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China pact a mixed blessing for Pakistan

Asia Times

China pact a mixed blessing for Pakistan

By Syed Fazl-e-Haider

3 July 2007

QUETTA, Pakistan - A free-trade agreement (FTA) signed last year between Pakistan and China came into effect on Sunday, with Islamabad announcing the first phase of a cut on 4,700 tariffs.

The FTA allows the free movement of goods and investments between the two countries in a bid to increase bilateral trade to US$15 billion by 2011. The "services" chapter of the agreement will be concluded by the end of this year. The FTA is Pakistan’s first comprehensive treaty with any country.

Under the treaty, both sides will scale down customs duties to 0% on 5,104 products in three years and 0-5% on 3,942 items within five years. Beijing has already lowered import taxes by 11% on 3,975 categories of goods from Pakistan to an average tax rate of 8%, beginning July 1. Pakistan will reduce the duty on 157 items and China will do the same on 604 items. The bulk of Pakistan’s imports from China are capital goods which are intended to aid the expansion of Pakistan’s manufacturing base and eventually lead to increased exports.

The FTA is considered to be a win-win situation by both countries. While Pakistan will get access to the Chinese market, China will sell Pakistan more goods, ranging from household items to textile plants and high-technology items as well as receiving inexpensive raw materials and easy access to Pakistani ports for exporting Chinese goods to other countries at reduced freight rates.

China has been focusing on building strategic transport links between Pakistan’s northern areas and its remote western regions, including Xinjiang, and the number of road links between Pakistan and China has risen to eight after an agreement signed between Islamabad and Beijing last year. China and Pakistan also opened four new passenger and cargo road links. Two cargo routes run from Kashi in southern Xinjiang autonomous region to Pakistan’s ports of Karachi, Qasim and Gwadar. The passenger lines run from Kashi and Taxkorgan, also in southern Xinjiang, to Pakistan’s northern city of Gilgit and Sost Pass respectively.

Islamabad and Beijing also plan to extend and expand the existing Karakoram highway, which links Islamabad to Kasghar, via the Khunjrab Pass. Pakistan believes that the Preferential Buyers Credit of more than $300 million from China will play a significant role in the Karakoram Highway (KKH) project, which will act as a link to strengthen the Sino-Pak trade relationship. Through the upgrade of KKH, the western regions of China and the Central Asian republics will be able not only to access the Pakistani market, but also to reach out to Middle East, Africa, South Asia, Europe, etc through Gwadar Port in southwestern Pakistan. China and Pakistan are also planning to link the KKH to Gwadar, Balochistan, through the Chinese-aided Gwadar-Dalbandin railway, which extends up to Rawalpindi.

Chinese products have already penetrated deep into the Pakistani market, where the private sector is naturally wary of China because its cheap products have already driven many local manufacturers out of the domestic market. Take the example of the Pakistani bicycle industry, which has virtually collapsed under the mounting pressure of lower-priced Chinese bikes. A few years ago, Pakistan was not only making but also exporting bicycles to Africa, Afghanistan and Iran. Today most of the Pakistani bicycle manufacturers have shut down because of increased production costs, and some former bike makers have become bulk importers of Chinese two-wheelers.

Some independent economists say an FTA is beneficial for both signatories because a weaker country is always given some advantages to protect its industries from adverse impacts. But in Pakistan’s case the status of China as the supplier of many of its consumer goods will be boosted. China will see its export business and trade surplus further expand as Pakistan has less to offer it and will be importing even more from the rising economic giant.

Syed Fazl-e-Haider ([email protected]) is a Quetta-based development analyst in Pakistan. He is the author of six books, including The Economic Development of Balochistan, published in May 2004.