Positioning Pakistan for integration with Regional Comprehensive Economic Partnership (RCEP)

The Regional Comprehensive Economic Partnership (RCEP) is a mega trade deal which includes 10 members of the Association of Southeast Asian Nations (ASEAN) and five regional ASEAN partner countries i.e., Australia, China, Japan, New Zealand, and South Korea. T RCEP is an extension of ASEAN’s existing trade deals with the 5 non-ASEAN members aiming to establish and deepen mutually beneficial economic partnerships.

RCEP does this by harmonizing trade rules led by the elimination of customs duties on 90% of goods over a 20-year period. Beyond tariff-based market access, the deal is designed to eliminate trade barriers, improve logistics, and reduce non-tariff barriers across the region. By its very membership profile, RCEP creates a free trade zone connecting a third of the world’s population, 30% of world GDP and will potentially generate gains estimated to add $500 billion to global trade over a decade.

Pakistan’s exports have remained fairly stagnant, concentrated in low-value agro-based goods and textiles where most value-addition occurs. Pakistan is a very small player in the global market, having signed several trade deals with countries such as China, Malaysia, and Indonesia but not realizing the full potential of such deals. The country exports to a few specific markets where market access exists such as the European Union (EU) where Pakistan enjoys unilateral preferential duties under the GSP plus. However, in order to become a competitive global player, Pakistan has to improve the diversity and complexity of its’ export basket and gain entry into regional and global value chains (GVCs).

The venerable entry into RCEP (hitherto known as ASEAN+5) would require Pakistan to first sign an FTA with ASEAN which itself is a heavily integrated region.  In pursuit of the goal to gain access to the RCEP market, this PBC study has the following findings:

  • Existing trade relationship with ASEAN+5 countries is imbalanced. Pakistan contributes a small share to the region’s imports (0.08% historically) while relying heavily on these countries for its own imports, especially China (46% of total imports in 2021, of which China’s is 28%). Pakistan’s exports to ASEAN+5 account for 17% of its total exports, with China being the largest market (11% of exports) in due part because of the China-Pakistan FTA (CPFTA).On the upside, Pakistan’s exports to ASEAN+5 have shown strong growth, with a 5-Y CAGR of 8%, outperforming export growth to the EU bloc. But this is still lower compared to Bangladesh, which exports almost twice as much as Pakistan. The second big market for Pakistani goods, after China, is Malaysia, followed by Australia, Thailand, and Japan. But these are not nearly big enough, with shares flying under 1% (slightly higher at 1.3% for Malaysia). It is clear that market diversification has not improved over the years
  • The product space of Pakistan’s exports to ASEAN+5 is dominated by traditional products such as cotton yarn, apparel, fabrics, and agricultural produce. Among the top 100 products exported to ASEAN+5, 46 products have Pakistan’s RCA greater than all the RCEP group (and Bangladesh). That is also 46% of the total export value in dollars. The glass-half scenario is half of the product line, and nearly half of the export values under Pakistan’s current exports to the region are those where Pakistan has a comparative advantage against all the other countries in the group, as well as Bangladesh, another possible candidate hopeful for entry into RCEP.Some new exported products where Pakistan has a comparative advantage include copper, sesame seeds, maize, onions, and dried peaches which have gained popularity in the region. Importantly, this demand for non-traditional products indicates a need for market scoping to target investments and refocus policy on non-traditional goods where Pakistan could perform well in the ASEAN+5 markets.
  • The multiplier for Pakistan’s exports to ASEAN+5 is 3x—exports could grow 3 times from current levels. Among the top 100 potential export products to ASEAN+5, 57 products representing a potential export value of $8 billion are those where Pakistan’s revealed comparative advantage (RCA) is higher than all 15
    RCEP countries as well as Bangladesh. Additionally, 84 of these 100 top potential export products are those where Pak RCA > Bangladesh’s and hence Pakistan has an advantage.
  • Unsurprisingly, many of the top potential export products are textile-based (such as cotton, garments, home linen). These are the products Pakistan is comfortable exporting, typically sent to Europe and North America enjoying benefits under GSP plus in the EU. The study attempted to isolate only non-textile potential exports and found potential in fruits, vegetables, spices, cement, leather products, medical and surgical instruments, furniture, bedding, carpets, and fresh/chilled bovine.

Many of these products have negligible existing exports to ASEAN+5 countries, but there is ample demand for them in those markets. Pakistan also possesses the capability to export them as demonstrated by its existing exports to other countries.

  • There is a narrow gap between Pakistan’s actual and potential exports to China which implies that Pakistan may already be exporting to the market as much as it has the current ability to, boosted by the CPFTA. The question is how would RCEP benefit Pakistan’s access to China given 75% tariff lines already liberalized under CPFTA? Analysis suggests that there are a number of products where Pakistan has a comparative advantage compared to other RCEP members as well as Bangladesh and which do not have tariff concessions under CPFTA, but such concessions are offered to ASEAN+5 members under RCEP. If extended to Pakistan too at par, Pakistan could gain entry to the Chinese market through enhanced investment in these areas.
  • ASEAN+5 members are already significantly integrated through a proliferation of trade deals. Under RCEP, they have liberalized even further. Pakistan cannot compete with members on tariff-based access, and so, Pakistan’s focus needs to go beyond tariff concessions in order to determine whether Pakistan can export “additional” products to ASEAN+5, if Pakistan is offered entry. As a latecomer, Pakistan would have to bring a strong negotiation stance in terms of protecting nascent domestic producers, and offering reciprocal market access to RCEP members. Furthermore, policymakers must focus on:
Policy Recommendations
1. Significantly cutting down on trade costs including overhauling transport and logistics infrastructure, reducing excessive documentation, and streamlining regulatory processes 2. Provide trade facilitation to businesses, especially SMEs, to build their level of “preparedness”. That means:

i. Helping firms understand market demand abroad and build firm-to-firm linkages so products and production processes can be re-tuned to demand.

ii. Eliminating information asymmetries related to rules of origin, non-tariff market specific requirements, market-specific/ product-specific licensing and quality regulations, and technical restrictions.

3. Move away from unconditional and indefinite concessions and subsidies. Policies offering incentives must be linked to performance indicators such as: quality benchmarks, standards, and volumes, and subject to rigorous impact evaluation. They must be backed with a data collection and monitoring & evaluation system.
4. Conduct evaluation of costs and potential benefits by sector experts and economists when negotiating trade deals. There is a critical need for sectoral expertise among policymakers to design regulations and policies to assess efficacy. 5. Resolve documented distortions and issues within tax policies. Reduce and eliminate tariffs on inputs, capital goods, and intermediates so backward linkages can be developed.

The PBC is a private sector not-for-profit advocacy platform set up in 2005 by 14 (now 98) of Pakistan’s largest businesses including multinationals. PBC’s research-based advocacy supports measures which improve the 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