A recent review of the working of the free trade agreement with China reveals that Pakistan has not benefited much in terms of the trade balance, and that its exports did not increase as much as expected, while the imports kept rising.

Pakistan is reviewing the progress of various free trade agreements (FTAs), aiming to make some modifications in the agreements where necessary. The fact remains that developing countries feel encouraged to enter into bilateral trade accords with each other or a developed country on the assumption that it will create a large market for their exports in the partner country. But there are always winners and losers.

The assumption was very high in case of China because of an ‘all-weather’ close friendship between the two countries, which gave hope of greater benefit. There was a rapid rise in exports in the initial period of the FTA, which became operational from July 1, 2007. Pakistan’s average monthly exports to China climbed from $40m to beyond $200m by 2012, making it the second-largest destination for its exports after the US.

But most of the increases coincided with cyclical fluctuations in the price of cotton. The decline set in when Pakistan failed to compete with other Asian countries with which China had also signed FTAs, partially because of inefficient policies of successive governments.

Pakistan’s exports to China were $0.6bn in 2006-07, while imports stood at $3.5bn, with a trade deficit of $2.9bn. Exports have now reached $2.6bn, while imports have shot up to an all-time high of $6.6bn, reflecting a deficit of $4bn. However, senior officials of the two countries in a meeting held on January 6-8 have now agreed to renegotiate tariff reduction on certain goods under the FTA.

The commerce ministry is revisiting all free trade agreements as these pacts had been poorly negotiated and were in fact working against the interests of the domestic industry

But China is not the only country with which the FTA experience has been less promising, if not disappointing. A similar situation exists with Malaysia and Indonesia as a result of what analysts say ‘ill-planned negotiations’. Official statistics show that Pakistan’s exports did not grow in tandem with imports from these countries. The country was already having a trade deficit with these countries, but the conclusion of the FTAs worsened the trade imbalance.

Pakistan’s FTA with Malaysia became effective on January 1, 2008. In 2008-09, our exports to Malaysia stood at $125.82m, against imports of $1.718bn, reflecting a deficit of $1.592bn. This shot up to $1.863bn in 2012-13, when exports rose to $237.025m and imports stood at $2.1bn. The two countries have held two meetings so far to review the working of the free trade treaty.

In the case of Indonesia, it was the preferential trade agreement (PTA), followed by an FTA, which was signed on February 3, 2012. Pakistan’s exports to Indonesia were $48.3m in 2008-09, while imports stood at $842.7m.The trade deficit was $1.099bn in 20012-13 after the PTA was signed. Exports did rise to $196.421m, but imports from Indonesia shot up to $1.296bn.

Pakistan has so far has signed four FTAs under the South Asia Free Trade Agreement (Safta) with China, Sri Lanka, Malaysia and India. Besides, there are three PTAs with Iran, Mauritius and Indonesia. After these agreements, bilateral trade volumes with these countries increased substantially, but mostly increased trade imbalances for Pakistan.

At the time of the signing of Safta with India in 2004, the bilateral trade volume was only $375.88m. In subsequent years, it rose to $2.606bn, with $2.1bn imports from India and $0.5bn exports from Pakistan to India. The European Union member states are currently doing around 50pc of their trade within the bloc. Against this, the Saarc member countries are only conducting 5pc of their trade within the region.

The commerce ministry is currently revisiting all FTAs and PTAs following a realisation among policymakers that these pacts had been poorly negotiated and were in fact working against the interests of the domestic industry. However, these trade agreements have a clause which allows renegotiation if a partner country finds serious flaws in certain clauses.

The current review can lead to changes in the text of the free trade agreements to improve trade terms and reduce trade deficits. Some trade deals may be scrapped if found unworkable. It is interesting to note that Pakistan has yet to conclude eight bilateral preferential trade treaties despite a lapse of several years. Talks were initiated during Gen Musharraf’s rule, but only 11 trade treaties were concluded, according to a Trade and Investment Report 2014 released by Unesco.

However, according to commerce ministry officials, Pakistan is still pursuing the conclusion of a PTA with Turkey. Talks for this were initiated in 2004, but no consensus could be developed over the modalities and lists of items for trading between the two countries, despite their friendly relations.

Published in Dawn, Economic & Business, January 19th , 2015

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