The Free-Trade Area (FTA) Mania

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In the last six months, there have been talks to revise the Pak-China FTA. A Pak-Iran FTA is on the cards with the latest round of discussion held last month, along with negotiations for an FTA with Thailand. Trade agreements with Vietnam and GCC countries have also been proposed. Tunisia, a country with which Pakistan’s bilateral trade was an insignificant amount of about $25 million in FY 17, has been added to the roster of countries Pakistan is exploring a trade agreement with.

Despite Pakistan’s lack of success in negotiating favourable trade agreements, the trade agreement mania continues with at least 6 trade agreements in the pipeline. The FTA with Turkey has not even been inked as yet and the Senate Standing Committee on Commerce and Textile has termed it as skewed in favour of Turkey and disastrous for Pakistan.

Similarly, trade agreement with Thailand has raised several questions as to its impact on Pakistan’s nascent auto sector, if the auto sector becomes part of the trade agreement as requested by the Thai side. This is a concern that extends to the potential Pakistan-Vietnam trade agreement since both Thailand and Vietnam belong to the ASEAN bloc that has a strong auto sector.

The trade agreement with China, with its $8.5 billion (SBP figures) trade balance in China’s favour, is the biggest cautionary tale in the history of Pakistan’s trade agreements. The Planning Commission, in a recent statement, expressed hope that the trade balance of the Pak-China FTA will improve considerably in Pakistan’s favour through the increase in exports of grains, cotton, sugar, vegetables, and fruits. Given that Pakistan’s competitors enjoy much higher preferential treatment ), our resource-based exports will at best increase marginally. On the other hand, as work on CPEC continues, the increasing yet essential imports of machinery will negate any and all increases in exports to China.

Empirical evidence of trade agreements within trade blocs or on a one-on-one basis among countries supports the theory that FTAs and PTAs can boost a country’s exports. However, this is contingent on two factors: firstly, a country should be able to hold its own during negotiations. Allowing imports to decimate local economy while exports flounder is not a recipe for success yet one that continues to be followed in Pakistan. Secondly, as long as Pakistan’s exports remain resource-based and imports value-added, trade agreement mania will be able to do little to address Pakistan’s current account deficit.

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