Trading with China

August 21, 2018

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ONE of the weightiest economic challenges that the new government will have to tackle is the erosion of Pakistan’s competitiveness in the global market. Over the decades, Pakistan’s economy has lost more ground to its competitors, and the base of the economy’s exports has narrowed. One country stands out in particular now in Pakistan’s balance of trade. That country is China. Pakistan’s trade deficit with China has been growing continuously year after year, and is today the primary reason for the country’s external-sector imbalances. Last fiscal year, it touched $9.7bn where the overall trade deficit was $37.7bn. Clearly, a way needs to be found to bring this growing deficit under control before it swamps not just Pakistan’s external sector but also its manufacturing base. Unfortunately, in today’s world, the tools available with which to rectify a country-specific trade imbalance are very blunt, and present Pakistan with very few options.

In light of this, the matter of the growing deficit has been raised in a number of high-level contacts between Pakistani and Chinese officials, most recently by the Senate chairman. Now we hear news reports that the Chinese ambassador has offered increased trade denominated in local currency as a solution, through expanding the currency swap agreements. This is no solution since it simply denominates the deficit in a different currency. If Chinese imports continue at the present pace, Pakistan’s next challenge will be to find ways to earn enough Chinese yuan to be able to finance this deficit. The honest fact is that China’s trade deficit has grown with respect to almost every country in the world, and it is up to each to find ways to protect domestic manufacturing. Two separate priorities emerge in the face of this deficit: protecting industry and shoring up the health of the external sector. First decision to be made is regarding which of these the government will embrace as its own. Second decision will be on how best to do this. It would be a mistake to adopt a hands-off approach to this question like the previous government did, or to use instruments like regulatory duties to choke off what is essentially a natural influx of cheap commodities. A smarter strategy needs to be devised, and with the kind of talent available to the PTI government and its finance and commerce teams, they are ideally placed to develop it.

Published in Dawn, August 21st, 2018