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Pakistan-China free trade agreement – a subject of review

Prime Minister Imran Khan recently returned home from his first official visit to China. Certainly, Pakistan actually needs trade not aid from its close friend. The country’s worsening trade balance with China raises concerns about the Free Trade Agreement (FTA) the two countries signed in 2006. Critics say that FTA deal should be scrapped as it has so far resulted in losses to the tune of billions of dollars to Pakistan economy. As a result of FTA deal, the Chinese exports have jumped from 3.5 billion dollars to over 16 billion dollars while Pakistani exports have increased negligibly, according to one estimate. The trade deficit has widened from $2.9 billion to over $32 billion. After the FTA deal, Pakistani exporters have been at the receiving end against Chinese competitors.

The talks on second phase of FTA could not reach a breakthrough between two countries so far this year. During the 9th round of talks, the two countries agreed for granting tariff reduction on 75 percent tariff line under the proposed revision in the FTA. Pakistan’s Ministry of Commerce suggested proposals to increase the number of items with zero duty from 2,600 tariff lines to 6,000 tariff lines. The 10th round of talks held in March in Islamabad between Pakistan and China remained inconclusive. It is worth mentioning that talks had started in 2012 between the two nations to finalize the revised version of the FTA. Under the first phase of FTA, Pakistan’s trade balance with China had worsened, and it had registered $12 billion mark in financial year 2016-17.

Pakistan’s trade deficit with China tripled between 2012 and 2017. The increasing imports for China and Pakistan’s declining exports actually caused an alarming increase in trade deficit. The average rate of increase in trade deficit between the two countries from its implementation in FY2007 to FY 2013 was 4 percent, according to the State Bank of Pakistan. During the last four fiscal year, the average rate of increase in trade deficit has been 45 percent, with the deficit for the current fiscal year standing at $6.2 billion.

In November 2006, China and Pakistan signed Free Trade Agreement (FTA), which came into effect on July1 2007. The two countries initially planned to enhance their bilateral trade to $15 billion by 2015. Under the FTA deal, the two sides agreed to implement the first phase of customs duty reduction from July 1, 2007. The five years tariff predictability provided a level-playing field to Chinese investors for making investment in various sectors of Pakistan’s economy. Islamabad announced incentives for Chinese entrepreneurs investing in the Industrial Park through a Protocol under FTA, while China committed to consider duty free access into China for all products manufactured in the Park.

Under FTA deal, China sold Pakistan more and more goods ranging from household items to textile plants and highly-sophisticated and latest technology items, besides getting cheap raw material and easy access to Pakistani ports for onwards export of its goods to world destinations at reduced freight rates. Today, the Chinese products have penetrated deep into Pakistani market. Local private sector feels suspicious about China, as it has become a hard fact that cheap Chinese products have driven many local manufacturers out of domestic market. Astonishingly, numbers of Chinese exports from China to Pakistan do not match the numbers reflecting Pakistani figures of imports from China showing much larger exports from China.

Critics say that a weaker country is always given some advantages to protect its industry from adverse impact making the free trade agreement really beneficial for both the signatories. But in Pakistan’s case the status of China as supplier of most of consumer goods further got a boost after FTA deal. Pakistan is flooded with cheaper Chinese goods almost of all kinds. Definitely China would see expansion in their business and its trade surplus will further rise to new horizons as Pakistan has less to offer to the economic giant and importing more from there.

Pakistan detected massive misuse of FTA signed between the countries, involving importers who submit wrong ‘certificates of origin’ to clear non-Chinese made goods from Pakistani ports. The actual quantum of misuse of the FTA facility has yet to be determined. Federal Board of Revenue (FBR) detected massive misuse of the Pakistan-China FTA, as the verification of documents reveal that many consignments were imported under the FTA with submission of forged ‘certificates of origin’. The consignments shipped from Hong Kong along with ‘certificates of origin’ of China, cannot be treated goods being cleared under the Pak-China FTA.

In view of past cases, it seems that the actual misuse of the FTA is much more as compared to the intercepted consignments which were re-examined by the authorities. The sudden jump in the import of mobile phones under the FTA could be judged from the data that 0.3 million mobile phones were imported during January-March 2009 as compared to around 3 million during the same period of January-March of 2010. The amount of duties and taxes is much lower in case of imports of mobile phones made during January-March of 2010 as compared to the same period of last fiscal year.

Some experts are of the view that the FTA deal is unlikely to push up the bilateral trade volume as still a lot of work is needed from Pakistan to improve internal security and promote its export and encourage business community to invest in China. The two countries facilitated integration of their economies for mutual benefit by signing FTA covering goods, investment and services. It would be a colossal job for the Pakistani exporters to bridge the wide gap, which would not be possible without the help of the Chinese.

Despite the FTA deal, Pak-China trade has still not developed up to its potential and it has largely been in favor of China. Pakistan, though close friend of China, has so far failed to improve its export to China. On the other hand, the country proved an attractive export destination for China despite its weak economic performance. The China’s trade surplus continues to rise because Pakistan has less to offer to the economic giant and importing more from there. The numbers of Chinese exports to Pakistan do not match the numbers reflecting Pakistani figures of imports from China showing much larger exports from China.

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