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  • Jan 29th, 2017
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Pakistan Business Council (PBC), a non-profit business policy advocacy forum has revealed that Pakistan's several high potential items are facing high tariffs in China despite a Free Trade Agreement (FTA). PBC in its third review of the Pakistan-China FTA has also stated Pakistan's exports to China have an indicative potential value of $20.1 billion showing that China actually has the ability to absorb nearly all of Pakistan's exports.

The forum in its analysis has further stated that top performing Pakistan exports to China (those which are either not given any tariff concessions, or are given less favourable concessions as compared to China's other trade agreement partners) should most definitely be given favourable tariff concessions or have tariffs eliminated completely in phase-II.

Pakistan's top export to China, cotton (HS2 level) has increased by 252 per cent over the last 10 years - tariff eliminations on just this product could significantly boost Pakistan's exports to China. However, there are other high-potential export products which are still facing tariffs of 20 per cent or higher (including jewellery, sugar and rice, amongst others). PBC has strongly recommended that such items should be given better tariff concessions or put in the tariff elimination category. The forum has also advocated that those imports which are harming local industries and manufacturers should be monitored carefully and added to Pakistan's protected list.

"There are also certain sectors where exports to China could be increased, as excess Chinese demand already exists and Pakistan could well benefit from beneficial tariff terms. The indicative potential value has been analysed to highlight such products. However, it must be noted that to increase total trade volumes, Pakistan's industries must increase their respective production capacities. In addition, industry must have access to reliable and cost competitive energy," the forum added.

PBC has also recommended that data collection should be standardised and monitored to ensure transparent, accurate and reliable results as currently there are great discrepancies between Pakistan's and China's reported data (particularly Pakistan imports from China), where the discrepancy is $5.5 billion due to possible under-invoicing which would mean that sever revenue losses and tax evasion are taking place.

According to PBC, since phase I of the Pakistan- China FTA came into effect in January 2007, there has been great discourse on how phase II should be negotiated. Pakistani industries have particularly focused on phase I was negotiated and the hugely negative impact it has had on domestic industries. As per the terms of phase I of the FTA, negotiations for phase II have been underway since July 2013. Another important milestone in Pakistan-China relations is the launch of the China-Pakistan Economic Corridor (CPEC) which is expected to lead to massive developments in manufacturing, employment, infrastructure, energy and logistics amongst other things.

The PBC's second review showed that Pakistan's exports to China were $2.6 billion in 2013 and imports from China were $6.6 billion leading to trade deficit of $3.6 billion. The study shows that in 2015, these figures stand at $1.9 billion and $11 billion respectively with the trade deficit rising sharply to $9.1 billion. Additional, 2015, Pakistan's exports to China made up 8.8 per cent of Pakistan's total exports, while Chinese imports made over 25 per cent of total imports into Pakistan, further confirming China's place as one of Pakistan's top trade partners.

However, due to sheer size of China's economy, as well as other factors like China's production capabilities and differences in overall competitiveness, it must be acknowledged that China would continue to have a positive trade balance with Pakistan, at least for the conceivable future. However, what is important to note and negotiate is the fact that Pakistan continues to face high tariffs; despite being a free trade partner especially when compared to China's other trade partners. PBC has hoped that better terms or at least parity with China's offerings to other trade partners would enable Pakistan to take much greater advantage of the FTA, lessening the trade deficit while simultaneously bolstering local industries and the economy overall. Pakistan's exports to China have an indicative potential value of $20.1 billion showing that China actually has the ability to absorb nearly all of Pakistan's exports. Furthermore, Pakistan has an extremely high revealed comparative advantage in cotton exports to China, indicating advantages in exporting as compared to other countries.

Allied Bank and Ibrahim Group, is of the view that the FTA with China is poorly negotiated which has resulted in ruining the domestic industry and dangerously widening the trade deficit of about $6 billion only through Pak-China trade. Pakistan is facing revenue losses of an estimated Rs 22 billion per annum on tax exemptions granted on Chinese imports. It has also suggested that the domestic industry should be given tariff protection against dumping of Chinese export surplus, enabling Pakistan to avoid revenue losses resulting from the dumping.

Thal Limited, House of Habib, in its comments said that ADP 2016-21 announced in June 2016, provides roadmap for automotive vehicles and parts manufacturers in terms of tariff, volumes for stability over next 5 years and the government's support policies in the areas of technological/skill upgrades in manufacturing, human resource and built-in quality.

In 2015, China produced 23,731,600 vehicles while Pakistan produced 283,807 vehicles (1.2 per cent of the Chinese auto industry). Due to economies of scale, complex qualitative approval procedures in China for automotive parts and vehicles exports to China and lack of high-tech manufacturing technologies in Pakistan, the domestic auto industry cannot benefit from the FTA.

Under the proposed working for phase II of the FTA, auto parts and vehicles fall under categories IV and V. The protection period for category IV at MFN is 10 years, after which custom duties will gradually decrease to zero per cent. This is a threat to the auto industry, as it will wipe out existing investments and employment. Furthermore long -term investments decisions will also be affected. It has been recommended that auto industry should be kept out of the FTA and maintain the auto specific HS coded under the "no concession" list.

Gatro (Ind) Limited, has suggested that concessionary rates of customs duty on import of PET resin yarn/film grade, PET resin bottle grade, PET amorphous resin, BoPet film and polyester filament yarn in Pakistan should not be allowed aimed at protecting domestic industry. Saif Group has said that Pakistan cotton and textile products would continue to flourish provided they are able to compete with India and Vietnam, who are emerging as major suppliers in China.

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