Esar Ali, owner of a garment badge factory in Federal Industrial Zone B, shifted his business to cattle farming as imports grew tighter due to strict government policies to suppress imports and increase exports.
Although government policies help curb imports and boost exports, Pakistan’s trade deficit remains large.
The China-Pakistan Free Trade Agreement (CPFTA) came into effect in 2007 but has been criticized for failing to provide preferential access for Pakistani goods to the large Chinese market. CPFTA phase-II has been negotiating since 2012 and was finally signed in early 2019 and became effective in January 2020.
The objective of the FTA is to increase bilateral trade between the two countries. CPFTA-I serves the purpose of promoting bilateral relations but Pakistan’s exports cannot be increased much.
With reduced tariffs, bilateral trade grew 184% between 2007 and 2019, almost six times faster than Pakistan’s trade growth with the rest of the world in the same period. In this regard, the FTA achieves the goal of enhancing bilateral trade relations.
According to trade figures for the last seven years (2013 to 2019), exports to China decreased by 26% in 2019 compared to 2013 while imports rose 47% in the same period.
“Pakistan’s imports from China are growing more than their exports,” said former president of the Karachi Chamber of Commerce and Industry (KCCI) Agha Shahab Ahmed Khan. As a result, Pakistan’s trade deficit with China has increased.
The business group, which believes that Pakistan is badly negotiating CPFTA-I, both in terms of gaining access to its products and granting access to Chinese goods, blames it for contributing to early deindustrialization, he said.
In CPFTA-I, there are no safeguards for the industry, there is no synergy between related institutions, the impact on the balance of payments is not included and there is no agreed data exchange policy to address the under-invoice problem, said the former KCCI president.
However, the signing of the CPFTA-II is an important milestone in the economic and trade relations between the two countries, which is an effort to repair the agreement in an effort to ease the negative impact on Pakistan.
The impact of change is not just limited to industry but will also help shape government policies that are being framed, including industrial, small and medium enterprise (SME) and textile policies, for the next five years, he said.
Given the balance of payments challenges, limiting the trade deficit with China and increasing export revenues could provide much-needed assistance to the economy.
“CPFTA-II provides a breakdown of the tariffs imposed by China on 8,238 product lines. The most basic benchmark of concessions offered by China is how much of these tariff posts are actually imported from the world, “said Entrepreneur Group Secretary General AQ Khalil.
China has provided direct duty-free access to 3,707 (45%) tariff lines. Furthermore, 30% of tariff lines will have duty free access by 2030. Tariffs for 412 tariff lines will be reduced by 20% in five years while tariffs will remain at base year (2013) levels for 1,867 (20%) tariff lines.
CPFTA-II will significantly increase Pakistani exporters’ access to China’s $ 2 trillion import market and thus help address the country’s trade deficit.
The tariff structure applicable to Pakistan under CPFTA-II shows a marked increase over CPFTA-I. On more than 80% of the CPFTA-II product line imported by China, Pakistan is now offered tariffs that are lower or equivalent to those applied to China’s main trading partners.
Tariffs of nearly 40% of CPFTA-II products imported by China have been lowered compared to CPFTA-I and 45% of tariff posts are now offered duty free access to China. Potential items Pakistan could export to China include seafood, garments, synthetic blankets and knitted shirts.
“A focus on these items in exports to China could give Pakistan an easy advantage in the short to medium term,” Khalil said. In the long term, “Pakistan needs to export goods imported by China but Pakistan is not exporting at this time,” he said.
As a starting point, Pakistan can gain market access for exports of machinery, mechanical equipment, electrical equipment and spare parts, mineral fuels, optical, photographic and surgical equipment, plastics, vehicles and basic necessities.
Domestic industrialization and the production of these goods must be the government’s top priorities in an effort to ease the import burden and gain access to China and other global markets.
Given this opportunity, the question arises whether Pakistan can produce goods on demand in the Chinese market?
“In order to evaluate Pakistan’s ability to produce good quality goods at the demand of the Chinese market, it is important to look at it in the context of Pakistan’s general trade performance,” Khalil advised.
Pakistan’s global export performance has declined over the past two decades – reasons including low competitiveness and low value-added and non-unique exports of products.
Apart from the textile sector, Pakistan has lost a large part of the world market over the last five years. Products with low added value are the main obstacle to meeting the demand of the Chinese market.
“Industrialization is a need today to build capacity to produce sufficient goods, which can meet domestic and international demand,” Khalil said.
“There is also a substantial information deficit facing Pakistani businesses. The factors behind this include a lack of research on China, identifying Chinese partners and meeting regulatory requirements, “he said.
“In order to translate increased tariff concessions into sustainable exports, the government must address issues related to capacity building among Pakistani businesses and issues relating to ease of doing business – both of which affect the ability to deliver orders on the scale required in China. within the allotted time, “said the former KCCI official
Pakistan must learn from its mistakes, which exacerbate trade deficits and create hurdles in the domestic manufacturing path. A phase-II FTA could be a failure for Pakistan if the trade deficit does not improve, he added.
“Now that the FTA has been signed, we can now hope that the Ministry of Trade has finished its homework and that the agreement will bring positive results. Trade should not come at the expense of the domestic cottage industry, which provides great employment opportunities. “
Pakistani businessmen often complain of a lack of invoices for goods imported from China.
Unfortunately, the shortage of invoices is rife in Pakistan, ”said Khalil. “There is discrepancy between the trade data reported by Pakistan and China, particularly Pakistani imports from China, due to possible invoice shortages.”
Esar Ali, when remembering the import process, said he once signed a contract with an import-export agent who took care of everything from logistics to documents with Customs.
“This is standard practice and I never know what the company is showing Customs,” he said. “They can play with the government system through false statements.”
The former KCCI president said Pakistan lacked the trained personnel and financial resources to tackle the invoice shortage problem. “It is time for the government and the Federal Revenue Council to look at this manipulation for the sake of industry,” he said.
Previously, goods were smuggled from China through Afghanistan but after the signing of the CPFTA-I in 2007, imports of goods became legally cheaper.
Under invoicing and smuggling of goods poses a number of challenges for the Pakistani economy as well as the business and industrial community, Khalil said.
The main problem is that Pakistan’s tax and customs rates and regulations make the country uncompetitive in the region. High tariffs force some businesses to engage in illegal practices such as under-invoicing and smuggling.
“Businesses that do not engage in such practices cannot then compete, which jeopardizes their growth prospects,” he said.
Naturally, consumers prefer goods with lower prices than to pay higher prices for the same products. This, at times, forces other businesses to use things like smuggling and under-invoicing to stay in the market.
Such practices lower government tax revenue, triggering responses in the form of higher taxes and duties and stricter trade regulations.
Exporters can establish good relations with Chinese companies by establishing proper communication links with most businesses. Exporters must also have knowledge of foreign trade regulations in China because lack of knowledge becomes a trade barrier.
“One of the most serious problems facing Pakistan’s exports to various countries including China is unsatisfactory overseas marketing,” said the former KCCI president.
Pakistani companies generally focus on the domestic market. Most of the companies sell local and imported goods in the domestic market.
As a result, exports were limited to certain sectors of the economy, he said. “Lack of interest in exports is deterring foreign interest in Pakistan as a source of imports.”
He said, “Pakistan must invest in marketing in various sectors. If domestic producers and exporters see that foreign companies are interested in various sectors, they will definitely try to take advantage of these opportunities. “
The state must also invest in obtaining good manufacturing capabilities in sectors other than textiles. In this way, Pakistan can rely less on imports and focus on production to meet domestic industrial demand and thus create an exportable surplus for the global market.
the author is a staff correspondent
Published in The Express Tribune, October 5th, 2020.
Like it Business on Facebook, follow @Tribun on Twitter to stay informed and join the conversation.