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  • Feb 27th, 2017
  • Comments Off on CPEC’s likely effects on local manufacturing
Local manufacturing industries have been finding it hard to dominate the local market for quite some time mainly due to price difference between locally manufactured goods and imported goods including smuggled goods. Unfortunately, CPEC is expected to exacerbate local manufacturing units' woes.

CPEC is basically a collection of multiple projects including Gwadar port development, energy projects, transport infrastructure projects and industrial development projects. However, industrial development projects are not aimed at developing existing industrial units, but at development of new industrial zones. This is advantageous because it will generate employment opportunities for Pakistanis and increase boost Pakistan's GDP.

Special tax policies and rebates for industries established by the Chinese have been agreed upon is a treat to local manufacturing industries that may get swamped by industries established by China. Due to such agreements, local manufacturing industries would be facing unfair and unjust competition from Chinese established industries and it would be near to impossible for local industries to compete in the long run at low profit margins, or even break even for most of the manufacturing sectors.

On the basis of the experience of Afghan Trade Transit (ATT), it is also anticipated that there would be an increase in smuggling through the CPEC route, which means loss to the national exchequer. If supply of smuggled goods increases in the local market, it would be impossible for local manufacturers to maintain their market share, resulting in heavy losses to local industrialists. Moreover, this would result in heavy losses to the government due to loss of duties and taxes, which otherwise would be collected at the import stage. To address this issue, Pakistan authorities have promised to design a mechanism to prevent smuggling. To ensure the safety of their borders, Pakistan and China have agreed to build a mechanism to exchange intelligence between their anti-smuggling bureaus, to strengthen customs controls at the border and to exchange information to curb illicit trafficking and smuggling across the border. However, no import action has been observed so far. There is a matter of concerns for local industries about the growing treat of smuggling and illicit trafficking associated with CPEC and ATT.

Apart from all the advantages that might come to Pakistan, CPEC also brings a threat that may force local manufacturers in the long run to limit their business activities and confine it only to trading ie, buy from Chinese-established industries and sell it in the local market at a margin. The resulting in elimination of existing local manufacturing unit and leave Pakistan dependent on foreign-funded industries which eventually will repatriate profits to their own countries in the form of dividends, management fees and transfer pricing.

Another problem which may surface as a result of CPEC is increase in inflation. Currently China imports raw material from all over the world, including Pakistan, though Pakistani exports to China only constitute around 8 percent of Pakistan's total exports. But when Chinese-established industries start their operations in Pakistan, these exports would be reduced. Further, there would be an increase in demand for industrial input in the local market, which will cause upward price shift, resulting, in turn, in further increase in the cost of production for all industries (both local for foreign-funded). On the bright side, we must not ignore the fact that about 27 percent of our imports are from China, which are also expected to be reduced once Chinese-established industries start operations in Pakistan and this will strengthen our balance of payment.

In addition to the above, it has also come to attention that the government is considering allowing Afghanistan, Iran, India and other neighbouring countries to trade through CPEC; in the short-term it will increase government revenue which will strengthen the Pakistani economy. But on the other hand, it would toughen the competitionfor local exporters in the international market. In this case, Pakistan's export-oriented businesses and manufacturing units would be adversely affected because the benefit of low transportation costs would give local export oriented businesses a competitive advantage over the neighbouring countries in capturing the international market, which would be lost by immediately sharing of CPEC's trade route.

Arrangements like CPEC are imperative for the development and growth of the Pakistani economy. But we should not ignore the fact that every arrangement has a cost and impact associated to it, which needs to be brilliantly managed.Under these circumstances, it is a matter of concern that the demise of our local manufacturing industries would continue due to bad planning, the tunnel vision and short sightedness of our policymakers and decision-makers. This results in the local manufacturing sector to halt production and start trading goods manufactured by the privileged foreign-funded industries.

In order to make sure that the benefits of CPEC supersede its disadvantages, the government should bring key stakeholders of local manufacturing industries on board while finalising trade and investment terms for CPEC and ATT, so that their concerns may also be addressed and resolved. The special tax policies and rebates agreed under CPEC can also be allowed to all local manufacturing industries, so that fair and healthy market competition would be assured.

As is the general practice around the world, the Pakistani government has to impose non-tariff barriers on imports for the purpose of local market consumption, under CPEC and ATT, so that local manufacturing industries would not loss their market share and competitiveness.

In the immediate future, neighbouring countries should not be allowed a trade route through CPEC. The government should consider an exclusive period of at least five years for local export-oriented businesses and manufacturing units to receive the benefit of CPEC. Alternatively, the government should relax policies, taxes and duties for local export oriented businesses and manufacturing units, so that their competitive edge is maintained.

CPEC is a bright opportunity for Pakistan to see its economy blossom and claim a prominent trade share in the international market. However, if policies are not managed properly and in the best interest of Pakistan and the local manufacturing industries, Pakistan might suffer losses far more than what can be anticipated.

the author