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Pakistan’s trade bear-hug with China

Asia Times

Pakistan’s trade bear-hug with China

By Syed Fazl-e-Haider

21 April 2010

KARACHI - China and Pakistan, which have strongly increased bilateral trade this decade with the help of a series of free-trade agreements (FTAs), have committed to doubling their commerce within the next three to four years.

That is raising concern about the impact on Pakistan’s domestic industries, due to the disproportionate value of Chinese imports to the country, while cheating using FTA-related documentation is also worrying authorities.

Annual trade has increased from less than US$2 billion in 2002 to $6.9 billion, with a goal of $15 billion by 2014. China, which has surpassed the European Union as Pakistan’s second-largest trading partner, exported goods worth $5.5 billion to Pakistan and imported $1.3 billion worth of products. The United States is Pakistan’s biggest trading partner.

Critics say that the official amount of Chinese exports to Pakistan do not reflect the real, larger, scale of Chinese goods brought into the country, and that China’s trade surplus is expected to increase as Pakistan has less to offer in the way of merchandise.

Under an FTA on trade in services, which became operational on October 10 last year, Pakistan is opening 102 sub-sectors of 11 major sectors and China is further opening 28 sub-sectors of six major sectors. Both countries have offered greater concessions than those committed under the World Trade Organization General Agreement on Trade in Service (GATS).

Strong penetration of cheap Chinese products into the Pakistani market is already raising local concerns, as they drive less-competitive manufacturers in the South Asian country out of the domestic market. Critics say that a weaker country in an FTA pact is always given some advantages to protect its industry from the adverse impact of making the agreement beneficial for both signatories. In Pakistan’s case, China already dominates the local market as a supplier of most consumer goods there.

Chinese investment in Pakistan has increased across many sectors of the economy, including port development, roads, railways, mobile telephony, communication technology, hydro and thermal power, mining, electronics, and nuclear energy, APP reported, citing an article recently published in the China Foreign Trade magazine. The areas of bilateral co-operation include the establishment of the Pakistan and China Joint Investment Co (JIC) for direct investment and joint ventures. The objective is to support Chinese investments in Pakistan and earn profits for its investors. The FTA covers 85% of the goods traded between the two countries.

"JIC has paid up capital of $200 million which we are trying to enhance to $1 billion," the China Foreign Trade report quoted Masood Khan, Pakistan’s ambassador to China as saying. "If we compare the current trade figure of $6.9 billion, with the figure of $1.8 billion in 2002, we have certainly done well. However, our target is to reach the figure of $15 billion in the next three to four years."

Under an FTA signed in 2006, the two countries agreed to implement the first phase of a reduction in customs duty from July 1, 2007. This helped to provide a level-playing field to Chinese investors for making investment in various sectors of Pakistan economy. Islamabad has announced incentives for Chinese entrepreneurs investing an industrial park through a protocol under the FTA, while the Chinese government has through the protocol committed to consider duty free access into China for all products manufactured in the park.

Islamabad plans a comprehensive strategy to attract foreign investment, particularly from China, in its northern areas, now called Gilgit-Baltistan. The country is specially focusing on the power sector to harness the huge water potential of the mountainous region with the help of China. Major hydropower projects in which Chinese companies are involved or interested include the Bunji and Basha dams and the Kohala and Neelum-Jhelum hydro-electric power projects. Gilgit-Baltistan, which connects Pakistan to China’s western province of Xinjiang, is seen by both India and Pakistan as part of the larger unresolved Jammu and Kashmir issue involving those two countries.

Some experts say the present FTAs are unlikely to push bilateral trade up to $15 billion until Pakistan improves its internal security, promotes its exports and encourages its business community to invest in China. Some Chinese investors are pulling out from Pakistan because of deteriorating security, with the intensification of the war against Taliban insurgents in the country’s northwest and rising incidents of violence in insurgency-hit south western province of Balochistan posing a threat to Chinese interests.

The number of Chinese companies in Pakistan has plummeted to about 60, involved in 122 projects, from about 145 private businesses in 2003.

Pakistani authorities have detected extensive massive misuse of the FTAs signed between the countries, involving importers who submit wrong "certificates of origin" to clear non-Chinese made goods from Pakistani ports. The extent of this misuse has yet to be determined.

In one example using forged certificates of origin, consignments shipped from Hong Kong with "Chinese" certificates of origin cannot be treated as goods being cleared under the Pakistan-China FTA, according to a Business Recorder report.

The actual misuse of the FTA may be considerably more than what is indicated by intercepted consignments re-examined by the authorities. Mobile phones imported under the FTA jumped from 0.3 million during January-March 2009 to about 3 million in the same period this year. Yet the amount of duties and taxes paid on the imports so far this year was much lower than in the same period a year ago.

Syed Fazl-e-Haider ( ) is a development analyst in Pakistan. He is the author of many books, including The Economic Development of Balochistan (2004).