Sound planning is key to achieving the full benefit from Free Trade Agreements with Central Asian countries
Regional integration and multilateral trade are beneficial for the participating countries provided that they tap the existing potential intelligently. The European Union and the ASEAN are relevant examples; their members set common goals for the prosperity of their peoples.
Pakistan, too, has been a member of regional trade blocs in the past and benefitted from such association. Lately, there has been a focus on increasing trade and cooperation among regional countries. This has been supported by the Asian Development Bank and the Central Asia Regional Economic Cooperation (CAREC) Institute under the CAREC framework. The CAREC is an inter-governmental forum representing 11 countries: Afghanistan, Azerbaijan, China, Georgia, Kazakhstan, Kyrgyzstan, Mongolia, Pakistan, Tajikistan, Turkmenistan, and Uzbekistan.
The framework also focuses on the untapped potential of Central Asia and its neighbouring countries to increase integration and multilateral trade among CAREC members through free trade agreements (FTAs). The FTAs help increase trade through a lowering of tariff and non-tariff barriers among the partner countries. At the same time, other factors restrict trade in goods and services.
How can FTAs among CAREC members be made more fruitful and result-oriented? A research, titled Exploring Export Driven Growth through Free Trade Agreements – Learning from Pakistan-China Free Trade Agreement carried out last year under the CAREC Think Tanks Network (CTTN) research grants programme, takes up the example of Pakistan’s FTA with China which was signed in 2006 to explain how FTAs work and what factors should be considered to make them productive.
According to its findings, the post-FTA exports from China in 10 major industries were to the tune of $88 billion. The figure for Pakistan was $17 billion, also for 10 major industries in 2007-2018. Total export creation after the FTA was $6.1 million per annum, which was 0.02 percent of the average yearly export of the country. The analysis covered 83 industries.
The food and beverages sector had the highest (72 percent) share in export creation with China. Almost half of the industries in textiles sector, meanwhile, diverted their exports from other countries towards China. This was despite the fact that the textile sector receives the most subsidies from the government. This export diversion is not a welcome development because if the increase in exports with FTA partners comes at the cost of reduced exports with non-FTA partners, there is no real gain from the agreement.
The findings hint at the need for policy changes like targeted subsidies to export-creating industries that may give better results than across-the-board subsidies to all industries in a sector.
Anwar Shah, a member of the research team from the Quaid-i-Azam University, Islamabad, says that a major factor behind low export creation has been the unavailability of surplus production from domestic industries. “There is a strong need to enhance the production capacity of industries to increase their ability to export as low production and high domestic demand hinder an export-driven growth strategy even with FTAs.” He says Pakistan uses about 94 per cent of its raw cotton output domestically. This leaves only a 6 per cent exportable surplus.
The focus of the fiscal and trade policy of CAREC countries should be on enhancing the exportable surplus of domestic industries, especially those already producing to export.
“The negotiations of tariff lines in the FTAs should be based on the exporting capacity of the industries. The existing trade agreements between CAREC members may also be re-negotiated on the basis of providing greater market access to higher export-creating industries and limiting the access of export-diverting industries,” the research says.
If we look at the figures, Pakistan’s trade with nine countries of CAREC (excluding China) is on average $2.4 billion per annum, which is very low. Pakistan enjoys a trade surplus with this region. However, almost half of the exports to CAREC region come from food and beverages sector, i.e, rice, sugar and fruits and vegetables. Pakistan should also explore its competitive advantage in agriculture and livestock, especially for future FTAs with CAREC countries, and introduce branding and marketing for final goods.
Syed Shakeel Shah, a director and Pakistan representative at the CAREC Institute, refers to the research and says, “This is one of the knowledge products that we help create to advance regional cooperation and contribute to the partnership for sustainable development goals.” He says there is immense potential for Pakistani exports to other CAREC countries in several sectors including sugar, rice, ethanol, food products, sports goods and textiles; even light engineering products.”
Lastly, the research makes recommendations for better results, some of which follow:
The subsidies given to textile, leather and carpet sectors have not resulted in any significant gain in exports. The results call for action on the policy side as targetted subsidies to export creating sector may give better result than across the board subsides to all industries in this sector. The export subsidy policies in CAREC countries may be based on export creation of the industries instead of rewarding industries that have the highest share in exports. Highest share may not necessarily result in continuous increased exports.
As domestic consumption is growing for many industries at a higher rate than the production, the ratio of surplus outcome may decline significantly over the coming years. Therefore, the focus of the fiscal and trade policy of CAREC countries should be on enhancing the exportable surplus of the domestic industries especially those which are already producing to export but require a conducive environment to increase their production. Policies that may enable the domestic industries in boosting their output include energy tariffs, taxation, vertical and horizontal linkages, subsidies and localisation of raw materials.
Food and beverages remain the best performing sector in terms of export creation. A majority of the exports emerge from low-value added agriculture and livestock sector. Pakistan can tap this competitive advantage by incentivising the technological progress in agriculture sector and introducing agricultural branding and marketing for the final goods. This use of branding and marketing can be significant if food and beverages sector is included in a future Pakistan-CAREC FTA.
The subsidised sectors sports goods and surgical instruments sectors have created significant new exports for Pakistan. These sectors are located mostly in Sialkot and have the status of a cottage Industry. The results call for policy action to support these industries as these have shown promising results in Pakistan-China FTA. A major breakthrough can result from declaring Sialkot Cottage Industry a special economic zone.
The writer is a staff member