ANALYSING PAK-CHINA ECONOMIC RELATIONS
SHABBIR H. KAZMI
Nov 24 - 30, 2008
Since the early 1950, Pakistan and China have entered in trade relations, however, a formal Trade Agreement was signed in January 1963. Later, in October 1982, the two countries established Pakistan-China Joint Committee on Economy, Trade and Technology. Trade between China and Pakistan had generally been conducted under 1963 Trade Agreement, according to which, both countries had granted MFN status to each other. Pakistan had, at that time, multi-modal trade with China i.e. barter trade and cash trade, however, at present trade with China is conducted almost entirely on cash basis in convertible currency. There has been an incremental growth in Pak-China trade in the last few years.
Although the two-way trade has increased but, the volume of trade is still low. Traditionally, the trade balance has always been titled in favour of China, except for a short while in 1952, owing to China's involvement in the Korean War. For decades China's constant increase in exports to Pakistan resulted in a persistent and growing trade imbalance. The main items of Pakistan's imports from China are machinery and parts, iron and steel manufactures, sugar, chemical materials, chemical elements and medical and pharmaceutical products. The main items of Pakistan's exports to China are cotton fabrics, cotton yarn, petroleum and its products, fish and its preparations, leather, fruits and vegetables.
Unfortunately, mix of Pakistan's products exported to China is very narrow. Almost around 80% of its exports consist of cotton yarn and fabric. Pakistan's exports to China lack diversity and both the countries are competitors in the textile sector. Diversification of exports from Pakistan in the non-traditional items will lead to minimising the trade imbalance. Another important factor of our trade deficit with China is growing exports of Chinese products to Pakistan. Since these are more economical, businessmen are inclined to buy more from China. Pakistan therefore, should be looking at China not simply as an export market but as a primary source for import of capital goods and industrial raw material.
The two countries signed a Preferential Trade Arrangement (PTA) in November 2003, which is operational since January 1, 2004. Pakistan and China instituted a Joint Study Group to negotiate a Free Trade Agreement between the two countries and have simultaneously negotiated an Early Harvest Programme (EHP), which has become operational from January 1, 2006.
According to Pakistan's Ministry of Commerce, Pakistan has given market access on 118 tariff lines of organic chemicals and 268 tariff lines of machinery ñ 386 tariff lines in total. Except 30 tariff lines; 13 relating to organic chemicals and 17 relating to machinery. All the other tariff lines have MFN rate of 5 percent. As per the agreed timeframe of elimination of tariff Pakistan is required to reduce tariff only on 30 tariff lines since January 1, 2006. The tariff on the reset of the tariff lines i.e. 356 tariff lines has been reduced to zero on January 1, 2007 i.e. no immediate revenue implications. Similarly, China has brought to zero all tariffs on 767 items.
Pakistan and China signed on February 12, 1989, a Bilateral Investment Treaty (BIT) that encourages promotion of bilateral investment both in China and Pakistan, covers all kinds of investments, protects investors and investments of both the countries against discrimination and expropriation, seeks fair and equitable treatment, and provides dispute resolution mechanism.
The overall Foreign Direct Investment (FDI) into Pakistan has risen by over 600 percent in the last five years. However, the Chinese share in the overall FDI is still very low. Pakistan has been able to introduce and implement investor friendly policies as a result of which FDI has increased. Pakistan's investment policy is very liberal which offers all economic sectors for FDI. It provides equal treatment to local and foreign investors and allows 100 percent equity to foreign investors with no government sanction required. Full remittance of profits, capital, dividends royalty, technical and franchise fee is allowed. Complete legal cover is provided through Foreign Private Investment (Promotion & Protection) Act 1976, Protection of Economic Reforms Act 1992, and Foreign Currency Accounts (Protection) Ordinance 2001.
In recent years, China and Pakistan have witnessed steady growth in mutual investments, however, the scale of investments is still small. According to the Board of Investment's statistics, out of the total FDI of 1524 million dollar that came in Pakistan during July 2004-June 2005, the Chinese share was only US$ 443,763.
By 2004, the Chinese enterprises approved or recorded by the Ministry of Commerce in Pakistan totaled 34, with Chinese contractual investment of 104.11 million USD. In 2005, the number of registered Chinese companies in Pakistan reportedly grew more than fifty. At present, China's investment in Pakistan (public & private) mainly covers the areas such as: Gwadar port construction, exploration of coal and other resources, nuclear power stations, hydroelectric power stations, ship-building, machinery, infrastructure, construction agriculture and manufacturing. Pakistan has invested in 96 projects in China with a contractual value of US$ 71.48 million, and an actual investment of US$ 17 million. Details of the investments made by the Pakistan side in China are not available.
While, the Chinese public sector corporations are undertaking the mega projects in Pakistan, the private sector is also engaged in medium and small-scale projects, especially in the manufacturing and construction sectors. Some of the major Chinese companies, which are operating in Pakistan such as Heirs, ZTE, Howai Technologies, China National Petroleum Corporation, China State Construction Engineering Corporation, Dong Fang Electric Corporation, CMEs, China Ocean Shipping Corporation and Air China, are making good profits.
The success of existing initiatives by the Chinese private sector companies in Pakistan would encourage and increase the investment from the Chinese private sector. On February 21, 2006, at Pakistan-China Investment Forum, Chinese and Pakistani private sector companies signed 19 agreements and MoUs worth US$ 500 million to undertake joint ventures in various sectors such as real-estate development, Karachi mass transit communication network, chemical, fertilizer, automobile, and agro-based industry.
These projects are to be implemented in the next four to five years' time. Besides these areas of interests, an agreement between Habib Bank and City Bank of Urumqi for making investments in development projects, and an agreement between the National Bank of Pakistan and China Development Bank for joint financing of projects have also been signed.