Potential for a Pakistan – U.S. Free Trade Agreement
Recommendation: The Pakistan Business Council (PBC) advises against the signing of a deep Free Trade Agreement (FTA) with the U.S....
Recommendation: The Pakistan Business Council (PBC) advises against the signing of a deep Free Trade Agreement (FTA) with the U.S....
The Pakistan Business Council (PBC) advises against the signing of a deep Free Trade Agreement (FTA) with the U.S. in the first stage. Pakistan potentially stands to lose more especially in its agricultural sector as opposed to the gains from greater access to the U.S. textile markets. The PBC recommends a limited Preferential Trade Agreement (PTA) which allows U.S. soybean and certain grades of cotton preferential access while providing Pakistan access to the U.S. textile markets – especially for apparel made from both cotton and man-made fiber.
The idea for a Pakistan – U.S. Free Trade Agreement is an old one with Pakistan at various stages in their bilateral relationship requesting the U.S. for greater market access for Pakistani goods, especially textiles. The possibility that the U.S. may now be more open to signing a market access agreement with Pakistan has its roots in a statement made in September 2018 when U.S. Senator Lindsey Graham hinted at offering Pakistan a trade proposal in return for the country’s assistance in ending the war in Afghanistan. This report tries to put a perspective on bilateral trade in case a Free Trade Agreement is signed between Pakistan and the United States.
The report begins with a review of the current trade patterns of both Pakistan and the U.S. – the markets as well as the major products that the two countries actively trade in as well as the state of their current bilateral trade relations. This is followed by a section on the likely impact on bilateral trade of a possible FTA between the two countries. The impact of external factors, such as the on-going U.S. – China trade war, has been included in this study to better understand the impact on Pakistan – U.S. trade in the near to medium-terms. The report concludes with a brief analysis of some major sectors/industries of the two economies and their likely role in the FTA negotiations and their demands for access or protection.
Currently, Pakistan is the 56th largest trading partner of the U.S. with a bilateral trade relation of $6.8 billion in 2018.
Pakistan, primarily, is an agri-based economy, with the agriculture sector contributing over 23.0 percent of Gross Domestic Product (GDP). The sector accounts for half of the employed labor force and is the largest source of foreign exchange earnings. Pakistan’s exports to the world are mostly dependent on cotton (HS-52), apparel (HS-61 and HS-62) and other made-up textiles (HS-63) which, combined, represent 54.0 percent of total exports. Imports, on the other hand, are focused on mineral fuels (HS-27), machinery and electrical equipment (HS-84 and HS-85) and oil seeds and miscellaneous grains (HS-12). Pakistan’s trade deficit has been on the rise, reaching a record high of $36.6 billion in 2018. Imports have been on an increasing trend since 2010, crossing $60.0 billion in 2018. On the other hand, exports have followed an almost flat trajectory, ranging between $20.0 – $23.0 billion over the last 4 years.
The United States is the largest economy in the world (in nominal terms) with a GDP of $20.9 trillion as of 2018. In 2018, the U.S. exported over $1.6 trillion worth of goods, and exports mostly comprised of machinery and electrical equipment (HS-84 and HS-85), mineral fuels (HS-27), vehicles, and aircraft & parts thereof (HS-87 and HS-88). On the other hand, the U.S. import bill in 2018 was $2.6 trillion and comprised majorly of machinery and mechanical equipment (HS-84 and HS-85), vehicles (HS-87) and mineral fuels (HS-27). Even though U.S. exports in 2018 increased by over $100.0 billion as compared to the previous year, the country still posted a trade deficit of $950.0 billion in 2018.
Bilateral trade between Pakistan and the U.S. reached an all-time high in 2018, with two-way trade worth $6.8 billion. Pakistan’s exports to the U.S. were $3.8 billion whereas imports amounted to $2.9 billion. The U.S. is one of the few countries with which Pakistan enjoys a trade surplus, which was worth nearly $969.0 million in 2018. However, this surplus has seen a declining trend as imports continue to rise while exports continue to show a slowdown. In 2018, 78.0 percent of Pakistan’s exports to the U.S. comprised of textiles and textile articles (HS-50 to HS-63), of which 73.0 percent were of apparel and other made up textiles.
In 2018, Soybean (HS-12) was Pakistan’s largest import category from the U.S. and represented approximately 23.0 percent of total imports. Long-staple cotton was another notable import category in 2018, and represented roughly 20.0 percent of total imports from the U.S. Other significant product categories imported by Pakistan from the U.S. were iron & steel (HS-72), machinery (HS-84) and aircrafts & parts thereof (HS-88), which combined, made up roughly 18.0 percent of total imports.
The top 20 commodities with the highest export potential to the U.S. from Pakistan have been identified in Table 26. Roughly estimated, these goods have an additional trade potential of $5.3 billion. ‘Rice, semi or wholly milled’ (HS-100630) and ‘Bedlinen of cotton’ (HS-630231) have the highest trade potential, with a combined value exceeding $1.4 billion. Moreover, an analysis of Pakistan’s top exports to the world in Table 28 indicates that the country is one of the major suppliers to the U.S., especially in textiles and textile products and in certain categories is meeting at least 10.0 percent of total U.S. demand. However, competing against Pakistan are Bangladesh and countries from the DR – CAFTA region which enjoy significant tariff advantages. This study also analyzed U.S. exports to Pakistan and found 20 products for which the U.S. could potentially increase its exports to Pakistan. The top 20 products with the highest potential can increase U.S. exports to Pakistan by about $7.8 billion. Most of these high potential items are categorized under electrical machinery, mechanical appliances and equipment thereof.
When U.S. President Trump announced tariffs on billions’ worth of Chinese goods, it sparked a trade war that has led to tariffs being placed by both China and the U.S. on more than $300.0 billion worth of goods. While Chinese goods face restrictions, the U.S. companies have been scouting for alternate suppliers to meet growing domestic demand. Pakistan, a competitor to China for the U.S. market, however, has been unable to meet this demand. Pakistan’s top textile exports to the U.S., some on which China faces additional tariffs, have been identified in Table 37. Analysis of the table shows that Pakistan’s existing capacity to export is limited mainly due to supply side constraints. However, some exports from China have become more expensive making Pakistani goods more competitive. There is, however, a need to address capacity issues and investments need to be made to develop the value-added textile sector. Another option available to Pakistan for increasing exports to the U.S. is by focusing on goods eligible for GSP benefits, some of which have been identified in Table 36.
Pakistan is a beneficiary of the U.S. Generalized System of Preferences (GSP) program, which provides duty-free access into the U.S. for over 3,500 products. In 2018, Pakistan’s exports to the U.S. under the program amounted to $326.0 million, a mere 8.0 percent of total exports to the U.S. Since the GSP scheme does not majorly cover textiles, leather and apparel exports, Pakistan has been unable to fully utilize the benefits of the program. An economy dependent on the textile industry, coupled with lack of awareness and interest on the traders’ part, are factors which have hindered the country from exploiting the full benefits of the program. However, the Ministry of Commerce’s recent efforts to include leather products under the GSP scheme have proved beneficial.
An opportunity analysis from Pakistan’s perspective of the U.S. government’s decision to withdraw GSP status from India has also been done in the report. In March 2019, the U.S. government decided to withdraw trade concessions granted to India, the largest GSP beneficiary, citing protectionist measures used by India to limit market access to U.S. producers. However, an analysis of the top 20 Indian GSP exports to the U.S. listed in Table 42 indicates that even with the complete removal of GSP status from India, for the 20 items listed in the table, Pakistan would only be able to divert goods worth $24.0 million towards the U.S. – a mere 1.0 percent when compared to Pakistan’s total exports of $23.6 billion.
The agriculture industry is a significant contributor to the U.S. economy and the country is a net exporter of agriculture produce. In 2018, it exported over $149.0 billion worth of agriculture produce. Most agriculture produce of the U.S. rely on international demand as a major component of total demand. The country is a low-cost high production source of agriculture commodities and the removal of trade barriers has given an economic boost to the sector. It, therefore, comes as no surprise that U.S. agriculture exports to FTA partners are significantly higher than to non-FTA partners. The current 20 U.S. FTA partner countries represent around 10.0 percent of the world’s GDP and 6.0 percent of global population, yet they account for 46.0 percent of U.S. agricultural exports to the world, up from 29.0 percent in 1990, before a majority of U.S. FTAs were implemented. U.S. agricultural exports to FTA partners are growing at a faster rate than to non-FTA countries, indicating the role FTAs have played in foreign markets for U.S. producers and exporters of agriculture produce. Pakistan’s agriculture sector contributes over 23.0 percent to the country’s GDP. Opening up the agriculture market to U.S. producers would increase competition and local farmers and businesses may suffer and be pushed out of the market as a result. Pakistan, therefore, needs to carefully weigh the benefits it will gain by signing an FTA with the U.S. against the likely costs it will have to bear.
This report has a section on the U.S. soybean industry with a specific focus on Pakistan as an importer of U.S. soybean. Presently, Pakistan imports over $657.0 million from the U.S. and $273.0 million worth of soybean from Brazil. In recent months, following the U.S. – China trade war, U.S. soybean prices have plummeted providing Pakistan with the opportunity to decease its import bill by diverting its import demand from Brazil to the U.S.
In the final section of this report, the importance of the textile industry for both Pakistan and the U.S. has been studied. Pakistan is the 4th largest producer of cotton, it is also a net importer of raw cotton, primarily due to the non-availability of indigenously produced long-staple cotton. In 2018, Pakistan was the 6th largest importer of cotton, with imports worth $1.09 billion. More than 40.0 percent of cotton was imported from the U.S., the main cotton supplier to world markets.
Pakistan is the 5th largest exporter of cotton yarn (HS-5205, HS-5206 & HS-5207) with exports exceeding $1.2 billion in 2018. A significant portion of yarn produced locally is exported rather than being utilized for domestic production of value-added products like fabrics or garments. This is an important structural weakness of the country’s textile sector. Major importers of Pakistani yarn include China, Bangladesh and Portugal who then convert the imported yarn into high value-added products, fetching high prices in the international market. The U.S. is the 10th largest export market for Pakistani cotton yarn, however Table 47 shows that the tariff applied by the former was greater than that imposed by all other top importers of Pakistani yarn. A preferential trade agreement with the U.S. could reduce the tariff rate on yarn and could possibly enhance yarn exports from Pakistan.
Similar is the case with Pakistan’s apparel and home textile exports to the U.S. Table 49 analyzes Pakistan’s top apparel and home textile exports to the U.S. It shows that Pakistan is a top supplier to the U.S. for the items mentioned in the list, but the country faces higher tariffs as compared to its competitors like Canada, Mexico and countries from Central America, that enjoy lower duty access to the U.S. market.
As of 2018, the U.S. imported over $119.3 billion worth of textile goods (HS-50 to HS-63) from the world of which $102.9 billion were categorized under apparel and home textiles (HS-61 to HS-63). Since textiles represent 78.2 percent of Pakistan’s total exports to the U.S., signing of a trade agreement could likely open up the U.S. textile market for Pakistani manufacturers. Majority of Pakistan’s textile exports to the U.S. are cotton-based where potential to increase exports exists. Hence, Table 53 has been created, based on the size of U.S. textile import demand and Pakistan’s capacity to supply these top imports. Table 53 can be used to develop a list of textile articles that PBC recommends to be pushed for inclusion in any possible future negotiations for a trade agreement with the U.S. In addition to some important cotton-based articles, it should be noted that 32 of the top 50 items in the table are made from man-made fibers of which Pakistan holds an insignificant share of less than 1.0 percent for a majority of the items listed. Hence, given the ever-increasing demand for MMF goods where the share of cotton in the global textile market has fallen to less than 27.0 percent (2016), Pakistani manufacturers need to develop industry capacity to manufacture textile articles based on man-made fiber and penetrate the global synthetic or man-made fibers (MMF) market which has long surpassed the demand for cotton articles.
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.pkDownload