Is China really ready to revise its FTA with Pakistan?

ISLAMABAD: Caretaker Minister of Commerce and Industry Gohar Ejaz, who is currently in China, has claimed that the neighbouring country has agreed to revise the existing Free Trade Agreement (FTA) between the two countries, to balance the bilateral trade, which presently is largely in favour of China. 

This could be very big news for all those associated with bilateral trade. However, it is not an easy job to “balance” trade with an economic giant like China. So are the claims made by Gohar Ejaz true? To understand the need to amend the FTA, let us first look at why this amendment is required.

What is an FTA?

FTAs are pacts between two or more countries to facilitate trade by reducing or eliminating tariffs, quotas, and other trade barriers between them.

Pakistan has FTAs with Sri Lanka, China, and Malaysia. Pakistan is also a part of the South Asian Association for Regional Cooperation (SAARC) and has preferential trade agreements with Iran, Indonesia, Turkey, and Mauritius.

The China-Pakistan Free Trade Agreement (CPFTA) was signed in 2006 and came into effect in 2007. It aimed to enhance bilateral trade by eliminating tariffs on a wide range of products over time. Under this agreement, both countries agreed to gradually reduce tariffs on various goods, promoting trade and economic cooperation amongst each other.

The first revised CPFTA, which is known as CPFTA-II was signed in April 2019 and implemented in January 2020. China and Pakistan aimed to reach $15–20 billion in bilateral trade by the completion of the second phase. 

Pakistan-China Bilateral Trade Analysis

The total trade between the two countries in FY22 was $23.934 billion, of which $20.84 billion was imported by Pakistan, leaving Pakistan with a trade balance of -$17.74 billion.

Similarly, of the $14.31 billion traded between Pakistan and China in 2022-23, Pakistan imported $11.702 billion. And despite the danger of another balance of payments crisis, more than 80% of the bilateral trade between Pakistan and China in FY24 (Jul-Nov) has been imported by Pakistan.

Despite a decrease in total imports due to administrative controls, the trade deficit has largely been around 80% of the total trade in the past three years.

Amongst the products exported to China in the current fiscal year, cotton yarn, thread, refined copper and other ores like chromium take the lead. Meanwhile the top items that China has exported to Pakistan during the same period are smartphones, telephones and other semiconductor devices.

What is wrong with CPFTA?

In the existing bilateral trade agreement, China granted Pakistan the opportunity to export over 1,000 products with zero duties. China ranks as the second-largest destination for Pakistani goods, accounting for 8% of its total exports, following the United States with a 17% share. However, the concerning issue lies in the substantial growth of Pakistan’s imports from China, leading to a ballooning trade deficit.

Pakistan is currently grappling with maintaining financial equilibrium due to an imbalance between imports and exports, significantly impacting the country’s overall economic well-being. The pressing concern remains how to rectify this trade imbalance amidst existing Free Trade Agreements (FTAs) and how to maximise value from the country’s trading partners. 

Pakistani products face challenges competing against local Chinese items and those sourced from other regions sent to China. Changing the current course, with the market constantly flooded with cheaper Chinese alternatives, becomes much more difficult for local manufacturers. Pakistani manufacturers and exporters would need to embrace modern techniques to enhance exports to partner countries and tackle the overarching trade imbalance in the longer-run.

Impact on Pakistan’s Economy

The FTA, over the years, has led to a substantial trade deficit between the two countries. Following the FTA, Pakistan witnessed a surge in imports from China while experiencing only nominal growth in exports. The trade deficit skyrocketed, reaching alarming levels and significantly contributing to currency depreciation.

The resultant currency devaluation triggered various economic issues, including increased outflows, reduced foreign investor confidence, and escalated opportunities for local investors to seek safer investments abroad. 

Pakistan struggled to capitalise on the Chinese market due to several reasons, including inadequate concessions for potential exports, a non-innovative export approach, and limited tariff exemptions on products with high export potential.

Local small and medium-sized enterprises (SMEs) faced challenges as they were unable to compete with Chinese products, leading to reduced market share. Industries like ceramics, electrical and medical equipment, chipboard, and plywood were particularly affected due to the influx of cheaper Chinese imports.

Subsequent favourable FTAs signed by China with ASEAN countries further eroded Pakistan’s margin of preference in key export items like cotton and rice, particularly impacting East Asian markets like Vietnam. Pakistan’s export potential was limited and Pakistan couldn’t keep up, especially in textiles, where China already dominated. 

Is there a revision?

While the caretaker minister claims that the Chinese government has already agreed to changing FTA’s terms, an official source in the Ministry of Commerce, informed Profit that the only development on the issue is that a joint review committee of the CPFTA has agreed to meet soon to discuss and review the implementation status of FTA as well as any issue/suggestion from both countries. Interestingly, he categorically denied that the FTA was being revised. It may be revised but that depends entirely upon the outcome of the review committee.

It was claimed that since the revised FTA, also known as the CPFTA-II is also largely benefitting China in terms of trade, the ministry of commerce here is trying to convince the Chinese side to consider a few amendments in the FTA to ensure addressing concerns of domestic industry, which has faced damages due to the free trade pacts.

But that too is a long way to go as any amendment and changes in the FTA go through a detailed review and analysis in both countries. This can be assessed by the fact that the first revision of the FTA became possible after almost 14 years of the signing of the agreement. 

As per Dr Vaqar Ahmad of Sustainable Development Policy Institute (SDPI), revising an FTA is not an easy job. 

The amount of homework that has been done to convince the Chinese side for the revision of the FTA is still not clear but it would still be a shot in the dark to say that amendments that will be significantly in the favour of Pakistan have been agreed upon. 

Since the major reason for lower exports is the shutdown of the manufacturing industry in the country, even if the FTA is revised the situation will not be improved. 

According to media reports, Gohar Ejaz claims that Pakistan has formally requested China to invest the Chinese Yuan equivalent of $5 billion to relocate a portion of its manufacturing companies to Pakistan.

He also said that Pakistan has proposed to shift bilateral trade to Chinese Yuan, decreasing the reliance upon US dollars.