LAHORE: The China-Pakistan Economic Corridor (CPEC) is a key component of the One Belt, One Road (OBOR) initiative undertaken by Beijing.
OBOR, the modern-day Silk Route, will connect China to other countries in the world through land and sea. It has been designed to create a trade network by following the principle of joint economic development, enhancement of trade and shared benefits for all participating nations.
Pakistan is an important stakeholder in the trade corridor. The influx of Chinese investment and businesses holds great promise for the country.
Not only this, it is envisaged that positive externalities will emerge through increased foreign exchange and exports. Owing to the inflow of businesses, domestic enterprises may benefit, since the trade route from China will require a litany of facilities to ensure a smooth flow of trade.
In order to explore the potential that CPEC holds, the Small and Medium Enterprises Development Authority (Smeda) has conducted a study for the identification of sectors in order to enhance economic cooperation with China. The study pertains to the prospects for Pakistan’s business community, especially SMEs, as CPEC will inevitably strengthen economic integration with the world’s largest trading nation, China.
In the study, trade potential has been identified by adopting a three-pronged approach which includes a detailed analysis of Pakistan’s trade with China, focus group discussions and stakeholder input in terms of a short survey. In the past few years, Pakistan’s imports from China have increased disproportionately compared to its exports to China.
Pakistan’s exports to China were $1.59 billion while imports stood at $13.68 billion in 2016. The trade deficit was $12.09 billion, accounting for 46% of Pakistan’s total trade deficit.
Identifying export products
Under CPEC, it is envisaged that Pakistan’s share in global trade will soar, but it is vital to adopt an approach which can lead to a reduction in the prevalent trade deficit with China.
The first step to increase Pakistan’s exports under CPEC is through identification of products that can be exported to China. A good starting point is to study the export supply capacity and/or import demand ability to assess the trade opportunities by identifying product trends.
Pakistan, a developing country, has an interest in exploring new export products while China may want to concentrate on discovering new markets for its existing export goods.
In order to identify the products that can be exported by Pakistan, China’s imports from the world have been matched with Pakistan’s exports to the world and Pakistan’s exports to China.
China imported a total of 5,578 types of products from around the world in 2015. On the other hand, Pakistan exported 795 types of products (each product valuing at $1 million) to the world.
From a total of 795 products, Pakistan exported 513 types of products to China.
Pakistan’s exports to China have been divided into high-value exports (HVE), medium-value exports (MVE) and low-value exports. These products can be used to explore the untapped potential in terms of exports. Products identified as LVE may have even higher unrealised export potential.
Some products identified as HVE are meat, fish, mangoes, chromium ores and concentrates, medical instruments, marble, footwear, rice, milk and cream, granulated sugar, denim, ethyl alcohol and footballs.
Products identified as MVE are maize, milk and cream solids, bananas, leather handbags, plastic/textile material handbags, polyethylene terephthalate, sweet biscuits, modified polystyrene, safety razor blades, orange juice, natural honey, frozen fish, frozen edible bovine offal, butter milk, butcher knives and hunting knives.
Some products under the LVE category are bran, articles of leather, paints and varnishes, articles of stone, folding cartons and boxes, coats and jackets, hydrochloric acid, tools for masons/watchmakers/miners, crates and similar articles of plastic, ball point pens, vegetable products, fruit seeds for sowing, articles of wood, clover seeds for sowing, shelled almonds, hide and skin of goats and crabs.
It is vital for Pakistan to broaden its export base to achieve growth targets and rein in the trade deficit. The increasing deficit is driven by a 7% fall in exports from 2015 to 2016 and an 8% increase in imports in the same time period. The average decrease in export value between 2012 and 2016 is 2% per annum.
Pakistan’s exporters are suffering from a combination of low growth in key markets and increasing competition from other developing countries in a range of product categories.
An automatic decrease in Pakistan’s imports is not expected in the near future and the axiomatic approach belabouring the point that exports need to increase has failed, as past record illustrates.
Chinese support
To reap long-term economic benefits, China and Pakistan should avoid industrial competition and rather focus on developing complementarities.
Through establishing enterprises, contracting projects and technology transfer, China can support Pakistan to develop its comparatively advantageous industries such as mining, agriculture and various manufacturing sub-sectors.
Thus, the various modes for industrial cooperation that may be explored include joint ventures, technical cooperation, foreign direct investment, mergers and acquisitions, reciprocal business opportunities and incentives. The world is keenly observing the positive externalities of this economic union and it is also drawing the ire of Pakistan’s neighbours. Their influences can pose a threat to CPEC, however, Pakistan and China are working assiduously to make it a success.
It is well known that China’s investment in Pakistan is not a completely altruistic endeavour, albeit majority of Pakistani citizens are looking forward to CPEC as a harbinger of opportunities and a catalyst for employment generation.
CPEC may have garnered all the adulation, however, only an aggressive policy shift to enhance exports may be fruitful in the long run.
By NADIA J SETH / FARHAN ZAFAR The writers are associated with the Policy and Planning Division, Smeda
Surely the Good Pakistanis will not the mistakes of the Hindoo Dindoo Indians and their disasters in exports and SEZs
India is doomed and the Indian SEZs are doomed.
• The pathetic state of the exports from the SEZ is assessed by the number of non-operative units and the poor capacity utilisation of the SEZ units – information about which is in public and national interest
• The laqck of planning of the GOI is highlighted by the fact that the GOI has done no benchmarking of the operations of the SEZ per se, and the SEZ units within – for each sector with comparable peers,in India or the global competition
• If a sector, say X,exists in a SEZ in a specific maritime geography and its global export hub,is in Country A, and the GOI has not been benchmarking the operating parameters of the Indian SEZ and the SEZ units of that sector (X),every 3 years – then the SEZ units in sector X,in India,will definitely cease to exist,or be in a state of terminal decline or exist at the mercy of competitors
• With the miserable performance of the Indian Rupee,and its impact of reduction in Dollarised Rupee costs payable to the SEZ authority by the SEZ units – why are the exports from the SEZs still a failure? In addition, in several sectors, the rupee costs paid by the SEZ units to the SEZ Authority,are not the determinant for operating and financial viability of the SEZ units
• In essence,the GOI has utterly failed to provide a level playing field to Indian exporters,in terms of admin costs,operating cost neutrality,financing costs,effective logistics costs and fiscal red tape and procedures
• The centres of manufacturing excellence near SEZs (For CMT/Job work/Material and Labour sourcing) are not cost effective – as there is no synergy between the SEZ and the Industrial planning and policy
• The strategy of the GOI is highlighted by the fact that the GOI has engaged no 3rd party to analyse the inefficiency of the operating parameters of SEZs and the SEZ units within the SEZ – for each sector within it , with comparable peers in India,and the global competition
• What planning and strategy will the GOI do,if it has no formal analysis of the specific operating costs,parameters,management and other issues,which explain the dismal state of the SEZ units by sector,scale and management quality
• The dismal state of the GOI planning is that it has not properly planned the sector profile of the units in each SEZ, to ensure that the right sectors are in the appropriate geography,in the right SEZ,to minimise the net logistics costs on the EXIM chain, and minimise the inward material logistics costs – considering the future dislocations in inward and external material sources and options of transhipment and alternative export markets
• Several SEZs elsewhere invest limited equity in SEZ units and common service providers,like banks,facilities,hotels,accounting firms etc,as a demonstration of their stake in the SEZ and their strategic inputs in the planning and operation of the same – which is then used to lower the lease charges – which is completely absent in India
• All of the above is to be seen in light of the fact that the SEZ has no data of the financial or operating performance of the SEZ units,loss making units or even the financial and operating performance of the Developers of the SEZ – and is naturally not concerned with the losses or the financial performance of the SEZ units therein
• The peculiar pattern of CMT and Job workers of key sectors such as Gold and Diamond jewellers,with multiple movement of stocks at different processors o/s the SEZ – is not the norm for Gems and Jewellery SEZs or SEZ units – and represents an abnormal industrial agglomeration with a planned and structural dislocation in manufacturing and processing operations – which cannot be solely for the purposes of manufacturing and commercial efficiency.
• Information on raids and prosecutions is critical especially in sectors with high import duties (on merit mode) for inputs,customised finished goods (wherein DRI/Customs cannot assess over invoicing),frequent movements to and from 3rd party processors (which makes the case for wastages and losses in SION and disappearing materials), materials where the EXIM transit time is a few hours and the logistics costs are less than 1per cent of CIF/FOB rates, inputs and outputs with marked differences in rates of different grades of items and offgrades,warehousing artificial losses,amortisable costs ,bad debts and write offs in select SEZs (to be used for 3rd party exports or mergers to obviate tax on SEZ profits),items where the SEZ units are well aware of the sampling and test checks of the DRI and Customs at the SEZ for the inputs and outputs etc.
• The Gems and Jewellery industry is run by cartels from a particular community spread from Western India to North America,EU,East Asia,West Asia and Africa and is a well coordinated money laundering and smuggling operation from the state of rough diamonds and raw gold,to the marketing of jewellery and warehousing of processed and raw diamonds,the banking chain,raters and the chain of associate and front companies – which is all the more insidious,as all the data with DRI/ED/Customs/Interpol used by the Indian State for surveillance all originated from the overseas counterparts and partners of the Indian traders located in India (who are in many cases – in spirit the same de facto entity owners)
• The premise that Indians are the least cost labour source for the jwellery sector and their informal working style (w/o documentation,using informal labour and in slum style conditions) is an innovative marvel of Indian genius,is a pathetic deception,and the entire array of fiscal and monetary sops for this sector (including SEZ) allows the sector to generate financial buffers via money laundering,tax arbitrage,treasury operations, merchanting exports,accomodation financing ,cash financing, alternative fund transfers,FX speculation,leveraging double and layered financing,defrauding Indian Merchant exporters such as STC and MMTC,Credit insurance fraud etc. which provide the sector a pricing edge in overseas markets ( via illegal,nefarious and fraudulent means)