CPEC: Once a game-changer, always a game-changer?

A PhD in international economics argues that while the intensity at which CPEC's potential is celebrated may have dampened with time, the economic prospects remain immense.

CPEC game-changer

China Pakistan Economic Corridor (CPEC) is heralded as a ‘game-changer’ with the potential to transform the economy of Pakistan into a regional manufacturing hub. Although the intensity at which its potential is celebrated may have dampened with time, the economic potential of this corridor continues to exist. CPEC-related projects involve enhancing transportation infrastructure, energy, development of Gwadar port, telecommunication and industrial cooperation.

More importantly, the revival of manufacturing activities will be accentuated with the development of special economic zones (SEZs). CPEC proposes special economic zones in the four provinces, AJK and Gilgit-Baltistan. These special economic zones can be the backbone of economic progress in Pakistan, particularly if they are well linked with regional and global value chains.

In essence, even though several experts believe that CPEC will contribute to the rising debt burden of Pakistan, it can become a major source for much needed foreign exchange with the right mix of game-changing investment and trade strategies. According to CPEC’s official website (www.cpec.gov.pk), groundbreaking has been performed for Allama Iqbal Industrial City in Faisalabad, while that for Rashakai Economic Zone and Dhabeji Special Economic Zone is scheduled in 2020.

It is imperative to mention that CPEC’s success hinges on the degree of industrial cooperation between Pakistan and China that transforms Pakistan’s ability to participate in international trading activities and upgrades its status as a major regional trading partner. That is, the production linkages between Pakistan and its major trading partners, in particular China, have to be enhanced.

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This relationship must extend beyond the free trade agreement, which entered into force in 2007 and was amended in 2019 to further expand trade between the two countries. Significance of China to the Regional and Global Economy Extracting data from the International Trade Center’s Trademap.org and UNCTAD’s (United Nations Conference on Trade and Development) Comtrade, China exported $2.5 trillion in 2019, which is approximately 13 per cent of global trade.

The second-largest exporter in the world, the United States exported $1.65 trillion. China is not only the largest exporter in the world but exports more than 150% the value of the next largest exporter, signifying its dominance in global trade. China exported more than $1.088 trillion worth of electrical machinery and machinery products. Even with all the trade restrictions imposed on imports from China by the United States, the US remains the largest export destination market for China.

This indicates the importance of China as a global manufacturing hub and proclaims the potential for Pakistan in entering in the global value chains created by China. China exported more to the United States each year between 2017 and 2019 than it ever did in prior years, even with all the threats of a trade war. On the other hand, China imported $2.07 trillion, making it the second-largest importer in the world. It is important to note that China maintains the largest trade surplus in the world at $430 billion.

CPEC proposes special economic zones in the four provinces, AJK and Gilgit-Baltistan. These special economic zones can be the backbone of economic progress in Pakistan, particularly if they are well linked with regional and global value chains

Considering the goods at different stages of their production, China mostly exports capital and consumer goods and imports raw materials and intermediate goods. It relies on the imports of raw materials and intermediate goods and converts them into finished exportable goods, which in turn generates significant value addition and manufacturing activity within the country.

As a comparison, China runs a trade deficit with ASEAN countries in electronic integrated circuits of $39 billion, in parts and accessories for transmission devices for $3.3 billion and in electrical capacitors for $1.7 billion. It also depends on the imports of mineral fuels, ores, slag and ash, rubber, animal or vegetable fats, wood pulp, copper, edible fruits and cereals among other goods from ASEAN countries.

On the other hand, China exports machinery and equipment, refined petroleum products, plastic articles and articles of clothing, among other goods to ASEAN countries. In essence, China and ASEAN countries are likely to have production networks that help boost value addition.

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China and the ASEAN countries have more than doubled their bilateral trade since 2010 as China continued its transformation into a major economic superpower in the 21st century. The ASEAN countries have been able to tap into the potential that China’s massive market size coupled with its rapid economic growth offered in terms of participation in regional value chains.

China-Pakistan Trade

Total exports of Pakistan in 2019 was $23.8 billion. The largest export destination market for Pakistan was the United States, followed by China, with $4.04 billion and $2.04 billion in export value to respective markets. Exports to China have recovered from the declining trend in the last couple of years. This could further increase with the renegotiation of the free trade agreement.

Exports peaked at $2.65 billion in 2013 but collapsed to $1.51 billion in 2017. Pakistan imported a total of $50.1 billion in 2019, with $12.4 billion from China. There is a downward trend in the imports from China since 2017 when it peaked at $15.4 billion.

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Although, Pakistan exports manufactured goods such as made up textile articles, apparels and clothing, articles of leather and medical and surgical instruments to its Western trading partners, its major exports to China include cotton yarn, copper, cereals and chromium ores. On the other hand, Pakistan imports electrical machinery (mobile phone sets) and equipment, power-generating machinery, iron and steel, and organic chemicals from China.

The current composition suggests that there is very little intra-industry trade between the two countries, as Pakistan has limited participation in regional and global value chains. The following few paragraphs analyze the trade of the two countries in terms of the product categories based on different stages of production and the economic sector to which the goods belong.

Analyzing the Trading Patterns

Trade patterns can be further analyzed by borrowing information on product categories characterizing different stages of production, namely raw materials, intermediate goods, consumer goods and capital goods as well as different classifications of good in terms of the major economic sectors, namely industrial, agricultural and petroleum products from World Bank’s World Integrated Trade Solution (WITS).

The share of raw materials in the exports from China in 2018 was a meagre 1.65 percent, the share of intermediate goods was 16.08 percent, consumer goods was 35.6 percent, and capital goods was 45.81 percent. Different varieties of iron and steel, as well as woven fabric, are commonly exported in the form of intermediate goods from China. Lastly, China has a wide variety of consumer and capital goods that includes toys, footwear, electronic apparatus, mobile phones, to name a few.

With the development of a new shipping port at Gwadar, its closer proximity to the Middle East and North African region and the sub-Saharan African region can help increase the role of Pakistani firms as intermediaries in the trade linkages between Chinese and their African and Middle Eastern counterparts

On the other hand, a quarter of imports into China were raw materials, 20.2 percent were intermediate goods, 13.17 percent were consumer goods, and 40 percent were capital goods. A small percentage of goods are unlisted. Approximately 96 percent of all exports originating from China in 2018 were industrial goods, while 80.66 percent of the imports into China were industrial goods and 12 percent was petroleum products. The largest imports into China are integrated circuits.

China also imports a significant amount of iron ore and copper ore as raw materials and intermediate goods in the form of unwrought metal, refined copper and cyclic hydrocarbons. The consumer goods with the largest trade value imported into China include motor vehicles, LNG, and medicaments. Approximately 11 percent of exports from Pakistan were raw materials, a quarter were intermediate goods, 60.2 percent were consumer goods, and 3.3 percent were capital goods.

It is important to mention that WITS defines medical and surgical instruments as capital goods. Other than that, the exports of capital goods from Pakistan is limited. Considering the classifications of products based on sectoral activities, 21.4 percent were agricultural products, and three-quarters were industrial products. On the other hand, based on the categories of goods at different stages of production, 19.5 percent of the imports into Pakistan in 2018 were raw materials, 27.7 percent were intermediate goods, 32 percent were consumer goods, and 20.6 percent were capital goods.

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Further, 68.3 percent of imports into Pakistan were industrial goods, 12.14 percent were agricultural goods, and the remaining were petroleum products. The largest imports into Pakistan were of different varieties of petroleum products ranging from crude oil to LNG. Cotton, iron and steel, soya bean seeds for sowing were the most common raw materials imported; intermediate goods included fertilizers and petrochemicals.

Commonly imported consumer goods include vehicles and medicaments, while capital goods commonly imported include telephone sets and electronic apparatus. In essence, China and Pakistan are both dependent on the imports of petroleum products. Considering, bilateral trade between the two countries, China primarily exports either intermediate goods or capital goods to Pakistan.

The most common intermediate goods exported from China to Pakistan is fertilizers, steel and woven fabric, among others. The most common capital goods were telephone sets and electrical apparatus. China is also an important source for power-generating machinery. On the other hand, Pakistan primarily exported intermediate goods to China in 2018.

Pakistan has to reduce its tariffs on the imports of primary products. According to the data extracted from World Bank’s World Development Indicators (WDI), Pakistan reports a higher weighted average for tariffs on primary products relative to India and China

About 2/3rd of the exports from Pakistan to China were intermediate goods, such as cotton yarn, undenatured ethyl alcohol, and refined copper. Exports of consumer goods is limited to rice. Although Pakistan currently does not have significant demand for parts and accessories, there is potential with the establishment of new trade linkages and production networks to promote the participation of value chains by Pakistani businesses.

Developing Potential Linkages through Pakistan

The upcoming Gwadar shipping port is located 2700 kilometers from Khunjerab Pass, which is at the border between Pakistan and China. Gwadar can cater to trade of goods produced and demanded in the Western provinces of China. It will circumvent the route through its Eastern seaboard and the Malacca Strait. With the development of a new shipping port at Gwadar, its closer proximity to the Middle East and North African region and the sub-Saharan African region can help increase the role of Pakistani firms as intermediaries in the trade linkages between Chinese and their African and Middle Eastern counterparts.

Further, Gwadar has an increasing potential to serve as the main shipping port for Chinese exports to European countries for goods produced in the Western provinces of China. There is significant potential in the exports of textile and leather products from Pakistan by tapping into its existing manufacturing sectors. However, the capabilities of the other sectors will have to be enhanced such that it improves access to high-quality input and fills in the current gaps in the supply chain.

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Considering the geographical regions, China imported $90.3 billion worth of goods from sub-Saharan African countries, $163.8 billion from Middle Eastern and North African region, $936 billion from East Asia and the Pacific but only $22.4 billion from the SAARC countries. Approximately 2/3rd of its imports from the sub-Saharan African countries was of raw materials and a quarter were of intermediate goods.

Roughly 11 percent of raw materials imported by China are sourced from the sub-Saharan African countries. Apart from crude oil, China commonly imports iron ores and manganese ores from sub-Saharan African countries. Further, raw materials, dominated by crude oil, constitutes approximately 70 percent of the imports into China from Middle Eastern & North African countries, while intermediate goods constitute 16 percent.

China imports a significant amount of organic chemicals and petrochemicals from Middle Eastern countries in the form of intermediate goods. In essence, even if a small percentage of total imports into China cater to the demand in the Western provinces, billions of dollars worth of raw material can be shipped through Gwadar port.

There is also potential to set up manufacturing plants that add value to products shipped from Gwadar to China through Pakistan. UNCTAD’s liner shipping connectivity index, which considers the position in maritime transportation networks, ranks Pakistan at 49. This itself is critical as not only does China rank 1st, but the top five ranks are all either East or South-east Asian countries.

In essence, Pakistan needs a rethink on its trade strategies, particularly if it has to achieve the potential that CPEC offers to its exporters. This must involve ensuring trade facilitation and infrastructure converge to the best international standards

To improve maritime connectivity, Pakistan will have to increase its maritime activity by not only attracting more cargo ships into its ports but also improve the total volume of freight handled at the port. This will require an improvement in customs and transit facilities as well as ensuring more effective process and procedures with the customs authorities.

Challenges

Pakistan has to reduce its tariffs on the imports of primary products. According to the data extracted from World Bank’s World Development Indicators (WDI), Pakistan reports a higher weighted average for tariffs on primary products relative to India and China. These tariffs may discourage efficiency-seeking investments that would otherwise take advantage of the location and the available resources, for example, unskilled labor, that are abundant in Pakistan.

Further, trade regulations imposed by China and other trading partners can be a significant challenge for Pakistani firms, particularly as regulations on the quality and standard of imports into Pakistan may vary significantly from that expected on imports into China. According to a recent report by the International Trade Centre and the World Bank on trade-related regulatory barriers, 60% of agricultural exporters and 47% of manufactured goods exporters struggle with trade regulations.

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It is important to note that China imposes stringent technical measures to regulate its imports. Hence, better standardization of regulation with major regional trading partners, more transparency in documentation, upgrading of customs infrastructure that ensures compliance and more streamlined trade procedures will help increase intra-regional trade with China. In essence, Pakistan needs a rethink on its trade strategies, particularly if it has to achieve the potential that CPEC offers to its exporters. This must involve ensuring trade facilitation and infrastructure converge to the best international standards.

Dr. Aadil Nakhoda is an assistant professor at the Institute of Business Administration, Karachi, and a research fellow at the Center of Business and Economic Research (CBER) at IBA. He holds a PhD in international economics from University of California, Santa Cruz, and specializes in international trade. He tweets @EconomistAadil.

The views expressed in this article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.

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