Preliminary Analysis of Pak-China FTA Phase II
This Study titled “China Pakistan Free Trade Agreement Phase 2 – A Preliminary Analysis” has been commissioned by the Pakistan...
This Study titled “China Pakistan Free Trade Agreement Phase 2 – A Preliminary Analysis” has been commissioned by the Pakistan...
This Study titled “China Pakistan Free Trade Agreement Phase 2 – A Preliminary Analysis” has been commissioned by the Pakistan Business Council (PBC) as part of its “Make-in-Pakistan” initiative.
Market access for Pakistani exporters especially in markets of FTA / PTA partner countries is an important component of the Make-in-Pakistan initiative. Phase I of the China Pakistan Free Trade Agreement (CPFTA) came into operation in 2007 and was widely criticized for failing to provide preferential access for Pakistani exports into the large Chinese markets.
The second phase of the China Pakistan Free Trade Agreement (CPFTA) spanning 2019-2024 was finalized between the two countries in early 2019 and entered its implementation phase from January 1, 2020. Negotiated well, CPFTA2 should significantly improve Pakistani exporters’ access to the USD 2 trillion Chinese import market and thus help address the country’s ballooning trade deficit. To understand how CPFTA2 can help Pakistan’s exporters meet that objective, Pakistan Business Council (PBC) has commissioned the Consortium for Development Policy Research (CDPR) to undertake a preliminary assessment of China’s tariff provisions in CPFTA2.
The assessment starts with the construction of a comprehensive dataset of all 8,238 tariff lines at the HS-8 digit level that China has included in CPFTA2, which merges three types of data for each tariff line: tariffs offered under CPFTA1 and Phase 2 (for year 0, year 5 and year 10), trade data on volumes for China and Pakistan, as well as growth rates for Pakistan, China and China’s top trade partners, and thirdly, tariff data for all countries that export to China by product. This dataset is used to compare tariffs offered by China to Pakistani products under CPFTA2 with those offered under CPFTA1 to determine if market access in China has improved, as well as with the tariffs offered to other countries that export those products to China. While the tariff concessions offered by Pakistan to Chinese products are an important second aspect to the FTA, these are outside the scope of this report.
The top-level results indicate that the tariff structure offered to Pakistan under CPFTA2 is a marked improvement over CPFTA1. On over 80 per cent of the CPFTA2 product lines that China imports, Pakistan is now offered tariffs that are lower than or equivalent to China’s main trade partner. Nearly 40 per cent of the CPFTA2 products that China imports have seen a lowering of tariffs under CPFTA2 as compared to CPFTA1, and 45 per cent of the tariff lines will now be offered duty free access into China. A disaggregated analysis for Pakistan’s high priority products shows substantial opportunities to expand and diversify exports to China, though there remain a small but significant number of product lines for which Pakistan still does not face competitive access to China, including rice, durum wheat, paper and paper board articles, as well as medicaments of hormones.
In 2007, China and Pakistan implemented the first phase of the China-Pakistan Free Trade Agreement, initiating a reduction in bilateral tariffs. In the period following CPFTA1, bilateral trade flourished, growing by 242 per cent between 2007 and 2018—nearly six times faster than the growth of Pakistan’s trade with the rest of the world in the same period. In that sense, CPFTA1 achieved its objective of promoting bilateral trade ties.
However, while the growth in Pakistan’s exports to China outpaced Pakistan’s exports to the rest of the world, Pakistan’s imports from China grew even more (Table 1). The result of this was that the trade deficit with China ballooned. It already represented a quarter of Pakistan’s total trade deficit in 2007. By 2018, this had grown to 35 per cent. The CPFTA also received widespread criticism amongst business groups in Pakistan, who believed that Pakistan had negotiated poorly, both in terms of getting access for the products for which it was better placed to export to China, and also in terms of granting access to Chinese goods that were perceived to have inundated the Pakistani market, contributing to premature deindustrialization.
Table 1 Pakistan’s trade following CPFTA1, 2007-2018, in USD bn
|Trade with all countries||50||84||66|
|Rest of the world (excluding China)||Exports||17||20||16|
Data source: ITC Trademap
This report assesses the concessions offered by China to Pakistan under CPFTA2. The CPFTA2 provides details of tariffs levied by China on 8238 product lines at the HS 8-digit level. The most basic yardstick of the quality of concessions offered by China is how many of these tariff lines it actually imports from the world. In 2018, China did not import 1035 of the 8238 tariff lines included in CPFTA2 (at the HS 8-digit level). On the remaining (87 per cent) product codes, tariffs range from 0 to 65 per cent. China has given immediate duty-free access on 3707 lines (45 per cent of total tariff lines). A further 30 per cent of tariff lines will have duty-free access by 2030. Tariffs on 412 lines will be reduced by 20 per cent in five years, while tariffs will remain at base year (2013) rates for 1867 tariff lines (or 20 per cent of the tariff lines).
This analysis is conducted separately for three main categories of products which are, in order of decreasing priority: Priority 1 products, which are defined as those products that Pakistan currently exports to China; Priority 2 products, which Pakistan exports and which China imports, but Pakistan does not export to China; and Priority 3 products, which China imports but Pakistan does not export. The tariffs offered to Pakistan under CPFTA2 are compared with i) those offered earlier under CPFTA1, and ii) those offered to Pakistan’s competitors in China.
These are Pakistani products for which there is an established market in China, and any non-tariff impediments have also been successfully circumvented. There are 401 products in this category in CPFTA2 at the 8-digit level, for which Pakistan exported USD 1.6 billion to China, against Chinese global imports of USD 148.4 billion. Pakistan exports USD 13.8 billion of these products to the world, which indicates that it has the export capacity to expand exports to China. By the final year of CPFTA2, 83 per cent of Priority 1 product lines will have duty-free access to China and 93 per cent of the product lines will face tariffs of less than 10 per cent. Relative to CPFTA1, 44 per cent of the product lines will now face a lower tariff under CPFTA2. In terms of the value of these product lines, almost USD 11.5 billion worth of exports now have duty-free access. The important exceptions are the rice categories, on which Pakistan continues to face tariffs of 65 per cent.
There have also been considerable improvements in access relative to competitors. For 87.5 per cent of the Priority 1 product lines, Pakistan will have better or equivalent access from the date of implementation of CPTFA 2. There remain 50 product lines (at the HS 8-digit) for which Pakistan faces higher tariffs than the top exporter to China, which will have gone down to 35 product lines by the end of year 10.
The largest opportunities, in terms of value of imports that will have better access to China, are in miscellaneous edible preparations, cotton, plastics, vehicle parts and footwear. Highest value products in which competitive access was not negotiated include paper and paperboard and rice.
There are 1436 products in this category at the HS 8-digit level, in which Pakistan exported USD 2.5 bn to the world, while China imported USD 464.7 bn from the world. By the last year of the CPFTA2, 70 per cent of Priority 2 product lines will have duty-free access to China—an increase of 575 product lines relative to CPFTA1. Compared to CPFTA1, 47 per cent of the product lines face lower tariffs under CPFTA2.
The data shows that the tariffs faced by Pakistan are lower than those faced by its top 5 export competitors in China for 603 out of 1436 Priority 2 product lines. These include products from machinery and mechanical appliances (129 codes), plastics (39 codes) and articles of steel and iron (29 codes).
There are 391 codes for which Pakistan’s access is worse than its top competitors in China, which includes important categories such as cotton yarn (15 codes), non-cotton and man-made fiber (MMF) men’s and women’s knitted and woven garments (56 codes), as well as machinery and mechanical appliances along with their parts (46 codes), vegetable and edible oils (13 codes), along with some items from processed food and edible fruit (19 codes). China’s global imports in these products lines are USD 306.8 billion.
These products, that China imports but Pakistan does not export, could be potential new exports for Pakistan, providing opportunities to diversify and expand Pakistan’s export offering to the world, starting with China. These products represent the highest opportunities for true trade creation, rather than diversion. For these products, more competitive tariff access is a necessary but insufficient condition. Further conditions for successfully tapping the Chinese market are that Pakistan must i) have latent competitive advantage in producing these goods, and ii) be able to resolve any non-tariff impediments that have precluded access so far.
This is the largest group of products, encompassing 5872 product lines at the HS 8-digit level. Of these, 80 per cent, or 4701 product lines will have duty-free access to China by the final year of the CPFTA2. 34 per cent of Priority 3 product lines face improved access under CPFTA2 relative to CPFTA1.
Relative to tariffs offered to the country that had the highest value of exports to China in 2018, Pakistan already faced lower tariffs in 60 per cent of these products— this has now increased to just over 70 per cent. However, 12 per cent of the product lines continue to face higher tariffs than those offered to China’s highest value trade partner for that product. In order to shortlist opportunities for Pakistan, several filters are applied to Priority 3 products.
The report then explores non-tariff impediments to accessing the Chinese market, based on findings from a focus group discussion and one-to-one interviews with exporters, some of whom had attempted to export to China. The key impediments were agreed to be Pakistan-specific issues, rather than non-tariff barriers in China. The impediments reported include capacity issues pertaining to internal factors like factory infrastructure and skilled labor, and to external factors such as uncertainties and delays in import and export procedures that hamper the ability of firms in committing to faster delivery times. Another critical issue was the information gap regarding China at the firm-, association- and sector-level. This arises from the inability to scope, research and target markets, to identify suitable partners, and to find the relevant regulatory or tariff information for themselves and also for comparison with their competitors in China. Lack of price competitiveness, inadequate trade facilitation and an unfavorable business environment were also brought up as important impediments.
In conclusion, the CPFTA2 offers substantial improvements in Pakistan’s tariff access to China. In order to capitalize on this opportunity, Pakistan will need to ensure that its exporters can compete with China’s other trade partners for market share in China. For this, it will be important to address the non-tariff impediments identified in this report, first and foremost through the provision of market information for China and through support services in matching business partners between the two countries. At the same time, Pakistan’s competitive market access in China must be widely publicized internationally to attract interest from big multinational firms to enter China through Pakistan.
This work of this report can continue to be extended by consolidating the experiences of exporters that try to export to China, as these reveal non-tariff impediments in real time, and help build capacity to address these impediments in Pakistan (such as meeting Chinese standards and SPS requirements) and in China (such as negotiating the removal of unnecessarily burdensome requirements, mutual recognition of standards, expedited data-sharing and so on).
The report ends by giving sector-specific suggestions for two priority sectors: ready-made garments and agro-processing. In an ideal world, the business environment should be improved for all products, and information and trade facilitation should be provided across the board. In the interim period, however, a realistic strategy would be to focus on specific products with high export potential that now have competitive access under CPFTA2, and to relieve constraints for and facilitate these product lines first. This report identifies not just the product lines that offer the greatest opportunities, but also, for a subset of these items, the actions required to translate the opportunities into actual exports.
In addition, the database that was generated for this report can be developed into a software that enables potential exporters to access the consolidated information for specific product lines. This includes not just the tariffs offered to Pakistan, but also an identification of the top exporting competitor country for each product line in China, the tariffs offered to this country, and the average tariff offered to the top five exporters to China. It also consolidates in one place both the value and growth rates of Chinese imports, which are helpful for sizing the market.
The Pakistan Business Council (PBC) is a business policy advocacy platform, established in 2005 by 14 (now 82) of Pakistan’s largest private-sector businesses and conglomerates, including multinationals. PBC businesses cover nearly all sectors of the formal economy. It is a professionally-run organization headed by a full-time chief executive oﬃcer.
The PBC is a pan-industry advocacy group. It is not a trade body nor does it advocate for any speciﬁc business sector. Rather, its key advocacy thrust is on easing barriers to allow Pakistani businesses to compete in regional and global arenas.
The PBC works closely with relevant government departments, ministries, regulators and institutions, as well as other stakeholders including professional bodies, to develop consensus on major issues which impact the conduct of business in and from Pakistan. The PBC has submitted key position papers and recommendations to the government on legislation and other government policies aﬀecting businesses.
More information about the PBC, its members and its activities can be found our website: www.pbc.org.pk
 All tariff data pertaining to the CPFTA Phase II has been retrieved from the Ministry of Commerce website at http://www.commerce.gov.pk/protocol-on-phase-ii-china-pakistan-fta. All trade data, unless otherwise mentioned, is retrieved from ITC TradeMap, accurate as of August 2019.Download