Critical Evaluation of Pakistan-China Free Trade Agreement: Policy Lessons

Abstract

The China Pakistan Free Trade Agreement (CPFTA), implemented on January 1st, 2007, has been a subject of contention due to concerns over its adverse impact on Pakistan's economy. On one hand, CPFTA is appreciated for increased trade with China, Chinese investment in infrastructure and energy-related projects and deepening of Pakistan's strategic ties with China, while on the other hand, challenges such as increased trade imbalance, erosion of domestic industry, limited exports diversification, increasing dependency on China and environmental challenges are viewed critically. The primary objective of this study is to conduct a quantitative analysis of import and export data, with the aim of assessing the economic impact of bilateral trade on Pakistan. This policy paper examines the FTA's effects on various aspects of Pakistan's trade. In this study, a quantitative approach has been utilized. Various secondary data sources, including the Economic Survey of Pakistan (from 2014-15 to 2022-23), Pakistan Revenue Automation Limited, World Bank indices, and World Trade Map, have been employed to calculate several indices. These indices are used to analyze the impacts of the Free Trade Agreement (FTA) on different aspects of international trade in Pakistan. Specifically, it analyzes the trade share, exports to GDP ratio, terms of trade, structure of imports and exports and trade imbalance between the two countries. By utilizing sample clearance data and evaluating the revenue concessions provided by China, the paper quantifies the trade-offs experienced by Pakistan. The findings aim to contribute to inform policy decision-making by offering insights into the overall impact of the FTA on Pakistan's economy and trade dynamics. The study highlights a rapidly growing trade imbalance, with Pakistan's trade deficit surging significantly against China. Increased reliance on foreign loans to finance imports from China poses inflationary risks and vulnerability to debt sustainability. While Pakistani exports to China have grown, their share in supplying highly demanded products remains low, whereas China's imports to Pakistan have risen substantially, posing a threat to local industries. Unsatisfactory utilization of trade products by Pakistan and the neglect of the business community during FTA negotiations further hinder the agreement's benefits for Pakistan. Understanding these lessons is vital for shaping future trade agreements that better serve the country's interests and economy.