New Year, New Agreement: The long-awaited Phase-II of Pak-China Free Trade Agreement (A Press Release)
(FTA) has officially come into effect on January 1, 2020. The agreement is expected to enhance bilateral trade between the two countries. It primarily focuses on five major areas including market access, safeguards measures, electronic data exchange, protected tariff lines and balance of payment. Overall, the provisions under phase-II seem to be relatively more in favor of Pakistan than those under phase-I. The new FTA will benefit Pakistan’s economy by increasing market access to key export commodities such as textiles and garments, leather, seafood, footwear,
chemicals, oilseeds, and some engineering goods. Most of the raw materials, intermediary products and types of machinery are imported from China. Concessions provided by Pakistan on these products imply cheap input imports and therefore would reduce industries’ cost of production. The lower cost of production would make Pakistan’s exports more price-competitive in the international market. Pakistan is also allowed to impose safeguard measures in case it deems the import of a
certain product is likely to hurt its domestic industry. Moreover, the use of electronic data exchange will curb under-invoicing which will assist in reducing the size of the black market and will increase revenues. Further, the country is allowed to take necessary measures amidst the balance of payment crisis. In any event, the agreement is staggered over the next 15 years. For several products, duties will be eliminated from 2022 to 2029 while for some others, duties will be gradually reduced from 2023 onwards and the process will be completed in 2035.
On the flip side, the gains from the FTA are undermined by Pakistan’s narrow export base and lack of value-addition. The elimination of tariffs on 313 products by China is likely to have a limited impact on Pakistan’s export receipts as the majority of these products are low-value products such as raw materials and semi-manufactured. The remaining items in this tariff line are not even produced by Pakistan such as air conditioners, motor vehicles, refrigerators, etc. Thus, the expected gains of $4-5 billion over the next five years may not materialize. if Pakistan does not quickly establish export processing zones for the manufacturing of value-added products and diversify its basket of exports, history may repeat itself in the form of deteriorating trade balance with China. It is pertinent to note that the FTA does not cater to other trade barriers such as sanitary and phytosanitary measures and technical barriers. These also act as a major hindrance to Pakistan’s exports in the Chinese market. As Pakistan will be lowering its tariffs for China on over 6000 items over time there is a possibility of increased trade deficit given the nature of those items (high valued inputs). It is important that Pakistan examines the impact of reduced tariffs on each product and correspondingly rationalizes its import tariff to avoid trade diversion as happened earlier.
Despite all the concessions in the FTA, until the government reduces the cost of doing business and improves the regulatory environment, exports may not increase as envisioned.