance for increasing economic cooperation between the two countries. Three Chinese prime ministers visited Pakistan in 2001, 2005 and 2010, and reassured the country of continuous Chinese support in expansion of economic relations and development of infrastructure. Since then a number of vital projects such as the Gwadar sea port, up-gradation of the Karakoram Highway (KKH) and several other smaller and energy related projects have either been completed or are in the process of completion by the Chinese. China has helped in constructing a second 330MW unit at Chashma that started working a few weeks earlier. There is a lot of scope to boost Chinese cooperation and private investment in the fields of agriculture, energy, finance and banking, as well as science and technology.

Measures to boost cooperation and investment in some of the above stated fields were suggested during the visit of the Chinese prime minister in May 2001. Six major agreements and a memorandum of understanding (MoU) were signed. These included agreements on economic and technical collaboration, tourism cooperation, lease of Saindak copper-gold project, supply of locomotives, and passenger coaches to Pakistan Railways. China pledged around $1 billion to support these agreements and construct the Gwadar Port and the Coastal Highway. A joint declaration on direction of bilateral relations was signed during the visit of Pakistan’s prime minister to China in 2004. Additionally, seven agreements aimed at enhancing trade, communication, further movement on preferential trade agreement and Chinese investments in Pakistan were made, in addition to Pakistan announcing the ‘free market economy’ status for China.

Pakistan and China signed a free trade agreement (FTA) in November 2006, after which Chinese products flooded the domestic markets. Pakistan imports about 1,000 items from China but exports to it stand at a dismal below-50. Furthermore, between December 2006 and August 2010, Pakistan imported around $11.1 billion worth of goods from China whereas its exports to China over the same period were only $0.25 billion. Since then there has been improvement in the bilateral trade but there is a lot of scope for further improvement.

According to an analysis, China’s total investment over the last five decades at current market price is estimated to be $40 billion. Around 125 Chinese companies are working in Pakistan that includes Zong, BGP (Pakistan) International, China Metallurgical Corporation and Saigol-Qingqi. The two countries have passed through different stages of economic cooperation such as granting of most favoured nation (MFN) status to each other in 1963, signing of preferential and FTA in 2003 and 2006 that became operational in 2004 and 2007 respectively.

Pakistan adopted a pro-West policy from the very beginning with a desire to be friend of the US and with the hope that it will help in ending Indian control of Kashmir and its monopoly in the region
There are many questions raised in Pakistan regarding the rationale behind signing the FTA with China. It is commonly believed that most of the agreements signed between the two countries are not driven by market forces. Instead, they are political decisions, which is why economic relations between the two countries have not strengthened to the level as envisioned.

GDP growth of the two countries is unmatchable; Pakistan’s economic growth hardly stands at 4.0 per cent in the last 10 years whereas China’s growth averages to around 9.5 per cent. Volume-wise, there is hardly any comparison: Chinese economy is the third largest in the world with a GDP of around $4.2 trillion whereas Pakistan economy is around $180 billion. Trade between the two countries is not primarily based on manufactured goods; Pakistan exports mainly raw materials against the import of value-added manufactured goods. This creates the huge trade gap.

Conspicuous among them are lack of developed infrastructure, energy crisis, low labour productivity, poor innovation and technology to create value-addition in manufactured goods, high cost of production and doing business, insufficient foreign direct investment in manufacturing sector, lack of diversification in exports, hostile security environment and political instability and poor governance. On the contrary, China has all the plus points on these accounts in addition to pursing export-led economic growth and development.

Most of Pakistan’s imports from China are value-added; over 85 per cent of its exports to China are raw materials such as cotton yarn and fabric, chrome and copper ores. Pakistan must add value to its exportable raw materials and other commodities and should benefit from joint ventures with Chinese companies that have the technology and are willing to invest in Pakistan. Pakistan has a narrow base in view of exportable commodities. More than 75 per cent of its exports originate from four items, namely cotton, rice, leather and sports goods. Diversifying commodities to make them suitable and more attractive for the Chinese domestic market is the sort of proactive export policy that could enhance the volume of exports and improve trade balance between the two countries. It will not be possible for Pakistan to increase its exports to China without improving value-addition and diversifying its exports to China. It should seek Chinese investment for projects aimed at export diversification.

For Pakistan, a window of opportunity came about with the visit of Prime Minister Wen Jiabao during which 22 trade-related agreements worth $15 billion, and 20 other agreements and MoUs worth $20 billion, covering a period of the next five years were signed. Pakistan must take full advantage of the situation and put its governance, security and political issues in order to strengthen its financial relations with China. Without addressing these core issues, the opportunity for strengthening trade and economic relations with China would be lost.

By: M.S. Qazi

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