Daily Times

It has become a common knowledge in policy and academic circles that Pakistan has failed to benefit from its Free Trade Agreement (FTA) with China. While trade volume between Pakistan and China has almost quadrupled since the FTA came into force in 2007, it has mostly favored the Chinese exporters. Pakistan’s trade balance with China has worsened by a whopping 240 per cent since 2007.

Trade experts have highlighted Pakistan’s weak negotiation with the Chinese on the matters of bilateral trade as one reason behind this poor performance. In addition to this, the fact that China has signed FTAs with ASEAN countries on even more concessionary terms has dissolved any tariff advantages Pakistani products had in the Chinese markets. For example, under Pak-China FTA, tariff rate of 3.7 per cent is imposed on import of cotton yarn from Pakistan, while Vietnam enjoys a tariff rate of just 0.4 per cent under the ASEAN FTA. Similarly, tariff rate on rice which is Pakistan’s second largest export product to China is 65 per cent as compared to 33.7 per cent for rice imports from Vietnam and Thailand.

The recent 8th meeting on the Second Phase of our FTA with China shows that both of these issues may be resolved. According to Secretary Commerce Younas Dagha, Pakistan has shared a list of 70 exportable products to be zero-rated immediately. The items include textiles, specifically, cotton yarn and readymade garments, along with leather food and fisheries products. The list could include up to 300 products. If it materialises, Pakistani products will have a natural advantage over ASEAN countries.

Pakistan’s exports to China comprise low-end products. These can’t be relied upon to increase our export earnings significantly. One such product is cotton yarn which accounts for 42 per cent of our exports to China

However, it remains to be seen if China will agree to this, because as per the Chinese reply, they will have to consult with their industry representatives before agreeing. But if they do agree to Pakistan’s requirements, can we expect that our exports to China will increase enough to improve our trade balance?

Most of the Pakistani exports to China are low-end products. Being low-end products, they are not priced high enough to increase our export earnings significantly. One such product is cotton yarn which accounts for 42 per cent of our total exports to China. Due to various factors like high energy price and protectionism in the spinning industry, cotton yarn from Pakistan’s regional trade rivals like Bangladesh and Vietnam is relatively cheaper. Protectionism, in particular, is more to be blamed here because it reduces incentive to become efficient and competitive which can decrease the cost of production. Even the quality of Pakistani cotton yarn is low compared to countries like India.

In Pakistan’s case, protection of the spinning industry has another downside that can diminish the positive impact of zero-rated tariff for ready-made garments under the second phase of Pak-China FTA. Pakistan has currently imposed a regulatory duty on import of cotton yarn to protect domestic spinning industry. The spinning mill owners wield serious political influence in the country. Due to their strong lobbying, a protectionist environment is created.

In July 2016, the price of cotton yarn increased by 15 per cent to Rs. 11, 500 per bag of 100 pounds from Rs. 9, 950 due to cartelisation of local manufacturers. Instead of importing cheap cotton yarn, ready-made garments manufactures have to use costly local cotton yarn. As a result, the regulatory duty has increased the cost of producing ready-made garments which has made them uncompetitive with regards to readymade garments produced in Vietnam, Cambodia and Bangladesh. The cost difference of Pakistani exports compared to India and Bangladesh is already 6-8 per cent due to this practice.

If Pakistan wants to take full advantage of its FTA with China, it must withdraw this regulatory duty. Export of readymade garments has more potential to improve our trade balance with China. Being on the high-end of the textile value-chain, it fetches higher price compared to export of cotton yarn. Promoting high-end textile export products isn’t necessary in the context of Pak-China FTA only. Pakistan will be able to target other markets as well where sizeable demand for high-end textile products exists.

The recent much-needed improvement in Pakistan’s overall trade deficit in the month of August 2017 has also come on the back of increase in exports of ready-made garments by 15.65 per cent. Interestingly, in the same month, the export of cotton yarn has actually decreased by 4 per cent due to reduction in the demand of cotton yarn from China.

Pakistan can only win trade games with its rivals if it adopts the policy of trade liberalisation by reducing import tariffs across the board. The best way to do it is by reducing them in different phases rather than doing it abruptly.

The best performing economies in international trade are those who have followed the path of trade liberalisation. Even in negotiating trade agreements like Pak-China FTA, Pakistan will always be on the disadvantaged side if sits on the negotiation table with protectionism on its mind.

The writer is a researcher and works in the development sector of Gilgit

Published in Daily Times, September 30^th 2017.