Pakistan-China FTA - ‘do more’
The lack of coordination amongst policymakers' and poor negotiation skills on international trade front could not be better demonstrated by the way Pakistan's Free Trade Agreement FTA) with China has unfolded in the last decade. The FTA was signed in 2006; and in FY08, Pakistan's trade deficit with China, according to the SBP data, was $2.4 billion which almost quadrupled to $8.9 billion in FY17.
The FTA was supposed to be renegotiated in 2014, with work supposedly started in 2011; but the process continues to date. Let's see the cost Pakistan has paid for this delay - the trade deficit with the dear friend has increased from $2 billion in FY13 to a whooping $8.9 billion in FY17. One wonders, how much could have been saved, had it been renegotiated on time?
Anyhow, the priority of the country’s leadership was CPEC at that time. Yes, we cannot undermine the importance of CPEC as not only it is bridging the requisite power, road and port infrastructure gap but also softening the much needed image in the international community.
Having said that, the widening trade gap has to be dealt with care. The CPEC is having its toll on the skewed trade balance. Seeing the PBS data where all the CPEC related trade numbers are punched, the picture is scarier. The trade deficit with China has increased from $4 billon n FY13 to a staggering $13.7 billion in FY17.
The question comes whether the outcome of CPEC on external balance would be similar to FTA with China. New power plants and all other infrastructure projects have some costs to pay in years to come. Today, the cost is in the form of imports in plant and machinery; going forward, the capacity payments of all the new power plants would add to it.
The amount paid to Chinese for their exports, loans and investment is on a steep rise. The transactions might convert into Renminbi. Given, the low earning capacity from China, there is a likelihood to build external debt in Chinese currency.
How to counter this dangerous trend? How can Pakistan contain external debt? The only viable way is to enhance exports to China. The current exports are just $1.6 billion. The highest were at $2.7 billion in FY13; just before the FTA renegotiation time.
Far Eastern economies, especially Vietnam, took the boat that Pakistan missed. Our traditional low value added textile exports tariff structure was washed away by even better terms offered to ASEAN, leave the competitive disadvantages aside.
It is time for the commerce ministry to do the homework to renegotiate the FTA. The process should be in sync with Planning Commission on CPEC, coordinated with finance ministry to have the right duty and taxation structure, and should have the backing of Foreign Office in anchoring relationship.
The objective should not be confined to boosting exports but more importantly to curb imports. The light engineering manufacturing needs a push to stand against the influx of Chinese goods. It is a tough call to do imports substitution. Get ready for debt in Renminbi!
