Several developing countries have taken advantage of their geographical proximity to major trading nations to stimulate bilateral trade and thereby grow their economies. After Turkey entered a customs union with the EU, its exports to the bloc increased from US$11 billion in 1995 to US$69 billion in 2020. Similarly, after Mexico joined the Under the North American Free Trade Agreement (NAFTA), its exports to the United States have grown from $42 billion in 1993 to $359 billion in 2019.

When the China-Pakistan Free Trade Agreement (CPFTA) came into effect in 2006, it was expected that increased trade with a booming China would also boost Pakistan’s economy. Over the past 15 years, trade between the two countries has increased by 250 percent to $15 billion, and China has become Pakistan’s largest bilateral trading partner, but exports have been mostly one-sided. China’s exports to Pakistan are more than six times its imports, or $13 billion to $2 billion.

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This $11 billion gap represents 40% of Pakistan’s total trade deficit

It may be useful to compare the export performance of some other countries that signed FTAs ​​with China around the same time as Pakistan. An example is the ASEAN-China Free Trade Agreement (ACFTA), which was signed in 2004 but entered into force in 2007 or around the same time as the CPFTA. Over these 14 years, China has become ASEAN’s largest trading partner with bilateral trade of $686 billion. All ASEAN countries have experienced immense growth not only in their imports but also in their exports.

According to World Bank data, from 2006 to 2019, Vietnam’s merchandise exports to China increased from $3 billion to $41 billion; Malaysia went from 11 to 33 billion dollars and that of Indonesia from 8 to 27 billion dollars. Pakistan’s exports to China amounting to $2 billion in 2019 pale in comparison.

Why has Pakistan’s export performance been so poor even after having preferential access to the vast Chinese market? Some blame Pakistani negotiators for not being able to get a good deal in the first phase of the FTA. They believe that with the recently concluded second phase of the CPFTA, where Pakistan was able to gain duty-free access for almost all of its export products, our exports would have the opportunity to grow.

However, this is unlikely to happen as China’s average tariffs on manufactured goods for all countries are now below 5%. Also, since China is now a member of the Regional Comprehensive Economic Partnership Agreement (RCEP) with 15 countries and has also signed FTAs ​​with many others, tariff preferences have become an insignificant factor in accessing the Chinese market.

If Pakistan is to fully exploit the potential of the CPFTA, it must radically reform its myopic trade policy. While all countries seek better market access when entering into an FTA, they also aim to liberalize their economy to make it more competitive. Pakistan has followed a totally mercantilist approach. It demands tariff reductions from its bilateral FTA partner without offering any significant concessions in return. Since China and ASEAN entered into an FTA, both sides have reduced their tariffs to less than 1%.

A recent World Bank study showed that Pakistan’s tariffs are still twice as high as the world average and three times higher than those in Southeast Asia. In addition to high tariffs, Pakistan also imposes other levies such as sales tax, income tax, and central excise duties on imports. The combined impact of these tariffs is that Pakistan derives nearly half of its tax revenue from imports.

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In contrast, ASEAN countries derive less than 5% of imports

High customs duties apply not only to finished consumer goods but also to several raw materials. For example, steel is an essential material used to manufacture engineering goods. The combined impact of taxes on steel imports is at least 52%. Thus, our engineering industry has great difficulty in sustaining international competition. Globally, engineering goods, mostly parts and components, make up 50% of exports. Pakistan has not adjusted its industrial and trade policy to capture this type of trade. Since most Chinese imports consist of parts and components, Pakistani exports cannot claim a significant share of these goods.

The global emphasis on fragmented trade meant the abandonment of import substitution policies. Pakistan still applies these outdated policies in crucial sectors. Pakistan’s automotive industry is an example. With a high level of protection, the automotive industry only looks to the domestic market.

China has made tremendous progress in the production of electric vehicles. If Pakistan can adopt a more open policy for the automotive sector and get rid of automotive-specific SROs, it can attract considerable investment in this new technology. This would at least allow it to increase exports of auto parts and components.

Another problem with Pakistan’s trade policy is the government’s reluctance to trade in the region despite its recent declaration to shift the focus from geopolitics to geoeconomics. While most countries have an average of 40% trade in their region, Pakistan’s is less than 5%. The success of countries like Turkey, Mexico and ASEAN is due to their trade with their neighbors, which provides them with cheaper inputs and nearby export markets. Robust regional trade attracts foreign investment as it increases market size. This would allow Chinese companies to manufacture products in Pakistan for export to other South Asian countries.

Due to the trade war between the United States and China as well as the disruptions caused by the Covid pandemic, major buyers of Chinese products are trying to diversify their sources. ASEAN countries are working on the “China plus one” strategy to seize this opportunity. They want outsourced industries from China to come to their country. Vietnam, Thailand and Malaysia offer several incentives for this. They have attracted most of the new industries’ FDI coming out of China.

Pakistan has set up 22 special export zones but has been unable to attract major relocated industries out of China. Recently, it imposed a 17% sales tax on plant and machinery installed in these areas. These taxes will further discourage potential investors from relocating industries to the zones.

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In summary, if Pakistan is to have a credible share of the $2 trillion Chinese import market, it needs to undertake serious trade policy reforms. Like ASEAN, Pakistan must lower its import tariffs and get rid of its protectionist policies. Without regional integration and without being part of global value chains, Pakistan is unlikely to achieve significant gains from its FTA with China.

The author has served as Ambassador of Pakistan to the WTO and FAO Representative to the United Nations in Geneva. He can be reached at [email protected] The opinions expressed in this article are those of the author and do not necessarily reflect the editorial policy of Global Village Space.