Potential for a Pakistan-GCC Free Trade Agreement – Market Access Series 2022

This report titled “Potential for a Pakistan-GCC Free Trade Agreement” is part of the PBC’s Market Access Series 2022. The Gulf Cooperation Council (GCC), which consists of the UAE, Saudi Arabia, Qatar, Bahrain, Oman and Kuwait, was established under an agreement concluded on 25 May 1981 in Riyadh, Saudi Arabia. The GCC countries occupy most of the Arabian Peninsula and are known for their large reserves of crude oil and natural gas.

The GCC at its Ministerial Council meeting in June 2004, agreed to consider the possibility of concluding a Framework Agreement on Economic Cooperation between the GCC States and Pakistan along with starting FTA negotiations. The Framework Agreement was signed in Islamabad in August 2004.

The GCC has voiced its readiness to resume the stalled Pak-GCC FTA negotiations. The Ministry of Commerce (MOC) in Pakistan is at the moment taking preliminary steps before holding the third round of negotiations.

The following table shows the socio-economic indicators in 2020 for the six member countries of the GCC.

Socio-Economic Indicators Bahrain Kuwait Oman Qatar Saudi Arabia UAE
Population (Millions) 1.70 4.27 5.11 2.88 34.81 9.89
GDP (US$, Billions) 34.73 105.96 73.97 144.41 700.12 358.87
GDP Growth (%) -5.10 -8.70 -3.20 -3.60 -4.10 -6.10
GDP per Capita (US$) 20,410.00 24,811.80 14,485.40 50,124.40 20,110.30 36,284.60
Inflation (%) -5.30 -14.10 -13.20 -15.10 -7.90 -8.40
Exchange Rate (LCU per US$) 0.38 0.31 0.38 3.64 3.75 3.67
FDI, net inflows (US$, Billions) 1.01 -0.63 2.86 -2.43 5.40 19.88

The GCC had a combined GDP of approximately US$ 1.4 Trillion where Saudi Arabia and the UAE contributed 49.4 and 25.3 percent, respectively, to the bloc’s GDP in 2020. The GCC countries had a total population of 58.7 million where Saudi Arabia and the UAE constituted 59.3 and 16.9 percent respectively, of the total population of the bloc in the same year.

The figure below shows Pakistan’s trade with the GCC as a trade bloc from 2017 to 2020.

Pakistan-GCC Trade

Pakistan’s exports to the GCC increased by US$ 483.2 Million while its imports from the GCC fell by US$ 4.5 Billion in the 2017-2020 period.

Pakistan’s cumulative exports of ‘Milled rice …’ (HS-100630) and ‘Carcases of bovine animals …’ (HS-020110) to the GCC contributed 25.6 percent to Pakistan’s total exports to the GCC in 2020. Other top exports of Pakistan to the GCC include ‘Petroleum oils …’ (HS-270900), ‘Guavas, mangoes and mangosteens …’ (HS-080450), ‘Commodities n.e.s’ (HS-999999) and ‘Men’s or boys’ ensembles of cotton …’ (HS-620322).

Pakistan’s import of ‘Mineral fuels …’ (HS-27) from the GCC contributed 74.5 percent to Pakistan’s total imports from the GCC in 2020. Pakistan imports ‘Mineral fuels …’ (HS-27) from the GCC in large quantities. Other top imports of Pakistan from the GCC include ‘Polypropylene …’ (HS-390210), ‘Waste and scrap of iron or steel …’ (HS-720449) and ‘Polyethylene …’ (HS-390110 and HS-390120).

GCC’s exports match Pakistan’s imports more closely relative to Pakistan’s exports with GCC imports. 26.8 percent of Pakistan’s exports complement GCC’s imports while 42.0 percent of GCC’s exports complement Pakistan’s imports.

Pakistan’s total export potential to GCC for the selected 50 products at HS-06 level identified in this Study was US$ 4.0 Billion while the actual exports were US$ 700.5 Million in 2020.

GCC’s total export potential to Pakistan for the selected 50 products at HS-06 level in this Study was US$ 8.8 Billion while the actual exports were US$ 5.2 Billion in 2020.

The table below shows the trade balance of Pakistan in services with GCC member states for the FY 2016-FY 2020 period.

*All Values in US$, Millions
Pakistan’s Trade Partners Pakistan’s Trade Balance
FY 2016 FY 2017 FY 2018 FY 2019 FY 2020
Gulf Cooperation Council (GCC) -1,128.50 -1,300.28 -1,607.35 -1,648.15 -1,254.56
United Arab Emirates -675.13 -620.34 -660.33 -807.28 -544.42
Saudi Arabia -340.18 -474.47 -564.58 -573.18 -460.19
Qatar -33.67 -105.21 -161.63 -109.35 -115.36
Oman -15.19 -22.59 -33.96 -83.65 -63.63
Kuwait -29.79 -40.97 -107.69 -33.52 -35.69
Bahrain -34.54 -36.70 -79.17 -41.17 -35.27

Pakistan’s overall trade deficit in services with the GCC has increased from US$ 1.1 Billion in FY 2016 to US$ 1.3 Billion in FY 2020.

Pakistan’s exports of services to GCC were worth US$ 886.6 Million while its imports of services from GCC were worth US$ 2.1 Billion in FY 2020. Pakistan’s exports of services to the GCC countries accounted for 16.3 percent of Pakistan’s global exports in services while Pakistan’s imports of services from the GCC countries accounted for 24.5 percent of Pakistan’s global imports of services in the same financial year.

There are a number of hurdles in trade and investment between Pakistan and the GCC countries.

Most Pakistani exporters of agricultural products are not growers themselves which restricts their ability to influence their supply chains, both backward as well as forwards.

There is no proper mechanism for trade dispute resolution in the GCC as a trade bloc.

Pakistan finds it tough to compete in exports of agricultural products with India in the GCC as even large-scale exporters from Pakistan have supply constraints.

India is a major regional competitor of Pakistan throughout the GCC due to costs and logistics advantages. Importing ’Basmati Rice’ (HS-10063010) from Pakistan into GCC costs US$ 100/Metric Ton more than importing it from India.

There is also a language barrier for Pakistan in trade activities with GCC which also creates issues in getting export licenses for Pakistani exporters.

The government of Pakistan has not incentivized the development of testing facilities in Pakistan where the required quality tests for shipping into the GCC markets can be performed in a cost-effective manner.

Pakistan lacks energy resources including gas which also creates issues in generating electricity making it difficult to attract foreign investment in any industry from Saudi Arabian companies.

There are other country specific issues for Pakistan while trading with Saudi Arabia like lack of brand recognition, lack of direct transportation routes and strict licensing requirements. Furthermore, countries like Oman and Qatar follow independent trade policies.

The Pakistan Business Council (PBC) strongly recommends that the government of Pakistan defer signing of the Proposed Pakistan-GCC FTA for the following reasons:

  1. Pakistan is likely to continue to import ‘Mineral fuels …’ (HS-27) in large quantities from the GCC regardless of the signing of the Proposed FTA. The GCC had a share of roughly 75.2 percent in Pakistan’s import of ‘Mineral fuels …’ (HS-27) from the world between 2017 & 2020.
  2. As part of a similar trade agreement, Pakistan offered a Margin of preference (MOP) on import of Palm Oil from Malaysia as part of the Malaysia-Pakistan Closer Economic Partnership Agreement (MPCEPA). The same MOP had to be offered on palm oil imports when Pakistan signed the Indonesia–Pakistan Preferential Trade Agreement (IPPTA). What is important to note here is that Pakistan gets all its imports of Palm Oil from Malaysia and Indonesia and reducing tariffs only impacted the FBR’s revenues.
  3. Tariffs in the GCC countries are in the range of 0 to 5%, if Pakistani exporters are unable to increase market shares, the reasons are clearly other than tariff

The exports of ‘Pharmaceutical products’ (HS-30), medical devices, sports goods including footballs, agricultural products, textiles and technology services etc. require special attention and a special package needs to be developed for these sectors.

Pakistani government should incentivize the development of testing centers in Pakistan where compliance tests can be performed in a cost-effective manner which will improve the quality of Pakistani products to match international standards.

Pakistani government must facilitate exporters in terms of prompt & efficient customs clearances, subsidized freight charges for non-traditional products etc.

Pakistan also needs to safeguard its local industry and ensure avoiding indirect imports of Chinese and Indian products via Dubai under an FTA.

The government of Pakistan should strengthen the dispute resolution mechanism in Pakistan by making the Trade Dispute Resolution Organization (TDRO) active by getting the Act approved by the cabinet. TDRO, in coordination with its counterparts in the GCC, should make sure that the trade damages are covered by exporters on either side in case the quality specifications are not met.

The Government of Pakistan should support investors from GCC by giving them access to Special Economic Zones (SEZs) in Pakistan where only investors from GCC should be allowed to work.

The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 96) 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