Daily Times

Trade is a cornerstone of important economic policymaking. In order to expand trade, many countries have chosen Free Trade Agreements (FTAs)/Preferential Trade Agreements (PTAs). An economy dominated by global value chains and underwritten by regionalism has impressed upon the countries to opt for FTAs.

In order to discuss free trade agreements, trade between Pakistan and China, and trade between Pakistan and India; we refer to Shahid Yusuf’s publication F-19150-PAK-1 in the International Growth Centre, 2020 and Akbar Zaidi’s chapter on the political economy of neighbourly relations in his book “Issues in Pakistan’s Economy,” published in 2015.

Shahid Yusuf writes, “Through FTAs, countries can strengthen linkages created by GVCs (global value chains) and forge other strategic ones as well leading to larger flows of FDI. Trade agreements covering a large region are particularly advantageous because firms can specialize and reap scale economies. In addition to greater access to markets, technology and skills, FTAs are attractive because they can spur reforms – as in the case of China prior to its accession to the WTO – including trade liberalization and bring about a simplification of rules governing trade. Hence FTAs/RTAs have proliferated.”

FTAs/PTAs support multilateralism. However, WTO data suggests that trade enhancing impact of FTAs/PTAs is likely to be “modest” since most countries already have agreed to tariff reductions under GATT/WTO.

Akbar Zaidi is of the view that PTAs established on the basis of competitive rather than complementary economies are more likely to be effective to create opportunities for trade and product specialisation.

Trade in South Asia could increase threefold, and inject the needed foreign direct investment into the economy.

South Asian Free Trade Agreement was executed in 2004 and it materialised in 2006 but it has performed at a very sub-optimal level. It has not generated much trade amongst its members. Exports are just six per cent and intraregional trade is only three per cent. South Asia has the lowest intraregional trade that makes up five per cent of total regional trade in the world. Unless India and Pakistan relations improve, SAFTA is not going to perform to its optimal level. This is in direct contrast to India and China’s bilateral trade, which is highly substantial despite the border dispute between the two of them. Yusuf refers to a World Bank research to state that trade in South Asia could increase threefold from its current level and this increase in trade could lead to injecting the needed foreign direct investment into the economy. To cite an example, the China-Pakistan Economic Corridor (CPEC) has made crucial investments in energy, infrastructure, and transport. However, there is a dire need for foreign direct investment in the export-oriented sectors in Pakistan.

There are advantages as well as disadvantages to trading between a lower-middle-income economy of Pakistan with a GDP of $313 billion in 2018 and China, which is the world’s second-largest economy with $13.6 trillion. The first FTA was negotiated between China and Pakistan in 2006. Its second phase was finalised in 2019. Trade between Pakistan and China that was less than $800 million in 2000 increased to $3.5 billion in 2006.

Pakistan largely imported machinery, transport equipment, iron, steel, yarn, and textiles from China. However, China imported textile yarn, resource-based products, and fabrics from Pakistan. The total Pakistan and China trade was roughly to the tune of $ 13.5 billion in 2017-18. Pakistan imports $11.5 billion worth of goods from China; while exports $1.7 billion worth of products in a similar range of manufactures as mentioned above. Over the years, Pakistan’s exports to China have increased twofold while China’s exports to Pakistan have increased threefold. It shows that more industrialised countries have an edge while trading with less developed countries. Pakistan needs to carefully negotiate the terms of trade with other countries. Pakistan should not compromise its long-term economic growth goals while pursuing medium-term trade arrangements.

Akbar Zaidi asks the question of whether Pakistan needs to trade with India meaningfully or can it remain in the bubble of a “non-peace, non-war environment.” Though there are two views on trade with India; Zaidi is emphatic that trade with India would be beneficial to Pakistan. Moreover, trade with India would help to bring down hostilities between the two countries.

It is hard to understand why the pro-status quo forces in Pakistan are opposed to trade with India. Despite the so-called claims of “independent foreign policy;” various Indian governments have not been able to pursue an independent foreign policy post-Nehru. Indian governments post-Nehru have been as much influenced by the US, the West, and important countries in the Middle East for decades as Pakistani governments have been for ages. Indian governments have been as much controlling and influencing their Indian civil society, academic, media and other organs of the state and society for decades as much as Pakistani governments have been controlling their civil society, academia, media, and other organs of the state and society just like the rest of the world whether the US, the UK, the Middle East or the rest of the world. Whether it is the developed world countries or developing countries; the governments control and influence the rest of the society and the government and the state institutions. So, when Pakistan and India are both in the Western camp and have been influenced by the West and are still being influenced by the West; why are the pro-status quo forces in Pakistan opposing open trade with India? Is it to keep the narrative of the “hostility with India alive” for the sake of showing it to the public, so that they can claim large amounts of the budget for their institutional interests year after year, decade after decade?

Right now, direct trade between India and Pakistan is not high in volume and indirect trade through a third country or smuggling is much greater. The actual trade (the majority being the illicit trade) is four to five times greater than the official trade. And it incurs a loss to both countries. For example, as far back as 2004, it was estimated that Pakistan could save $110 million a year if it directly bought tea from India rather than Kenya or any other source. Other statistics paint a similar picture. Pakistan is losing out by not trading with India. Due to this reason, civilian governments in Pakistan have been for opening up trade with India but it has been opposed by the status-quo forces in the country. Zaidi refers to the Ministry of Commerce study in Pakistan, “The study looked at a number of sectors in the Pakistan economy and concluded that ‘the economic benefits of liberalising trade with India outweigh costs’. Consumers in Pakistan would benefit ‘unambiguously’ because of lower prices, and the government will get far greater revenue from legalising the existing illicit trade. Moreover, ‘important segments of producers would also benefit because of increased competitiveness and market access to a much larger Indian economy.”

Whether it is trade with China, CPEC, or trade with India; the government and the state in Pakistan must do thorough homework and look at the long-term growth prospects of the country and play to its advantage while minimising the risks. There would certainly be costs of opening up the trade but the benefits outweigh them.

The writer is an Islamabad-based social scientist. She can be reached at fskcolumns@gmail.com