Pakistan has proposed unprecedented concessions on Chinese imports in the second leg of the China-Pakistan Free Trade Agreement (CPFTA), a move many say will cause immense damage to local industries.
The decision, the deal’s many critics say, was taken without consulting key stakeholders and ignoring warnings from the revenue board.
Senior Pakistani and Chinese officials are now involved in consultations to arrive at a consensus on zero-rating import duties on an additional 6,000 tariff lines in the new phase of the CPFTA. Every item, whether it’s raw material or finished goods, has a certain percentage of import duty imposed, which are called a tariff line. These are the items imported from abroad on payment of import duties.
Pakistan has already accorded duty remissions on more than 2,600 Chinese imports. The second-phase of the FTA is likely to be signed in the coming weeks. Prime Minister Shahid Khaqan Abbasi will announce the details of the FTA during his visit to Beijing next month.
A highly placed source in the ministry of commerce revealed to Asia Times that the Chinese government wanted Pakistan to waive 10% to 20% of the import duties on a wide variety of goods, including chemicals, consumers items, electronics goods, cosmetics, processed food, machinery, printing materials, construction and agricultural appliances, that adds up to a revenue impact of more than US$400 million.
The Federal Board of Revenue (FBR), he said, had opposed the revised FTA with China, making the case that Pakistan does not have a surplus that could substantially increase the country’s export performance by exploiting a reciprocal incentive regime from China. Local business leaders have issued a stern warning that the step would have a debilitating impact on Pakistan’s manufacturing sector.
Not a level playing field
The business community, they stated, will resist if the government continued with incentivizing Chinese industries at the expense of local investors.
“We have already conveyed to the concerned authorities that the second round of Chinese FTA should not damage the local industries that need priority and a level playing field to compete with the Chinese competitors,” Ghazaffar Bilour, the President of the Federation of Pakistan Chamber of Commerce & Industry, told Asia Times.
He said Pakistan’s industries require protection so “those products which are manufactured in the country should be placed in the negative list to provide an enabling environment to the local investors and manufacturers.”
Bilour added that he did not think the government would go ahead with the Chinese FTA because of the tough resistance it was facing from all quarters. “If it signed the FTA with China, then Pakistan will face an industrial slump, massive unemployment and a further erosion in the balance of payment position,” he said.
A lack of consultation
Ironically, Pakistan’s government did not consider getting any input from the private sector while formulating recommendations for the FTA-II with China. “We have expressed our indignation over the government failure to consult the stakeholders before granting further industrial perks to the Chinese counterparts,” Zahid Ullah Shinwari, the President of the Sarhad Chamber of Commerce & Industry told Asia Times.
He said China already enjoyed a zero-rating on 35% of the tariff-lines, which could now increase to 70%, which will hurt local industries. “The business community of the whole country is unanimous and informed the FPCCI that in case the government ignored the stakeholders’ apprehensions and continued with its imprudent import/export policies, we would have no other option but to kick-start a protest movement to protect local industries,” he added.
Shinwari claimed that the government’s pro-China overtures so far had failed to derive positive results as imports from China grew from $8 billion to $14 billion, while exports fell from $3 billion to $1.5 billion. “The FTA should have increased the exports of the country, but we saw a downward tendency in exports and upwards in imports despite zero-rating 35% of the Chinese tariff lines, which now they plan to increase to 70%,” he said.
Reserves showing a steep decline
“The duty-free imports of China’s finished goods will almost close down the local industry,” Muhammad Ishaq, a leading industrialist and former member of the board of directors of the Khyber Pakhtunkhwa Board of Investment & Trade, told Asia Times. Ishaq said that investment-led imports from China have put pressure on the country’s trade deficit, which jumped to $30.9 billion in 2016-17. “The balance of payment outflow will surge to $4.5 billion in the next few years with government reserves showing a steep decline,” he said.
The International Monetary Fund warned last month that Pakistan’s fiscal deficit was set to reach 5.5% of GDP. As part of its assessment, the IMF cautioned that if Pakistan failed to stop the fiscal erosion, it might get into default on the repayment of loans in the next few months due to the country’s fast depleting foreign exchange reserves.
It claimed the drying up of reserves threatened the medium-term capacity of Pakistan to repay $17 billion worth of debt-servicing liabilities. Pakistan has procured more than $87 billion in foreign loans, including CPEC-related borrowing from China.