The Road Ahead: Opportunities in a Türkiye-Pakistan Free Trade Agreement

The report titled “The Road Ahead: Opportunities in a Türkiye-Pakistan Free Trade Agreement” is part of the Market Access Series 2024-25 published by the Pakistan Business Council (PBC).

Pakistan and Türkiye have historically had friendly diplomatic relations. Economic relations, however, have been relatively muted. Bilateral trade, especially, has been insignificant, with Türkiye holding a 0.5% and a 1.2% share in Pakistan’s imports and exports. Pakistan’s exports to Türkiye were only 352.1 USD Million and imports 250.8 USD Million in 2023.

The figure below shows the trend of bilateral trade between the two countries.

Source: Author’s calculations using ITC Trade Map

Pakistan’s exports to Türkiye in 2023 were concentrated in a few lines, namely cotton fabrics, yarn, other textiles, unwrought lead and oil seeds. Cotton products alone accounted for 43.5% of all exports to Türkiye in 2023. Türkiye’s exports to Pakistan, on the other hand, were more diversified and featured a higher share of value-added manufactured goods including nuclear machinery and electrical equipment. Cotton and cotton fabrics, plastics and chemical products are also featured in Türkiye’s export basket to Pakistan.

The Preferential Trade Agreement

A Preferential Trade Agreement (PTA) was signed between the two countries in May 2023. The PTA includes tariff liberalization on 130 tariff lines by Pakistan and 261 lines by Türkiye. Pakistan granted Türkiye the highest number of concessions on HS-84 (Nuclear machinery) and HS-85 (Electrical Machinery). Türkiye, in comparison, granted Pakistan most concessions on HS-39 (Plastics), HS-84 (Nuclear Machinery), HS-19 (Preparations of cereal, flour, starch, milk), HS-42(Leather articles) and HS-70 (Glassware). Unlike Pakistan, Türkiye has negotiated the bulk of its concessions on value-added categories.

The tables below show the number of lines that were included in each concessions category for both Pakistan and Türkiye.

Concession Categories TRM Number of lines on which Türkiye offered concessions to Pakistan (HS-12)
0 Immediate 100% concessions 150
5 Gradual reductions in 5 years 39
7 Gradual reductions in 7 years 13
10 Gradual reductions in 10 years 40
 50% MFN (Most Favoured Nations) Immediate 50% reduction 5
TRQ (Tariff Reduction Quota) Immediate reduction within specified quota 14
Concessions Categories on Custom Duty TRM Number of Lines on which Pakistan offered concessions to Türkiye (HS-08)
T-0 Immediate 100% concessions 16
T-5 Gradual Reductions in 5 years 11
T-10 Gradual Reductions in 10 years 5
MOP 20% (Margin of Preference) Immediate 20% reduction 54
MOP 50% (Margin of Preference) Immediate 50% reduction 42
Immediate Reduction to 3% Immediate Reduction to 3% 2

One important point to note is that Türkiye has granted Pakistan concessions on 261 lines at HS-12 as Türkiye reports its trade data at HS-12. Pakistan, on the other hand, has granted Türkiye concessions at HS-08 on 130 lines. On paper, it seems that Pakistan has negotiated a better deal for itself by obtaining concessions on more lines. However, since Pakistan only reports imports and exports at HS-08, it allows Türkiye concessions on many more lines at HS-12 since there are multiple lines at HS-12 that are included under HS-08. Türkiye may have circumvented this issue by offering Pakistan concessions at HS-12.

In general, Pakistan’s trade agreements have often prioritized short-term gains over long-term strategic objectives. This has led to several negative consequences such as exports of non-value-added goods, loss of tax revenue on imports, missed opportunities in global value chains, weak negotiating position, eroded competitive advantage, ineffective diplomacy and lack of FDI attraction.

Bilateral Trade Potential

Türkiye is the 17th largest economy in the world and, in terms of GDP, is about three times the size of Pakistan. In 2023, Türkiye exported 255.4 USD Billion worth of goods, and imported 361.8 USD Billion worth of goods, operating at a substantial 106.4 USD Billion trade deficit. Main export destinations included Europe, the United Stares and the Middle East. Top export categories included metal and metal articles, machinery and electronics, textiles, vehicles, mineral fuels and oils. Top imports consisted of machinery and electronics, metal and metal articles, mineral fuels and oils, chemicals, vehicles and precious stones.

Pakistan’s faces its highest export potential to Türkiye on lines pertaining to textiles, surgical instruments and agricultural products. However, instead of relying on historical data to target sectors which Türkiye offers current high demand in, this report advocates for also identifying sectors which Türkiye is expected to experience future demand growth in. The trajectory of Türkiye’s future markets is expected to be affected by various factors including government prioritization, climate change and population growth. Türkiye’s 2053 Vision, in particular, offers a glimpse into the country’s future aspirations for positioning itself as a logistics, advanced technological and diplomatic hub.

Six sectors are identified in this report as holding significant potential for increased or sustained future demand in Türkiye: Construction, Agriculture, Plastics, Medical, Automotives (particularly EVs and hybrids) and Solar Energy technologies.

The figure below displays Türkiye’s import value for each sector in 2023.

Source: Author’s calculations using ITC Trade Map

Türkiye imported 85,676.9 USD Million worth of goods in these categories in 2023. This is almost three times Pakistan’s total export value of 28,950.1 USD Million in 2023.

Recommendations

Negotiating Style
Pakistan, in the past, has focused too heavily on invoking friendly relations with countries in its FTA negotiations. This has also contributed to Pakistan granting its partners concessions much more favourable than what Pakistan was granted in exchange. Türkiye will want access to Pakistan’s market for its high-tech industries, including automotives and electronics. Pakistan would be served well to only grant these concessions in exchange for access to similar value-added markets in Türkiye.

HS Digits of the negotiated concessions
In order to avoid a repeat of the Preferential Trade Agreement, where Türkiye gained access to more lines than at first seemed and Pakistan gained access to less, any concessions negotiated in the FTA must be negotiated at the same HS Level for both countries. That is, concessions should be granted bilaterally at the HS-06 or HS-08 digit level.

Textile Concessions and TURQUALITY
While a forward-looking FTA is encouraged, Pakistan should also seek concessions for its current major industries, such as textiles (HS50-HS63). Additionally, Pakistan may gain lessons from Türkiye’s TURQUALITY® program: a state sponsored branding program aimed at improving the competitiveness and brand value of Turkish brands. It has proven to be very successful in boosting Türkiye’s textile exports and elevating the Turkish brand status.

Diversifying to High Growth Value-Added Sectors
Pakistan’s top exports to Türkiye consist almost exclusively of low value-added offerings such as agricultural products and cotton fabrics. It is imperative, thus, that Pakistan augment its concessions list with lines in sectors which are value-added, and/or which are predicted to experience high or sustained future demand. The identified sectors are construction, agriculture, plastics, pharmaceuticals, automotive, and solar energy.

Investigation into Trade Data Discrepancy
High trade data discrepancy has been observed in bilateral trade in the past. This may be due to factors other than under or over-invoicing of imports and exports. However, negotiations should include considerations for early and effective implementation of electronic data exchange measures, similar to what was negotiated with China.

Domestic Industrial Capacity Building
Even if Pakistan gains access on all it’s desired lines in an FTA with Türkiye, it should be impressed that Pakistan cannot export value-added goods such as machinery, chemicals, pharmaceuticals and electronics unless there are favourable domestic policy conditions pertaining to competitive energy provision, tax incentives and investment that are conducive to industry growth. Pakistan has some of the highest energy costs in the region along with an encumbered bureaucracy and high taxes.

Enticing Chinese investment in Pakistan’s domestic manufacturing could prove to be mutually beneficial as China seeks to circumvent tariffs and anti-dumping measures levied on it by several countries, including Türkiye.

Guarantees against post-FTA tariff and non-tariff barriers
Türkiye has shown itself to be a liberal user of country specific import restrictions, tariffs and non-tariff barries and anti-dumping measures. Pakistan, itself, has had anti-dumping duties imposed on its denim products by Türkiye. However, states such as Türkiye’s European Free Trade Association partners and Israel are often exempt from such measures.

Thus, it is possible for Pakistan to negotiate guarantees by Türkiye against implementing such measures, should Pakistan’s industry, in any sector, develop into a significant competitive player. Negotiations must also take into account Türkiye’s veterinary and phytosanitary concerns and steps must be outlined for Pakistan to satisfy the relevant standards, such as disease mitigation, vaccinations, cold chain and appropriate packaging for meat transport.

 

The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 100+) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about the PBC, its members, objectives and activities can be found on its website: www.pbc.org.pk

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