Lessons from trade agreements

Trade agreements help boost exports, attract FDI, and generate jobs. Vietnam is an excellent example of how this can be achieved. Through trade agreements with virtually all the important trading nations and blocks, its exports rose from $132 billion in 2013 to $335 billion in 2023. Its FDI in 2024 is projected at $40 billion. Samsung, a Korean electronics company, accounts for 17 per cent of Vietnam’s product exports and has invested over $20 billion.

Pakistan’s exports and FDI pale in comparison. Unlike Vietnam, Pakistan has not benefited from its few trade agreements because it neither negotiated from a position of strength nor with a full understanding of its own needs or capabilities. Brotherly relations and hope for handouts coloured the outcome.

Without exception, Pakistan’s partner countries deployed better insights to maximise their advantage. The private sector, which does the bulk of trade, did not have a seat on the negotiation table. Many essential aspects of trade and investment were not sufficiently considered in our approach to trade agreements in general and with China in particular.

In a mindless bid to boost exports to China, Pakistan failed to differentiate between commodities and value-added goods. We focussed on the export of raw cotton without appreciating that China would convert this into value-added apparel and compete with us in our target markets. Commodity exports do not generate employment as much as value-added goods. Our strategy should have been to use our cotton to produce value-added items.

Also, Pakistan’s duty concessions to China on the import of value-added and finished items undermined employment in the domestic manufacturing sector, the decline of which is also due to a period of energy shortfall followed by high energy tariffs, taxation, infrastructure, and regulatory constraints. Manufacturing as a percentage of GDP has been declining, as has Pakistan’s share of world exports. The trade deficit with China grew from under $4 billion in 2007, when the FTA was signed, to $14 billion by 2022.

To strengthen friendly relations with Malaysia, duty concessions were granted on edible oil without regard to Indonesia’s interests. Indonesia is a more significant producer of palm oil and Malaysia’s principal sourcing competitor. Eventually, identical terms had to be offered to Indonesia. However, neither of the countries could provide more favourable tariffs to Pakistan than those they had to offer the ASEAN pact countries.

Duty concessions on edible oil reduced Pakistan’s tax revenue, made it cheaper, increased its consumption, and burdened Pakistan’s trade balance. In 2023, Pakistan spent $3 billion on edible oil imports and recorded a trade deficit with Indonesia and Malaysia. Motivated by friendly relations, Pakistan keeps pursuing a trade agreement with Turkiye. Our export basket is narrow and heavily weighted by textiles, in which we compete with Turkiye in many markets. Turkiye, on the other hand, is keen to export plastics, chemicals, and auto parts, which we should focus on producing locally.

Our negotiators are easily impressed by statistics that prove shallow when examined in detail. For example, securing duty-free access for 45 per cent of HS lines into China was celebrated as Pakistan’s achievement and China’s generosity. However, when lines that neither China imports, nor Pakistan exports are accounted for, the duty-free access effectively falls to 14.5 per cent. Similarly, the 75 per cent duty-free promise by 2030 amounts to only 23 per cent when a similar adjustment is made.

Pakistan’s economic diplomacy is weak. Bangladesh secured duty-free access to China for 96 per cent of its export lines without a trade agreement, compared to the 45 per cent offered by China to us. Moreover, Pakistan failed to secure an evergreen preference for its exports under the FTA, allowing China to offer significantly better terms to ASEAN, thus undermining Pakistan’s competitiveness.

Due to Pakistan’s recurring solvency crises and reliance on the Middle East for support, its negotiation strength on trade is limited. The GCC desires favourable market access into Pakistan for goods it assembles or plans to make from imported inputs, including many from India, otherwise denied entry to Pakistan. Against a potential saving of a 2–5 per cent duty levied by the GCC on imports, Pakistan’s domestic industry will face considerable disruption due to the lower duty that Pakistan would need to offer GCC in return.

Industry in Pakistan suffers from high energy costs, weak infrastructure, red tape, poor logistics, weak cold chain, and low labour productivity. There is a critical need to evaluate the trade-off of foreign relations with the impact on Pakistan's external and fiscal accounts and jobs. There is also an urgent need for the private sector to become less reliant on duty protection.

In the absence of an industrial policy, investment priorities are unclear, investment is low, and fiscal, trade, and energy policies are neither well-aligned nor predictable. Therefore, even with better trade agreements, it is unlikely that market access alone will boost exports of value-added goods.

We need a fundamental and holistic reset of the policy framework and move away from short-term fixes arising from the fragmentation of decision-making in the federal government and between the centre and the provinces.

The writer is the CEO of the Pakistan Business Council.