Trade ties with China

Oct 11, 2017
A new paper from the State Bank of Pakistan draws attention to the implications that our growing trade ties with China have for Pakistan’s economy. Although CPEC commands all attention these days, the trade relationship between the two countries has largely receded into the background in the economic conversation. Yet it is here that both countries have taken the largest strides over the last decade, with Pakistan’s share of bilateral trade reaching $13.8bn in 2016, up from $2.2bn in 2005, a near six-fold increase and possibly the fastest-growing trade relationship that we have with any other country. At the heart of this is the free trade agreement that both countries signed in 2006, and which has been stuck in negotiations for expansion since 2012 with the talks continuing to the present day.
The document, which does not represent the official view of the State Bank but is part of its Working Paper series, notes the rapid increase in bilateral trade. However, it argues that the trade relationship “remained tilted in China’s favour” because the growth rate of Pakistan’s imports from the former country was more than double that of exports since the agreement went into force. Today, China is the single largest source of Pakistan’s non-oil imports, according to the paper. It is important to bear in mind that this is not uniformly a bad situation. It would be simplistic to measure the success of a trade relationship on the basis of the quantum of trade balance alone. As the authors of the report note, many of the imports coming from China consist of growth supporting capital goods, as well as ‘import substitution’ of those goods that were previously imported at higher prices from other countries but that now come from China. These are positive developments, and show that trade ties need not necessarily be in balance or surplus to be called healthy.
However, what matters is the future trajectory of this relationship, more than its past evolution. For example, at some point imports should either hit a plateau or enter into a decline as capital goods imported into Pakistan lift productivity and their output finds its way back into the Chinese market. Likewise, the substitution effect should not be expected to continue indefinitely. At the moment, 75pc of Pakistan’s exports to China consist of raw materials — cotton and rice — while the majority of imports consist of finished goods and machinery. This relationship can be healthy only for a period of time; if it becomes a permanent state of affairs, its effects on the domestic economy can be harmful. It is imperative, therefore, that the government remain alert and vigorous when formulating its own economic interests as it negotiates the future of Pakistan’s growing engagement with China.
Dawn News, October 11, 2017

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