China-Pakistan FTA: catalyst for burgeoning trade deficit of Pakistan

Pakistan’s trade deficit has hit a record level of 30 billion US dollars in the first 11 months of 2016-17, showing a jump of 42 per cent as compared to the same period in the previous financial year. Exports have declined by three per cent to 18.5 billion US dollars while imports have gone up by 21 per cent to 48.5 billion US dollars.

Never before in the country’s history have imports been over two-and-a-half times of exports as they are now. This unprecedented trade deficit has occurred despite the prevalence of relatively low international prices of our biggest import, oil.

The reasons why Pakistan’s exports have declined by 20 per cent since 2013-14 include a number of structural factors and wrong policies. Unlike East Asia, Pakistan has historically followed a policy of import substitution rather than export promotion.

The Free Trade Agreement (FTA) between Pakistan and China has had a significant impact on the amount of trade between the two countries. This has prompted a shift from higher productivity to lower productivity in firms, which is far from optimal in the context of Pakistan’s growth strategy.

The relationship between China and Pakistan has a long history and over the last few decades this relationship has been accompanied by significant economic interactions, which include the 2006 Free Trade Agreement (FTA) between Pakistan and China as well as the China-Pakistan Economic Corridor (CPEC).

Trade volume between Pakistan and China

Pakistan’s trade deficit with its largest trading partner China widened to $6.223 billion in the fiscal year 2015-16. The volume of Pakistan’s overall trade with China was $10.029bn in the fiscal year 2015-16, including $1.903bn exports and $8.126bn imports.

Effect of FTA with China

According to study conducted by the Lahore School of Economics, Pakistani tariffs on Chinese goods have negatively affected productivity in those sectors that have become more vulnerable to Chinese imports. At the same time, there has been a significant decrease in the value added and value added per worker in those sectors.

Owing to low tariffs on Chinese imports, a reduction has also been seen in the number of firms and the level of employment in these sectors.

lower Chinese tariffs on Pakistani goods have negatively affected productivity in those sectors that could have potentially benefited from higher access to the Chinese markets.

So there has been a significant decrease in the value-added in those sectors as compared to others. The sectors that benefit from lower Chinese tariffs, have witnessed a significant increase in the level of employment as well as in the total Pakistani exports to China.

In the context of results drawn on the impact of Chinese tariff concessions to Pakistani exports, it is critical that Pakistan gain the same level of tariff concessions from China as received by the ASEAN countries.

Since there is a very central industrial cooperation component to CPEC, it is critical that Chinese industrial initiatives yield the maximum economic benefits for local stakeholders in Pakistan.

The Free Trade Agreement (FTA) between Pakistan and China has already resulted in trade imbalances with Pakistani exports being far less than its imports from China. This is about formal trade; the flooding of Pakistani markets with Chinese products is in addition to it. Anyone can be surprised to know that many Pakistani manufacturers have stopped production at their units. Instead, they import products from China and supply them to the market in Pakistani packaging. Buyers think the product is manufactured in Pakistan which is not the case.