KARACHI: Pakistan must reassess the implications of its Free Trade Agreement (FTA) with China in the light of developments under China-Pakistan Economic Corridor (CPEC), said State Bank of Pakistan (SBP).
The Central Bank in its First Quarterly Report for Fiscal Year 2017-18 (FY18) said historically, FTA has benefited China more than it has Pakistan, putting a strain on the already skewed trade balance between the two economies. It is therefore necessary that Pakistan gains supportive concessions in tariff from China of an equivalent magnitude as those enjoyed by the ASEAN economies in order to engage on a relatively equal footing, it suggested.
Furthermore, the small scale segment of Pakistan economy has suffered because of cheap inflow of Chinese products. High inflows of Chinese consumer durable commodities, and non-availability of their local substitutes, indicate that local SMEs are losing ground in the domestic market. Along the same lines, it is crucial to ensure that Chinese involvement in the industrial sector results in benefits for local players as well (minimum local labor force requirements for joint ventures in Special Economic Zones (SEZs), for example, can be a step forward There is a matter of how increased Chinese
participation in the local industry would affect the
current industrial structure, the Report added.
“Government must strive to ensure that the entrants help spur a competitive environment and not instead become part of the cartelization that is being observed in varying degrees in segments such as cement and auto manufacturing. An oligarch structure would ensure the incoming businesses higher margins from the domestic economy, whereas increased competition would help invigorate the economy, improve the quality of production, and increase export revenues.”
The SBP further suggested that incentive based policies are needed to steer the industry’s focus towards the latter. The tariff structure of the economy would need an overhaul to benefit fully from the opportunities provided by CPEC. Tariff liberalization has not only been slow in Pakistan when compared with regional countries, but has also been applied disproportionately and in a non-uniform manner. Finished products are granted more protection than semi-finished and basic commodities, while major industries such as textiles and automobiles enjoy high protection rates. This has resulted in an industrial structure that promotes anti-export bias and ineffectiveness. The Central Bank said Pakistan would have to focus on developing a roadmap that is less intrusive (shielding) and more facilitative. Export oriented sectors would need to be liberalized so as to welcome foreign participation and encourage innovation and quality enhancement, especially with respect to the potential SEZs.
Published in Daily Times, January 21st 2018.