The Pakistan Business Council (PBC) was requested by the Special Investment Facilitation Council (SIFC) to share its observations on Pakistan’s trade agreements and to draw lessons to help the country improve its market access in the future.

Common Takeouts from the Review of Trade Agreements

In general Pakistan has not negotiated trade agreements from a position of strength or with full understanding of its own needs. Without exception, its partner countries have deployed better insights into maximizing their advantage. Private sector input into Pakistan’s negotiation has been limited and it did not have a seat on the negotiation table.

Six important aspects that have not been factored sufficiently in the way that Pakistan approached trade agreements in general and with China in particular, are:

  1. Pakistan’s attempts to increase exports has inadequately differentiated between export of commodities and export of value-added goods. We therefore celebrate aggregate outcomes on exports without looking carefully how these are achieved. A classic example is export of raw cotton and yarn to China and Bangladesh when we should have prioritized export of apparel. Countries to which we export cotton & fabric convert these to more value-added apparel which then competes with Pakistan’s in the same target markets i.e. USA, EU and the UK.
  2. Linked with (a) above is the impact on Pakistan’s employment level. Export of raw materials and commodities adds very little employment in Pakistan.
  3. Duty concessions granted by Pakistan to the contracting countries on import of value-added/finished items affects domestic manufacturing and hence employment in Pakistan.
  4. Likely displacement of imports from other sources by imports from the contracting country prompts the affected countries to seek similar terms. An example being duty reductions on Palm oil to Malaysia and Indonesia without equivalent concessions from both.
  5. Pakistan’s tax revenue is impacted due to reduction in tariffs granted to the contracting country vs. full duty imports from other sources. Whilst this may be acceptable if such a reduction leads to value addition and exports from Pakistan of goods, it serves little purpose when granted on imports that are inevitable, such as on cooking oil and worse still when granted to one supplier and not a competing one. When Pakistan granted duty relief to Malaysia for Palm oil, it had to eventually match the terms for import of the same commodity from Indonesia. In aggregate there was a loss of tax revenue and as we will see later, neither resulted in meaningful increase in Pakistan’s exports. Cheaper landed cost of cooking oil also had a negative impact on our balance of payments.
  6. Failure to appreciate the importance of positioning Pakistan as a location for conversion of inputs into finished goods for export to China, soon to be the largest economy. By obtaining greater concessions than what we managed in CPFTA2, we could have realized the potential that Bangladesh has secured through duty free access for 96% of its lines to China. Western companies can now leverage Bangladesh’s unique access to China, resulting in greater employment and positive impact on its balance of payments, besides offering Western nations an opportunity to address the trade imbalance with China. Pakistan has missed a valuable opportunity to integrate in the global value chain.