New FTA with China is a ‘marked improvement’

Published January 26, 2020
The government will have an additional task to closely monitor FTAs that other countries sign with China in the coming years, and renegotiate this one accordingly. — File
The government will have an additional task to closely monitor FTAs that other countries sign with China in the coming years, and renegotiate this one accordingly. — File

KARACHI: A new report just released on the second phase of China-Pakistan Free Trade Agreement (CPFTA) concludes that the “tariff structure offered to Pakistan [under the new agreement] is a marked improvement” over the first CPFTA that was signed in 2006.

“On over 80 per cent of the CPFTA-II product lines that China imports, Pakistan is now offered tariffs that are lower than or equivalent to China’s main trade partner” the study says.

The study was commissioned by the Pakistan Business Council and carried out by the Consortium for Development Policy Research. The authors built a dataset of all 8,238 tariff lines at the HS-8 digit level that are part of the CPFTA-II. It merged three types of data, including the tariffs offered under CPFTA-I, trade data on volumes for China and Pakistan and growth rates for Pakistan, China and China’s top trade partners. The authors seek to compare whether CPFTA-II gives better access to Pakistani products in the Chinese markets compared to the first FTA, as well as compared to competitor countries that have the same products to offer as those of Pakistan.

Of the 8,238 product lines studied in the report, China does not import 1,035 of the products, meaning 87pc of the product lines are actually there to be availed. Tariffs on these range from zero to 65pc. China has given Pakistan duty-free access on 3,707 lines. A further 30pc of the tariff lines will have duty free access by 2030, and 412 tariff lines will see duty reduced by 20pc in five years. For 1,867 tariff lines, duties will remain where they were in 2013, which is the base year for the study.

Pakistan’s progress in the first FTA with China was limited. Even though trade volumes grew, the authors find that out of 7,550 tariff lines that were part of the agreement, actual trade only took place in 350 of these lines.

“It appears Pakistan utilised a meagre 5pc of the lines on which concessions were available, while China exported along 57pc of the lines on which preference tariff lines” under the agreement.

In CPFTA-II the authors identify 401 products that they mark as “high priority”, meaning those products that present the highest potential for expansion of exports. Pakistan exported $1.6 billion worth of these products to China in the base year 2013, against China’s imports of $148.4bn of the same products from around the world. Pakistan’s total exports of these products were $13.8bn worldwide, “which indicates that it has the export capacity to expand exports to China” the report says.

“It will be important, however, to focus on creating new exports, rather than diverting exports from existing markets to China.”

In priority 2, there are 1,436 products of which Pakistan exported $2.5bn to the world in 2013, while China imported $464.7bn. By the year 2030, 70pc of priority 2 product lines will have duty free access to China, and in 77pc of these product line Pakistan will find equal of superior access compared to its top five competitors.

The report says challenges to the growth of trade remain beyond tariff concessions. “These relate largely to capacity issues amongst Pakistani businesses, and Pakistan’s poor ease of doing business, both of which affect the ability to deliver orders of the scale required in China within the specified period. In addition, there is a strong need for more “market research and scoping in China, identifying reliable Chinese partners, and meeting regulatory requirements in China.”

The government will have an additional task to closely monitor FTAs that other countries sign with China in the coming years, and renegotiate this one accordingly. “The Asean-China FTA that followed quick on the heels of CPFTA-I was a sobering reminder that preference margins can be eroded when competitor countries in China successfully negotiate relatively better tariffs.”

Published in Dawn, January 26th, 2020

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