The Opportunities and Pitfalls of Pakistan’s Trade with China and Other Neighbors
January 07, 2014
Naved Hamid* and Sarah Hayat**
1.
Introduction
There is increasing recognition in Pakistan that regional trade could
be an important driver of growth for the country. However, much of this debate
has focused on India–Pakistan trade.[i] While,
undoubtedly, trade with India could give a tremendous boost to Pakistan’s
economy, there are other neighbors with whom trade could be equally important.
We propose to look at this neglected aspect of regional trade and show that
promoting trade with the rest of Pakistan’s neighbors could have a significant
positive impact on the country’s growth over the next decade or more. Trade
with India and trade with the other neighbors are two sides of the same
coin—promoting trade with both would have tremendous synergies. The overall
impact on Pakistan’s economy could well be to raise the trend growth rate for
the next decade or so by 2 to 3 percentage points above the historical trend
growth rate of 5.5 percent per annum.
Section 2
provides a review of the trends in growth in trade, particularly exports in the
last decade. In the next three sections, we discuss trends in exports at the
aggregate and commodity level, as well as the pitfalls, opportunities, and
appropriate policies to promote exports with respect to Pakistan’s three
largest trading partners of its neighboring countries, i.e., China, the United
Arab Emirates (UAE), and Afghanistan. Section 6 briefly reviews the potential
for trade with Central Asia, overland through Afghanistan. Section 7 concludes
the chapter.
2.
Regional Trade
There is an
impression that Pakistan trades (excluding imported crude oil and petroleum
products) primarily with the West. This was the case for a long time, but it
has changed in the last decade. In 2011, about 25.1 percent of Pakistan’s
exports and 35.3 percent of imports were from neighboring countries (UAE,
China, Afghanistan, India, and Iran); as a group, these neighbors are now are
more important for Pakistan’s trade than North America and about as important
as Europe (Table 14.1). The fact that trade between Pakistan and its neighbors
has increased so rapidly, despite the lack of progress in formal regional
economic agreements such as the South Asia Free Trade Area (SAFTA) and Economic
Cooperation Organization (ECO), is indicative of the potential and dynamics of
trading with neighboring countries.
Table
14.1: Pakistan’s trade in 2011
Country
|
Exports
|
Imports
|
||
USD billion
|
% Share
|
USD billion
|
% Share
|
|
Neighbors*
|
6.4
|
25.1
|
15.4
|
35.3
|
North America
|
4.0
|
15.8
|
2.4
|
5.5
|
Europe
|
6.4
|
25.3
|
4.7
|
10.8
|
East Asia (excl. China)
|
1.4
|
5.4
|
7.0
|
16.1
|
Pakistan‘s total
|
25.3
|
43.6
|
||
Note: * China, UAE, Afghanistan, India, and Iran.
Source: United Nations Statistics Division, UN comtrade.
This chapter
focuses primarily on exports. This is not to imply that imports are not
important, but simply that, historically, poor export performance has been
Pakistan’s Achilles’ heel and the main reason for the country’s stop-go growth
experience since the 1970s. Therefore, it is critical for Pakistan to improve
its export performance, and to do that it must diversify its exports both in
terms of products and markets. We show that this had already started happening
in the last decade due to growing trade with its neighbors. We also argue that
these neighbors could provide the dynamic and potentially large export markets
that might help resolve Pakistan’s historic export dilemma and serve as one of
the drivers of its growth for the next decade or more.
In the last decade, although aggregate exports to neighboring countries
fluctuated greatly, they grew at an average of more than 19 percent per annum
compared to only 6 percent to the rest of the world (Figure 14.1). As a result,
its neighbors’ share in Pakistan’s total exports increased from less than one
tenth to about one fourth in 2010, when three of the world’s five top export
markets for Pakistan were neighboring countries.
Figure
14.1: Trends in Pakistan’s exports to its
neighbors and ROW*
Note: ROW = exports to world – exports to neighbors.
Source: United Nations Statistics
Division, UN comtrade.
In the last
decade, exports to all neighboring countries grew more rapidly than to the rest
of the world, but exports to Afghanistan grew fastest (Table 14.2). As a
result, Afghanistan’s share of Pakistan’s exports increased
eight-fold, making it the second most important export market in the world for
Pakistan in 2011 (after the US). The next most rapid growth in exports was to
Iran, but this was from a very small base and, consequently, total exports to
Iran were still relatively small in 2011. China’s export share increased by
about 2.5 times during this period and that of the UAE almost doubled, making
them the third and fourth most important export markets in the world, respectively,
for Pakistan in 2011. Although exports to India increased more slowly than to
the other neighbors, they grew faster than exports to the rest of the world.
Table
14.2: Neighbors’ export shares, 2000–11
Country
|
2000
|
2011
|
||
USD million
|
% Share*
|
USD million
|
% Share*
|
|
UAE**
|
304.5
|
3.3
|
1,558.3
|
6.3
|
Afghanistan
|
124.0
|
1.3
|
2,660.3
|
10.5
|
China
|
244.6
|
2.7
|
1,678.9
|
6.6
|
India
|
65.0
|
0.7
|
272.8
|
1.0
|
Iran
|
16.6
|
0.2
|
153.3
|
0.6
|
Neighbors’ total
share
|
754.8
|
8.2
|
6,353.5
|
25.1
|
Pakistan‘s total
exports
|
9,201.1
|
21,413.1
|
||
Notes: * As a percentage of
Pakistan‘s total exports. ** Data for UAE is based on import values reported by
UAE.
Source: United Nations Statistics Division, UN comtrade.
In brief, regional trade expanded rapidly during the last decade with
imports and exports from Pakistan’s neighbors increasing, on average, by 17 and
19 percent per annum, respectively. However, while the growth in exports to all
the neighboring countries was high—ranging from 29 percent per annum for
Afghanistan to 15 percent per annum for India—the products exported and the
factors responsible for this growth were quite different for each country.
Therefore, it is necessary to look in more detail at each individual country’s
experience to form an idea of the nature of expansion in regional trade in the
last decade, as well as the potential opportunities and pitfalls. The next
three sections examine in greater detail the trends in export growth in the last
decade for China, the UAE, and Afghanistan, both at the aggregate and product
levels.
3.
People’s Republic of China
China has been the world’s fastest-growing
major economy for many years; it is now the world’s second largest economy, after the US, the
largest exporter, and the second largest
importer of goods. Its overall trade was
more than USD 3.6 trillion in 2011, with exports and imports of USD 1.9 trillion
and 1.7 trillion, respectively (International Monetary Fund, 2011). China’s outward foreign direct investment (FDI) has also shown
a marked increase in recent years, and was USD 65 billion in 2011 (United
Nations Conference on Trade and Development, 2012).
Overland trade ties between Pakistan and China were established in
1979, following the completion of the all-weather Karakoram Highway. However, a very small
proportion of Pakistan’s trade with China is through this route, and the
overland link is seen primarily as enhancing the country’s defense. In fact,
Pakistan has always looked at China largely from a security perspective—as a
counter to political pressure from the US, support in a confrontation with
India, and as a source of military hardware. China, as an emerging global
economic power, offers immense opportunities to Pakistan, particularly as a
neighbor and an old ally.
Pakistan’s economic interdependence with China has grown rapidly in the
last decade—in 2010, the latter was Pakistan’s second
largest source of imports and its fourth largest market for exports.
Pakistan’s exports to China grew rapidly throughout the decade, with growth
accelerating sharply following the signing of a free trade agreement (FTA) in
2006. The average annual export growth increased from 19 percent between 2003
and 2006 to 28 percent from 2007 to 2011. As a result, China’s share in
Pakistan’s exports almost doubled in just three years (Table 14.3).
Table 14.3:
Pakistan’s exports to China (USD million)
2000
|
2003
|
2005
|
2007
|
2011
|
||||||
Value
|
% Share
|
Value
|
% Share
|
Value
|
% Share
|
Value
|
% Share
|
Value
|
% Share
|
|
Exports
|
244.6
|
2.7
|
259.6
|
2.2
|
435.7
|
2.7
|
613.8
|
3.4
|
1,678.9
|
6.6
|
Source: United Nations Statistics Division, UN comtrade.
Even though aggregate exports to China have
increased rapidly, one needs to look at the structure of exports to fully
understand the dynamics of this change. A review of the structure of exports
reveals two things. First, the export structure in 2011 is not encouraging,
with raw materials and primary manufactures such as cotton fiber, chromium
ores, and cotton yarn accounting for 63 percent of total exports (Table 14.4).
Second, this structure has not changed much in the last decade—the same six
commodities account for over 80 percent of exports in 2000 and 2011. However,
over the 11 years, the shares of chromium ores and cotton yarn have increased at
the expense of cotton fabrics, a change that most would see as a move backward.
Table
14.4: Structure of Pakistan’s exports to
China, 2000–2011
No.
|
Commodity
|
2000
|
2011
|
||
USD million
|
% Share*
|
USD million
|
% Share*
|
||
1
|
Cotton yarn, excl.
thread
|
100.0
|
40.9
|
869.9
|
51.8
|
2
|
Chromium ores and
concentrates
|
4.5
|
1.8
|
97.4
|
5.8
|
3
|
Cotton fabrics, woven
|
56.5
|
23.1
|
179.1
|
10.7
|
4
|
Textile fibers:
cotton
|
10.7
|
4.4
|
87.1
|
5.2
|
5
|
Fish, crustaceans,
mollusks
|
15.3
|
6.3
|
49.1
|
2.9
|
6
|
Leather
|
15.9
|
6.5
|
47.5
|
2.8
|
7
|
Machinery and transport
equip.
|
0.8
|
0.3
|
8.1
|
0.5
|
8
|
Plastics in primary
form
|
2.5
|
1.0
|
46.7
|
2.8
|
Subtotal
|
206.2
|
84.3
|
1,384.9
|
82.5
|
|
Total exports to China
|
244.6
|
1,678.9
|
|||
Note: * = as a percentage of
Pakistan‘s total exports to China.
Source: United
Nations Statistics Division, UN comtrade.
Pakistan needs to shift from exporting primary commodities and simple
manufactures to higher-value-added products, if export growth is to be
sustained and exports are to contribute to expanding employment and GDP in the
country. The FTA with China should give Pakistan an edge over other countries
in a number of potentially high-growth products as it provides market
access at zero duty for cotton fabrics, bed-linen and other home textiles, leather articles, sports
goods, and fruits and vegetables among other goods (Pakistan, Ministry of
Textile Industry, 2008).
However, in almost all these products, Pakistani exporters have failed to make
headway because of nontariff barriers. For example, Pakistan is a major exporter of towels and
bed-linen to the US and Europe, but exports of these products to China are
negligible.[ii] Pakistan
needs to focus on having these nontariff barriers removed in areas that are its
export strengths, such as cotton fabrics, bed-linen, towels, and sports goods.
Besides exports, investment from China could
provide a major boost to Pakistan’s export industry. According to Eichengreen, Rhee, and Tong
(2007), the structure of China’s exports has been changing over the years—from
“clothing, footwear, other light manufactures and fuels that dominated its
trade in the 1980s and early 1990s, toward office machinery,
telecommunications, furniture, and industrial supplies in the late 1990s and
automated data processing equipment and consumer electronics in recent years”
(p. 202). In other words, China has been moving up the value chain, but because
of its huge labor force, it has
continued to export labor-intensive products as well. However, after almost 30
years of rapid growth, most of the surplus labor has now been absorbed and
wages are rising rapidly, particularly in the coastal belt. As a result,
exporters in China are losing competitiveness in the more labor-intensive
industries and beginning to look at the possibility of relocating these industries
elsewhere.
In Asia, this has happened many times before, i.e., as wages rose in one
country, its export industry tended to move to manufacturing more sophisticated
products at home and relocated the labor-intensive product processes to
neighboring countries. This started with industry relocating from Japan to
Korea, Taiwan, Singapore, and Hong Kong in the 1960s and 1970s, then to
Thailand, Malaysia, and Indonesia in the 1980s and to China and Vietnam in the
1990s and 2000s. This process has often been referred to as “the flying geese
model of Asian economic development,” with Japan in the forefront (Kojima,
2000; Kumagai, 2008).
Owing to China’s huge labor force, it has taken much longer for this
process to start, but it is beginning to happen, with industry being relocated
to Vietnam, Laos, and Cambodia. According to the World Investment Report 2011, “A new round of industrial
restructuring and upgrading is taking place in China, and some low-end,
export-oriented manufacturing activities have been shifting from coastal China
to low income countries in South-East Asia and also Africa” (United Nations
Conference on Trade and Development, 2011, p. 50). However, the Southeast Asian
countries do not have enough population to absorb a significant portion of the
labor-intensive industry relocating from China once the process starts in
earnest. South Asia, because of its large population, should be the main
recipient of this industry and Pakistan should aim to be the leader in this
regard.
This is a
window of opportunity for Pakistan, which has a large textile sector as well as
strong clusters in sports goods, surgical instruments, and light engineering.
It therefore needs to develop a strategy to attract Chinese investment in these
areas. Thus far, Pakistan’s approach has been the traditional one, i.e., trying
to attract investment from China in import-substituting industry by providing
incentives, including special industrial zones, and corporate income tax and
import duty concessions for the manufacture of consumer durables, such as
televisions, refrigerators, air conditioners, washing machines, etc. This
strategy has failed in the past and it is unlikely to do much better this time
since it will only attract investment for assembly plants producing for the domestic
market.
Pakistan’s strategy should aim to attract Chinese investment into export
industries, particularly those labor-intensive industries that are likely to be
relocating out of China in the next 10 years and that are also Pakistan’s
strengths, such as garments, textiles, leather and footwear, surgical goods,
cutlery, and sports goods. The strategy needs to be developed in partnership
with larger exporters and the representatives of export associations in these
industries. Once such a strategy is developed, the government should leverage
its long-standing relationship with the Chinese government to garner the
latter’s support in implementing the key elements of the strategy.
In addition, Pakistan should seize the opportunity provided by China’s
drive to accelerate development in its western provinces. The Karakoram Highway provides the shortest overland route to the sea
for these provinces, and China has indicated an interest in upgrading the
highway to handle heavy traffic. If Pakistan were to prioritize this project
and control the movement of Islamic militants crossing over into China, the
resulting transit trade through Pakistan could provide a tremendous boost to
economic activity. It would attract Chinese investment into the northern
regions of Pakistan and create opportunities for the export of Pakistani
products to western China.
Any discussion
on Pakistan’s economic relations with China would be incomplete without at least
a brief look at the import side. Pakistan’s imports from China have grown
dramatically from about USD 0.6 billion in 2000 to USD 6.5 billion in 2011.
China’s share in Pakistan’s total imports has increased from less than 5
percent to over 15 percent during this period. This is not surprising since China’s exports to the
rest of the world have also grown rapidly, but because of Pakistan’s security dependence on China, the government tends to
turn a blind eye to violations on imports from the latter. This has provided an
opportunity for collusion between unscrupulous Pakistani importers and Chinese
exporters to misclassify imports from China and understate their value to evade
import duties and taxes. As a result, the actual increase in imports has been even
greater than that indicated by official figures.
Although there
is no way to estimate the full extent of tax evasion, one can get a rough idea
of the undervaluation by comparing the value of “imports from China” reported
by Pakistan and “exports to Pakistan” reported by China in the UN comtrade
dataset. Exports reported by China exceeded imports reported by Pakistan by 30
percent in 2011 (Table 14.5). The underreporting is probably even greater since
exports are reported on a free-on-board (f.o.b.) basis and imports on a
cost-insurance-and-freight (c.i.f.) basis, and the cost of “insurance and
freight” is generally between 10 and 20 percent of the import value (see World
Bank, n.d.). Even with a conservative 10 percent adjustment for insurance and
freight, the underreporting comes to 43 percent. Thus, actual imports from
China in 2011 were in the range of USD 8.5 billion to 9.5 billion.
The problem is not only the loss in government revenue, but also the
impact of this “unfair” competition on domestic industry. The rapid growth in
imports from China has decimated a number of industries in Pakistan; generally,
these have been industries that were dominated by small to medium firms
producing for the local market. This was not because the imported products were
of better quality—based on anecdotal evidence and personal experience, they are
in many cases of very poor quality and often imitations of established local
brands—but because they were extremely cheap due to the evasion of taxes and
import duties. Small local producers were unable to compete with these products
because the effective tariff (including sales tax) on the final product
imported from China is, in many cases, substantially lower than the effective
tariff on the raw materials used by small manufacturers in Pakistan. Small
producers have to buy raw materials from commercial importers, who have to pay
the statutory rates of duties and a 16 percent sales tax on the duty-paid value
of imports because they are not eligible for the concessions that large
manufacturers enjoy under Pakistan’s notorious Statutory Regulatory
Order regime (Pursell, Khan, &
Gulzar, 2011).
Table
14.5: Pakistan–China trade: Value
understatement (USD
million)
Reporting country
|
2000
|
2003
|
2005
|
2007
|
2011
|
Imports reported by
Pakistan
|
550.1
|
957.3
|
2,349.4
|
4,164.2
|
6,470.6
|
Exports reported by
China
|
670.3
|
1,855.0
|
3,427.7
|
5,831.4
|
8,439.7
|
Source: United Nations Statistics Division, UN comtrade.
However, the impact of Chinese imports has not been all negative. There
has been a huge consumer gain in industries where Pakistan did not have any
local manufacturing, such as mobile phones. Pakistan would have never achieved
the tele-density that it has, if only “full” duty-paid and sales tax-paid
phones were available in the market. In the motorcycle industry, which was
highly protected and had an oligopolistic structure, Chinese imports have led
to huge producer and consumer gains. The opening up of the motorcycle industry
by removing entry restrictions on the assembly of motorcycles and allowing the
import of parts and components from China in 2006
resulted in a dramatic growth spurt in the industry. The domestic production of
motorcycles rose from less than 600,000 in 2004/05 to over 1.6 million in
2010/11 (Association of Pakistan Motorcycle
Assemblers, 2010). One of the reasons for the large increase in size of the domestic
market for motorcycles was probably the decline in their price in real terms (by
about 40 percent) between 2006 and 2012.[iii]
Thus, a sensibly designed and implemented trade policy—for example, one
that eliminates the distinction between commercial and industrial importers of
raw materials and components—would not only mitigate the negative impact of
imports on the local industry, but also dramatically improve its prospects.
Clearly, the automobile industry in Pakistan is a prime candidate for
“motorcycle industry-type” opening up to imports from China and India.
4.
United Arab
Emirates
The UAE is Pakistan’s closest neighbor by
sea (after Oman)—the distance from Karachi
to Dubai is almost the same as from Karachi to Islamabad. Estimated to have 8.5 percent of the world’s
oil reserves and the fifth largest gas reserves, the UAE’s economy and exports are obviously
dominated by the oil and gas sector. However, around one third
of its total merchandise exports are re-exports (World Trade Organization [WTO], 2012), which means that it is also an
important trading hub and packaging and distribution center. In 2010, the UAE’s total nonoil exports
(including re-exports) were USD 126.4 billion, of which India had the highest
share (33.7 percent), while Pakistan, with a 2.5 percent share, ranked among
the top ten. As for the UAE’s imports, the
top two countries for nonoil commodity imports are India and China with 17.1
and 10.3 percent, respectively (WTO, 2012), while Pakistan’s share is about 1 percent (United Nations
Statistics Division, n.d.).
The UAE is an
important economic partner for Pakistan, and there are many dimensions to the
relationship. For example, there are over half a million Pakistanis resident in
the UAE, who officially remitted USD 2.6 billion to Pakistan in 2010/11. Most
large international banks have regional offices in the UAE with many Pakistani
professionals on their staff, including in senior management positions. Most
Pakistanis traveling overseas pass through the UAE—there are more than 100
flights a week from Pakistan to the UAE, more than to any other country in the
world or between any two destinations in Pakistan. During the civil
disturbances in Karachi in the 1990s, many Pakistani business families set up
operations in UAE and it became a major destination for Pakistani investors,
particularly for real estate. Dubai is an offshore base for many Pakistani
businesses that maintain a presence there to meet with foreign buyers,
suppliers, investors, and bankers, who for reasons of security or inconvenience
are reluctant to travel to Pakistan. Until recently, a substantial part of the
India–Pakistan trade was routed through the UAE to circumvent the trade
restrictions imposed by the two countries. Finally, the UAE is Pakistan’s
fourth largest export market, with a share of 6.3 percent of total exports in
2011.
Having so many
linkages also has its pitfalls, since it makes the UAE a convenient base for
avoiding or exploiting the Pakistan government’s economic regulations. The UAE
is the most commonly used channel for capital flight or for taking advantage of
arbitrage possibilities created by government policies. For example, when
Pakistan has provided product-specific export incentives in the past—such as
tax rebates, duty drawbacks, and subsidized credit—Pakistani businesses have
mislabeled or overvalued exports to the UAE in order to make windfall gains at
the state’s expense. This is evident from the large gap between “exports to
UAE” as reported by Pakistan and “imports from Pakistan” as reported by the UAE
in the UN comtrade dataset. Between 2003 and 2007, for instance, the former
were two to three times the value of the latter (United Nations Statistics
Division, n.d.).
It is also the
likely explanation for the large year-to-year fluctuations in the value of
exports of individual products (in the Pakistan data), since the duty drawbacks
on individual items were regularly adjusted (often in response to stories in
the press of the misuse of these incentives by exporters). For example, in 2003, “fabrics from man-made fibers” and “household linen”
accounted for 12.8 and 16.2 percent, respectively, of Pakistan’s total exports
to the UAE (as reported by Pakistan), but these fell to only 2.9 and 6.7
percent in 2005, in which year clothing exports accounted for 16.3 percent of
the total. Clothing exports came down to 6.4 percent in 2007.[iv] As
the government phased out various export incentives after 2007 because of
fiscal difficulties, the gap between the numbers reported by Pakistan and the
UAE also started to decline and had virtually disappeared by 2009.[v]
This creates a
problem in analyzing trends in exports to the UAE. To circumvent this, at least
at the aggregate level, we use the value of “imports from Pakistan” for
Pakistan’s exports to the UAE as reported by the UAE instead of “exports to
UAE” as reported by Pakistan. We see that exports so measured increased by
almost six times between 2000 and 2010, and growth accelerated after 2005 (Table 14.6).[vi] Thus,
in the last decade, exports to the UAE grew at an annual average rate of 18
percent, which resulted in the its share of Pakistan’s exports increasing from
3.3 percent in 2000 to 8.3 percent in 2010.
Table
14.6: Pakistan’s export trend to UAE (USD million)
Reporting country
|
2000
|
2003
|
2005
|
2007
|
2009
|
2010
|
Exports reported by
Pakistan*
|
516.9
|
1,010.2
|
1,012.9
|
1,503.6
|
1,340.6
|
1,497.4
|
Imports reported by UAE*
|
304.5
|
419.3
|
520.4
|
778.7
|
1,569.7
|
1,782.9
|
Note: * = excluding petroleum
exports.
Source: United
Nations Statistics Division, UN comtrade.
This rapid export growth has taken place without any
focused effort by the government. However, if Pakistan were to implement a
strategy of leveraging the existing advantages—proximity, outstanding
connectivity, its extensive banking presence in the UAE, a large Pakistani
diaspora as well as those from other South Asian countries with similar
cultures and taste, and excellent political relations—to promote exports, it
could significantly increase exports further, not only to the UAE but to the
entire region. The UAE is potentially a huge market for Pakistani consumer
products, such as packaged foods, clothing, furniture, and furnishings, and for
entertainment content such as music and television serials. It could also
become a showcase for Pakistani products for export to the rest of the world.
Some of this may already be happening, but a focused
approach by the government to promote the UAE as Pakistan’s offshore hub could
make a qualitative difference. This may involve
establishing a trade and investment liaison office in Dubai, which has
high-level representation of all the relevant government ministries and
agencies—including the Ministry of Finance, Board of Investment, and Trade
Development Authority of Pakistan—and setting up a Pakistan expo-center. The
latter should be run as a public–private partnership between the government and
major exporters/export associations. It should have, in addition to exhibition
halls, common facilities such as office space and business services for
exporters’ use to reduce their cost of interacting with international buyers
(earlier suggested in Ahmad, Mahmud, Hamid, & Rahim, 2010, pp. 43–44). In
brief, the strategy’s goal should be to make it possible for the UAE to play a
role similar for Pakistan as Hong Kong did for China in the 1990s.[vii]
5.
Afghanistan
Historically,
Afghanistan has been a major trading partner of Pakistan, though in the past
most of this trade was undocumented. Following the Soviet invasion of
Afghanistan in 1979, and the subsequent period of civil war, formal trade
between Pakistan and Afghanistan ceased but informal trade between the two
countries probably remained substantial. However, since the end of the Taliban
regime in 2001 and resumption of normal trade relations, documented trade
between the two countries has expanded rapidly. Between 2002 and 2011, there
was an eleven-fold increase in Pakistan’s exports to Afghanistan, and by 2011
Afghanistan was Pakistan’s second largest export market, accounting for 10.5
percent of the latter’s total exports.
Afghanistan is not only an important export market for
Pakistan, it has also been instrumental in the development of a number of
nontraditional exports that have long-term export potential. For example, in
2011, Afghanistan accounted for 33 to 59 percent of Pakistan’s total exports of
vegetables and fruit, petroleum products, cement, and
metal manufactures and 17 percent of its exports of machinery and
transport equipment (Table 14.7). These are
the documented exports—since informal trade between the two countries was also
substantial, Pakistan’s exports of nontraditional products to Afghanistan were
probably larger and even more diverse. The development of such exports to
Afghanistan is important. It is always difficult for a country to develop new
export products, but once the export capacity, production experience, and
domestic supply chains are developed for a particular product, it becomes much
easier to export that product to other markets. Therefore, the export of these
products to Afghanistan is likely to promote their future export to other
countries.
Table
14.7: Structure of Pakistan’s exports to
Afghanistan, 2011
No.
|
Commodity
|
Value
(USD
million)
|
% Share
|
1
|
Rice
|
165.0
|
8.0
|
2
|
Vegetables and fruit
|
297.7
|
47.5
|
3
|
Petroleum and
petroleum products
|
773.5
|
59.1
|
4
|
Lime, cement, and
construction materials
|
246.9
|
51.7
|
5
|
Metal manufactures
|
72.2
|
32.7
|
6
|
Machinery and
transport equipment
|
74.9
|
16.8
|
Subtotal
|
1,630.2
|
||
Total exports to Afghanistan
|
2,660.3
|
Note: * =
as a percentage of Pakistan‘s total exports of the commodity to the world.
Source: United Nations Statistics Division, UN comtrade.
While it is evident that Afghanistan contributed significantly to
Pakistan’s export growth in the last decade—accounting for almost 16 percent of
the entire increase in exports during this period—it could potentially have an
even greater impact in the next decade or so. No doubt, there is some
uncertainty about future political developments in Afghanistan, but Pakistan is
in a position to create a win-win outcome for both countries. However, this
will require Pakistan to switch from looking at Afghanistan through the
security lens to an economic one. If Pakistan’s decision makers are able to
change this mindset, it would greatly improve the prospects of peace. It would
also make it possible to invest in appropriate infrastructure, such as roads
and truck-ports at the border, which could have a substantial additional impact
on trade with Afghanistan.
An increase in
Afghanistan–Pakistan trade will promote prosperity in the border regions and
beyond, which should help break the cycle of militancy and violence in the
region. This, in turn, would make it easier for Pakistani banks and businesses
to establish a physical presence in Afghanistan and expand exports of Pakistani
products, such as food, textiles and clothing, tractors and transport equipment
(motorcycles, rickshaws, etc.), electrical machinery (fans, washing machines,
electric motors, etc.), and simple industrial and agricultural machinery
(lathes, diesel motors and pumps, grain threshers, etc.). Pakistan should focus
on establishing its economic presence in Afghanistan rather than worrying about
other countries capturing its markets. Cultural and ethnic linkages are
continually demonstrated to be far more powerful drivers of trade than
political affiliations; it is therefore likely that products and businesses
from Pakistan, particularly from Khyber Pakhtunkhwa, would have an edge over
those from most other countries.
As Nabi (2012) explains, the areas that now constitute Pakistan were
historically important transit hubs for trade routes between Central Asia and
Persia on one side and China and India on the other. Peshawar was a great
trading city at the time, and it has the potential of once again emerging as a
key transit hub for trade in the region. Afghanistan, neighbored by Iran to the
west and by Turkmenistan, Uzbekistan, and Tajikistan to the north, is
Pakistan’s bridge to Central Asia. It is a member of SAARC
and ECO and, given its increasing emphasis on regional trade, is undertaking
what is termed the “New Silk Road”
trade project—a major element of which is the development of
infrastructure in the country to facilitate overland trade. The Afghanistan–Tajikistan Bridge, which was completed
in 2007, is an important component of the road network for trade between
Afghanistan and Central Asia. Similarly, the Afghanistan–Pakistan Transit Trade
Agreement, signed in 2010, aims to promote not only the smooth flow of goods
between the two countries, but also to provide access to the sea for
Afghanistan and ultimately for the rest of Central Asia. Therefore, peace in
Afghanistan would not only boost Pakistan’s trade with Afghanistan, it would
also facilitate exports to Central Asia and the import of gas and power from
the latter, which could go a long way toward easing Pakistan’s critical energy
constraint.
6.
Central Asian
Republics
The Central Asian republics (CARs), i.e., Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, and Uzbekistan, with a combined population of 61
million and GDP of USD 219 billion, are becoming an increasingly important
economic region (Table 14.8). After a prolonged period of low (or negative)
growth, the region has grown at an impressive rate in the last decade. Some of
their main advantages have been their abundant natural resources (oil, gas, gold, etc.) and a “reasonable infrastructure and human
capital as legacies of Soviet rule” (Dowling & Wignaraja, 2006, p. 10).
Table
14.8: Central Asia in 2011
Country
|
Populationa
|
GDPb
|
Importsb
|
Average growth rate
2000–11
|
|
GDPc
|
Importsc
|
||||
Million
|
USD billion
|
USD billion
|
%
|
%
|
|
Kazakhstan
|
16
|
188
|
40
|
9
|
20
|
Kyrgyzstan
|
5
|
6
|
8
|
4
|
26
|
Tajikistan
|
7
|
7
|
4
|
8
|
21
|
Turkmenistan
|
5
|
28
|
7
|
14
|
16
|
Uzbekistan
|
29
|
45
|
10
|
7
|
16
|
Total
|
62
|
274
|
69
|
||
Sources: a = World Bank (2012), World
dataBank; b = United
Nations Statistics Division, UN comtrade; c = authors’
calculations using a and b.
Trade has
grown rapidly with the development of the market economy and increasing
incomes. In 2011, the CARs’ imports were USD 69 billion, having expanded at an
average rate of almost 20 percent per annum during 2000–11. Individually, all
the countries exhibited an increased demand for imports, with import growth
ranging from 16 to 26 percent per annum; in Kazakhstan, the largest of the CAR
economies, imports increased by more than six-fold in 11 years. The importance
of imports from their neighboring countries has also increased in the last
decade, the share going up from 47 to 60 percent. In 2000, Russia accounted for
the largest share of imports, but imports from China have grown dramatically,
and in 2011 it was almost the same as Russia, accounting for more than USD 18.6
billion imports (Table 14.9). The value of imports from Turkey rose nine-fold
during period, and imports from Iran also increased rapidly. However, imports
from Pakistan declined—in 2011, they were almost 40 percent of that in 2000.
The key factor in the decline was the disruption of Pakistan’s overland trade
with Central Asia because of the war in Afghanistan.
Table 14.9: The CARs’ imports from their neighbors
Country
|
2000
|
2011
|
USD million
|
USD million
|
|
China
|
767.3
|
18,585.2
|
Russia
|
2,810.6
|
19,151.5
|
Turkey
|
342.4
|
3,148.8
|
Iran
|
249.9
|
845.0
|
Pakistan
|
26.7
|
11.2
|
Afghanistan
|
-
|
10.3
|
Subtotal
|
4,196.9
|
41,752.0
|
Total imports from the world
|
8,800.0
|
69,000.0
|
Note: Export
values from partners to CARs reported.
Source: United
Nations Statistics Division, UN comtrade.
To assess the
potential market for Pakistan, it is useful to look at what the CARs are
importing from their neighbors. Imports from Russia were primarily petroleum,
iron, steel, and different types of heavy machinery and mechanical apparatus.
However, more relevant for Pakistan were the imports from China and Turkey.
Table 14.10 summarizes the CARs’ major imports from these two countries, and
also presents Pakistan’s world exports of these commodity groups. We can see
that Pakistan actually exports significant quantities of four of the ten main
items that the CARs were importing from China and Turkey in 2011. Two items of
particular interest are “clothing and accessories” and “textile yarn, fabric,
etc.”—the CARs’ two largest imports from China and also Pakistan’s biggest
exports to the rest of the world. Nonmetallic mineral manufactures, i.e.,
cement, and miscellaneous manufactured goods are also potential export items
for Pakistan.
Table
14.10: Main exports from China and Turkey
to the CARs and Pakistan’s exports of these to the world, 2011 (USD million)
No.
|
Commodity
|
China
|
Turkey
|
Pakistan’s exports to world
|
1
|
Clothing and accessories
|
4,783.2
|
127.9
|
4,549.6
|
2
|
Textile yarn, fabric, etc.
|
2,673.4
|
209.3
|
9,082.1
|
3
|
Footwear
|
1,805.3
|
27.4
|
112.3
|
4
|
Nonmetallic mineral
manufactures
|
581.6
|
91.8
|
518.2
|
5
|
Road vehicles
|
775.4
|
64.6
|
57.1
|
6
|
Special industrial
machinery
|
835.1
|
113.3
|
92.7
|
7
|
Metal manufactures
|
734.4
|
366.0
|
220.4
|
8
|
Misc. manuf. goods
|
572.8
|
232.9
|
963.4
|
9
|
Electric machine apparatus,
parts, etc.
|
654.2
|
404.6
|
53.6
|
10
|
Plastic, nonprimary form
|
173.0
|
159.7
|
36.9
|
Subtotal
|
13,588.4
|
1,797.5
|
15,686.3
|
|
Total exports to CARs
|
18,585.2
|
3,148.8
|
25,343.8
|
Note: Blank cells indicate values of less than USD 0.1
million.
Source: United
Nations Statistics Division, UN comtrade.
Given the
positive growth trajectory of the CARs and the fact that the distance from
Peshawar to Tashkent (1,281 km) is even smaller than that from Peshawar to
Karachi (1,382 km), Central Asia appears to offer huge economic opportunities
for Pakistan, both as a market for the latter’s exports and as a low-cost
supplier of energy. However, without peace in Afghanistan, which is necessary
for the transport of goods overland and for building gas pipelines and power
lines between Central Asia and Pakistan, this potential cannot be realized.
7.
Conclusion
Pakistan’s trade
with its neighbors has grown rapidly over the last 11 years; together, they
constitute the largest market for Pakistani exports. These exports are not only
important in terms of absolute value, they have also promoted the development
of new export products such as fruit and vegetables, cement, and metal
manufactures to Afghanistan; and jewelry to the UAE. Given the growth prospects
of most of the neighboring governments, we can expect the potential for
Pakistan’s exports to continue to expand. It is up to Pakistan to adopt
appropriate policies to take advantage of this potential.
This will
require a change in policymakers’ perspectives, who need to adopt an “economy
first” approach. Such a change, together with a strategy to focus in each
country on a few areas that are likely to provide the greatest immediate
benefits, could significantly accelerate exports. This may, in turn, be a
driver of sustained growth for the next decade or more. Policies with respect
to China include gaining market access for Pakistan’s exports and attracting
Chinese investment to the export industries. The UAE should be developed as an
offshore center for facilitating exports and investment inflows. Trade with
Afghanistan and Central Asia will require a change in mindset to give priority
to economic issues, measures to end the conflict in Afghanistan, and building
the necessary infrastructure for overland trade and energy imports.
* The author is director of the Centre for Research in
Economics and Business (CREB) at the Lahore School of Economics.
** The author is a teaching fellow at the Department of
Economics at the Lahore University of Management Sciences.
This
is an updated version of a paper presented at the Annual Conference on theManagement of the Pakistan Economy organized by the Lahore School of Economics
in May 2012, republished by kind permission of the Lahore Journal of Economics in September 2012.
[i] An important exception was a report prepared at the
request of Jahangir Khan Tareen, federal minister for industries, production,
and special initiatives, for the Government of Pakistan in 2005 by a team of
economists led by Ijaz Nabi (see Nabi, Kardar. Bari,
Cheema, Siddiqui, & Kemal, 2005).
[ii] According to a former chairperson
of the Towel Manufactures’ Association of Pakistan, “The landed cost of
Pakistani towels in China is 15 to 20 percent less than the price of equivalent
towels made in China and with zero duty under the FTA we should be able to
export substantial quantities to China. But no large store or distributor in
China will buy imported towels unless the Chinese Government gives them the
go-ahead. Since, thus far, the Chinese Government has not given its okay;
Pakistan is unable to export any towels to China” (personal interview with
Tahir Jahangir, 22 July 2012).
[iii] The price of a Honda 70 cc motorcycle, the most
popular make and size in Pakistan, increased from PKR 54,000 in 2006
(“Motorcycles sales stagnating,” 2007,
April 4) to PKR 67,000 in 2012 (Qeemat Prices in Pakistan, 2011), i.e.,
by less than 25 percent, while the overall price level more than doubled (the
consumer price index increased from 132 in 2005/06 to 269 in 2011/12).
[iv] Calculated by the authors
using data from the UN
comtrade dataset (United Nations Statistics Division, n.d.).
[v] Keeping in mind the point made
earlier that exports are reported on an f.o.b. basis and imports on a c.i.f.
basis, it seems that exports are still being overstated by about 10–20 percent.
[vi] Interestingly, “exports to UAE” as reported by
Pakistan, show an opposite trend, i.e., phenomenal growth between 2005 and 2007
and then a collapse.
[vii] This point was first made by Ashwani Saith in his
comments on this paper at the Lahore School’s Conference on Management of the
Pakistan Economy (May 2012).
Labels: Pakistan, Pakistan Economy, Pakistan: Moving the Economy Forward, Publications
posted by S A J Shirazi @ 1/07/2014 03:19:00 PM,
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