5th Review of the China-Pakistan Free Trade Agreement with Recommendations for Phase II Negotiations

Including a Note on China’s Steel Industry

This is the fifth publication from the Pakistan Business Council (PBC) on the China-Pakistan Free Trade Agreement (CPFTA). The CPFTA was signed by the governments of China and Pakistan in November 2006. Phase I of the CPFTA became operational in July 2007 and originally covered the period 2007 – 2012. Under Phase I, Pakistan offered tariff concessions on 6,711 items to China. On the other hand, China offered tariff concessions on 6,418 items to Pakistan.

This study takes a look at the goods currently being traded under the FTA and the investments made in Pakistan by Chinese companies. It identifies tariff lines where Pakistan needs to negotiate with the Chinese for equal, if not better, concessions than those offered by China to its other trading partners. This is especially important as post signing of the CPFTA, China offered better concessions to ASEAN countries on product lines where Pakistan has a comparative advantage. This report briefly analyzes the likely impact on Pakistani exports to the US as a result of the on-going US China trade war. The final section of the study looks at the global dominance of the Chinese steel industry, and Pakistan’s surgical goods industry and its potential in the Chinese market.

This report highlights the continuous mismatch in trade numbers between what China says it has exported to Pakistan and what Pakistan reports as having imported from China. In 2017, this discrepancy was $2.87 billion, which translates into $2.87 billion of imports on which no duties or taxes were paid in 2017.

Despite having an FTA, Pakistan’s exports to China have decreased by more than 40% in the past five years. Imports, on the other hand, have grown by 132%.

One likely reason for a reduction in Pakistan’s exports to China and a continued increase in Pakistani imports from China could be better utilization of the concessions negotiated by the Chinese. Forty-two percent of China’s exports to Pakistan in 2017 faced zero tariffs, in comparison, only twenty-six percent of Pakistan’s exports to China entered that country duty free. To better manage the trade deficit, this report identifies a list of 30 products which have the potential to increase Pakistan’s exports to China by $3.0 billion.

For Pakistan to benefit in any significant manner from the current US – China trade dispute, Pakistan’s textile industry will need to diversify its exports from conventional cotton-based textiles and garments towards man-made articles of apparel.

Recently, China has become one of the largest investors in the world; its yearly FDI outflow has grown from $56 billion in 2008 to $178 billion in 2017. This report highlights the scale and scope of Chinese investments in the developing countries with specific focus on investment in Pakistan

China’s long-term strategy to develop its steel industry is discussed, as are the new tax rebate polices announced by China in response to the additional tariffs imposed by the Trump administration on steel imports. Imports of Iron & Steel and their products were valued at $1.93 billion, i.e., 13% of Pakistan’s total imports from China in 2017. Over the last five years’, Pakistan’s steel imports from China have registered a growth of 131%.

The final section of the report looks at Pakistan’s surgical goods industry (HS-90) and its potential to export to China. In 2017, Pakistan had an export potential of $370 million in ‘Optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof’ (HS-90) against which it only exported goods worth $40 million to China.

The PBC is a private sector not-for- profit advocacy platform set up in 2005 by 14 (now 78) of Pakistan’s largest businesses. PBC’s research based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about PBC, its members, objectives and activities can be found on its website: www.pbc.org.pk