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Reviewing CPEC: What is wrong?
Pakistan and China has a proud history of diplomatic and strategic relationship but when it comes to trade relations there is much to be desired and achieved. The two major trade initiatives between the neighbors are the Free Trade Agreement (FTA) and China-Pakistan Economic Corridor (CPEC). If the FTA is said to be implemented without accruing substantial economic benefit to Pakistan then CPEC, which is yet to be implemented in letter and spirit, is mired in much controversy.
Pakistan signed a Free Trade Agreement with China, a disproportionately major economic power, on 24 November 2006 with an intention to mutually benefit from trade relations. Both countries made commitment to reduce or eliminate tariffs on all products, under different concession categories, in two phases. The first phase that ended in 2012 was without much success because it is widely believed that Pakistan was not able to derive optimum benefit of trade as compared to China. This is illustrated by the fact that imports from China rose consistently from $2.9 billion in 2006 to $6.7 billion in 2012 and sky rocketed to further $15.9 billion in 2017. On the other hand our exports increased marginally from $506 million in 2006 to $2.6 billion in 2012 and declined thereafter to $1.5 billion in 2017 showing a trade deficit of $14.3 billion for Pakistan. Even though trade volume between the two neighbours increased significantly to $14billion from 2006-2017, but it was at the cost of rising imports from China and declining exports from Pakistan that negatively impacted our trade balance with China. In addition, there was consistent loss of customs revenue for Pakistan over the years that bloated to the tune of Rs 92 billion in 2017-18, as a result of wide range of exemptions offered to the Chinese products. The loss in revenue was exacerbated by under- invoicing and fake certificate of origins which is a major threat from Chinese exporters that needs to be bridged. The empirical analysis further suggests that influx of Chinese imports had an adverse impact on most of our domestic manufacturing industry making them non-competitive and less productive.
What hurt Pakistan most was its poor export performance with China despite an FTA. There were some obvious reasons for it. Firstly, we exported mainly raw materials like cotton yarn, cotton fiber, hides, chrome and marble that Chinese industries manufactured into finished goods and exported to the world including Pakistan gaining economic advantage. Second, Pakistan exported value added products to selected destinations like US, Europe, Saudi Arabia, Hong Kong and Dubai accounting for 50% of total exports as compared to only 7% share of exports to China, hence, taking no advantage of FTA. Third, non-tariff barriers further eroded Pakistan’s export potential for products like fruits, vegetables, leather articles, bed linen, home textiles, cotton fabrics and sports goods. Fourth, Pakistan did not enjoy similar tariff concessions in China as compared to latter’s other FTA partners like ASEAN who enjoy a trade surplus with China because 90% of its products are taxed at much lower rate than Pakistan’s hence giving our economy a trade disadvantage.
The government circles have attributed the eventual lopsided effect of FTA an outcome of hasty negotiations at time of drafting; in short too much of give away. Having said that, it is heartening that a review clause has been inserted vide Article 8.3(1) of Pak-China FTA which enable the party’s to modify tariffs after every five years on basis of friendly consultation and accommodation. This is obviously a redeeming clause, in wake of partial success of FTA. In fact it has afforded ample opportunity to the out-going government to continue with the process of tariff re- negotiations and reconsideration after the first five years ended. Ten meetings had been conducted between the Ministry of Commerce of China and Pakistan to review the FTA to procure maximum trade advantages. Now the agenda lies big on the shoulder of the present government to carry forward the momentum of talks.
By following the same principle the idea of reviewing the CPEC should not raise hue or cry by the opponents. The commitment for fostering CPEC, as a flagship project of One Belt One Road Initiative, is reinforced by the ruling government both domestically and internationally. What is wrong in reviewing CPEC when review under FTA is going on without any controversy since last five years? The review of CPEC, it is widely believed, would aim to evaluate performance of the completed projects, identify gaps and weaknesses in execution work and assess advantages accrued to our socio-economic development so far. It would address concerns of smaller provinces, issues of alleged non-transparency and so called preferential treatment for Chinese firms, if any. It would analyze if loans granted under CPEC by China are the cause of our current economic crisis as believed by IMF. A timely review mechanism would be helpful for planning of medium term CPEC projects envisaged for 2025, particularly when the short term projects are near completion in 2020. The ruling government may even think of inserting a ‘review’ clause in CPEC agreement, on the pattern of Pak-China FTA, to make it free from controversies in future.
Beelam Ramzan
LLM International Economic Law