Evaluating Phase II of the China Pakistan Free Trade Agreement
The Pakistan Business Council (PBC) has published five studies reviewing progress or otherwise of Phase I of the China-Pakistan Free...
The Pakistan Business Council (PBC) has published five studies reviewing progress or otherwise of Phase I of the China-Pakistan Free Trade Agreement (CPFTA) and an additional report offering a pre-liminary analysis of Phase II of the China-Pakistan Free Trade Agreement. With more than three years having passed since Phase II of the CPFTA came into force, this study, “Evaluating Phase II of the China Pakistan Free Trade Agreement”, seeks to evaluate the impact of Phase II on Pakistan’s trade with China thus far.
Phase I of the CPFTA saw Pakistan granting China concession on 5,686 tariff lines and China granting Pakistan concessions on 6,418 lines. Reactions to the first Phase in Pakistan were, overall, negative, with the Agreement being criticized for advantaging China too much at the expense of Pakistan. Phase II of the CPFTA was expected to improve on these shortcomings and allow Pakistan to improve its terms of trade and the value and diversity of its exports to China.
This, the 7th PBC study on the CPFTA seeks to examine the impact of Phase II on bilateral trade between Pakistan and China, particularly in terms of Pakistan’s exports. It also examines the level of discrepancies in reported trade data between the two countries and compares it with discrepancies prior to Phase II’s implementation. The report ends with recommendations designed to enhance concession utilization, renegotiate important but still excluded lines, and improve the domestic industrial climate in order to take advantage of the FTA.
The methodology for evaluating bilateral trade performance in this report is to compare imports and exports between Pakistan and China in Phase I and Phase II.
Since Pakistan’s exports are concentrated along a handful of lines at the HS-08 and the HS-02 levels, the study compares the top imports and exports in Phase I and Phase II of the CPFTA in terms of their CAGRs. For the top imports and exports in the pre-Phase II period (2007-2019), we also track their performance in Phase II to evaluate the effect of the second phase on Pakistan’s historical top exports and imports.
Further analysis is undertaken to ascertain what concessions these top lines received, at the HS-08 level, in Phase II in order to reveal insights into the quality of Pakistan’s concession utilization. The report also evaluates the growth in exports for the Critical 313 lines by comparing exports to China, their market share in China’s imports and the export potentials for these lines in 2019 and 2022.
Additionally, we evaluate the performance of exports in each concession category: A-0 (Duty free access immediately), A-5 (Duty-Free Access by Year 5), A-10 (Duty-Free Access by Year 10), MOP-1 (Reduce base rates by 20 per cent in year 5), MOP-2 (Reduce base rates by 20 per cent immediately), C1 (Tariffs remain at 2013 base rate), and C2(no concessions).
We then examine the historical performance of the 313 critical lines from 2007 to 2022 and examine the category-wise breakdown of exports. Additionally, Pakistan’s import and export diversity in Phase I and Phase II is also compared.
Trade data discrepancy is also examined and the trend of discrepancies in Pakistan and China’s reported imports and exports is analysed to see if the Electronic Data Exchange measures, proposed in Phase II, have been implemented and effective at curbing over/under-invoicing of imports and exports. The analysis reveals that there remain significant discrepancies in Pakistan’s reported imports and China’s reported exports as well as discrepancies in Pakistan’s reported exports and China’s reported imports. The tables below illustrate the trend of discrepancies through the last decade.
Table 1: Discrepancies in Pakistan’s Exports vs China’s Imports
| Unit: USD Million | |||||||||||
| Year | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| China’s reported imports from Pakistan | 3,140.39 | 3,196.84 | 2,753.87 | 2,477.07 | 1,906.33 | 1,830.04 | 2,179.82 | 1,806.13 | 2,124.87 | 3,584.87 | 3,413.28 |
| Pakistan’s reported exports to China | 2,619.94 | 2,652.22 | 2,252.90 | 1,934.93 | 1,590.86 | 1,510.41 | 1,829.44 | 2,042.89 | 1,867.76 | 3,042.84 | 2,561.41 |
| Discrepancy Over/(Under) Partner Imports US$ Bn | – 520.45 | – 544.62 | – 500.97 | – 542.14 | – 315.47 | – 319.63 | – 350.38 | 236.77 | – 257.12 | – 542.03 | – 851.87 |
| Discrepancy as % of Pakistan’s Exports to China | – 19.86 | – 20.53 | – 22.24 | – 28.02 | – 9.83 | – 21.16 | – 19.15 | 11.59 | – 13.77 | – 17.81 | – 33.26 |
| Source: Author’s calculations from ITC Website | |||||||||||
Table 2: Discrepancies in Pakistan’s imports vs China’s Exports
| Unit: USD Million | |||||||||||
| Year | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
|---|---|---|---|---|---|---|---|---|---|---|---|
| Pakistan’s reported imports from China | 6,687.57 | 6,626.32 | 9,588.42 | 11,019.01 | 13,680.15 | 15,404.33 | 14,599.75 | 12,424.00 | 12,504.58 | 20,705.50 | 16,343.91 |
| China’s reported exports to Pakistan | 9,276.49 | 11,019.60 | 13,244.48 | 16,481.15 | 17,468.61 | 18,309.56 | 16,967.15 | 16,166.92 | 15,357.59 | 24,240.97 | 23,089.42 |
| Discrepancy Over/(Under) Partner Exports US$ Bn | – 2,588.93 | – 4,393.27 | – 3,656.06 | – 5,462.15 | – 3,788.46 | – 2,905.23 | – 2,367.40 | – 3,742.92 | -2,853.01 | -3,535.47 | -6,745.50 |
| Discrepancy as % of Pakistan’s Imports from China | – 38.71 | – 66.30 | – 38.13 | – 49.57 | – 27.69 | – 18.86 | – 16.22 | – 30.13 | – 22.82 | -17.08 | – 41.27 |
| Source: Author’s calculations from ITC Website | |||||||||||
Overall, the impact of Phase II on Pakistan’s bilateral trade with China is mixed. As observed from Figure 1 below, Pakistan’s trade balance has not seen any improvement.
Figure 1: Pakistan’s Trade Balance with China (USD Millions)
Source: ITC Website
Analysing the figures at greater granularity reveals additional key findings:
- Pakistan’s trade deficit with China has widened since 2007 when Phase I of the CPFTA was enacted.
- Pakistan’s import CAGR in Phase II is higher (7.1%) than its export CAGR (5.8%) in the same period.
- Pakistan’s top exports consist of low value-added exports, raw materials and agricultural products such as cotton, metals, aquatic products, textiles etc. China’s top exports, on the other hand, consist of high value-added sophisticated products, including Electrical Machinery, Nuclear Reactors, Chemicals, Pharmaceuticals, Vehicles etc.
- Pakistan’s exports are still concentrated in only a handful of categories and lines.
- Pakistan’s utilization rates of concessions, offered under Phase II are much lower than China’s utilization: 32.3% vs 79.8% respectively.
- There is no significant improvement in exports of the 313 critical items list
- No significant improvement in trade data discrepancy in Phase II.
With the above in mind, this report prescribes some recommendations in an attempt to remedy these issues and allow Pakistan to utilize the concessions to their fullest potential:
- Pakistan’s strategy has to be to maximize exports rather than attempting to curb imports. Pakistan needs to look at China as a source for intermediate goods which can be converted into finished products, both for exports to China as well as to other markets.
- Including only those concessionary lines which Pakistan exports and China also imports, Pakistan could only utilize 14.15% of the given concessions. Renegotiating the agreement to include some of Pakistan’s top exports such as semi-milled and wholly milled rice, brown rice, peaches, frozen fish etc. should be considered.
- Too many tariff lines, which have received significant concessions, are not being exported by Pakistan. Local industry must be encouraged and taken onboard to utilize the afforded concessions.
- Pakistan cannot export items which it simply does not produce. This is especially true for value-added sophisticated products. Pakistan’s domestic industrial capacity needs much development before the country is capable of exporting any significant quantities of value-added products to China.
- Trade discrepancies have not seen any improvement in Phase II. Electronic Data Exchange needs to be activated at the earliest.
The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 100+) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about the PBC, its members, objectives and activities can be found on its website: www.pbc.org.pk
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