LAHORE: The China-Pakistan Economic Corridor (CPEC) is a key component of the One Belt, One Road (OBOR) initiative undertaken by Beijing.
OBOR, the modern-day Silk Route, will connect China to other countries in the world through land and sea. It has been designed to create a trade network by following the principle of joint economic development, enhancement of trade and shared benefits for all participating nations.
Pakistan is an important stakeholder in the trade corridor. The influx of Chinese investment and businesses holds great promise for the country.
Not only this, it is envisaged that positive externalities will emerge through increased foreign exchange and exports. Owing to the inflow of businesses, domestic enterprises may benefit, since the trade route from China will require a litany of facilities to ensure a smooth flow of trade.
In order to explore the potential that CPEC holds, the Small and Medium Enterprises Development Authority (Smeda) has conducted a study for the identification of sectors in order to enhance economic cooperation with China. The study pertains to the prospects for Pakistan’s business community, especially SMEs, as CPEC will inevitably strengthen economic integration with the world’s largest trading nation, China.
In the study, trade potential has been identified by adopting a three-pronged approach which includes a detailed analysis of Pakistan’s trade with China, focus group discussions and stakeholder input in terms of a short survey. In the past few years, Pakistan’s imports from China have increased disproportionately compared to its exports to China.
Pakistan’s exports to China were $1.59 billion while imports stood at $13.68 billion in 2016. The trade deficit was $12.09 billion, accounting for 46% of Pakistan’s total trade deficit.
Identifying export products
Under CPEC, it is envisaged that Pakistan’s share in global trade will soar, but it is vital to adopt an approach which can lead to a reduction in the prevalent trade deficit with China.
The first step to increase Pakistan’s exports under CPEC is through identification of products that can be exported to China. A good starting point is to study the export supply capacity and/or import demand ability to assess the trade opportunities by identifying product trends.
Pakistan, a developing country, has an interest in exploring new export products while China may want to concentrate on discovering new markets for its existing export goods.
In order to identify the products that can be exported by Pakistan, China’s imports from the world have been matched with Pakistan’s exports to the world and Pakistan’s exports to China.
China imported a total of 5,578 types of products from around the world in 2015. On the other hand, Pakistan exported 795 types of products (each product valuing at $1 million) to the world.
From a total of 795 products, Pakistan exported 513 types of products to China.
Pakistan’s exports to China have been divided into high-value exports (HVE), medium-value exports (MVE) and low-value exports. These products can be used to explore the untapped potential in terms of exports. Products identified as LVE may have even higher unrealised export potential.
Some products identified as HVE are meat, fish, mangoes, chromium ores and concentrates, medical instruments, marble, footwear, rice, milk and cream, granulated sugar, denim, ethyl alcohol and footballs.
Products identified as MVE are maize, milk and cream solids, bananas, leather handbags, plastic/textile material handbags, polyethylene terephthalate, sweet biscuits, modified polystyrene, safety razor blades, orange juice, natural honey, frozen fish, frozen edible bovine offal, butter milk, butcher knives and hunting knives.
Some products under the LVE category are bran, articles of leather, paints and varnishes, articles of stone, folding cartons and boxes, coats and jackets, hydrochloric acid, tools for masons/watchmakers/miners, crates and similar articles of plastic, ball point pens, vegetable products, fruit seeds for sowing, articles of wood, clover seeds for sowing, shelled almonds, hide and skin of goats and crabs.
It is vital for Pakistan to broaden its export base to achieve growth targets and rein in the trade deficit. The increasing deficit is driven by a 7% fall in exports from 2015 to 2016 and an 8% increase in imports in the same time period. The average decrease in export value between 2012 and 2016 is 2% per annum.
Pakistan’s exporters are suffering from a combination of low growth in key markets and increasing competition from other developing countries in a range of product categories.
An automatic decrease in Pakistan’s imports is not expected in the near future and the axiomatic approach belabouring the point that exports need to increase has failed, as past record illustrates.
To reap long-term economic benefits, China and Pakistan should avoid industrial competition and rather focus on developing complementarities.
Through establishing enterprises, contracting projects and technology transfer, China can support Pakistan to develop its comparatively advantageous industries such as mining, agriculture and various manufacturing sub-sectors.
Thus, the various modes for industrial cooperation that may be explored include joint ventures, technical cooperation, foreign direct investment, mergers and acquisitions, reciprocal business opportunities and incentives. The world is keenly observing the positive externalities of this economic union and it is also drawing the ire of Pakistan’s neighbours. Their influences can pose a threat to CPEC, however, Pakistan and China are working assiduously to make it a success.
It is well known that China’s investment in Pakistan is not a completely altruistic endeavour, albeit majority of Pakistani citizens are looking forward to CPEC as a harbinger of opportunities and a catalyst for employment generation.
CPEC may have garnered all the adulation, however, only an aggressive policy shift to enhance exports may be fruitful in the long run.
By NADIA J SETH / FARHAN ZAFAR The writers are associated with the Policy and Planning Division, Smeda