China is using the Free Trade Agreement (FTA) as a cruel leverage under the umbrella of CPEC to the detriment of the economic interests of Pakistan. FTA- II will provide 75 percent zero tariff lines for a wide range of cheaper Chinese imports. It will destroy the local industry and shatter the hopes of much trumpeted new phase of industrialization in the form of joint ventures between the Pakistani and Chinese entrepreneurs in the special economic zones (SEZs).
Ironically, the Ministry of Commerce is not taking on board the Federal Bureau of Revenue (FBR) and Board of Investment (BOI) about the tariff lines slashing import duties to zero. The FTA-I which offer 35 percent tariff lines with zero duty has caused huge losses to domestic business. Pakistani manufacturers are now compelled to import goods from China and sell them as ‘Made in Pakistan’ in the local market. It is widely believed that FTA-II will adversely hit the federal revenues from custom duty, but advisor to the Prime Minister Miftah Ismail has created an impression that it will boost exports from the current level of $ 1.5 to $ 9billion, which is a false notion keeping in view the devastating effect of FTA-I raising trade with China from 3.5billion to $ 12.5 billion. If an FTA-I with 35 percent zero tariff lines has brought such a big disaster in external balance then how FTA-II providing 75 percent zero tariff lines for Chinese imports will give a tremendous boost to country’s’ exports to $ 9 billion.
Exports to China cannot be increased due to lack of diversification and high cost of doing business caused by sky high energy input prices and irrational taxation structure. Pakistan has slipped to 147th position in the World Bank Index of Ease of Doing Business index over the past two years. A few months ago, BOI asked the Commerce Ministry for a coherent investment policy so that negative impact of FTA-II could be minimized. The Commerce Ministry agreed but did not frame a policy to ward off the likely fall out of the second phase of Free trade agreement with China.
The government made the people believe, in a report of the State Bank of Pakistan, that CPEC may see relocation of complete industrial units and transfer of technology to SEZs which will include low end textile manufacturing and basic food processing units from China. Later, fertilizers, steel, automobiles, plastic products and other manufacturing industries may also see a similar trend. But all this is now at stake due to the FTA-II. Because of the barrage of tariff and non-tariff restriction slapped on Pakistani goods and primary commodities, the value of exports to China remained feezed at $ 1.5 billion over the past eight years but Chinese imports rose from $ 4 billion to $ 14 billion because of zero tariff concessions given to it under FTA-I
Pakistan does not have much to offer to China. Its exports of cotton, rice, raw hides and skins, vegetable and food products face numerous tariff and non-tariff barriers. On the contrary, Chinese imports of machinery, fertilizers, chemicals, yarn, iron , steel, synthetic textile fiber, road vehicles and auto parts, fruits and vegetables and a number of other goods enter our markets with zero tariff. The negative effects of FTA are like the IPP agreements that were made by PPP government giving the impression that the agreements will turn Pakistan into another industrial and business hub like Hong Kong. But these agreements trapped the country into the quagmire of recurring massive circular debt accumulations and abnormal increase in the cost of doing business, resulting in the transfer of large number of textile units to Bangladesh in the pursuit of inexpensive energy inputs.
US President Donald Trump, as a part of his America first campaign, levied heavy duties on the import of steel and few other items to reduce the trade deficit. If a resilient economy of the United States cannot endure the jolts of free trade agreements and a wave of protectionism has started in Europe then how a weak and debt riddled economy of a developing country like Pakistan can afford the luxury of 75 percent tariff lines with Zero import duty. The incumbent government should avoid the signing of FTA-II with China at the tail end of its tenure. It is now for the opposition political parties, particularly PTI, to agitate this issue in the parliament in the larger interest of the country and its people.