Pakistan, China to set up free trade area
(China Business Weekly)
Updated: 2004-12-26 11:01

China and Pakistan are poised to widen the silk road between them by building a free trade area (FTA).

For Pakistanis, it is mainly a "cotton road.''

Currently, 70 per cent of Pakistani exports to China are cotton yarn and cotton fabric.

However, the country is also keen to promote its other products ranging from mangoes to footballs.

During Pakistani Prime Minister Shaukat Aziz's visit to Beijing last month, a protocol was signed for the talks on the establishment of an FTA between the two nations, currently with an annual trade volume of around US$2.5 billion.

Negotiations will start in January and could be concluded within one year.

"I believe Pakistan and China will be very accommodating to each other in the FTA talks because of good relations between the two countries,'' Tariq Ikram, minister of state and chairman of the Export Promotion Bureau of Pakistan, told China Business Weekly in an interview.

"Pakistan will respect China's needs, and China will also respect ours. The negotiations will not be difficult.''

Chen Chao, an official with the International Trade Department of China's Ministry of Commerce, also said the relationship between the two nations is a very favourable factor for the FTA talks.

In economic terms, it would not be hard to obtain a win-win deal, he said.

"The difference between Chinese and Pakistani goods in bilateral trade is relatively big and the number of their competing goods is relatively small,'' he said in a written interview with China Business Weekly.

Currently, more than 70 per cent of Pakistan's exports to China are cotton yarn or cotton fabric. The rest are leather products, minerals and seafood. China's main shipments to Pakistan include machinery equipment, chemicals, electronics and footware.

Now Pakistan intends to sell more grain, fruit and vegetables to China.

Shahid Mahmood, commercial and economic counsellor of the Pakistani Embassy in Beijing, said an "early harvest programme,'' which will mainly focus on agricultural products, is expected to be rolled out six months after the FTA talks are launched.

Quarantine is a key issue here. Pakistan's Ministry of Agriculture and China's General Administration of Quality Supervision, Inspection and Quarantine are already talking about a mechanism to grant certificates to qualified Pakistani exporters.

The farm products Pakistan wants to sell to China include rice, mangoes, potatoes, onions, dates and apricots.

People in Beijing and Shanghai will not see much of these Pakistani produce appear in their supermarkets because, according to Mahmood, they will mainly target China's western regions, with which Pakistan has fairly good land transportation connection.

Mahmood said he recently travelled along the roads linking China's Xinjiang Uygur Autonomous Region and northern part of Pakistan and found conditions there are satisfactory enough for the expansions of cross-border trade.

For the Chinese side, a market with 150 million people in Pakistan is undoubtedly a source of great opportunities. A Sino-Pakistani FTA, which will mean less or zero tariffs for many products, could make the market more attractive.

Ma Chunyan, an official with the chemical section of the China Council for Promotion of International Trade, sees a great market for Chinese pesticide and fertilizer producers.

"I know a woman making 1 million yuan (US$120,000) in commission this year by serving as an agent selling pesticide to Pakistan,'' she said.

Chinese business people can benefit from the FTA not only by selling China-made goods, but also by investing in the country, Ma said.

Some Chinese pesticide producers are already thinking about investing in Pakistan because of the market demand and low labour costs, she said.

Investing in Pakistan

Chinese companies already account for an important part of foreign investment in Pakistan. About 500 foreign companies are now operating in Pakistan, 60 of which are Chinese.

Many of these companies are operating in the public utilities and infrastructure sectors, such as mining, telecommunication and energy.

But an increasing number of Chinese consumer goods manufacturers are entering the country. White goods maker Haier is already there and so are Shenzhen-based telecommunications firm ZTE, Shanghai-based electronic maker SVA and a number of motorcycle companies from Chongqing.

Ikram said Pakistani industries -- including fishing, stone processing, automobiles, food processing, bicycles and gem stone cutting and polishing -- welcome foreign investments in particular.

Mahmood made a special reference to food processing, which is suitable for enterprises of different sizes.

"A small investment (in food processing) could bring huge dividends,'' he said.

Nasir Hussain, the National Bank of Pakistan Beijing office's chief representative, offered an additional angle in commenting on the benefits for Chinese companies' investing in Pakistan. The bank is the nation's largest commercial bank.

"Chinese companies can use Pakistan as a gateway for penetrating markets in Central Asian countries,'' he said.

His bank already provided banking services to Chinese companies doing business in Pakistan, Afghanistan and Kyrgzstan. No Chinese banks have operations in this area.

Pakistani investment in China is relatively small. The most remarkable area might be the manufacturing of leather products, according to Mahmood. This industry is mainly in East China's Fujian Province and South China's Guangdong Province.

FTA was raised at a time when such trade arrangements are becoming increasingly popular and Pakistan stepped up its efforts to promote trade and investment.

China is holding FTA talks at different levels with countries in Southeast Asia, around the Gulf and in Latin America. Pakistan has signed an FTA agreement with Sri Lanka. It is discussing the same issue with Iran and Bangladesh.

It is just natural that China and Pakistan should also establish an FTA, said Sun Shihai, a senior research fellow with the Institute of Asia-Pacific Studies under the Chinese Academy of Social Sciences.

During the past few years, the Pakistani economy has shook off stagnation and become healthier. The economy is estimated to grow by 7 per cent in 2004, as compared to zero growth five years ago. Inflation has dropped to a benign 4.5 per cent from 10 per cent in 1999.

The country is to hold an exposition -- which is said to be the biggest in the country's history -- in early February to promote trade and investment. The country's diplomats and trade officials are busy trying to attract business people across the world to the fair.

Implications for security

It is hard to talk about going to Pakistan without touching on the question of security thanks to the country's proximity to Afghanistan. The recent Chinese hostage incident just added Chinese business people's sense of uncertainty regarding doing business in Pakistan.

But Ikram said the chances of such incidents taking place in Pakistan is not bigger than most of other places on the globe.

"Most of the terrorists that entered Pakistan after 9/11 have been finished,'' he said.

In fact, the establishment of a Sino-Pakistani FTA will also be significant in terms of security, said Sun.

He said the FTA will enrich the contents of the relationship between China and Pakistan, which already call each other "all-weather friends.''

Developing economic co-operation is key to social stability in the cross-border area because economic growth can significantly reduce violence and separatism in this area, he said.

Ikram said the FTA would not have a big impact on other economies in the South Asia because Pakistan and other economies export different commodities to China.

China's trade volume with Pakistan now accounts for 20 per cent of China's total trade with South Asia, which also includes India, Nepal, Bangladesh, Sri Lanka and Maldives.

South Asian nations are discussing an FTA of their own.

In fact, China is active in promoting economic co-operation with the entire region. A conference was held last week in Kunming, in Southwest China's Yunnan Province, on co-operation between Yunnan, South Asia and Southeast Asia.

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