Wasting energy on FTAs

Published September 15, 2015
The writer is a former governor of the State Bank of Pakistan.
The writer is a former governor of the State Bank of Pakistan.

THE first phase of our Free Trade Agreement (FTA) with China involving restructuring of import tariffs ran its course in 2012. There is heart-burning in Islamabad that the benefits that had been envisaged to flow to Pakistan’s economy from such an arrangement have not been realised. The feeling is widespread that the FTA is slanted in favour of the Chinese instead of being neutral to both parties, that we have seemingly given more generous concessions to the Chinese in terms of the number and variety of products than they have given to us.

The supposed benefit given to some of our products through lower import duties under the FTA has not given us much of an advantage since lower or the same duties are applied by the Chinese on similar products from members of Asean. Moreover, some products, such as jewellery and knitwear, that we sell to the rest of the world and for which Chinese demand is also strong fall outside the scope of the FTA. Hence the desire to renegotiate the FTA going forward.

In support of this contention the data shows that our imports from China are $7 billion (17pc of our total imports and 24pc of non-oil imports at today’s reduced prices of oil) while our exports to China are $2.2bn (a mere 9.5pc of our total exports). The resulting trade deficit of $4.8bn is 27.6pc of the country’s overall trade deficit and 50.5pc of the total Pak-China trade. And when we calculate the trade deficit minus the oil import bill (which has no links with China) we end up with a total trade deficit of the country that is almost equal to the trade deficit with China!

However, this data should not obscure the fact that trade with China has benefited us in many ways. For example, imports of decent quality rudimentary (not very high-tech) durable consumer goods and some capital goods from China are cheap and have contributed to our economic growth. The more obvious ones from which Pakistani consumers have gained include motorcycles and mobile phones. There is, however, a dark side to it all.


Trade with China has benefited us but genuine concerns remain.


There are genuine concerns of both the government and domestic producers to which the Chinese have apparently not given a fair hearing. These relate to their non-tariff barriers to our exports and the under-invoicing and misclassification of their exports to evade our customs duties. There have been long-standing, vociferous complaints of unfair competition by local manufacturers of plastic and rubber products, footwear, textile fabrics, ceramic tiles, fans, tyres, etc. whereby the Chinese equivalents of such products have been allowed to flood our markets through such unscrupulous ways.

Although the government has been continuously revising customs duties upwards supplemented by regulatory duties so as to protect domestic producers and ease the pressures being faced by our external account, this policy has given the Chinese a significant, inequitable advantage because of our FTA with them. The preferential margin for Chinese exports has increased as a result of these adjustments in the import tariffs, since under the terms of the FTA import duties cannot be raised on their products. The combined result of these two factors has benefited the Chinese at our expense.

The most damaging impact on the economy (especially through the escalation in the cost of manufacturing) has come from imports of rather inefficient Chinese energy equipment, simply because of the considerable price advantage that they have over energy suppliers of more efficient equipment from the rest of the world.

There is, however, a need to appreciate the factors driving the persistent increase in the trade deficit with China. This trade deficit has grown because of a) the diversion of imports from other countries to China owing to the FTA; and b) the changing structure of China’s economy from a narrow manufacturing base of low value-added products to one that is now producing more superior and value-added goods.

While China has moved up the value chain, the structure of our exports to it is such that the bulk of them comprise raw materials and commodities (like yarn and cotton fibre) and primary manufactures. We are still marketing goods that are not of the quality that can meet the demands of the massive Chinese population whose consumption basket is also changing with the elimination of poverty.

Addressing these demands will involve necessary adjustments/reductions in: a) the value of the rupee-overvalued by more than 10pc; b) distortions in the import tariff structure; c) the cost of energy through governance reforms and revisions in tariff structures of these utilities; d) other taxes that have raised the cost of manufacturing; and e) the regulatory regime that has added to the cost of doing business and skewed the incentive structure against manufacturing for exports.

More importantly, in view of the existence of global value chains and regional nucleuses of manufacturing we shouldn’t be looking at bilateral trade balances. High-value and technology-intensive components, especially in electronics and telecommunications, produced in Japan, Korea, Taiwan and Singapore are being put together under an assembly process in China and then sold internationally. Countries importing these finished products end up running large bilateral trade balances with China simply because the value chain ends in China. In other words, if we want to mend this trade balance with China we must become an integral part of this East Asian supply chain.

Therefore, a key lesson from the discussion here is that instead of expending energies negotiating FTAs we should focus on improving the competitiveness of the economy in which major import tariff adjustments would be a critical ingredient (the meaningful tariff rationalisation carried out between 2000 and 2002 which resulted in an improvement in exports has, as indicated, been undone).

Finally, with China moving up the value chain some of its labour-intensive industries are losing competitiveness. Such manufacturing outfits are looking to relocate themselves and Pakistan could become an attractive proposition. Therefore, both the government and the private sector need to double their endeavours to earnestly woo them into manufacturing these products here and then using their muscle to market them globally. Recent governments have made concerted efforts to create such opportunities having changed our historical approach of viewing China purely from a security-dependence prism.

The writer is a former governor of the State Bank of Pakistan.

Published in Dawn, September 15th, 2015

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