Potential for a Pakistan – Canada Free Trade Agreement

Recommendation:

The Pakistan Business Council advises against the signing of a Free Trade Agreement (FTA) with Canada. With a current minor share in Canada’s textile imports, Pakistan stands to lose more especially in the agriculture sector as opposed to gains from greater access to Canada’s textile markets. The PBC recommends a limited Preferential Trade Agreement (PTA) in the first stage, which allows Pakistani manufacturers increased access to Canada’s textile market, especially for apparel, in return for tariff concessions on certain agricultural produce such as Canadian canola and other fruits and vegetables.

Executive Summary of the Report

This report, which is the 3^rd in the PBC’s 2019 Market Access Series, begins with a global trade overview for both Pakistan and Canada, the markets that the two countries actively trade in as well as the state of bilateral trade between them. This is followed by an analysis of Canada’s most substantive trade agreements, namely CETA and NAFTA (now USMCA) and their impact on Canada’s trade, investment and industry. The report concludes with an analysis of Pakistan’s major export industries, namely agriculture and textiles, and the likely impact on these sectors if a free-trade agreement is negotiated and signed between Pakistan and Canada.

Pakistan, a semi-industrialized, agri-based economy is one of the largest producers of natural commodities, and its labor market is the 10th largest in the world. Agriculture in Pakistan plays a central role in the economy as it contributes nearly 23.0 percent to GDP and employs more than 42.3 percent of the country’s labor force. Since 2010, Pakistan’s imports have been on an increasing trend, whereas exports have followed an almost flat trajectory leading to a rising trade deficit which in 2018 reached an all-time high of $36.5 billion.

Canada is the 10^th largest economy in the world (in nominal dollars) with a GDP of $1.7 trillion as of 2018. The country has a booming service industry with over three-quarters of the people employed in the service sector. Canada’s economy has grown steadily in the past ten years; however, on the trade front, the country’s export growth has shown a decrease. Exports over the past decade posted a negative CAGR of 0.1 percent, with exports valued at $450.7 billion in 2018. Imports, however, have increased in the same time period with a CAGR of 1.1% and were valued at $459.8 billion in 2018.

Canada is the 21^st largest export partner of Pakistan, with bilateral trade exceeding $800.0 million in 2018. Pakistan’s major exports to Canada include rice, textile articles, cotton yarn, jewellery, etc. One of the major imported items, and which constitutes over 45.6 percent of total imports from Canada, is that of rapeseed, locally known as canola. Most of Pakistan’s exports to Canada are commodities of textiles and textile articles, which in 2018 totaled $196.3 million – accounting for more than 58.3 percent of Pakistan’s total exports to Canada.

Pakistan’s top 20 commodities with the highest export potential to Canada are valued at $2.9 billion. Twelve of these belong to the category of textiles and textile articles where most fall under the sub-category of kitted and woven apparel (HS-61 and HS-62). Rice is amongst those commodities that is currently imported by Canada in low quantities, but holds immense potential, a value which could possibly exceed $289.2 million. Moreover, Pakistan is one of the top suppliers to Canada, especially in the import of textiles and textile articles. Countries competing against Pakistan for a larger share of Canada’s market for these items are the United States and Bangladesh, both of which have trade treaties that give them tariff advantages. This study also analyzes Canada’s export potential to Pakistan, which calculated for 2018, exceeds $6.1 billion. Most of these high potential items are categorized under iron and steel, machinery, motor vehicles and mechanical appliances.

This report includes a section on Canada’s agricultural industry with a specific focus on the likely impact on Pakistan’s agricultural markets in the light of a free trade agreement. Canada is the 5th largest exporter of agriculture and agri-food products in the world. Analysis of Canada’s major trade agreements shows that agriculture plays a vital role in any Canadian trade negotiation. If a trade agreement were to be signed between Pakistan and Canada, agriculture would be at the forefront of possible contention between the two countries. However, several benefits could be obtained if policy makers take a balanced approach to negotiations where access to agricultural market could be given for certain products such as canola, soybeans, chickpeas and other grains of which Pakistan imports significant quantities. In return, Canada could provide access to rice, fruits & vegetables, sugar and sugar confectionary items.

The final section of this report takes a closer look at the importance of the textile industry for Pakistan’s economy. Since more than 60.0 percent of Pakistan’s export basket comprises of textiles and textile related products, this report lays special emphasis on the importance of this sector and urges policy makers to introduce initiatives to address capacity issues where investments need to be made to develop the value-added textile sector. Moreover, despite growing world and Canadian demand of synthetic and man-made fiber apparel, Pakistan’s apparel fiber mix still stands at 80:20 in favor of cotton. This report therefore stresses on the textile industry’s need to develop its capacity to manufacture textile articles based on man-made fibers.

A list of textile articles is provided in this report that the PBC recommends be part of the concessions list for preferential access to the Canadian market.

The PBC is a private sector not-for-profit advocacy platform set up in 2005 by 14 (now 82) 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